Assuming a current ratio of 1.2 and an acid-test ratio of 0.80, how will the purchase of inventory with cash affect each ratio?

A) Increase the current ratio and increase the acid-test ratio.

B) No change to the current ratio and decrease the acid-test ratio.

C) Decrease the current ratio and decrease the acid-test ratio.

D) Decrease the current ratio and increase the acid-test ratio.

Answer: B

Which of the following measures of liquidity does not control for the relative size of the company?

A) Working capital.

B) Current ratio.

C) Acid-test ratio.

D) They all control for the relative size of the company.

Answer: A

The acid-test ratio is

A) Current assets divided by current liabilities.

B) Cash and short-term investments divided by current liabilities.

C) Cash, short-term investments, and accounts receivable divided by current liabilities.

D) Cash, short-term investments, accounts receivable, and inventory divided by current liabilities.

Answer: C

Which financial ratio relates most closely to a company's ability to pay its short-term debts?

A) Receivables turnover

B) Debt to equity ratio

C) Return on assets

D) Current ratio

Answer: D

The current ratio is

A) Current assets divided by current liabilities.

B) Cash and short-term investments divided by current liabilities.

C) Cash, short-term investments, and accounts receivable divided by current liabilities.

D) Cash, short-term investments, accounts receivable, and inventory divided by current liabilities.

Answer: A

Working capital is

A) Current assets divided by current liabilities.

B) Current assets minus current liabilities.

C) Cash, short-term investments, and accounts receivable divided by current liabilities.

D) Cash, short-term investments, and accounts receivable minus current liabilities.

Answer: B

Discount Travel has the following current assets: cash, $102 million receivables, $94 million inventory

Discount Travel has the following current assets: cash, $102 million receivables, $94 million inventory, $182 million and other current assets, $18 million. Discount Travel also has the following liabilities: accounts payable, $98 million current portion of long-term debt, $35 million and long-term debt, $23 million. Based on these amounts, what is the acid-test ratio?

A) 1.47.

B) 2.00.

C) 2.84.

D) 3.86.

Answer: A

Discount Travel has the following current assets: cash, $102 million receivables, $94 million inventory, $182 million and other current assets, $18 million. Discount Travel also has the following liabilities: accounts payable, $98 million current portion of long-term debt, $35 million and long-term debt, $23 million. Based on these amounts, what is the current ratio?

A) 2.54.

B) 2.98.

C) 4.04.

D) 2.84.

Answer: B

Which of the following statements regarding liquidity ratios is false?

A) A high current ratio generally indicates the ability to pay current liabilities on a timely basis.

B) A high acid-test ratio generally indicates the ability to pay current liabilities on a timely basis.

C) All current assets are due within one year and therefore have essentially equal liquidity.

D) As a rule of thumb, a current ratio of 1 or higher often reflects an acceptable level of liquidity.

Answer: C

Unified Airlines is being sued by Northeast Airlines for $5,000,000. At the end of the year, Unified feels it is reasonably possible that it will pay $5,000,000 at some point in the following year. What should Unified and Northeast record at the end of the year concerning the lawsuit?

A) Unified does not record any loss Northeast records a $5,000,000 gain.

B) Neither company records a loss or gain.

C) Unified records a $5,000,000 loss Northeast records a $5,000,000 gain.

D) Unified records a $5,000,000 loss Northeast does not record any gain.

Answer: B

Unified Airlines is being sued by Northeast Airlines for $5,000,000. At the end of the year, Unified feels it is probable that it will pay $5,000,000 at some point in the following year. What should Unified and Northeast record at the end of the year concerning the lawsuit?

A) Unified does not record any loss Northeast records a $5,000,000 gain.

B) Unified records a $5,000,000 loss Northeast does not record any gain.

C) Unified records a $5,000,000 loss Northeast records a $5,000,000 gain.

D) Neither company records a loss or gain.

Answer: B

Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under a contract with Volt.

Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under a contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs:

A) When the equipment is sold.

B) When the repairs are performed.

C) When payments are made to the service firm.

D) Evenly over the life of the warranty.

Answer: A

A contingent liability should be disclosed in a note to the financial statements rather than being recorded if:

A) The likelihood of a loss is remote.

