Financial Accounting, 10e (Libby)

Chapter 5 Communicating and Interpreting Accounting Information

1) External users of accounting information include decision makers such as investors, creditors,
and financial analysts.

2) The mission of the Securities & Exchange Commission (SEC) is to develop generally
accepted accounting principles.

3) Independent auditors are advisors who analyze financial statements and other economic
information to formulate forecasts and stock recommendations.

4) The Securities & Exchange Commission (SEC) oversees the work of the Financial
Accounting Standards Board (FASB).

5) The Financial Accounting Standards Board (FASB) oversees the work of the Public Company
Accounting Oversight Board (PCAOB).

6) The Public Company Accounting Oversight Board (PCAOB) sets auditing standards for
independent auditors.

7) The primary responsibility for the information in a corporation's financial statements lies with
the chief executive officer (CEO) and the chief financial officer (CFO).

8) The audit committee of the board of directors is responsible for maintaining the integrity of a
company's financial statements and financial reporting.

9) The Securities & Exchange Commission requires publicly traded companies to have their
financial statements audited by their internal auditors.

10) Financial analysts utilize a company's financial reports to assist them in making earnings
forecasts and earnings per share projections.

11) Corporate governance refers to the procedures designed to ensure that the company is
managed in the interest of the board of directors who oversee management.

12) The fraud triangle conditions necessary for financial statement fraud to occur are the
existence of a system of internal control, the ability to invade the system, and rationalization to
commit the fraud.

13) The form 10-Q contains an unaudited set of quarterly financial statements.

14) The form 10-K is the annual report that publicly traded companies must file with the
Securities & Exchange Commission (SEC).

15) Sales by major product category is a required financial statement disclosure.

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16) Information on all contractual agreements is included in notes as a financial statement
disclosure.

17) Inventories are reported on the balance sheet as a current asset.

18) Intangible assets are reported on the balance sheet as a current asset.

19) Intangible assets are reported on the balance sheet as noncurrent assets and include goodwill.

20) Comparative financial statements are those of a company in one industry presented with
another company in the same industry.

21) An intangible asset has no physical existence and no life.

22) The essence of reporting the gains on sales of investments separately on an income statement
is that they are not part of the primary operations of the reporting company.

23) Net sales plus cost of goods sold is reported on the income statement as income from
continuing operations.

24) Gains and losses on sales of investments are reported on the income statement as a
component of income from operations.

25) The summary of significant accounting policies is typically included as one of the first notes
to the financial statements.

26) Preparers of the statement of cash flow must choose the direct or indirect method for each
classification category on the statement.

27) The indirect method of reporting cash flow from operating activities on the statement of cash
flow begins with net income and adjusts for cash items.

28) The gross profit percentage is calculated by dividing net sales by gross profit.

29) The gross profit percentage decreases when operating expenses increase.

30) The return on assets ratio is calculated by dividing operating income by average total assets.

31) The return on assets ratio may increase when sales increase.

32) The return on assets ratio is affected by both the net profit margin ratio and the total asset
turnover ratio.

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33) Which of the following tasks is not performed by the Securities & Exchange Commission
(SEC)?
A) Overseeing the work of the Financial Accounting Standards Board (FASB).
B) Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).
C) Taking responsibility for protecting investors and maintaining the integrity of the securities
markets.
D) The development of generally accepted accounting principles.

34) Which of the following tasks does the Financial Accounting Standards Board (FASB)
perform?
A) Overseeing the work of the Securities & Exchange Commission (SEC).
B) Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).
C) The responsibility for protecting investors and maintaining the integrity of the securities
markets.
D) The development of generally accepted accounting principles.

35) Which of the following are primarily responsible for the information provided in a
company's financial statements?
A) The internal and external auditors.
B) The Securities & Exchange Commission (SEC) and the external auditors.
C) The chief executive officer (CEO) and the chief financial officer (CFO).
D) The external auditors and the board of directors.

