When closing Income Summary, assuming the corporation had net income for the
accounting period, the account Retained Earnings is credited.
Accounts payable are often subdivided into the categories of trade accounts payable and
notes payable.
Diluted earnings per share are shown to alert investors that earnings per share could be
increased by the effects of conversions of securities into common stock.
A total cost variance for materials can be caused by differences in the quantity used, or
in the price paid, but not by both.
Diluted earnings per share represents a hypothetical case, showing what earnings per
share would be if certain securities were converted into additional shares of common
stock.
In order to maximize sales and profits, effective internal control over receivables
ensures that credit is extended to all customers who request credit.
The operating cycle is the average time required to manufacture products for sale.
The term plant assets refers to long-lived assets acquired for use in business operations,
rather than for resale to customers.
Metalworks applies manufacturing overhead on the basis of direct materials used in
production. During the current period, direct materials used for job #123 amounted to
$22,545. If Metalworks’ overhead rate is 0.65 of direct materials used, the overhead
applied to job #123 for the period was $15,000.
A principal objective of cost accounting systems is to ensure that cost reports to
management are prepared in accordance with generally accepted accounting principles.
Completing 3,000 units which were each 75% complete at the beginning of the period
represents 2,250 equivalent units of work during the current period.
Maintenance and fuel costs are types of revenue expenditures.
To be consistent with international standards, the FASB has changed reporting
requirements for redeemable preferred stock to require it to be reported in the equity
section.
A net decrease in accounts payable to suppliers indicates that cash payments to
suppliers were less than purchases made during the period.
Since payment is due within one year, the current portion of long-term debt should be
reported separately in the long-term liabilities section of the balance sheet.
The annual financial statements of large corporations such as Microsoft or PepsiCo
need not be audited by independent certified public accountants, since these firms
maintain large accounting departments as part of their organizations.
Sunk costs may be defined as unavoidable future costs resulting from past decisions.
Whenever an American corporation sells merchandise to a foreign company, the
transaction must be stipulated in U.S. dollars.
The three basic types of manufacturing costs are direct materials, direct labor and
manufacturing overhead.
A value chain is a linked set of activities and resources necessary to create and deliver a
product or service to a customer.
Overhead application rates allow overhead to be assigned as units are being produced
throughout the accounting period.
The entry to record the issuance of 100 shares of capital stock in exchange for $1,000
cash includes a debit to Capital Stock.
When an investment fails to provide the desired rate of return, the investment should be
rejected.
When straight-line depreciation is used, the average carrying value of an asset with no
salvage value is equal to the asset’s original cost divided by its estimated useful life.
Stock based performance evaluation of managers is considered more risky than
accounting based performance evaluation.
The adjusted trial balance may be used in place of the income statement.
The market value of a convertible bond tends to move inversely to the market value of
an equivalent number of shares of common stock.
When bonds are issued at a discount, the borrower must pay more at maturity than the
amount originally received.
The amount transferred out of retained earnings when a 4% stock dividend is declared
is equal to the prevailing market value per share times the number of dividend shares to
be distributed.
Capital turnover is calculated by dividing operating income by average invested capital.
Incremental revenue is relevant in decision making.
Standard costs are typically reviewed once per year.
If a depreciable asset’s market value increases during the year, no depreciation expense
should be recorded.
The SEC requires public companies to use the indirect method for the statement of cash
flows.
From a creditor’s point of view, the lower the debt ratio; the safer the creditor’s position.
Revenues increase owners’ equity and are, therefore, recorded by crediting the revenues
account.
Free cash flow is computed as net cash flow from operating activities plus cash used to
acquire plant assets minus cash paid for dividends.
The debt ratio measures how quickly a company pays off the long-term liabilities it has
incurred.
A short payback period is preferred so that the investment’s costs can be put to other
uses.
A company with a fully funded pension plan:
A. Recognizes no pension expense.
B. Reports no long-term liability for future pension payments.
C. Does not utilize the services of a trustee to operate the pension plan.
D. Recognizes pension expense equal to the cash payments made to retirees during the
current period.
An unfavorable labor efficiency variance is most likely to occur if:
A. Employees are paid at an overtime wage rate.
B. Employees are inefficient and units must be reworked.
C. Labor cost per unit exceeds materials costs per unit.
D. Employee turnover rates are low.
If beginning inventory in Work in Process is zero and 2,000 units are started during the
period, assuming that 1,700 units were completed and transferred out, how many units
remain in ending inventory?
A. 2,000 units.
B. 285 units.
C. 300 units.
D. 1,700 units.
Which of the following factors would suggest the use of a periodic inventory system?
A. A small company.
B. A high volume of sales and a manual accounting system.
C. Neither a small company nor a high volume of sales and a manual accounting
system.
D. Both a small company and a high volume of sales and a manual accounting system.
Refer to the information above. Assume that in its financial statements, Victor uses
straight-line depreciation and the half-year convention. Depreciation recognized on this
equipment in 2014 and 2015 will be:
A. $40,000 in 2014 and $30,000 in 2015.
B. $23,333 in 2014 and $30,000 in 2015.
C. $17,500 in 2014 and $35,000 in 2015.
D. $20,000 in 2014 and $35,000 in 2015.
In a schedule of cost of finished goods manufactured, the figure for total manufacturing
costs:
A. May be less than the cost of direct materials used.
B. May be less than the direct labor costs assigned to production.
C. May be less than the manufacturing overhead applied to production.
D. May be less than the cost of finished goods manufactured.
As the volume of output increases:
