Cash Flow Statement Questions! Trivia Quiz

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Cash Flow Statement Questions! Trivia Quiz - Quiz

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Questions and Answers
  • 1. 

    All of the following activities are reported on the statement of cash flows except:

    • A.

      Marketing activities

    • B.

      Investing activities

    • C.

      Operating activities

    • D.

      Financing activities

    Correct Answer
    A. Marketing activities
    Explanation
    The statement of cash flows is a financial statement that provides information about the cash inflows and outflows of a company. It categorizes these cash flows into three main activities: operating activities, investing activities, and financing activities. Operating activities include cash flows from the company's core business operations, such as revenue from sales and payments to suppliers. Investing activities involve cash flows related to the acquisition or sale of long-term assets, such as property or equipment. Financing activities include cash flows from activities that affect the company's capital structure, such as issuing or repurchasing stock or taking out loans. Marketing activities, on the other hand, do not directly involve the inflow or outflow of cash and therefore are not reported on the statement of cash flows.

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  • 2. 

    Activites that create long-term liabilites are usually

    • A.

      Financing activities

    • B.

      Operating activities

    • C.

      Noncash investing and financing activities

    • D.

      Investing activities

    Correct Answer
    A. Financing activities
    Explanation
    Financing activities involve obtaining or repaying funds to finance a company's operations or investments. These activities often result in the creation of long-term liabilities, such as issuing long-term debt or taking out loans. By engaging in financing activities, companies can secure the necessary capital to support their long-term growth and operations. Therefore, it is reasonable to conclude that activities that create long-term liabilities are usually classified as financing activities.

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  • 3. 

    Activities affecting long-term assets are

    • A.

      Financing activities

    • B.

      Marketing activities

    • C.

      Operating activities

    • D.

      Investing activities

    Correct Answer
    D. Investing activities
    Explanation
    Investing activities refer to the buying, selling, and acquiring of long-term assets such as property, equipment, and investments. These activities involve the use of cash or other resources to generate future income or enhance the company's operations. Financing activities, on the other hand, involve obtaining funds from investors or creditors to finance the company's operations. Marketing activities focus on promoting and selling products or services, while operating activities involve the day-to-day operations of the business. Therefore, the correct answer is investing activities as it specifically relates to the acquisition and disposal of long-term assets.

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  • 4. 

    In 2010, PMW Corporation borrowed $110,000, paid dividends of $34,000, issued 10,000 shares of stock for $45 per share, purchased land for $240,000, and received dividends of $10,000. Net income was $150,000, and depreciation for the year totaled $8,000. How much should be reported as net cash provided by operating activites by the indirect method?

    • A.

      $194,000

    • B.

      $158,000

    • C.

      $234,000

    • D.

      $134,000

    Correct Answer
    B. $158,000
    Explanation
    To calculate net cash provided by operating activities using the indirect method, we start with net income and make adjustments for non-cash expenses (such as depreciation) and changes in working capital. In this case, there is no information given about changes in working capital, so we only need to account for the depreciation expense. Since depreciation is a non-cash expense, it is added back to net income. Therefore, the net cash provided by operating activities would be the net income of $150,000 plus the depreciation expense of $8,000, which equals $158,000.

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  • 5. 

    Activities that obtain the cash needed to launch and sustain a company are

    • A.

      Marketing activities

    • B.

      Income activities

    • C.

      Investing activities

    • D.

      Financing activities

    Correct Answer
    D. Financing activities
    Explanation
    Financing activities refer to the actions taken by a company to raise funds for its operations and growth. These activities include obtaining loans, issuing stocks or bonds, and repurchasing company shares. By engaging in financing activities, a company can secure the necessary cash to launch and sustain its operations. This may involve seeking external funding from banks or investors, as well as utilizing internal sources such as retained earnings. Overall, financing activities play a crucial role in providing the financial resources required for a company's establishment and ongoing activities.

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  • 6. 

    The exchange of stock for land would be reported as

    • A.

      Exchanges are not reported on the statement of cash flow

    • B.

      Financing activities

    • C.

      Noncash investing and financing activities

    • D.

      Investing activities

    Correct Answer
    C. Noncash investing and financing activities
    Explanation
    The exchange of stock for land is considered a noncash transaction because it does not involve the use of cash. Instead, it involves the exchange of one asset (stock) for another asset (land). Noncash investing and financing activities are reported separately from cash flows in the statement of cash flows to provide information about significant noncash transactions that impact the company's financial position. Therefore, the exchange of stock for land would be reported as noncash investing and financing activities.

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  • 7. 

    Net Income: $50,000                                                        Increase in Accounts Payable: $9,000 Depreciation Expense:$10,000                                     Acquisition of Equipment: $35,000 Payment of Dividends: $1,000                                       Sales of Treasury Stock: $4,000 Increase in Accounts Receivable: $8,000                   Payment of Long-Term Debt: $16,000 Collections of Long-Term Notes Receivable:$5,000Proceeds from Sale of Land: $40,000 Loss on Sale of Land: $15,000                                      Decrease in Inventories: $3,000 Under the direct method, net cash provided by operating activites would be

    • A.

      $84,000

    • B.

      $76,000

    • C.

      $79,000

    • D.

      $89,000

    Correct Answer
    C. $79,000
    Explanation
    To calculate net cash provided by operating activities using the direct method, we need to consider the cash inflows and outflows from operating activities.

    In this case, the cash inflows include an increase in accounts receivable ($8,000) and collections of long-term notes receivable ($5,000). The cash outflows include an increase in accounts payable ($9,000) and a decrease in inventories ($3,000).

