Question

Question 1

1. Gross profit is defined as

   		the difference between total assets and total liabilities.
   		the income generated by the company after subtracting all operating expenses.
   		net income less the dividends declared during the period.
   		sales minus cost of goods sold.
   		net income before the effect of income taxes.

1 points

Question 2

1. Which of the following is an example of an accrual of unrecorded revenues?

   		Office supplies are purchased each month, but the account is not adjusted until the end of the month.
   		Equipment purchased will be beneficial for several years.
   		Wages have been earned, but have not been paid at the end of the month.
   		An attorney has performed work for a client, but has not billed the client yet.
   		A 2-year loan was signed with interest accruing monthly.

1 points

Question 3

1. The adjusting entry to recognize periodic depreciation has what effect on the basic accounting equation?

   		Decrease in assets, increase in stockholders' equity
   		Decrease in assets, decrease in stockholders' equity
   		Decrease in assets, increase in liabilities
   		Decrease in assets, decrease in liabilities
   		None of these

1 points

Question 4

1. Calvey Enterprises likes to maintain a current ratio near 1.5; however, the CFO for Calvey Enterprises has noticed a decline in previous months. The current ratio for May, 2009 produced a ratio of 0.7. What would be the CFO's major concern with a declining current ratio of less than 1.5?

   		The company may have difficulty meeting its short-term obligations.
   		The company has excessive holdings of current assets.
   		The company has not sold enough products on credit, thus distorting the accounts receivable balance and the current ratio.
   		The company has not purchased enough inventory to meet current demand.
   		Long-term obligations such as notes payable may need to be deferred, causing potential investor concerns.

Answer 1

Answer 1) Sales minus cost of goods sold.

Reason : Gross profit is a required income statement entry that reflects total revenue minus cost of goods sold (COGS). Gross profit is a company's profit before operating expenses, interest payments and taxes.

Answer 2) An attorney has performed work for a client, but has not billed the client yet.

Reason : This is because work has already performed but the revenue has not recognised.

Answer 3) Decrease in assets, decrease in stockholders' equity

Reason: Entry for depreciation is Depreciation a/c debit to Accumulated depreciation

Where depreciation is an expense to be charged in Profit and loss account & Accumulated depreciation is considered contra asset i.e it is subtracted from assets value while preparing balance sheet.

Answer 4) The company may have difficulty meeting its short-term obligations.

Reason : Current ratio is basically and primarily measure the firm ability to meet its short term obligations , so the CFO would be more concerned about the short term obligations as any failure would impact day to day operations of the entity.