36) Which of the following is not a responsibility of the chief executive officer (CEO) and the
chief financial officer (CFO)?
A) Overseeing the financial statement external audit.
B) Ensuring the accuracy and completeness of all reports provided to the Securities & Exchange
Commission (SEC).
C) The certification of the strength of the internal control system.
D) The disclosure to the audit committee of any frauds they are aware of.

37) Which of the following is not true about the audit committee of the board of directors?
A) They meet with the auditors to discuss management's compliance with their financial
reporting responsibilities.
B) They ensure the accuracy and completeness of all reports provided to the Securities &
Exchange Commission (SEC).
C) They are responsible for ensuring that processes are in place for maintaining the integrity of
the financial statement preparation and reporting.
D) They are responsible for hiring the company's external auditors.

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38) Which of the following statements is false?
A) The board of directors meets with the external auditors to discuss management's compliance
with their financial reporting obligations.
B) The external auditors are selected by the Securities & Exchange Commission (SEC).
C) The Securities & Exchange Commission (SEC) requires publicly traded companies to have
their financial statements audited by an independent auditor.
D) The external auditors assume some responsibility with respect to the fairness of the financial
statements.

39) Which of the following is an objective of the external audit of a company's financial
statements?
A) To provide a forecast of the company's future earnings.
B) To assure no fraud has been committed by the company's management.
C) To provide credibility that the financial statements are fairly presented.
D) To detect all accounting errors made by the accounting system and employees.

40) Which of the following is not included as a primary part of the financial disclosure in Form
10-K?
A) Summarized financial data for a 5-year period.
B) Management's opinion of the financial statements.
C) Business operations and strategy.
D) Four basic financial statements.

41) The Statement of Comprehensive Income includes items in which order?

A) Net income, Other items of net income, Comprehensive income.
B) Comprehensive income, Net income, Other items of Comprehensive income.
C) Net income, Other Fair value items, Comprehensive income.
D) Net income, Other comprehensive income items, Comprehensive income.

42) Which of the following would not be classified as a current asset?

A) Accounts receivable.
B) Goodwill.
C) Inventories.
D) Non-trade receivables.

43) Information disclosed in a balance sheet about shares of common stock includes the number
of shares that are:
A) Authorized and Issued.
B) Issued and Outstanding.
C) Authorized, Issued, and Outstanding.
D) Authorized, Issued, Outstanding, and Not Outstanding.

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44) Stockholders' equity, also called shareholders' equity, includes which of the following two
accounts?
A) Common stock and Deferred revenue.
B) Common stock and Retained earnings.
C) Liabilities and Retained earnings.
D) Retained earnings and Cash.

45) Components of other comprehensive income can be reported in combination with the:
A) Balance sheet.
B) Statement of cash flows.
C) Statement of stockholders' equity.
D) Income statement.

46) Panmar Inc. is preparing a statement of stockholders' equity for 2019. On January 1, 2019,
Panmar started the year with a $200,000 credit balance in its retained earnings account. During
2019, the company earned net income of $140,000. Panmar declared dividends of $80,000 and
paid $50,000 of those dividends. Also, the company received cash of $100,000 for additional
shares of common stock issued and then paid $30,000 to repurchase shares of common stock.
What is the balance in retained earnings on December 31, 2019?
A) $260,000.
B) $290,000.
C) $330,000.
D) $390,000.

47) Denmark Inc. is preparing a statement of stockholders' equity for 2019. On January 1, 2019,
Denmark started the year with a $100,000 credit balance in its retained earnings account. During
2019, the company earned net income of $70,000 and declared dividends of $10,000. Also, the
company received cash of $15,000 as an additional investment by its owners. What is the
balance in retained earnings on December 31, 2019?
A) $100,000.
B) $170,000.
C) $175,000.
D) $160,000.

