Ratio analysis, assets and liability classifications, revenue and expenses reporting, basis and calculations for accrual basis accounting and reporting.

1.  Comparing one firm's liquidity to another is best accomplished by comparing

a.         working capital.

b.        current ratio.

c.         debt-to-asset ratio.

d.        debt-to-equity ratio.

e.         gross profit.

2.   A firm's debt ratio is 60%. This means that

a.         40% of the assets were provided by shareholders.

b.        60% of the assets were provided by shareholders.

c.         The firm has legal claims against only 40% of the assets.

d.        The firm has legal claims against only 60% of the assets.

e.         60% of every sales dollar must be paid to the creditors.

3.   Compute operating expenses using the following information: Gross profit was $80,000 Income tax rate was 20% Profit margin ratio was 5% Gross profit ratio was 40%

a.         $30,000

b.        $70,000

c.         $67,500

d.        $20,000

e.         $28,000

4.  Possible asset categories on a balance sheet include all of the following except

a.         property, plant, and equipment.

b.        intangible assets.

c.         retained earnings.

d.        current assets.

e.         long-term investments.

5.   The gross profit percentage

a.         is an indicator of how well a firm manages its operating expenses.

b.        is equal to net income divided by sales.

c.         is computed by subtracting cost of goods sold from sales and dividing the result by sales.

d.        varies inversely with the markup the firm takes on its inventory.

e.         None of the above.

6.  Revenue should be included in the income statement in the period in which

a.         it is collected.

b.        it is earned.

c.         the related expense is paid.

d.        total revenues first exceed total expenses for a given transaction.

e.         it is subject to tax.

7.  Expense should be included in the income statement in the period in which (hint: the matching principle applies here)

a.         it is paid.

b.        the related revenue is collected.

c.         the related revenue is subject to tax.

d.        the related revenue is earned.

e.         it is deductible for tax purposes.

8.  A firm sells inventory for $100 that it acquired for $60. The customer pays $25 at the time of the sale and promises to pay the remaining $75 in the following month. The firm should recognize

a.         $100 of revenue and $60 of expense in the following month when the customer\'s payment is complete.

b.        $25 of revenue and $60 of expense at the time of the sale and another $75 of revenue when the rest of the sale price is collected.

c.         $25 of revenue and $15 of expense at the time of the sale and another $75 of revenue and $45 of expense when the rest of the sale price is collected.

d.        $100 of revenue and $60 of expense at the time of the sale.

e.         None of the above.

9.  A firm performed services for a client in September for $100. It collected $70 in September and $30 in October. Based on this information, for the month of October the firm should recognize

a.         no revenue.

b.        revenue of $30.

c.         revenue of $100.

d.        None of the above.

10. Basic earnings per share is computed as

a.         net income from operations divided by the average number of shares outstanding during the period.

b.        net income before the expenses of interest and taxes divided by the average number of shares outstanding during the period.

c.         net income divided by the average number of shares outstanding during the period.

d.        net income divided by the number of shares outstanding on the last day of the period.

e.         dividends paid on each share of common stock during the period.