The payback period can be determined by multiplying the amount invested by net cash
flows received annually.
The acid test ratio includes marketable securities but does not include accounts
receivable.
Non-financial factors are relevant in capital budgeting.
In a flexible budget, both variable and fixed costs will vary with the level of activity.
Dividends paid belong in the operating activities section of the statement of cash flows.
Finished goods is comprised of direct materials purchased, direct labor, and
manufacturing overhead.
If a company records a purchase at the net cost and then fails to take advantage of the
discount, the discount not taken is recorded in the Interest Expense account.
Manufacturing overhead is considered an indirect cost, since overhead costs generally
cannot be traced conveniently and directly to specific units of product.
In order for a loss on the disposal of a discontinued operation to be classified on the
income statement as a discontinued operation, it must be unusual in nature.
When a stockholder sends in a proxy statement to a corporation he or she owns stock in,
they grant management the voting rights associated with their shares.
The target costing process begins with finding a low cost supplier to reduce the overall
cost of production.
An advantage of the average-cost method of accounting for inventory is that the
inventory is valued in the balance sheet at current replacement costs.
A current asset must be capable of being converted into cash within a relatively short
period of time, usually less than five years.
An international joint venture involves the creation of a new company that is owned by
two or more firms from different countries.
If a budget is to provide a basis for evaluating departmental performance, departmental
managers should not know what their budget targets are until after the budget period
has ended.
Net cash flows from operating activities will have the same total no matter which
method is used, direct or indirect.
As units are completed, their cost is transferred from the Work in Process Inventory
account to the Finished Goods Inventory account.
A variance is said to be unfavorable when actual costs exceed standard costs.
If total current assets are $140,000 at the end of Year 1, increase by $50,000 by the end
of Year 2, and increase by $50,000 in Year 3, the percentage increase over the preceding
year is less in Year 3 than in Year 2.
The accounting profession has been slow to develop in Asian countries because of strict
governmental control of accounting regulations.
The IRS tax return is one of the primary financial statements.
The operating activities section of the cash flow statement includes the cash effects of
those transactions reported on the income statement.
A factor that might suggest that a periodic inventory system is appropriate is that all
merchandise is stored at the sales site.
A credit to a ledger account refers to the entry of an amount on the right side of an
account.
Activity-based costing systems refer to acquiring materials and manufacturing goods
only as needed to fill customers’ orders.
Junk bonds are attractive to investors because they carry a high rate of interest and are
convertible into a specified number of shares of capital stock.
The salaries paid to partners are shown as an expense on the income statement while the
salary taken by a sole proprietor is debited to a drawing account.
Nonfinancial considerations are not accounted for in capital budgeting decisions.
Unearned revenue is a liability and should be reported on the income statement.
When interest rates rise, the price of a given bond issue will fall.
When a company has a fully funded pension plan, they only need to record the present
value of pension payments as a current liability.
A credit balance in the manufacturing overhead account at month end indicates that the
actual overhead costs were less than the amount of overhead costs applied to jobs.
The going concern principle assumes that the business will continue indefinitely.
The inventory turnover rate indicates how quickly inventory sells.
The relevant costs and revenues to consider in a special order decision include variable
costs, fixed costs, and incremental revenues.
A company should carry the amount of working capital necessary to conduct
operations, not necessarily maximize its working capital.
The value chain usually starts with the _________ and ends with the ____________.
A. Supplier; customer
B. Retailer; wholesaler
C. Customer; retailer
D. Retailer; customer
Incremental analysis – accepting a special order
Essential Company normally produces and sells 4,000 video monitors for personal
computers each month. Variable manufacturing costs amount to $62 per unit, and fixed
manufacturing costs are $170,000 per month. The regular sales price of the monitors is
$140 per unit. The company is considering a special order from a foreign computer
maker to buy an additional 1,000 monitors per month at a special price of $70 per unit.
Filling this special order would not affect Essential Company’s regular sales volume or
fixed manufacturing costs.
(a) The average cost per unit at the 4,000-unit-per-month production level is
$_______________ per unit.
(b) The average cost per unit at the 5,000-unit-per-month production level is
$_______________ per unit.
(c) The amount of increase or decrease (indicate the correct term) in Essential
Company’s operating income that would result from accepting the special order is
$_______________.
A company with monthly fixed costs of $170,000 expects to earn monthly operating
income of $25,000 by selling 6,500 units per month. What is the company’s expected
unit contribution margin?
A. $30 per unit.
B. $26 per unit.
C. $22 per unit.
D. The information given is insufficient to determine unit contribution margin.
Dwyer Company’s ROI is 6% and its return on sales is 16%. What is its capital
turnover?
