Test bank with answers for financial accounting 6e by libby chapter 03

To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

True / False Questions
1. The operating cycle is the time it takes for a company to purchase goods, pay for the goods,
sell them to customers, and collect the cash from the customers.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

2. Wal-Mart would likely have a shorter operating cycle than General Motors.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

3. The time period assumption allows a company to meet the qualitative characteristic of
relevance by allowing for timelier reporting of financial information.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 1

4. An example of ongoing operations is revenue earned through the sale of a new automobile
by a car dealership.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

3-1
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit

visit


Chapter 003: Operating Decisions and the Income Statement

5. An example of revenue earned from ongoing operating activities is the sale of an extended
warranty contract on a washer and dryer.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 2

6. Revenues are inflows of net assets from peripheral transactions.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

7. Income tax expense will appear on the balance sheet.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

8. Interest expense connected to notes payable is an example of a non-operating or peripheral
expense.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

9. Under accrual accounting, interest expense would be recognized when the interest has
accrued with the passage of time even though cash has not been paid.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

3-2
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit

Chapter 003: Operating Decisions and the Income Statement

10. Application of generally accepted accounting principles requires that accrual basis
accounting be used for the income statement.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

11. Revenues are recognized when delivery has occurred or services have been rendered,
there is persuasive evidence of an arrangement for customer payment, the price is fixed or
determinable and collection is reasonably assured.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

12. The matching principle states that expenses are recognized when incurred in generating
revenue.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

13. The revenue principle recognizes revenue from the sale of goods when ownership passes
from the seller to the buyer. In the sale of services, revenue is recognized when the services
are completed.

TRUE

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3

3-3
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

14. When a business pays for a two-year insurance policy it has incurred an expense.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium

L.O.: 3

15. Revenue collected in advance of being earned represents a liability until it is earned.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

16. Expense accounts are debited to recognize an incurred expense and not usually credited.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

17. The balance sheet is always prepared before the income statement.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 5

18. The statement of cash flows is prepared last and is the only financial statement which
shows the cash inflows and outflows from transactions.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

3-4
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

19. The asset turnover ratio is computed by dividing average total assets by sales revenue.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 6

20. Delta Air Lines reports an asset turnover of .52 compared to Harley-Davidson's turnover
of 1.05. Delta Air Lines is less efficient at generating revenues on its asset base because of
their significantly higher investment in property, plant and equipment assets.

TRUE

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 6

Multiple Choice Questions
21. The principle that requires us to record a transaction when we provide service to a client
and bill them is
A. historical cost principle
B. cost principle.
C. full disclosure.
D. revenue recognition.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

3-5
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest

testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

22. The primary difference between revenues and gains is
A. gains are increases in net assets from peripheral activities while revenues are increases
from ongoing activities.
B. generally accepted accounting principles makes no distinction between them since they
both increase income.
C. revenues cause increases in net assets as a result of peripheral activities and gains cause
increases through ongoing activities.
D. both revenues and gains cause a decrease in net assets from ongoing and peripheral
transactions respectively.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

23. Which of the following would shorten the operating cycle causing an improvement in cash
flows?
A. Faster collection of accounts receivables.
B. Selling inventory in a shorter period of time.
C. Increasing the number of customers who paid cash to buy our goods.
D. All of these would shorten the operating cycle.

AACSB Tag: Relative Thinking
Difficulty: Hard

L.O.: 1

24. Which of the following is true about the time period assumption?
A. It assumes we value the business properly as of the end of every month.
B. It is the cutoff point for asset and liability recognition.
C. It keeps the company's transactions separate and apart from those of the owners.
D. It assumes we divide the long life of a business into a series of shorter time periods for
accounting and reporting purposes.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

3-6
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit

Chapter 003: Operating Decisions and the Income Statement

25. Financial analysts look to the income statement to determine
A. whether the company has generated sufficient cash to pay its bills.
B. if the company has invested too much cash in its inventory.
C. whether the company has generated income from operations.
D. if the company has too much debt.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 1