48) Which of the following is true about gross profit (gross margin)?
A) It is net sales minus operating expenses.
B) It is net sales minus cost of goods sold.
C) It is the same as income from continuing operations.
D) It is net sales minus cost of goods sold and operating expenses.

49) Which of the following best describes operating income?

A) It includes the results of discontinued operations.
B) It is before operating expenses.
C) It is sales minus cost of goods sold and income tax expense.
D) It is net sales minus cost of goods sold and operating expenses.

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50) The Callie Company has provided the following information:

Operating expenses were $231,000;

Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.

What was Callie's gross profit?

A) $564,000.
B) $188,000.
C) $333,000.
D) $232,000.

51) The Callie Company has provided the following information:

Operating expenses were $231,000;

Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of investments was $76,000;
Income tax expense was $151,000.

What was Callie's income from operations (operating income)?

A) $188,000.
B) $333,000.
C) $156,000.
D) $232,000.

52) The Callie Company has provided the following information:

Operating expenses were $231,000;

Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.

What was Callie's income before taxes?

A) $564,000.
B) $188,000.
C) $377,000.
D) $232,000.

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53) Kryton Corp. has provided the following information:

Gross profit was $620,000;

Cost of goods sold was $380,000;
Net income was $400,000.

What was Kryton's gross profit percentage?

A) 40%
B) 61.3%
C) 62%
D) 155%

54) Brimmel Corp. has provided the following information:

Sales were $780,000;

Cost of goods sold was $429,000;
Net income was $195,000.

What was Brimmel's gross profit percentage?

A) 55%
B) 45%
C) 62%
D) 222%

55) Which of the following is not reported as an operating expense on the income statement?
A) Administrative expenses.
B) Research and development expense.
C) Interest expense.
D) Selling expenses.

56) The Nellie Company has provided the following information:

Operating expenses were $115,000;

Gross profit was $629,000;
Cost of goods sold was $470,000;
Interest expense was $17,000;
Income tax expense was $199,000.

What was Nellie's operating income?

A) $514,000.
B) $612,000.
C) $497,000.
D) $298,000.

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57) The Nellie Company has provided the following information:

Operating expenses were $115,000;

Gross profit was $629,000;
Cost of goods sold was $470,000;
Interest expense was $17,000;
Income tax expense was $199,000.

What was Nellie's income before taxes?

A) $514,000.
B) $612,000.
C) $497,000.
D) $298,000.

58) The Willie Company has provided the following information:

Operating expenses were $345,000;

Income from operations was $415,000;
Net sales were $1,100,000;
Interest expense was $71,000;
Loss from sale of investments was $87,000;
Income tax expense was $58,000.

What was Willie's gross profit?

A) $340,000.
B) $689,000.
C) $818,000.
D) $760,000.

59) The Willie Company has provided the following information:

Operating expenses were $345,000;

Income from operations was $415,000;
Net sales were $1,100,000;
Interest expense was $71,000;
Loss from sale of investments was $87,000;
Income tax expense was $58,000.

What was Willie's income before taxes?

A) $344,000.
B) $199,000.
C) $257,000.
D) $286,000.

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60) The Willie Company has provided the following information:

Operating expenses were $345,000;

Income from operations was $415,000;
Net sales were $1,100,000;
Interest expense was $71,000;
Loss from sale of investments was $87,000;
Income tax expense was $58,000.

What was Willie's nonoperating income (expense)?

A) ($71,000).
B) ($158,000).
C) $216,000.
D) $257,000.

61) The Willie Company has provided the following information:

Operating expenses were $345,000;

Income from operations was $415,000;
Net sales were $1,100,000;
Interest expense was $71,000;
Loss from sale of investments was $87,000;
Income tax expense was $58,000.

What was Willie's net income?

A) $373,000.
B) $328,000.
C) $199,000.
D) ($156,000).

62) Which of the following would not be used to calculate income from operations?
A) Gross profit.
B) Selling and administrative expenses.
C) Interest income.
D) Research and development expense.

