If a company purchases equipment by issuing a note payable, its total assets will not
change.
If a long-term debt is to be paid off in monthly installments over a 5-year period, the
entire principal should be classified as a long-term debt.
Financial accounting standards issued by the FASB are considered generally accepted
accounting principles.
When applying the direct method in a statement of cash flows, the amount of
depreciation is added to net income.
When using a perpetual inventory system, the Inventory account is credited when a sale
is made.
In a periodic inventory system, the ending inventory can be determined from the
accounting records, and a physical count of the merchandise on hand will confirm the
amount.
Net income stated as a percentage of sales is one means of evaluating a company’s
ability to control its expenses.
Bonds payable are a means of dividing a very large, long-term liability among many
creditors, some of whom may participate in the loan only for a short period of time.
The more pessimistic investors’ expectations regarding a company’s future performance,
the lower the price-earnings ratio is likely to be.
In a periodic inventory system, the Inventory and Cost of Goods Sold accounts are kept
up-to-date throughout the accounting period.
A transaction that causes an increase in an asset may also cause a decrease in another
asset, an increase in a liability, or an increase in owners’ equity.
Immaterial items may be accounted for in the most convenient manner, without regard
to other theoretical concepts.
When the periodic inventory system is used, determining the cost of the year-end
inventory involves two distinct steps: counting the units and pricing the units.
In a planned economy, ownership of land and the means of production are private and
markets dictate the allocation of resources and the output among segments of the
economy.
Loss contingencies stem from past events.
A failure of the return on average investment method is that no consideration is given to
the time value of money.
Overstating the ending inventory will result in understating the cost of goods sold and
overstating profits.
Cash equivalents are the most liquid of all assets.
Service charges are an example of a transaction that appears in the bank statement but
which may not yet have been recorded by the company.
A just-in-time manufacturing system is also known as a supply push system.
The payment of a liability causes an increase in owners’ equity.
In considering investment in new plant assets, the payback period is computed without
regard to the total useful life of the investment.
The withholding of taxes from an employee’s pay is a liability to the company.
Any business event that might affect the future profitability of a business should be
reported in its balance sheet.
The price-earnings ratio is calculated by dividing earnings per share by the current
market price of a share of the company’s stock.
In a periodic system, the only account in regard to inventory that is kept up-to-date is
the inventory account.
Nonfinancial considerations are relevant in decision making.
The left-hand side of an account is used for recording debits and the right-hand side for
recording credits.
External auditors are often called upon to evaluate cost variances.
Total assets must always equal total liabilities plus total owners’ equity.
Large cash flows from operations are more important to financial statement analysts
over the long term than cash flows from financing or investing.
A materials price variance is arrived at by taking standard quantity times actual price,
less standard price.
When a company receives cash in advance and is obligated to provide a service or a
product in the future, the entry would be a debit to a revenue account and a credit to a
liability account.
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 below each statement, indicate the accounting term
described, or answer “None” if the statement does not correctly describe any of the
terms.
_____ (a) The process of using activity-based costs to help reduce or eliminate
non-value-added activities.
_____ (b) Can be eliminated without affecting the desirability of the product from the
perspective of the customer.
_____ (c) The length of time for a product to pass completely through a specific
manufacturing process.
_____ (d) If eliminated, the desirability of the product to consumers is decreased.
_____ (e) Consideration of all potential resources that will be consumed by a product
from development through disposal.
_____ (f) A method in which a product’s cost is determined by subtracting a fixed profit
margin from its selling price.
_____ (g) An approach that explicitly monitors quality costs and rewards quality
enhancing behavior.
Rockland Corporation has 22 employees and incurs total wages and salaries expense of
$800,000 per year. The following table shows various payroll amounts as a percentage
of this annual wage and salaries expense:
In addition, Rockland provides group health insurance for its entire workforce. The cost
of this insurance is $450 per month for each employee.
Refer to the information above. Some of the payroll-related expenses incurred by
Rockland Corporation are mandated by law, rather than negotiated with employees.
