TEST BANK for Financial and Managerial Accounting for MBAs 6th Edition by Easton, Halsey, McAnally

Module 1 Financial Accounting for MBAs Learning Objectives – Coverage by question True/False

Multiple Choice

LO2 – Identify and discuss the users and suppliers of financial statement information.

1- 4

1, 2

LO3 – Describe and examine the four financial statements, and define the accounting equation.

5-10

3-19

LO4 – Explain and apply the basics of profitability analysis.

11-13

20-25

14

26, 27

15

28-30

LO1 – Explain and assess the four main business activities.

LO5 – Assess business operations within the context of a competitive environment.

LO6 – Access reports filed with the SEC (Appendix 1A). LO7 – Describe the accounting principles and regulations that frame financial statements (Appendix 1B). These questions are available to assign in myBusinessCourse.

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Financial & Managerial Accounting for MBAs, 6th Edition

Module 1: Financial Accounting for MBAs

True/False Topic: Users of Financial Statement Information LO: 2 1. Shareholders demand financial information primarily to assess profitability and risk whereas bankers demand information primarily to assess cash flows to repay loan interest and principal. Answer: True Rationale: While both shareholders and bankers are interested in all the information companies provide, shareholders care about more about a company’s profitability and bankers care more about solvency and creditworthiness.

Topic: Publicly Available Financial Reports LO: 2 2. Publicly traded companies are required to provide quarterly financial reports directly to the public. Answer: False Rationale: Companies provide electronic versions of quarterly financial statements to the SEC, which posts them to the Internet for the public to access them.

Topic: Users of Financial Statement Information LO: 2 3. Publicly traded companies provide financial information primarily to satisfy the SEC and the tax authorities (that is, the Internal Revenue Service). Answer: False Rationale: Demand for information extends to many users; the regulators such as the SEC and the IRS are only one class of users.

Topic: SEC Filings LO: 2 4. Publicly traded companies must provide to the Securities Exchange Commission annual audited financial statements (10-K reports) and quarterly audited financial statements (10-Q reports). Answer: False Rationale: Quarterly reports do not need to be audited.

Topic: Balance Sheet LO: 3 5. If a company reports retained earnings of $175.3 million on its balance sheet, it must also report $175.3 million in cash. Answer: False Rationale: The accounting equation requires total assets to equal total liabilities plus stockholders’ equity. That does not imply, however, that liability and equity accounts relate directly to specific assets.

Test Bank (T/F & MC), Module 1

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Topic: Balance Sheet LO: 3 6. A balance sheet shows a company’s position over a period of time, whereas an income statement, statement of stockholders’ equity, and statement of cash flows show its position at a point in time. Answer: False Rationale: The statement is reversed: A balance sheet shows a company’s position at a point in time, whereas an income statement, statement of equity, and statement of cash flows show its position over a period of time.

Topic: Accounting Equation LO: 3 7. Assets must always equal liabilities plus equity. Answer: True Rationale: The accounting equation is Assets = Liabilities + Equity. This relation must always hold.

Topic: Income Statement LO: 3 8. The income statement reports net income which is defined as the company’s profit after all expenses and dividends have been paid. Answer: False Rationale: The statement contains two errors. First, net income does not include any dividends during the period; these are a distribution of profits and not part of its calculation. Second, the income statement is prepared on an accrual basis and thus includes expenses incurred (as opposed to paid).

Topic: Statement of Cash Flows LO: 3 9. A statement of cash flows reports on cash flows for operating, investing and financing activities at a point in time. Answer: False Rationale: A statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time. Topic: Statement of Stockholders’ Equity LO: 3 10. An increase in common stock would be reflected in the statement of stockholders’ equity. Answer: True Rationale: The statement of stockholders’ equity reports on changes in the accounts that make up stockholders’ equity. This includes contributed capital, retained earnings, and other equity.

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Financial & Managerial Accounting for MBAs, 6th Edition

Topic: Return on Assets LO: 4 11. Return on Assets (ROA) measures the profit the company makes on each dollar of total assets it uses. Answer: True Rationale: Return on Assets is a profitability metric that measures how much profit the company made for each dollar of assets the company holds on average during the year.

Topic: Return on Assets LO: 4 12. Return on Assets (ROA) = (Net Income / Sales) × Asset Turnover Answer: True Rationale: Return on Assets = Net Income / Average Assets. This is the disaggregation of the ROA into its components

Topic: Asset Turnover LO: 4 13. Consider two companies (A and B) with equal profit margins of 18%. Company A has an asset turnover of 1.2 and Company B has an asset turnover of 1.5. If all else is equal, Company B with its’ higher asset turnover, is less profitable because it requires more revenue to turn its assets over. Answer: False Rationale: Asset turnover is an efficiency metric. The higher the turnover, the more efficient the company is with its assets and thus, the more profitable. Algebraically, ROA = PM × AT. Company A above is less profitable: 18% × 1.2 = 21.6% whereas Company B’s ROA is 18% × 1.5 = 27.0%.

Topic: Financial Accounting and Business Analysis LO: 5 14. Financial statements are influenced by five important forces that determine a company’s competitive intensity: (A) industry competition, (B) buyer power, (C) supplier power, (D) product substitutes, and (E) threat of entry. Answer: True Rationale: By systematically considering these five business forces, we can gain better insights from financial statements.

Topic: Audit Report LO: 7 15. A “clean” audit report asserts—among other things—that (a) the auditor has prepared all necessary financial statements and (b) management has expressed its opinion that they are prepared in conformity with GAAP. Answer: False Rationale: The statement is reversed: A “clean” audit report asserts—among other things—that (a) management has prepared all necessary financial statements and (b) the auditor has expressed its opinion that they are prepared in conformity with GAAP.

Test Bank (T/F & MC), Module 1

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Multiple Choice Topic: Users of Financial Statement Information LO: 2 1. Which of the following groups would likely not be interested in the financial statements of a large public company such as Procter & Gamble? A) Shareholders B) Employees C) Competitors D) Taxing agencies E) None of these are correct Answer: E Rationale: All of these parties would use the financial statements, albeit in different ways and for different purposes.

Topic: Users of Financial Statement Information LO: 2 2. The SEC adopted Regulation FD, to curb public companies’ practice of: A) Routinely filing extensions for annual reports (Form 10-K) B) Selectively disclosing information C) Reporting pro forma (non-GAAP) numbers D) Hiring auditors for non-audit services such as consulting engagements E) None of these are correct Answer: B Rationale: Reg FD reads as follows: “Whenever an issuer discloses any material nonpublic information regarding that issuer, the issuer shall make public disclosure of that information . . . simultaneously, in the case of an intentional disclosure; and . . . promptly, in the case of a nonintentional disclosure.”

Topic: Components of the Balance Sheet LO: 3 3. A list of assets, liabilities and equity can be found on which of the following? A) Balance Sheet B) Income Statement C) Statement of Assets and Liabilities D) Statement of Cash Flows E) Statement of Stockholders’ Equity Answer: A Rationale: A balance sheet lists amounts for assets, liabilities and equity at a point in time.

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Financial & Managerial Accounting for MBAs, 6th Edition

Topic: Balance Sheet LO: 3 4. Which of the following items would not be found on a balance sheet? (Select all that apply) A) Stockholders’ Equity B) Property, plant and equipment C) Nonowner financing D) Cash E) Dividends Answer: E Rationale: The balance sheet reports assets (including cash and property, plant and equipment), liabilities (including nonowner financing) and equity. Dividends are reported on statement of stockholders’ equity.

Topic: Profit and Cash Flow LO: 3 5. A company’s net cash flow will equal its net income … A) Almost always B) Rarely C) Occasionally D) Only when the company has no investing cash flow for the period E) Only when the company has no investing or financing cash flow for the period Answer: B Rationale: Net income reflects the company’s revenue minus expenses for the given period. Net cash flow represents the amount of money received (spent) on operating, investing and financing activities for the given period. These values are rarely the same.

Topic: Financial Statement Information LO: 3 6. Which of the following statements are correct (select all that apply)? A) A balance sheet reports on investing and financing activities. B) An income statement reports on financing activities. C) The statement of equity reports on changes in the accounts that make up equity. D) The statement of cash flows reports on cash flows from operating, investing, and financing activities over a period of time. E) A balance sheet reports on a company’s assets and liabilities over a period of time. Answer: A, C, and D Rationale: Statement (B) is incorrect—the statement of cash flows reports on financing activities that are reflected on the balance sheet. Statement (E) is incorrect—the balance sheet reports on a company’s assets and liabilities at a point in time.

Test Bank (T/F & MC), Module 1

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Topic: Balance Sheet—Numerical calculations required LO: 3 7. Kelty Company’s year-end financial statements reported the following (in millions): Total assets Total liabilities Total shareholders’ equity Dividends Net income (loss) Retained earnings, Jan. 1

$41,278 29,465 11,813 205 3,160 11,425

What did Kelty Company report for retained earnings at December 31? A) $14,380 million B) $14,768 million C) $14,790million D) $14,585 million E) There is not enough information to determine the answer. Answer: A Rationale: (in millions) Retained earnings, Jan. 1 Net income Dividends

$11,425 3,160 (205)

Retained earnings, Dec. 31

$14,380

Topic: Balance Sheet—Numerical calculations required LO: 3 8. United Company’s year-end balance sheet reported the following (in millions) Total Assets Total Liabilities Contributed Capital

$100,228 78,713 8,933

What was United Company’s total liabilities and stockholders’ equity at December 31? A) $ 87,646 million B) $ 91,295 million C) $100,228 million D) $ 21,515 million Answer: C Rationale: Assets = Liabilities + Stockholders Equity. Assets = $100,228 so this is the total of liabilities and equity combined.

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Financial & Managerial Accounting for MBAs, 6th Edition

Topic: Balance Sheet—Numerical calculations required LO: 3 9. On December 31 Starstruck Corporation reported, on its Form 10-K, the following (in millions): Total assets Total stockholders’ equity Total current liabilities

$21,494.3 8,836.1 6,820.4

What did Starstruck report as total liabilities on December 31? A) $12,658.2 million B) $ 5,837.8 million C) $14,673.9 million D) $23,510.0 million E) None of these are correct. Answer: A Rationale: Assets = Liabilities + Stockholders Equity. $21,494.3 = Liabilities + $8,836.1 Therefore, total liabilities = $12,658.2 on December 31.

