Personal liability of the owners for any business debts is an important consideration
when selecting an appropriate form of business organization.
The Securities and Exchange Commission is instrumental in the development of
financial accounting standards.
When a corporation issues capital stock, most state laws require the corporation to
credit Retained Earnings for the par value of shares of stock issued.
The contribution margin approach to preparing reports for managers classifies costs into
fixed and variable costs.
Under the periodic inventory system, no effort is made to keep up-to-date records of
either Inventory or Cost of Goods Sold as transactions occur.
The “cost of finished goods manufactured”, which appears on the bottom of the
Schedule of Finished Goods Manufactured, flows to the balance sheet and is reported as
the ending inventory balance.
When a corporation fails to pay a dividend one year on its common stock, it is said to
be “in arrears.”
The adjusting entry to record estimated income taxes in a profitable period consists of a
debit to Income Tax Payable and a credit to Income Tax Expense.
A standard cost is the per unit cost actually incurred under normal operating conditions.
In a statement of cash flows, the term cash includes both cash and cash equivalents.
Inventory is an example of a quick asset.
Dividends declared are an expense and reduce net income.
The American Institute of Certified Public Accountants has the legal authority over
publicly held corporations to enforce compliance with generally accepted accounting
principles.
A factor that might suggest that a perpetual inventory system is appropriate is that
inventory includes many different kinds of low-cost items.
The Foreign Corrupt Practices Act allows Americans doing business in countries where
bribes are legal to also negotiate bribes.
The Public Company Accounting Oversight Board is responsible for creating and
promoting International Financial Reporting Standards.
If a bond is callable, the call price is usually lower than the face value of the bond.
Sales tax on equipment is not part of the acquisition cost and should not be capitalized.
The current ratio is a measure of liquidity.
A corporation is a legal entity separate from its owners; it may sue and be sued, but it
may not own property in its own name.
Job order costing is appropriate for businesses that produce mass quantities of identical
units using the same amount of direct materials, direct labor, and manufacturing
overhead.
In a classified balance sheet, assets are subdivided into current assets, plant and
equipment and other assets, while liabilities are all classified as current.
Avalon Company paid $4,400 cash for an insurance policy providing three years
protection against fire loss. This transaction could properly be recorded by a $4,400
debit to Unexpired Insurance and a $4,400 credit to Cash.
The unpaid balance column on an amortization table for a note payable shows the
amount the debtor could pay to settle the liability at a particular point in time.
The owners of a corporation are not personally responsible for the debts of the business.
The debt ratio is computed by dividing total liabilities by current assets.
One of the most important requirements of the Foreign Corrupt Practices Act is the
maintenance of an adequate system of internal control procedures.
The Cash account is usually affected by adjusting entries.
With fixed costs, the cost per unit varies with changes in volume.
Companies choose a standard exchange rate to compute the cost buildup in their
domestic currency.
Under the half-year convention, six months’ depreciation is recorded on an asset in the
year of acquisition and in the year of retirement regardless of the month in which the
asset is actually purchased or retired.
Non-value-added activities are those that add to a product’s desirability.
An overhead application rate is a device used to assign overhead costs to units of
product in proportion to some “activity base” that can be traced directly to the
manufactured products.
ROE – return on equity – is measured by dividing net income by average number of
shares outstanding.
The purpose of accrual accounting is to measure the amounts of cash received and paid
during the period.
In comparison with a financial statement prepared in conformity with generally
accepted accounting principles, a managerial accounting report is more likely to:
A. Be used by decision makers outside of the business organization.
B. Focus upon the operating results of the most recently completed accounting period.
C. View the entire organization as the reporting entity.
D. Be tailored to the specific needs of an individual decision maker.
Which statement is true regarding a standard cost system?
A. Both actual and standard costs are used.
B. Only standard costs are used.
C. If variances occur, then something negative in the operations has occurred.
D. Standards are used only when actual amounts are not available.
On December 1, Year 1, Bradley Corporation incurs a 15-year $200,000 mortgage
liability in conjunction with the acquisition of an office building. This mortgage is
payable in monthly installments of $2,400, which include interest computed at the rate
of 12% per year. The first monthly payment is made on December 31, Year 1.
Refer to the information above. The total liability related to this mortgage reported in
Bradley’s balance sheet at December 31, Year 1, is:
A. $432,100.
B. $199,600.
C. $194,923.
D. $200,000.
Which of the following factors would suggest the use of a perpetual inventory system?
