True/False
Indicate whether the
statement is true or false.
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1.
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Financial statements provide the primary source of information needed by owners
and managers to make decisions on the future activity of a business.
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2.
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An income statement is used to report a business's financial
progress.
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3.
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Information from a completed work sheet is used to prepare the income
statement.
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4.
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Reporting financial information the same way from one fiscal period to the next
is an application of the Adequate Disclosure accounting concept.
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5.
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A corporation prepares only two financial statements: an income statement and a
balance sheet.
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6.
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An income statement for a merchandising business has three main sections:
revenue section, expenses section, and a merchandise inventory section.
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7.
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Cost of merchandise sold is also known as cost of goods sold.
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8.
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Revenue remaining after cost of merchandise sold has been deducted is called
gross profit on sales.
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9.
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Calculating a ratio between gross profit on sales and net sales enables
management to compare its performance to prior fiscal periods.
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10.
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Total expenses on an income statement are added to the gross profit on sales to
find net income before federal income tax.
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11.
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For a merchandising business, every sales dollar reported on the income
statement includes only two components: total expenses and net income.
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12.
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When a business's expenses are less than the gross profit on sales, the
difference is known as a net loss.
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13.
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Increasing sales revenue while keeping cost of merchandise sold the same will
decrease gross profit on sales.
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14.
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Most businesses correct an unacceptable component percentage for gross profit by
simply increasing the markup on merchandise purchased for sale because an increased selling price
will always increase profit.
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15.
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Individual amounts reported on an income statement have significant meaning
without being compared to another amount.
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16.
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If a company has determined that the acceptable component percentage for cost of
merchandise sold is not more than 51.1 percent, the current year's actual component percentage
of 48.9 percent is unacceptable.
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17.
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If a company has determined that the acceptable component percentage for gross
profit on sales is not less 45.0 percent, the current year's actual component percentage of 48.9
percent is unacceptable.
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18.
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A statement of stockholders' equity contains two major sections: retained
earnings and capital stock.
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19.
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The beginning balance of the capital stock account is the amount of capital
stock issued at the beginning of the year.
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20.
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A value assigned to a share of stock and printed on the stock certificate is
called net value.
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21.
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The total amount of stockholders' equity is shown on the last line of a
statement of stockholders' equity.
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22.
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Some income may be distributed as dividends to provide stockholders with a
return on their investments.
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23.
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A corporation's balance sheet reports assets, liabilities, and
stockholders' equity on a specific date.
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24.
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A balance sheet must be prepared in account form only.
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25.
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A business owning both current and plant assets usually lists them under one
heading on a balance sheet.
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26.
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Data needed to prepare the liabilities section of a balance sheet are obtained
from a work sheet.
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27.
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A major difference between balance sheets of a corporation and a proprietorship
is the owners' equity section.
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28.
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A supporting schedule is sometimes referred to as an exhibit.
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29.
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A supporting schedule is always prepared for principal financial
statements.
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30.
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Ruled double lines across both amount columns below the Assets section and below
the Stockholders' Equity section show that the assets equal liabilities plus owners'
equity.
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Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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31.
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Preparing financial statements that provide information about a business's
financial condition, changes in this financial condition, and the progress of operations is an
application of the accounting concept ____.
a. | Consistent Reporting | c. | Historical Cost | b. | Adequate Disclosure | d. | Matching Expenses with
Revenue |
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32.
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Reporting financial information the same way from one fiscal period to the next
is an application of the accounting concept ____.
a. | Consistent Reporting | c. | Historical Cost | b. | Adequate Disclosure | d. | Matching Expenses with
Revenue |
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33.
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An income statement has three main sections for ____.
a. | assets, liabilities, and owner's equity | b. | revenue, expenses,
and inventory | c. | revenue, cost of merchandise sold, and expenses | d. | owner's equity,
share of net income, and drawing |
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34.
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The total original price of all merchandise sold during a fiscal period is
____.
a. | the cost of merchandise sold | c. | the cost of
sales | b. | the cost of goods sold | d. | all of the above |
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35.
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Recording the total original price of all merchandise sold as the cost of
merchandise sold is an application of the accounting concept ____.
a. | Consistent Reporting | c. | Historical Cost | b. | Adequate Disclosure | d. | Matching Expenses with
Revenue |
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36.