Topic: Balance Sheet—Numerical calculations required LO: 3 10. In its 2019 annual report, Snap-Tite Incorporated reported the following (in millions): Current assets Total shareholders’ equity Total liabilities

$1,884.0 $2,635.2 $2,088.0

What did Snap-Tite report as total assets at year-end? A) $6,607.2 million B) $2,839.2 million C) $3,972.0 million D) $4,723.2 million E) None of these are correct. Answer: D Rationale: Assets = Liabilities + Stockholders Equity. Assets = $2,088.0 + $2,635.2 Therefore, Assets = $4,723.2

Test Bank (T/F & MC), Module 1

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Topic: Balance Sheet—Numerical calculations required LO: 3 11. In its 2016 annual report, Kehl’s Corporation reported the following (in millions): Total assets Total shareholders’ equity Total liabilities

$20,362 $ 7,766 $12,596

What proportion of Kehl’s Corporation is financed by nonowners? A) 44.8% B) 38.1% C) 61.9% D) 61.7% E) None of these are correct. Answer: C Rationale: Nonowner financing for Kehl’s assets is provided from liabilities (the shareholders are the owners). $12,596 / $20,362 = 61.9%

Topic: Balance Sheet—Numerical calculations required (more challenging; requires calculation of total assets before ratio can be calculated.) LO: 3 12. In its 2016 annual report, Malibu Inc. reported the following (in millions) on its year-end balance sheet: Total liabilities Total shareholders’ equity

$4,086.0 $2,648.6

What proportion of Malibu Inc. is financed by nonowners? A) 60.7% B) 39.3% C) 64.8% D) 78.6% E) None of these are correct. Answer: A Rationale: Nonowner financing for Malibu’s assets is provided from liabilities (the shareholders are the owners). Assets = Liabilities + Equity. Assets = $4,086.0 + $2,648.6 = $6,734.6 $4,086.0 / $6,734.6 = 60.7%

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Financial & Managerial Accounting for MBAs, 6th Edition

Topic: Income Statement—Numerical calculations required LO: 3 13. The Tread Company’s December 31 financial statements reported the following (in millions) Sales Cost of sales Other expenses (excluding cost of sales)

$22,737 $16,458 $ 4,353

What did Tread Company report for net income for the year ending December 31? A) $ 6,279 million B) $12,105 million C) $10,632 million D) $ 1,926 million E) $43,548 million Answer: D Rationale: Sales – Cost of sales – Other expenses = Net income $22,737 – $16,458 – $4,353 = $1,926

Topic: Income Statement—Numerical calculations required LO: 3 14. Tully Corporation reported the following on its annual income statement (in millions) Sales revenue Gross profit Total expenses

$118,774 $72,382 $46,634

What did Tully report for cost of goods sold during the year? A) $31.004 million B) $93,026 million C) $25,748 million D) $46,392 million E) None of these are correct. Answer: D Rationale: Sales – Cost of goods sold = Gross profit $118,774 – Cost of goods sold = $72,382 Therefore, Cost of goods sold = $46,392

Test Bank (T/F & MC), Module 1

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Topic: Income statement—Numerical calculations required LO: 3 15. On September 30, Star Corporation reported, in its annual report, the following (in millions):

Total expenses Operating income Net earnings

Year 2 $27,745.5 $6,257.9 $4,228.4

Year 1 $24,605.1 $5,401.5 $4,139.0

What amount of revenues did Star Corporation report for the year ended September 30, Year 2 (in millions)? A) $31.973.9 B) $34,003.4 C) $29,775.0 D) $27,834.9 E) None of these are correct. Answer: A Rationale: Revenues – Total expenses = Net earnings Revenues – $27,745.5 = $4,228.4 Therefore, Revenues were $31.973.9

Topic: Income Statement—Numerical calculations required (more challenging; requires calculation of growth rate.) LO: 3 16. On December 31, Sleek Corporation reported, on its annual report, the following (in millions):

Operating income Net earnings

Year 2 $4,255.3 $2,875.3

Year 1 $3,673.0 $2,759.3

Calculate year-over-year increase or (decrease) in net earnings, in percentage terms. A) 4.2% B) 15.9% C) 16.8% D) 4.0% E) None of these are correct. Answer: A Rationale: During the year, net earnings increased compared to the prior year. This increase is calculated as ($2,875.3 – $2,759.3) / $2,759.3 = 4.2%.

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Financial & Managerial Accounting for MBAs, 6th Edition

Topic: Income Statement—Numerical calculations required (more challenging; requires calculation of gross profit and ratios for two years.) LO: 3 17. In its year-end financial statements, Pillar Inc. reported the following (in millions):

Sales Cost of goods sold

Year 2 $38,537 $28,309

Year 1 $47,011 $33,546

As a percentage of sales, did Pillar’s gross profit increase or decrease during the year? A) Gross profit increased from 25.0% to 28.6% B) Gross profit decreased from 28.6% to 25.0% C) Gross profit increased from 71.4% to 75.0% D) Gross profit decreased from 75.0% to 71.4% E) There is not enough information to answer the question. Answer: B Rationale: Sales – Cost of goods sold = Gross profit. In Year 1, gross profit to sales was $13,196 / $46,071 = 28.6%. In Year 2, gross profit to sales was $9,457 / $37,766 = 25.0%.

Topic: Statement of Cash Flows—Numerical calculations required LO: 3 18. Trio Company’s December 31, Year 2, financial statements reported the following (in millions). Cash December 31 Cash from operating activities Cash from investing activities Cash from financing activities

$1,698 $2,256 $(1,460) $(1,313)

What did Trio Company report for cash on its December 31, Year 1 balance sheet? A) $2,215 million B) $3,422 million C) $ 517 million D) $1,181 million E) None of these are correct Answer: A Rationale: Cash, beginning of year + Cash from operating activities + Cash from investing activities + Cash from financing activities = Cash at end of year Cash, beginning of year + $2.256 – $1,460 – $1,313 = $1,698 Cash, beginning of year = $2,215

Test Bank (T/F & MC), Module 1

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Topic: Statement of Cash Flows—Numerical calculations required LO: 3 19. Page’s June 30, year-end financial statements reported the following (in millions): Cash, beginning of year Cash, end of year Cash from operating activities Cash from investing activities

$17,090 $17,755 $38,588 $(13,938)

What did Page report for cash from financing activities for the year ended June 30? A) $ 23,985 million B) $25,315 million C) $(23,985) million D) $25,315 million E) $24,650 million Answer: C Rationale: Cash, beginning of year + Cash from operating activities + Cash from investing activities + Cash from financing activities = Cash at end of year $17,090 + $38.588 – $13,938 + Cash from financing = $17,755 Cash from financing = $(23,985)

Topic: Return on Assets LO: 4 20. A company’s return on assets (ROA) can be disaggregated to reveal which of the following (select all that apply): A) Financial leverage B) Profit margin C) Sales growth D) Asset growth E) Asset turnover Answer: B and E Rationale: ROA can be disaggregated into profit margin and asset turnover. Financial leverage and sales growth are not components of this ratio. Asset growth affects the calculation via the denominator, but can’t be disaggregated directly.

Topic: Return on Equity LO: 4 21. The ratio of net income to equity is also known as: A) Total net equity ratio B) Profit margin C) Return on equity D) Net income ratio E) None of these are correct. Answer: C Rationale: The ratio of net income to equity is called ROE, return on equity, and measures how profitable the company was given the shareholders’ investment.

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Financial & Managerial Accounting for MBAs, 6th Edition

Topic: Return on Equity—Numerical calculations required LO: 4 22. Sales for the year = $341,126, Net Income for the year = $38,441, Income from equity investments = $9,033, and average Equity during the year = $123,650. Return on equity (ROE) for the year is: A) 31.1% B) 11.3% C) 7.3% D) 2.6% E) There is not enough information to answer the question. Answer: A Rationale: Return on equity = Net income / Average Equity $38,441 / $123,650 = 31.1%.

Topic: Return on Assets—Numerical calculations required LO: 4 23. Sales for the year = $296,024, Net Income for the year = $22,965, and average Assets during the year = $163,628. Return on Assets (ROA) for the year is: A) 55.3% B) 7.8% C) 14.0% D) There is not enough information to calculate ROA. E) None of these are correct. Answer: C Rationale: ROA = Net Income / Average assets Therefore ROA equals $22,965 / $163,628 = 14.0%.

Topic: Return on Assets—Numerical calculations required (more challenging because net income is not provided, must be calculated.) LO: 4 24. Sales for the year = $997,279, Profit margin =18%, and average Assets during the year = $647,770. Return on Assets (ROA) for the year is: A) 65.0% B) 27.7% C) 11.7% D) There is not enough information to calculate ROA. E) None of these are correct. Answer: B Rationale: ROA = Net Income / Average assets. We are not given Net income, but we do know that profit margin is 18%. Thus we can calculate: Net income as Sales × PM = $997,279 x 18% = $179,510.22 ROA = $179,510.22 / $647,770 = 27.7%

Test Bank (T/F & MC), Module 1

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Topic: Return on Assets—Numerical calculations required (more challenging because average assets are not provided; must be calculated.) LO: 4 25. On December 31, Harper, Inc., reported, on its year-end financial statements, the following (in millions):

Total assets Total sales Net income

Year 2 $11,868 $7,195 $692

Year 1 $11,968 $7,194 $902

Calculate return on assets (ROA) for Year 2. A) 5.8% B) 60.6% C) 60.4% D) 6.8% E) None of these are correct. Answer: A Rationale: Return on assets = Net income / Average assets. A simple way to calculate average assets is to take the average of the beginning and ending assets: ($11,868 + $11,968) / 2 = $911,918 ROA = $692 / $11,918 = 0.05815 = 5.8%

Topic: Five Forces of Competitive Industry LO: 5 26. Which of the following are not one of the five forces that determine a company’s competitive intensity? (Select as many as apply) A) Bargaining power of suppliers B) Threat of substitution C) Ability to obtain financing D) Threat of entry E) Threat of regulatory intervention Answer: C and E Rationale: The five forces of the competitive industry include: industry competitors, bargaining power of buyers, bargaining power of suppliers, threat of substitution, and threat of entry.

Topic: Business Environment LO: 5 27. Which of the following are relevant in an analysis of a company’s business environment? (Select as many as apply) A) Financing B) Labor C) Buyers D) Governance E) All of the above Answer: E Rationale: The components of business analysis are: life cycle, outputs, buyers, inputs, competition, financing, labor, governance, and risk.

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Financial & Managerial Accounting for MBAs, 6th Edition

Topic: Clean Audit Opinion LO: 7 28. A clean audit opinion includes which of the following assertions: (Select as many as apply) A) Financial statements present fairly the company’s financial condition B) The auditor certifies the financials to be error free C) The financial statements are management’s responsibility D) Management has handled transactions efficiently in all material respects E) All of the above Answer: A and C Rationale: The audit is not a certification (B is wrong) and the auditor does not provide any opinion about how management handles transactions (D is wrong).

Topic: Auditor Report LO: 7 29. The audit report is addressed to: A) The audit committee B) The board of directors C) The shareholders D) The board of directors and the shareholders E) The Securities and Exchange Commission (SEC) Answer: D Rationale: The auditors’ report to the owners and the directors.

Topic: GAAP LO: 7 30. Generally Accepted Accounting Principles (GAAP) are created by: (select all that apply) A) The Securities and Exchange Commission B) The Generally Accepted Accounting Principles Task Force C) The Sarbanes Oxley Act D) The Financial Accounting Standards Board E) The Public Company Accounting Oversight Board Answer: A and D Rationale: The Sarbanes Oxley Act did not create new accounting principles but rather, rules for auditors and corporate governance mechanisms for companies. Answer B is fictional. The PCAOB was established to oversee the development of audit standards and to monitor the effectiveness of auditors.

