1) A single step income statement separates routine operating results from peripheral or
non-operating items.
2) When a corporation records a stock dividend, it decreases Retained Earnings for the
par value of the stock.
3) Preparing a bank reconciliation is an important internal control for a business.
4) Clear lines of authority and responsibility are essential to establishing a
responsibility accounting system.
5) For a company that uses a perpetual inventory system, a physical count of the
inventory can reveal the amount of inventory shrinkage the company has experienced.
6) If a budgeting system is designed correctly, top management will not have to get
involved in the process.
7) Wallace Company wishes to allocate overhead costs in a heavily automated
production department. Direct labor hours would be a less appropriate cost driver than
machine hours.
8) In an equipment replacement decision, the current market value of old equipment is a
sunk cost.
9) Gains and losses are reported as non-operating items on the income statement.
10) If a financial statement is labeled “pro forma” this means that the statement was
prepared by a professional accountant following a prescribed format.
11) The format for the contribution margin income statement is sales less fixed costs
equals contribution margin less variable costs equals operating income.
12) The following balance sheet information was provided by Paino Company:
Assuming net credit sales totaled $145,000, what was the company’s average number of
days to collect receivables in 2012?
A.18.3 days
B.21.5 days
C.30.4 days
D.52.1 days
13) The amount of accounts receivable that is actually expected to be collected is
known as:
A.net realizable value
B.uncollectible accounts expense
C.accounts receivable turnover
D.allowance for doubtful accounts
14) Balfour Company prepared the following information as part of its bank
reconciliation as of October 31, 2012:
Required:
Indicate how each of the transactions reflected in the bank reconciliation would affect
Balfour’s financial statements, using the model provided. Enter dollar amounts of
increases and decreases. For each cash flow, indicate whether it is an operating (OA),
investing (IA), or financing (FA) activity.
15) How will the effective interest rate method of amortization affect the interest
expense incurred on a bond issued at a premium?
A.Interest expense will decrease as the carrying value of the bond decreases
B.Interest expense will decrease as the carrying value of the bond increases
C.Interest expense will increase as the carrying value of the bond increases
D.Interest expense will increase as the carrying value of the bond decreases
16) The term “realization” refers to which of the following?
A.the closing of an account
B.the collection of cash from sale of goods or services
C.the earning of revenue
D.the correction of an error
17) At March 31, Bandstra Co. had a book balance in its cash account of $5,500. At the
end of March the company determined that it had outstanding checks of $900, deposits
in transit of $600, a bank service charge of $20, and an NSF check from a customer for
$280. The true cash balance at March 31 is:
A.$5,200
B.$5,220
C.$5,500
D.$4,980
18) Travis Company recently gave its management employees a 10% raise in salary. All
other costs and revenues were unchanged. Select the response that indicates the impact
of the salary raises on the company’s break-even point and margin of safety.
A.Choice A
B.Choice B
C.Choice C
D.Choice D
19) For 2012, Stull Corporation reported after-tax net income of $1,100,000. During the
year, the number of outstanding shares of 6% $100 par preferred stock remained
constant at 5,000, and 500,000 shares of common stock were outstanding all year. The
company’s total stockholders’ equity at December 31, 2012, was $10,500,000. Stull’s
common stock was selling at $38 per share at the end of the year. All dividends for the
year were paid, including a dividend of $1.50 per share to common stockholders.
Required:
Compute the following:
a) Earnings per share
b) Book value per share of common stock
c) Price-earnings ratio
d) Dividend yield
20) Paul’s Valley Company issued bonds with a $10,000 face value on January 1, 2012.
The bonds were issued at face value and carried 5-year term to maturity. They had a 5%
stated rate of interest that was payable in cash on January 1 of each year beginning
January 1, 2013 . Based on this information alone, the amount of total liabilities
appearing on the December 31, 2012 balance sheet would be:
A.$10,000
B.$10,500
C.$9,500
D.$0
21) Which of the following transactions is a claims exchange transaction?
A.Paid cash to retire notes payable
B.Issued common stock for cash
C.Purchased office equipment for cash
D.Made adjusting entry to recognize the portion of unearned revenue that has been
earned
22) Select the correct statement regarding vertical analysis.
A.Vertical analysis of the income statement involves showing each item as a percentage
of sales
B.Vertical analysis of the balance sheet involves showing each asset as a percentage of
total assets
C.Vertical analysis examines two or more items from the financial statements of one
accounting period
D.All of these are correct
23) The Blumer Company entered into the following transactions during 2012:
1> The company was started with $22,000 of common stock issued to investors for
cash.
