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Multiple Choice Questions: Working Capital, Dividends, Stock

13-2. Assume a company's current ratio is less than one. If the company pays current liabilities with cash, the new current ratio will:
b. decrease.
c. remain the same.
d. cannot be determined with the information given

12-3. Stockton-Meadows Incorporated reports an increase in Accounts Payable of $9,200 and an increase in inventory of $45,000 for the current year. Accounts Payable relates solely to the purchase of merchandise. Sales on account were $532,100 and cost of goods sold was $358,000. The total purchases of merchandise for the period were:
a. $174,100.
d. $403,000.

12-4. Coker's Appliance Shop reported interest revenue of $9,500 and its Interest Receivable account decreased $1,200 during the same period. Interest received for the period amounted to:
a. $1,200.
b. $10,700.
d. $8,300.

12-5. Berlin & Snider enterprises Inventory account decreased $37,500 and its Accounts Payable account (which relates solely to the purchase of merchandise) decreased $13,760 during the year. Berlin & Snider also reported sales of $856,000 and cost of goods sold of $597,600 during the same period. Berlin & Snider's payments to suppliers for inventory during the year were:
a. $621,340.
b. $573,860.
d. $648,860.

12-6. Tri-Square Company reported plant assets, net of accumulated depreciation, on January 1, 2004, at $645,000 and $732,500 on December 31, 2004. The income statement showed depreciation of $48,300 and a $5,600 loss on sale of plant assets. Tri-Square Company acquired $213,000 of plant assets during the year. The proceeds from the sale of plant assets were:
a. $125,500.
b. $89,900.
c. $71,600.

9-8. The payment of a cash dividend previously recorded:
a. reduces stockholders' equity and reduces assets.
b. increases liabilities and increases assets.
c. reduces liabilities and reduces assets.

9-9. The B. Disraeli Corporation has 10,000 shares of 10%, $100 par value, cumulative preferred stock outstanding and 50,000 shares of $5 par value common stock outstanding. As of the beginning of this fiscal year, there were 2 years' dividends in arrears on the preferred stock. The board of directors wants to give the common stockholders a $1.50 dividend per share at the end of this fiscal year. The total dividends to be declared by the B. Disraeli Corporation are:
a. $105,000.
b. $120,000.
d. $375,000.

9-10. The entry to record the distribution of a stock dividend includes a:
a. credit to Common Stock.
b. debit to Retained Earnings.
c. credit to Retained Earnings.

9-11. Dividends in arrears on preferred stock are reported as a:
b. footnote to the financial statements.
c. reduction in retained earnings.
d. current asset on the balance sheet.

9-12. The declaration of a cash dividend:
a. increases stockholders' equity and reduces liabilities.
b. increases liabilities and increases stockholders' equity.
c. increases liabilities and decreases stockholders' equity.

9-13. A large stock dividend will:
b. have no effect on total assets.
c. have no effect on total assets or total owners' equity.
d. increase total owners' equity.

9-15. The purchase of treasury stock:
b. decreases assets and decreases stockholders' equity.
c. decreases assets and increases liabilities.
d. increases assets and decreases stockholders' equity.

9-16. The number of shares of treasury stock plus the number of shares outstanding equals:
a. the number of shares authorized.
b. the number of shares issued.
c. the number of shares authorized that have not been issued.

9-17. Assets received in exchange for the issuance of stock should be recorded at:
a. historical cost.
c. fair market value as determined by a good-faith estimate from independent appraisers. d. none of these answers

9-19. A dividend becomes a legal liability of the corporation on the:
a. date of payment.
b. date of declaration.
c. date of record.

9-21. The entry to record the issuance of 12,500 shares no-par value common stock at $2.50 per share includes a:
b. credit to Retained Earnings for $31,250.
c. credit to Common Stock for $31,250.
d. credit to Paid-in Capital in Excess of Par Value-Common for $31,250.

9-23. The entry to record the issuance of 8,000 shares of $5 par value common stock at $9 per share includes a:
a. credit to Common Stock for $72,000.
b. credit to Common Stock for $40,000.
d. debit to Paid-in Capital in Excess of Par Value-Common for $32,000.

9-24. The payment of a cash dividend previously recorded:
b. increases liabilities and increases assets.
c. reduces liabilities and reduces assets.
d. increases stockholders' equity and reduces liabilities.

9-25. The entry to record the payment of a cash dividend previously declared includes a:
a. debit to Retained Earnings.
c. credit to Dividends Payable.
d. debit to Dividends Payable.

6-26. If ending inventory for the year ended December 31, 2004, is overstated by $25,000:
a. net income for 2005 will be understated by $25,000.
b. net income for 2005 will be overstated by $25,000.
c. ending inventory for 2005 will be understated by $25,000.

6-27. If ending inventory on December 31, 2004, is overstated, then:
b. cost of goods sold for the year ended December 31, 2004, will be overstated.
c. gross profit for the year ended December 31, 2004, will be understated.
d. gross profit for the year ended December 31, 2005, will be understated.