Test Bank (T/F & MC), Module 1

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Module 2 Introducing Financial Statements Learning Objectives – Coverage by question True/False

Multiple Choice

1-7, 11

1-8, 13-15, 24, 26, 27, 29

7-9

9-12, 25, 28, 30

10

20-23

LO5 – Construct and apply linkages among the four financial statements.

12-14

16-23

LO6 – Locate and use additional information from public sources.

15, 16

LO1 – Examine and interpret a balance sheet.

LO2 – Examine and interpret an income statement.

LO3 – Examine and interpret a statement of stockholders’ equity.

LO4- Describe a statement of cash flows.

These questions are available to assign in myBusinessCourse.

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Financial & Managerial Accounting for MBAs, 6th Edition

Module 2: Introducing Financial Statements and Transaction Analysis

True/False Topic: Definition of an Asset LO: 1 1. In order for an asset to be reported on the balance sheet, it must be owned or controlled by the company and be expected to provide future benefits. Answer: True Rationale: Assets reported on the balance sheet must be owned or controlled by the company and must be expected to provide future benefits. These benefits can relate to the expected receipt of cash or another asset, or the expected decrease in a liability.

Topic: Historical Cost LO: 1 2. Assets are reported on the balance sheet at their current market value. Answer: False Rationale: Assets are generally reported at historical costs. An exception is marketable securities.

Topic: Book vs. Market Value LO: 1 3. The book value of stockholders’ equity (the amount reported on the balance sheet) is most typically equal to the market value of the equity of a company. Answer: False Rationale: Book value and market value differ for many reasons, including reporting assets at historical costs instead of current market value, and differences between the accounting periods in which transactions are recognized in the financial statements and when the value implications of those transactions are recognized by the capital markets.

Topic: Reporting of Assets and Liabilities LO: 1 4. Assets are listed on the balance sheet in order of liquidity and liabilities are listed in order of maturity. Answer: True Rationale: Assets are reported in the order that they are generally expected to be converted into cash. Receivables are, thus, reported before inventories, and inventories before PPE. Liabilities are reported in order of maturity, with current liabilities expected to be paid within one year and long-term liabilities expected to be paid over a longer period of time.

Test Bank (T/F & MC), Module 2

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Topic: Unrecorded Assets LO: 1 5. In addition to purchased assets like inventories and equipment, companies also may report on their balance sheets intangible assets such as the value of a brand name. Answer: True Rationale: Companies may report intangible assets if they acquired them in an arms’ length transaction. But if the intangible was not purchased, if it was internally generated it may not be included on the balance sheet because its future economic benefits cannot be reliably measured. So, all internally generated intangible assets are excluded from the balance sheet under GAAP.

Topic: Liabilities LO: 1 6. Liabilities and equities are both claims against the assets of a company. Answer: True Rationale: Both liabilities and equity are claims against the assets. In the event of default of a company, liabilities are settled first against the assets of the company. The owners, however, still have an interest in the remaining assets.

Topic: Unearned Revenue and Revenue Recognition Principle (more challenging—involves unearned revenue and recognition thereof.) LO: 1, 2 7. A customer’s prepayment for services not yet rendered is initially recorded as unearned revenue (a liability). Then, at the end of the accounting period, the unearned revenue is moved from the balance sheet to the income statement. This is an example of the revenue recognition principle. Answer: False Rationale: Unearned revenue is recorded for customer prepayments. But it is only moved to the income statement when the services have been rendered and not automatically at the end of the accounting period.

Topic: Revenue Recognition Principle and Cash LO: 2 8. According to the revenue recognition principle, companies are required to record revenue when cash is received as this provides the most objective evidence for the auditors. Answer: False Rationale: Revenue is recognized when the company has done what it is obligated to do under the sales contract, such as, when goods have been transferred or services performed for the customer. This means a sale of goods on credit would qualify for recognition of revenue although no cash was received.

Topic: Accrual Accounting for Expenses LO: 2 9. Under accrual accounting principles, the cost of inventory should be reported as an expense in the income statement when it is sold, regardless of when it was purchased. Answer: True Rationale: Under accrual accounting, the cost of inventory is reported as expense in the period in which it is used up, typically at the point of sale. Purchased inventories that have not yet been sold are reported as assets, notwithstanding whether or not they have been paid for.

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Financial & Managerial Accounting for MBAs, 6th Edition

Topic: Statement of Cash Flows LO: 4 10. The statement of cash flows has three main sections: cash flows from operating activities, cash flows from investing activities, and cash flows from capital activities. Answer: False Rationale: The statement of cash flows has three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Topic: Net working Capital LO: 1 11. Net working capital = Current assets + Current liabilities Answer: False Rationale: Net working capital = Current assets less current liabilities.

Topic: Articulation of Financial Statements LO: 5 12. Articulation refers to the concept that financial statements are linked to each other and linked across time. Answer: True Rationale: Balance sheets are linked over time because the permanent accounts’ closing balance last period becomes the opening balance in the current period. The statements are linked to each other via cash (statements of cash flow and balance sheets), via retained earnings (income statements and balance sheets), and via equity accounts (statements of stockholders’ equity and balance sheets).

Topic: Articulation of Financial Statements LO: 5 13. The income statements of the prior and current year are linked via the balance sheet. Answer: False Rationale: The balance sheets of the prior and current year are linked via the income statement.

Topic: Articulation of Retained Earnings LO: 5 14. Retained earnings articulate across time which means that last period’s retained earnings plus current period net income (or loss) is equal to the current period’s retained earnings. Answer: False Rationale: Last period’s retained earnings plus current period net income (or loss) less any dividends paid, is equal to the current period’s retained earnings.

Test Bank (T/F & MC), Module 2

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Topic: Additional Information Sources LO: 6 15. All companies must file with the SEC a detailed annual report and discussion of their business activities in their Form 10-K. Answer: False Rationale: Companies with publicly traded securities must file with the SEC, not all companies.

Topic: Additional Information Sources LO: 6 16. A publicly traded company must file a Form 8-K with the SEC within four business days following a change in its certified public accounting firm. Answer: True Rationale: A change in a company’s certified public accounting firm is one of several events in which the SEC requires a company to disclose the change by filing a Form 8-K within four business days following the event.

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Financial & Managerial Accounting for MBAs, 6th Edition

Multiple Choice Topic: Reporting of Assets LO: 1 1. Assets are recorded in the balance sheet in order of: A) Market Value B) Historic Value C) Liquidity D) Maturity E) None of these are correct. Answer: C Rationale: Liquidity refers to the ease of conversation to cash. Current Assets are to be used during the current operating cycle. Non-current assets, like equipment and goodwill are reported after current assets. Market value and historic value refer not to the order but to the valuation of assets. Maturity refers to the order in which liabilities are recorded in the balance sheet.

Topic: Current Assets LO: 1 2. Which of the following are included in current assets? A) Prepaid rent B) Taxes payable C) Automobiles D) Common stock E) None of these are correct. Answer: A Rationale: Taxes payable is a liability, automobiles is not a current asset but a long-term one, and common stock is an equity.

Topic: Net Working Capital—Numerical calculations required LO: 1 3. At year-end, Rapid Airlines had negative net working capital of $(4,692) million and current assets of $8,996 million. The firm’s current liabilities are: A) $4,692 million B) $4,304 million C) $10,472 million D) $13,688 million E) There is not enough information to calculate the amount. Answer: D Rationale: Net working capital = Current assets – Current liabilities. Current liabilities = Current assets – Net working capital Current liabilities = $8,996 – $(4,692) Current liabilities = $13,688 million

Test Bank (T/F & MC), Module 2

2-6

Topic: Net Working Capital—Numerical calculations required LO: 1 4. At year-end, ABC Auto had current assets of $10,838 million and current liabilities of $8,296 million. The firm’s net working capital is: A) $2,542 million B) $10,838 million C) $(2,542) million D) 19,134 million E) None of these are correct. Answer: A Rationale: Net working capital = Current assets – Current liabilities. Net working capital = $10,838 – $8,296 Net working capital = $2,542 million.

Topic: Net Working Capital—Numerical calculations required LO: 1 5. At year end, Kay Corporation had net working capital of $4,546 million and current liabilities of $5,948 million. The firm’s current assets are: A) $1.402 million B) $10,494 million C) $16,442 million D) $5,948 million E) None of these are correct. Answer: D Rationale: Net working capital = Current assets – Current liabilities. $4,546 = Current assets – $5,948 Current assets = $10,494

Topic: Liabilities LO: 1 6. Which one of the following is not a current liability? A) Taxes payable B) Accounts payable C) Wages payable D) Wage expense E) None of these are correct. Answer: D Rationale: Wage expense is an income statement account, not a balance sheet account. It is not a current liability.

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Financial & Managerial Accounting for MBAs, 6th Edition

Topic: Stockholders’ Equity LO: 1 7. Which of the following is included as a component of stockholders’ equity? A) Buildings B) Retained earnings C) Prepaid property taxes D) Accounts payable E) Dividends Answer: B Rationale: Retained earnings is a component of stockholders’ equity. earnings but they are not reported as a separate component.

Dividends affect retained

Topic: Recognition of Costs as Expense LO: 1 8. As inventory and property plant and equipment on the balance sheet are consumed, they are reflected: A) As a revenue on the income statement B) As an expense on the income statement C) As a use of cash on the statement of cash flows D) On the balance sheet because assets are never consumed E) Both B and C because the financial statements articulate Answer: B Rationale: As assets are consumed (used up), their cost is transferred to the income statement as expenses. Cash is not involved so C and E are incorrect.

Topic: Income Statement LO: 2 9. Interest expense appears in which financial statement? A) Statement of stockholders’ equity B) Balance sheet C) Income statement D) Statement of cash flows E) All of the above Answer: C Rationale: Expenses, including interest expense, appear in the income statement.

Test Bank (T/F & MC), Module 2

2-8

Topic: Gross Profit—Numerical calculations required LO: 2 10. During the year, Macur Inc. had sales of $10,913,300, total expenses of $10,277,256 and gross profit of $5,108,782. What was the company’s cost of sales for the year? ($ in thousands) A) $ 5,804,518 thousand B) $ 5,744,826 thousand C) $10,277,256 thousand D) $ 1,807,888 thousand E) There is not enough information to calculate the cost of sales. Answer: A Rationale: Sales – Cost of sales = Gross profit $10,913,300– Cost of sales = $5,108,782 Cost of sales = $5,804,518 thousand

Topic: Net Income—Numerical calculations required LO: 2 11. During the year, Kale Inc. had Sales of $28,029 million, Cost of merchandise sold of $17,916 million, and Gross profit of $10,112 million. What was net income for the year? A) $ 7,949 million B) $10,112 million C) $17,916 million D) $28,029 million E) There is not enough information to calculate the amount. Answer: E Rationale: Sales – Total expenses = Net income. There is no information about total expenses, so we cannot compute net income.

