Financial Accounting Tools For Business Decision Making 3rd Edition Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso - Solutions

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What is the importance of the economic entity as- sumption? Give an example of its violation.AppendixLO1
Sue Leonard is president of Better Books. She has no accounting background. Leonard cannot under- stand why market value is not used as the basis for accounting measurement and reporting. Explain what basis is used and why.AppendixLO1
Which of these items are liabilities of Kool-Jewelry Stores? (a) Cash. (b) Accounts payable. (c) Dividends.. (d) Accounts receivable. (e) Supplies. (f) Equipment. (g) Salaries payable. (h) Service revenue. (i) Rent expense.AppendixLO1
What is the purpose of the statement of cash flow?AppendixLO1
"A company's net income appears directly on the in- come statement and the retained earnings statement, and it is included indirectly in the company's balance sheet." Do you agree? Explain cash flows?AppendixLO1
Listed here are some items found in the financial statements of Ruth Weber, Inc. Indicate in which fi- nancial statement(s) each item would appear.AppendixLO1
Valuing assets at their market value rather than at their cost is inconsistent with the: (a) time period assumption. (b) economic entity assumption. (c) cost principle. (d) All of the above.AppendixLO1
The cost principle states that: (a) assets should be recorded at cost and ad- justed when the market value changes. (b) activities of an entity should be kept sepa- rate and distinct from its owner. (c) assets should be recorded at their cost. (d) only transaction data capable of being ex- pressed
The segment of a corporation's an- nual report that describes the corporation's ac- counting methods is the: (a) notes to the financial statements. (b) management discussion and analysis. (c) auditor's report. (d) income statement.AppendixLO1
As of December 31, 2004, Stoneland Corpora- tion has assets of $3,500 and stockholders' equity of $2,000. What are the liabilities for Stoneland Corporation as of December 31, 2004? (a) $1,500. (c) $2,500. (b) $1,000. (d) $2,000.AppendixLO1
Which financial statement reports assets, lia- bilities, and stockholders' equity? (a) Income statement. (b) Retained earnings statement. (c) Balance sheet. (d) Statement of cash flows.AppendixLO1
What section of a cash flow state- ment indicates the cash spent on new equip- ment during the past accounting period? (a) The investing section. (b) The operating section. (c) The financing section. (d) The cash flow statement does not give this information.AppendixLO1
Net income will result during a time period when: (a) assets exceed liabilities.(b) assets exceed revenues. (c) expenses exceed revenues. (d) revenues exceed expenses.AppendixLO1
Which statement about users of accounting in- formation is incorrect? (a) Management is considered an internal user. (b) Taxing authorities are considered external users. (c) Present creditors are considered external users. (d) Regulatory authorities are considered in- ternal users.AppendixLO1
Which is not one of the three primary business activities? (a) Financing. (b) Operating. (c) Advertising. (d) Investing.AppendixLO1
Which is an advantage of corporations relative to partnerships and sole proprietorships? (a) Lower taxes. (b) Harder to transfer ownership. (c) Reduced legal liability for investors. (d) Most common form of organization.AppendixLO1
Which is not one of the three forms of business organization? (a) Sole proprietorship. (b) Creditorship. (c) Partnership. (d) Corporation.AppendixLO1
Describe the assumptions and principles of accounting addressed in this chapter.AppendixLO1
What is the purpose of the auditor's report?AppendixLO1
Why are notes to the financial statements necessary? What kinds of items are included in these notes?AppendixLO1
What is the intent of the management discussion and analysis section in the annual report?AppendixLO1
The accounting equation is: Assets Liabilities + Stockholders' Equity. Toot- sie Roll's financial statements are provided in Appendix A at the end of this book. Replacing words in the equation with dollar amounts, what is Tootsie Roll's accounting equation at December 31, 2001? The answer to this
What are the content and purpose of each statement: income statement, bal- ance sheet, retained earnings statement, and statement of cash flows?AppendixLO1
What questions might each of the following decision makers ask that could be answered by financial information: bank loan officer, stock investor, la- bor union president, and federal bank regulator?AppendixLO1
What are assets, liabilities, common stock, revenues, expenses, and net income?AppendixLO1
What are the three types of business activity?AppendixLO1
What are the two primary categories of users of financial information? Give examples of each.AppendixLO1