B) The likelihood of a loss is reasonably possible.

C) The likelihood of a loss is probable.

D) The likelihood of a loss is eighty percent.

Answer: B

Which of the following is a contingency that should be recorded?

A) The company is being sued and a loss is reasonably possible and reasonably estimable.

B) The company deducts life insurance premiums from employees' paychecks.

C) The company offers a two-year warranty and the expenses can be reasonably estimated.

D) It is probable that the company will receive $100,000 in settlement of a lawsuit.

Answer: C

A contingent liability should be recorded in a company's financial statements only if the likelihood of a loss occurring is:

A) At least remotely possible and the amount of the loss is known.

B) At least reasonably possible and the amount of the loss is known.

C) At least reasonably possible and the amount of the loss is reasonably estimable.

D) Probable and the amount of the loss can be reasonably estimated.

Answer: D

When a gain contingency is probable and the amount of gain is reasonably estimable, the gain should be:

A) Reported in the income statement and disclosed.

B) Offset against stockholders' equity.

C) Disclosed, but not recognized in the income statement.

D) Reported in the income statement, but not disclosed.

Answer: C

Gain contingencies usually are recognized in a company's income statement when:

A) The gain is certain.

B) The amount is reasonably estimable.

C) The gain is reasonably possible and the amount is reasonably estimable.

D) The gain is probable and the amount is reasonably estimable.

Answer: A

Carpenter Inc. estimates warranty expense at 2% of sales. Sales during the year were $4 million and warranty expenditures were $44,000

Carpenter Inc. estimates warranty expense at 2% of sales. Sales during the year were $4 million and warranty expenditures were $44,000. What was the balance in the Warranty Liability account at the end of the year?

A) $44,000.

B) $80,000.

C) $36,000.

D) $480,000.

Answer: C

Which of the following is true regarding the relationship between the current ratio and the acid-test ratio?

A) The current ratio will always be equal to or larger than the acid-test ratio for a specific company.

B) The acid-test ratio will always be equal to or larger than the current ratio for a specific company.

C) Either the current ratio or the acid-test ratio could be larger for a specific company.

D) One ratio will always exceed 1.0, while the other will always be less than 1.0.

Answer: A

Note disclosure is required for material potential losses when the loss is at least reasonably possible:

A) Only if the amount is known.

B) Only if the amount is known or reasonably estimable.

C) Unless the amount is not reasonably estimable.

D) Even if the amount is not reasonably estimable.

Answer: D

Talks-A-Lot, Inc. sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program. The average repair cost is $75 per phone. For 2021,

Talks-A-Lot, Inc. sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program. The average repair cost is $75 per phone. For 2021, Talks-A-Lot has sold 750 cell phones and has repaired 30 of them as of December 31, 2021. What amount of warranty liability should be reported at December 31, 2021?

A) $2,250.

B) $3,375.

C) $5,625.

D) None, all expected returns from warranties have been received.

Answer: B

In 2021, a company estimates that warranty costs in the following year will be $25,000. Actual warranty costs in 2022 are only $20,000. What is the effect on the accounting equation when recording actual warranty costs in 2022?

A) Stockholders' equity decreases.

B) Stockholders' equity increases.

C) Liabilities increase.

D) Liabilities decrease.

Answer: D

Patriot Paddleboards sells a paddleboard model that carries a one-year warranty on all included accessories. Past experience indicates that 15% of those sold will have defective accessories within a year and that average repair cost is $20 per paddleboard. If 1,000 were sold this year and 50 have already been repaired under warranty, the entry to record warranty expense for the year would include a debit to:

A) Warranty Expense of $2,000.

B) Warranty Liability of $2,000.

C) Warranty Liability of $3,000.

D) Warranty Expense of $3,000.

Answer: D

Bears Inc. sells football helmets to local schools and warrants all of its products for one year. While no helmets sold in 2021 have been returned yet, based upon previous years, Bears Inc.

Bears Inc. sells football helmets to local schools and warrants all of its products for one year. While no helmets sold in 2021 have been returned yet, based upon previous years, Bears Inc. estimates that 3% of its products will need repairs or be replaced within the next year. What effect would this warranty have on assets, liabilities, and stockholders' equity in 2021?