Topic: Net Income—Numerical calculations required LO: 2 12. During the year, Sparkle Inc. had Sales of $2,850.6 million, Gross profit of $1,307.7 million and Selling, general, and administrative expenses of $1,022.4 million. What was Sparkle’s Cost of sales for the year? A) $1,828.2 million B) $1,542.9 million C) $2,330.1 million D) $ 285.3 million E) There is not enough information to calculate the amount. Answer: B Rationale: Sales – Cost of sales = Gross profit $2,850.6 – Cost of sales = $1,307.7 Cost of sales = $1,542.9 million

2-9

Financial & Managerial Accounting for MBAs, 6th Edition

Topic: Components of Financial Statements—Numerical calculations required (more challenging; total assets not given) LO: 1 13. In its December 31, year-end financial statements, Davidson reported the following (in millions): Long-term Assets

Current Liabilities

Long-term Liabilities

Total Liabilities

Equity

$4,829

$ 2,290

$4,086

$6,376

$1,536

At December 31, current assets amount to: A) $3,083 million B) $1,547 million C) $2,290 million D) $5,622 million E) None of these are correct. Answer: A Rationale: Total assets = Total liabilities + Equity. Total assets – Long-term assets = Current assets. Current assets = $6,376 + $1,536 – $4,829 Current assets = $3,083 million

Topic: Components of Financial Statements—Numerical calculations required LO: 1 14. On December 31, Nate Inc. reported the following (in millions): Current Assets

Current Liabilities

Long-term Liabilities

Equity

$2,594

$2,423

$3,167

$696

What amount did the company report as total assets? A) $5,590 million B) $7,488 million C) $3,692 million D) $8,880 million E) None of these are correct. Answer: E Rationale: Total assets = Total liabilities + Equity Total assets = $2,423 + $3,167 + $696 = $6,286 million. This amount is not given in the problem.

Test Bank (T/F & MC), Module 2

2-10

Topic: Components of Financial Statements—Numerical calculations required LO: 1 15. As of December 31, Drake Inc. reported the following (in millions): Current Assets

Long-term Assets

Current Liabilities

Total Liabilities

$25,574

$34,190

$20,906

$49,193

What amount did Drake Inc. report as equity on December 31? A) $38,858 million B) $59,764 million C) $13,966 million D) $10,571 million E) None of these are correct. Answer: D Rationale: Total assets = Total liabilities + Equity $25,574 + $34,190 = $49,193 + Equity Equity = $10,571 million.

Topic: Articulation of Statement of Retained Earnings with Income Statement—Numerical calculations required LO: 5 16. ABC Corporation reports the following (in $ millions): net income of $445, , retained earnings at the end of the year of $10,018, and retained earnings at the beginning of the year of $9,863. Assume that there were no other retained earnings transactions during the year. What dividends did the firm pay during the year? A) $290 million B) $600 million C) $155 million D) $-0E) There is not enough information to calculate the amount. Answer: A Rationale: Retained earnings, ending = Retained earnings, beginning + Net Income – Dividends Dividends = Retained earnings, Beginning + Net Income – Retained earnings, ending Dividends = $9,863 + $445 – $10,018 = $290 million

2-11

Financial & Managerial Accounting for MBAs, 6th Edition

Topic: Articulation of Statement of Retained Earnings with Balance Sheet—Numerical calculations required LO: 5 17. Balance Inc. reports a net loss for the year of $(134) million, retained earnings at the end of the year of $54,754 million, and dividends during the year of $3,604 million. What was the company’s retained earnings balance at the start of the year? A) $58,492 million B) $51,284 million C) $51,016 million D) $54,888 million E) There is not enough information to calculate the amount. Answer: A Rationale: Retained earnings, ending = Retained earnings, beginning + Net Income – Dividends $54,754= Retained earnings, beginning + $(134) – $3,604 Retained earnings at the start of the year were $58,492 million.

Topic: Articulation of Statement of Retained Earnings with Balance Sheet—Numerical calculations required LO: 5 18. Fitz Inc., a pharmaceutical company, reported net income for fiscal 2016 of $5,772 million, retained earnings at the start of the year of $57,594 million and dividends of $5,958 million, and other transactions with shareholders that increased retained earnings during the year by $11 million. If there were no additional transactions during the year that affected retained earnings, what was the balance of retained earnings at the end of the year? A) $57,419 million B) $57,769 million C) $45,875 million D) $57,397 million E) There is not enough information to calculate the amount. Answer: A Rationale: Retained earnings, ending = Retained earnings, beginning + Net Income – Dividends + Other Retained earnings, ending = $57,594 + $5,772 - $5,958 +$11 Ending retained earnings = $57,419 million.

Test Bank (T/F & MC), Module 2

2-12

Topic: Articulation of Statement of Retained Earnings with Income Statement—Numerical calculations required LO: 5 19. TeleLink reports retained earnings at the end of the current year of $32,598 million and retained earnings at the end of the previous year of $30,091 million. The company reported dividends of $3,940 million and other transactions with shareholders that reduced retained earnings during the current year by $1,806 million. How much net income did the firm report in the current year? A) $2,507 million net income B) $8,253 million net loss C) $8,253 million net income D) $2,507 million net loss E) None of these are correct. Answer: C Rationale: Retained earnings, ending = Retained earnings, beginning + Net Income – Dividends +/- Other transactions $32,598 = $30,091 + Net income – $3,940 – $1,806 Net income = $8,253 million net income.

Topic: Articulation of Statement of Cash Flows with Balance Sheet—Numerical calculations required LO: 4, 5 20. In its year-end financial statements, Naperville, Inc. reported cash of $6,276 million. The statement of cash flows reports the following (in millions): Net cash from operating activities Net cash from investing activities Net cash from financing activities

$6,192 (2,068) (5,552)

What was the balance in Naperville’s cash account at the start of the current year? A) $ 4,848 million B) $ 7,704 million C) $ 1,428 million D) $12,468 million E) None of these are correct. Answer: B Rationale: Cash at end of year = Cash at beginning of year + Change in cash during the year $6,276 = Cash at beginning of year + $6,192 – $2,068 – $5,552 Cash at beginning of year = $7,704 million

2-13

Financial & Managerial Accounting for MBAs, 6th Edition

Topic: Articulation of Statement of Cash Flows with Balance Sheet—Numerical calculations required LO: 4, 5 21. On its year-end balance sheet, Blue Corporation, reported cash of $354 million at year-end. The statement of cash flows reports that cash increased by $92 million during the year and that net cash flow from operating activities was $1,306 million. What was the cash flow from investing activities during the year? A) $ 446 million cash outflow B) $1,044 million cash inflow C) $ 446 million cash inflow D) $1,044 million cash outflow E) There is not enough information to determine the amount. Answer: E Rationale: Change in cash during the year = Cash from operations + Cash from investing + Cash from financing. We are only given two of the four amounts.

Topic: Articulation of Statement of Cash Flows with Balance Sheet—Numerical calculations required LO: 4, 5 22. On its year-end balance sheet, Hasten Inc., reported cash and cash equivalents at the start of the year of $43,315 thousand. By the end of the year, the cash and cash equivalents had decreased to $40,931 thousand. The company’s statement of cash flows reported cash from operating activities of $249,540 thousand, cash from financing activities of $(184,163) thousand. What amount did the company report for cash from investing activities? A) $62,993 thousand cash inflow B) $62,993 thousand cash outflow C) $67,761 thousand cash inflow D) $67,761 thousand cash outflow E) None of these are correct. Answer: D Rationale: Cash at end of year = Cash at start of year + Cash from operations + Cash from investing + Cash from financing. $40,931 = $43,315 + $249,540 + Cash from investing + $(184,163) Cash from investing is an outflow of $67,761 thousand.

Test Bank (T/F & MC), Module 2

2-14

Topic: Statement of Cash Flows—Numerical calculations required LO: 4, 5 23. On its annual statement of cash flows, Bell Inc. reports the following (in millions): Net cash from operating activities Net cash from investing activities Cash at the beginning of the year Change in cash during the year

$1,778 (25,005) 5,261 2,318

What did Bell report for “Net cash from financing activities” during the year? A) $25,545 million cash inflow B) $25,545 million cash outflow C) $28,488 million cash inflow D) $28,488 million cash outflow E) None of these are correct. Answer: A Rationale: Change in cash during the year = Cash from operations + Cash from investing + Cash from financing. $2,318 = $1,778 + $(25,005) + Cash from financing Cash from financing = $25,545 million

Topic: Transaction Effects on the Balance Sheet LO: 1 24. How would cash collected on accounts receivable affect the balance sheet? A) Increase liabilities and decrease equity B) Decrease liabilities and increase equity C) Increase assets and decrease assets D) Increase assets and increase equity Answer: C Rationale: Cash collected on accounts receivable produces an increase in cash and a decrease in accounts receivable, both asset accounts. There is no impact on liabilities or on equity.

Topic: Transaction Effects on the Income Statement (more challenging) LO: 2 25. How would a purchase of inventory on credit affect the income statement? A) It would increase liabilities B) It would decrease retained earnings C) It would increase assets D) Both A and C, above E) None of these are correct. Answer: E Rationale: The purchase on credit increases both accounts payable and inventory, which are balance sheet accounts. It would, therefore, have no effect on the income statement.

2-15

Financial & Managerial Accounting for MBAs, 6th Edition

Topic: Cash Conversion Cycle LO: 1 26. The cash conversion cycle is computed as A) Days sales outstanding + Days inventory outstanding – Days payable outstanding B) Days sales outstanding – Days payable outstanding C) Days sales outstanding – Days inventory outstanding D) Days sales outstanding – Days inventory outstanding + Days payable outstanding E) None of these are correct. Answer: A Rationale: Cash conversion cycle = Days sales outstanding + Days inventory outstanding – Days payable outstanding.

Topic: Cash Conversion Cycle—Numerical calculations required LO: 1 27. Prestige Company has determined the following information for its recent fiscal year. Days inventory outstanding Days payable outstanding Days sales outstanding

85.4 days 113.6 days 182.6 days

Compute Prestige Company’s cash conversion cycle. A) 154.4 days B) 16.4 days C) 210.8 days D) 199.0 days E) None of these are correct. Answer: A Rationale: 182.6 days + 85.4 days – 113.6 days = 154.4 days

Test Bank (T/F & MC), Module 2

2-16

Topic: Gross Profit Margin—Numerical calculations required LO: 2 28. Following is Stanley’s income statement for the year (in millions): STANLEY INC. Income Statement For the year ended December 31 ($ millions) Sales Cost of goods sold Gross profit Selling, general and administrative expenses Other operating expenses Operating income Interest and other nonoperating expenses Income before income tax Income tax expense Net income

$11,406.9 7,068.3 $4,338.6 2,576.0 265.5 1,497.1 169.6 1,327.5 258.6 $1,068.9

Compute Stanley’s gross profit margin. A) 62.0% B) 13.1% C) 9.4% D) 38.0% E) None of these are correct. Answer: D Rationale: $4,339 / $11,406.9 = 38.0%

Topic: Identifying and Classifying Balance Sheet Items LO: 1 29. Identify which of the following items would be reported in the balance sheet. a. b. c.