63) Which of the following statements regarding earnings per share is false?
A) It is reported on the income statement.
B) It increases when net income increases.
C) It is calculated using the average number of common shares outstanding during the period.
D) It would not be affected by additional shares of common stock issued during the year.

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64) Which of the following would not typically be disclosed in the notes to the financial
statements?
A) Additional detail regarding numbers reported in the financial statements.
B) A summary of significant accounting policies.
C) Commitments under long-term supply agreements.
D) The net income earned for the reporting period.

65) Examples of nonoperating items that would appear on an income statement are:
A) Interest income, depreciation expense, gain on sale of land.
B) Cost of sales, interest expense, loss on sale of investments.
C) Interest expense, interest income, loss on sale of investments.
D) Depreciation expense, interest income, interest expense.

66) In which of the following classifications would cash dividend payments to stockholders be
reported in the statement of cash flows?
A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Stockholder activities.

67) Which of the following items is not part of disclosure notes to the financial statements?
A) Descriptions of the significant accounting methods applied in the company's financial
statements.
B) Additional detail of income taxes payable reported in the balance sheet.
C) Names of executive officers and the salaries for each officer listed.
D) Commitments under long-term supply agreements to buy inventory and equipment.

68) Anjou Company had 10,000 shares of common stock outstanding at December 31, 2018 and
14,000 shares of common stock outstanding at December 31, 2019. Anjou had sales of
$3,600,000 in 2019 and net income of $280,000 in 2019. What is the earnings per share amount
reported for Anjou in 2019?
A) $7.78
B) $9.36
C) $20.00
D) $23.33

69) What additional information is required to be presented on the same page as the income
statement?
A) Cash paid for interest.
B) Deferred revenues.
C) Earnings per share.
D) Profit margin.

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70) When shares of the reporting company's common stock are issued in exchange for cash,
where is this reported on a statement of cash flows?
A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Stockholder activities.

71) In what order are cash flow activities presented on the statement of cash flows?
A) Investing activities, Operating activities, Financing activities.
B) Financing activities, Operating activities, Investing activities.
C) Operating activities, Investing activities, Financing activities.
D) Operating activities, Financing activities, Investing activities.

72) A company has paid cash to repurchase its common stock that was previously issued. Where
will this cash flow be reported on the statement of cash flows?
A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Stockholder activities.

73) Which of the following statements is false when a company sells inventory costing $700 for
$1,200 cash and operating expenses are $200?
A) Cost of goods sold is $700.
B) Gross profit is $500.
C) Stockholders' equity increases by net income of $300.
D) Net sales increase $500.

74) Which of the following statements is false when a company sells inventory costing $900 for
$1,500 cash?
A) Current assets increase $600.
B) Gross profit increases $1,500.
C) Stockholders' equity increases $600.
D) Net sales increases $1,500.

75) Which one of the following statements is true when a company sells inventory costing $800
for $1,400 cash, and operating expenses are $500?
A) There is no change in current assets.
B) Stockholders' equity increases $100.
C) Gross profit increases $100.
D) Net sales increases $2,200.

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76) Huron has provided the following year-end balances:

Cash, $25,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Retained earnings, 15,500
Trademarks, $12,600
Accounts payable, $8,000
Goodwill, $11,000

How much are Huron's current assets?

A) $85,900.
B) $71,300.
C) $74,900.
D) $102,100.

77) Huron has provided the following year-end balances:

Cash, $25,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Retained earnings, 15,500
Trademarks, $12,600
Accounts payable, $8,000
Goodwill, $11,000

How much are Huron's net noncurrent assets?

A) $122,300.
B) $120,200.
C) $123,800.
D) $112,300.

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78) Huron has provided the following year-end balances:

Cash, $25,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Retained earnings, $15,500
Trademarks, $12,600
Accounts payable, $8,000
Goodwill, $11,000

How much is Huron's stockholders' equity?

