1) Investors and creditors use accounting information to identify the businesses they
wish to provide resources to.
2) Suboptimization refers to actions taken by a manager that are in his/her best interest
but not in the best interest of the firm as a whole.
3) Stephanie needs to have $10,000 one year from today. The formula to compute the
amount of money that must be invested today is Future value/(1 + interest rate).
4) A partner is responsible for (liable for) his/her own actions and also for actions taken
by another partner on behalf of the partnership.
5) Often, the recognition of revenue is accompanied by an increase in liabilities.
6) Outsourcing increases the extent of a company’s vertical integration.
7) The term “loss” represents the excess of cost over revenue from transactions that
occur on a regular basis.
8) The book value of a share of stock is generally approximately equal to the market or
selling price of the stock.
9) Pro forma financial statements are financial statements that are prepared for a period
of less than a year.
10) An investment opportunity with a residual income that equals or exceeds zero
should be accepted.
11) While horizontal analysis examines one item over two or more time periods,
vertical analysis examines different items in the same period of time.
12) A vertical analysis calculates percentages to compare the parts of an individual
statement to the whole. For example, on an income statement, each item could be
shown as a percentage of net sales.
13) The lower a company’s magnitude of operating leverage, the greater the benefit
from an increase in revenues.
14) Cost-volume-profit analysis is an important tool in determining an organization’s
break-even point.
15) An alternative under consideration involves incurring $50 in costs to generate $60
in revenue. The differential revenue for this alternative is $10.
16) A promissory note may be secured by assets belonging to the maker.
17) Performance evaluation of the segments of an organization should be done in a
manner that promotes management by exception.
18) A business’s creditors have a priority claim to its assets in the event of liquidation.
19) Two of the steps in the accounting cycle are adjusting the accounts and closing the
accounts.
20) The following accounts and balances were drawn from the records of Rayburn
Company on December 31, 2012:
Total assets on the December 31, 2012 balance sheet amounted to
A.$2,650
B.$3,450
C.$1,800
D.$3,150
21) Which of the following statements concerning product costs versus general, selling,
and administrative costs is true?
A.Product costs incurred during the period will always appear as inventory on the
balance sheet
B.General, selling, and administrative costs are always expensed when cash is paid
C.Product costs may be divided between the balance sheet and income statement
D.General, selling, and administrative costs sometimes appear as inventory on the
balance sheet
22) All of the following are capital investment decisions except
A.Purchasing $40,000 of machinery
B.Buying a $4,000,000 manufacturing plant
C.Acquiring $400,000 of common stock
D.Paying $500,000 to renovate a retail store
23) Harrison and Sons is a law firm. On September 1, 2012, Harrison contracted to
provide 12 months of legal services to a client. On that date, Harrison collected a
$36,000 retainer and began providing services. How much revenue would Harrison
report from that client for the year ending December 31, 2012?
A.$36,000
B.$12,000
C.$9,000
D.$15,000
24) Which of the following items will not appear on a cash budget?
A.Expected cash payments
B.Budgeted sales on account
C.Expected cash collections
D.All of these will appear on a cash budget
25) Morris Company makes one product, and it expects to incur a total of $400,000 in
indirect (overhead) costs during 2012. Production of the product for the year is
expected to be:
Required:
1) Calculate a predetermined overhead rate based on the number of units of product
expected to be made during 2012 .
2) Assuming that direct materials and direct labor costs are $8 and $6, respectively,
determine the total cost per unit using the overhead rate you calculated in part a).
26) 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.
The Hamilton Corporation began operations by issuing 5,000 shares of $10 stated-value
stock at $12. Indicate the effects of this transaction on the financial statements.
27) The following balance sheet information is provided for Northrup Company:
What is the company’s current ratio?
A.0.73
B.1.25
C.1.46
D.2.55
28) The following are features of an internal control system except for:
A.Bonding employees to recover losses through insurance
B.Establishing proper procedures for processing transactions
C.Mandatory retirement at the age of 65
D.Hiring and training competent employees
29) Cost accumulation is used to
A.identify fixed and variable costs
B.identify and estimate opportunity costs
C.determine the cost of a particular cost object
D.set the selling price for a service
30) The recognition of an expense may be accompanied by which of the following?
A.an increase in assets
B.a decrease in liabilities
C.a decrease in revenue
D.an increase in liabilities
31) For 2012, Division A of Peoria Company reported operating assets of $8,500,000,
revenues of $6,800,000, and operating expenses of $5,760,000. The company has
established a target return on investment (ROI) of 14% for the division.
Required:
a) Calculate the 2012 ROI for the division. Did the division achieve its target ROI for
the year?
b) For 2013, Division A managers expect that its operating assets will stay at about the
same level as for 2012 . Variable expenses for 2012 were $4,080,000, and the remaining
expenses were fixed. The managers expect that the contribution margin ratio for 2013
will be the same as for 2012 and that the amount of fixed expenses will not change. To
what level must sales increase in 2013 to achieve the target ROI?