2> On July 1, the company purchased land that cost $15,500 cash.
3> There were $700 of supplies purchased on account.
4> Sales on account amounted to $9,500.
5> Cash collections of receivables were $5,500.
6> On October 1, 2012, the company paid $3,600 in advance for a 12-month insurance
policy that became effective on October 1 .
7> Supplies on hand as of December 31, 2010 amounted to $225.
The adjusting entry necessary to record the supplies expense would result in a:
A.$700 increase in assets and liabilities
B.$700 decrease in assets and equity
C.$475 decrease in assets and equity
D.$475 increase in assets and liabilities
24) Rice Company sold merchandise costing $1,600 for $2,500 cash. All of the
merchandise was later returned by the customer. If the perpetual inventory method is
used, what effect will the sales return have on the accounting equation?
A.Total assets and total equity increase by $900
B.Total assets increase by $1,600 and total equity is decreased by $2,500
C.Total assets and total equity decrease by $2,500
D.Total assets and total equity decrease by $900
25) Which of the following is not a procedure for the control of cash receipts?
A.Immediate preparation of records of all cash receipts
B.Giving customers written receipts for all monies paid
C.Using prenumbered checks
D.Depositing cash in the bank frequently
26) The term “Retained Earnings” is best explained by which of the following
statements?
A.Money set aside for the redemption of bonds payable
B.A measure of equity generated by a corporation through its operating activities
C.Cash retained in a separate bank account designated for emergency uses
D.The difference between total revenue and total expenses in an accounting period
27) Select the correct statement regarding fixed costs.
A.There is a contradiction between the term “fixed cost per unit” and the behavior
pattern implied by the term
B.Fixed cost per unit is not fixed
C.Total fixed cost remains constant when volume changes
D.All of these are correct statements
28) In a bank reconciliation, a customer’s NSF check included with the bank statement
is:
A.deducted from the bank’s cash balance to get the true cash balance
B.added to the bank’s cash balance to get the true cash balance
C.deducted from the company’s cash balance to get the true cash balance
D.added to the company’s cash balance to get the true cash balance
29) A cash flow that only occurs once is referred to as
A.an annuity
B.a lump sum
C.a principal sum
D.none of these
30) On January 1, 2010, Desmet Company purchased office equipment that cost
$15,000 cash. The equipment was delivered under terms FOB shipping point, and
transportation cost was $1,000. The equipment had a five year useful life and a $1,200
expected salvage value.
Using straight line depreciation, determine the amount of depreciation expense and the
amount of accumulated depreciation that would appear on the December 31, 2012
financial statements.
A.$2,960/$2,960
B.$2,608/$7,824
C.$2,960/$8,880
D.$2,600/$7,800
31) Moreland Ltd. Reported net sales of $10 million and net income of $3 million in
2012 . Based on this information, which of the following is an example of a material
misstatement on Moreland’s 2012 financial statements?
A.Sales equal to $100,000 were recorded before goods were shipped to the customers
B.Raw materials purchases of $500,000 were received before yearend but remain
unaccrued pending receipt of the vendors’ invoices
C.The inventory account included $125,000 worth of obsolete inventory
D.All of the above
32) On June 1, 2012, Siebens Enterprises loaned $20,000 to Tyler Company for one
year at 8 percent interest. Under the terms of the promissory note, Tyler will repay the
principal and pay one year’s interest on May 31, 2013 .
Related to this note receivable, what amount of interest income would Siebens report on
its 2013 income statement?
A.$667
B.$600
C.$800
D.$0
33) Ruiz Company sold land for $25,000 cash. The original cost of the land was
$25,000. Select the answer that indicates how this event would affect the company’s
financial statements.
A.Choice A
B.Choice B
C.Choice C
D.Choice D
34) At the beginning of the year, Gonzales Company’s accounting records had the
general ledger accounts and balances shown in the table below. During the year, the
following transactions occurred:
1> received $80,000 cash for providing services to customers
2> paid rent expense, $10,000
3> purchased land for $9,000 cash
4> paid $5,000 on note payable
5> paid operating expenses, $52,000
6> paid cash dividend, $6,000
Required:
a) Record the transactions in the appropriate general ledger accounts. Record the
amounts of revenue, expense, and dividends in the Retained Earnings column,
providing appropriate titles for these accounts in the last column of the table.
b) What is the amount of total assets as of the end of the year?
c) What is the amount of total stockholders’ equity as of the end of the year?
