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ratio analysis

Use the following data for questions 1 and 2 below:
Quayle Company bought real estate, on which there was an old office building, for $800,000. It paid $80,000 in cash as a down payment and signed a 10% mortgage for the remainder. It immediately had the old building razed at a net cost of $70,000. Attorneys were paid $12,000 in connection with the land purchase and an additional $6,000 in connection with permits and zoning variances necessary for Quayle's new office building. $40,000 was paid for excavation for the basement of the new building, $2,800,000 was paid for construction of the new building, and $150,000 was paid for a parking lot and necessary walkways and driveways.

1. The new office building should be recorded at
a. $2,800,000.
b. $2,846,000.
c. $2,840,000.
d. $2,916,000.

2. Land should be recorded at a cost of
a. $870,000.
b. $882,000.
c. $928,000.
d. $922,000.

3. Kotsch Textile purchased machinery for $80,000 eight years ago. It was expected to have a useful life of ten years, no salvage value, and was depreciated using the straight-line method. At the end of its eighth year of use, it was retired from service and given to a junk dealer. The entry to record the retirement includes a
a. debit to Loss on Disposal for $16,000.
b. credit to Depreciation Expense for $8,000.
c. debit to Machinery for $80,000.
d. credit to Accumulated Depreciation?Machinery for $64,000.

4. Which of the following should not be included in the plant assets (property, plant, and equipment) classification?
a. Land on which warehouse sits
b. Building housing corporate headquarters
c. Parking lot used by visitors
d. All of the above should be included

5. Salvage (residual) value is deducted in the computation of depreciation expense in all of the following methods with the exception of
a. straight-line.
b. units-of-activity.
c. declining-balance.
d. All of the above include a deduction of salvage value.

6. The three primary accounting problems associated with accounts receivable are
a. valuation, disposition, and statement presentation.
b. recognition, valuation, and statement presentation.
c. recognition, valuation, and disposition.
d. revenue recognition, matching, and statement presentation.

7. Allowance for Doubtful Accounts is presented as a(n)
a. addition to Accounts Receivable on the balance sheet.
b. operating expense on the income statement.
c. deduction from Sales on the income statement.
d. contra asset on the balance sheet.

8. Which of the following methods and bases of accounting for uncollectible accounts receivable is inconsistent with the proper application of matching?
a. Direct write-off method
b. Aging of receivables allowance method
c. Percentage of receivables basis
d. Percentage of sales basis

9. When recording exchanges of similar assets,
a. losses are recognized immediately.
b. the gain or loss on the old asset is the difference between its cost and its fair market value.
c. gains are treated as increases in the cost of the new asset.
d. none of the above.

10. The cost of a patent should be amortized over
a. 20 years.
b. the shorter of its legal life or its useful life.
c. the longer of its legal life or its useful life.
d. its useful life.

11. On June 30, 2005, Fox Enterprises sold equipment with an original cost of $990,000 for $400,000. The equipment was purchased January 1, 2004, and was depreciated using the straight-line method assuming a five year useful life and $90,000 salvage value. The necessary entries for 2005 include a
a. debit to Accumulated Depreciation?Equipment for $180,000.
b. credit to Gain on Sale of Equipment for $320,000.
c. credit to Cash for $400,000.
d. debit to Depreciation Expense for $90,000.

12. Which of the following is not an intangible asset?
a. Research and development costs
b. Copyrights
c. Franchises
d. Goodwill

13. Employer payroll taxes include
a. state income tax withholding, deductions for charitable contributions, and federal unemployment taxes.
b. FICA taxes, state unemployment taxes, and union dues.
c. FICA taxes, federal unemployment taxes, and state unemployment taxes.
d. federal income tax withholding, federal unemployment taxes, and pension funding.

14. Contingent liabilities
a. need not be disclosed if the possibility that the contingency will occur is remote.
b. are recorded as liabilities if they can be estimated and are remote.
c. are disclosed only if they are probable.
d. are always recorded as liabilities if the possibility that the contingency will occur is high.

15. Woody's Retail Store regularly makes payments to a state government for the sales taxes resulting from its sales to customers. These sales taxes
a. should appear on Woody's income statement as an expense.
b. are based upon a company's gross profit in most states.
c. are long-term liabilities when they have been paid.
d. are collected by Woody's as an agent for the state's taxing authority.

16. Novak Corporation borrowed $60,000 on March 1, 2005, signing a one year, 6% note payable to Lebo State Bank. The adjusting entry required on December 31, 2005, includes a
a. debit to interest expense of $3,000.
b. debit to cash of $60,000.
c. credit to interest revenue of $3,000.
d. debit to interest payable of $3,600.

17. Carter Electric began operations in 2005 and provides a one year warranty on the curling irons it sells. They estimate that 10,000 of the 200,000 curling irons sold in 2005 will be returned for repairs and that these repairs will cost $4 per unit. The cost of repairing 8,000 curling irons presented for service in 2005 was $32,000. Carter should report
a. warranty expense of $8,000 for 2005.
b. warranty expense of $40,000 for 2005.
c. estimated warranty liability of $40,000 on December 31, 2005.
d. no warranty obligation on December 31, 2005, since this is only a contingent liability.