A. A small company.
B. Inventory items with a high per-unit cost.
C. A desire to minimize record-keeping requirements.
D. Only annual reporting is required.
The cost of salaries paid to employees who work in a factory maintaining the heating
system is considered:
A. Direct labor.
B. Indirect materials.
C. Factory overhead.
D. General and administrative costs.
The realization principle indicates that revenue usually should be recognized and
recorded in the accounting records:
A. When goods are sold or services are rendered to customers.
B. When cash is collected from customers.
C. At the end of the accounting period.
D. Only when the revenue can be matched by an equal dollar amount of expenses.
The financial ratio intended to measure the effectiveness with which management has
utilized the resources of the business, regardless of how these resources are financed, is:
A. Gross profit rate.
B. Current ratio.
C. Return on assets.
D. Return on equity.
Marks Corporation has total stockholders’ equity of $7,400,000. The company has
outstanding 300,000 shares of $1 par value common stock and 20,000 shares of 8%
preferred stock, $100 par value. (No dividends are in arrears.) The book value per share
of common stock is:
A. $9.00.
B. $24.06.
C. $24.66.
D. $18.00.
Income Summary appears on which financial statement:
A. Income statement.
B. Balance sheet.
C. Retained Earnings statement.
D. Income summary does not appear on any financial statement.
Evans Products uses a process costing system with two processing departments: the
Mixing Department and the Finishing Department. In June, unit costs incurred by the
Mixing Department amounted to $4.00 per unit. Unit costs transferred to the finished
goods warehouse during the month amounted to $22. Work-in-process inventories are
reduced to zero each month.
Refer to the information above. The entry to record the sale of 3,500 units in June
would include:
A. A debit to Work-in-Process Inventory, of $77,000.
B. A debit to Finished Goods Inventory of $77,000.
C. A debit to Cost of Goods Sold of $77,000.
D. A credit to Cost of Goods Sold of $77,000.
The following information is available:
Calculate the gross profit:
A. $0.
B. $1,500.
C. $450.
D. $900.
In the short run, the greatest increase in profitability will result from increasing sales in
those profit centers with the:
A. Highest performance margins.
B. Lowest traceable fixed costs.
C. Highest contribution margin ratios.
D. Highest responsibility margins.
When products held in inventory are sold:
A. Cost of Goods Sold is credited.
B. Work in Process Inventory is credited.
C. Finished Goods Inventory is credited.
D. Finished Goods Inventory is debited.
The following information is available about the August transactions of the Helpful
Tool Company:
The product costs to be deducted from revenue in August amount to:
A. $493,000.
B. $737,000.
C. $718,000.
D. $739,000.
Accounting terminology
Listed below are nine technical accounting terms emphasized in this chapter.
Fair value accounting
Factoring
Direct write-off
Financial asset
Cash equivalent
Bank reconciliation
Allowance for doubtful accounts
Accounts receivable turnover
Uncollectible accounts expense
Each of the following statements may (or may not) describe one of these technical
terms. In the space provided below each statement, indicate the accounting term
described, or answer “None” if the statement does not correctly describe any of the
terms.
______ a. A transaction in which a business sells its accounts receivables to a financial
institution.
______ b. An estimate of the portion of year-end accounts receivable that ultimately
will turn out to be uncollectible.
______ c. Schedule explaining any differences between cash balances appearing in the
accounting records and in the monthly bank statement.
______ d. Balance sheet valuation standard applicable to investments in marketable
securities.
______ e. Cash and assets convertible directly into known amounts of cash, such as
marketable securities and receivables.
______ f. A ratio, computed by dividing 365 days by average receivables, that indicates
the liquidity of the receivables.
______ g. Method of accounting for uncollectible receivables that fails to match
revenues and expenses.
All of the following are considered cash equivalents except:
A. Marketable securities.
B. Money market funds.
C. Commercial paper.
D. Treasury bills.
If the unit sales price is $12, variable costs are $6 per unit and fixed costs are $26,000
what is the contribution margin ratio per unit?
A. 40%.
B. 50%.
C. 60%.
D. 70%.
On January 1, 2015, Alice Corporation had 20,000 shares of $6 par value common
stock and 10,000 shares of 8%, $100 par value convertible preferred stock outstanding.
The preferred shares carried a 3 for 1 conversion privilege. As of December 31, 2015,
none of the preferred shares had been converted. What number of shares must Alice use
in computing diluted earnings per share at December 31, 2015?
A. 10,000.
B. 20,000.
C. 30,000.
D. 50,000.
The operating cycle of a company:
A. Must be less than one year.
B. Is usually greater than one year.
C. Is the time it takes to purchase inventory, sell inventory, and collect cash from the
sale.
D. Is the time it takes to acquire a loan, pay the interest, and retire the loan by paying
the creditor in full.
In making a decision, management will look thoroughly at both relevant and irrelevant
data.
The Delux Company purchased and used 2,900 yards of material in its manufacturing
process. The actual cost of the materials was $2.20 per yard. Standard materials and
costs were 2,700 yards at $2.00 per yard.
Required:
(a) Compute the materials quantity variance.
(b) Compute the materials price variance.
(c) Compute the total material variance.
Capri Boat Corporation uses a job order cost system and applies overhead based on a
percentage of direct labor cost. Cost flows through the Work in Process Inventory
account during March are given below:
Only Job #007 was still in process at the end of March and this job had been charged
with $40,000 in direct materials cost.
Refer to the information above. The journal entry which accounts for the $300,000
transferred out of Work in Process account includes a debit of $300,000 to:
A. Finished Goods.
B. Cost of Goods Sold.
C. Accounts Receivable.
D. Sales.
Soriano Company had net sales of $300,000 for the month (after returns and allowances
of $1,500 and sales discounts of $3,250). Beginning inventory for the month was
$60,000; purchases for the month were $175,000; and gross profit was 43%.