    We can calculate the net cash provided by operating activities by adding the cash inflows and subtracting the cash outflows:

    $8,000 + $5,000 - $9,000 - $3,000 = $1,000

    Therefore, the correct answer is $1,000.

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  • 8. 

    Net Income: $50,000                                                        Increase in Accounts Payable: $9,000 Depreciation Expense:$10,000                                     Acquisition of Equipment: $35,000 Payment of Dividends: $1,000                                       Sales of Treasury Stock: $4,000 Increase in Accounts Receivable: $8,000                   Payment of Long-Term Debt: $16,000 Collections of Long-Term Notes Receivable:$5,000Proceeds from Sale of Land: $40,000 Loss on Sale of Land: $15,000                                      Decrease in Inventories: $3,000 Net cash provided by (used for) investing activites would be

    • A.

      $20,000

    • B.

      $10,000

    • C.

      $(15,000)

    • D.

      $ (10,000)

    Correct Answer
    B. $10,000
    Explanation
    The net cash provided by (used for) investing activities would be $10,000. This is calculated by adding the proceeds from the sale of land ($40,000) and subtracting the acquisition of equipment ($35,000) and the loss on the sale of land ($15,000). The increase in accounts payable, depreciation expense, payment of dividends, sales of treasury stock, increase in accounts receivable, payment of long-term debt, collections of long-term notes receivable, and decrease in inventories are not relevant to calculating the net cash provided by (used for) investing activities.

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  • 9. 

    Net Income: $50,000                                                        Increase in Accounts Payable: $9,000 Depreciation Expense:$10,000                                     Acquisition of Equipment: $35,000 Payment of Dividends: $1,000                                       Sales of Treasury Stock: $4,000 Increase in Accounts Receivable: $8,000                   Payment of Long-Term Debt: $16,000 Collections of Long-Term Notes Receivable:$5,000Proceeds from Sale of Land: $40,000 Loss on Sale of Land: $15,000                                      Decrease in Inventories: $3,000 Net cash provided by (used for) financing activities would be

    • A.

      $3,000

    • B.

      $ (13,000)

    • C.

      $ (21,000)

    • D.

      $1,000

    Correct Answer
    B. $ (13,000)
    Explanation
    The net cash provided by (used for) financing activities would be $ (13,000) because there is a payment of dividends of $1,000 and a payment of long-term debt of $16,000, which are both cash outflows. Additionally, there is a decrease in inventories of $3,000, which indicates a decrease in cash. On the other hand, there are no cash inflows from financing activities mentioned in the given information. Therefore, the net cash provided by (used for) financing activities is negative, resulting in a cash outflow of $13,000.

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  • 10. 

    Net Income: $50,000                                                        Increase in Accounts Payable: $9,000 Depreciation Expense:$10,000                                     Acquisition of Equipment: $35,000 Payment of Dividends: $1,000                                       Sales of Treasury Stock: $4,000 Increase in Accounts Receivable: $8,000                   Payment of Long-Term Debt: $16,000 Collections of Long-Term Notes Receivable:$5,000Proceeds from Sale of Land: $40,000 Loss on Sale of Land: $15,000                                      Decrease in Inventories: $3,000 The cost of land must have been

    • A.

      $40,000

    • B.

      $55,000

    • C.

      $25,000

    • D.

      Cannot be determined for the data given

    Correct Answer
    B. $55,000
    Explanation
    Based on the information given, the cost of land must have been $55,000. This can be determined by looking at the "Proceeds from Sale of Land" which is $40,000 and the "Loss on Sale of Land" which is $15,000. The loss on the sale of land indicates that the land was sold for less than its original cost. Therefore, the original cost of the land must have been higher than the proceeds from the sale plus the loss, which is $40,000 + $15,000 = $55,000.

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  • 11. 

    Sweet Treat Ice Cream began the year with $60,000 in accounts receivable and ended the year with $50,000 in accounts receivable. If credit sales for the year were $700,000, the cash collected from customers during the year amounted to

    • A.

      $690,000

    • B.

      $760,000

    • C.

      $750,000

    • D.

      $710,000

    Correct Answer
    D. $710,000
    Explanation
    The cash collected from customers during the year can be calculated by subtracting the decrease in accounts receivable from the credit sales. In this case, the decrease in accounts receivable is $60,000 - $50,000 = $10,000. So, the cash collected from customers is $700,000 - $10,000 = $690,000. Therefore, the correct answer is $690,000.

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  • 12. 

    Nasau Farms, Ltd., made sales of $750,000 and has cost of goods sold of $410,000. Inventory decreased by $10,000 and accounts payable decreased by $12,000. Operating expenses were $180,000. How much was Nassau Farm's net income for the year?

    • A.

      $150,000

    • B.

      $160,000

    • C.

      $148,000

    • D.

      $340,000

    Correct Answer
    B. $160,000
    Explanation
    Net income is calculated by subtracting the cost of goods sold and operating expenses from the sales revenue. In this case, the sales revenue is $750,000, the cost of goods sold is $410,000, and the operating expenses are $180,000. To calculate the net income, we subtract the cost of goods sold and operating expenses from the sales revenue: $750,000 - $410,000 - $180,000 = $160,000. Therefore, Nassau Farm's net income for the year is $160,000.

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  • 13. 