6-29. Which inventory method presents accurate ending inventory on the balance sheet but fails to match cost of goods sold with revenue on the income statement?
a. FIFO
c. weighted-average
d. specific identification

6-30. An item is considered material if:
a. its dollar value is greater than 1.5% of total assets.
b. its exclusion from the financial statements would affect the decisions of a user of the financial statements.

6-31. Which of the following statements is generally true when prices are rising?
a. LIFO produces taxable income that exceeds taxable income under FIFO.
b. The use of LIFO will result in paying less in taxes than under FIFO.
d. FIFO results in paying less in taxes than under LIFO.

6-32. When the FIFO method is used, cost of goods sold is assumed to consist of:
b. the units with the lowest per unit cost.
c. the units with the highest per unit cost.
d. the oldest units.

6-33. Which of the following would be included in the Cost of Goods Sold account on a merchandising company's income statement?
a. shipping costs from the manufacturer to the merchandiser
b. sales commissions
d. sales taxes

6-34. If ending inventory is overstated, then:
a. cost of goods sold and ending inventory will both be overstated.
b. cost of goods sold and ending inventory will both be understated.
d. cost of goods sold will be understated and ending inventory will be overstated.

6-35. An error in the ending inventory for the year ended December 31, 2004:
a. automatically creates errors in cost of goods in the 2004 and 2005 financial statements. b. has no effect on the 2004 financial statements but will create an error in the 2005 financial statements.
d. affects only the 2004 financial statements.

6-37. All of the following are reasons for choosing the LIFO versus the FIFO costing method except:
a. it reports the most up-to-date inventory values on the balance sheet.
c. LIFO uses more current costs in calculating cost of goods sold.
d. it is generally more conservative.

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13-2. Assume a company's current ratio is less than one. If the company pays current liabilities with cash, the new current ratio will:
b. decrease.
c. remain the same.
d. cannot be determined with the information given

Answer: b. decrease.

Both current assets (cash) and current liabilities would decrease by the same amount.
If the ratio is less than one and the numerator and denominator decrease by the same amount , the ratio decreases.
Current ratio (CR) = Current Assets (CA) / Current Liabilities (CL)

Let originally, CA=400, CL =500, therefore CR= 400/500 =0.8

Let the reduction in current liabilities= reduction in cash =100
Therefore, CR= (400-100)/(500-100) = 300/400 = 0.75
Thus the ratio has decreased from 0.8 to 0.75

12-3. Stockton-Meadows Incorporated reports an increase in Accounts Payable of $9,200 and an increase in inventory of $45,000 for the current year. Accounts Payable relates solely to the purchase of merchandise. Sales on account were $532,100 and cost of goods sold was $358,000. The total purchases of merchandise for the period were:
a. $174,100.
d. $403,000.

Answer: d. $403,000

Cost of goods sold + Increase in inventory = inventory purchase = $358,000 + $45,000 = $403,000

12-4. Coker's Appliance Shop reported interest revenue of $9,500 and its Interest Receivable account decreased $1,200 during the same period. Interest received for the period amounted to:
a. $1,200.
b. $10,700.
d. $8,300.

Answer: b. $10,700.

Interest received for the period = Interest revenue + decrease in interest receivable amount =$9,500 + $1,200 = $10,700.

12-5. Berlin & Snider enterprises Inventory account decreased $37,500 and its Accounts Payable account (which relates solely to the purchase of merchandise) decreased $13,760 during the year. Berlin & Snider also reported sales of $856,000 and cost of goods sold of $597,600 during the same period. Berlin & Snider's payments to suppliers for inventory during the year were:
a. $621,340.
b. $573,860.
d. $648,860.

Answer: b. $573,860.

Cash payment = Cost of goods sold - decrease in inventory + decrease in accounts payable account = $597,600 - $37,500 + $13,760 = $573,860.

12-6. Tri-Square Company reported plant assets, net of accumulated depreciation, on January 1, 2004, at $645,000 and $732,500 on December 31, 2004. The income statement showed depreciation of $48,300 and a $5,600 loss on sale of plant assets. Tri-Square Company acquired $213,000 of plant assets during the year. The proceeds from the sale of plant assets were:
a. $125,500.
b. $89,900.
c. $71,600.

Answer: c. $71,600.

Beginning assets + acquisition - sale (Book Value) - depreciation = ending assets
$645,000 + $213,000 - sale (BV) - $48,300 = $732,500

Therefore, BV of assets sold= $77,200
Sale price = BV of assets sold - Loss = $77,200 - $5,600 = $71,600.

9-8. The payment of a cash dividend previously recorded:
a. reduces stockholders' equity and reduces assets.
b. increases liabilities and increases assets.
c. reduces liabilities and reduces assets.

Answer: c. reduces liabilities and reduces assets.
Dividend payable ...

Solution Summary

Answers Multiple Choice Questions on Working Capital, Dividends, treasury stock, issuance of shares, income statement etc.

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