What are the three forms of business organization and the advantages of each?AppendixLO1
Explain the basic assumptions and principles underlying financial statements.AppendixLO1
Two students are discussing the use of a trial balance. They wonder whether the following errors, each considered separately, would prevent the trial balance from balancing. What would you tell them? (a) The bookkeeper debited Cash for $600 and cred- ited Wages Expense for $600 for payment of
Tom Bars is confused about how accounting infor- mation flows through the accounting system. He be- lieves information flows in this order: (a) Debits and credits are posted to the ledger. (b) Accounting transaction occurs. (c) Information is entered in the journal. (d) Financial statements are
What is a trial balance and what are its purposes?AppendixLO1
(a) What is a ledger? (b) Why is a chart of accounts important?AppendixLO1
Journalize these accounting transactions. (a) Stockholders invested $9,000 in the business in exchange for common stock. (b) Insurance of $800 is paid for the year. (c) Supplies of $1,500 are purchased on account. (d) Cash of $7,500 is received for services rendered.AppendixLO1
State the rules of debit and credit as applied to (a) as- set accounts, (b) liability accounts, and (e) the Com- mon Stock account.AppendixLO1
Colleen Mooney, a beginning accounting student, believes debit balances are favorable and credit bal- ances are unfavorable. Is Colleen correct? Discuss.AppendixLO1
Tony Galego, a fellow student, contends that the dou- ble-entry system means each transaction must be recorded twice. Is Tony correct? Explain.AppendixLO1
Are the following events recorded in the accounting records? Explain your answer in each case. (a) A major stockholder of the company dies. (b) Supplies are purchased on account. (e) An employee is fired. (d) The company pays a cash dividend to its stock- holders.AppendixLO1
Can a business enter into a transaction that affects only the left side of the basic accounting equation? If so, give an example.AppendixLO1
Describe the accounting information system and the steps in the recording process.AppendixLO1
A trial balance will not balance if: (a) a correct journal entry is posted twice. (b) the purchase of supplies on account is deb- ited to Supplies and credited to Cash. (c) a $100 cash dividend is debited to Divi- dends for $1,000 and credited to Cash for $100. (d) a $450 payment on account is
A trial balance: (a) is a list of accounts with their balances at a given time. (b) proves the mathematical accuracy of jour- nalized transactions. (c) will not balance if a correct journal entry is posted twice. (d) proves that all transactions have been recorded.AppendixLO1
Posting: (a) normally occurs before journalizing. (b) transfers ledger transaction data to the journal. (c) is an optional step in the recording process. (d) transfers journal entries to ledger accounts.AppendixLO1
A ledger: (a) contains only asset and liability accounts. (b) should show accounts in alphabetical or- der. (c) is a collection of the entire group of ac- counts maintained by a company. (d) provides a chronological record of trans- actions.AppendixLO1
Which of these statements about a journal is false? (a) It contains only revenue and expense ac- counts. (b) It provides a chronological record of trans- actions. (c) It helps to locate errors because the debit and credit amounts for each entry can be readily compared. (d) It discloses in one place
Which is not part of the recording process? (a) Analyzing transactions. (b) Preparing a trial balance. (c) Entering transactions in a journal. (d) Posting transactions.AppendixLO1
Which accounts normally have debit balances? (a) Assets, expenses, and revenues. (b) Assets, expenses, and retained earnings. (c) Assets, liabilities, and dividends. (d) Assets, dividends, and expenses.AppendixLO1
Debits: (a) increase both assets and liabilities. (b) decrease both assets and liabilities. (c) increase assets and decrease liabilities. (d) decrease assets and increase liabilities.AppendixLO1
Which statement about an account is true? (a) In its simplest form, an account consists of two parts. (b) An account is an individual accounting record of increases and decreases in spe- cific asset, liability, and stockholders' eq- uity items. (c) There are separate accounts for specific as- sets
What are the limitations of a trial balance?AppendixLO1
What is the primary purpose of a trial balance?AppendixLO1
What is a trial balance, and how is it prepared?AppendixLO1
What is the purpose of (a) the ledger and (b) a chart of accounts?AppendixLO1
How does journalizing differ from posting?AppendixLO1
What are the standard form and content of a journal entry made in the gen- eral journal?AppendixLO1
What contribution does the journal make to the recording process?AppendixLO1
What is the correct sequence of steps in the recording process?AppendixLO1