Cash Sales Long-term debt

d. e. f.

Wage expense Wages payable Retained earnings

g. h. i.

Net income Inventory Cost of goods sold

Items reported in the balance sheet would include: A) a, b, c, e, and f B) b, e, f, h, and i C) c, d, e, h, and i D) a, c, e, f, and h E) c, e, f, h, and i Answer: D Rationale: Balance sheet items include: a. Cash, c. Long-term debt, e. Wages payable, f. Retained earnings, and h. Inventory.

2-17

Financial & Managerial Accounting for MBAs, 6th Edition

Topic: Identifying and Classifying Income Statement Items LO: 2 30. Identify which of the following items would be reported in the income statement. a. b. c.

Cash Sales Long-term debt

d. e. f.

Wage expense Wages payable Retained earnings

g. h. i.

Net income Inventory Cost of goods sold

Items reported in the income statement would include: A) b, e, g, and h B) a, b, d, and i C) b, e, f, and g D) d, f, g, and h E) b, d, g, and i Answer: E Rationale: Income statement items include: b. Sales, d. Wages expense, g. Net income, and i. Cost of goods sold.

Test Bank (T/F & MC), Module 2

2-18

Module 3 Transactions, Adjustments, and Financial Statements Learning Objectives – Coverage by question True/False

Multiple Choice

LO1 – Explain the accounting cycle, and construct the financial statement effects template.

1-3

LO2 – Apply the financial statement effects template to analyze accounting transactions.

4-6

1-8, 14, 15, 23, 24, 25

LO3 – Prepare and explain accounting adjustments and their financial statement effects.

7-11

9-13, 21, 22

LO4 – Construct financial statements from accounting records.

12, 13

14, 16

LO5 – Explain and apply the closing process.

14, 15

17-20

These questions are available to assign in myBusinessCourse.

3-1

Financial & Managerial Accounting for MBAs, 6 th Edition

Module 3: Transactions, Adjustments, and Financial Statements

True/False Topic: Financial Statement Effects Template LO: 1 1. The financial statement effects template captures the effects of transactions on all four financial statements. Answer: True Rationale: The balance sheet accounts are all on the left side of the template and the income statement accounts on the right. In addition, the cash column provides the statement of cash flows, and the two equity columns can be used to construct the statement of shareholders’ equity.

Topic: Journal Entries LO: 1 2. Assets, expenses and dividends increase with debits. Answer: True Rationale: Assets increase with debits and equity decreases with debits. Therefore, expenses and dividends decrease equity – they are debits.

Topic: Journal Entries LO: 1 3. Increases are recorded on the left side of asset T-accounts and on the right side of liability T-accounts. Answer: True Rationale: Debits increase assets and credits increase liabilities.

Topic: Financial Statement Effects of Transactions LO: 2 4. When shareholders contribute capital to a company, earned capital increases because the company has earned the shareholders’ investments. Answer: False Rationale: When shareholders contribute capital to a company, contributed, not earned, capital increases.

Topic: Financial Statement Effects of Transactions LO: 2 5. Revenues and expenses affect the income statement but not the balance sheet. Answer: False Rationale: Revenue and expense recognition increases retained earnings on the balance sheet.

Test Bank (T/F & MC), Module 3

3-2

Topic: Financial Statement Effects of Transactions LO: 2 6. Revenue is typically recorded as earned when cash is received because that is when the company can measure the revenue objectively. Answer: False Rationale: Revenue is recorded when it is earned regardless of when cash is received.

Topic: Financial Statement Effects of Transactions LO: 3 7. Expenses that are paid in advance are held on the balance sheet until the end of the accounting period when they are transferred to the income statement with accounting adjustments. Answer: False Rationale: Expenses paid in advance include prepaid insurance, inventory and fixed assets. All of these items end up on the income statement when they are used up, not necessarily at the end of the accounting period.

Topic: Accrual Accounting LO: 3 8. Accrual accounting recognizes revenues only when cash is received and expenses only when cash is paid. Answer: False Rationale: Accrual accounting refers to the recognition of revenue when products and services are delivered at an amount expected to be received and the matching of expenses when incurred. The recognition of revenues and expenses does not, necessarily, relate to the receipt or payment of cash.

Topic: Accrual Accounting LO: 3 9. The journal entry for recording sales revenue that has been earned is to debit accounts receivable if cash will be received later, or credit unearned revenue if cash was received in advance. Answer: True Rationale: If cash is received later, the debit is to accounts receivable. If the cash is received before revenue is earned then the appropriate debit is to cash and a credit to unearned revenue.

Topic: Accounting Adjustments LO: 3 10. The journal entry for recording cost of sales is to debit cost of sales expense and credit the inventory account. Answer: True Rationale: The journal entry for recording cost of sales is to debit cost of sales expense and credit inventory. When the cash is paid for the inventory does not affect the expense.

3-3

Financial & Managerial Accounting for MBAs, 6 th Edition

Topic: Accounting Adjustments LO: 3 11. Companies make adjustments to more accurately reflect items on the income statement and the balance sheet. Answer: True Rationale: Adjustments ensure that performance and position are accurately portrayed in the financial statements.

Topic: Preparing Financial Statements LO: 4 12. There is a certain order in which a company prepares its financial statements. First, a company prepares its balance sheet. Answer: False Rationale: A company first prepares its income statement. It then uses the net income number and dividend information to update the retained earnings account.

Topic: Preparing Financial Statements LO: 4 13. Two steps must be completed in order to prepare financial statements: recording transactions during the period and adjusting records to ensure all events are properly recorded. Answer: True Rationale: Both steps are required to prepare accrual based financial statements.

Topic: Closing Accounts LO: 5 14. A company closes all of its accounts in order to zero out the balances so that next period starts with a fresh slate. Answer: False Rationale: A company closes its temporary accounts only. Balance sheet accounts are never closed out – they have cumulative balances.

Topic: Closing Accounts LO: 5 15. To close revenue accounts, a company must debit Retained Earnings because Revenue has a credit balance and debits must equal credits. Answer: False Rationale: Revenue does have a credit balance. Therefore, to close Revenue, the company debits Revenue and credits Retained earnings.

Test Bank (T/F & MC), Module 3

3-4

Multiple Choice Topic: Financial Statement Effects—Sales on Account LO: 2 1. Sales on account would produce what effect on the balance sheet? A) Increase the Revenue account B) Increase noncash assets (Accounts receivable) C) Increase cash assets D) A and B E) A, B and C Answer: B Rationale: Revenue is not on the balance sheet, therefore Answers A, D, and E are incorrect). Cash has not yet been received from the customer.

Topic: Financial Statement Effects—Collection of a Receivable LO: 2 2. Cash collected on accounts receivable would produce what effect on the balance sheet? A) Increase liabilities and decrease equity B) Decrease liabilities and increase equity C) Increase assets and decrease assets D) Decrease assets and decrease liabilities E) None of these are correct. Answer: C Rationale: Cash collected on accounts receivable produces an increase in cash and a decrease in accounts receivable, both asset accounts. There is no impact on profit and on equity.

Topic: Financial Statement Effects—Inventory Purchase LO: 2 3. How would a purchase of $320 of inventory on credit affect the income statement? A) It would increase cost of goods sold by $320. B) It would decrease liabilities by $320. C) It would decrease noncash assets by $320. D) It would decrease net income by $320. E) None of these are correct. Answer: E Rationale: There is no income statement effect of an inventory purchase.

3-5

Financial & Managerial Accounting for MBAs, 6 th Edition

Topic: Financial Statement Effects—Inventory Purchase LO: 2 4. During the year, Shoe Productions recorded inventory purchases on credit of $270.2 million. The financial statement effect of these purchase transactions would be to: A) Increase liabilities (Accounts payable) by $270.2 million B) Decrease cash by $270.2 million C) Increase expenses (Cost of goods sold) by $270.2 million D) Decrease noncash assets (Inventory) by $270.2 million E) None of these are correct. Answer: A Rationale: Credit purchases do not involve cash or expenses (B and C are incorrect). Noncash assets increase not decrease (D is incorrect).

Topic: Financial Statement Effects—Cost of Goods Sold (Numerical calculation required) LO: 2 5. During the fiscal year, Shoe Productions recorded inventory purchases on credit of $270.2 million. Inventory at the start of the year was $30.6 million and at the end of the year was $42.4 million. Which of the following describes how these transactions would be entered on the financial statement effects template? A) Increase expenses (Cost of goods sold) by $258.4 million B) Increase liabilities (Accounts payable) by $258.4 million C) Increase expenses (Cost of goods sold) by $270.2 million D) Increase noncash assets (Inventory) by $11.8 million E) None of these are correct. Answer: C Rationale: Cost of goods sold is purchases less the increase in inventory $270.2 – ($42.4 – $30.6) = $258.4

Test Bank (T/F & MC), Module 3

3-6

Topic: Financial Statement Effects—Accounts Receivable Collection LO: 2 6. During the year, Plastics Company recorded cash of $70,240 from customers for accounts receivable collections. Which of the following financial statement effects template entries captures this transaction? A)

Balance Sheet Cash Asset

+

Noncash Assets

+70,240

=

Liabilities +

Income Statement Contrib. Capital

+

=

B)

Earned Capital

Revenues

–

+70,240 (Retained Earnings)

+70,240

–

Balance Sheet Cash Asset

+

+70,240

Noncash Assets

=

-70,240 (AR)

=

C)

Liabilities +

+

Noncash Assets

=

Contrib. Capital

+

Earned Capital

Revenues

+70,240 (AR)

=

D)

-70,240

+

Noncash Assets

=

+70,240 (AR)

=

Liabilities +

Net Income

=

+70,240

Expenses

=

Net Income

=

Income Statement Contrib. Capital

+

Earned Capital

Revenues

–

+70,240 (Retained Earnings)

+70,240

–

Balance Sheet Cash Asset

– –

Liabilities +

=

Income Statement

Balance Sheet Cash Asset

Expenses

Expenses

=

Net Income

=

+70,240

=

Net Income

Income Statement Contrib. Capital

+

Earned Capital

Revenues

– –

Expenses

=

Answer: B Rationale: Collecting cash from customers increases cash and decreases accounts receivable. There is no income statement effect.

3-7

Financial & Managerial Accounting for MBAs, 6 th Edition

Topic: Financial Statement Effects of Equity Transactions— (Numerical calculations required) LO: 2 7. During the year, Decker Corporation reported Net income of $1,448.0 million and paid dividends of $496.4 million. Which of the following describes how these transactions would affect Decker’s equity accounts? (in millions) A) Increase contributed capital by $1,448.0 and decrease earned capital by $496.4 B) Decrease contributed capital by $496.4 and increase earned capital by $1,448.0 C) Increase contributed capital by $951.6 D) Increase earned capital by $951.6 E) None of these are correct. Answer: D Rationale: Net income increases earned capital and dividends decrease earned capital. The net effect is an increase to earned capital.