A. Variable costs per unit will increase.
B. Variable costs per unit will decrease.
C. Variable costs per unit will not change.
D. Variable costs in total will decrease.
If all things are equal, except one company uses LIFO during inflation and the other
uses FIFO, then:
A. The LIFO company will have a higher inventory turnover.
B. The FIFO company will have a higher inventory turnover.
C. The two companies will have the same inventory turnover.
D. Inventory valuation methods do not effect inventory turnover calculations.
All of the following are measures of liquidity except:
A. Quick ratio.
B. Debt ratio.
C. Current ratio.
D. Working capital.
Declaration and distribution of a stock dividend cause each of the following effects
except:
A. An increase in the number of shares of stock outstanding.
B. A decrease in retained earnings.
C. A decrease in total assets of the issuing corporation.
D. An increase in legal capital of the issuing corporation.
Premium on bonds payable:
A. Is an asset account.
B. Increases the carrying value of the liability.
C. Is a contra-asset account.
D. Is disclosed by a footnote.
The basic measure of the amount of leverage being applied within the capital structure
of an organization is the:
A. Interest coverage ratio.
B. Debt ratio.
C. Return on assets.
D. Return on equity.
Of the items listed, which would appear closest to the bottom of the income statement?
A. Extraordinary items.
B. Prior period adjustment.
C. Income from continuing operations.
D. Discontinued operations.
Which of the following would not be presented in the cash flows from operating
activities section of the statement of cash flows when the direct method is used?
A. Dividends paid.
B. Dividends received.
C. Neither dividends paid nor dividends received would be shown.
D. Both dividends paid and dividends received would be shown.
Capital budgeting
Carry-Along is debating whether or not to invest in new equipment to manufacture a
line of high-quality luggage. The new equipment would cost $850,000, with an
estimated four-year life and no salvage value. The estimated annual operating results
with the new equipment are as follows:
All revenue from the new luggage line and all expenses (except depreciation) will be
received or paid in cash in the same period as recognized for accounting purposes. You
are to compute the following for the investment in the new equipment to produce the
new luggage line: (rounded)
(a) Annual cash flow: $__________
(b) Payback period: __________
(c) Return on average investment: __________%
(d) Total present value of the expected future annual cash flows, discounted at an
annual rate of 12% (an annuity table shows that the present value of $1 received
annually for four years discounted at 12% is 3.037): $__________
(e) Net present value of the proposed investment: $__________
Land and a warehouse were acquired for $890,000. What amounts should be recorded
in the accounting records for the land and for the warehouse if an appraisal showed the
estimated values to be $400,000 for the land and $700,000 for the warehouse?
A. $400,000 for land; $490,000 for warehouse.
B. $323,960 for land; $566,040 for warehouse.
C. $400,000 for land; $700,000 for warehouse.
D. $190,000 for land; $700,000 for warehouse.
Of the following globalization strategies, which would be least demanding in terms of
the quantity and variety of accounting information required?
A. Exporting.
B. International licensing.
C. Joint ventures.
D. Establishing a wholly owned foreign subsidiary.
In estimating annual pension expense, which of the following factors would not be
taken into consideration?
A. Current financial condition of the company.
B. Expected rate of return to be earned on pension fund assets.
C. Employee turnover rates.
D. Compensation levels and estimated rate of pay increases.
Diluted earnings per share is a hypothetical computation to warn stockholders what
could happen if:
A. Loss contingencies turn out adversely.
B. Convertible securities are converted into shares of common stock.
C. Extraordinary losses were to recur.
D. Consideration was given to the loss from operations discontinued during the current
period.
The gross profit rate represents:
A. Total sales revenue.
B. The percentage change in net sales from the prior period.
C. The percentage of sales revenue remaining after providing for the cost of the
merchandise sold.
D. Net income stated as a percentage of total sales revenue.
Which of the following types of cost are always relevant to a decision?
A. Sunk costs.
B. Average costs.
C. Incremental costs.
D. Fixed costs.
Although accounting information is used by a wide variety of external parties, financial
reporting is primarily directed toward the informational needs of:
A. Investors and creditors.
B. Government agencies such as the Internal Revenue Service.
C. Customers.
D. Trade associations and labor unions.
Refer to the information above. Which of the following represents the largest amount
withheld from employees’ paychecks?
A. Workers’ compensation insurance.
B. Social Security and Medicare.
C. Personal income taxes.
D. Group health insurance.
The financial statements of Garver, Inc., provide the following information for the
current year:
Refer to the information above. Compute the cash received from customers during the
current year.
A. $530,000.
B. $510,000.
C. $520,000.
D. $80,000.
A summary of work completed with related unit and total costs in a process costing
system is called a(n):
A. Equivalent units production form.
B. Cost requisition form.
C. Summary of conversion costs.
D. Production cost report.
Which method of project selection gives consideration to the time value of money in a
capital budgeting decision?
A. Payback method.
B. Average rate of return.
C. Discounted cash flows method.
D. Accounting rate of return.
Which of the following best describes liquidity?
A. The ability to increase the value of retained earnings.
B. The ability to pay the debts of the company as they become due.
C. Being able to buy everything the company requires for cash.
D. Purchasing everything the company requires on credit.
When equipment is purchased entirely through a loan:
A. The equipment is shown as an increase in the investing activities section.
B. The equipment is shown as a decrease in the investing activities section.
C. The loan is shown as an increase in the financing section.
D. Neither the loan nor the purchase of equipment is shown in the investing or the
financing sections.
A small stock dividend is recorded at:
A. Market value.
B. Book value.
C. Par value.
D. No amount, just a memorandum entry is required.