What are the normal balances for the following accounts of Tootsie Roll In- dustries: Accounts Receivable; Income Taxes Payable; Sales; and Selling, Marketing, and Administrative Expense? The answer to this question is pro- vided on page 157.AppendixLO1
What are the debit and credit effects on revenues, expenses, and dividends?AppendixLO1
What are the debit and credit effects on assets, liabilities, and stockholders' equity?AppendixLO1
What do the terms debit and credit mean?AppendixLO1
Grace McQuillan, president of McQ Industries, wishes to issue a press re- lease to bolster her company's image and maybe even its stock price, which has been gradually falling. As controller, you have been asked to provide a list of 20 financial ratios along with some other operating statistics
M. F. Hoffman is the chief executive officer of Hi-Tech Electronics. Hoffman is an expert engineer but a novice in accounting. Hoffman asks you, as an accounting major, to explain (a) the bases for comparison in analyzing Hi-Tech's financial statements and (b) the limitations, if any, in financial
You are a loan officer for Premier Bank of Port Washington. Rick Gleason, president of R. Gleason Corporation, has just left your office. He is interested in an 8-year loan to expand the company's operations. The borrowed funds would be used to purchase new equipment. As evidence of the company's
Purpose: To employ comparative data and industry data to evaluate a com- pany's performance and financial position. Address: http://biz.yahoo.com/i (or go to www.wiley.com/college/kimmel) Steps (1) Identify two competing companies. (2) Go to the above address. (3) Type in the first company's name
Purpose: To use the Management Discussion and Analysis (MD&A) section of an annual report to evaluate corporate performance for the year. Addresses: www.ge.com/investor/ (or go to www.wiley.com/college/kimmel) Steps 1. From General Electric's Web site, choose the most recent annual report. 2.
The Coca-Cola Company and PepsiCo, Inc. provide refreshments to every corner of the world. Selected data from the 2001 consolidated financial statements for The Coca-Cola Company and for PepsiCo, Inc., are presented here (in millions). Total current assets Total current liabilities Coca-Cola $
The October 15, 2002, issue of the Wall Street Journal included an article by Jesse Drucker entitled "Motorola's Profit: 'Special' Again?" (Subscribers to Business Ex- tra can find the article at that site.) Instructions Read the article and answer the following questions. (a) For how many
The August 21, 2001, issue of the Wall Street Journal included an article by Jonathan Weil entitled "Companies Pollute Earnings Reports, Leaving P/E Ratios Hard to Calculate." (Subscribers to Business Extra can find the article at that site.) Instructions Read the article and answer the following
The financial statements of Hershey Foods are presented in Appendix B, fol- lowing the financial statements for Tootsie Roll Industries in Appendix A. Instructions (a) Based on the information in the financial statements, determine each of the follow- ing for each company: (1) The percentage
Your parents are considering investing in Tootsie Roll Industries common stock. They ask you, as an accounting expert, to make an analysis of the company for them. Fortunately, excerpts from a recent annual report of Tootsie Roll are presented in Appendix A of this textbook. Instructions (a) Make a
Explain how the choice of one of the following ac- counting methods over the other raises or lowers a company's net income during a period of continuing inflation. (a) Use of FIFO instead of LIFO for inventory cost- ing. (b) Use of a 6-year life for machinery instead of a 9- year life.. (c) Use of
Merit Grafixx Inc. has net income of $300,000, av- erage shares of common stock outstanding of 50,000, and preferred dividends for the period of $40,000. What is Merit's earnings per share of common stock? Eric Roskopf, the president of Merit Grafixx, believes that the computed EPS of the company
Which two ratios do you think should be of greatest interest in each of the following cases? (a) A pension fund considering the purchase of 20-year bonds. (b) A bank contemplating a short-term loan. (c) A common stockholder.AppendixLO1
The return on assets for Syed Corporation is 7.6%. During the same year Syed's return on common stockholders' equity is 12.8%. What is the explana- tion for the difference in the two rates?AppendixLO1
Holding all other factors constant, indicate whether each of the following changes generally signals good or bad news about a company. (a) Increase in profit margin ratio. (b) Decrease in inventory turnover ratio. (c) Increase in current ratio. (d) Decrease in earnings per share. (e) Increase in
What is the formula for computing the payout ratio? Do you expect this ratio to be high or low for a growth company?AppendixLO1