Topic: Financial Statement Effects of Equity Transactions— (Numerical calculations required) LO: 2 8. Cari’s Bakery, Inc., began operations in October. The owner contributed cash of $14,400 and a delivery truck with fair value of $19,200 to the company. Which of the following describes how these transactions would affect the company’s equity accounts? A) Increase contributed capital by $33,600 B) Increase earned capital by $33,600 C) Increase contributed capital by $14,400 and earned capital by $19,200 D) Increase earned capital by $14,400 and contributed capital by $19,200 E) None of these are correct. Answer: A Rationale: Cash and equipment have both been contributed by the owner—this represents contributed capital.

Topic: Accounting Adjustment—Accrue Wages LO: 3 9. An accrual of wages expense would have what effect on the balance sheet? A) Decrease liabilities and increase equity B) Increase assets and increase liabilities C) Increase liabilities and decrease equity D) Decrease assets and decrease liabilities E) None of these are correct. Answer: C Rationale: An accrual of wages expense increase wages payable (a liability) and decreases retained earnings, resulting from the decrease in net income.

Test Bank (T/F & MC), Module 3

3-8

Topic: Accounting Adjustments—Cost of Goods Sold—(Numerical calculations required) LO: 3 10. At the end of the current fiscal year, Nick’s Greenhouse counted inventory and determined that inventories of $69,728 were on hand. The end of fiscal year the unadjusted inventory account balance is $76,000. Inventory at the start of the year was $79,904. Which of the following accounting adjustments should Nick’s Greenhouse record? A)

Balance Sheet Cash Asset

+

Noncash Assets

=

-6,272 (Inventory)

=

B)

Liabilities +

Income Statement Contrib. Capital

+

Earned Capital

Revenues

-6,272 (Retained earnings) Balance Sheet

Cash Asset

+

Noncash Assets

=

-3,904 (Inventory)

=

C)

Liabilities +

+

Noncash Assets

=

Contrib. Capital

+

Earned Capital

Revenues

-3,904 (Retained earnings)

-10,176 (Inventory)

=

Liabilities +

Expenses

=

Net Income

–

+6,272 (COGS)

=

-6,272

Income Statement

Balance Sheet Cash Asset

–

–

Expenses

=

Net Income

–

+3,904 (COGS)

=

-3,904

Income Statement Contrib. Capital

+

Earned Capital -10,176 (Retained earnings)

Revenues

–

Expenses

=

Net Income

–

+10,176 (COGS)

=

-10,176

D) No accounting adjustment is required. Answer: A Rationale: Unadjusted balance of $76,000 must be decreased to actual inventory on hand of $69,728. This requires a decrease to inventory and an increase in COGS.

Topic: Accounting Adjustment—Supplies Inventory—(Numerical calculations required) LO: 3 11. During its first three months of operations, Cari’s Bakery, Inc. purchased supplies such as plates, napkins, bags, and cutlery for $7,200 and recorded this as supplies inventory. Supplies on hand at the end of the first quarter, amount to $4,480. To prepare financial statement for the first quarter, the company must record which of the following accounting adjustments? A) Increase Supplies expense by $2,720 and decrease Supplies inventory by $2,720 B) Increase Supplies expense by $4,480 and decrease Supplies inventory by $4,480 C) Increase Supplies inventory by $4,480 and decrease Supplies expense by $4,480 D) Increase Supplies inventory by $2,720 and decrease Supplies expense by $2,720 E) None of these are correct. Answer: A Rationale: $7,200 supplies purchased less $4,480 supplies on hand equals $2,720 in supplies used for the quarter; this is recorded with an increase to supplies expense and a decrease to supplies inventory of $2,720.

3-9

Financial & Managerial Accounting for MBAs, 6 th Edition

Topic: Recognition of Costs as Expense LO: 3 12. As inventory and PPE assets on the balance sheet are consumed, they are reflected: A) As a revenue on the income statement B) As an expense on the income statement C) As a cash flow outflow on the Statement of Cash flows D) Both B and C E) Assets are never consumed. Answer: B Rationale: As assets are consumed (used up), their cost is transferred into the income statement as an expense. The cash outflow occurred when the assets were originally purchased and not when they are used up.

Topic: Accounting Adjustment for Depreciation Expense LO: 3 13. A company records an adjusting journal entry to record $10,000 depreciation expense. Which of the following describes the entry? A) Debit Property Plant and Equipment and Credit Depreciation expense B) Debit Depreciation expense and Credit Property Plant and Equipment C) Debit Property Plant and Equipment and Credit Cash D) Debit Depreciation expense and Credit Cash E) Debit Net Income and Credit Property Plant and Equipment Answer: B Rationale: Depreciation is an expense which decreases retained earnings—it is a debit. Property plant and equipment is being used up and thus its balance is decreasing on the balance sheet—it requires a credit.

Topic: Calculating Net Income from Transactions—(Numerical calculations required) LO: 2, 4 14. During the month of Marc, Weimar World, a tax-preparation service, had the following transactions. •

Billed $396,800 in revenues on credit

•

Received $131,200 from customers’ accounts receivable

•

Incurred expenses of $155,200 but only paid $70,160 cash for these expenses

•

Prepaid $25,776 for computer services to be used next month

What was the company’s accrual basis net income for the month? A) $241,600 B) $215,824 C) $ 44,384 D) $326,640 E) None of these are correct. Answer: A Rationale: Revenues (earned) Expenses (incurred) Net income

Test Bank (T/F & MC), Module 3

$396,800 155,200 $241,600

3-10

Topic: Calculating Cash Balance from Transactions—(Numerical calculations required) LO: 2 15. Weimar World, a tax-preparation service, had a cash balance of $245,000 as of March 1. During the month of March, Weimar World had the following transactions. •

Billed $992,000 in revenues on credit

•

Received $328,000 from customers’ accounts receivable

•

Incurred expenses of $388,000 but only paid $175,400 cash for these expenses

•

Prepaid $64,400 for computer services to be used next month

What was the company’s cash balance on March 31? A) $604,000 B) $849,000 C) $333,200 D) $397,600 E) None of these are correct. Answer: C Rationale: Beginning cash balance Revenues (cash receipts) Expenses ($175,400 +$64,400) Cash from operating activities

$245,000 $328,000 239,800 $333,200

Topic: Items Involved in Preparing Income Statement LO: 4 16. Which of the following accounts would not be involved in preparing the income statement? A) Depreciation expense B) Accumulated depreciation C) Taxes payable D) Interest income E) B and C Answer: E Rationale: Accumulated depreciation and taxes payable are both balance sheet accounts.

Topic: Closing Entries LO: 5 17. Which of the following accounts would not appear in a closing entry? A) Net income B) Depreciation expense C) Cost of goods sold D) Inventory E) Both A and D Answer: E Rationale: Net income (answer A) is not a trial balance account so it is not closed. Inventory (answer D) is a balance sheet (permanent) account, which is never closed. Therefore, the correct answer is E.

3-11

Financial & Managerial Accounting for MBAs, 6 th Edition

Topic: Closing Entries – Dividends—(Numerical calculations required) LO: 5 18. During the year, Dixon Inc., reported net income of $3,008 million. The company declared dividends of $818 million. The closing entry for dividends would include which of the following? A) Credit Cash for $818 million B) Credit Dividends for $818 million C) Debit Net income for $818 million D) Credit Retained earnings for $1818 million E) Debit Dividends for $818 million Answer: B Rationale: To close out the Dividends account, the entry includes a debit to Retained Earnings and a credit to Dividends.

Topic: Closing Entries LO: 5 19. Which of the following accounts would not appear in a closing entry? A) Interest expense B) Accumulated depreciation C) Cost of goods sold D) Dividends E) Both B and D Answer: B Rationale: Accumulated depreciation is a balance sheet (permanent) account, which is never closed.

Topic: Closing Entries—Inventory and Cost of Goods Sold LO: 5 20. During the year, Brown Company reported cost of goods sold of $1,213.9 million. Inventory at the start of the year was $437.4 million and at the end of the year was $468.6 million. Which of the following describes the closing entry that the company will make for these accounts? A) Credit Cost of goods sold $1,213.9 million B) Debit Inventory $31.2 million C) Credit Inventory $468.6 million D) Debit Cost of goods sold $745.3 million E) None of these are correct. Answer: A Rationale: Cost of goods sold is a temporary account that must be closed. Inventory accounts are never closed—they are permanent accounts.

Test Bank (T/F & MC), Module 3

3-12

Topic: Accounting Adjustment for Unearned Revenue LO: 3 21. On January 1, Fey Properties collected $5,760 for six months’ rent in advance from a tenant renting an apartment. Fey Company prepares monthly financial statements. Which of the following describes the required adjusting entry on January 31? A) Debit Unearned rent revenue for $4,800 and Credit Cash for $4,800 B) Debit Rent revenue for $960 and Credit Unearned rent revenue for $960 C) Debit Cash for $5,760 and Credit Rent revenue for $5,760 D) Debit Unearned rent revenue for $960 and Credit Rent revenue for $960 E) Debit Cash for $4,800 and Credit Unearned rent revenue for $4,800. Answer: D Rationale: The adjusting entry required consists of a debit to unearned rent revenue and a credit to revenue for $960 ($5,760 / 6 months).

Topic: Accounting Adjustment for Prepaid Insurance LO: 3 22. On January 1, Fey Properties paid $10,080 for a three-year insurance premium, with coverage beginning immediately. Fey Company prepares monthly financial statements. Which of the following describes the required adjusting entry on January 31? A) Debit Cash for $3,360 and Credit Prepaid insurance for $3,360 B) Debit Insurance expense for $280 and Credit Prepaid insurance for $280 C) Debit Prepaid insurance for $280 and Credit Insurance expense for $280 D) Debit Cash for $6,720 and Credit Prepaid insurance for $6,720 E) Debit Insurance expense for $3,360 and Credit Prepaid insurance for $3,360 Answer: B Rationale: The adjusting entry required consists of a debit to insurance expense and a credit to prepaid insurance for $280 ($10,080 / 36 months).

Topic: Transaction Effects on the Financial Statements LO: 2 23. How would a sale of $320 of inventory on credit affect the balance sheet if the cost of the inventory sold was $128? A) It would increase noncash assets by $320 and increase equity by $320 B) It would decrease noncash assets by $128 and decrease equity by $128 C) It would increase cash by $320 and increase equity by $320 D) Both A and B, above happen simultaneously E) None of these are correct. Answer: D Rationale: The sale on credit is an account receivable, a noncash asset that increases revenue and therefore increases equity (answer A). The sale also involves reducing inventory by $128, a noncash asset, which is an expense and therefore a decrease to equity of $128 (answer B). Therefore both A and B are correct so the answer is D.

3-13

Financial & Managerial Accounting for MBAs, 6 th Edition

Topic: Financial Statement Effects Template LO: 2 24. Examine the financial statements effects template below. Then select the answer that best describes the transaction. Balance Sheet Transaction

Cash Asset

??

-240

A) B) C) D) E)

+

Noncash Assets

=

+240

=

Liabilities

+

Income Statement Contrib. + Capital

Earned Capital

Revenues

–

Expenses

–

=

Net Income

=

Repay accounts payable of $240 with cash Collect cash for accounts receivable of $240 Purchase inventory of $240 on account Purchase inventory of $240 for cash None of these are correct.

