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Marshall McBride inherited $10,000 from his Great Aunt Martha. He invested $5,000 in a new, risky start-up venture, 10th Generation, Inc., and the other $5,000 in Major Chemicals, Inc., a well-known chemical company that's been around for years. Today, his financial planner called to inform him that the Return on equity on 10th Generation = 6.28%; and, Return on equity on Major Chemicals = 10.50%. Which of the following facts is important information for Marshall McBride?


A) The return on equity on new companies is always lower than the return on equity of well-established firms.
B) Investors willing to take added risk, expect higher returns.
C) Return on equity is a liquidity ratio that has very little bearing on profitability.
D) If Marshall wants to know how well his investments are performing, he should employ leverage ratios such as the debt to equity ratio.

E) All of the above
F) C) and D)

Correct Answer

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The __________ is an accounting statement that reports the financial condition of a firm at a specific point in time.


A) income statement
B) balance sheet
C) statement of cash flows
D) trial balance

E) C) and D)
F) A) and D)

Correct Answer

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A business manager who keeps his/her customers satisfied can be successful without having a great deal of knowledge about accounting practices.

A) True
B) False

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If the goal of a business is to pay lower taxes on its income during an inflationary period, it is likely to use the FIFO inventory costing method.

A) True
B) False

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The accounting book that provides all the information about a single account in one place is called the ledger.

A) True
B) False

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The Sarbanes-Oxley Act strengthens the protection for whistleblowers who report wrongful actions of company officers.

A) True
B) False

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The purpose of a trial balance is to prepare a practice balance sheet.

A) True
B) False

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The three important financial statements prepared by accountants are:


A) ledger, journal, and trial balance.
B) cash budget, capital budget, and master budget.
C) revenue summary, expense summary, and consolidation statement.
D) balance sheet, income statement, and statement of cash flows.

E) C) and D)
F) None of the above

Correct Answer

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Stockholders of the Sasha Deal Company are concerned about irregularities in the firm's accounting system. One approach to identify problems in the records of the company would be to have a(n) ________ performed.


A) internal audit
B) independent audit
C) unofficial audit
D) GAAP analysis

E) C) and D)
F) B) and C)

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If the economy began experiencing a prolonged period of deflation in which the prices of most goods are falling, many firms would find that the LIFO method of inventory valuation would result in higher reported profits.

A) True
B) False

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Careful consideration of the use of computers in accounting indicates that computers _____________________.


A) will soon eliminate all of the accounting functions.
B) are tools to help the accountant perform his or her job.
C) are of little use to small-business owners that need accounting services.
D) have a very limited use in accounting due to inadequate privacy controls.

E) C) and D)
F) A) and B)

Correct Answer

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_________ is the systematic write-off of the value of a tangible asset over its useful life.


A) Expense structuring
B) Depreciation
C) Capital budgeting
D) Gross margin allocation

E) B) and C)
F) B) and D)

Correct Answer

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At the time the Jepson Plumbing Supply prepared its financial statements, it had several customers who bought goods over the past three months on its "90 days same as cash" credit plan. These customers had not yet paid their bills, but they have good credit ratings and Jepson is confident that they will make their payments on time. The amount these credit customers owe would show up as part of the:


A) current assets listed on Jepson's balance sheet.
B) current liabilities listed on Jepson's balance sheet.
C) a deferred cash flow on Jepson's statement of cash flows.
D) unrealized revenue reported on Jepson's income statement.

E) None of the above
F) B) and D)

Correct Answer

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The top managers of Highbrow Bookstores want to indicate to the firm's shareholders how effectively they have managed the company. Perhaps the most meaningful way to do this would be by reporting strong:


A) liquidity ratios.
B) leverage ratios.
C) activity ratios.
D) profitability ratios.

E) A) and B)
F) A) and C)

Correct Answer

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If prices of inventory are unchanged throughout the year, LIFO and FIFO inventory valuation methods will produce the same reported net income.

A) True
B) False

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Marissa is taking her first course in accounting this semester. One of the first things she learns is that revenue and net income mean the same thing.

A) True
B) False

Correct Answer

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Expenses a firm incurs for insurance, office salaries, and rent are classified as:


A) selling expenses on an income statement.
B) general expenses on an income statement.
C) current liabilities on a balance sheet.
D) general expenses on a cash flow statement.

E) A) and B)
F) A) and C)

Correct Answer

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A firm's ________ reports the profit or loss for the firm over a specified time period.


A) income statement
B) balance sheet
C) statement of cash flows
D) bank statement

E) None of the above
F) All of the above

Correct Answer

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The accounting cycle is a six-step procedure that results in the preparation and analysis of major financial statements.

A) True
B) False

Correct Answer

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The balance sheet reflects the fact that assets equal the sum of liabilities and owners' equity.

A) True
B) False

Correct Answer

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