In September 2002 the price-earnings ratio of Gene- ral Motors was 14, and the price-earnings ratio of Microsoft was 33. Which company did the stock market favor? Explain.AppendixLO1
Which ratios should be used to help answer each of these questions? (a) How efficient is a company in using its assets to produce sales? (b) How near to sale is the inventory on hand? (c) How many dollars of net income were earned for each dollar invested by the owners? (d) How able is a company to
Quick Buys, a retail store, has a receivables turnover ratio of 4.5 times. The industry average is 12.5 times. Does Quick Buys have a collection problem with its receivables?AppendixLO1
What is the difference between the current ratio and working capital?AppendixLO1
What does each type of ratio measure? (a) Liquidity ratios. (b) Solvency ratios. (c) Profitability ratios.AppendixLO1
Daniel Shapson is puzzled. His company had a profit margin of 10% in 2004. He feels that this is an indi- cation that the company is doing well. Suzie Franklin, his accountant, says that more information is needed to determine the company's financial well- being. Who is correct? Why?AppendixLO1
Name the major ratios useful in assessing (a) liq- uidity and (b) solvency.AppendixLO1
(a) If Belman Company had net income of $380,000 in 2003 and it experienced a 24.5% increase in net income for 2004, what is its net income for 2004? (b) If 6 cents of every dollar of Belman's revenue is net income in 2003, what is the dollar amount of 2003 revenue?AppendixLO1
Two popular methods of financial statement analy- sis are horizontal analysis and vertical analysis. Explain the difference between these two methods.AppendixLO1
(a) Distinguish among the following bases of com- parison: intracompany, industry averages, and intercompany. (b) Give the principal value of using each of the three bases of comparison.AppendixLO1
(a) Ilana Hadar believes that the analysis of finan- cial statements is directed at two characteristics of a company: liquidity and profitability. Is Ilana correct? Explain. (b) Are short-term creditors, long-term creditors, and stockholders interested in primarily the same characteristics of a
Grand Gourmet Inc. has been in operation for 3 years. All of its manufacturing equipment, which has a useful life of 10 to 12 years, has been depreciated on a straight-line basis. During the fourth year, Grand Gourmet changes to an accelerated deprecia- tion method for all of its equipment. (a)
Blue Print Inc. reported 2003 earnings per share of $3.26 and had no extraordinary items. In 2004 earn- ings per share on income before extraordinary items was $2.99, and earnings per share on net income was $3.49. Do you consider this trend to be favorable? Why or why not?AppendixLO1
Indicate which of the following items would be re- ported as an extraordinary item on Thought for Food Corporation's income statement. (a) Loss from damages caused by a volcano eruption. (b) Loss from the sale of short-term investments. (c) Loss attributable to a labor strike. (d) Loss caused when
Explain sustainable income. What relationship does this concept have to the treatment of irregular items on the income statement?AppendixLO1
Which situation below might indicate a com- pany has a low quality of earnings? (a) The same accounting principles are used each year. (b) Revenue is recognized when earned. (c) Maintenance costs are capitalized and then depreciated. (d) The financial statements are prepared in accordance with
Plano Corporation reported net income $24,000; net sales $400,000; and average assets $600,000 for 2004. What is the 2004 profit mar- gin? (a) 6%. (b) 12%. (c) 40%. (d) 200%.AppendixLO1
Which of these is not a liquidity ratio? (a) Current ratio. (b) Asset turnover ratio. (c) Inventory turnover ratio. (d) Receivables turnover ratio.AppendixLO1
Which measure is useful in evaluating the effi- ciency in managing inventories? (a) Inventory turnover ratio. (b) Days in inventory. (c) Both (a) and (b). (d) None of the above.AppendixLO1
Which measure is an evaluation of a company's ability to pay current liabilities? (a) Current cash debt coverage ratio. (b) Current ratio. (c) Both (a) and (b). (d) None of the above.AppendixLO1
In vertical analysis, the base amount for de- preciation expense is generally: (a) net sales. (b) depreciation expense in a previous year. (c) gross profit. (d) fixed assets.AppendixLO1
The following schedule is a display of what type of analysis? Amount Percent Current assets $200,000 25% Property, plant, and equipment 600,000 75% Total assets $800,000 (a) Horizontal analysis. (b) Differential analysis. (c) Vertical analysis. (d) Ratio analysis.AppendixLO1
Adams Corporation reported net sales of $300,000, $330,000, and $360,000 in the years 2002, 2003, and 2004, respectively. If 2002 is the base year, what is the trend percentage for 2004? (a) 77%. (b) 108%. (c) 120%. (d) 130%.AppendixLO1

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