A) $33,800.
B) $187,100.
C) $195,100.
D) $202,600.

79) Which of the following would not be included on an income statement?

A) Accumulated depreciation.
B) Insurance expense.
C) Cost of goods sold.
D) Discontinued operations.

80) Which of the following is true?

A) Income from operations would increase other income.
B) Income before income taxes would be shown as a component of operating income on the
income statement.
C) Gains and losses on the sales of investments are included in nonoperating income (loss).
D) Income tax expense is shown as part of operating expenses.

81) Farrell Company has rent expense, wages expense, and utilities expense. Where will the
company present these expenses on the income statement?
A) As a component of net sales.
B) As a component of gross profit.
C) After income from operations.
D) Prior to income from operations.

82) Which of the following statements regarding international financial reporting standards
(IFRS) is false?
A) Common stock is titled as share capital.
B) Property, plant, and equipment can be reported on the balance sheet at either fair value or
historical cost.
C) The last-in first-out (LIFO) inventory method is permitted.
D) Development costs are capitalized.
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83) Which of the following statements does not accurately describe the effect of the sale of
inventory at a profit on the financial statements?
A) Income from operations and current assets both increase.
B) Operating income and gross profit both increase.
C) Net income and earnings per share both increase.
D) Current assets do not change and stockholders' equity increases.

84) Which of the following statements regarding international financial reporting standards
(IFRS) is false?
A) Research and development costs are expensed.
B) Paid-in capital is titled share premium.
C) Cash payments for interest are reported on the cash flow statement as either an operating or
financing cash flow.
D) Reversal of inventory write-downs is required.

85) Which of the following would not be included within the operating activities section of a
cash flow statement?
A) Cash received from customers.
B) Cash paid for insurance.
C) Cash paid for interest expense.
D) Cash paid to acquire a patent.

86) Which of the following would be reported in the supplemental cash flows disclosure section
of the statement of cash flows?
A) Sales on account which have not yet been collected.
B) Net income.
C) Cash paid for income taxes.
D) Depreciation expense.

87) Which of the following statements is correct?

A) Accumulated depreciation is the amount of depreciation on the income statement.
B) Current liabilities are debts expected to be paid within one year.
C) Current assets are resources of a company that might include cash and copyrights.
D) Patents, goodwill, and deferred revenues are classified as intangible assets on the balance
sheet.

88) Which of the following statements is false?

A) Gross profit percentage is calculated as gross profit divided by net sales.
B) Gross profit percentage should only be viewed for each reporting company and is not useful
in comparing different companies in the same industry.
C) Gross profit is calculated as net sales less cost of sales.
D) A higher gross profit might be strategic in order to afford high research and development
costs.

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89) On January 1, 2019, Gucci Brothers Inc. had a $500,000 credit balance in retained earnings
and $600,000 balance in common stock. During 2019, the company earned net income of
$100,000, declared a dividend of $15,000, and issued additional stock for $25,000. What is total
stockholders' equity on December 31, 2019?
A) $1,100,000.
B) $1,210,000.
C) $1,225,000.
D) $1,240,000.

90) Which of the following transactions results in a decrease in the return on assets ratio?
A) Increasing the sales price of the products sold.
B) An increase in the net profit margin ratio.
C) Purchasing land by signing a long-term note payable.
D) Collecting cash from an account receivable.

91) Which of the following results in an increase in the return on assets ratio?
A) A decrease in the total asset turnover ratio.
B) An increase in the net profit margin ratio.
C) Purchasing a building by signing a long-term mortgage payable.
D) Using cash to purchase land.

92) Marino Company has provided the following information:

Net sales, $480,000

Net income, $24,000
Average total assets, $200,000

What is Marino's net profit margin?

A) 75%
B) 12%
C) 42%
D) 5%

93) Marino Company has provided the following information:

Net sales, $480,000

Net income, $24,000
Average total assets, $200,000

What is Marino's total asset turnover?