18. Employees' payroll taxes include
a. FICA taxes.
b. federal unemployment taxes.
c. state unemployment taxes.
d. all of the above.

19. A 30% interest in the stock of another company is
a. an insignificant investment.
b. a controlling investment.
c. a short-term investment.
d. a significant investment.

20. Todd Corporation issues its bonds at a discount. Amortization of the discount will
a. decrease bond interest expense.
b. increase bond interest expense.
c. decrease the carrying value of the bonds on the balance sheet.
d. be reported as a loss on the income statement.

21. Rhome Corp. issued $300,000 of 8%, 5 year bonds at 102 on January 1, 2005. The straight-line method of amortization is used and the bonds pay interest annually on January 1. The amount of bond interest expense that Rhome should report on its 2005 income statement is
a. $24,000.
b. $24,480.
c. $22,800.
d. $25,200.

22. A company with an insignificant investment in the stock of another company
a. should decrease the Investment account balance for their share of dividends paid by the investee.
b. should prepare consolidated financial statements.
c. should record Dividend Income for their share of dividends paid by the investee.
d. should record Dividend Income for their share of net income reported by the investee.

23. The entry to record the receipt of interest on an investment in bonds, assuming that no interest has been accrued, will include
a. a credit to Bonds Payable.
b. a debit to Interest Receivable.
c. a credit to Interest Revenue.
d. a debit to Interest Expense.

24. Gomez Industries purchased goods on account from Saltmine Enterprises for $50,000, terms 2/10, n/30. The entry to record the purchase includes
a. a credit to Sales Revenue for $49,000.
b. a debit to Notes Payable for $50,000.
c. a debit to Cash for $50,000.
d. a credit to Accounts Payable for $50,000.

25. All of the following would be classified as current liabilities at 12/31/2005 except:
a. Accounts Payable.
b. Notes Payable, due 5/1/2006.
c. Bonds Payable, due 2010.
d. Salaries Payable.

26. Which of the following companies would be required to prepare consolidated financial statements?
a. Alpha Company owns a 5% interest in Beta Company.
b. Dixon Company owns a 35% interest in Union Enterprises.
c. Blaise Company owns a 49% interest in Ernst Company.
d. Stirling Company owns a 62% interest in Westward Inc.

27. Discount on Bonds Payable
a. is a contra revenue account.
b. is a contra liability account.
c. is added to Bonds Payable to determine the carrying value of the bond.
d. has a credit balance.

28. The amortization of Premium on Bonds Payable
a. increases interest expense.
b. increases the carrying value of the bond.
c. is recorded by debiting Premium on Bonds Payable.
d. reduces the cash paid to bondholders.

29. Bonds Payable of $1,000,000 sold at 99 would yield proceeds of
a. $900,000.
b. $990,000.
c. $1,000,000.
d. $1,090,000.

30. Rable Company purchased goods on account from Gordon Industries for $32,000 on March 1, terms 2/10, n/30. On April 9, Rable signed a 10%, 90 day note payable for this amount after Gordon agreed to exchange the accounts receivable for the note. The entry on Gordon's books to record the exchange will include
a. a debit to Cash for $30,000.
b. a debit to Interest Receivable for $3,200.
c. a debit to Notes Payable for $35,200.
d. a debit to Notes Receivable for $32,000.

31. Bertolli Industries dishonored a 12%, 3 month note payable for $10,000 issued to Canton Company. The entry on the books of Canton Company to record the dishonored note includes:
a. a debit to Notes Receivable for $10,300.
b. a credit to Interest Receivable for $300.
c. a debit to Cash for $10,300.
d. a credit to Notes Receivable for $10,000.

32. The purchase of treasury stock
a. reduces assets and stockholders' equity.
b. reduces income and stockholders' equity.
c. reduces liabilities and stockholders' equity.
d. increases assets and stockholders' equity.

33 . The inventory turnover ratio is computed by dividing the average inventories into
a. net sales.
b. total assets.
c. cost of goods sold.
d. stockholders' equity.

34. In performing a vertical analysis, the base for prepaid expenses is
a. total current assets.
b. total assets.
c. total liabilities.
d. total expenses.

35 . Which one of the following transactions does not affect cash?
a. Acquisition and retirement of bonds payable.
b. Write-off of an uncollectible accounts receivable.
c. Acquisition of treasury stock.
d. Payment of a cash dividend.

36. The purchase of office equipment for cash
a. is a cash outflow from financing activities.
b. is a cash outflow from operating activities.
c. is a cash outflow from investing activities.
d. does not affect cash flows.

37. Which of the following is a financing activity?
a. purchase of treasury stock.
b. purchase of trading securities.
c. purchase of inventory.
d. purchase of equipment.

