1) A common rule of thumb is that a company’s acid-test ratio should have a value near
or higher than 1 to conclude that a company is unlikely to face near-term liquidity
problems.
2) Since the process cost summary describes the activities of a production department
for a specified reporting period, it does not present information about any costs incurred
in prior periods.
3) The FASB recommends that the operating section of the statement of cash flows be
reported using the direct method.
4) A favorable direct materials price variance might lead to an unfavorable direct
materials quantity variance because the company purchased inferior materials.
5) Operating leases are long-term or noncancelable leases in which the lessor transfers
substantially all the risks and rewards of ownership to the lessee.
6) Service firms, unlike manufacturing firms, should only use actual costs when
determining a selling price for their services.
7) A company that uses the percent of sales to account for its bad debts had credit sales
of $740,000 in Year 1, including a $720 sale to Marshall Fresh. On December 31, Year
1, the company estimated its bad debts at 1.5% of its credit sales. On June 1, Year 2, the
company wrote off, as uncollectible, the $720 account of Marshall Fresh. On December
21, Year 2, Marshall Fresh unexpectedly paid his account in full. Prepare the necessary
journal entries:
(a) On December 31, Year 1, to reflect the estimate of bad debts expense.
(b) On June 1, Year 2, to write off the bad debt.
(c) On December 21, Year 2, to record the unexpected collection.
8) Yamada Company applies factory overhead to its production departments on the
basis of 90% of direct labor costs. In the Assembly Department, Yamada had $125,000
of direct labor cost, and in the Finishing Department, Yamada had $35,000 of direct
labor cost. The entry to apply overhead to these production departments is:
A.Debit Factory Overhead—Assembly $112,500; debit Factory Overhead—Finishing
$31,500; credit Work in Process Inventory $144,000.
B.Debit Factory Overhead $144,000; credit Work in Process Inventory—Assembly
$112,500; credit Work in Process—Finishing $31,500.
C.Debit Factory Overhead $144,000; credit Factory Payroll $144,000.
D.Debit Work in Process Inventory—Assembly $112,500; debit Work in Process
Inventory—Finishing $31,500; credit Factory Overhead $144,000.
E.Debit Factory Payroll $144,000; credit Cash $144,000.
9) The dividend yield is computed by dividing:
A.Annual cash dividends per share by earnings per share.
B.Earnings per share by cash dividends per share.
C.Annual cash dividends per share by the market value per share.
D.Market price per share by cash dividends per share.
E.Cash dividends per share by retained earnings.
10) Equivalent units of production are equal to:
A.The number of units that could have been started and completed given the costs
incurred during the period.
B.The number of finished units actually produced during a period.
C.The number of units started into the process during a period.
D.The number of units still in process at the end of a period.
E.Physical units that were started and completed during a period.
11) Match the followingterms with the definitions.
1)Controllable costs
2)Profit center
3)Indirect expenses
4)Direct expenses
5)Joint cost
6)Cost center
7)Investment center
A. Costs readily traced to a specific department because they are incurred for the sole
benefit of that department.
B. A department that generates revenues and incurs costs.
C. Costs for which a manager has the power to determine or at least significantly affect.
D. Costs that are incurred for the joint benefit of more than one department and cannot
be readily traced to only one department.
E. A department or unit that incurs costs without directly generating revenues.
F. Costs incurred to produce or purchase two or more products at the same time.
G. A department or unit that generates revenues and incurs costs, in which the manager
is also responsible for investments made in operating assets.
12) A plan that reports the units or costs of merchandise to be purchased by a
merchandising company during the budget period is called a:
A.Selling expenses budget.
B.Merchandise purchases budget.
C.Sales budget.
D.Cash budget.
E.Capital expenditures budget.
13) Match the following terms with the appropriate definitions.
a. Sales journal
b. Controlling account
c. Accounts receivable ledger
d. Cash disbursements journal
e. Cash receipts journal
f. Schedule of accounts payable
g. Segment return on assets
h. Columnar journal
i. Special journal
j. Purchases journal
____ 1> The special journal used to record all receipts of cash.
____ 2> A journal with more than one column for recording data.
____ 3> A record of the separate accounts of each credit customer that is controlled by
a general ledger account.
____ 4> A journal used to record all purchases on credit.
____ 5> A journal used to record sales of merchandise on credit.
____ 6> A measure of the profitability of a segment, calculated as segment operating
income divided by segment average assets.
____ 7> A special journal used to record all payments of cash.
____ 8> Any journal used for recording and posting transactions of a similar type.
____ 9> A general ledger account, the balance of which, after posting, equals the sum
of the balances of the accounts in its related subsidiary ledger.
____10> A list of each customer from the accounts payable ledger with their balances
and the total.
14) If overapplied or underapplied overhead is material, it should be disposed of by
allocating it to:
A.Cost of goods sold and finished goods inventory.
