Internal users of financial accounting information include all of the following except:
A. Investors.
B. Managers.
C. Chief Financial Officer.
D. Chief Executive Officer.
Assuming there is no preferred stock, book value per share of common stock is derived
by which of the following:
A. Stockholders’ equity divided by the number of shares authorized.
B. Stockholders’ equity divided by the number of shares outstanding.
C. Net income divided by the number of shares outstanding.
D. Net income divided by the number of shares authorized.
Accounting terminology
Listed below are eight technical accounting terms introduced or emphasized in this
chapter:
Each of the following statements may (or may not) describe one of these technical
terms. In the space provided beside each statement, indicate the accounting term
described, or answer “None” if the statement does not correctly describe any of the
terms.
____ (a) Data pertaining to future time periods which may vary among alternative
courses of action.
____ (b) The point at which manufacturing costs are split between finished goods
inventory and work in progress.
____ (c) The benefit foregone by pursuing one course of action over another.
____ (d) Products which emerge from common materials and shared production
processes.
____ (e) A cost incurred in the past that will not change as a result of future actions.
____ (f) Costs yet to be incurred which are expected to vary under different courses of
action.
____ (g) The examination of differences between future costs and revenue under
varying courses of action.
Which of the following statements regarding liquidity and profitability is not true?
A. If a business is unable to pay its debts as they come due, it is operating unprofitably.
B. A business may be liquid, yet operate unprofitably for several years.
C. A business may operate profitably, yet be unable to meet its obligations.
D. In order to survive in the long-run, a business must both remain liquid and operate
profitably.
The term cash equivalent refers to:
A. An item such as a money order, travelers’ check, or check from a customer.
B. An account receivable from a reliable customer who has always paid bills within the
discount period.
C. A guaranteed line of credit at the company’s bank.
D. Very liquid short-term investments such as U.S. Treasury Bills and commercial
paper.
Discounting cash flows
Determine the present value of the following cash flows discounted at an annual rate of
10%:
(a) $96,000 to be received five years from today (the present value of $1 at a 10%
compound interest rate for five years is 0.621): $__________
(b) $37,000 to be received annually for five years (the present value of $1 at 10%
received annually for five years is 3.791): $__________
(c) $58,000 to be received annually for six years, with an additional $16,000 salvage
value to be received at the end of the sixth year (the present value of $1 at 10% received
annually for six years is 4.355, and the present value of $1 due six years hence at 10%
is 0.564): $__________
Omega 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 12% had been
obtained on December 1.
(2) The company 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
amounting to $6,800.
(3) On December 1, rent on the office building had been paid for four months. The
monthly rent is $6,000.
(4) Depreciation of office equipment is based on an estimated useful life of six years.
The balance in the Office Equipment account is $9,360; no change has occurred in the
account during the year.
(5) Fees of $9,800 were earned during the month for clients who had paid in advance.
On December 31, Louis Jeweler’s made an adjusting entry to record $4,200 accrued
interest payable on its mortgage. On January 10, the mortgage payment was made. This
payment included interest charges of $6,300, $2,100 of which were applicable to the
period from January 1 through January 10. When recording this mortgage payment, the
accountant should:
A. Debit Interest Expense $2,100 and debit Accrued Interest Payable $4,200.
B. Debit Interest Expense $6,300.
C. Debit Accrued Interest Payable $6,300.
D. Debit Interest Expense $2,100 and credit Accrued Interest Payable $4,200.
The process of originally recording a business transaction in the accounting records is
termed:
A. Journalizing.
B. Footing.
C. Posting.
D. Balancing.
Bonds issued at discount or premium
On March 31, 2015 Louis Company issued $20,000,000 face amount of 7%, 5-year
bonds payable, with interest payable each June 30 and December 31. The company
received cash of $20,200,000, including the accrued interest from December 31, 2014.
Louis uses the straight-line method of amortizing any discount or premium over the
remaining life of the bonds – 57 months.
(a) What was the amount of accrued interest received by Louis on March 31, 2015
when the bonds were issued? (Do not assume the bonds were issued at par.)
$________________
(b) What was the amount of discount or premium on the bonds at issuance date?
(Indicate discount or premium.)
$________________
(c) What amount of cash is paid to bondholders for interest during year 2015?
$________________
(d) What is Louis’ total interest expense for year 2015 related to this bond issue?
$________________
(e) What is the carrying value of this bond issue as of December 31, year 2015?
$________________
Refer to the information above. What is the monthly sales volume in dollars necessary
to break-even?
A. $82,500.
B. $66,500.
C. $97,059.
D. $77,500.
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. All of the following costs are traceable to specific sales
departments except:
A. Cost of goods sold.
B. Depreciation of equipment and fixtures used in the department.
C. Advertising a special sale in a particular department.
D. The salary of the store manager.
A fixed cost may include all of the following except:
A. Rent for the warehouse.
B. Annual salary of the CEO.
C. Depreciation.
D. Sales commission expense.
In a responsibility income statement, the term common fixed costs describes fixed costs
that:
A. Are under the manager’s immediate control.
B. Jointly benefit several responsibility centers of the business.
C. Occur in virtually every responsibility center of the business (such as salaries).
D. Are easily traceable to specific profit centers.
When a stock dividend is declared, total stockholders’ equity will:
A. Decrease.
B. Increase.
C. Not change.
D. Increase or decrease, depending upon whether it’s a small or large stock dividend.
A liability for deferred income taxes represents:
A. Income taxes on earnings already reported in the income statement, but that will be
taxed in future periods.
B. Income taxes already paid on earnings which have not yet been reported in the
company’s income statement.
