To “write-off” an account receivable is to reduce the balance of the customer’s account
to zero.
Stockholders in a corporation elect the board of directors, pass the bylaws of the
corporation, and hire top corporate officers and managers.
Most companies benefit by using accelerated depreciation methods for income tax
purposes.
Management uses a cost accounting system to evaluate and reward employee
performance.
A company’s liquidity refers to its ability to remain profitable.
A corporation continues in existence even if a stockholder dies or withdraws from the
organization.
Annual depreciation expense is increased when salvage values are small.
Whether one uses the direct or the indirect method of presentation of the statement of
cash flows, the totals from each of the three sections (activities) will be the same
regardless of the method used.
The purchasing manager is often included in evaluating cost variances.
Window dressing occurs when management attempts to make a company look
financially stronger than it actually is.
Adjusting entries are only required when errors are made.
The Sarbanes-Oxley Act places responsibility on CEOs and CFOs of companies to
certify the fairness of company’s financial statements. The Act also created the Public
Company Accounting Oversight Board which oversees the public accounting
profession.
If a company uses the indirect method to prepare its statement of cash flows, it must
provide a supplementary schedule showing the computation of net cash flow from
operating activities using the direct method.
Earnings per share is equal to net income applicable to common stock, divided by the
weighted number of common shares outstanding.
The present value of a single amount can only be calculated through the application of
complex calculations.
Economies of scale can be achieved by using facilities more intensively.
Joint costs are the middle costs of a product.
In a periodic inventory system, a complete physical inventory must be taken at year-end
in order to compute the amount of purchases made during the period.
Articulation between the financial statements means that they relate closely to each
other on the basis of the same underlying transaction information.
Licensing maintains control over product creation while exporting involves giving up
some control for a monetary return.
When a corporation receives cash or other assets from its owners in a sale of capital
stock, it records these investment transactions by crediting Retained Earnings.
“Discontinued operations” is an example of an extraordinary item.
In a standard cost system, actual costs are charged to work in process as they are
incurred.
Merchandise sold F.O.B. destination belongs to the buyer while in transit.
The costs to organize a corporation (organization costs) are reported as an intangible
asset in the balance sheet and amortized to expense over the 5-year life used by the IRS.
The adjusting entry to record income taxes in an unprofitable period would debit
Income Tax Payable and credit Income Tax Expense.
The trend in ratios is usually more useful than looking at a single year’s ratio.
All incremental revenue or incremental costs are relevant.
The standards issued by the International Accounting Standards Board must be
followed by all multinational companies.
Costs to repair equipment are considered a direct cost.
If operations at a center are discontinued, all traceable costs attributed to the cost would
be discontinued.
If a lease transfers ownership of the property to the lessee at the end of the lease term, it
should be regarded as an operating lease.
To arrive at a target cost, the target selling price and a satisfactory profit margin are
added together.
The inventory method used by a company will affect profitability by affecting the
amount of income taxes a company owes.
The value chain consists of only those activities that increase the selling price of a
product as it is distributed to a customer.
The transfer price is the dollar amount used in recording sales to primary customers.
In the long run, it is more important for a business to generate positive cash flows from
investing activities than from operating activities.
Comparative financial statements compare the company’s current statements with:
A. Those of prior periods.
B. Those of other companies in the same industry.
C. Those of the company’s principal competitor.
D. The budgeted level of performance for the period.
Bank reconciliation–computations and journal entry
The Cash account in the ledger of Pine Golf Club shows a balance of $11,925 at
December 31, 2015. The December 31 bank statement shows a balance of $10,440. The
only reconciling items consist of:
Bank service charges of $32.
Deposit in transit of $1,813.
NSF check from customer L. Diamond in the amount of $126.
Error in recording check no. 970 for utilities: check was written in the amount of $834
but was recorded in Pine’s accounting records as $384.
Outstanding checks.
(a) What is the amount of the adjusted cash balance at December 31, 2015?
$_______________
(b) What is the total amount of outstanding checks at December 31, 2015?
$________________
(c) Record the journal entry necessary, if any, to adjust Pine’s Golf Club accounting
records at December 31, 2015. (An explanation is not required; a single compound
journal entry is acceptable.)
Topper Corporation has 60,000 shares of $1 par value common stock and 16,000 shares
of cumulative 7%, $100 par preferred stock outstanding. Topper has not paid a dividend
for the prior year. If Topper declares a $1.95 per common share dividend this year, what
will be the total amount they must pay their shareholders?