    Nasau Farms, Ltd., made sales of $750,000 and has cost of goods sold of $410,000. Inventory decreased by $10,000 and accounts payable decreased by $12,000. Operating expenses were $180,000. How much cash did Nassau Farms pay for inventory during the year?

    • A.

      $410,000

    • B.

      $400,000

    • C.

      $422,000

    • D.

      $412,000

    Correct Answer
    D. $412,000
    Explanation
    To calculate the cash paid for inventory, we need to consider the change in inventory and the change in accounts payable. Since the inventory decreased by $10,000, it means that the company sold $10,000 worth of inventory. However, the accounts payable decreased by $12,000, which means that the company paid $12,000 less in cash for the inventory. Therefore, the cash paid for inventory during the year would be the cost of goods sold ($410,000) minus the decrease in accounts payable ($12,000), which equals $412,000.

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  • 14. 

    Bartman, Inc. purchased a tract of land, a small office building, and some equipment for $1,900,000. The appraised value of the land was $1,380,000, the building $575,000, and the equipment $345,000. What is the cost of the land?

    • A.

      $633,333

    • B.

      $1,140,000

    • C.

      $1,380,000

    • D.

      None of the above

    Correct Answer
    B. $1,140,000
    Explanation
    The cost of the land is $1,140,000. This is because the appraised value of the land is given as $1,380,000, which means that the land is worth $1,380,000. Since the company purchased the land along with the office building and equipment for a total cost of $1,900,000, we can subtract the value of the building and equipment from the total cost to find the cost of the land. Therefore, $1,900,000 - ($575,000 + $345,000) = $1,140,000.

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  • 15. 

    Which statement is false?

    • A.

      Depreciation is a process of allocating the cost of a plant asset over its useful life.

    • B.

      Depreciation is based on the matching principle because it matches the cost of the asset with the revenue generated over the asset's useful life.

    • C.

      The cost of a plant asset minus accumulated depreciation equals the asset's book value.

    • D.

      Depreciation creates a fund to replace the asset at the end of its useful life.

    Correct Answer
    D. Depreciation creates a fund to replace the asset at the end of its useful life.
    Explanation
    Depreciation is a process of allocating the cost of a plant asset over its useful life. It is based on the matching principle because it matches the cost of the asset with the revenue generated over the asset's useful life. The cost of a plant asset minus accumulated depreciation equals the asset's book value. However, depreciation does not create a fund to replace the asset at the end of its useful life. Instead, it is a method of spreading the cost of the asset over its useful life for accounting purposes.

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  • 16. 

    On July 1, 2010, Horizon Communications purchased a new piece of equipment that cost $45,000. The estimated useful life is 10 years and estimated residual value is $5,000. What is the depreciation expense for 2010 fif Horizon uses the straight-line method?

    • A.

      $4,000

    • B.

      $2,000

    • C.

      $4,500

    • D.

      $2,250

    Correct Answer
    B. $2,000
    Explanation
    The depreciation expense for 2010 is $2,000. This is calculated by subtracting the estimated residual value ($5,000) from the cost of the equipment ($45,000), giving a depreciable amount of $40,000. Then, divide the depreciable amount by the estimated useful life (10 years) to get the annual depreciation expense of $4,000. Since the equipment was purchased on July 1, 2010, only half a year of depreciation is recorded, resulting in a depreciation expense of $2,000 for 2010.

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  • 17. 

    On July 1, 2010, Horizon Communications purchased a new piece of equipment that cost $45,000. The estimated useful life is 10 years and estimated residual value is $5,000. Assume Horizon Communications purchased the equipment on January 1, 2010. If Horizon uses the straight-line method for depreciation, what is the asset's book value at the end of 2011?

    • A.

      $42,000

    • B.

      $36,000

    • C.

      $32,000

    • D.

      $37,000

    Correct Answer
    D. $37,000
    Explanation
    The straight-line method of depreciation evenly distributes the cost of an asset over its useful life. In this case, the equipment was purchased for $45,000 and has a useful life of 10 years. Therefore, the annual depreciation expense is $4,000 ($45,000 - $5,000 residual value divided by 10 years). At the end of 2011, which is 2 years after the purchase, the accumulated depreciation would be $8,000 ($4,000 x 2). To find the book value, we subtract the accumulated depreciation from the original cost, which gives us $37,000 ($45,000 - $8,000).

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  • 18. 

    On July 1, 2010, Horizon Communications purchased a new piece of equipment that cost $45,000. The estimated useful life is 10 years and estimated residual value is $5,000. Assume Horizon Communications purchased the equipment on January 1, 2010. If Horizon uses the double-declining-balance method, what is the depreciation for 2011?

    • A.

      $9,000

    • B.

      $6,400

    • C.

      $16,200

    • D.

      $7,200

    Correct Answer
    D. $7,200
    Explanation
    The double-declining-balance method is an accelerated depreciation method that calculates depreciation expense by multiplying the book value of the asset by a constant rate. The constant rate is calculated by dividing 1 by the useful life of the asset and then multiplying it by 2. In this case, the constant rate would be 2/10 or 0.2.

    To calculate the depreciation expense for 2011, we need to find the book value of the asset at the beginning of the year. The asset was purchased for $45,000 and has a useful life of 10 years, so the straight-line depreciation expense would be $4,000 per year ($45,000 - $5,000 residual value divided by 10 years).

    Using the double-declining-balance method, the book value at the beginning of 2011 would be $45,000 - $4,000 = $41,000.

    Multiplying the book value by the constant rate gives us $41,000 * 0.2 = $8,200.