26. The operating cycle of a business is best defined as
A. the period of time for which we prepare our financial statements.
B. the time it takes for a company to purchase and pay for goods or services from suppliers,
sell those goods or services to customers and collect cash from the customers.
C. the length of time over which property, plant and equipment assets are expected to be used
by the company in generating revenues.
D. the period of time between borrowing money and repaying it.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

27. The effect of shortening the length of the operating cycle is
A. increase in operating costs.
B. decreased cash inflow.
C. increased profits.
D. increased debt.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 1

3-7
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

28. Which of the following costs is most likely to be the largest expense item on the income
statement of a merchandising chain such as Wal-Mart?
A. Wage, salary and benefits expense
B. Cost of Sales
C. Advertising
D. Income tax expense

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

29. Which of the following businesses would not report cost of sales on their income
statements?
A. A large law firm
B. An automobile dealership
C. A pizza restaurant chain
D. A computer chip manufacturer

AACSB Tag: Communications
Difficulty: Medium
L.O.: 2

30. Calculate the effective income tax rate for a company that reports income tax expense of
$142.5 million, net income of $357.5 million, and income before income taxes of $500
million.
A. 33 1/3%
B. 25%
C. 28.5%
D. 71.5%.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

3-8
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

31. Revenues are defined as
A. increases in net assets as a result of peripheral transactions.
B. decreases in net assets as a result of ongoing operations.
C. increases in net assets as a result of ongoing operations.
D. decreases in net assets as a result of peripheral transactions.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

32. Which of the following statements is true?
A. The balance sheet must disclose earnings per share (EPS).
B. The income statement reports revenues, expenses, gains and losses.
C. A loss causes an increase in net assets resulting from a peripheral transaction.

D. Dividends are disclosed on the balance sheet.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

33. Which of the following activities will most likely result in a reported gain on the income
statement?
A. The sale of inventory to customers
B. The sale of old equipment
C. The wages and benefits paid to employees
D. The payment of dividends to stockholders

AACSB Tag: Communications
Difficulty: Hard
L.O.: 2

3-9
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,

bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

34. Which of the following expenses is usually listed last on the income statement?
A. Cost of sales
B. Salaries and benefits expense
C. Advertising expense
D. Income tax expense

AACSB Tag: Communications
Difficulty: Medium
L.O.: 2

35. A landlord received $5,000 cash for December 2011's rent but the tenant's rent for
December is $8,000. Which of the following is true for year ended 2011?
A. $8,000 would be reported on the statement of cash flows.
B. $8,000 would appear on the balance sheet as rent receivable.
C. $8,000 would appear on the income statement as rent revenue earned.
D. $5,000 would appear on the balance sheet as prepaid rent.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 3

36. Two basic accounting principles determine when revenues and expenses are to be
recorded under accrual basis accounting. They are
A. revenue recognition and matching principles.

B. revenue recognition and measurement principles.
C. cost and matching principles.
D. none of these.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

3-10
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

37. During 2010, Sigma Company earned service revenues amounting to $700,000, of which
$630,000 was collected in cash; the balance will be collected in January 2011. The 2010
income statement of the company should report the following amount for service revenues

A. $ 630,000.
B. $ 700,000.
C. $ 70,000.
D. $1,330,000.

AACSB Tag: Analytic
Difficulty: Easy
L.O.: 3

38. The owner of an office building should report rent collected in advance as a debit to cash
and a credit to
A. a liability.
B. an asset other than cash.
C. a revenue.
D. an expense.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

39. The revenue principle requires four conditions to be met. Which of the following is one of
the four conditions?
A. The customer has paid for the goods or services.
B. Delivery of goods or performance of service has occurred or is scheduled to occur.
C. The price is fixed or determinable.
D. The customer has signed a contract.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3

3-11
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

40. Accrued expenses which must be recorded in adjusting entries represent expenses
A. incurred and paid.
B. incurred but not paid.
C. paid in advance.
D. paid in advance and not recorded.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