A) 12.0
B) 8.33
C) 0.42
D) 2.4

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94) Marino Company has provided the following information:

Net sales, $480,000

Net income, $24,000
Average total assets, $200,000

What is Marino's return on assets?

A) 240%
B) 12%
C) 5%
D) 42%

95) Harley Company has provided the following selected financial information.

2018 2019
Total assets $ 3,200,000 $ 3,600,000
Net sales $ 7,200,000 $ 9,000,000
Net income $ 640,000 $ 450,000

What is Harley's 2019 total asset turnover (rounded)?

A) 2.38
B) 2.25
C) 0.132
D) 2.65

96) Harley Company has provided the following selected financial information.

2018 2019
Total assets $ 3,200,000 $ 3,600,000
Net sales $ 7,200,000 $ 9,000,000
Net income $ 640,000 $ 450,000

What is Harley's 2019 net profit margin (rounded)?

A) 5.0%
B) 6.1%
C) 6.7%
D) 13.2%

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97) Harley Company has provided the following selected financial information.

2018 2019
Total assets $ 3,200,000 $ 3,600,000
Net sales $ 7,200,000 $ 9,000,000
Net income $ 640,000 $ 450,000

What is Harley's 2019 return on assets (rounded)?

A) 12.5%
B) 13.2%
C) 16.0%
D) 25.0%

98) Which of the following transactions will decrease both the return on assets ratio and the total
asset turnover ratio?
A) Purchasing land by signing a note payable.
B) Accruing interest expense at year-end.
C) Accruing interest revenue at year-end.
D) Collecting cash from an account receivable.

99) Which of the following does not increase the net profit margin ratio?
A) Increasing sales volume.
B) Increasing sales price.
C) Reducing inventory kept on hand.
D) Decreasing operating expenses.

100) Which of the following statements is true?

A) A decrease in net income decreases both the net profit margin ratio and the total asset
turnover ratio.
B) An increase in average total assets results in a decrease in both the total asset turnover ratio
and the net profit margin ratio.
C) A decrease in average total assets results in an increase in the total asset turnover ratio and a
decrease in the net profit margin ratio.
D) An increase in net income increases both the net profit margin ratio and the return on assets
ratio.

101) Which of the following would most likely increase the net profit margin ratio?
A) An increase in the unit selling price.
B) A decrease in the overall sales volume.
C) An increase in operating expenses.
D) An increase in cost of goods sold.

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102) Which of the following statements is correct?
A) Income from operations increases when common stock is sold for more than par value.
B) The accrual of research and development costs does not affect the net profit margin ratio.
C) The payment of an accrued liability decreases total asset turnover.
D) The declaration and payment of a cash dividend increases the return on assets ratio.

103) Which of the following statements correctly describes the effect of accruing interest
revenue at year-end?
A) Income from operations increases.
B) The net profit margin ratio does not change.
C) The total asset turnover ratio increases.
D) The return on assets ratio is affected.

104) The balance sheet for Glenwood Corporation at December 31, 2019 showed the following
subtotals:

Current assets $140,000

Current liabilities 80,000
Buildings and equipment 420,000
Total stockholders' equity 420,000
Retained earnings 120,000
Total liabilities 210,000
Other long-term assets 70,000

Required:
Based on the above data, calculate the following amounts:

A. Total assets _______

B. Long-term liabilities _______
Common stock and Additional
C. paid-in capital _______
Total liabilities and stockholders'
D. equity _______

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105) Ridgetop Corporation reported the following amounts on its balance sheet at December 31,
2019:

Total current assets $1,800,000

Total long-term assets 900,000
Total current liabilities 1,300,000
Total long-term liabilities 500,000
Total stockholders' equity 900,000
Net income 100,000

On January 1, 2019, total assets were $2,000,000, total liabilities were $1,200,000 and total
stockholders' equity was $800,000.