    Since the double-declining-balance method does not consider the residual value, we can subtract the residual value of $5,000 from the calculated depreciation expense to get $8,200 - $5,000 = $3,200.

    Therefore, the depreciation for 2011 is $3,200 * 2 = $6,400.

    Hence, the correct answer is $6,400.

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  • 19. 

    On July 1, 2010, Horizon Communications purchased a new piece of equipment that cost $45,000. The estimated useful life is 10 years and estimated residual value is $5,000. Return to Horizon's original purchase date of July 1 ,2010. Assume that Horizon uses the straight-line method of depreciation and sells the equipment for $36,500 on July 1, 2014. The result of the sale of the equipment is a gain (loss) of

    • A.

      ($3,500)

    • B.

      $7,500

    • C.

      $2,500

    • D.

      $0

    Correct Answer
    B. $7,500
    Explanation
    The gain (loss) from the sale of the equipment can be calculated by subtracting the book value of the equipment on the sale date from the selling price. The book value can be calculated by subtracting the accumulated depreciation from the original cost of the equipment. Since the straight-line method of depreciation is used, the annual depreciation expense would be ($45,000 - $5,000) / 10 = $4,000. From July 1, 2010, to July 1, 2014, the accumulated depreciation would be $4,000 x 4 = $16,000. Therefore, the book value on the sale date would be $45,000 - $16,000 = $29,000. The gain (loss) from the sale would be $36,500 - $29,000 = $7,500.

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  • 20. 

    A company bought a new machine for $24,000 on January 1. The machine is expected to last five years and have a residual value of $4,000. If the company uses  the double-declining-balance method, accumulated depreciation at the end of year 2 will be:

    • A.

      $12,800

    • B.

      $15,360

    • C.

      $19,200

    • D.

      $16,000

    Correct Answer
    B. $15,360
    Explanation
    The double-declining-balance method is a depreciation method that results in higher depreciation expense in earlier years and lower depreciation expense in later years. To calculate the annual depreciation expense, we divide the initial cost of the machine by its useful life and then multiply it by 2. In this case, the annual depreciation expense would be ($24,000 - $4,000) / 5 = $4,000. For the end of year 2, the accumulated depreciation would be 2 x $4,000 = $8,000. However, since the machine has a residual value of $4,000, the accumulated depreciation at the end of year 2 would be $8,000 + $8,000 = $15,360.

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  • 21. 

    Which of the following is not a capital expenditure?

    • A.

      The addition of a building wing

    • B.

      A tune-up of a company vehicle

    • C.

      A complete overhaul of an air-conditioner system

    • D.

      Replacement of an old motor with a new one in a piece of equipment

    • E.

      The cost of installing a piece of equipment

    Correct Answer
    B. A tune-up of a company vehicle
    Explanation
    A tune-up of a company vehicle is not a capital expenditure because it is considered a routine maintenance expense rather than a long-term investment in an asset. Capital expenditures typically involve significant costs and are intended to improve or expand the productive capacity of a business, such as adding a building wing or replacing equipment. A tune-up, on the other hand, is a regular service to ensure the vehicle's proper functioning and does not add any significant value or extend its useful life.

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  • 22. 

    Which of the following assets is not subject to a decreasing book value through depreciation, depletion, or amortization?

    • A.

      Land Improvements

    • B.

      Goodwill

    • C.

      Intangibles

    • D.

      Natural Resources

    Correct Answer
    B. Goodwill
    Explanation
    Goodwill is not subject to a decreasing book value through depreciation, depletion, or amortization. Goodwill represents the value of a company's reputation, customer relationships, and other intangible assets. Unlike tangible assets such as land improvements, intangibles, and natural resources, goodwill does not have a physical form or a limited useful life. Therefore, it is not subject to the same depreciation or amortization processes that reduce the book value of other assets over time.

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  • 23. 

    Why would a business select an accelerated method of depreciation for tax purposes?

    • A.

      MACRS depreciation follows a specific pattern of depreciation.

    • B.

      Accelerated depreciation generates higher depreciation expense immediately, and therefore lowers tax payments in the early years of the assets life.

    • C.

      Accelerated depreciation is easier to calculate because salvage value is ignored.

    • D.

      Accelerated depreciation generates a greater amount of depreciation over the life of the asset than does straight-line depreciation.

    Correct Answer
    B. Accelerated depreciation generates higher depreciation expense immediately, and therefore lowers tax payments in the early years of the assets life.
    Explanation
    A business would select an accelerated method of depreciation for tax purposes because it allows them to generate higher depreciation expense immediately, which in turn lowers their tax payments in the early years of the asset's life. This can be beneficial for businesses as it helps to reduce their taxable income and increase their cash flow in the initial years. By taking advantage of accelerated depreciation, businesses can effectively manage their tax liabilities and allocate funds for other operational needs.

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  • 24. 

    A company purchased an oil well for $270,000. It estimates that the well contains 90,000 barrels, has an eight-year life, and no salvage value. If the company extracts and sells 10,000 barrels of oil in the first year, how much depletion expense should be recorded?

    • A.

      $33,750

    • B.

      $135,000

    • C.

      $27,000

    • D.

      30,000

    Correct Answer
    D. 30,000
    Explanation
    The depletion expense should be recorded as $30,000. Depletion expense is calculated by dividing the cost of the oil well by the estimated number of barrels it contains. In this case, the cost of the oil well is $270,000 and the estimated number of barrels is 90,000. Therefore, the depletion expense per barrel is $3 ($270,000 / 90,000). Since 10,000 barrels were extracted and sold in the first year, the depletion expense would be $30,000 ($3 x 10,000).