41. Revenue is always recognized when
A. expenses are paid.
B. cash is collected.
C. it is earned.
D. the end of the period arrives.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

42. Which of the following is not an example of the application of the revenue principle?
A. Recording the sale of merchandise on credit in sales revenue.
B. Recording rent received in advance as unearned rent revenue.
C. Recording interest collected due to a note receivable.
D. Reducing the service revenue account for service revenue collected but not yet performed
at the end of the accounting period.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

3-12
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,

ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

43. Which of the following is an example of revenue or expense recognized in the current
period's income statement?
A. Cash received from a client before the lawyer represents them in court.
B. Inventory purchased by a retail store.
C. Wage costs owed to employees who worked during the period.
D. Cash collected from an accounts receivable.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3

44. The principle which holds that all of the expenses incurred in earning revenue should be
identified with the revenue recognized and reported for the same period is the
A. revenue principle.
B. liability principle.
C. timing principle.
D. matching principle.

AACSB Tag: Relative Thinking
Difficulty: Medium

L.O.: 3

45. Which of the following is not normally a condition that must be met for revenue to be
recognized (recorded under the revenue principle)?
A. Delivery has occurred or services have been rendered.
B. An exchange in the future has been planned.
C. Collection of receivables from credit sales is reasonably assured.
D. The price is fixed or determinable.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

3-13
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit

Chapter 003: Operating Decisions and the Income Statement

46. Which of the following liability accounts is likely to be satisfied with other than payment
of cash?
A. Wages payable
B. Unearned subscriptions revenue
C. Accounts payable
D. Taxes payable

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

47. An example of an asset account that would be created at the end of the accounting period
because revenue has been earned but not collected or recorded yet would be?
A. Rent receivable
B. Inventory
C. Prepaid rent
D. Unearned rent

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

48. A company receives a $50,000 cash deposit from a customer on October 15 but will not
deliver the goods until November 20. Which of the following statements is true?
A. Cash will be reported on the statement of cash flows for the month of November
B. Revenue will be recorded and reported on the income statement for October
C. A liability will be reported on the balance sheet at the end of October
D. A prepaid asset will be reported on the balance sheet at the end of October

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

3-14
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

49. A company purchases $20,000 of inventory in February 2011 and will pay for it in March
2011. Which of the following statements is false?
A. The company will report an accounts payable of $20,000 in February 2011.
B. The statement of cash flows will report an operating cash outflow of $20,000 in March
2011.
C. The income statement will report the $20,000 as cost of goods sold in February 2011 when

it was purchased.
D. The company will record $20,000 in inventory purchased in February 2011.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 3

50. Which of the following activities does not violate the revenue recognition principle?
A. Recording revenue in December 2009 for units manufactured but not yet sold to customers
B. Recording cash received in advance from customers as revenue when the product is not yet
shipped
C. Not recording interest earned in 2009 until the cash is received in 2010
D. Recording revenue in December 2009 for units sold but not yet paid for in full

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

51. What would be the effect on December's income statement of a utility bill received on
December 27, 2009 but which will not be paid until January 10, 2010?
A. No expense will be recognized until the bill is paid in January
B. Net income would increase by recording the expense in December
C. Recording the expense in December when it is incurred will increase expenses
D. Net income will be decreased when we pay the bill in January

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

3-15

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

52. Which group of accounts contains only those that normally have a credit balance?
A. Accounts receivable; Prepaid rent; Fees earned.
B. Bonds payable; Cash; Contributed capital.
C. Cash; Inventory; Unearned revenue.
D. Notes payable; Wages payable; Contributed capital.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

53. During 2010, Sensa Corporation incurred operating expenses amounting to $100,000 of
which $75,000 was paid in cash; the balance will be paid in January 2011. Transaction

analysis of operating expenses for 2010 should reflect only the following:
A. decrease stockholders' equity, $75,000; decrease assets, $75,000.
B. decrease assets, $100,000; decrease stockholders' equity, $100,000.
C. decrease assets, $100,000; increase liabilities, $25,000; decrease stockholders' equity,
$100,000.
D. decrease stockholders' equity, $100,000; decrease assets, $75,000; increase liabilities,
$25,000.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 4