B.Finished goods inventory and work in process inventory.
C.work in process inventory, finished goods inventory, and cost of goods sold.
D.work in process inventory.
E.Raw materials inventory, work in process inventory, and finished goods inventory.
15) Which of the following budgets is not a budget that a manufacturer would include
in its master budget?
A.Sales budget.
B.Direct materials budget.
C.Production budget.
D.Merchandise purchases budget.
E.Cash budget.
16) Using the information below, calculate gross profit for the period.
A.$774,000.
B.$769,000.
C.$530,000.
D.$535,000.
E.$448,000.
17) Western Company is preparing a cash budget for June. The company has $12,000
cash at the beginning of June and anticipates $30,000 in cash receipts and $34,500 in
cash disbursements during June. Western Company has an agreement with its bank to
maintain a minimum cash balance of $10,000. As of May 31, the company owes
$15,000 to the bank. To maintain the $10,000 required balance, during June the
company must:
A.Borrow $4,500.
B.Borrow $2,500.
C.Borrow $10,000.
D.Repay $7,500.
E.Repay $2,500.
18) Trago Company manufactures a single product and has a JIT policy that ending
inventory must equal 5% of the next month’s sales. It estimates that May’s ending
inventory will consist of 14,000 units. June and July sales are estimated to be 280,000
and 290,000 units, respectively. Compute the number of units to be produced that
would appear on the company’s production budget for the month of June.
A.290,000.
B.294,500.
C.280,500.
D.280,000.
E.266,000.
19) Identify each of the following business activities 1 through 6 into the appropriate
category a, b, and c.
a. Operating
b. Investing
c. Financing
____ 1> Paid utilities expenses.
____ 2> Withdrawal of funds by owners.
____ 3> Purchase of land.
____ 4>Sale of used equipment.
____ 5> Borrowed money from a bank on a long-term note.
____ 6> Paid employee wages.
____ 7> Received investment from owner.
____ 8> Paid an amount due on a long-term bank loan.
20) In preparing Marjorie Company’s statement of cash flows for the most recent year,
the following information is available:
Net cash flows from investing activities for the year were:
A.$438,000 of net cash used.
B.$438,000 of net cash provided.
C.$264,000 of net cash used.
D.$351,000 of net cash used.
E.$264,000 of net cash provided.
21) Justin Company’s budget includes the following credit sales for the current year:
September, $25,000; October, $36,000; November, $30,000; December, $32,000.
Experience has shown that payment for the credit sales is received as follows: 15% in
the month of sale, 60% in the first month after sale, 20% in the second month after sale,
and 5% is uncollectible. How much cash can Justin Company expect to collect in
November as a result of current and past credit sales?
A.$19,700.
B.$28,500.
C.$30,000.
D.$31,100.
E.$33,900.
22) Which of the following is not a step in creating operating department income
statements?
A.Prepare the departmental income statements.
B.Accumulate revenues and direct expenses by department.
C.Allocate indirect expenses across departments.
D.Allocate service department expenses to operating departments.
E.Eliminate the uncontrollable costs for each department.
23) A quantity of inventory that provides protection against lost sales caused by
unfulfilled demands from customers is called:
A.Just-in-time inventory.
B.Budgeted stock.
C.Continuous inventory.
D.Capital stock.
E.Safety stock.
24) A company purchased new furniture at a cost of $16,000 on January 1. The
furniture is estimated to have a useful life of 6 years and a $1,000 salvage value. The
company uses the straight-line method of depreciation. What is the book value of the
furniture on December 31 of the first year?
A.$16,000
B.$15,000
C.$2,500
D.$13,500
E.$13,333
25) Within an organizational structure, the person most likely to be evaluated in terms
of controllable costs would be:
A.A payroll clerk.
B.A cost center manager.
C.A production line worker.
D.A maintenance worker.
E.A sales representative.
26) Which of the following is not a result of following a well-designed budgeting
process?
A.Improved decision-making processes.
B.Improved performance evaluations.
C.Improved coordination of business activities.
D.Assurance of future profits.
E.Improved communication of management’s action plans.
27) Gala Enterprises reports the following information regarding the production on one
of its products for the month. Compute the direct labor cost variance, the direct labor
rate variance, the direct labor efficiency variance and identify each as either favorable
or unfavorable.
28) A company established a petty cash fund in April of the current year and
experienced the following transactions affecting the fund during April. Prepare journal
entries to establish the fund on April 1, to replenish it on April 25, and to record the
increase in the fund on April 25
29) Differences between actual costs and standard costs are known as
_______________. These differences may be subdivided into ______________ and
_________________.
30) The depreciation method that uses a depreciation rate that is a multiple of the
straight-line rate and applies it to an asset’s beginning-of-period book value is
____________________.
31) Under the alternative method for recording prepaid expenses, which is the correct
set of journal entries?