During the current year, these mandated amounts increased Rockland’s payroll-related
expenses by approximately:
A. $101,200.
B. $96,000.
C. $117,200.
D. $118,800.
If a company purchases equipment on account:
A. Assets will increase and owners’ equity will also increase.
B. Assets will increase and owners’ equity will decrease.
C. Assets will increase and owners’ equity will remain unchanged.
D. Assets will increase and liabilities will decrease.
Dorfmann Industries has an accounts receivable turnover rate of 12. Which of the
following statements is not true?
A. Dorfmann’s accounts receivable are more liquid than those of a business whose
accounts receivable turnover rate is 8.
B. Dorfmann waits approximately 30 days to make collections of its credit sales. (Use
365 days in a year.)
C. Dorfmann writes off accounts receivable as uncollectible if they are over 30 days
old.
D. Dorfmann’s net credit sales are about twelve times the amount of its average
accounts receivable.
Which of the following is not a measure used by the financial perspective lens of the
balanced scorecard?
A. ROI.
B. EVA.
C. Residual income.
D. Net operating income.
A company had 125,000 shares of common stock outstanding on January 1 and then
sold 35,000 additional shares on March 30. Net income for the year was $594,750.
What are earnings per share?
A. $4.73.
B. $4.58.
C. $3.93.
D. $6.61.
Which of the following is not one of the strategies of the financial perspective lens of
the balanced scorecard?
A. Improve shareholder perspectives.
B. Improve credit rating.
C. Improve customer relations.
D. Reduce risk.
Expenditures for research and development intended to lead to new products of
commercial value:
A. Should be recorded as intangible assets and amortized during the years in which
benefits are expected.
B. Should be charged to expense when incurred.
C. Should be capitalized only if patents are expected to be granted.
D. Should be classified as deferred charges.
Which of the following transactions would cause a change in owners’ equity?
A. Repayment of the principal on a bank loan.
B. Purchase of a delivery truck on credit.
C. Sale of land on credit for a price above cost.
D. Borrowing money from a bank.
Overhead costs are assigned to production using an overhead application rate, whereas
no such “application rate” is used to assign the costs of direct materials and direct labor
to production. The reason for this difference in procedures is that:
A. Overhead is an indirect cost which cannot be traced easily and directly to specific
units of product.
B. Overhead is always larger in dollar amount than either direct materials or direct
labor.
C. The amounts of direct material and direct labor applicable to each unit of production
cannot be determined as easily as the amount of overhead.
D. Overhead is always equal to a constant percentage of direct labor costs.
Which of the following appears in the income statement of a merchandising business,
but not in the income statement of a business that renders only services?
A. Interest revenue.
B. Gross profit.
C. Advertising expense.
D. Income tax expense.
The following information has been taken from the perpetual inventory system of Elite
Mfg. Co. for the month ended August 31:
Refer to the above data. The total amount of inventory to be included in Elite’s August
31st balance sheet amounts to:
A. $135,000.
B. $210,000.
C. $160,000.
D. Some other amount.
Refer to the information above. Assuming Dynamic, Inc. uses the direct write-off
method of accounting for uncollectible accounts, uncollectible accounts expense for
March is:
A. $13,500.
B. $6,000.
C. $11,500.
D. $17,500.
Which of the following is not a product cost?
A. Property tax on the factory building.
B. Advertising.
C. Factory workers’ salaries.
D. Indirect materials used in production.
The comparative balance sheets of Friends, Inc. show a net increase in accounts
receivable of $650 and a net decrease in inventory of $500. To determine net cash flow
from operating activities under the indirect method, net income should be:
A. Reduced by $650.
B. Increased by $650.
C. Reduced by $150.
D. Increased by $150.
The part of a business a particular manager is held responsible for is called a:
A. Cost center.
B. Profit center.
C. Investment center.
D. Responsibility center.
An analysis of changes in selected balance sheet accounts of Hierarchy Corporation
shows the following for the current year:
Hierarchy’s income statement for the current year includes a $9,600 gain on disposal of
plant assets. All payments and proceeds relating to purchase or sale of plant assets were
in cash.
