The account Discount on Bonds Payable has a debit balance and should appear on the
balance sheet as an asset; the account Premium on Bonds Payable has a credit balance
and should be classified as a liability.
The present value of an annuity is calculated by multiplying the periodic cash flows by
the discounted factor from the future value of an annuity table.
The most common types of payroll deductions are taxes, insurance premiums,
employee savings, and union dues.
It is an acceptable accounting practice to treat an expenditure that is not material in
dollar amount as an expense of the current period even though the expenditure may
benefit several periods.
Wages are an expense to the employer when earned, rather than when paid.
Managerial accounting information is designed primarily to assist investors and
creditors in deciding how to allocate scarce resources.
If gross profit and cost of goods sold are added together, they should equal sales.
A sunk cost is the benefit that could have been obtained by pursuing an alternate course
of action.
“I was just following orders” is an acceptable defense if you committed an unethical
action during an audit.
In a production cost report, the units in beginning Work in Process are always expressed
as equivalent units.
The purchase of equipment for the manufacturing of inventory belongs in the operating
activities section of the statement of cash flows.
The erroneous recording of a revenue expenditure as a capital expenditure will cause an
overstatement of net income for the period.
The level of production plays an important role in determining cost standards.
Non-value-added activities do not directly increase the worth of a product to a
customer.
An amortization table for a note payable shows decreasing amounts of interest and an
increasing amount of unpaid balance each period.
One characteristic common to all types of costs is the tendency to rise and fall in direct
proportion to changes in the volume of business output.
Comprehensive income may be presented in a statement with net income, in a separate
statement, or as part of the notes to the financial statements.
Depreciation expense on equipment is considered a cash expense since the company
must pay cash for the equipment.
The write-down of an impaired asset is treated as a cash outflow from investing
activities.
A net profit results from having more revenues than liabilities.
The lower the discount rate of an investment, the lower the present value of the
investment.
Both the direct method and the indirect method of computing net cash flow from
operating activities convert accrual-based income statement amounts into cash flows.
Publicly owned companies are typically managed by their stockholders.
Shareholders report and pay income tax on dividends received from a corporation.
If actual overhead costs are less than the amount of overhead applied to production, this
indicates that manufacturing overhead is over-applied.
Career opportunities in accounting exist in public accounting, management accounting,
governmental accounting and accounting education.
The par value of a stock is the minimum amount of capital of the corporation existing
for the protection of creditors.
Entries made in the general journal after preparing a bank reconciliation are called
closing entries.
Standard cost systems are generally compatible with job cost systems or with process
cost systems.
In its simplest form an account has only three elements: a title, a left side (called debit),
and a right side (called credit).
Closing entries do not affect the cash account.
The amount of cash dividends paid to common stockholders is part of the computation
of earnings per share.
Dividend revenue and interest revenue are reported in the income statement as a
component of a company’s net income.
Today, the most authoritative source of generally accepted accounting principles is the
American Accounting Association.
Companies with perpetual inventories need not take physical inventory counts because
inventory amounts are perpetually available.
An activity-based costing system does not help managers make better product pricing
decisions.
Value-added activities add to a product’s desirability from the manufacturer’s
perspective.
Management accounting information is oriented toward the future while financial
accounting information is historical in nature.
When a small (under 10%) stock dividend is declared, the market value of the stock is
transferred from Retained Earnings into other stockholder equity accounts.
Prepaid expenses are assets that should appear on the balance sheet.
Interest payable on a loan becomes a liability:
A. When the note payable is issued.
B. As it accrues.
C. At the maturity date.
D. When the borrowed money is received.
A note that does not include an interest rate should be recorded at:
A. Its face amount if the difference between face and present value is material.
B. Its present value if the difference between face and present value is material.
C. Its face amount at all times.
D. Its present value at all times.
Watins, Inc.’s 2015 income statement reported net sales of $5,000,000. Watin’s average
accounts receivable during 2015 amounted to $450,000. Using 360 days to a year,
Watin’s:
A. Accounts receivable turnover rate is approximately 13.8 times.
B. Accounts receivable turnover rate is approximately 1.25 times.
C. Average number of days to collect an account receivable is 32 days.
D. Accounts receivable turnover rate is approximately 2 times.
The Cash account in the ledger of Clear Windows shows a balance of $12,596 at
September 30. The bank statement, however, shows a balance of $16,253 at the same
date. The only reconciling items consist of a bank service charge of $16, a large number
of outstanding checks totaling $6,740, and a deposit in transit.
