Manufacturing overhead is a term used to describe all manufacturing costs other than
direct materials and direct labor.
Differences in accounting practices among countries reflect the different sources of
capital in those countries.
Most organizations try to achieve their goals by providing incentives to employees who
use resources wisely.
Straight-line is the most widely used depreciation method in financial statements, and
MACRS is the most widely used method in federal income tax returns.
The owner of a sole proprietorship is personally liable for the debts of the business,
whereas the stockholders of a corporation are not personally liable for the debts of the
business.
In the Stockholders’ Equity section of a balance sheet, par value of common stock is
presented first, followed by par value of preferred stock, followed by additional paid-in
capital on common stock, followed by additional paid-in capital on preferred stock.
The lower the current ratio, the more liquid the company appears.
The matching principle refers to the relationship between revenues and expenses.
An underwriter is a bank or trust company that maintains a corporation’s stockholder
records.
The present value of a single amount is calculated by multiplying the future amount by
the present value of $1 table.
In a periodic inventory system, overstating the amount of ending inventory will cause
an understatement of gross profit in the following year.
A spending variance results from incurring more overhead costs than allowed for the
actual level of activity achieved.
A stock option is a right to sell a certain number of shares at a specific price sometime
in the future.
The lower the accounts receivable turnover rate, the longer a company must wait to
collect from its credit customers.
Joint products are similar products that serve the same exact function.
An increase in the exchange rate between a transaction date and the date of payment
will cause the debtor to incur a loss.
Cost of goods sold is an expense shown separately from other expenses in an income
statement.
International Financial Reporting Standards (IFRS) require companies to expense costs
associated with R&D activities.
The Allowance for Doubtful Accounts is called a valuation account, or contra-asset
account, and normally has a credit balance.
A company whose future earnings are expected to rise substantially is likely to have a
higher price-earnings ratio than a company whose future earnings are expected to
decline.
Compensating balances are not included in the amount of cash listed on a balance sheet.
Costs flow through a process costing system in the same sequence as actual products
move through the assembly process.
Generally accepted accounting principles (GAAP) in the United States are fully
converged with International Financial Reporting Standards (IFRS).
Contribution margin is total revenue less variable costs.
The rate of interest is usually expressed as an annual rate.
Period costs are deducted from sales to arrive at gross profit.
The current ratio may be less than, equal to, or greater than the quick ratio.
The CPA examination is administered by the General Accounting Office of the U. S.
Government.
A statement of cash flows reports revenue and expense activities for a specific time
period such as one month or one year.
The higher the unit contribution margin, the higher the volume of unit sales required to
cover a given amount of fixed costs.
The payback period considers total profitability over the life of an investment and takes
into consideration the timing of an investment’s future cash flows.
Classification of costs
Using the code letters below, indicate in the space provided how each of the following
costs should be classified in the indicated manufacturing company:
Costs
____ (a) Research and development costs incurred by Martin, manufacturer of
derailleurs, brakes, and other component parts for bicycles in its efforts to develop new
products.
____ (b) Salaries paid by Martin to the plant managers supervising production
operations.
____ (c) An inventory of Martin Group 105 components purchased by Earl Bicycle
Corporation for use in the manufacture of Earl’s Model 1200 aluminum bicycle.
____ (d) An inventory of Model 1200 bicycle frames manufactured by Earl. Prior to
sale, these frames will be painted and equipped with derailleurs, brakes, and other
component parts.
____ (e) Salaries paid by Earl to its sales personnel.
____ (f) Salaries paid by Earl to employees who install derailleurs, brakes, and other
component parts on the bicycle frames.
____ (g) An inventory of Martin Group 105 derailleurs awaiting sale to customers.
The suppliers and production component of the value chain would include all of the
following costs except:
A. Direct production labor.
B. Production set-up.
C. Salaries for sales personnel.
D. Receipt of direct materials from suppliers.
Early in the current year, Tokay Co. purchased the Silverton Mine at a cost of
$20,000,000. The mine was estimated to contain 200,000 tons of ore and to have a
residual value of $5,000,000 after mining operations are completed. During the year,
105,000 tons of ore were removed from the mine. At year-end, the book value of the
mine (cost minus accumulated depletion) is:
A. $15,000,000.
B. $12,125,000.
C. $7,875,000.
D. Less than $10,000,000.
If current assets are $180,000 and current liabilities are $130,000, the current ratio will
be:
A. 72%.
B. $50,000.
C. 1.4.
D. $310,000.
Midwest Office Products uses the retail method to estimate ending inventory in its
monthly financial statements. The following information is available for the month
ended May 31:
Refer to the information above. Determine the cost ratio that should be used in
estimating the May 31 inventory using the retail method. (Round your final answer
percentage to one decimal point)
A. 63.8%.
B. 69.4%.
C. 66.0%.
D. 68.4%.
The following information has been taken from the perpetual inventory system of
Imperial Mfg. Co. for the month ended September 30:
Refer to the above data. Total manufacturing costs charged (debited) to Work in Process
during September amount to:
A. $180,000.
B. $170,000.
C. $172,000.
D. Some other amount.
Emerald Co. uses a perpetual inventory system and records purchases of merchandise at
net cost. The company recently purchased 200 compact discs at an invoice price of
$6,000 and terms of 2/10, n/30. Half of these discs had been mislabeled and were
returned immediately to the supplier. The journal entry to record payment of this
invoice after the discount period has expired will include a:
A. Debit to Inventory for $3,000.
B. Credit to Cash for $3,000.
C. Debit to an expense account for $60.
D. Credit to Cash for $2,940.
Which of the following describes the proper form of a balance sheet?
