To be recorded as a liability, an item must meet three specific conditions. Two of them are: it must involve probable future sacrifice of economic resources by the entity, and it must be a present obligation that arose as a result of a past transaction. Which one of the following is the third condition?

The item must reduce the market value of the recording entity

It must involve a transfer of resources to another entity

It must involve the expenditure of cash now or in the future

It must not cause total liabilities to exceed total assets
16) The next 9 questions are based on Patnode Inc.’s balance sheets at year end 2004 and 2005.
During 2005, Patnode announced and paid dividends of $1,000, the only dividend-related activity during the year. What was its 2005 net income?




Cannot be estimated
During 2005, Patnode had a cash outflow of $15,000 for investing activities and a cash inflow of $7,000 from financing activities. Its 2005 cash flow from operations was:

Outflow of $15,000

Inflow of $15,000

Outflow of $8,000

Inflow of $8,000
Patnode’s 2005 statement of cash flows contains four items in the financing section. Three of them are: Short-term debt issued, $15,000; Short-term debt paid, ($10,000) and Dividends paid, ($1,000). What is the fourth item in the financing section?

Retained earnings, $4,600

Common stock issued, $3,000

Long-term debt paid, ($3,000)

Cash from financing, $3,000
How much total depreciation and amortization expense did Patnode record during 2005?




During 2005, Patnode recorded sales of $17,000. How much cash did it collect from its customers?




Cannot be estimated
Which one of the following items will not appear in the operating section of Patnode’s 2005 indirect method cash flow statement?

Deduct: increase in accounts receivable $3,000

Add: decrease in accounts payable $1,000

Add: increase in taxes payable $2,400

Add: decrease inventories $6,000
What is Patnode’s current ratio at the end of 2004?




What is Patnode’s total debt to equity ratio at the end of 2004 (rounded to two decimal places)?




Patnode recorded a 2005 tax expense of $3,000. What amount did it pay to the tax authorities during 2005?




Kirby, Inc. records a sale with a gross margin of $1,400. Which one of the following statements correctly describes the effect of such a sale on its balance sheet?

Common stock increases by $1,400

The sales revenue account increases by $1,400

The gross margin account increases by $1,400

The retained earnings account increases by $1,400
Sandy Robbins is the sole owner of a hair salon. He often takes small amounts of “lunch money” from the cash register, figuring that “it is my business anyway.” His accountant, however, insists that Sandy make a note of the cash he takes, and at the end of the each accounting period, she debits owners’ equity and credits the cash account for the total amount that Sandy has taken during the period.
In recording the cash withdrawals even though Sandy is sole proprietor, the accountant is correctly applying the:

Matching concept

Entity concept

Materiality concept

Conservatism concept
Anderson Electronics’ 2005 return on sales percentage is 20%. Its 2005 net income is $40,000. What is its 2005 sales?





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