Refer to the information above. What is the amount of the deposits in transit?
A. $5,856.
B. $9,513.
C. $3,067.
D. $3,083.
At the beginning of the current year, Elite Corporation had 200,000 shares of $1 par
common stock outstanding and had retained earnings of $4,800,000. During the year,
the company earned $1,675,000, declared a 10% stock dividend when the price of stock
was $28 per share, and paid a year-end cash dividend of $3 per share. (The cash
dividend was paid after the stock dividend had been distributed.) What was Elite
Corporation’s retained earnings at the end of the year?
A. $5,915,000.
B. $5,255,000.
C. $5,311,000.
D. $3,580,000.
Accelerated depreciation methods are used primarily in:
A. Income tax returns.
B. The financial statements of small businesses.
C. The financial statements of publicly owned corporations.
D. Companies with computer-based accounting systems.
As of December 31, 2015, Chippewa Company has $26,440 cash in its checking
account, as well as several other items listed below:
What amount should be shown in Chippewa’s December 31, 2015, balance sheet as
“Cash and cash equivalents”?
A. $30,040.
B. $139,640.
C. $209,640.
D. $59,640.
On January 1, 2015, Aili Corporation issued 60,000 shares of its total 200,000
authorized shares of $4 par value common stock for $18 per share. On December 31,
2015, Aili Corporation’s common stock is trading at $32 per share. Assume Aili
Corporation decides to issue an additional 10,000 shares of its common stock on
December 31, 2015. How will the above increase in value affect Aili?
A. Aili can issue the 10,000 shares at a higher price than the initial 60,000 shares.
B. Aili can sell the 10,000 shares for $32 each, as well as collect an additional $14 per
share for each of the 60,000 shares sold initially.
C. Aili reports a gain of $14 per share on all stock sold during the year.
D. Paid-in capital at the end of 2015 will be $2,240,000 (i.e., 70,000 shares times $32
per share).
Bartner Furniture, Inc. purchased inventory at $1,200 list price and the terms were 3/10,
n/30. Bartner paid the full invoice price on the 10th day, what amount of cash did
Bartner pay to settle the account?
A. $1,176.
B. $1,236.
C. $1,164.
D. $1,200.
At the end of the current year, the owners’ equity in Durante Co. is $360,000. During
the year, the assets of the business had increased by $68,000 and the liabilities had
increased by $118,000. Owners’ equity at the beginning of the year must have been:
A. $410,000.
B. $310,000.
C. $546,000.
D. $174,000.
The document that provides information for the cost of goods manufactured is:
A. The job cost sheet.
B. Time cards.
C. Material requisition.
D. Payroll check.
Gamma Company adjusts its accounts at the end of each month. The following
information has been assembled in order to prepare the required adjusting entries at
December 31:
(1) A one-year bank loan of $720,000 at an annual interest rate of 6% had been obtained
on December 1.
(2) The company’s pays all employees up-to-date each Friday. Since December 31 fell
on Tuesday, there was a liability to employees at December 31 for two day’s pay.
Employees earn a total of $12,800 per week.
(3) On December 1, rent on the office building had been paid for three months. The
monthly rent is $7,000.
(4) Depreciation of office equipment is based on an estimated useful life of five years.
The balance in the Office Equipment account is $12,360; no change has occurred in the
account during the year.
(5) All fees totaling $19,800 were earned during the month for clients who had paid in
advance.
Refer to the information above. How much depreciation expense should be recorded for
December?
A. $206.
B. $472.
C. $12,360.
D. $9,800.
The reason that revenue is recorded by a credit entry to a revenue account is:
A. That revenue always involves a debit to the Cash account.
B. Explained by the realization principle.
C. Explained by the matching principle.
D. That revenue increases owners’ equity.
Refer to the information above. What are the equivalent units for materials?
A. 92,000 units.
B. 60,000 units.
C. 160,000 units.
D. 110,000 units.
A restriction of retained earnings:
A. Reduces the dollar amount of retained earnings shown in the balance sheet.
B. Appears in the statement of retained earnings as a reduction of ending retained
earnings.
