Multiple Choice: Chapter Sixteen

1. Financial statement ratio analysis may be undertaken to study liquidity, turnover, profitability, and other indicators. To which does the current ratio most relate?

a. Liquidity

b. Turnover

c. Profitability

d. Other indicator

Answera. The current ratio is a liquidity ratio.

2. Zhang Corporation had net income of \$100,000, paid income taxes of \$30,000, and had interest expense of \$8,000. What was Zhang's times interest earned ratio?

a. 12.5

b. 16.25

c. 17.25

d. 17.85

Answerc. 17.25. Income before income taxes and interest (\$100,000 + \$30,000 + \$8,000 = \$138,000) is divided by interest charges (\$8,000).

3. Selected information for 20X1 for the Bernstein Company is as follows:

Cost of goods sold \$6,000,000
Average inventory \$2,000,000
Net sales \$8,000,000
Average receivables \$3,000,000
Net income \$1,000,000

Assuming a 360-day business year, what was the inventory turnover ratio for Bernstein?

a. 3

b. 4

c. 5

d. 6

Answera. 3. Cost of goods sold (\$6,000,000) is divided by average inventory (\$2,000,000).

4. Thompson Corporation wrote off a \$200 uncollectible account receivable against the \$2,400 balance in its Allowance for Bad Debts account. Compare the current ratio before the write-off (X) with the current ratio after the write-off (Y).

a. X greater than Y

b. X equals Y

c. X less than Y

d. Cannot be determined

Answerb. The write-off of an uncollectible account reduces Accounts Receivable and the corresponding contra account, Allowance for Uncollectible Accounts.

5. Ames Corporation's net accounts receivable were \$750,000 on December 31, 20X1, and \$1,250,000 on December 31, 20X2. Net cash sales for 20X2 were \$3,300,000. The accounts receivable turnover ratio for 20X2 was 16. What were the total net sales for 20X2?

a. \$12,800,000

b. \$16,000,000

c. \$16,100,000

d. \$19,300,000

Answer d. \$19,300,000. Total net sales equals cash sales (\$3,300,000) plus credit sales (\$16,000,000). Credit sales are 16 times the amount of average accounts receivable ((\$750,000 + \$1,250,000)/2 = \$1,000,000).

6. On a statement of cash flows, which of the following types of activities would not be disclosed in a separate section?

a. Operating activities

b. Investing activities

c. Financing activities

d. Contractual activities

Answer d. The statement of cash flows includes separate sections for operating, investing, and financing activities. The statement is silent with regard to contractual activities.

7. Which of the following activities would generally be regarded as a financing activity in preparing a statement of cash flows?

a. Dividend distribution

b. Proceeds from the sale of stocks of other firms

d. Employees' salaries and wages paid

Answer a. Dividends are a return to the owners who provided financing for the company; hence, they are reported as a financing activity. Proceeds from the sale of the stock of other firms and loans made to others are investing activities. Salaries and wages relate to operations.

8. In preparing the statement of cash flows, how should noncash investing/financing activities be reported?

a. Not be reported

b. Be reported in a separate schedule accompanying the statement of cash flows

c. Be reported in the investing activities section of the statement of cash flows

d. Be reported in the financing activities section of the statement of cash flows

Answerb. Noncash investing/financing activities must be reported in a separate schedule accompanying the statement of cash flows.

9. For purposes of calculating cash receipts from customers, which of the following adjustments should be made to convert accrual basis sales to cash basis sales?

a. Add an increase in accounts receivable to accrual basis sales

b. Subtract an increase in accounts receivable from accrual basis sales

c. Add cash in bank to accrual basis sales

d. Add the change in cash to the accrual basis sales

Answerb. Increases in accounts receivable relate to accrual basis sales not yet collected. Therefore, the amount of the increase in accounts receivable must be subtracted from accrual basis sales in calculating cash basis sales. The total change in cash and cash in bank are unrelated to the conversion process.

10. If the indirect approach for the statement of cash flows is presented, which of the following items should be subtracted from accrual basis net income to derive cash flow from operating activities?

a. Gains on the sale of long-term investments

b. Losses on the sale of long-term investments

c. Depreciation expense

d. Amortization expense

Answer a. Nonoperating gains must be subtracted from accrual basis income in working toward operating cash flows (i.e., accrual basis income was increased for this nonoperating amount); conversely, nonoperating losses would be added. The conversion process requires that depreciation and amortization be added to accrual basis income because they reduce accrual basis income without consuming cash.

11. As a generalization, the adjustment of accrual basis income to cash provided by operating activities requires which of the following to be added?

a. Increases in current assets related to operating activities

b. Increases in current liabilities related to operating activities

c. Decreases in current liabilities related to operating activities

d. Both (a) and (c) are correct.

Answer b. Increases in current liabilities related to operations are indicative of expenses and purchases not yet paid. Therefore, such amounts must be added to accrual basis income when computing cash from operating activities; conversely, decreases would be subtracted. Increases in current assets related to operations are also subtracted.

12. When preparing a statement of cash flows under the indirect method, supplemental disclosure should be made for which of the following?

a. Net cash consumed by operating activities

b. Cash dividend distributions

c. Cash paid for interest and taxes

d. All of the above

Answerc. Choices "a" and "b" are an integral part of the statement. Cash paid for interest and taxes must be presented as a supplement.

13. Wilkin Corporation reported accrual basis sales of \$200,000, cost of goods sold of \$80,000, and operating expenses, taxes, and interest summing to \$30,000. In evaluating Wilkin's comparative balance sheets, it is determined that accounts receivable increased \$10,000, inventory increased \$5,000, and accounts payable decreased \$7,000. There were no changes in prepaid expenses nor were there any interest or taxes payable at the beginning or end of the year. How much was cash basis income for Wilkin Corporation for the year?

a. \$68,000

b. \$82,000

c. \$105,000

d. \$112,000

Answer a. \$68,000. The accrual basis income (\$200,000 - \$80,000 - \$30,000 = \$90,000) is reduced by the increase in accounts receivable (\$10,000), the increase in inventory (\$5,000), and the decrease in accounts payable (\$7,000).

14. Dixon Corporation reported 20X1 accrual basis net income of \$50,000. Relevant information to adjust accrual basis income to cash basis income follows.

Depreciation expense \$12,000
Loss on the sale of land 16,000
Increase in accounts receivable 8,000
Decrease in merchandise inventory 4,000
Increase in accounts payable 3,000
Increase in taxes payable 2,000

How much is net cash provided by operating activities?

a. \$47,000

b. \$49,000

c. \$51,000

d. \$79,000

Answer d. \$79,000. The \$50,000 accrual basis income should be increased by depreciation expense (\$12,000), loss on the sale of land (\$16,000), decrease in merchandise inventory (\$4,000), increase in accounts payable (\$3,000), and increase in taxes payable (\$2,000), and be decreased by the increase in accounts receivable (\$8,000). (\$50,000 + \$12,000 + \$16,000 + \$4,000 + \$3,000 + \$2,000 - \$8,000 = \$79,000).

15. In preparing a work sheet for the statement of cash flows, the lower portion corresponds to a statement of cash flows prepared using the indirect method. Items in the debit column of this lower portion most closely correspond to items which:

a. Explain increases in cash.

b. Explain decreases in cash.

c. Relate to financing activities.

d. Relate to investing activities.

Answera. A close examination of the lower portion of a work sheet reveals that the debits generally relate to cash increases, whether related to operating, investing, or financing activities.