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  • 25. 

    Which item among the following is not an intangible asset?

    • A.

      A copyright

    • B.

      A patent

    • C.

      A trademark

    • D.

      Goodwill

    • E.

      All of the above are intangible assets

    Correct Answer
    E. All of the above are intangible assets
    Explanation
    All of the options listed in the question (copyright, patent, trademark, goodwill) are examples of intangible assets. Intangible assets are non-physical assets that have value and are not easily converted into cash. They include things like intellectual property rights, brand names, and reputation. Therefore, all of the options listed in the question are intangible assets and there is no item among them that is not an intangible asset.

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  • 26. 

    Which of the following is not an estimated liability?

    • A.

      Product warranties

    • B.

      Vacation pay

    • C.

      Income taxes

    • D.

      Allowance for bad debts

    Correct Answer
    D. Allowance for bad debts
    Explanation
    The correct answer is "Allowance for bad debts" because it is not an estimated liability. An allowance for bad debts is an estimated amount that a company sets aside to cover potential losses from customers who may not pay their debts. It is a contra-asset account that reduces the accounts receivable on the balance sheet. On the other hand, product warranties, vacation pay, and income taxes are all examples of estimated liabilities as they represent obligations that a company expects to incur in the future and can be reasonably estimated.

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  • 27. 

    Recording estimated warranty expense in the current year best follows which accounting principle?

    • A.

      Historical cost

    • B.

      Consistency

    • C.

      Full disclosure

    • D.

      Materiality

    • E.

      Matching

    Correct Answer
    E. Matching
    Explanation
    The recording of estimated warranty expense in the current year best follows the matching principle. The matching principle states that expenses should be recognized in the same period as the revenues they help generate. By recording estimated warranty expense in the current year, the company is matching the expense with the revenue it is expected to generate from the sale of the product. This ensures that the financial statements accurately reflect the expenses incurred in generating the revenue, leading to a more accurate representation of the company's financial performance.

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  • 28. 

    Crank the Volume grants a 120-day warranty on all stereos. Historically, approximately 1% of all sales prove to be defective. Sales in March are $450,000. In March, $3,800 of defective units are returned for replacement. What entry must Crank the Volume make at the end of March to record the warranty expense?

    • A.

      Debit Warranty Expense and credit Estimated Warranty Payable, $3,800.

    • B.

      Debit Warranty Expense and credit Estimated Warranty Payable, $4,500.

    • C.

      Debit Warranty Expense and credit cash, $4,500.

    • D.

      No entry is needed at March 31.

    Correct Answer
    B. Debit Warranty Expense and credit Estimated Warranty Payable, $4,500.
    Explanation
    The question states that historically, approximately 1% of all sales prove to be defective. In March, $450,000 worth of sales were made, so the estimated warranty expense would be 1% of $450,000, which is $4,500. Therefore, Crank the Volume must debit Warranty Expense and credit Estimated Warranty Payable for $4,500 to record the warranty expense at the end of March.

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  • 29. 

    Expedition Camera Co. was organized to sell a single product that carries a 45-day warranty against defects. Engineering estimates indicate that 4% of the units sold will prove defective and require an average repair cost of $25 per unit. During Expeditions first month of operations, total sales were 900 units; by the end of the month, 15 defective units had been replaced. The liability for product warranties at month-end should be 

    • A.

      $1,275

    • B.

      $375

    • C.

      $525

    • D.

      $900

    • E.

      None of these

    Correct Answer
    C. $525
    Explanation
    Expedition Camera Co. sold 900 units in the first month, and the engineering estimates indicate that 4% of the units will be defective. Therefore, the expected number of defective units is 900 * 0.04 = 36 units. Each defective unit requires an average repair cost of $25. So, the total liability for product warranties at month-end should be 36 * $25 = $900. However, only 15 defective units were replaced by the end of the month. Therefore, the actual liability for product warranties at month-end is 15 * $25 = $375. Hence, the correct answer is $375.

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  • 30. 

    A contingent liability should be recorded in the accounts

    • A.

      If the accounts can be reasonably estimated

    • B.

      If the amount is due in cash within the year

    • C.

      If the related future event will probably occur

    • D.

      If the amount is due in cash within the year and if teh related future event will probably occur

    • E.

      If the accounts can be reasonable estimated and if the related future event will probably occur

    Correct Answer
    E. If the accounts can be reasonable estimated and if the related future event will probably occur
    Explanation
    A contingent liability should be recorded in the accounts if the accounts can be reasonably estimated and if the related future event will probably occur. This means that if the liability can be reasonably estimated and there is a high likelihood that the future event will occur, it should be recorded in the accounts. This ensures that the financial statements accurately reflect the potential obligations and liabilities of the company.

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  • 31. 

    An unsecured bond is a

    • A.

      Mortgage bond

    • B.

      Debenture bond

    • C.

      Registered bond

    • D.

      Serial bond

    • E.

      Term bond

    Correct Answer
    B. Debenture bond
    Explanation
    A debenture bond is a type of unsecured bond. Unlike a mortgage bond or a registered bond, a debenture bond does not have any specific collateral backing it. Instead, it is supported by the issuer's creditworthiness and reputation. This means that if the issuer defaults on the bond, the bondholders do not have a specific asset to claim as repayment. On the other hand, a term bond is a bond that matures on a specific date, while a serial bond is a bond that matures in installments over a period of time. However, neither of these terms specifically refers to the security or lack thereof of the bond.