C. Appears in the liability section of the balance sheet.
D. Limits the dollar amount of dividends a corporation may declare.
If a transaction causes an asset account to decrease, which of the following related
effects may occur?
A. An increase of equal amount in an owners’ equity account.
B. An increase in a liability account.
C. An increase of equal amount in another asset account.
D. An increase in the combined total of liabilities and owners’ equity.
Which of the following is not considered a cash equivalent?
A. U.S. Treasury bills.
B. Money market funds.
C. Accounts receivable.
D. High-grade commercial paper.
On April 30, 2014, Tilton Products purchased machinery for $88,000. The useful life of
this machinery is estimated at 8 years, with an $8,000 residual value.
Refer to the information above. Assume that in its financial statements, Tilton Products
uses straight-line depreciation and rounds depreciation for fractional years to the nearest
month. Depreciation expense recognized on this machinery in 2014 and 2015 will be:
A. $2,333 in 2014 and $7,000 in 2015.
B. $5,833 in 2014 and $10,000 in 2015.
C. $6,667 in 2014 and $10,000 in 2015.
D. $10,000 in 2014 and $10,000 in 2015.
General Chemical Company (GCC) manufactures two products as part of a joint
process: A1 and B1. Joint costs up to the split-off point total $22,000. The joint costs
are allocated to A1 and B1 in proportion to their relative sales values. At the split-off
point, product A1 can be sold for $42,000, whereas product B1 can be sold for $63,000.
Product A1 can be processed further to make product A2, at an incremental cost of
$38,000. A2 can be sold for $85,000. Product B1 can be processed further to make
product B2, at an incremental cost of $48,000. B2 can be sold for $95,000.
Refer to the information above. Joint costs allocated to product B1 total:
A. $8,800.
B. $13,200.
C. $13,500.
D. $22,000.
Allocating activity cost pools to products
Burgandy Corporation makes plastic and wooden picture frames. The company has
assigned $107,000 in monthly manufacturing overhead costs to two cost pools as
follows: $67,000 to power costs, and $40,000 to production set-up costs. Additional
monthly data are provided below:
Power costs are allocated to products using machine hours as an activity base. Set-up
costs are allocated to products based on the number of production runs each product
line requires.
(a) Allocate manufacturing overhead from the activity cost pools to each product line.
(b) Compare the total per-unit cost of manufacturing plastic frames and wooden frames.
(c) On a per-unit basis, which product line appears to be most profitable?
Amelia Corporation has the following information in its financial statement:
Refer to the information above. How many shares of preferred stock are outstanding?
A. 32,400 shares.
B. 5,400 shares.
C. 10,000 shares.
D. The number of shares cannot be determined without more information.
Paddle, Inc. purchased equipment for $14,760 on February 1, 2015. The equipment has
a useful life of 3 years. How much depreciation expense should Paddle recognize on its
income statement for 2015?
A. $4,510
B. $410
C. $4,920
D. $14,760
Cigna Corporation’s 2015 net income is smaller than net cash flow from operating
activities. Which of the following would not be an explanation of why net income is
smaller than net cash flow from operating activities?
A. Cigna paid dividends to shareholders during 2015.
B. Cigna’s accounts payable increased during 2015.
C. Cigna recognized depreciation expense in 2015.
D. Cigna sold equipment at a loss in 2015.
Which of the following accounts normally does not have a debit balance?
A. Accounts receivable.
B. Cash.
C. Building.
D. Capital Stock.
All of the following captions or subtotals are typical of a multiple-step income
statement, except:
A. Net sales.
B. Gross profit.
C. Total costs and expenses.
D. Operating income.
As a result of taking an annual physical inventory, it usually is necessary in a perpetual
inventory system to make an entry:
A. Reducing assets and increasing the cost of goods sold.
B. Reducing assets and increasing liabilities.
C. Reducing the cost of goods sold.
D. Increasing assets and increasing the cost of goods sold.
Patterson’s Department Store prepares monthly income statements by sales
departments. These income statements are organized to show contribution margin,
performance margin, and responsibility margin for each sales department, as well as
operating income for the store as a whole.
