1. If an investor owns less than 20% of the common stock of another corporation as a long-term investment, a. the equity method of accounting for the investment should be employed. b. no dividends can be expected. c. it is presumed that the investor has relatively little influence on the investee. d. it is presumed that the investor has significant influence on the investee. 2. If the cost method is used to account for a long-term investment in common stock, dividends received should be a. credited to the Stock Investments account. b. credited to the Dividend Revenue account. c. debited to the Stock Investments account. d. recorded only when 20% or more of the stock is owned. 3. On January 1, 2002, Belle Corporation purchased 25% of the common stock outstanding of Mann Corporation for $200,000. During 2002, Mann Corporation reported net income of $80,000 and paid cash dividends of $40,000. The balance of the Stock Investments??Mann account on the books of Belle Corporation at December 31, 2002 is a. $200,000. b. $210,000. c. $220,000. d. $190,000. 4. The account, Stock Investments, is a. a subsidiary ledger account. b. a long-term liability account. c. a general ledger control account. d. another name for Debt Investments. 5. If a common stock investment is sold at a gain, the gain a. is reported as operating revenue. b. is reported under a special section, "Discontinued investments," on the income statement. c. is reported in the Other Revenue and Gain section of the income statement. d. contributes to gross profit on the income statement. 6. Short-term investments are securities that are readily marketable and intended to be converted into cash within the next a. year. b. two years. c. year or operating cycle, whichever is shorter. d. year or operating cycle, whichever is longer. 7. Short-term creditors are usually most interested in evaluating a. solvency. b. liquidity. c. marketability. d. profitability. 8. Vertical analysis is a technique which expresses each item within a financial statement a. in dollars and cents. b. in terms of a percentage of the item in the previous year. c. in terms of a percent of a base amount. d. starting with the highest value down to the lowest value. 9. A liquidity ratio measures the a. income or operating success of an enterprise over a period of time. b. ability of the enterprise to survive over a long period of time. c. short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. d. number of times interest is earned. 10. Parr Hardware Store had net credit sales of $6,500,000 and cost of goods sold of $5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The receivables turnover was a. 7.7 times. b. 10.8 times. c. 9.3 times. d. 10 times. 11. Asset turnover measures a. how often a company replaces its assets. b. how efficiently a company uses its assets to generate sales. c. the portion of the assets that have been financed by creditors. d. the overall rate of return on assets. 12. The debt to total asset ratio measures a. the company's profitability. b. whether interest can be paid on debt in the current year. c. the proportion of interest paid relative to dividends paid. d. the percentage of the total assets provided by creditors. 13. A supplier to a company would be most interested in the company's a. asset turnover. b. profit margin. c. current ratio. d. earnings per share. 14. A company has an average inventory on hand of $40,000 and the average days to sell inventory is 73 days. What is the cost of goods sold? a. $200,000. b. $2,920,000. c. $400,000. d. $1,460,000. 15. Earnings per share is calculated a. only for common stock. b. only for preferred stock. c. for common and preferred stock. d. only for treasury stock. 16. Financing activities involve a. lending money. b. acquiring investments. c. issuing debt. d. acquiring long-lived assets. 17. The category that is generally considered to be the best measure of a company's ability to continue as a going concern is a. cash flows from operating activities. b. cash flows from investing activities. c. cash flows from financing activities. d. usually different from year to year. 18. Which of the following transactions does not affect cash during a period? a. Write-off of an uncollectible account b. Collection of an accounts receivable c. Sale of treasury stock d. Exercise of the call option on bonds payable 19. Meyer Company reported net income of $40,000 for the year. During the year, accounts receivable increased by $14,000, accounts payable decreased by $6,000 and depreciation expense of $10,000 was recorded. Net cash provided by operating activities for the year is a. $30,000. b. $70,000. c. $38,000. d. $40,000. 20. In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period is a. deducted from net income. b. added to net income. c. ignored because it does not affect income. d. ignored because it does not affect expenses. 