Calculate Ridgetop's return on assets.

106) Complete the following balance sheet by entering the appropriate amounts in the blanks
provided.

ASSETS
Cash $15,000
Accounts receivable (A.) _______
Building $60,000
Accumulated depreciation (B.) _______ 35,000
Total Assets (C.) _______
LIABILITIES
Accounts Payable $11,000
Notes payable, short-term 12,000
Income taxes payable
Total current liabilities (D) _______ $25,000
Mortgage payable 25,000
Total Liabilities 50,000
STOCKHOLDERS'
EQUITY
Common stock $25,000
Retained earnings 15,000
Total Stockholders' Equity (E.) ______
Total Liabilities and
Stockholders' Equity (F.) ______

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107) FocusMore, Inc., had the following list of accounts taken from its adjusted trial balance at
December 31, 2019:

Accounts Payable $15,000

Accounts Receivable 18,000
Accumulated Depreciation-
Building 26,200
Advertising Expense 12,800
Building 100,000
Common Stock 60,000
Cash 15,000
Cost of Goods Sold 56,500
Depreciation Expense 2,000
Utilities Expense 3,800
Utilities Payable 1,900
Inventory 25,000
Land 30,000
Prepaid Insurance 4,600
Interest Revenue 2,500
Retained Earnings (Jan. 1, 2019) 58,000
Wages Expense 48,000
Wages Payable 4,600
Sales 150,000
Supplies Inventory 1,200
Supplies Expense 2,000
Deferred Rent Revenue 700

Required:
Prepare a multiple step income statement for the year ended December 31, 2019. (Include gross
profit, but ignore income taxes.)

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108) The following data were taken from the adjusted trial balance of Kent Corporation.

Kent Corporation
Adjusted Trial Balance Data
December 31, 2019
Accounts Payable $12,000
Accounts Receivable 13,000
Accumulated Depreciation-Building 6,000
Accumulated Depreciation-
Equipment 9,000
Building 60,000
Common Stock 40,000
Cash 24,000
Copyrights 22,000
Dividends Declared 12,000
Equipment 15,000
Land 25,000
Note Payable (10%, due in 5 years) 40,000
Office Supplies 1,000
Prepaid Insurance 3,000
Retained Earnings (January 1, 2019) 23,000
Wages Payable 2,000
Service Revenue 85,000
Wages Expense 28,000
Utilities Expense 2,000
Depreciation Expense 5,000
Insurance Expense 2,000
Office Supplies Expense 1,000
Interest Expense 4,000

Prepare a classified balance sheet in good form at December 31, 2019. (Ignore income taxes).

109) Anthony Inc. reported the following amounts on its 2018 and 2019 income statements:

2019 2018
Net Sales $20,438 $20,367
Cost of sales 7,943 8,198

A. Compute the gross profit percentage for years 2018 and 2019.
B. Provide at least two potential causes for the change in Anthony's gross profit percentage.

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110) Twin Lakes, Inc. reported the following December 31 amounts in its financial statements:

2019 2018
Sales revenue $250.0 $210.0
Gross profit 75.0 68.0
Net income 28.0 21.0
Total assets 90.0 80.0
Total stockholders' equity 40.0 36.0

Compute the following for the 2019 ratios:

A. Gross profit percentage
B. Net profit margin
C. Total asset turnover
D. Return on assets

111) The following information was taken from the income statement and balance sheet of The
Mickey Company for the years 2018 and 2019:

2019 2018
Sales revenues $30,752 $27,061
Net income 2,345 1,267
Total assets 53,902 49,988
Total stockholders' equity 26,081 23,791

Compute the following ratios for 2019:

A. Net profit margin
B. Total asset turnover
C. Return on assets

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112) Determine the effect of the following transactions on the identified financial statement
components and ratios. Code your answers as follows:

A: If the transaction results in an increase in the financial statement component or ratio.