A. $117,000.
B. $341,000.
C. $327,000.
D. $177,000.
On April 1, Year 1, Greenway Corporation issues $20 million of 10%, 20-year bonds
payable at par. Interest on the bonds is payable semiannually each April 1 and October
1.
Refer to the information above. The journal entry to record the first cash payment to
bondholders on October 1, year 1, will include:
A. A credit to Cash of $2,000,000.
B. A debit to Bonds Payable of $1,000,000.
C. A debit to Interest Expense of $1,000,000.
D. A credit to Interest Payable of $1,000,000.
A process costing system differs from a job order costing system in that:
A. There is no need for overhead application rates in process costing systems.
B. Process costing systems are used primarily in service industries, whereas job order
costing systems are used in manufacturing operations.
C. Per-unit costs are not computed in process costing systems.
D. Process costing systems are used when production involves large volumes of
standardized products, whereas job order costing systems are used when each job or
batch of products is uniquely different.
The concept of contribution margin applies:
A. Only to investment centers.
B. Only to profit centers.
C. Only to cost centers.
D. To all types of responsibility centers.
Trego Company issued, on December 31, 2015, $1,000,000 face value, 4%, 5-year
bonds. Interest will be paid semiannually each June 30 and December 31. The bonds
sold at a price of 102; Trego uses the straight-line method of amortizing bond discount
or premium.
Refer to the information above. Trego’s entry at June 30, 2016, to record the first
semiannual payment of interest and amortization of discount/premium on the bonds
includes a:
A. Debit to Bond Interest Expense of $20,000.
B. Credit to Cash of $22,000.
C. Credit to Premium on Bonds Payable of $2,000.
D. Debit to Bond Interest Expense of $18,000.
A $1,000 bond that sells for 104 has a selling price of:
A. $1,004.
B. $1,040.
C. $1,400.
D. $1,000.
Capital expenditures budgets are typically prepared for a period of:
A. 3 months.
B. 6 months.
C. The entire fiscal year.
D. Several years.
A transaction is first recorded in which of the following accounting records?
A. Trial balance.
B. Ledger.
C. General journal.
D. Balance sheet.
Deferred income taxes
At the end of its first year of operations, Harding Construction, Inc., included in its
balance sheet a long-term liability entitled “Deferred Income Taxes.”
(a) Briefly explain what deferred income taxes represents, including how this liability
came into existence and whether such an item is generally perceived as favorable or
unfavorable from company management’s point of view.
(b) If Harding Construction, Inc., is a successful, growing business, would you expect
the liability for deferred income taxes to increase or decrease over the next few years?
Explain.
A store that sells expensive custom-made jewelry is most likely to determine its cost of
goods sold using:
A. Specific identification.
B. Average cost.
C. First-in, first-out.
D. Last-in, last-out.
Identifying value-added activities
Pomme Farms operates an apple cider press. The production of cider involves the
following activities:
(1.) Inspect incoming shipments of apples.
(2.) Store apples in adjacent barn until needed.
(3.) Transport apples from storage barn to the press building.
(4.) Load apples onto the conveyor leading to the press.
(5.) Run press.
(6.) Fill bottles with completed cider.
(7.) Dispose of waste from press.
(8.) Store filled bottles until sale.
Requirements:
(a.) Identify Pomme’s value-added activities.
(b.) Identify any non-value added activities performed by Pomme.
At year-end, the perpetual inventory records of Anderson Co. indicate 60 units of a
particular product in inventory, acquired at the following dates and unit costs:
Purchased in August: 30 units at $750 per unit.
Purchased in November: 30 units at $700 per unit.
A complete physical inventory taken at year-end indicates only 50 units of this product
actually are on hand.
Refer to the information above. Under the FIFO cost flow assumption, the cost of these
items to be included in inventory in the company’s year-end balance sheet is:
A. $36,000.
B. $36,500.
C. $42,000.
D. $37,500.
Balance sheet method-computations
Rainbow Company uses the balance sheet approach to estimate uncollectible accounts.