A. The heading sets forth the period of time covered.
B. Cash is always the first asset listed, followed by permanent assets (such as land and
buildings), and finally by assets such as receivables and supplies.
C. Liabilities are listed before owners’ equity.
D. A subtotal for total assets plus total liabilities is shown.
The fair market value of Lewis Company’s net identifiable assets is $5,000,000. Martin
Corporation purchases Lewis’ entire business for $5,800,000. Which of the following
statements is not correct?
A. Martin Corporation paid $800,000 for goodwill generated by Lewis Company.
B. Martin feels that Lewis Company has the ability to generate earnings in excess of a
normal return on net identifiable assets.
C. Martin will record amortization expense over a period not to exceed 40 years.
D. Martin Corporation will record $800,000 to goodwill, an intangible asset, which will
be reported in its balance sheet.
The total overhead variance is the difference between:
A. Budgeted overhead and applied overhead.
B. Actual overhead and budgeted overhead.
C. Actual overhead and applied overhead.
D. Applied overhead and budgeted overhead.
One of the strategies of the business process perspective lens of the balanced scorecard
is to improve the quality of the manufacturing process. Which of the following is not
one of the measures?
A. Number of on-time deliveries.
B. Machine downtime.
C. Percent of orders filled.
D. Scrap as a percentage of raw materials.
During the current year, Atkins, Inc. sold a parcel of land for $840,000 cash. The land
had been purchased by Atkins several years ago for $410,000. Atkins, Inc. uses the
indirect method to prepare its statement of cash flows. In order to reconcile net income
to net cash flow from operating activities, net income must be:
A. Decreased by $410,000.
B. Decreased by $430,000.
C. Increased by $430,000.
D. Not adjusted because the sale of land is classified as an investing activity.
Which of the following is not considered a basic type of adjusting entry?
A. An entry to convert a liability to a revenue.
B. An entry to accrue unpaid expenses.
C. An entry to convert an asset to an expense.
D. An entry to convert an asset to a liability.
If the actual cost per pound of direct material is less than the standard cost per pound,
there is:
A. A favorable materials price variance.
B. An unfavorable materials price variance.
C. A favorable materials quantity variance.
D. A favorable total materials variance.
Companies with periodic inventory systems often use techniques such as the gross
profit method and the retail method to:
A. Prepare interim financial statements without taking a complete physical inventory.
B. Increase gross profit.
C. Value inventory at its sales price instead of its cost.
D. Reduce taxable income during a period of rising prices.
Accounting terminology
Listed below are eight technical accounting terms introduced in this chapter:
1. Just-in-time
2. Average-cost method
3. LIFO method
4. Gross profit method
5. Inventory shrinkage
6. FIFO method
7. Retail method
8. Inventory turnover
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. The cost flow assumption in which the oldest units purchased are assumed
to have remained in inventory.
_______ b. A method of estimating the cost of goods sold and ending inventory based
upon cost relationships from prior periods.
_______ c. The practice of valuing inventory in the balance sheet at expected sales
prices, rather than at cost.
_______ d. An inventory cost flow assumption involving only one “cost layer.”
_______ e. The inventory cost flow assumption likely to result in the highest reported
amount of gross profit during a period of rising prices.
_______ f. A technique for minimizing a company’s investment in inventory,
particularly inventories of raw materials and finished goods.
_______ g. A measure of a company’s ability to sell its inventory quickly.
Responsibility accounting systems should begin with:
A. A budget by center.
B. A performance report by center.
C. A measure of corporate performance.
D. A company-wide income statement.
A payment of a business debt not including interest:
A. Decreases total assets.
B. Increases total liabilities.
C. Increases the owners’ equity in the business.
D. Decreases the owners’ equity in the business.
Stanley, Inc.’s 2015 income statement reported net sales of $6,000,000, uncollectible
accounts expense of $160,000, and net income of $700,000. Stanley’s average accounts
receivable during 2015 amounted to $1,200,000. Using 360 days to a year, Stanley’s
A. Accounts receivable turnover rate is approximately 4.4 times.
B. Accounts receivable turnover rate is approximately 2.5 times.
C. Average number of days to collect an account receivable is 72 days.
D. Accounts receivable turnover rate is approximately 2 times.
Indicate whether each of the following is a product cost or a period cost:
(a) Electricity for lighting a factory building.
(b) Costs of delivering finished bicycles to dealers.
(c) Cost of a store detective in a retail establishment.
(d) Cost of eggs in a bakery.
(e) Cost of chocolate to a candy manufacturer.