35) Assuming actual volume is 11,000 units and planned volume is 10,000 units, the
sales volume variance
A.is 1,000 units favorable
B.is 1,000 units unfavorable
C.cannot be determined without additional information
D.None of these
36) Which of the following items would appear on a balance sheet?
A.Notes Payable
B.Dividends
C.Expenses
D.Revenues
37) McDavid Company has completed its sales budget for the first quarter of 2012 .
Projected credit sales for the first four months of the year are shown below:
The company’s past records show collection of credit sales as follows: 30% in the
month of sale and the balance in the following month. The total cash collection from
receivables in February is expected to be
A.$38,700
B.$45,000
C.$42,300
D.$31,800
38) The process of dividing a total cost into parts and assigning it to cost objects is
known as
A.cost allocation
B.cost division
C.divide and conquer
D.none of these
39) When using residual income (RI) as a project-screening tool, management should
accept a project if
A.RI is negative
B.RI is positive
C.RI equals return on investment
D.None of these
40) Emily paid $2 for a bottle of ThirstAid. Later while on a hiking trip, she was offered
$10 for the ThirstAid. Select the correct statement from the following.
A.The $2 original purchase price is a sunk cost
B.If Emily drinks the ThirstAid, no opportunity cost is associated with her decision
C.The $10 offer is not relevant if Emily refuses to sell the ThirstAid
D.All of these are correct
41) Which of the following should not be recorded as an expense?
A.Paid office salaries
B.Paid factory maintenance costs
C.Paid product advertising costs
D.Paid sales commissions
42) Indicate how the event affects the elements of the financial statements. Use the
following letters to record your answer in the box shown below each element:
If the event affected cash flow, indicate whether the cash flow would be classified as an
operating activity (OA), investing activity (IA), or financing activity (FA). For example,
an event that increased cash and was an investing activity would be shown in the Cash
Flow column as I/IA.
Peru Corporation paid $40,000 cash to purchase land.
43) Bigtime Video is considering installing tanning beds in its video rental stores. The
beds cost $200,000 and have an estimated six-year useful life. Ignore income taxes. The
following pro forma income statement shows the expected annual results:
Required:
1) Bigtime Video would like to recoup its original investment in less than five years.
Compute the payback period for the tanning bed investment. Would you recommend
that the beds be purchased? Why or why not?
2) Bigtime Video’s minimum acceptable unadjusted rate of return is 12%. Compute the
unadjusted rate of return on the original investment. Would you recommend that the
beds be purchased? Why or why not?
44) Halley Company has just received a special order for 1,000 deck chairs. Halley has
sufficient idle capacity to accept the order. Indicate whether the given cost is a sunk
cost, opportunity cost, relevant or not relevant to the decision to accept the special
order, variable or fixed, by placing X’s below the headings as appropriate. A variable
cost is one that varies with the number of chairs that Halley makes.
45) What characteristics must information have to be useful in making a particular
decision?
46) How is the asset turnover ratio calculated, and what does it tell you about a
company?
47) The Harlan-Wells Company was started on January 1, 2012 as a partnership. The
initial investments from the two partners were $20,000 each. During 2012, the
Harlan-Wells Company earned $30,000 in cash revenue and paid $20,000 in cash
expenses and the partners withdrew $1,000 each for their personal use. The partnership
agreement calls for equal sharing of net income or loss. Using only the above
information, prepare an income statement, a capital statement, and a balance sheet for
the Harlan-Wells Company.
48) The accumulated depreciation at the end of 2013 under the straight-line method
would be $5,000
49) How would you determine whether a particular cost is unit-level or batch-level?
Use as an example: product inspection costs.
50) Indicate how each event affects the elements of financial statements. Use the
following letters to record your answer in the box shown below each element. You do
not need to enter amounts. Assume use of a perpetual inventory system.
After having shipped merchandise to a customer, Lowe Co. received a complaint about
some minor defects. Lowe agreed to allow a price reduction of $500. The merchandise
had been sold to the customer on account, and the account had not been collected yet.
Show how the transaction would affect Lowe’s financial statements.
51) Indicate whether each of the following statements about the income statement is
true or false.
1>The income statement measures income for a given period of time
2>An asset decrease from operating a business is a revenue
3>An income statement can be prepared for a period shorter than a year, such as a
quarter
4>The income statement matches asset increases from operating a business with asset
decreases from operation of the business
5>A net loss occurs when expenses are greater than revenues