The profit margin is calculated as the ratio of operating income to:
a. invested assets.
b. investment turnover.
c. sales.
d. residual income.
Separation of businesses into more manageable operating units is termed centralization.
a. True
b. False
The management of Retz Corporation is considering the purchase of a new machine
costing $500,000. The company’s desired rate of return is 10%. The present value
factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826,
0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the
following data in determining the acceptability in this situation:
YearIncome from OperationsNet Cash Flow
1$100,000$200,000
2 80,000 170,000
3 50,000 130,000
4 10,000 80,000
5 10,000 80,000
The cash payback period for this investment is:
a. 5 years.
b. 3 years.
c. 2 years.
d. 4 years.
A machine was purchased for $35,500, having a useful life of 10 years, and a residual
value of $6,000. Compute the annual depreciation expense using the straightline
method.
a. $3,550
b. $4,150
c. $5,800
d. $2,950
The following is a list of various costs of producing sweatshirts. Classify each cost as
either a variable, fixed, or mixed cost for units produced and sold.
(a)Electricity costs of $0.025 per kilowatthour
(b)Warehouse rent of $6,000 per month plus $0.50 per square foot of storage used
(c)Thread
(d)Zip used in sweatshirts
(e)Janitorial costs of $2,000 per month
(f)Advertising costs of $10,000 per month
(g)Plant manager salary
(h)Color dyes for producing different colors of sweatshirts
(i)Salary of the production supervisor
(j)Straightline depreciation on sewing machines
(k)Patterns for different designs. Patterns typically last many years before being
replaced
(l)Maintenance costs for the company’s sewing machine. The cost is $2,000 per year
plus $0.001 for each machine hour of use
(m)Property taxes on factory, building, and equipment
(n)Cotton and polyester cloth
(o)Hourly wages of sewing machine operators
Under the indirect method for preparing the statement of cash flows, decreases in
current assets are _____ net income in the cash flows from operating activities section.
a. subtracted from
b. added to
c. not used in calculating
d. cannot tell from the information given
The following information is available for Morgan Corporation:
2016
Market price per share of common stock$25.00
Earnings per share on common stock1.25
Which of the following statements is correct?
a. The priceearnings ratio is 20 and a share of common stock was selling for 20 times
the amount of earnings per share at the end of 2016.
b. The priceearnings ratio is 5.0% and a share of common stock was selling for 5.0%
more than the amount of earnings per share at the end of 2016.
c. The market price per share and the earnings per share are not statistically related to
each other.
d. The priceearnings ratio is 10 and a share of common stock was selling for 125 times
the amount of earnings per share at the end of 2016.
Red Co. uses the product cost concept of applying the costplus approach to product
pricing. Given below is cost information for the production and sale of 40,000 units of
its sole product. Red Co. desires a profit equal to a 15% rate of return on invested assets
of $1,200,000.
Fixed factory overhead cost$80,000.00
Fixed selling and administrative costs140,000.00
Variable direct materials cost per unit7.00
Variable direct labor cost per unit11.00
Variable factory overhead cost per unit3.00
Variable selling and administrative cost per unit2.00
The unit selling price for the company’s product is:
a. $28.
b. $37.
c. $42.
d. $33.
The point where the profit line intersects the left vertical axis on the profitvolume graph
represents:
a. the maximum possible operating loss.
b. the maximum possible operating income.
c. the total fixed costs.
d. the breakeven point.
On January 1, a company made a sale of $87,500, on credit. If the credit terms were
2/10, n/30, what would be the amount of the sales discount be if the payment is
received on January 9?
a. $26,250
b. $8,750
c. $10,000
d. $1750
When standard costs are used in applying the costplus approach to product pricing, the
standards should be based upon normal levels of performance.
a. True
b. False
Efficient Corporation uses a standard cost system. The following information was
provided for the period that just ended:
Actual price per gallon$11.75
Actual gallons of material used5,000
Actual hourly labor rate$17.00
Actual hours of production24,300
Standard price per gallon$12.00
Standard gallons per completed unit1/2
Standard hourly labor rate$12.00
Standard time per completed unit3 hrs.
Units completed during the period9,000
The direct materials cost variance is:
a. $1,125 favorable.
b. $4,750 unfavorable.
c. $6,000 unfavorable.
d. $7,125 unfavorable.
The portion of a corporation’s net income that is paid out to the stockholders, instead of
being retained in the business, is referred to as:
a. gross income.
b. earnings before interest and taxes.
c. interest expense.
d. dividends.
The cost of goods sold is subtracted from sales to arrive at _____.
a. net sales
b. Fees earned
c. operating income
d. gross profit
For EFG Co., the transaction “payment to creditors” would:
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. decrease stockholders’ equity.
In preparing a bank reconciliation, the amount of deposits in transit is deducted from
the cash balance per books.
a. True
b. False
Inventories of merchandising and manufacturing businesses are reported as current
assets on the balance sheet.
a. True
b. False
The variable cost per unit remains constant with changes in the level of activity.
a. True
b. False
Which transfer price approach is used when the transfer price is set at the amount sold
to outside buyers?
a. Market price
b. Cost price
c. Negotiated price
d. Variable price
A decentralized business organization is one in which all major planning and operating
decisions are made by top management.
a. True
b. False
Which of the following is most likely a period cost?
a. Depreciation on factory lunchroom furniture
b. Salary of telephone receptionist in the sales office
c. Salary of a security guard for the factory parking lot
d. Computer chips used by a computer manufacturer
If a business has several bank accounts, it will have a separate record for each of them.
a. True
b. False
For February, sales revenue is $300,000; sales commissions are 5% of sales; the sales
manager’s salary is $40,000; advertising expenses are $13,000; shipping expenses total
1% of sales; and miscellaneous selling expenses are $1,100 plus 1/2 of 1% of sales.
Total selling expenses for the month of February are:
a. $71,000.
b. $55,000.
c. $58,600.
d. $73,600.
A series of unequal cash flows at fixed intervals is termed an annuity.
a. True
b. False
“Market,” as used in the phrase “lower of cost or market” for valuing inventory, refers
to the price at which the inventory is being offered for sale by its owner.
a. True
b. False
Obligations that depend on past events and that are based on future transactions are
contingent liabilities.
a. True
b. False
The contribution margin ratio is the same as the variable cost ratio.
a. True
b. False
Which of the following is the effect of purchasing merchandise for cash on a company’s
liquidity and profitability metrics?
a. There is no effect on liquidity and profitability.
b. There is an increase in liquidity, while profitability remains unchanged.
c. There is an increase in profitability, while liquidity remains unchanged.
d. There is an increase in both liquidity and profitability.
The sale of a finished good on account would:
a. decrease Cost of Goods Sold and increase Finished Goods.
b. increase Cost of Goods Sold and decrease Finished Goods; increase Accounts
Receivable and increase Sales.
c. increase Sales Expense and decrease Finished Goods; decrease Cash and decrease
Accounts Receivable.
d. increase WorkinProcess and decrease Finished Goods; increase Accounts Receivable
and increase Sales.
The major shortcoming of using operating income as an investment center performance
measure is that, it ignores the amount of assets invested in each center.
a. True
b. False
A change in fixed costs as a result of increase in yearly insurance premium will
decrease the breakeven point.
a. True
b. False
Job order cost systems can be used to compare unit costs of similar jobs to determine if
costs are staying within expected ranges.
a. True
b. False