C. Income tax obligations being disputed with the Internal Revenue Service.
D. Income taxes levied in prior years which are now past due.
Refer to the information above. How should the transactions involving marketable
securities be classified in Korman’s statement of cash flows for 2015?
A. The purchase of marketable securities, sales of marketable securities, and receipt of
dividends are all classified as investing activities.
B. The purchase and the sale of marketable securities are classified as investing
activities; the receipt of dividends is classified as an operating activity.
C. The purchase of marketable securities is classified as an investing activity; the sale
of marketable securities is classified as a financing activity; the receipt of dividends is
classified as an operating activity.
D. The purchase and the sale of marketable securities are classified as investing
activities; the receipt of dividends is classified as a financing activity.
Salem Co. has outstanding $100 million of 7% bonds, due in 7 years, and callable at
104. The bonds were issued at par and are selling today at a market price of 94.
Refer to the information above. If Salem Co. retires $10 million of these bonds by
purchasing them from bondholders at current market price, the company will report:
A. A $600,000 gain.
B. A $500,000 loss.
C. A $700,000 gain.
D. Neither gains nor losses are recognized on early retirements of debt.
Audits of financial statements are performed by:
A. The controller of the reporting company.
B. The Financial Accounting Standards Board (FASB).
C. The management of the reporting company.
D. Independent certified public accountants (CPAs).
Which of the following is a capital expenditure?
A. Sales tax paid in conjunction with the purchase of office equipment.
B. Monthly rent of a delivery truck.
C. Monthly fuel costs for a truck owned by the company.
D. Small expenditures to acquire long-lived assets, such as $13 to purchase a
wastebasket.
Murphy’s Auto Co. purchased a large piece of equipment on January 1, 2004. The
equipment is being depreciated, using the straight-line method, at the rate of $16,000
per year. On January 5, 2015 the book value of the machine was $190,000.
(a) What was the original cost of the machine?
(b) What will the book value be on December 31, 2016?
Budgeted material purchases and payments to suppliers
On January 1 of the current period, Gotham Corporation has direct materials on hand of
$82,000. Of this amount, Gotham owes suppliers $51,000 on account. The company has
prepared the following budget estimates for January:
(a) Purchases of direct materials budgeted in January amount to: $_______________
(b) Cash payments to suppliers budgeted in January amount to: $_______________
Computations
Royal Corporation uses the indirect method of computing net cash flow from operating
activities and reported the following for 2015: accounts receivable decreased by
$10,300, merchandise inventory increased by $15,300, accounts payable decreased by
$4,000, and income taxes payable increased by $18,800. If Royal Corporation reported
net income for 2015 of $157,800 (including $34,800 of depreciation expense), net cash
flow from operating activities for 2015 is:
A. $202,400.
B. $132,800.
C. $164,800.
D. $221,700.
On February 28, 2015, $5,000,000 of 6%, 10-year bonds payable, dated December 31,
2014, are issued. Interest on the bonds is payable semiannually each June 30 and
December 31. If the total amount received (including accrued interest) by the issuing
corporation is $5,060,000, which of the following is correct?
A. The bonds were issued at a premium.
B. The amount of cash paid to bondholders on the next interest date, June 30, 2015, is
$300,000.
C. The amount of cash paid to bondholders on the next interest date, June 30, 2015, is
$50,000.
D. The bonds were issued at a discount.
Under accrual accounting, fees received in advance from customers should be shown as
being earned:
A. When cash is collected.
B. When services are performed or goods delivered.
C. When tax rates are low.
D. When tax rates are high.
Assets that have been pledged as security for a loan:
A. Are reported as liabilities on the balance sheet.
B. Must be sold when the loan matures.
C. Become the property of the lender until the loan is paid in full.
D. Are disclosed in the notes to the financial statements.
Which of the following is not an example of the cost of quality?
A. Prevention costs.
B. Internal failure costs.
C. Target costs.
D. Appraisal costs.
The Kansas Company makes credit sales to customers who use bank credit cards (such
as Visa or MasterCard) as well as to customers who use non-bank credit cards (such as
American Express or Diner’s Club). In this situation:
A. Sales to customers using bank credit cards are recorded as cash sales.
B. Regardless of the type of credit card used by the customer, Kansas records a
receivable from the credit card company when a credit sale is made.
C. Regardless of the type of credit card used by the customer, Kansas estimates
uncollectible accounts related to these credit sales using the allowance method.
D. The fees charged by the credit card company reduce the dollar amount of sales
recorded.
Management expects total sales of $40 million, a margin of safety of $10 million, and a
contribution margin ratio of 45%. Which of the following estimated amounts is not
consistent with this information?
A. Variable costs, $22 million.
B. Fixed costs, $13.5 million.
C. Operating income, $6 million.
D. Break-even sales volume, $30 million.
Which account will not appear on an After-Closing Trial Balance?
A. Dividends.
B. Prepaid Expenses.
C. Unearned Revenue.
D. Retained Earnings, at the end of the period.
Under accrual accounting, salaries earned by employees but not yet paid should be
expensed:
A. In the period in which they are earned.
B. In the period in which they are paid.
C. In the period with the higher earnings.
D. In the period with the lower earnings.
Clark Imports sold a depreciable plant asset for cash of $35,000. The accumulated
depreciation amounted to $70,000, and a loss of $5,000 was recognized on the sale.
Under these circumstances, the original cost of the asset must have been:
A. $65,000.
B. $75,000.
C. $100,000.
D. $110,000.
The Sales Returns and Allowances account is debited when:
A. Merchandise is returned to a supplier.
B. Merchandise is returned by a customer.
C. Payment is made to a supplier within the discount period.
D. An account receivable is collected within the discount period.