Multiple Choice Answers

1. What is Jane’s rate of return on total assets if average total assets are $100,000; net income is $2,000;
interest expense if $1,600; and income tax is $2,000?
A. 5.6%
B. 4.6%
C. 5.2%
D. 3.6%

2. Operating cash flows affect
A. long-term asset accounts.
B. current assets and current liabilities.
C. equity accounts.
D. long-term liability accounts.

3. Which section of the income statement does not report net of income taxes or net of income tax savings?
A. Cumulative effect of changes in accounting principles section
B. Discontinued operations section
C. Extraordinary items section
D. Continuing operations section

4. What are the rate of return on stockholders’ equity and the rate of return on common stockholders’
equity (rounded to the nearest one-tenth of a percent) given the following information:
Net Income $350,000
Preferred Dividends 20,000
Common Stock 48,000
Common Stockholders’ Equity 1/1/2011 4,400,000
Total Stockholders’ Equity 1/1/2011 5,300,000
Total Stockholders’ Equity 12/31/2011 5,500,000
A. Return on Stockholders’ Equity: 7.8 %; Return on Common Stockholders’ Equity: 8.9%
B. Return on Stockholders’ Equity: 6.5 %; Return on Common Stockholders’ Equity: 7.6%
C. Return on Stockholders’ Equity: 8.1 %; Return on Common Stockholders’ Equity: 9.2%
D. Return on Stockholders’ Equity: 5.6 %; Return on Common Stockholders’ Equity: 6.7%

5. The Isaiah Corporation Stockholders’ Equity section includes the following information:
Total par value of the preferred and common stock is
Preferred Stock $22,000
Paid-in Capital in Excess of Par—Preferred 2,980
Common Stock 48,000
Paid-in Capital in Excess of Par—Common 3,400
Retained Earnings 7,350
A. $70,000.
B. $83,730.
C. $77,350.
D. $76,380.

6. What is the rate of return on equity if net income is $22,700; preferred dividends are $3,000; sales are
$100,000; and average common stockholders’ equity is $86,000?
A. 22.9%
B. 86.0%
C. 26.4%
D. 22.7%

7. Birch issued 200 shares of $12 par common stock in exchange for a piece of equipment with a current
market value of $3,000. Which of the following is not part of the journal entry for this transaction?
A. Crediting Common Stock for $2,400
B. Crediting Paid-in Capital in Excess of Par—Common for $600
C. Debiting Equipment for $3,000
D. Crediting Common Stock for $3,000

8. For vertical analysis purposes, the base item on the income statement is
A. gross profit.
B. net income.
C. total expenses.
D. net sales.

9. Accounts receivable amounted to $215,000 at the beginning of the year and $245,000 at the end of the year. Income reported on the income statement for the year was $300,000. The cash flow from operating activities on the cash flow statement using the indirect method is
A. $300,000.
B. $330,000.
C. $270,000.
D. $315,000.

10. Net sales at Kelly’s Bakery increased from $40,000 to $60,000, and its cost of goods sold increased
from $20,000 to $40,000. Vertical analysis based on net sales would show which percentages for cost of
goods sold (rounded to the nearest %)?
A. 10% and 30%
B. 50% and 67%
C. 40% and 20%
D. 67% and 40%

11. If you own 500 shares (2% of a corporation’s stock) and the corporation issues 15,000 new shares,
how many of the new shares can you purchase under preemptive right?
A. 800
B. 300
C. 500
D. 0

12. What is the rate of return on common stockholders’ equity if sales are $100,000, net income is
$22,700, and average common stockholders’ equity is $86,000?
A. 22.7%
B. 86.0%
C. The rate of return can’t be determined from the information given.
D. 26.4%

13. If current assets were $100,000 in 2009 and $88,000 in 2010, what was the amount of increase or
decrease in percentage terms from 2009 to 2010? (Round to the nearest percent.)
A. Decrease of 14%
B. Increase of 12%
C. Increase of 14%
D. Decrease of 12%

14. Casey Company has 5,000 shares of treasury cost that it purchased for $13 per share. It later resold
2,000 of those shares for $17 per share. The amount to be credited to Paid-in Capital—Treasury Stock is
A. $34,000.
B. $30,000.
C. $8,000.
D. $26,000.

15. The Amanda Corporation Stockholders’ Equity section includes the following information:
What was the total selling price of the preferred stock?
Preferred Stock $12,000
Paid-in Capital in Excess of Par— Preferred 2,700
Common Stock 15,000
Paid-in Capital in Excess of Par— Common 4,100
Retained Earnings 8,200
A. $12,000
End of exam
B. $14,700
C. $20,200
D. $16,100
16. Patty’s Baker has cost of goods sold for the years 2011, 2010, and 2009, respectively, of $28,600,
$26,900, and $25,600. If 2009 is the base year, the trend percentage for 2011 is
A. 5.08%.
B. 105.08%.
C. 11.72%.
D. 111.72%.

17. Operating expenses—other than depreciation—for the year were $335,000. Prepaid expenses
decreased by $7,000. Cash payments for operating expenses to be reported on the cash flow statement
using the direct method would be
A. $7,000.
B. $328,000.
C. $335,000.
D. $342,000.

18. The accuracy of the statement of cash flows can be verified by computing the change in the balance of
the
A. cash and cash equivalent accounts.
B. revenue accounts.
C. equity account.
D. asset and liability accounts.

19. The records of Ashley Boutique showed a net loss of $30,000; depreciation expense of $25,000; and
an increase in supplies on hand of $5,000. The amount of net cash flow from operating activities using the
indirect method is
A. $20,000.
B. $15,000.
C. ($10,000).
D. ($15,000).

20. Casey Company has a $2,400 credit balance in Paid-In Capital— Treasury Stock. It sells 500 shares of
treasury stock that the company reacquired at $21/share, for $18/share. After the transaction, what will the
balance be in the Paid-In Capital in Excess of Par— Treasury account?
A. $900 credit
B. $900 debit
C. $3,900 credit
D. $1,500 debit