1. (TCO A) Which of the following is an advantage of the sole proprietorship relative to the corporate form of business organization?
Limited liability of investor
Transferability of ownership
Simple to establish
Unlimited life

2. (TCO A) Dividends _____.
represent an expense and are an operating activity
represent an obligation and are an operating activity
represent a distribution of earnings and are a financing activity
represent an asset and are an investing activity

3. (TCOs A, B) Below is a partial list of account balances for LBJ Company:

Cash $15,000
Prepaid insurance 5,000
Accounts receivable 2,500
Accounts payable 3,000
Notes payable 6,000
Common stock 10,000
Dividends 500
Revenues 15,000
Expenses 13,000

What did LBJ Company show as total debits?

4. (TCOs B, E) Why is the accrual basis of accounting preferred by GAAP?

The Accrual basis is easier to use.
The Accrual basis is also preferred by the Internal Revenue Service.
The Accrual basis complies with the revenue recognition and matching principles.
The Accrual basis requires fewer accounting resources.

5. (TCO D) In a period of increasing prices, which inventory cost flow assumption will result in the highest amount of net income?
The average cost method
Income tax expense for the period will be the same under all assumptions.

6. (TCOs A, E) Equipment was purchased for $75,000 on January 1, 2011. Freight charges of $3,200 were incurred and there was a cost of $6,000 for installation. It is estimated the equipment will have a $12,000 salvage value at the end of its 5-year useful life. Depreciation expense for 2011 using the straight-line method will be _____.

7. (TCO D,G) Payne Corporation issues 100 twenty-year, 6%, $1,000 bonds dated July 1, 2010, at 94. The journal entry to record the issuance will show a _____.
debit to Cash of $100,000
credit to Bonds Payable of $94,000
credit to Premium on Bonds Payable of $4,000
debit to Discount on Bonds Payable of $6,000

8. (TCO C) Accounts receivable arising from sales to customers amounted to $80,000 and $100,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $1,000,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is _____.

9. (TCO F) If you are making comparisons within a company to detect changes in financial relationships and significant trends, you are performing what type of analysis?
Industry averages analysis
Intercompany analysis
Common-size analysis
Intracompany analysis

10. (TCO F) The formula for performing horizontal analysis is _____.
(Current Year Amount minus Base Year Amount) divided by Current Year Amount
Base Year Amount divided by Current Year Amount
Current Year Amount minus Base Year Amount
(Current Year Amount minus Base Year Amount) divided by Base Year Amount

11. (TCO F) Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time _____.
that has been arranged from the highest number to the lowest number
that has been arranged from the lowest number to the highest number
to determine which numbers are in error
to determine the amount and/or percentage increase or decrease that has taken place

12. (TCO F) A common measure of liquidity is _____.
debt-to-total-assets ratio
cash debt coverage
free cash flow
working capital

13. (TCO F) Short-term creditors would be most interested in which of the following ratios?
Average collection period
Times interest earned
Cash debt coverage
Free cash flow

14. (TCO G) To calculate the market value of a bond, we need to _____.
multiply the bond price times the interest rate
calculate the present value of the principal only
calculate the present value of the interest only
calculate the present value of both the principal and

15. (TCO A) Use the following partial financial statement information below to calculate the liquidity and profitability ratios. This information can be used to correctly solve each of the ratios below.
Average common shares outstanding 35,000 Current liabilities $25,000
Capital expenditures $20,000 Net income $50,000
Cash provided by operations $77,000 Net sales $100,000
Preferred stock dividends paid $30,000 Total liabilities $50,000
Current assets $20,000 Total assets $80,000

Instructions: Compute the following.

a) Current ratio
b) Working capital
c) Earnings per share
d) Debt-to-total-assets ratio
e) Free cash flow
To earn full credit, you must show the formula you are using, show your computations, and explain the meaning of each of your ratio results.

16. (TCOs D, E) Please prepare the following journal entries. Indicate which account should be debited with the abbreviation DR in front of the account name and which account should be credited with the abbreviation CR in front of the account name along with the dollar amount of the debit and credit.
a) Investors invested $150,000 in exchange for 10,000 shares of common stock.
b) Company made payment on account for $10,000
c) Company received $15,000 for services not yet performed
d) Company purchased $7,500 worth of equipment
e) Company billed $5,000 for services performed


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