21. Which of the following would be subtracted from net income using the indirect method? a. Depreciation expense b. An increase in accounts receivable c. An increase in accounts payable d. A decrease in prepaid expenses 22. The indirect and direct methods of preparing the statement of cash flows are identical except for the a. significant noncash activity section. b. operating activities section. c. investing activities section. d. financing activities section. 23. When equipment is sold for cash, the amount received is reflected as a cash a. inflow in the operating section. b. inflow in the financing section. c. inflow in the investing section. d. outflow in the operating section. (9 Points) 24. Glaser Company had the following transactions pertaining to debt securities held as a short-term investment. Jan. 1 Purchased 30, 8%, $1,000 Edwards Company bonds for $30,000 cash plus brokerage fees of $600. Interest is payable semiannually on July 1 and January 1. July 1 Received semiannual interest on Edwards Company bonds. Oct. 1 Sold 15 Edwards Company bonds for $16,000 plus accrued interest less $300 brokerage fees. INSTRUCTIONS (a) Journalize the transactions. (b) Prepare the adjusting entry for the accrual of interest on December 31. (14 Points) 25. On January 5, 2012, Sloan Company purchased the following stock securities as a long-term investment: 400 shares Nance Corporation common stock for $4,200. 500 shares Wood Corporation common stock for $12,000. 800 shares Trent Corporation common stock for $19,800. Assume that Sloan Company cannot exercise significant influence over the activities of the investee companies and that the cost method is used to account for the investments. On June 30, 2012, Sloan Company received the following cash dividends: Nance Corporation ............................. $2.00 per share Wood Corporation .............................. $1.00 per share Trent Corporation ............................. $1.50 per share On November 15, 2012, Sloan Company sold 200 shares of Trent Corporation common stock for $5,500. On December 31, 2012, the fair value of the securities held by Sloan Company is as follows: Per Share ????????? Nance Corporation common stock $10 Wood Corporation common stock 18 Trent Corporation common stock 25 INSTRUCTIONS Prepare the appropriate journal entries that Sloan Company should make on the following dates: January 5, 2012 June 30, 2012 November 15, 2012 December 31, 2012 (8 Points) 26. Selected data from Oates Company are presented below: Total assets $1,600,000 Average assets 1,750,000 Net income 245,000 Net sales 1,225,000 Average common stockholders' equity 1,000,000 INSTRUCTIONS Calculate the profitability ratios that can be computed from the above information. Test #2 Name _________________________ Pb 1 - 23 (3 points each) 1. If an investor owns less than 20% of the common stock of another corporation as a long-term investment, a. the equity method of accounting for the investment should be employed. b. no dividends can be expected. c. it is presumed that the investor has relatively little influence on the investee. d. it is presumed that the investor has significant influence on the investee. 2. If the cost method is used to account for a long-term investment in common stock, dividends received should be a. credited to the Stock Investments account. b. credited to the Dividend Revenue account. c. debited to the Stock Investments account. d. recorded only when 20% or more of the stock is owned. 3. On January 1, 2002, Belle Corporation purchased 25% of the common stock outstanding of Mann Corporation for $200,000. During 2002, Mann Corporation reported net income of $80,000 and paid cash dividends of $40,000. The balance of the Stock InvestmentsMann account on the books of Belle Corporation at December 31, 2002 is a. $200,000. b. $210,000. c. $220,000. d. $190,000. 4. The account, Stock Investments, is a. a subsidiary ledger account. b. a long-term liability account. c. a general ledger control account. d. another name for Debt Investments. 5. If a common stock investment is sold at a gain, the gain a. is reported as operating revenue. b. is reported under a special section, "Discontinued investments," on the income statement. c. is reported in the Other Revenue and Gain section of the income statement. d. contributes to gross profit on the income statement. 6. Short-term investments are securities that are readily marketable and intended to be converted into cash within the next a. year. b. two years. c. year or operating cycle, whichever is shorter. d. year or operating cycle, whichever is longer. 7. Short-term creditors are usually most interested in evaluating a. solvency. b. liquidity. c. marketability. d. profitability. 8. Vertical analysis is a technique which expresses each item within a financial statement a. in dollars and cents. b. in terms of a percentage of the item in the previous year. c. in terms of a percent of a base amount. d. starting with the highest value down to the lowest value. 9. A liquidity ratio measures the a. income or operating success of an enterprise over a period of time. b. ability of the enterprise to survive over a long period of time. c. short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. d. number of times interest is earned. 