A) A decrease in assets and decrease in stockholders' equity.

B) No journal entry is necessary until products under warranty are returned.

C) An increase in stockholders' equity and a decrease in liabilities.

D) A decrease in stockholders' equity and an increase in liabilities.

Answer: D

Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty liability at the end of the year?

A) $0.

B) $16,000.

C) $7,000.

D) $9,000.

Answer: C

Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty expense for the year?

A) $0.

B) $16,000.

C) $7,000.

D) $9,000.

Answer: B

At the beginning of 2021, Angel Corporation began offering a 1-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales.

At the beginning of 2021, Angel Corporation began offering a 1-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2021 were $180 million. Five percent of the units sold were returned in 2021 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense in Angel's 2021 income statement is:

A) $5.3 million.

B) $7.2 million.

C) $9.0 million.

D) $27.0 million.

Answer: B

The account "Warranty Liability":

A) is adjusted at the end of the year.

B) is closed at the end of the year.

C) has a year-end credit balance equal to the cost of warranty repairs made during the year.

D) is credited each time a warranty repair is made.

Answer: A

While providing services to Palmer Co., Raider Group caused damages of $125,000. As of the end of the year, both parties agree that it is probable that Raider will pay Palmer the full amount of the damages within the next two months. How would Raider and Palmer report the lawsuit at the end of the year?

A) Raider reports a loss Palmer reports nothing.

B) Raider reports nothing Palmer reports nothing.

C) Raider reports nothing Palmer reports a gain.

D) Raider reports a loss Palmer reports a gain.

Answer: A

Amplify, Inc. was sued by Sound City for $50,000. Sound City feels very confident that it will win the case and will be awarded the full amount.

Amplify, Inc. was sued by Sound City for $50,000. Sound City feels very confident that it will win the case and will be awarded the full amount. Amplify, Inc. feels it is probable that it will lose the case and pay Sound City the full amount. Which of the following is correct?

A) Amplify, Inc. would record a loss and contingent liability for $50,000.

B) Sound City would record a gain and lawsuit receivable for $50,000.

C) Sound City would record nothing.

D) Amplify, Inc. would record a loss and contingent liability for $50,000 Sound City would record nothing.

Answer: D

Ogden Motors, Inc. is involved in a lawsuit. It is reasonably possible that the jury will find in favor of the plaintiff and Ogden will owe ten million dollars. What is the appropriate reporting of this lawsuit and what is the effect in the balance sheet?

A) Record decrease stockholders' equity and increase liabilities.

B) Record increase stockholders' equity and decrease liabilities.

C) Disclose no effect in the balance sheet.

D) Disclose decrease stockholders' equity and decrease liabilities.

Answer: C

A company has two active lawsuits at the end of the year. In Lawsuit 1, the company feels it is probable that it will win $10,000. In Lawsuit 2, the company feels that it is probable that it will lose $6,000. At the end of the year, the company should report a:

A) Net gain for $4,000.

B) Loss for $6,000.

C) Net Loss for $4,000.

D) Gain for $10,000.

Answer: B

Away Travel filed suit against West Coast Travel seeking damages for copyright violations. Away Travel's legal counsel believes it is probable

Away Travel filed suit against West Coast Travel seeking damages for copyright violations. Away Travel's legal counsel believes it is probable (but not certain) that Away Travel will win the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Away Travel report this litigation?

A) As a receivable for $100,000 with disclosure of the range.

B) As a receivable for $150,000 with disclosure of the range.

C) As a receivable for $200,000 with disclosure of the range.

D) As a disclosure only. No receivable is reported.

Answer: D

Away Travel filed suit against West Coast Travel seeking damages for copyright violations. West Coast Travel's legal counsel believes it is reasonably possible that West Coast Travel will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should West Coast Travel report this litigation?

A) As a liability for $100,000 with disclosure of the range.

B) As a liability for $150,000 with disclosure of the range.

C) As a liability for $200,000 with disclosure of the range.

D) As a disclosure only. No liability is reported.

Answer: D

Young Company is involved in a lawsuit. The liability that could arise as a result of this lawsuit should be recorded on the books if the probability of Young owing money as a result of the lawsuit is:

A) Remote and the amount is reasonably estimable.