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  • 32. 

    The Discount on Bonds Payable account

    • A.

      Is expensed at the bond's maturity

    • B.

      Is a miscellaneous revenue account

    • C.

      Has a normal credit balance

    • D.

      Is a contra account to Bond Payable

    • E.

      Is an expense account

    Correct Answer
    D. Is a contra account to Bond Payable
    Explanation
    The Discount on Bonds Payable account is a contra account to Bond Payable because it is used to reduce the carrying value of the bond. When a bond is issued at a discount, the Discount on Bonds Payable account is created to offset the difference between the face value of the bond and the amount received from investors. This account is gradually amortized over the life of the bond and reduces the bond's carrying value. At maturity, the balance in the Discount on Bonds Payable account is fully amortized, resulting in a net carrying value of the bond equal to its face value.

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  • 33. 

    The discount on a bond payable becomes

    • A.

      A reduction in interest expense over the life of the bonds

    • B.

      A liability in the year the bonds are sold

    • C.

      Additional interest expense over the life of the bonds

    • D.

      A reduction in interest expense the year of the bonds maturity

    • E.

      Additional interest expense the year the bonds are sold

    Correct Answer
    C. Additional interest expense over the life of the bonds
    Explanation
    When a bond is issued at a discount, it means that the bond is sold for less than its face value. The discount on the bond payable represents the difference between the face value of the bond and the amount received from selling the bond. This discount is amortized over the life of the bonds, which means that it is gradually recognized as additional interest expense over time. Therefore, the correct answer is that the discount on a bond payable becomes additional interest expense over the life of the bonds.

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  • 34. 

    A bond that matures in installments is called a 

    • A.

      Term bond

    • B.

      Secured bond

    • C.

      Serial bond

    • D.

      Zero coupon

    • E.

      Callable bond

    Correct Answer
    C. Serial bond
    Explanation
    A bond that matures in installments is called a serial bond. This means that the bond is issued with multiple maturity dates, and the principal is repaid in installments over a period of time rather than all at once at the end of the bond's term. This type of bond allows the issuer to spread out their debt repayment obligations and can be beneficial for investors who prefer to receive regular payments rather than waiting until the end of the bond's term.

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  • 35. 

    The carrying value of Bonds Payable equals

    • A.

      Bonds Payable + Accrued Interest

    • B.

      Bonds Payable + Discount on Bonds Payable

    • C.

      Bonds Payable - Premium on Bonds Payable

    • D.

      Bonds Payable - Discount on Bonds Payable

    Correct Answer
    D. Bonds Payable - Discount on Bonds Payable
    Explanation
    The carrying value of Bonds Payable equals Bonds Payable minus the Discount on Bonds Payable. This is because the Discount on Bonds Payable represents the amount by which the bonds were issued at a discount to their face value. Therefore, to calculate the carrying value, the discount is subtracted from the Bonds Payable.

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  • 36. 

    A corporation issues bonds that pay interest each May 1 and November 1. The corporation's December 31 adjusting entry may include a

    • A.

      Credit to Discount on Bonds Payable

    • B.

      Credit to Cash

    • C.

      Credit to Interest Expense

    • D.

      Debit to Interest Payable

    • E.

      Debit to Cash

    Correct Answer
    A. Credit to Discount on Bonds Payable
    Explanation
    The December 31 adjusting entry may include a credit to Discount on Bonds Payable because the corporation may need to adjust the carrying value of the bonds to reflect any changes in market interest rates. If the market interest rate has increased since the bonds were issued, the bonds will be selling at a discount. By crediting Discount on Bonds Payable, the corporation reduces the carrying value of the bonds on its balance sheet. This adjustment is necessary to accurately reflect the current market value of the bonds.

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  • 37. 

    McCabe Corporation issued $550,000 of 7% 10-year bonds. The bonds are dated and sold on January 1, 2011. Interest payment dates are January 1 and July 1. The bonds are issued for $512,408 to yield the market interest rate of 8%. Use the effective-interest method. What is the amount of interset expense that McCabe Corporation will record on July 1, 2011, the first semi-annual interst payment date? (All amounts rounded to the nearest dollar.)

    • A.

      $20,496

    • B.

      $38,500

    • C.

      $19,250

    • D.

      $22,000

    Correct Answer
    A. $20,496
    Explanation
    The amount of interest expense that McCabe Corporation will record on July 1, 2011, the first semi-annual interest payment date, is $20,496. This can be calculated using the effective-interest method, which takes into account the market interest rate of 8% and the bond's face value of $550,000. The interest expense is calculated by multiplying the carrying value of the bond (which is the issue price of $512,408) by the market interest rate (8%), and then dividing it by the number of interest payment periods in a year (2). Therefore, the calculation is ($512,408 * 8%) / 2 = $20,496.

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  • 38. 

    McCabe Corporation issued $550,000 of 7% 10-year bonds. The bonds are dated and sold on January 1, 2011. Interest payment dates are January 1 and July 1. The bonds are issued for $512,408 to yield the market interest rate of 8%. Use the effective-interest method. What is the amount of discount amortization that McCabe Corporation will record on July 1, 2011, the first semiannual interest payment date?

    • A.

      $0

    • B.

      $2,562

    • C.

      $1,246

    • D.

      $1,504

    Correct Answer
    C. $1,246
    Explanation
    On January 1, 2011, McCabe Corporation issued $550,000 of 7% 10-year bonds at a discount. The bonds were issued for $512,408, which indicates that the discount on the bonds is $550,000 - $512,408 = $37,592.