Answer: D Rationale: The purchase of inventory for cash decreases cash by $240 and increases inventory, a noncash asset, by $240.

Topic: Financial Statement Effects Template LO: 2 25. Examine the financial statements effects template below. Then select the answer that best describes the transaction. Balance Sheet Transaction

Cash Asset

??

-96

A) B) C) D) E)

+

Noncash Assets

=

Liabilities

+480

=

+384

+

Income Statement Contrib. + Capital

Earned Capital

Revenues

– –

Expenses

=

Net Income

=

Repay accounts payable of $96, net Purchase inventory of $480 partially on account Record accounts receivable of $480 and cash collected of $96 Purchase $480 of equipment on account None of these are correct.

Answer: B Rationale: The purchase of $600 inventory partially on account implies that the rest is purchased for cash. Cash decreases by $120 and accounts payable (a liability) increase for the balance of $480.

Test Bank (T/F & MC), Module 3

3-14

Module 4 Analyzing and Interpreting Financial Statements Learning Objectives – Coverage by question True/False

Multiple Choice

LO1 – Compute and interpret return on equity (ROE).

1

1-3

LO2 – Apply DuPont disaggregation of ROE into return on assets (ROA) and financial leverage.

2, 10

25

LO3 – Disaggregate ROA into profitability and productivity and analyze both.

15

10, 11, 25

LO4 – Identify balance sheet operating items and compute net operating assets.

2, 4

4, 5, 15

LO5 – Identify income statement operating items and compute net operating profit after tax.

5, 6

6-8

LO6 – Compute and interpret return on net operating assets (RNOA).

14

9

LO7 – Disaggregate RNOA into net operating profit margin and net operating asset turnover.

7-9

10-14

LO8 – Compute and interpret nonoperating return (Appendix 4A).

7, 11

1, 10, 11, 16, 17

1, 12, 13

18-24

LO9 – Compute and interpret measures of liquidity and solvency (Appendix 4B). These questions are available to assign in myBusinessCourse.

4-1

Financial & Managerial Accounting for MBAs, 6 th Edition

Module 4: Analyzing and Interpreting Financial Statements

True/False Topic: Use of Ratios LO: 9 1. Ratios provide one way to compare companies in the same industry regardless of their size. Answer: True Rationale: Ratios mitigate problems arising from different sizes of companies.

Topic: Financial Leverage and RNOA LO: 2, 4 2. Highly leveraged firms have higher RNOA than firms with lower leverage. Answer: False Rationale: Financial leverage does not affect the RNOA computation because it is based on operating profit. Financial leverage will increase ROE, however.

Topic: Return on Equity and Treasury Stock LO: 1 3. Repurchasing shares near year-end will increase a firm’s return on equity (ROE). Answer: True Rationale: Repurchasing shares will decrease equity because treasury stock is a contra-account (it reduces total equity). If the repurchases happen at year-end, there are likely no significant profit impacts and thus, the numerator in the ROE ratio will be unaffected. Thus, the ratio will increase.

Topic: Nonoperating Return LO: 4 4. All else equal, when investors consider a firm’s return on equity (ROE) they consider less risky a firm that earns proportionately more of that return from operating activities as opposed to nonoperating activities. Answer: True Rationale: Financial leverage will increase nonoperating return and ROE; however this adds risk to the investment. For equal returns, investors typically prefer less risk.

Topic: Tax on Operating Profit LO: 5 5. To determine tax on net operating profit, we begin with total tax expense and deduct taxes related to net nonoperating expenses. Answer: False Rationale: We begin with total tax expense and add back any taxes related to net nonoperating expenses (NNE).

Test Bank (T/F & MC), Module 4

4-2

Topic: NOPAT LO: 5 6. NOPAT is equivalent to income from operating activities. Answer: False Rationale: NOPAT is income from operating activities after tax which excludes nonoperating expenses such as interest expense. Income from operating activities often includes interest expense and is before tax.

Topic: Asset Turnover Effect on RNOA/ROE LO: 7, 8 7. Increasing a company’s net operating asset turnover (NOAT) increases both RNOA and ROE. Answer: True. Rationale: ROE = RNOA + FLEV × Spread. RNOA is further disaggregated into profit margin × asset turnover. Therefore an increase in asset turnover will yield an increase in RNOA, which will result in an increase in ROE if all other variables remain constant.

Topic: Profitability and RNOA LO: 7 8. If Company A has a higher net operating profit margin (NOPM) than Company B, then Company A’s RNOA will be higher. Answer: False Rationale: RNOA depends on NOPM but also depends on operating asset productivity (NOAT). If Company B had a much higher operating asset productivity, its RNOA could be higher despite the lower profitability.

Topic: Net Operating Asset Turnover LO: 7 9. Net operating asset turnover (NOAT) measures a company’s profitability. Answer: False Rationale Net operating asset turnover is a productivity or efficiency concept.

Topic: Financial Leverage and Debt Ratings LO: 2 10. All else being equal, higher financial leverage will decrease a company’s debt rating and increase the interest rate it must pay. Answer: True Rationale: Higher levels of financial leverage increase the probability of default and of bankruptcy. This reduces credit ratings and increases costs for borrowed funds.

4-3

Financial & Managerial Accounting for MBAs, 6 th Edition

Topic: Return on Equity (ROE) LO: 8 11. ROE can be disaggregated into operating and nonoperating returns. Nonoperating return will be positive as long as Spread is positive. Answer: False Rationale: The nonoperating return can be negative (which reduces ROE) if spread is positive and financial leverage (FLEV) is negative.

Topic: Current Ratio LO: 9 12. A current ratio greater than 1.0 is generally desirable for a company. Answer: True Rationale: A company with a current ratio greater than 1.0 indicates positive working capital. In general, companies prefer greater levels of current assets than current liabilities.

Topic: Solvency LO: 9 13. Solvency ratios measure a company’s ability to meet its debt obligations. Answer: True Rationale: A solvent company is one that can meet its debt obligations including principal and interest payments as they come due.

Topic: ROA versus RNOA LO: 6 14. The only difference between return on assets (ROA) and return on net operating assets (RNOA) is that the denominator in RNOA is typically smaller than the denominator in ROA because the former is net of operating liabilities. Answer: False Rationale: It is true that the denominator in RNOA is typically smaller but the other difference between the ratios is that the numerators are different. ROA includes all net income whereas RNOA includes only net profits from operating activities.

Topic: Basic DuPont Analysis LO: 3 15. The DuPont analysis disaggregates return on equity into profitability, productivity, and leverage components. Answer: True Rationale: The DuPont disaggregation of return on equity is: ROE = Profit margin (PM) × Asset turnover (AT) × Financial leverage (FL). These three terms measure profitability, productivity, and leverage respectively.

Test Bank (T/F & MC), Module 4

4-4

Multiple Choice Topic: ROE Computation LO: 1, 8 1. ROE is computed as: A) Net income attributable to controlling interest / Average equity attributable to controlling interest B) Net income attributable to controlling interest / Net sales C) [RNOA + (FLEV × Spread)] x NCI ratio D) A and B E) A and C Answer: E Rationale: ROE = Net income attributable to controlling interest / Average equity attributable to controlling interest. This is the most straightforward way to calculate ROE, so A is correct. Answer C is a disaggregation of ROE into its operating and nonoperating components. Thus, the correct answer is E: A and C.

Topic: ROE Computation (Numerical calculations required) LO: 1 2. The year-end balance sheet of Pointe Company shows average Pointe shareholders’ equity attributable to controlling interest of $7,997 million, net operating profit after tax of $2,308 million, net income attributable to Pointe of $2,513 million, and common shares issued of 760.035 million. Assume the company has no preferred shares issued. Pointe’s return on equity (ROE) for the year is: A) 28.9% B) 30.2% C) 31.4% D) 32.9% E) There is not enough information to calculate the ratio. Answer: C Rationale: ROE = Net income/Average shareholders’ equity = $2,513 / $7,997 = 31.4%

Topic: ROE Computation (Numerical calculations required) LO: 1 3. The year-end financial statements of Time Company reveal average shareholders’ equity attributable to controlling interest of $669,826 thousand, net operating profit after tax of $48,032 thousand, net income attributable to the company of $29,068 thousand, and average net operating assets of $283,531 thousand. The company’s return on equity (ROE) for the year is: A) 4.3% B) 10.3% C) 7.2% D) 16.9% E) There is not enough information to calculate the ratio. Answer: A Rationale: ROE = Net income / Average shareholders’ equity = $29,068 / $669,826 = 4.3%

4-5

Financial & Managerial Accounting for MBAs, 6 th Edition

Topic: NOA Computation (Numerical calculations required) LO: 4 4. The year-end balance sheet of Star Inc. shows total assets of $6,617 million, operating assets of $5,253 million, operating liabilities of $2,822 million, and shareholders’ equity of $2,950 million. The company's year-end net operating assets are: A) $9,39million B) $5,253 million C) $2,431 million D) $8,075 million E) None of these are correct. Answer: C Rationale: NOA = Operating assets – Operating liabilities = $5,253 – $2,822 = $2,431

Topic: Average NOA Computation (Numerical calculations required) LO: 4 5. The year-end balance sheet of Fine Foods Inc. reports operating assets of $4,391 million, operating liabilities of $1,653 million, and total liabilities of $2,494 million. Fine Food’s average net operating assets are: A) $1,897million B) $4,391 million C) $6,044 million D) $2,738 million E) There is not enough information to calculate the amount. Answer: E Rationale: Average net operating assets requires two years of balance sheet data. The question only provided one year’s data, thus, there is not enough information to calculate the amount.

Topic: Tax Shield Computation (Numerical calculations required) LO: 5 6. Maxwell’s annual financial statements show operating profit before interest and tax of $415,386 thousand, net income of $254,418 thousand, provision for income taxes of $73,016 thousand and net nonoperating expense before tax of $87,593 thousand. Assume Maxwell’s statutory tax rate for the year is 37%. Maxwell’s tax shield is: A) $ 27,016 thousand B) $236,738 thousand C) $ 73,016 thousand D) $ 32,409 thousand E) None of these are correct. Answer: D Rationale: Tax shield = Net nonoperating expense before tax × statutory tax rate = $87,593 × 37% = $32,409 thousand.

Test Bank (T/F & MC), Module 4

4-6

Topic: Effective Tax Rate Computation (Numerical calculations required) LO: 5 7. Maxwell’s annual financial statements show operating profit before interest and tax of $524,425 thousand, net income of $321,202 thousand, provision for income taxes of $91,720 thousand and net nonoperating expense before tax of $110,586 thousand. Assume Maxwell’s statutory tax rate for the year is 37%. Maxwell’s effective tax rate is: A) 37.0% B) 22.2% C) 17.5% D) 28.6% E) None of these are correct. Answer: B Rationale: Effective tax rate = Provision for income taxes / Income before tax = $91,720 / ($321,202 + $91,720) = 22.2%

Topic: NOPAT Definition LO: 5 8. Net operating profit after tax (NOPAT) includes operating revenues less expenses such as: A) Cost of goods sold (COGS) B) Taxes on operating income C) Selling, general and administrative expenses (SG&A) D) After-tax earnings from investments and interest expenses E) All of the above F) A, B and C only Answer: F Rationale: NOPAT is net operating profit after tax. After-tax earnings from investments and interest expenses are not included because they are nonoperating items.