B) Probable and the amount is reasonably estimable.

C) Reasonably possible and the amount is reasonably estimable.

D) Probable and the amount is not reasonably estimable.

Answer: B

Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins' legal counsel believes it is probable that Higgins

Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins' legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Higgins report this litigation?

A) As a liability for $100,000 with disclosure of the range.

B) As a liability for $150,000 with disclosure of the range.

C) As a liability for $200,000 with disclosure of the range.

D) As a disclosure only. No liability is reported.

Answer: A

If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, a contingent liability should be

A) Disclosed, but not reported as a liability.

B) Disclosed and reported as a liability.

C) Neither disclosed nor reported as a liability.

D) Reported as a liability, but not disclosed.

Answer: B

If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is reasonably possible, a contingent liability should be

A) Disclosed, but not reported as a liability.

B) Disclosed and reported as a liability.

C) Neither disclosed nor reported as a liability.

D) Reported as a liability, but not disclosed.

Answer: A

Region Jet has a $50 million liability at December 31, 2021, of which $10 million is payable in 2022. In its December 31, 2021 balance sheet,

Region Jet has a $50 million liability at December 31, 2021, of which $10 million is payable in 2022. In its December 31, 2021 balance sheet, the company reports the $50 million debt as a:

A) $50 million current liability in the balance sheet.

B) $50 million long-term liability in the balance sheet.

C) $10 million current liability and a $40 million long-term liability in the balance sheet.

D) $40 million current liability and a $10 million long-term liability in the balance sheet.

Answer: C

United Supply has a $5 million liability at December 31, 2021, of which $1 million is payable in each of the next five years. United Supply reports the liability in the balance sheet as a:

A) $5 million current liability.

B) $5 million long-term liability.

C) $1 million current liability and a $4 million long-term liability.

D) $4 million current liability and a $1 million long-term liability.

Answer: C

The current portion of long-term debt is:

A) The amount that will be paid within one year of the balance sheet date.

B) Reported as an asset.

C) Reported as a long-term liability.

D) None of the other answer choices is correct.

Answer: A

Union Apparel has sales including sales taxes for the month of $551,200. If the sales tax rate is 6%, how much does Union Apparel owe for sales tax?

A) $51,200.

B) $33,272.

C) $31,200.

D) $551,200.

Answer: C

Union Apparel has sales including sales taxes for the month of $551,200. If the sales tax rate is 6%, what are Union Apparel's sales for the month?

A) $500,000.

B) $518,128.

C) $520,000.

D) $551,200.

Answer: C

The current portion of long-term debt should be

A) Reported as a current liability in the balance sheet.

B) Reported as a long-term liability in the balance sheet.

C) Combined with the rest of the long-term debt in the balance sheet.

D) Paid immediately.

Answer: A

The Route 66 Gift Shop, which records sales and sales tax separately, had sales on account of $1,500 and cash sales of $1,000. The state sales tax is 8%. The journal entry to record the sales would include a:

A) Debit to Sales Tax Payable for $75.

B) Debit to Cash of $1,000.

C) Credit to Sales Revenue of $2,700.

D) Debit to Accounts Receivable of $1,620 and a debit to Cash of $1,080.

Answer: D

Suppose you buy dinner for $23.75 that includes an 8% sales tax. How much did the restaurant charge you for the dinner (excluding any tax) and how much does the restaurant owe for sales tax?

A) $23.75 for dinner and $1.90 for sales tax.

B) $23.75 for dinner and no sales tax.

C) $21.85 for dinner and $1.90 for sales tax.

D) $21.99 for dinner and $1.76 for sales tax.

Answer: D

If a 6% sales tax is recorded together with sales revenue in the sales account and the balance at the end of the month is $5,300, how much sales tax is payable?

A) $600

B) $280

C) $318

D) $300

Answer: D

Suppose you buy lunch for $8.39 that includes a 5% sales tax. How much did the restaurant charge you

Suppose you buy lunch for $8.39 that includes a 5% sales tax. How much did the restaurant charge you for the lunch (excluding any tax) and how much does the restaurant owe for sales tax? (Do not round intermediate calculations. Round the answers to 2 decimal places.)

A) $8.39 for lunch and $0.42 for sales tax.