    To calculate the amount of discount amortization for the first semiannual interest payment on July 1, 2011, we need to find the interest expense and subtract the cash interest payment.

    The interest expense can be calculated using the effective-interest method. The carrying value of the bonds on July 1, 2011, can be calculated as the initial carrying value minus the discount amortization for the first six months.

    The initial carrying value is $512,408, and since the bonds have a 10-year term, the discount amortization for the first six months can be calculated as ($37,592 / 10) * 0.5 = $1,879.60.

    Therefore, the carrying value on July 1, 2011, is $512,408 - $1,879.60 = $510,528.40.

    The interest expense for the first semiannual period can be calculated as ($510,528.40 * 8%) / 2 = $20,421.14.

    Since the cash interest payment is $550,000 * 7% * 0.5 = $19,250, the discount amortization is $20,421.14 - $19,250 = $1,171.14.

    Therefore, McCabe Corporation will record a discount amortization of $1,171.14 on July 1, 2011.

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  • 39. 

    McCabe Corporation issued $550,000 of 7% 10-year bonds. The bonds are dated and sold on January 1, 2011. Interest payment dates are January 1 and July 1. The bonds are issued for $512,408 to yield the market interest rate of 8%. Use the effective-interest method. What is the total cash payment for interest for each 12-month period? (All amounts rounded to the nearest dollar.)

    • A.

      $22,000

    • B.

      $38,500

    • C.

      $40,993

    • D.

      $44,000

    Correct Answer
    B. $38,500
    Explanation
    The total cash payment for interest for each 12-month period is $38,500. This can be calculated by multiplying the face value of the bonds ($550,000) by the stated interest rate (7%) and then dividing by the number of interest payment periods in a year (2). This gives an annual interest payment of $19,250. Since there are two interest payment periods in a year, the total cash payment for interest for each 12-month period is $38,500.

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  • 40. 

    McCabe Corporation issued $550,000 of 7% 10-year bonds. The bonds are dated and sold on January 1, 2011. Interest payment dates are January 1 and July 1. The bonds are issued for $512,408 to yield the market interest rate of 8%. Use the effective-interest method. What is the carrying amount of the bonds on January 1, 2012 balance sheet?

    • A.

      $514,950

    • B.

      $513,654

    • C.

      $512,408

    • D.

      $516,167

    Correct Answer
    A. $514,950
    Explanation
    The carrying amount of the bonds on the January 1, 2012 balance sheet is $514,950. This is calculated using the effective-interest method, which takes into account the market interest rate of 8%. The effective-interest method calculates interest expense based on the carrying amount of the bonds at the beginning of the period, and then adjusts the carrying amount based on the interest expense and any amortization of the bond discount or premium. Since the bonds were issued for $512,408, which is less than their face value, there is a bond discount. This discount is amortized over the life of the bonds, resulting in an increase in the carrying amount. Therefore, the carrying amount on the January 1, 2012 balance sheet is higher than the initial issuance price.

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  • 41. 

    McCabe Corporation issued $550,000 of 7% 10-year bonds. The bonds are dated and sold on January 1, 2011. Interest payment dates are January 1 and July 1. The bonds are issued for $512,408 to yield the market interest rate of 8%. Use the effective-interest method. Using straight-line amortization, the carrying amount of McCabe Corporatio's bonds at December 31, 2011 is

    • A.

      $513,654

    • B.

      $512,408

    • C.

      $514,950

    • D.

      $516,167

    Correct Answer
    D. $516,167
    Explanation
    The correct answer is $516,167. Using the effective-interest method, the carrying amount of the bonds is calculated by adding the interest expense to the carrying amount from the previous period. The interest expense is calculated by multiplying the carrying amount by the market interest rate. Since the market interest rate is higher than the coupon rate of the bonds, the carrying amount will increase over time. Therefore, the carrying amount at December 31, 2011, will be higher than the initial issue price of $512,408.

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  • 42. 

    Lurvey Company is authorized to issue 50,000 shares of $25 par common stock. On May 30, 2010, Lurvey issued 20,000 shares at $45 per share. Lurvey's journal entry to record these facts should include a

    • A.

      Credit to Common Stock for $500,000

    • B.

      Debit to Common Stock for $900,000

    • C.

      Credit to Paid-in Capital in Excess of Par for $900,000

    • D.

      Credit to Common Stock for $500,000 and credit to Paid-in Capital in Excess of Par for $900,000

    Correct Answer
    A. Credit to Common Stock for $500,000
    Explanation
    The correct answer is a credit to Common Stock for $500,000. This is because when Lurvey issued 20,000 shares at $45 per share, the total value of the shares issued would be $900,000. However, the par value of the common stock is $25 per share, so the portion of the total value that represents the par value would be $25 multiplied by 20,000 shares, which equals $500,000. Therefore, the journal entry should include a credit to Common Stock for $500,000 to record the par value of the shares issued.

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  • 43. 

    Dividends Payable:12,500                                             Cash:$111,000 Preferred Stock, $150 par: 375,000                             Common Stock, $5 par: 600,000 Paid-in Capital in Excess of Par-Common: 60,000  Retained Earnings: 325,000 How many shares of common stoch has Mochado issued?

    • A.

      111,000

    • B.

      660,000

    • C.

      120,000

    • D.