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Cost of merchandise sold is found by taking the amount of beginning merchandise
inventory ____.
a. | less purchases plus ending inventory | c. | less expenses | b. | plus gross profit on
sales | d. | plus purchases less
ending inventory |
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37.
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The revenue remaining after cost of merchandise sold has been deducted is
____.
a. | gross profit on sales | c. | net sales | b. | cost of merchandise sold | d. | total sales |
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38.
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For a merchandising business, every sales dollar reported on the income
statement includes ____.
a. | cost of merchandise sold and total expenses only | b. | total expenses and
gross profit on sales only | c. | total expenses and net income
only | d. | cost of merchandise sold, gross profit on sales, total expenses, and net income
before income tax |
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39.
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Acceptable component percentages should be determined ____.
a. | based only on industry standards | b. | based only on comparisons with prior fiscal
periods | c. | based on industry standards and comparisons with prior fiscal
periods | d. | based on the amount of each sales dollar that is considered
acceptable |
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40.
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One way to improve an unacceptable component percentage for cost of merchandise
sold is ____.
a. | to sell more merchandise | b. | to increase selling prices | c. | to purchase from
different vendors who offer better prices | d. | none of the
above |
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41.
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Sometimes increasing the markup to improve an unacceptable component percentage
for gross profit on sales is a bad decision because ____.
a. | markup does not affect gross profit on sales | b. | markup should be
decreased to improve gross profit on sales | c. | an increase in markup may actually cause a
decrease in sales revenue | d. | none of the
above |
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42.
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One way to increase gross profit on sales is to ____.
a. | decrease expenses | c. | increase sales revenue | b. | decrease sales
revenue | d. | increase cost of
merchandise sold |
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43.
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A financial statement that summarizes the changes in a corporation's
ownership for a fiscal period is ____.
a. | an income statement | c. | a statement of stockholders' equity | b. | a balance
sheet | d. | a distribution of net
income statement |
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44.
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A financial statement that reports a corporation's assets, liabilities, and
stockholders' equity on a specific date is ____.
a. | an income statement | c. | an owners' equity statement | b. | a balance
sheet | d. | a distribution of net
income statement |
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45.
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To prepare the corporation's balance sheet, use the information from
____.
a. | the Balance Sheet columns of a work sheet | b. | the owners'
equity statement | c. | both A and B | d. | neither A nor B |
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46.
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A report prepared to give details about an item on a principal financial
statement is ____.
a. | an income statement | c. | a supporting schedule | b. | a balance
sheet | d. | none of the
above |
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47.
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When information about the account balance of each vendor is needed,
____.
a. | an income statement is prepared | b. | a schedule of accounts payable is
prepared | c. | a schedule of accounts receivable is prepared | d. | a distribution of
net income statement is prepared |
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48.
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Liabilities owed for more than a year are called ____.
a. | current liabilities | c. | short-term liabilities | b. | long-term
liabilities | d. | debts |
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49.
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An asset's book value is reported on a balance sheet by listing
____.
a. | the balance of the asset account | b. | the balance of the asset's contra
account | c. | the book value | d. | all of the
above |
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50.
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The relationship between the market value per share and earnings per share of a
stock is called the ____.
a. | price-earnings ratio | c. | earnings value | b. | financial ratio | d. | par value |
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51.
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The amount of net income after federal income tax belonging to a single share of
stock is called ____.
a. | financial ratio | c. | price-earnings ratio | b. | earnings per share | d. | par value |
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52.
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How is the price-earnings ratio calculated?
a. | Market price per share multiplied by the earnings per share | b. | Market price per
share divided by the earnings per share | c. | Market price per share plus the earnings per
share | d. | Market price per share minus the earning per share |
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53.
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How is the earnings per share calculated?
a. | Net income after federal income tax plus the value of shares
outstanding | b. | Net income after federal income tax minus the value of shares
outstanding | c. | Net income after federal income tax multiplied by the number of shares
outstanding | d. | Net income after federal income tax divided by the number of shares
outstanding |
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54.
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On an income statement, merchandising businesses report ____.
a. | revenue | c. | gross profit on sales | b. | cost of merchandise
sold | d. | all of the
above |
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55.
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Total sales less sales discount and sales returns and allowances is called
____.
a. | net profit | c. | net sales | b. | net income | d. | none of the
above |
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