Refer to the information above. The monthly salaries of the employees of the store’s
Accounting Department should be classified as a:
A. Common fixed cost.
B. Traceable fixed cost.
C. Committed fixed cost.
D. Controllable fixed cost.
For which of the following categories is it not important to know the number of units?
A. The number of units completed during the period.
B. The number of units transferred to the next department during the period.
C. Beginning work in process.
D. The number of units started during the period.
In February 2015, Gemstone Industries purchased the Opal Mine at a cost of
$20,000,000. The mine is estimated to contain 500,000 carats of stone and to have a
residual value of $1,000,000 after mining operations are completed. During 2015,
50,000 carats of stone were removed from the mine and sold. In this situation:
A. The book value of the mine is $19,000,000 at the end of 2015.
B. The amount of depletion deducted from revenue during 2015 is $1,900,000.
C. The amount of depletion deducted from revenue during 2015 is $1,000,000.
D. The mine is classified as an intangible asset and amortized over a period not to
exceed 40 years.
At the end of March, the unadjusted trial balance of Tutor, Inc. included the following
accounts:
Refer to the information above. Tutor uses the balance sheet approach in estimating
uncollectible accounts expense, and aging the accounts receivable indicates the
estimated uncollectible portion to be $8,600. What is the amount of uncollectible
accounts expense recognized in Tutor’s income statement for March?
A. $8,600.
B. $6,800
C. $10,400.
D. $1,800.
The concept of materiality:
A. Involves only tangible assets and not intangible assets.
B. Relates only to the income statement and not the balance sheet.
C. Is always an exact percentage of a financial account balance.
D. Is measured as an item significant enough to influence the decisions of users of
financial statements.
Skelton Corporation had planned to produce 50,000 units of product during the first
quarter of the current year. The company prepared the following budget on May 1:
During the first quarter, Skelton produced 60,000 units and incurred total manufacturing
costs of $184,000.
Refer to the information above. The cost-volume relationship used to prepare Skelton’s
flexible budget for various production levels includes:
A. Fixed cost of $1.17 per unit.
B. Manufacturing overhead costs of $1.43 per unit.
C. Variable costs of $2.07 per unit.
D. Total cost of $3.05 per unit.
Cash receipts budget
The director of budgeting for Bond Products is beginning the process of preparing a
cash budget for each month of the coming year. The sales forecast for the month of
January is as follows:
In the past, the accounts receivable originating from credit sales have been collected in
the following pattern:
Credit sales in the last two months of the current year, some of which remain
uncollected at year-end, were as follows:
Compute the amount of cash expected to be collected from customers in January of the
coming year.
Inventory systems
Briefly distinguish between a perpetual inventory system and a periodic inventory
system.
Computation of operating cash flows
The financial statements of Custom Corporation provide the following information for
the current year:
Using this information, compute for the current year:
Robbins Co. has been producing a part for a camera they manufacture. The costs for
this part are as follows:
Robbins has an opportunity to purchase this part rather than manufacture it. To purchase
the part will cost $3 a unit. If the part is purchased, fixed costs will be reduced by 20%.
Should Robbins Co. make or buy this part. Show how you arrived at your decision.
Sam Rivers has $3,000 to invest. He must decide whether to invest this money for five
years at 10% compounded semi-annually or at 12% compounded annually. Which
option should he select?
Adjusting Entries
Identify four types of timing differences between cash flows and the recognition of
expenses or revenues that may require adjusting entries.
Matching principle
In April, Grinnel Paving, Inc. acquired a large quantity of crushed stone on account
with payment due in 90 days. The stone was used in May when Grinnel Paving, Inc.
completed a large parking lot for a local shopping center. In early July, Grinnel Paving,
Inc. paid the supplier from which the crushed stone had been purchased. In which
month should Grinnel Paving, Inc. recognize the cost of the crushed stone as an
expense? What accounting principle provides the justification for the answer?
Appraising rate of return adequacy
What factors should be taken into consideration when appraising the adequacy of the
rate of return of a capital investment proposal?
Target costing
Ray-Dee, Inc. is considering the introduction of a new deluxe quality stereo tabletop
radio. This radio will produce exceptional sound quality through new speaker
technology. Market research indicates that customers would be willing to pay $400 for a
radio of the quality considered. Ray-Dee requires a 30% return on sales for all its
products.
Required: Compute Ray-Dee’s target cost for the radio under consideration.