Topic: RNOA Computation (Numerical calculations required) LO: 6 9. The year-end financial statements of Time Company reveal average shareholders’ equity attributable to controlling interest of $845,656 thousand, net operating profit after tax of $48,032 thousand, net income attributable to the company of $29,068 thousand, and average net operating assets of $357,958 thousand. The company’s return on net operating assets (RNOA) for the year is: A) 8.1% B) 5.3% C) 13.4% D) 42.3% E) There is not enough information to calculate the ratio. Answer: C Rationale: RNOA = NOPAT / average NOA = $48,032 / $357,958 = 13.4%

4-7

Financial & Managerial Accounting for MBAs, 6 th Edition

Topic: Nonoperating Return Computation (Numerical calculations required) LO: 3, 7, 8 10. The annual financial statements of Naperville Inc. shows net operating profit margin (NOPM) of 11.4%, net operating asset turnover (NOAT) of 3.83, return on equity of 30.2%, and adjusted return on assets of 17.1%. What is the company’s nonoperating return? A) (13.5)% B) 35.3% C) (13.1)% D) 18.8% E) There is not enough information to calculate the ratio. Answer: A Rationale: ROE = RNOA + Nonoperating return = 30.2% – (11.4% × 3.83) = (13.5)%

Topic: Nonoperating Return Computation (Numerical calculations required) LO: 3, 7, 8 11. The year-end balance sheet of Time Company shows net operating profit margin (NOPM) of 3.1%, net operating asset turnover (NOAT) of 4.41, return on equity of 3.5%, and adjusted return on assets of 2.2%. What is the company’s nonoperating return? A) (10.2)% B) 1.3% C) (12.3)% D) (10.6)% E) None of these are correct. Answer: A Rationale: ROE = RNOA + Nonoperating return = 3.5% – (3.1% × 4.41) = (10.2)%

Topic: Net Operating Profit Margin (NOPM) Computation (Numerical calculations required) LO: 7 12. The Year 2 fiscal year-end financial statements for Walter Co. report revenues of $55,743 million, net operating profit after tax of $9,954 million, net operating assets of $58.720 million. The Year 1 fiscal year-end balance sheet reports net operating assets of $59,197 million. Walter’s Year 2 net operating profit margin is: A) 16.8% B) 17.0% C) 17.9% D) 11.7% E) There is not enough information to calculate the ratio. Answer: C Rationale: NOPM = NOPAT / Revenues = $9,954 / $55,743 = 17.9%

Test Bank (T/F & MC), Module 4

4-8

Topic: Net Operating Asset Turnover (NOAT) Computation (Numerical calculations required) LO: 7 13. The year-end Year 2 financial statements for Grandier Inc., report net sales of $115,004 million, net operating profit after tax of $4,593 million, net operating assets of $39,502 million. The year-end Year 1 balance sheet reports net operating assets of $41,829 million. The company’s year-end Year 2 net operating asset turnover is: A) 11.3% B) 2.91 C) 2.83 D) 11.6% E) There is not enough information to calculate the ratio. Answer: C Rationale: NOAT = Net sales / Average NOA = $115,004 / [($39,502 + $41,829) / 2] = 2.83

Topic: Net Operating Asset Turnover (NOAT) Computation (Numerical calculations required) LO: 7 14. Kreeger’s annual financial statements show net operating profit after tax of $2,291 million, net income of$1,979 million, sales of $115,568 million, and average net operating assets of $18,616 million. Kreeger’s net operating asset turnover for the year is: A) 16.1% B) 9.4 C) 11.0% D) 6.21 E) There is not enough information to calculate the ratio. Answer: D Rationale: Net operating asset turnover = Sales / Average net operating assets = $115,568 million / $18,616 million = 6.21.

Topic: NNO Computation (Numerical calculations required) LO: 4 15. The year-end balance sheet of Macur Corp. reports total assets of $154,955million, operating liabilities of $54,408 million, and total shareholders’ equity of $57,598 million. Macur's nonoperating liabilities are: A) $112,006 million B) $ 42,949 million C) $ 54,498 million D) $ 97,357 million E) There is not enough information to calculate the amount. Answer: B Rationale: Total assets = Operating liabilities + Nonoperating liabilities + Shareholders’ equity Nonoperating liabilities = $154,955 million – $54,408 million – $57,598 million = $42,949 million

4-9

Financial & Managerial Accounting for MBAs, 6 th Edition

Topic: Computing Financial Leverage (FLEV) (Numerical calculations required) LO: 8 16. The year-end financial statements of Synergy Inc. shows average net operating assets (NOA) of $8,450 million, average net nonoperating obligations (NNO) of $(4,033) million, average total liabilities of $9,032 million, and average equity of $12,508 million. The company’s financial leverage (FLEV) is: A) (0.477) B) 0.676 C) 0.722 D) (0.322) E) There is not enough information to determine the ratio. Answer: D Rationale: FLEV = Average NNO / Average equity = $(4,033) / $12,508 = (0.322)

Topic: Computing Financial Leverage (FLEV) (Numerical calculations required) LO: 8 17. The fiscal year-end financial statements of Reed Enterprises shows average net operating assets (NOA) of $4,805 million, average net nonoperating obligations (NNO) of $605 million, average total liabilities of $6,343 million, and year-end equity of $5,250 million. The company’s year-end financial leverage (FLEV) is: A) 0.144 B) 0.126 C) 0.115 D) 0.13 E) There is not enough information to determine the ratio. Answer: A Rationale: FLEV = Average NNO / Average equity = $605 / ($4,805 – $605) = 0.144

Topic: Liquidity LO: 9 18. Liquidity refers to: A) A company’s operating cycle B) A company’s ability to generate sales from use of its assets C) A company’s ability to meet its debt obligations D) A company’s amount of financial leverage E) A company’s cash availability Answer: E Rationale: Liquidity refers to cash, the amount on hand, the amount generated from operating activities, and the amount that can be raised on relatively short notice.

Test Bank (T/F & MC), Module 4

4-10

Topic: Current Ratio LO: 9 19. The current ratio is used to assess: A) Solvency B) Bankruptcy position C) Liquidity D) Financial leverage E) None of these are correct. Answer: C Rationale: The current ratio is one of two common ratios used to assess the degree of a company’s liquidity.

Topic: Liquidity Measure LO: 9 20. Which of the following is a measure of liquidity? A) Liabilities-to-Equity Ratio = Total Liabilities / Stockholder’s Equity B) Times Interest Earned = Earnings before interest and taxes / Interest Expense C) Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities D) Return on net operating assets (RNOA) E) All of the above Answer: C Rationale: The only measure of liquidity listed above is c (Quick Ratio) which is simply a variation of the Current Ratio (Current Ratio = Current Assets / Current Liabilities) to focus on quick assets (cash, securities, and receivables).

Topic: Computing Current Ratio (Numerical calculations required) LO: 9 21. The fiscal year-end balance sheet for Specialists Inc. reports the following data (in millions). What is the company’s current ratio?

A) B) C) D) E)

Cash and cash equivalents

Marketable Securities

Accounts receivable

Merchandise inventories

Current assets

Current liabilities

$344

$371

$237

$507

$1,936

$1,341

0.69 1.44 0.71 1.41 None of these are correct.

Answer: B Rationale: Current ratio = Current assets / Current liabilities = $1,936 / $1,341 = 1.44

4-11

Financial & Managerial Accounting for MBAs, 6 th Edition

Topic: Computing Quick Ratio (Numerical calculations required) LO: 9 22. The fiscal year-end balance sheet for Specialists Inc. reports the following data (in millions). What is the company’s quick ratio?

A) B) C) D) E)

Cash and cash equivalents

Marketable securities

Accounts receivable

Merchandise inventories

Current assets

Current liabilities

$352

$380

$242

$518

$1,979

$1,341

0.73 1.48 0.68 1.38 None of these are correct.

Answer: A Rationale: Quick ratio = (Cash + Marketable securities + Accounts receivable) / Current liabilities = ($352 + $380 + $242) / $1,341 = 0.73

Topic: Computing Times Interest Earned Ratio (Numerical calculations required) LO: 9 23. Selected income statement data follow for Harper, Inc., for the year ended December 31 (in thousands). What is the company’s times interest earned ratio?

A) B) C) D) E)

Income before provision for income taxes

Interest expense

Statutory tax rate

Provision for income taxes

Net income

$1,025,959

$29,670

37%

$332,410

$693,548

34.6 24.4 35.6 11.2 None of these are correct.

Answer: C Rationale: Times interest earned = ($1,025,959 + $29,670) / $29,670 = 35.6

Test Bank (T/F & MC), Module 4

4-12

Topic: Computing Liabilities-to-Equity Ratio (Numerical calculations required) LO: 9 24. Selected balance sheet data follow for Zeveea Company for the year ended December 31 (in millions). What is the company’s liabilities-to-equity ratio?

A) B) C) D) E)

Total operating liabilities

Total nonoperating liabilities

Total current liabilities

Total liabilities

Total liabilities and shareholders’ equity

$6,320

$5,490

$4,827

$11,810

$16,511

2.51 1.03 0.29 0.72 None of these are correct.

Answer: A Rationale: Liabilities-to-equity ratio = $11,810 / ($16,511 – $11,810) = 2.51

Topic: Computing Traditional DuPont Ratios (Numerical calculations required) LO: 3 25. Selected ratios follow for Barron, Inc. for the year ended December 31 (in millions). What is the company’s return on equity (ROE) for the year?

A) B) C) D) E)

Return on net operating assets (RNOA)

Profit Margin (PM)

Net operating profit margin (NOPM)

Asset turnover (AT)

Financial leverage (FL)

43.6%

11.6%

11.4%

1.51

1.72

13.1% 29.6% 17.5% 30.1% None of these are correct.

Answer: D Rationale: ROE = PM × AT × FL = 11.6% × 1.51 × 1.72 = 30.1%

4-13

Financial & Managerial Accounting for MBAs, 6 th Edition

Module 5 Revenues, Receivables, and Operating Expenses Learning Objectives – Coverage by question True/False

Multiple Choice

LO1 – Apply revenue recognition principles and assess results.

1-3

1-5

LO2 – Examine and evaluate sales allowances.

4

21, 22

LO3 – Analyze deferred revenue.

19, 20

LO4 – Evaluate how foreign currency exchange rates affect revenue.

5

6

LO5 – Analyze accounts receivable and uncollectible amounts.

6-9

7-14

LO6 – Evaluate operating expenses and discontinued operations.

10

15-18

LO7 – Interpret pro forma and non-GAAP disclosures.

These questions are available to assign in myBusinessCourse.

5-1

Financial & Managerial Accounting for MBAs, 6 th Edition