32) Assume the perpetual inventory method is used.
1) Marathon Company purchased merchandise inventory that cost $8,000 under terms
of 2/10, n/30 and FOB shipping point.
2) Marathon paid freight cost of $500 on the merchandise.
3) Marathon made payment to the supplier within the discount period.
4) All of the goods were sold to customers on account for $12,000.
As a result of Marathon’s four transactions above, the net amount of the company’s cash
flow from operating activities is
A.$8,340 outflow
B.$12,000 inflow
C.$8,500 outflow
D.$3,660 inflow
33) On December 31, 2012, the Landon Corporation estimated that 3% of its credit
sales of $215,000 would be uncollectible. Landon used the allowance method of
accounting for uncollectible accounts. On February 15, 2013, Landon wrote off the
account of one of its customers, in the amount of $2,500. On April 7, 2013, the
customer paid the account in full.
Which of the following answers correctly shows the effect of the December 31, 2012
adjusting entry for uncollectible accounts on the financial statements of the Landon
Corporation?
A.Option A
B.Option B
C.Option C
D.Option D
34) Flynn Corp., which is authorized to issue 25,000 shares of no-par common stock,
issued 10,000 shares for $150,000. What effect will this event have on the accounting
equation?
A.Increase assets by $375,000 increase, equity by $375,000
B.Increase assets by $150,000, increase net income by $150,000
C.Increase assets by $150,000, increase equity by $150,000
D.Both B and C
35) Parker Company purchased Eynon Corporation in 2009, recording $80,000 in
goodwill at the time of purchase. In January, 2014, Parker decides that the value of the
goodwill has declined substantially due to local economic and demographic changes.
Parker estimates that the true value of the goodwill should only be $30,000. Which of
the following shows the effect of this situation on the financial statements?
A.Choice A
B.Choice B
C.Choice C
D.Choice D
36) Based on the income statements of the three following retail businesses, which
company has the highest operating leverage?
A.Alpha Company
B.Beta Company
C.Gamma Company
D.They all have same operating leverage
37) Filemyr Corporation, a U.S. business, is a direct competitor of the Hyakawa
Company, a Japanese firm. The two firms not only compete for customers, but also for
investment capital. In 2012, each company spent about $3,000,000 U.S. dollars or the
equivalent on research and development. US GAAP requires the entire amount to be
expensed, while Japan requires its businesses to capitalize R&D and expense it over its
useful life. Assuming the treatment of R&D is the only difference between the two
firms, which of the following is correct?
A.Filemyr will have higher total assets than Hyakawa in 2012
B.Hyakawa will have a lower net income for 2012
C.Filemyr will have a higher debt-to-assets ratio than Hyakawain 2012
D.There will be no differences between the two companies’ financial statements for
2012
38) In order to avoid suboptimization, many companies prefer to evaluate their
investment centers using
A.Return on investment instead of residual income
B.Residual income instead of return on investment
C.Gross margin instead of contribution margin
D.Sales instead of income
39) Mitchell Company was authorized to issue 50,000 shares of common stock. The
company issued 27,000 shares of stock and later purchased 5,000 shares of treasury
stock. The number of outstanding shares of common stock is:
A.45,000
B.28,000
C.22,000
D.17,000
40) Under a periodic system, shipping costs paid for goods received from a supplier
increases the amount of
A.Merchandise Inventory
B.Cost of Goods Sold
C.Transportation-in
D.Transportation-out
41) Which of the following statements accurately describes a fidelity bond?
A.Insurance that the company buys to protect itself from loss due to employee
dishonesty
B.Proper procedures for processing accounting transactions
C.Procedures to provide reasonable assurance that the objectives of a company are
accomplished
D.Guidelines that limit the actions and authority of different levels of management
42) Walden Company offers a six-month warranty on all the merchandise it sells. For
2012, total sales were $528,000. The company estimates that its warranty cost will be
2% of sales. During the year, the company paid $6,100 for repairs provided to
customers.
Required:
Indicate how the company’s financial statements would be affected by
a) the sales during 2012
b) warranty expense
c) payment for repairs
Use the statements model, below. Show dollar amounts of increases and decreases;
enter NA if an item is not affected. In the cash flows column, designate cash flows as
operating activities (OA), investing activities (IA) or financing activities (FA).
43) Jones Company started the accounting period with $500 in supplies. During the
period the company purchased $1,100 of supplies on account. At the end of the
accounting period there were $700 of supplies on hand. Based on this information, the
amount of supplies expense appearing on the end-of-period income statement would be
A.$1,600
B.$1,100
C.$900
D.$400
44) Greenhill Company’s balance sheet as of December 31, 2011 is provided below:
In anticipation of preparing the company’s operating budget for the upcoming period,
the company’s accountant has gathered the following information:
a) December 2011 sales were $110,000. Sales are expected to grow at a rate of 8% per
month. Half of all sales are for cash and half are on account.
b) Inventory purchases are expected to total $50,000 during January and the inventory
account is expected to have a $14,000 balance at January 31, 2012 . All inventory
purchases are on account.
c) Selling and administrative expenses for January, 2012 are budgeted at $30,000
(exclusive of depreciation) plus 10% of sales. S&A expenses are paid in cash.