By aging the customers’ accounts, it was estimated that $7,325 of the company’s
month-end accounts receivable would prove to be uncollectible. Determine the amount
that should be debited to the Uncollectible Accounts Expense account in the month-end
adjusting entry under each of the following independent assumptions:
(a.) Before making any adjustment, the Allowance for Doubtful Accounts has a $635
credit balance. $________________
(b.) Before making any adjustment, the Allowance for Doubtful Accounts has a debit
balance of $720. $________________
The statement of cash flows of Bosley Corporation shows the amount of cash received
from customers as $720,000. If net sales in Bosley Corporation’s income statement are
reported at $670,000 then:
A. Bosley’s accounts receivable increased $50,000.
B. Bosley’s Cash account decreased $50,000.
C. Bosley’s accounts receivable decreased $50,000.
D. Bosley’s accounts receivable are $50,000 at the end of the year.
We can compare income of the current period with income of a previous period to
determine whether the operating results are improving or declining:
A. Only if each accounting period covered is a full year.
B. Only if the same accountant prepares the income statement each period.
C. Only if the accounting periods are equal in length.
D. Only if a manual accounting system is used in both periods.
To determine the amount to be deposited in a bank today to grow to $5,000 three years
from now at 7% which table should be used?
A. Present value of 1.
B. Future value of 1.
C. Present value of an annuity.
D. No table is required, just multiply $5,000 by 1.07.
Overhead volume variances indicate:
A. Efficient performance.
B. Inefficient performance.
C. Fluctuations in the level of production from month to month.
D. Inadequate budgeting.
Under the Foreign Corrupt Practices Act, American business firms are required to:
A. Refuse to transact business in countries that sanction official corruption.
B. Report all bribery attempts to the International Monetary Fund and World Bank.
C. Maintain an adequate system of internal control limiting access to company assets to
authorized personnel.
D. Maintain a list of all personnel employed by the company during the last 10 years.
Using cost-volume-profit formulas
Fantasy Corporation manufactures a single product. The selling price is $125 per unit,
and variable costs amount to $81 per unit. The fixed costs are $28,500 per month
(round any units to the next highest full unit).
(a) What is the contribution margin per unit? $_______________ per unit
(b) What is the contribution margin ratio? _______________% (Rounded to 1 decimal
place)
(c) What is the monthly sales volume (in dollars) at the break-even point?
$________________
(d) How many units must be sold each month to earn a monthly operating income of
$50,000? _______________ units
(e) What is the monthly margin of safety (in dollars) if 1,500 units are sold each month?
$_______________
(f) What will be the monthly operating income if 1,500 units are sold each month?
$_______________
Accounting terminology
Listed below are nine technical accounting terms introduced in this chapter:
Each of the following statements may (or may not) describe one of these technical
terms. In the space provided below each statement, indicate the accounting term
described, or Answer “None” if the statement does not correctly describe any of the
terms.
_____ (a.) An expenditure to pay an expense of the current period.
_____ (b.) The accelerated depreciation system used in federal income tax returns for
depreciable assets purchased after 1986.
_____ (c.) A policy that fractional-period depreciation on assets acquired or sold during
the period should be computed to the nearest month.
_____ (d.) An intangible asset representing the present value of future earnings in
excess of normal return on net identifiable assets.
_____ (e.) Expenditures that could lead to the introduction of new products, but which,
according to the FASB, should be viewed as an expense of the current accounting
period.
_____ (f.) Depreciation methods that take less depreciation in the early years of an
asset’s useful life, and more depreciation in the later years.
_____ (g.) An account showing the portion of the cost of a plant asset that has been
written off to date as depreciation expense.
The stockholders’ equity section of the balance sheet of Caesar Corporation at
December 31, 2015, appears as follows: (The company engaged in no treasury stock
transactions prior to 2015)
Refer to the information above. What was the average issue price per share of preferred
stock?
A. $100.
B. $110.
C. $115.
D. $5.
Flynn Corporation purchased bicycles from a British manufacturer at a price of 45,000
British pounds on November 15, 2014 with payment due in 60 days. Using the
following exchange rates, what gain or loss from currency fluctuations should be
recognized in 2014 and 2015, respectively?
A. A $2,250 loss in 2014 and a $900 gain in 2015.
B. No gain or loss in 2014 and a $1,350 loss in 2015.
C. A $2,250 gain in 2014 and a $900 loss in 2015.
D. No gain or loss in 2014 and a $1,350 gain in 2015.
Accepting a special order is profitable whenever the revenue from the special order
exceeds:
A. The average unit cost of production multiplied by the number of units in the order.
B. The incremental cost of producing the order.
C. The materials and direct labor costs of producing the order.
D. The fixed manufacturing costs for the period.
Process costing system-journal entries
Joyce Industries uses a process costing system. All of the company’s manufacturing
activities take place in a single processing department. There was no beginning
inventory in May. During the month, $60,000 of materials were added and $40,000 of
labor and $75,000 of overhead costs were charged to work in process. The entire work
in process inventory of 20,000 units was completed and transferred to finished goods.