54. Which of these accounts would normally have a debit balance?
A. Prepaid expenses
B. Unearned Revenue
C. Wages Payable
D. Retained earnings

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 4

3-16
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,

slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

55. Which group of accounts contains only those that normally have a debit balance?
A. Prepaid expenses, wages payable, and contributed capital
B. Cash, utilities expense, and accounts receivable
C. Retained earnings, cost of sales, and wages expense
D. Utilities expense, prepaid expenses, and wages payable

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

56. If a company records sales revenue,
A. net income will decrease.
B. retained earnings will decrease.
C. assets will increase.
D. expenses will increase.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

57. Which of the following is not one of the elements in the transaction analysis model?
A. Stockholders' equity
B. Liabilities
C. Gains
D. Expenses

AACSB Tag: Communications
Difficulty: Medium
L.O.: 4

58. If Royal Company paid $2,000 for wages to its employees, this would
A. decrease assets.
B. increase assets.
C. decrease expenses.
D. increase liabilities.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

3-17
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,

ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

59. If Cedar Corporation declared a dividend to its stockholders, which has not been paid, this
would
A. decrease stockholders' equity and decrease cash.
B. increase liabilities and decrease retained earnings.
C. increase liabilities and decrease contributed capital.
D. decrease assets and decrease liabilities.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

60. Which of the following would not cause stockholders' equity to change?
A. Sale of additional stock to investors.
B. Earning revenue for services performed.
C. Cash payment for dividends previously declared.
D. Declaration of a cash dividend to stockholders.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

61. During 2010, Burlington Company incurred operating expenses amounting to $600,000,
of which $550,000 was paid in cash; the balance will be paid in January 2011. On the 2010
income statement of the company, what amount should be reported for operating expenses?
A. $550,000.
B. $560,000.
C. $600,000.
D. $1,150,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 4

3-18
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit

Chapter 003: Operating Decisions and the Income Statement

62. With respect to stockholders' equity, indicate which one of the following statements is
correct.
A. Revenues are recorded as credits to the revenue accounts.
B. Gains are recorded as debits to the revenue accounts.
C. Contributions (investments) by owners are recorded as debits to the contributed capital
accounts.
D. Expenses are recorded as credits to the expense accounts.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

63. Which of the following would cause retained earnings to increase?
A. Payment of expenses.
B. Sold shares of company stock to investors.
C. Loss on the disposal of land and building.
D. Sale of service on credit.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

64. Boone's Cleaning Service performed cleaning services during December, 2009, but had
not collected any cash (or other assets) from its customers by the end of the accounting
period, December 31, 2009. What effect did performing these services have on the accounting
equation?
A. Increased assets and increased liabilities.
B. Increased assets and increased stockholders' equity.

C. Increased assets and decreased stockholders' equity.
D. Decreased liabilities and decreased stockholders' equity.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

3-19
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

65. For each transaction recorded in an accounting system, the two basic equalities that must
be maintained at all times are
A. (1) Assets = Liabilities + Stockholders' Equity. (2) Net Income = Revenues + Expenses.
B. (1) Cash Increase = Cash Inflows Cash Outflows. (2) Net income = Revenues +

Expenses.
C. (1) Assets = Liabilities + Stockholders' Equity. (2) Debits = Credits.
D. (1) Net Income = Revenues + Expenses. (2) Debits = Credits.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 4

66. On December 31, 2009, Avery Corporation paid $10,000 for next year's insurance policy.
This transaction should be recorded as follows by Avery:
A.

B.

C.