38. I f a loss of $13,000 is incurred in selling (for cash) equipment having a book value of $45,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is
a. $32,000.
b. $45,000.
c. $13,000.
d. $58,000.

39. Roses Paint reported sales of $350,000, total assets of $150,000, total stockholders' equity of $60,000, current assets of $50,000, current liabilities of $30,000, and cash of $15,000. In a vertical analysis of the balance sheet, cash would be shown as
a. 25%.
b. 10%.
c. 30%.
d. 20%.

40. Common size analysis is an alternative term for
a. ratio analysis.
b. horizontal analysis.
c. liquidity analysis.
d. vertical analysis.

41. The purchase of an office building by issuing long-term notes payable should be reported as a
a. cash outflow in the financing section of the statement of cash flows.
b. cash outflow in the investing section of the statement of cash flows.
c. cash outflow in the operating section of the statement of cash flows.
d. noncash investing and financing activity.

42. As an indicator of financial health, a low ratio is desirable for the
a. asset turnover ratio.
b. return on assets ratio.
c. debt to total assets ratio.
d. current ratio.

43. Swanson Company had inventory of $220,000 and $180,000 on December 31, 2004, and December 31, 2005, respectively. Cost of goods sold for 2005 was $1,560,000. Average days in inventory is approximately
a. 46.8.
b. 7.8.
c. 51.1.
d. 7.1.

44. When using the indirect method to compute cash provided by operations
a. income taxes paid may be ignored.
b. depreciation expense is added to net income.
c. increases in inventory are added to net income.
d. decreases in accounts receivable are subtracted from net income.

45. The three most commonly referenced financial statements for a corporation are;
a. Income Statement, Balance Sheet, Cashflow statement
b. Statement of Working Capital, Balance Sheet, Pro Forma statement
c. Income Statement, Balance Sheet, Statement of Working Capital
d. Income Statement, Balance Sheet, Statement of Retained Earnings

46. In analyzing financial statements, horizontal analysis is a
a. requirement.
b. tool.
c. principle.
d. theory.

47. Horizontal analysis is also called
a. linear analysis.
b. vertical analysis.
c. trend analysis.
d. common size analysis.

48. Vertical analysis is also known as
a. perpendicular analysis.
b. common size analysis.
c. trend analysis.
d. straight-line analysis.

49. In ratio analysis, the ratios are never expressed as a
a. rate.
b. negative figure.
c. percentage.
d. simple proportion.

50. Which of the following companies was not identified
as having precipated the Sarbanes Oxley act because of
their unethical business practices.
a. Enron
b. Worldcom
c. AIG
d. Tyco

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Dear Student,

Thank you for using BM.
Below are my answers.

ANSWERS
Use the following data for questions 1 and 2 below:
Quayle Company bought real estate, on which there was an old office building, for $800,000. It paid $80,000 in cash as a down payment and signed a 10% mortgage for the remainder. It immediately had the old building razed at a net cost of $70,000. Attorneys were paid $12,000 in connection with the land purchase and an additional $6,000 in connection with permits and zoning variances necessary for Quayle's new office building. $40,000 was paid for excavation for the basement of the new building, $2,800,000 was paid for construction of the new building, and $150,000 was paid for a parking lot and necessary walkways and driveways.

1. The new office building should be recorded at
b. $2,846,000.
2800000 + 40000 + 6000
2. Land should be recorded at a cost of
b. $882,000.
800000 + 70000 + 12000

3. Kotsch Textile purchased machinery for $80,000 eight years ago. It was expected to have a useful life of ten years, no salvage value, and was depreciated using the straight-line method. At the end of its eighth year of use, it was retired from service and given to a junk dealer. The entry to record the retirement includes a
a. debit to Loss on Disposal for $16,000.
Book value: 80000 - (80000/10*8) = 16000
Debit: Loss on disposal 16000
Debit: Accumulated depreciation 64000
Credit: Machinery 80000

4. Which of the following should not be included in the plant assets (property, plant, and equipment) classification?
d. All of the above should be included

5. Salvage (residual) value is deducted in the computation of depreciation expense in all of the following methods with the exception of
c. declining-balance.
Formula is straight line depreciation rate say, 20% (1/5 years) multiplied by 200%

6. The three primary accounting problems associated with accounts receivable are
c. recognition, valuation, and disposition.
when, how much and treatment of uncollectible accounts

7. Allowance for Doubtful Accounts is presented as a(n)
d. contra asset on the balance sheet.
deducted from accounts receivable

8. Which of the following methods and bases of accounting for uncollectible accounts receivable is inconsistent with the proper application of matching?
a. Direct write-off method
recognizes the expense upon write off while the revenues associated to such an accounst receivable have been recognized in prior period which is not matching expenses to revenues

9. When recording exchanges of similar assets,
a. losses are recognized immediately.

10. The cost of a patent should be amortized over
b. the shorter of its legal life or ...

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Types of analyses are featured.

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