Refer to the information above. What was the gross profit for the month?
A. $129,000.
B. $171,000.
C. $235,000.
D. $304,750.
An Unrealized Holding Gain (or Loss) on Investments classified as “available-for-sale”
securities:
A. Is reported in the asset section of the balance sheet, as an adjustment to the carrying
value of the marketable securities.
B. Is reported in the stockholders’ equity section of the balance sheet, as either an
increase or decrease in total stockholders’ equity.
C. Appears in the current period income statement, combined with realized gains and
losses from sales of securities.
D. Indicates the amount of cash a company would receive if the marketable securities
were sold as of the balance sheet date.
On October 1 of the current year, Molloy Corporation prepared a cash budget for
October, November, and December. All of Molloy’s sales are made on account. The
following information was used in preparing estimated cash collections:
Approximately 60% of all sales are collected in the month of the sale, 30% is collected
in the following month, and 10% is collected in the month thereafter.
Refer to the information above. Budgeted collections from customers in December
total:
A. $55,000.
B. $60,000.
C. $64,000.
D. $59,000.
The management of Salem Corporation is considering the purchase of equipment
costing $109,000 which has an estimated life of 3 years and no salvage value. The net
after tax cash flow from the project for each of the three years is expected to be
$45,000. The company’s cost of capital is 10%. Compute the net present value of the
equipment. (Present value of $1 due in three years, discounted at 10%, is 0.751; present
value of $1 received annually for three years, discounted at 10%, is 2.487.)
A. ($3,616).
B. $2,548.
C. $2,915.
D. ($3,213).
The objectives of an accounting system include all of the following, except:
A. Interpret and record the effects of business transactions.
B. Classify the effects of transactions to facilitate the preparation of reports.
C. Summarize and communicate information to decision makers.
D. Dictate the specific types of business transactions that the enterprise may engage in.
Neville Company is considering an investment of $380,000 in heavy equipment which
will enable the company to be more competitive in the construction industry. The useful
service life of the equipment is estimated to be 10 years, with $30,000 salvage value.
Straight-line depreciation is used. The company estimates that net income will increase
by $41,000 per year as a result of the company’s ability to handle a wider range of
projects with the new equipment.
Refer to the information above. The payback period for this investment is
approximately:
A. 4.7 years.
B. 9 years.
C. 8.75 years.
D. 5 years.
Which of the following would usually be the greatest amount?
A. The number of shares authorized.
B. The number of shares issued.
C. The number of shares outstanding.
D. The number of shares of Treasury Stock.
Effects of depreciation on income and cash flows
In its financial statements, Flysafe Airlines has for many years depreciated its aircraft
over an estimated useful life of 12 years. In preparing this year’s financial statements,
management decided to revise the estimate from 12 years to 15. Briefly explain how
this revision in estimated life is likely to affect this year’s:
(a) Net income.
(b) Net cash flow.
(c) Taxable income.
Which of the following is not a characteristic of an estimated liability?
A. The liability is known to exist.
B. The precise dollar amount cannot be determined until a later date.
C. The liability should not be recorded in the accounting records until future events
have determined the exact amount.
D. The liability stems from past transactions.
From an accounting point of view, one implication of an effective just-in-time inventory
system is that:
A. Sales transactions must be recorded using on-line point-of-sale terminals.
B. Inventories are less material in dollar amount and alternative inventory flow
assumptions will produce more similar results.
C. The cost of goods sold is significantly reduced.
D. Purchases of merchandise are recorded as cash payments are made, and sales
transactions are recorded as cash is received.
Which of the following would not be a proper application of the concept of materiality
by Millridge Corporation?
A. Transactions involving small dollar amounts are not recorded in Millridge’s
accounting records.
B. Estimates of supplies on hand are used to determine the supplies expense for the
period.
C. On a monthly basis, utility bills are expensed in the month paid, rather than in the
month in which services are used.
D. Immaterial items are ignored in making end-of-period adjusting entries.
A 2-for-1 stock split will have what effect upon the following items?
A. Option A
B. Option B
C. Option C
D. Option D
Explain the importance of incentive systems for motivating performance.
Return on average investment vs. discounting cash flows
The computation of return on average investment ignores one characteristic of the
earnings stream which is considered in discounting cash flows. What is this
characteristic? Why is it important?
How is the balanced scorecard used to identify, evaluate, and reward business
performance?
Seeking creative solutions to problems
Explain why it would be irresponsible and short-sighted for managers to base decisions
entirely on revenue and cost figures.
Schedule of cost of finished goods manufactured
The accounting records of Village Cleaning Co. include the following information
about the company’s manufacturing costs and inventories in 2015:
Complete the following Schedule of Cost of Finished Goods Manufactured for the year
ended December 31, 2015:
Financial and management accounting information
Explain one way in which the characteristics of financial and management accounting
information differ.
The retained earnings account of Company XYZ has a balance of $350,000 at the end
of 2014. At the end of 2015 the following information is available.
What is the amount of retained earnings at the end of 2015?