A. 3%.
B. 37.5%.
C. 300%.
D. Some other percentage.
Short-term creditors are likely to view a higher-than-average inventory turnover rate as
indicating that:
A. A company is in financial difficulty.
B. The company is able to sell its inventory quickly.
C. The company probably has an excessive amount of inventory.
D. The company has a longer-than-average operating cycle.
Excessive overtime hours worked by direct labor workers often results in:
A. An unfavorable labor rate variance.
B. A favorable labor rate variance.
C. A favorable materials price variance.
D. An unfavorable materials price variance.
Refer to the information above. Before the journal entry above, Martin had assets of
$900,000; liabilities of $460,000; and owners’ equity of $440,000. Total assets
immediately after the above transaction has been recorded amount to:
A. $900,000.
B. $921,000.
C. $956,000.
D. $794,000.
The lower-of-cost-or-market rule may be applied by comparing the market value of the
inventory to the cost of the inventory based on:
A. Individual inventory items.
B. Major inventory categories.
C. The entire inventory.
D. Any of the three: individual inventory items, major inventory categories, or the
entire inventory.
Shown below is a trial balance for Novelty Toys Inc., on December 31, after adjusting
entries:
Refer to the information above. The total debits in the After-Closing Trial Balance will
equal:
A. $25,375.
B. $29,125.
C. $40,875.
D. $18,125.
Assume the exchange rate for the Mexican Peso is falling relative to the U.S. dollar. An
American company will incur losses from this falling exchange rate if the company is
making:
A. Credit sales to Mexican companies at prices stated in U.S. dollars.
B. Credit purchases from Mexican companies at prices stated in U.S. dollars.
C. Credit sales to Mexican companies at prices stated in Mexican Pesos.
D. Credit purchases from Mexican companies at prices stated in Mexican Pesos.
Shown below are selected data from the financial statements of Supreme Co. Dollar
amounts are in millions (except for the per share data).
Supreme reported earnings per share for the year of $4 and paid cash dividends of $1
per share. At year-end, the Wall Street Journal listed Supreme’s capital stock as trading
at $88 per share.
Refer to the information above. Supreme’s return on assets was:
A. 9.75%.
B. 6.75%.
C. 17.75%.
D. 30.75%.
The following information is from the manufacturing budget and budgeted financial
statements of Altman Corp.:
Refer to the information above. For the year, budgeted purchases of direct materials
amounted to:
A. $344,000.
B. $328,000.
C. $360,000.
D. $370,000.
Grand Gimmicks Company produces a single product with a current selling price of
$170. Variable costs are $130 per unit, and fixed costs per month average $6,240.
Management is considering increasing the selling price to $190 per unit. Assume that
the variable cost per unit of the product and monthly fixed expenses will not change as
a result of the proposed increase in selling price.
Refer to the information above. At the current selling price of $170 per unit, closest to
what dollar volume of sales per month is necessary for Grand Gimmicks to generate
monthly operating income of $12,000? (Round your intermediate percentage to one
decimal place.)
A. $24,162.
B. $51,063.
C. $58,838.
D. $77,617.
From an accounting viewpoint, when is a business considered as an entity separate from
its owner(s)?
A. Only when organized as a sole proprietorship.
B. Only when organized as a partnership.
C. Only when organized as a corporation.
D. A business is always considered as an accounting entity separate from the activities
of the owner(s).
Dawson Company has a union contract which calls for an 8% cost of living increase in
the wages paid to all factory workers as of July 1 of the current year. This suggests that:
A. The labor rate variance for July will be unfavorable.
B. The labor rate variances during the first half of the current year have been favorable.
C. The standard labor cost per unit should be revised as of July 1.
D. The labor efficiency variance for July will be unfavorable.
Which statement is true about land?
A. Land should be depreciated over the same period as the building located on it.
B. Land cannot be depreciated for greater than a 40-year period.
C. Land should not be depreciated.
D. The straight line method should be used to depreciate land.
Which of the following would have no effect on Retained Earnings?
A. Declaration of a cash dividend.
B. Declaration of a stock dividend.
C. Declaration of a stock split.
D. A prior period adjustment.
Incremental revenues:
A. Always increase revenue when one course of action is selected over another.
B. Always decrease revenue when one course of action is selected over another.
C. May increase or decrease when one course of action is selected over another.
D. Cause revenues to remain steady.
Express, Inc., is considering replacing equipment. The following data are available:
Refer to the information above. Which of the data above is a sunk cost?
A. The annual cost of operating the new equipment.
B. The annual cost of operating the old equipment.
C. The disposal value of the old equipment.
D. The original cost of the old equipment.
The sales forecast directly affects many elements of the master budget. Which of the
following would be least affected by short-term fluctuations in the sales forecasts?
A. The production schedule.
B. The budgeted income statement.
C. The capital expenditures budget.
D. The operating expense budget.
In comparison to selling a product with a low contribution margin ratio, selling a
product with a high contribution margin ratio always:
A. Requires less dollar sales volume to cover a given level of fixed costs.
B. Results in a greater margin of safety.
C. Results in higher operating income.
D. Results in a higher contribution margin per unit sold.
Bremmer uses a periodic inventory system and the following information is available:
Refer to the information above. What is the gross profit?
A. $96,800.
B. $133,600.
C. $132,200.
D. $230,400.
Accounting terminology
Listed below are eight technical accounting terms emphasized in this chapter:
In the space provided for each statement, indicate the accounting term described.