Depreciation is budgeted at $1,500 for the month.
d) The notes payable will be paid in January, 2012 . The amount due will be $25,250.
The $250 represents January’s interest expense.
e) The company expects to purchase a new machine during January, 2012 at a cost of
$5,000.
Required:
Prepare a budgeted income statement for the month of January 2012 . Use the
traditional income statement format and ignore income taxes.
45) 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.
Ling Corporation paid a $3,000 cash dividend to its owners.
46) On October 1, Snyder Company made a $50,000 sale giving the customer terms of
3/10, n/30. The receivable was collected from the customer on October 8 . What effect
will the collection of cash from the receivable have on the company’s financial
statements?
A.Choice A
B.Choice B
C.Choice C
D.Choice D
47) Ransom Manufacturing Company operates its three production departments within
a single facility. Each department produces its own products and maintains its own
production equipment. Although they share a common facility, each department is
overseen by separate supervisor. Which one of the following costs is a direct cost of
each department?
A.Lease payment on facility
B.Depreciation on the facility
C.Plant manager salary
D.Cost of goods sold
48) Rowena Company spent cash to purchase equipment. As a result of this event,
A.total liabilities increased
B.total assets increased
C.net income increased
D.total assets were unchanged
49) Which of the following would result in the impairment of the auditor’s
independence?
A.The auditor does not have any immediate family members employed by the client
B.The audit fee is based on a percentage of the company’s net income for the year
C.The auditor does not have any investment in the client’s business
D.The auditor serves on Dayton Inc.’s board of directors along with the client’s CEO
50) Select the incorrect decision rule from the following.
A.A 2:1 current ratio is generally preferred over a 1:1 current ratio
B.A 30-day average collection period for accounts receivable is generally preferred
over a 40-day average collection period
C.A 2% dividend yield is generally preferred over a 3% dividend yield
D.A 10% net margin is generally preferred over an 8% net margin
51) East Ridge Company is considering a capital project that delivers a $50,000 annual
net cash flow before tax. The investment will result in annual depreciation expense of
$10,000 over the project’s four-year useful life. Assuming a tax rate of 40%, what
amount of annual after-tax net cash flow will be provided by this project?
A.$40,000
B.$16,000
C.$24,000
D.$34,000
52) Which of the following is not a possible commonly-used term for costs that can be
eliminated by taking a specified course of action?
A.avoidable costs
B.differential costs
C.relevant costs
D.sunk costs
53) Which of the following transactions is an asset source transaction?
A.acquired office supplies by signing a short-term note payable
B.paid cash to purchase land
C.paid cash for operating expenses
D.paid cash dividends to owners
54) How does the amortization of the principal balance affect the amount of interest
expense recorded each succeeding year?
A.Has no effect on interest expense each succeeding year
B.Increases the amount of interest expense each succeeding year
C.Reduces the amount of interest expense each succeeding year
D.The effect depends on the interest rate
55) Borrowing by issuing a note payable is a/an
A.asset source transaction
B.asset use transaction
C.asset exchange transaction
D.claims exchange transaction
56) Great Products Company currently outsources an electrical switch that is a
component in one of its products. The purchase price for the switches is $20 each. The
company is considering making the switches internally at the following projected
annual production costs:
The company expects an annual need for 5,000 switches. If the company makes the
product, it will have to utilize factory space currently being leased to another company
for $1,500 a month. If the company decides to make the parts, total costs will be
A.$30,500 more than if the switches are purchased
B.$27,000 less than if the switches are purchased
C.$20,000 less than if the switches are purchased
D.$10,500 more than if the switches are purchased
57) Indicate whether each of the following statements about treasury stock is true or
false.
1>A purchase of treasury stock is reported in the investing activities section of the
statement of cash flows
2>The Treasury Stock account is classified as a contra equity account
3>The purchase of treasury stock is an asset exchange transaction
4>Corporations sometimes buy back their own stock to prevent hostile takeovers
5>One reason for a corporation to buy its own stock is to make a quick profit on the
reissue of the stock
58) Matching. Select the term from the list of terms that best matches the description
provided.
59) The following is a list of balance sheet accounts (in random order) and balances for
the Community Naval Supply Company. They have been updated as of December 31,
2012 .
Required:
Prepare a classified balance sheet for Community Naval Supply Company at December
31, 2012 .
60) Indicate which of the budgets and pro forma financial statements the given item
appears on by placing X’s in the appropriate column or columns.
Budgeted cash payments for inventory.
61) One of your friends is preparing to open a store that will sell clothing and
fashionable accessories. When you heard that the business would have three or four
employees, you told your friend that she would need to pay careful attention to
separation of duties. She has asked you to explain what duties should be separated and
why separation of duties is important in a business. Write a note to your friend
explaining these issues.
62) What are the characteristics of preferred stock?