B: If the transaction results in a decrease in the financial statement component or ratio.
C: If the transaction does not affect the financial statement component or ratio.

Transaction 1: A company issued common stock at a price in excess of par value.

Revenues _____
Assets _____
Stockholders' equity _____
Return on assets ratio _____

Transaction 2: A company recorded depreciation expense at year-end.

Net income _____
Assets _____
Stockholders' equity _____
Total asset turnover ratio _____

113) Determine the effect of the following transactions on the identified financial statement
components and ratios. Code your answers as follows:

A: If the transaction results in an increase in the financial statement component or ratio.

B: If the transaction results in a decrease in the financial statement component or ratio.
C: If the transaction does not affect the financial statement component or ratio.

Transaction 1: A company accrued interest expense at year-end.

Net income _____
Assets _____
Stockholders' equity _____
Total asset turnover ratio _____

Transaction 2: A company declared and paid cash dividends to stockholders.

Net income _____
Assets _____
Stockholders' equity _____
Return on assets ratio _____

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114) Determine the effect of the following transactions on the identified financial statement
components and ratios. Code your answers as follows:

A: If the transaction results in an increase in the financial statement component or ratio.

B: If the transaction results in a decrease in the financial statement component or ratio.
C: If the transaction does not affect the financial statement component or ratio.

Transaction 1: A company paid for research and development costs incurred to develop a patent.
Net income _____
Property, plant, and equipment _____
Stockholders' equity _____
Net profit margin ratio _____

Transaction 2: Inventory was purchased on account.

Net income _____
Current assets _____
Current liabilities _____
Return on assets ratio _____

115) Determine the effect of the following transactions on the identified financial statement
components and ratios. Code your answers as follows:

A: If the transaction results in an increase in the financial statement component or ratio.

B: If the transaction results in a decrease in the financial statement component or ratio.
C: If the transaction does not affect the financial statement component or ratio.

Transaction 1: A company acquired land by signing a long-term note payable.

Property, plant, and equipment _____
Total asset turnover ratio _____
Net profit margin ratio _____
Return on assets ratio _____

Transaction 2: Cash was used to pay a current liability.

Net income _____
Total asset turnover ratio _____
Net profit margin ratio _____
Return on assets ratio _____

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116) Determine the effect of the following transactions on the financial statements components
identified. Code your answers as follows:

A: If the transaction results in an increase in the financial statement component or ratio.

B: If the transaction results in a decrease in the financial statement component or ratio.
C: If the transaction does not affect the financial statement component or ratio.

Transaction 1: A company sold inventory for an amount greater than its cost.
Gross profit _____
Current assets _____
Stockholders' equity _____

Transaction 2: Advertising expense was recorded but has yet to be paid for.
Net income _____
Gross Profit _____
Stockholders' equity _____

117) For the year ending December 31, 2019, the accounts of Jackson Corporation showed the
following balances:

Common stock, January 1, 2019 $500,000

Retained earnings, beginning
balance, January 1, 2019 $100,000
Total revenues earned during 2019 $150,000
Total expenses incurred during
2019 $90,000
Total dividends declared during
2019 $10,000
Issuance of stock during 2019 $50,000

Determine the components of stockholders' equity as of December 31, 2019.

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118) The following income statement was reported for Bauer Inc. for the first year of operations
ending December 31, 2019 reported (in thousands of dollars):

Sales revenue $24,500

Expenses:
Cost of Sales $14,700
Wages 3,300
Rent 700
Utilities 500
Miscellaneous 200
Total Expenses 19,400
Income before taxes 5,100
Income tax expense 1,785
Net income $3,315

A. Calculate gross profit percentage.

B. Calculate net profit margin.
C. Calculate earnings per share if there are 200,000 shares of common stock outstanding.

119) Describe the return on assets ratio and the DuPont approach for calculating return on assets.

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