Of these 20,000 units, 15,000 were sold on account at $14 per unit.
In the space provided, prepare a general journal entry to summarize each of the
following categories of transactions for the month of May (you may omit explanations):
(a.) The recording of manufacturing costs applied to production (use a single journal
entry).
(b.) The transfer of completed units from work in process to the finished goods
warehouse.
(c.) The sale of 15,000 units manufactured during the month and the related cost of
goods sold.
Judy Bright has just won the lottery. She can elect to receive her winnings in equal
payments of $200,000 a year for the next ten years on December 31 or to receive
$2,000,000 immediately. If the current interest rate is 6%, which choice will provide the
highest amount:
A. Receiving $2,000,000 immediately.
B. Taking equal payments for 10 years.
C. It does not matter since either choice provides the same amount.
D. Refusing to accept the winnings since it is not enough.
Within the relevant range, fixed costs:
A. Fall as sales volume falls.
B. Rise as sales volume rises.
C. Rise as sales volume falls.
D. Remain steady when sales volume changes.
The measurement of the relative size of each item included in a total is called:
A. Money changes.
B. Trend percentages.
C. Component percentages.
D. Ratios.
The financial statements of a business entity:
A. Include the balance sheet, income statement, and income tax return.
B. Provide information about the cash flow prospects of the company.
C. Are the first step in the accounting process.
D. Are prepared for a fee by the Financial Accounting Standards Board.
Comprehensive income can be displayed to users of financial statements in which of the
following way(s):
A. Only as a second income statement.
B. As a single income statement that includes both the components of net income and
the components of other comprehensive income.
C. As a footnote disclosure to the financial statements.
D. Either as a second income statement or as a single income statement that includes
both the components of net income and the components of other comprehensive
income.
During May, the number of equivalent units of materials applied to units produced by
Department Q totaled 48,000, computed as follows: beginning inventory, 5,000
equivalent units; units started and completed in May, 37,000 equivalent units; and
ending inventory, 6,000 equivalent units.
Refer to the information above. On the basis of this information, which of the following
statements is true?
A. The number of units transferred in May from Department Q to the next process or
department was 37,000.
B. There were more units in Department Q’s ending inventory than in Department Q’s
beginning inventory for May.
C. Department Q completed 48,000 units of product during May.
D. Department Q used enough materials during May to produce 48,000 equivalent
units.
Notes payable
On September 1, 2015, Charles Associates borrowed $600,000 from Diana Credit
Union and signed a 9%, one-year note payable, all due at maturity.
Significance of cash flows
In the long run, is it more important for a business to have a positive cash flow from its
operating activities, investing activities, or financing activities? Why?
Special sections in an income statement
What is the purpose of arranging an income statement to show subtotals for Income
from Continuing Operations and for Income before Extraordinary Items?
Retail method
Many large retailers take a physical inventory near year-end and state in their annual
report that inventory has been valued by the “retail method.” What does this mean?
(Your answer should address [1] whether inventory is valued in the financial statements
at cost or retail prices, and [2] how this dollar amount is determined.)
Explain how compound interest applies to the time value of money.
Flexible budgeting
What is meant by the term flexible budget? What role do flexible budgets play in
evaluating performance?
Elmer Corporation has the following information for the month of October, its first
month of operations: Round intermediate calculations to two decimal places
Costs added in October:
(1.) Determine the equivalent units of production for October.
(2.) Determine the cost of the ending work in process.
(3.) Determine the cost of goods completed.
(4.) If the company sold of its completed goods for $264,000, what is the gross profit?
Objectives of a cost accounting system
What are the major objectives of a cost accounting system in a manufacturing
company?
Use the tables to determine the answers to the following:
(1) How much must be invested now for 5 periods at 6% to amount to $15,000?
(2) How much is $3,000 invested now at 8% in 8 periods worth?
(3) How much is $25,000 compounded quarterly at 12% for 4 years?
The following information is for the Choplin Company for 2015:
Required:
(1) What is the cost of materials purchased?
(2) What is the cost of goods sold?
(3) What is gross profit?
(4) What is net profit?
A corporation that uses a strategy of hedging all contracts specifying a foreign currency
(i.e. foreign accounts receivable and foreign accounts payable):
Job order and process costing systems
There are two distinct types of cost accounting systems: job order costing systems and
process costing systems. How does management decide whether to use a job order
costing system or a process costing system in any given manufacturing situation?
Explain briefly.
Elements of the master budget
Describe briefly the purpose of a master budget and discuss its elements.