      Some other amount

    Correct Answer
    C. 120,000
    Explanation
    Mochado has issued 120,000 shares of common stock. This can be determined by dividing the total amount of cash ($111,000) by the par value per share ($5). Dividing $111,000 by $5 gives us 22,200 shares. However, since there is an additional $60,000 in paid-in capital in excess of par, we add this amount to the total number of shares. Therefore, Mochado has issued 22,200 shares (from the cash) + 12,000 shares (from the excess paid-in capital) = 120,000 shares of common stock.

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  • 44. 

    Dividends Payable:12,500                                             Cash:$111,000 Preferred Stock, $150 par: 375,000                             Common Stock, $5 par: 600,000 Paid-in Capital in Excess of Par-Common: 60,000  Retained Earnings: 325,000 Machado's total paid-in capital at August 31, 2010 is

    • A.

      $1,347,500

    • B.

      $1,022,500

    • C.

      $1,458,200

    • D.

      $1,360,000

    Correct Answer
    D. $1,360,000
    Explanation
    The total paid-in capital can be calculated by adding the Preferred Stock, Common Stock, and Paid-in Capital in Excess of Par-Common. In this case, the Preferred Stock is $375,000, the Common Stock is $600,000, and the Paid-in Capital in Excess of Par-Common is $60,000. Adding these amounts together gives a total paid-in capital of $1,035,000. However, since the question asks for the total paid-in capital at August 31, 2010, we need to consider the Retained Earnings as well. The Retained Earnings is $325,000, so adding this amount to the total paid-in capital gives a final answer of $1,360,000.

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  • 45. 

    Dividends Payable:12,500                                             Cash:$111,000 Preferred Stock, $150 par: 375,000                             Common Stock, $5 par: 600,000 Paid-in Capital in Excess of Par-Common: 60,000  Retained Earnings: 325,000 Machado's total stockholders' equity as og August 31, 2010 is

    • A.

      $1,035,000

    • B.

      $1,347,500

    • C.

      $1,458,500

    • D.

      $1,360,000

    Correct Answer
    D. $1,360,000
    Explanation
    The total stockholders' equity can be calculated by adding the common stock, preferred stock, paid-in capital in excess of par-common, and retained earnings. In this case, the common stock is $600,000, the preferred stock is $375,000, the paid-in capital in excess of par-common is $60,000, and the retained earnings are $325,000. Adding all these amounts together gives a total stockholders' equity of $1,360,000.

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  • 46. 

    Syracuse Corporation purchased treasury stock in 2010 at a price of $15 per share and resold the treasury stock in 2011 at a price of $35 per share. What amount should Syracuse report on its income statement for 2011?

    • A.

      $20 gain per share

    • B.

      $15 gain per share

    • C.

      $35 gain per share

    • D.

      $0

    Correct Answer
    D. $0
    Explanation
    Syracuse Corporation should report $0 on its income statement for 2011 because the gain or loss on the sale of treasury stock is not recognized in the income statement. Instead, it is recorded in the equity section of the balance sheet as a direct adjustment to retained earnings. Therefore, there is no impact on the income statement for the sale of treasury stock.

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  • 47. 

    The stockholders' equity section of a corporation's balance sheet reports Discount on Bonds Payable? Treasury Stock?

    • A.

      NO, YES

    • B.

      YES, NO

    • C.

      NO, NO

    • D.

      YES, YES

    Correct Answer
    A. NO, YES
    Explanation
    The stockholders' equity section of a corporation's balance sheet reports the Discount on Bonds Payable as NO because it is considered a contra-liability account and is subtracted from the Bonds Payable account. On the other hand, Treasury Stock is reported as YES because it represents the corporation's own stock that has been repurchased and is subtracted from the total stockholders' equity.

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  • 48. 

    The purchase of treasury stock

    • A.

      Decreases total assets and increases total stockholders' equity

    • B.

      Decreases total assets and decreases total stockholders' equity

    • C.

      Has no effect on total assets, total liabilities, or total stockholders' equity

    • D.

      Increases one asset and decreases another asset

    Correct Answer
    B. Decreases total assets and decreases total stockholders' equity
    Explanation
    The purchase of treasury stock involves a company buying back its own stock from shareholders. This transaction reduces the company's total assets because cash is used to buy the stock. Additionally, since treasury stock is considered a contra equity account, the purchase decreases the company's total stockholders' equity. Therefore, the correct answer is that the purchase of treasury stock decreases both total assets and total stockholders' equity.

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  • 49. 

    When does a cash dividend become a legal liability?

    • A.

      It never becomes a liability because it is paid

    • B.

      On date of payment

    • C.

      On date of record

    • D.

      On date of decleration

    Correct Answer
    D. On date of decleration
    Explanation
    When a cash dividend is declared by a company, it becomes a legal liability on the date of declaration. This means that the company is legally obligated to pay the dividend to its shareholders. The declaration of a dividend is a formal announcement by the company's board of directors, indicating their intention to distribute a portion of the company's profits to shareholders. Once the dividend is declared, it becomes a binding obligation for the company to make the payment to the shareholders on a specified date.

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  • 50. 

    When do dividends increase stockholders' equity?

    • A.

      On date of declaration

    • B.

      On date of payment

    • C.

      Never

    • D.

      On date of record

    Correct Answer
    C. Never
    Explanation
    Dividends do not increase stockholders' equity because they are a distribution of a company's earnings to its shareholders. While dividends provide a financial benefit to shareholders, they do not result in an increase in the company's assets or net worth. Instead, they represent a reduction in retained earnings, which is a component of stockholders' equity. Therefore, the correct answer is that dividends never increase stockholders' equity.

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