B) $8.39 for lunch and no sales tax.

C) $8.81 for lunch and $0.42 for sales tax.

D) $7.99 for lunch and $0.40 for sales tax.

Answer: D

When a company collects sales tax from a customer, the event results in a(n) ________ in Cash and a(n) ________ in Sales Tax Payable:

A) increase decrease

B) increase increase

C) decrease increase

D) decrease decrease

Answer: B

When a company collects sales tax from a customer, the event is recorded by:

A) A debit to Sales Tax Expense and a credit to Sales Tax Payable.

B) A debit to Cash and a credit to Sales Tax Payable.

C) A debit to Sales Tax Payable and a credit to Sales Tax Expense.

D) A debit to Sales Tax Payable and a credit to Cash.

Answer: B

On July 1, 2021, a company sells $2,000 of gift cards to customers. The gift cards expire one year from the date of sale

On July 1, 2021, a company sells $2,000 of gift cards to customers. The gift cards expire one year from the date of sale. By December 31, 2021, $1,600 of the gift cards have been redeemed. What is the appropriate balance in the Deferred Revenue account on December 31, 2021?

A) $2,000.

B) $1,800.

C) $1,600.

D) $400.

Answer: D

On October 1, 2021, a company sells $800 of gift cards to customers. The gift cards expire one year from the date of sale. By October 1, 2022, $750 of the gift cards have been redeemed and the sales recorded at the time of redemption. What entry, if any, should the company record on October 1, 2022?

A) Debit Deferred Revenue, $50 credit Sales Revenue, $50.

B) Debit Sales Revenue, $50 credit Cash, $50.

C) Debit Cash, $750 credit Sales Revenue, $750.

D) No journal entry is necessary.

Answer: A

Sales taxes collected by a company on behalf of the state and local governments are recorded by:

A) A debit to an expense account.

B) A credit to a revenue account.

C) A debit to a revenue account.

D) A credit to a liability account.

Answer: D

On March 31, 2021, a company sells $1,200 of gift cards to customers. The gift cards expire one year from the date of sale

On March 31, 2021, a company sells $1,200 of gift cards to customers. The gift cards expire one year from the date of sale. What entry should the company record on March 31, 2021?

A) Debit Cash, $1,200 credit Sales Revenue, $1,200.

B) Debit Sales Revenue, $1,200 credit Cash, $1,200.

C) Debit Cash, $1,200 credit Deferred Revenue, $1,200.

D) No journal entry is necessary.

Answer: C

Gift card breakage refers to:

A) The inability of the company to satisfy its obligation to customers that have previously purchased gift cards.

B) The point in time when gift cards expire or when the likelihood of redemption by customers is viewed as remote.

C) The time at which customers redeem their previously purchased gift cards for goods and services.

D) Companies selling gift cards to customers on account and then those customers failing to pay the amount owed.

Answer: B

When a company delivers a product or service for which a customer has previously paid, the company records the following:

A) A debit to a revenue account and a credit to a liability account.

B) A debit to a revenue account and a credit to an asset account.

C) A debit to an asset account and a credit to a revenue account.

D) A debit to a liability account and a credit to a revenue account.

Answer: D

In January, 2021, Summit Department Store sells a gift card for $50 and receives cash. In February, 2021, the customer comes back and spends $20

In January, 2021, Summit Department Store sells a gift card for $50 and receives cash. In February, 2021, the customer comes back and spends $20 of the gift card to purchase a water bottle. What would be the appropriate journal entry for the customer's purchase of the water bottle in February?

A) Debit Deferred Revenue, $50 credit Sales Revenue, $50.

B) Debit Deferred Revenue, $20 credit Sales Revenue, $20.

C) Debit Sales Revenue, $20 credit Deferred Revenue, $20.

D) No journal entry is necessary.

Answer: B

At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent:

A) Liabilities until the product or service is provided.

B) A component of stockholders' equity.

C) Long-term assets until the product or service is provided.

D) Revenue upon receipt of the advance payment.

Answer: A

The sale of gift cards by a company is a direct example of:

A) Deferred revenues.

B) Sales tax payable.

C) Current portion of long-term debt.

D) Contingencies.

Answer: A