10. Parr Hardware Store had net credit sales of $6,500,000 and cost of goods sold of $5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The receivables turnover was a. 7.7 times. b. 10.8 times. c. 9.3 times. d. 10 times. 11. Asset turnover measures a. how often a company replaces its assets. b. how efficiently a company uses its assets to generate sales. c. the portion of the assets that have been financed by creditors. d. the overall rate of return on assets. 12. The debt to total asset ratio measures a. the company's profitability. b. whether interest can be paid on debt in the current year. c. the proportion of interest paid relative to dividends paid. d. the percentage of the total assets provided by creditors. 13. A supplier to a company would be most interested in the company's a. asset turnover. b. profit margin. c. current ratio. d. earnings per share. 14. A company has an average inventory on hand of $40,000 and the average days to sell inventory is 73 days. What is the cost of goods sold? a. $200,000. b. $2,920,000. c. $400,000. d. $1,460,000. 15. Earnings per share is calculated a. only for common stock. b. only for preferred stock. c. for common and preferred stock. d. only for treasury stock. 16. Financing activities involve a. lending money. b. acquiring investments. c. issuing debt. d. acquiring long-lived assets. 17. The category that is generally considered to be the best measure of a company's ability to continue as a going concern is a. cash flows from operating activities. b. cash flows from investing activities. c. cash flows from financing activities. d. usually different from year to year. 18. Which of the following transactions does not affect cash during a period? a. Write-off of an uncollectible account b. Collection of an accounts receivable c. Sale of treasury stock d. Exercise of the call option on bonds payable 19. Meyer Company reported net income of $40,000 for the year. During the year, accounts receivable increased by $14,000, accounts payable decreased by $6,000 and depreciation expense of $10,000 was recorded. Net cash provided by operating activities for the year is a. $30,000. b. $70,000. c. $38,000. d. $40,000. 20. In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period is a. deducted from net income. b. added to net income. c. ignored because it does not affect income. d. ignored because it does not affect expenses. 21. Which of the following would be subtracted from net income using the indirect method? a. Depreciation expense b. An increase in accounts receivable c. An increase in accounts payable d. A decrease in prepaid expenses 22. The indirect and direct methods of preparing the statement of cash flows are identical except for the a. significant noncash activity section. b. operating activities section. c. investing activities section. d. financing activities section. 23. When equipment is sold for cash, the amount received is reflected as a cash a. inflow in the operating section. b. inflow in the financing section. c. inflow in the investing section. d. outflow in the operating section. (9 Points) 24. Glaser Company had the following transactions pertaining to debt securities held as a short-term investment. Jan. 1 Purchased 30, 8%, $1,000 Edwards Company bonds for $30,000 cash plus brokerage fees of $600. Interest is payable semiannually on July 1 and January 1. July 1 Received semiannual interest on Edwards Company bonds. Oct. 1 Sold 15 Edwards Company bonds for $16,000 plus accrued interest less $300 brokerage fees. INSTRUCTIONS (a) Journalize the transactions. (b) Prepare the adjusting entry for the accrual of interest on December 31. (14 Points) 25. On January 5, 2012, Sloan Company purchased the following stock securities as a long-term investment: 400 shares Nance Corporation common stock for $4,200. 500 shares Wood Corporation common stock for $12,000. 800 shares Trent Corporation common stock for $19,800. Assume that Sloan Company cannot exercise significant influence over the activities of the investee companies and that the cost method is used to account for the investments. On June 30, 2012, Sloan Company received the following cash dividends: Nance Corporation ............................. $2.00 per share Wood Corporation .............................. $1.00 per share Trent Corporation ............................. $1.50 per share On November 15, 2012, Sloan Company sold 200 shares of Trent Corporation common stock for $5,500. On December 31, 2012, the fair value of the securities held by Sloan Company is as follows: Per Share Nance Corporation common stock $10 Wood Corporation common stock 18 Trent Corporation common stock 25 INSTRUCTIONS Prepare the appropriate journal entries that Sloan Company should make on the following dates: January 5, 2012 June 30, 2012 November 15, 2012 December 31, 2012 (8 Points) 26. Selected data from Oates Company are presented below: Total assets $1,600,000 Average assets 1,750,000 Net income 245,000 Net sales 1,225,000 Average common stockholders' equity 1,000,000 INSTRUCTIONS Calculate the profitability ratios that can be computed from the above information