______ a. The generally accepted accounting principle of providing with financial
statements any information that users need to interpret those statements properly.
______ b. A trial balance prepared after all closing entries have been posted. This trial
balance consists only of accounts for assets, liabilities, and owners’ equity.
______ c. Journal entries made at the end of the period for the purpose of closing
temporary accounts (revenue, expense, and dividend accounts) and transferring
balances to the Retained Earnings account.
______ d. Computer software used for recording transactions, maintaining journals and
ledgers, and preparing financial statements. Also includes spreadsheet capabilities for
showing the effects of proposed adjusting entries or transactions on the financial
statements without actually recording these entries in the accounting records.
______ e. The summary account in the ledger to which revenue and expense accounts
are closed at the end of the period. The balance (credit balance for a net income, debit
balance for a net loss) is transferred to the Retained Earnings account.
______ f. Financial statements prepared for periods of less than one year (includes
monthly and quarterly statements).
______ g. Supplemental disclosures that accompany financial statements. They provide
users with various types of information considered necessary for the proper
interpretation of the statements.
______ h. A multicolumn schedule showing the relationships among the current
account balances (a trial balance), proposed or actual adjusting entries or transactions,
and the financial statements that would result if these adjusting entries or transactions
were recorded. Used both at the end of the accounting period as an aid to preparing
financial statements and for planning purposes.
JCN Industries normally produces and sells 5,000 keyboards for personal computers
each month. Variable manufacturing costs amount to $25 per unit, and fixed costs are
$146,000 per month. The regular sales price of the keyboards is $86 per unit. JCN has
been approached by a foreign company that wants to purchase an additional 1,000
keyboards per month at a reduced price. Filling this special order would not affect
JCN’s regular sales volume or fixed manufacturing costs.
Refer to the information above. Assume that the price offered by the foreign company is
$43 per unit. Accepting the special order will cause JCN’s operating income to:
A. Increase by $18,000.
B. Decrease by $2,000.
C. Decrease by $33,000.
D. Decrease by $35,000.
Generally accepted accounting principles are intended to assist accountants in preparing
financial statements that:
A. Are relevant, verifiable, comparable, and understandable.
B. Show the business to be both solvent and profitable.
C. Comply with all income tax rules and regulations.
D. Are ideally suited to the specific needs of each user of the financial statements.
The specific identification method is more appropriate than a cost flow assumption
method:
A. For a large inventory of identical low-priced items.
B. If each item in the inventory is unique.
C. If purchase costs are rising.
D. If purchase costs are falling.
Mentha Company currently has the following statistics:
Days in inventory – 80
Operating cycle – 148
What is Mentha’s days in accounts receivable?
A. 80 days.
B. 68 days.
C. 148 days.
D. Cannot be determined from the information given.
Eagle Company uses a standard cost system which has provided the following data:
Refer to the information above. The direct labor efficiency variance for the period was:
A. $360 favorable.
B. $360 unfavorable.
C. $320 favorable.
D. $320 unfavorable.
In order to calculate break-even sales units, fixed costs are divided by the:
A. Contribution margin per unit.
B. Contribution margin percentage.
C. Target operating income.
D. Sales volume.
An investment center:
A. Is a profit center for which management is able to objectively measure the cost of the
assets used in the center’s operations.
B. Is a cost center for which management is able to identify the original amount
invested.
C. May be either a cost center or a profit center.
D. Is a subunit of the organization that provides services to other centers within the
organization.
Which of the following is not an accurate statement regarding the distinction between
debt and equity?
A. Only equity is considered a source of financing for operations of the business, since
debt must be repaid at a specified maturity date.
B. If a business ceases operations and liquidates, claims of all creditors have legal
priority over claims of the stockholders.
C. Most debt requires the borrower to pay interest; equity financing does not obligate
the company to make a specified payment.
D. The providers of equity are owners of the business; the providers of borrowed funds
are creditors.
Refer to the above data. If Riverview applies overhead using a predetermined rate based
on machine-hours, what amount of overhead will be assigned to a unit of output which
requires 0.5 machine hours and 0.25 labor hours to complete?
A. $12.00.
B. $16.00.
C. $20.00.
D. Some other amount.
Fully amortizing installment note payable (mortgage)
On October 31, 2015, Seldon Company incurs a 30-year $600,000 mortgage liability in
conjunction with the purchase of a motel. This mortgage is payable in equal monthly
installments of $6,485, which include interest computed at an annual rate of 12%. The
first monthly payment is made on November 30, 2015. This mortgage is fully
amortizing over 360 months.
Complete the amortization table for the first two payments by entering the correct dollar
amounts in the blank spaces provided. In addition, answer the questions which follow.
(a) With respect to this mortgage, Seldon’s 2015 income statement includes interest
expense of $_______________, and Seldon’s balance sheet at December 31, 2015,
includes a total liability for this mortgage of ______________. (Do not separate into
current and long-term portions.)
(b) The aggregate monthly cash payments Seldon will make over the 30-year life of the
mortgage amount to $_______________.
(c) Over the 30-year life of the mortgage, the amount Seldon will pay for interest
amounts to $_______________.
