CHAPTER 11

1.
A company issued 7% preferred stock with a $100 par value. This means that:
The amount of the potential dividend is $7 per year per preferred share.
2.
A company had a beginning balance in retained earnings of $43,000. It had net
income of $6,000 and paid out cash dividends of $5,625 in the current period. The
ending balance in retained earnings account is equal to:
$43,375

3.
A company has 3,000 shares of $2 par value common stock and 1,500 shares of 8%,
$150 par, noncumulative preferred stock outstanding. The balance in Retained
Earnings at the beginning of the year was $400,000. The net loss for the current
year was $30,000. If the company paid a dividend of $1 per share on its common
stock, what is the balance in Retained Earnings at the end of the year?
$349,000

4.
A corporation was formed on January 1. The corporate charter authorized 100,000
shares of $10 par value common stock. During the first month of operation, the
corporation issued 300 shares to its attorneys in payment of a $5,000 charge for
drawing up the articles of incorporation. The entry to record this transaction would
include:
A debit to Organization Expenses for $5,000.
5.

A corporation issued 6,000 shares of its $10 par value common stock in exchange
for land that has a market value of $84,000. The entry to record this transaction
would include:
A credit to Contributed Capital in Excess of Par Value, Common Stock for $24,000.
6.
A corporation issued 300 shares of its $5 par value common stock in payment of a
$1,800 charge from its accountant for assistance in filing its charter with the state.
The entry to record this transaction will include:
A $300 credit to Contributed Capital in Excess of Par Value, Common Stock.
7.
A company declared a $0.50 per share cash dividend. The company has 20,000
shares authorized, 9,000 shares issued, and 8,000 shares of common stock
outstanding. The journal entry to record the dividend declaration is:

$0.50 8,000 shares = $4,000

8.
A stock dividend transfers:
Retained earnings to contributed capital.
9.
A corporation declared and issued a 15% stock dividend on November 1. The
following up-to-date information was available immediately prior to the dividend:

The amount that total stockholders' equity will increase (decrease) as a result of
recording this stock dividend is:
$0
10.

A corporation had 20,000 shares of $10 par value common stock outstanding on
January 10. Later that day the board of directors declared a 30% stock dividend
when the market value of each share was $40. The entry to record this dividend is:

20,000 shares 0.30 $10 = $60,000

11.
Preferred stock on which the right to be paid both the current and all prior periods'
unpaid dividends before any dividend is paid to common stockholders is called:
Cumulative preferred stock
12.
A company has 1,000 shares of $50 par value, 4.5% cumulative and
nonparticipating preferred stock and 10,000 shares of $10 par value common stock
outstanding. The company paid total cash dividends of $1,000 in its first year of
operation. The cash dividend that must be paid to preferred stockholders in the
second year before any dividend is paid to common stockholders is:
$3,500
Preferred stock dividend: 1,000 shares $50/share 0.045 = $2,250
Dividends in arrears year 1: $2,250 - $1,000 = $1,250
Preferred dividends due year 2: $1,250 + 2,250 = $3,500
13.
Treasury stock is classified as:
A contra equity account.
14.
A company's outstanding stock consists of (a) 17,000 shares of noncumulative 7.5%
preferred stock with a $10 par value and (b) 42,500 shares of common stock with a
$1 par value. During its first four years of operation, the corporation declared and
paid the following total cash dividends:

What amount of dividends will common stockholders receive in 2014?

$15,250
$28,000 - (17,000 $10 0.075) = $15,250

15.
A company's outstanding stock consists of (a) 17,000 shares of noncumulative
7.50% preferred stock with a $10 par value and (b) 42,500 shares of common stock
with a $1 par value. During its first four years of operation, the corporation declared
and paid the following total cash dividends:

What is the amount of dividends that the common stockholders receive for all years
presented?
$287,750

16.
Strength Inc. sold 10,000 shares of $1 par value stock for $25 per share. How would
the company record this transaction?
Debit Cash for $250,000, credit Common Stock, $1 Par Value for $10,000, and credit
Paid-In Capital, Common Stock for $240,000.

Cash: 10,000 $25 = $250,000

Common Stock: 10,000 $1 = $10,000
Paid-In Capital, Common Stock = $250,000 - $10,000 = $240,000
17.
Authorized stock is the total number of shares outstanding.
False
18.
Common stock always carries a preference for receiving dividends over preferred
stock.
False
19.
When a company declares cash dividends, retained earnings is reduced.
True

CHAPTER 12
1.
Use the following information and the indirect method to calculate the net cash
provided or used by operating activities:

$20,400.