D.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 4

3-20
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,

slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

67. On January 1, 2009 Gucci Brothers Inc. started the year with a $500,000 credit balance in
retained earnings and $600,000 balance in capital stock. During 2009, the company earned net
income of $100,000, declared a dividend of $15,000, and issued more stock for $25,000.
What is total stockholders' equity on December 31, 2009?
A. $1,100,000
B. $1,210,000
C. $1,225,000
D. $1,240,000

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 5

68. On January 1, 2010, Denmark Inc., started the year with a $200,000 credit balance in its
retained earnings account. During 2010, the company earned net income of $70,000 and
declared and paid dividends of $10,000. Also, the company received cash of $15,000 as an
additional investment by its owners. Therefore, the balance in retained earnings on December
31, 2010, would be
A. $200,000.

B. $270,000.
C. $245,000.
D. $260,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 5

69. Which of the following transactions would most likely create cash inflow from an
operating activity?
A. Collected cash from a credit customer
B. Borrowed money from the bank
C. Paid suppliers from whom purchases had been made on credit
D. None of these is cash inflow from an operating activity

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

3-21
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand

andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

70. For a law firm, typically the largest operating cash outflow would be
A. payment to suppliers for inventory.
B. wages and benefits paid to employees.
C. payment for utilities.
D. interest paid on notes payable.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

71. The following is the correct order for preparing the financial statements.
A. Balance sheet, statement of retained earnings, income statement, and statement of cash
flows.
B. Statement of cash flows, balance sheet, statement of retained earnings, and income
statement.
C. Balance sheet, income statement, statement of retained earnings, and statement of cash
flows.
D. Income statement, statement of retained earnings, balance sheet, and statement of cash
flows.

AACSB Tag: Relative Thinking
Difficulty: Medium

L.O.: 5

72. Typically, the largest, continuous cash inflow for a business will come from?
A. Sale of our stock to investors
B. Bank loans
C. Cash collected from customers
D. Cash interest received on our investments

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

3-22
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

73. For a merchandising company, the largest operating cash outflow would result from
A. payments to suppliers for inventory.
B. payment of benefits to employees.
C. payment of taxes to the various government entities.
D. payment of interest on notes payable.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

74. Operating cash inflows and outflows are primarily connected to
A. acquisitions and sale of long lived assets.
B. the sale of goods and services to customers and costs incurred to operate the business.
C. issuance of stock and dividend payments.
D. bank borrowings and repayments.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

75. The asset turnover ratio is used to assess
A. whether the company can pay their bills currently due with their existing cash and
receivables.
B. whether the company can borrow money from the bank.
C. whether the company is using its assets effectively in generating sales revenue.
D. whether the company keeps old assets for the optimal amount of time.

AACSB Tag: Relative Thinking
Difficulty: Medium

L.O.: 6

3-23
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload
downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

76. Which of the following activities would most likely cause the asset turnover ratio to
increase?
A. A decrease in sales.
B. Buying facilities instead of renting or leasing them.
C. A decrease in inventory.
D. An increase in assets.

AACSB Tag: Relative Thinking
Difficulty: Hard

L.O.: 6

77. Which of the following would most likely decrease the asset turnover ratio?
A. A decrease in expenses causing net income to increase as a percentage of sales.
B. An increase in total assets during the year.
C. An increase in sales revenue.
D. A decrease in debts owed for asset purchases.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 6

78. A company reports sales revenue of $200 million the current year and $180 million last
year. Their total assets in the current year are $150 million and last year's total assets were
$130 million. What is the current year's asset turnover ratio?
A. 1.48
B. 1.33
C. 1.36
D. 1.43

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 6

3-24
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e


To
Todownload

downloadmore
moreslides,
slides,ebook,
ebook,solutions
solutionsand
andtest
testbank,
bank,visit
visit


Chapter 003: Operating Decisions and the Income Statement

79. If Hawks Company reports an asset turnover ratio of 2.57 for 2009 and their competitor
reports 2.89 for their 2009 ratio, it means that Hawks
A. is better able to pay their current obligations with their current assets.
B. has been more effective in managing the use and level of its assets.
C. has been less effective in managing the use and level of its assets.
D. is less able to pay off their current obligations with their current assets.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 6

3-25
©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e