(f) Salary of injection molding machine operator in a plastics factory.
(g) Salary of a sewing machine operator in a clothing factory.
(h) Depreciation of a freezer in an ice cream plant.
If the standard quantity of materials is 84,500 units @ $0.15 per unit and the actual
quantity is 95,000 units @ $0.12 per unit, then the materials price variance is:
A. $2,850 Favorable.
B. $1,575 Unfavorable.
C. $1,275 Favorable.
D. $2,850 Unfavorable.
John Boyd Corporation manufactures and sells 1,000 tractors each month. The primary
component in each tractor is the motor. John Boyd has the monthly capacity to produce
1,300 motors. The variable costs associated with manufacturing each motor are shown
below:
Fixed manufacturing overhead per month (for up to 1,300 units of production) averages
$27,000. Joan Reid, Inc. has offered to purchase 200 motors from John Boyd per month
to be used in its own outboard motors.
Refer to the information above. If Joan Reid’s order is rejected, what will be John
Boyd’s average unit cost of manufacturing each motor?
A. $68 per unit.
B. $70 per unit.
C. $96 per unit.
D. Some other amount.
A job cost sheet will include:
A. All raw materials purchased.
B. Actual overhead.
C. Direct labor applied to production.
D. Selling costs.
Computation of assets, liabilities, and owners’ equity after a series of transactions
On April 30, 2014, the balance sheet of China Collectibles showed total assets of
$700,000, total liabilities of $400,000, and owners’ equity of $300,000. The following
transactions occurred in May of 2014:
(1) Capital stock was issued in exchange for $165,000 cash.
(2) The business purchased equipment for $360,000, paying $160,000 cash and issuing
a note payable for $200,000.
(3) The business paid $70,000 of its accounts payable.
(4) The business collected $54,000 of its accounts receivable.
Compute the following as of May 31, 2014:
(A.) Total assets $____________
(B.) Total liabilities $____________
(C.) Owners’ equity $____________
In a flexible budget for a profit center, which of the following items would not be
expected to vary with the level of activity?
A. Revenue.
B. Fixed manufacturing overhead.
C. Direct materials cost.
D. Variable manufacturing overhead.
Which of the following is considered an operating budget?
A. The prepayments budget.
B. The debt service budget.
C. The customer service budget.
D. The capital expenditures budget.
Gamma Company adjusts its accounts at the end of each month. The following
information has been assembled in order to prepare the required adjusting entries at
December 31:
(1) A one-year bank loan of $720,000 at an annual interest rate of 6% had been obtained
on December 1.
(2) The company’s pays all employees up-to-date each Friday. Since December 31 fell
on Tuesday, there was a liability to employees at December 31 for two day’s pay.
Employees earn a total of $12,800 per week.
(3) On December 1, rent on the office building had been paid for three months. The
monthly rent is $7,000.
(4) Depreciation of office equipment is based on an estimated useful life of five years.
The balance in the Office Equipment account is $12,360; no change has occurred in the
account during the year.
(5) All fees totaling $19,800 were earned during the month for clients who had paid in
advance.
Refer to the information above. What amount of interest expense has accrued on the
bank loan?
A. $3,200
B. $3,500
C. $3,600
D. $3,900
Machinery acquired new on January 1 at a cost of $80,000 was estimated to have a
useful life of 10 years and a residual salvage value of $20,000. Straight-line
depreciation was used. On January 1, following six full years of use of the machinery,
management decided that the estimate of useful life had been too long and that the
machinery would have to be retired after three years, that is, at the end of the ninth year
of service. Under this revised estimate, the depreciation expense for the seventh year of
use would be:
A. $8,000.
B. $10,000.
C. $13,000.
D. $24,000.
During the current year, Carlin Equipment Stores had net sales of $500 million, a cost
of goods sold of $400 million, average accounts receivable of $60 million, and average
inventory of $50 million.
Refer to the information above. Assuming a 365-day year, the average number of days
required for Carlin Equipment to sell its inventory is: (Round your final answer to one
decimal place)
A. 36.5 days.
B. 45.6 days.
C. 54.4 days.
D. 292 days.
Refer to the information above. The payback period for this proposed investment is:
A. 4.5 years.
B. 12.3 years.
C. 6 years.
D. 2.8 years.
Computation of cash flows
An analysis of changes in selected balance sheet accounts of Gable Corporation shows
the following for the current year:
The income statement for the current year included the following items relating to the
transactions summarized above:
All payments and proceeds relating to these transactions were in cash. Using this
information, compute the following cash flows for the current year:
Powers Company wishes to issue $2,000,000 of 8%, 10 year bonds which pay interest
semi-annually. The current discount rate is 6%. What amount should the bonds sell for?
Users of accounting information
List seven groups that would typically use financial information.
Equivalent units
What is meant by the term equivalent units? How is this concept used in computing
average unit costs?
Cost-volume-profit graph
Describe the important relationships shown on a cost-volume-profit graph.
Briefly explain how generally accepted accounting principles enhance the integrity of
financial accounting information.
Standard costs
Define standard costs. Under what conditions should previously established standard
costs be revised?