2.
Net income of Lucky Company was $58,000. The accounting records reveal
depreciation expense of $105,000 as well as increases in prepaid rent, salaries
payable, and income taxes payable of $80,000, $16,900, and $15,200, respectively.
What is the net cash flow provided (used) by operating activities?
$115,100
58,000 + 105,000 80,000 + 16,900 + 15,200 = 115,100
3.
Walker Company reports net income of $411,000 for the year ended December 31,
2013. It also reports $74,700 depreciation expense and a gain of $10,100 on the
sale of machinery. Its comparative balance sheets reveal a $32,700 decrease in
accounts receivable, $16,320 increase in accounts payable, $8,340 decrease in
prepaid expenses, and $12,120 increase in wages payable. What is the net cash
flows provided (used) by operating activities using the indirect method?
$545,080

4.
The statement of cash flows is:
A financial statement that reports the cash inflows and outflows for an accounting
period and that classifies those cash flows as operating activities, investing
activities, or financing activities.

5.
The appropriate section in the statement of cash flows for reporting the purchase of
equipment for cash is:
Investing activities.
6.
Activities that involve the production or purchase of merchandise and the sale of
goods and services to customers, including expenditures related to administering
the business, are classified as:
Operating activities
7.
Cash flows from interest received are reported in the statement of cash flows as
part of:
Operating activities.
8.
The appropriate section in the statement of cash flows for reporting the purchase of
land in exchange for common stock is:
Schedule of noncash investing or financing activity.
9.
The indirect method for the preparation of the operating activities section of the
statement of cash flows:
Reports net income and then adjusts it for items necessary to determine net cash
provided or used by operating activities.
10.
Wessen Company reports net income of $200,000 for the year ended December 31,
2013. It also reports $40,000 depreciation expense, $22,500 amortization expense,
and a $15,000 loss on the sale of machinery. Its comparative balance sheets reveal
a $225,700 increase in accounts receivable, $31,600 decrease in accounts payable,
$15,000 decrease in prepaid expenses, and $48,100 decrease in wages payable.
What net cash flows are provided (used) by operating activities using the indirect
method?
($12,900)

11.
The statement of cash flows explains the difference between the beginning and
ending balances of cash and cash equivalents.
True
12.
Business activities that either generate or use cash are classified as operating,
investing, or financing activities on the statement of cash flows.
True
13.
Financing activities include the purchase and sale of long-term assets.
False
14.
Both cash dividends received and interest received are considered to be investing
inflows.
False
15.
The payment of cash dividends to shareholders is classified as a financing activity.
True
16.

The full disclosure principle requires that noncash investing and financing activities
be disclosed as part of the statement of cash flows.
True
17.
A noncash investing transaction should be disclosed as either a footnote or small
schedule attached to the statement of cash flows.
True
18.
Accounting standards require that the statement of cash flows be included in a
complete set of financial statements.
True
19.
The purchase of stock in another company is considered to be a financing activity.
False
20.
Companies have the option of using either the direct or indirect method to prepare
the operating section of the statement of cash flows.
True

Comprehensive Exam Practice

1.
Indicate the each of the following items as revenues (R), expenses (EX), or
dividends (D) from the drop down provided.

2.

Indicate the each of the following items as assets (A), liabilities (L), or equity (EQ)
from the drop down provided.

3.
On October 1, Keisha King organized Real Answers, a new consulting firm; On
October 3, the owner contributed $71,023 cash. On October 31, the company's
records show the following items and amounts.

Using the above information prepare an October income statement for the business.

4.
On October 1, Keisha King organized Real Answers, a new consulting firm; on
October 3, the owner contributed $58,745 cash. On October 31, the companys
records show the following items and amounts.

Explanation:
For the computation of net income:

5.
On October 1, Keisha King organized Real Answers, a new consulting firm; on
October 3, the owner contributed $78,165 cash. On October 31, the companys
records show the following items and amounts.

Using the above information prepare an October 31 balance sheet for Real Answers.

6.
The adjusted trial balance for Tybalt Construction as of December 31, 2013, follows.

O. Tybalt invested $1,600 cash in the business in exchange for more common stock
during year 2013; the December 31, 2012, credit balance of retained earnings was
$128,900. Tybalt Construction is required to make a $8,500 payment on its longterm notes payable during 2014.

Required:
1.
1 Prepare the income statement for the calendar year 2013.

1.
2 Prepare the statement of retained earnings for the calendar year 2013.

1.
3 Prepare the classified balance sheet at December 31, 2013.

2. Prepare the necessary closing entries at December 31, 2013.

Closing entries (all dated December 31, 2013):

3.
Use the information in the financial statements to compute the
following ratios:

Explanation:
1.3
Long-term notes payable = $70,000 $8,500 = $61,500
3.
(a) Return on assets = $8,200/[($200,000 + $239,700)/2] = 3.73% (or 0.040)
(b) Debt ratio = $109,100/$239,700 = 0.46
(c) Profit margin = $8,200/$126,200 = 6% (or 0.06)
(d) Current ratio = $48,200/$47,600 = 1.01