Refer to the information above. The amount of cash paid by Hierarchy to acquire plant
assets during the current year was:
A. $252,000.
B. $504,000.
C. $724,000.
D. $768,000.
Marty’s Metal Shop uses a job order cost system. It applies overhead to jobs at a rate of
175% of direct labor costs. Job No. 2617 required $800 in direct labor costs. The job
was initially budgeted to require $850 in direct labor costs. Overhead applied to Job No.
2617 during the period amounted to:
A. $850.
B. $1,400.
C. $1,275.
D. Some other amount.
“Adoption” means abandoning a country’s financial reporting standards and replacing
them with:
A. International Accounting Standards.
B. International Financial Accounting Standards.
C. Generally Accepted Accounting Principles.
D. Securities and Exchange Commission Principles.
In a perpetual inventory system, the flow of inventory cost is:
A. First through the income statement, then through the balance sheet.
B. First through the balance sheet, then through the income statement.
C. Only through the balance sheet and not the income statement.
D. Only through the income statement and not the balance sheet.
Jayson Products uses a perpetual inventory system. At year-end, the Inventory account
had a balance of $280,000, but a complete year-end physical inventory indicated goods
on hand costing only $273,000. Jayson should:
A. Reduce its cost of goods sold by $7,000.
B. Record a $7,000 current liability.
C. Reduce the balance in its Inventory control account and inventory subsidiary ledger
by $7,000.
D. Reduce the balance in the Inventory control account and record a current liability,
both in the amount of $7,000.
Which of the following is not classified among the investing activities in a statement of
cash flows?
A. Purchase of marketable securities for cash.
B. Collection of the principal amount of cash loans made to others.
C. Investment of cash made in the business by the owners.
D. Purchase of plant assets for cash.
Stone Corporation has 25 employees and incurs total wages and salaries expense of
$900,000 per year. The following table shows various payroll amounts as a percentage
of this annual wage and salaries expense:
In addition, Stone provides group health insurance for its entire workforce. The cost of
this insurance is $350 per month for each employee.
Refer to the information above. Employees’ annual “take-home-pay,” totals
approximately:
A. $672,300.
B. $762,300.
C. $675,000.
D. $741,150.
For the current year, Voque Company reported basic earnings per share of $8 and
diluted earnings per share of $3. The difference between these figures is attributable to
outstanding shares of convertible preferred stock. If all this preferred stock had actually
been converted into common stock at the beginning of the current year, Voque
Company would have reported only one earnings per share amount, which would have
been:
A. $8.
B. $5.
C. $3.
D. Cannot be determined.
The Allowance for Doubtful Accounts represents:
A. Cash set aside to make up for bad debt losses.
B. The amount of uncollectible accounts written off to date.
C. The difference between total credit sales and collections on credit sales.
D. The difference between the face value of accounts receivable and the net realizable
value of accounts receivable.
Incremental analysis
Information regarding current operations of the Farrell Corporation is given below:
A proposed addition to Farrell’s factory is estimated by the sales manager to increase
sales by a maximum of $750,000. The company’s accountants have determined that the
proposed addition will add $320,000 to fixed costs each year.
(a) Explain why the existing $310,000 of fixed costs is a sunk cost while the $320,000
of fixed costs associated with the proposed addition is an out-of-pocket cost.
(b) Calculate by how much the proposed addition will either increase or reduce
operating income.
The return on equity ratio usually is computed as:
A. Net income divided by average total assets.
B. Net income divided by average total stockholders’ equity.
C. Gross profit divided by average total stockholders’ equity.
D. Net income less preferred dividends, divided by average common stockholders’
equity.
If cost of goods sold is $480,000 and the gross profit rate is 40%, what is the gross
profit?
A. $320,000.
B. $288,000.
C. $480,000.
D. $1,200,000.
The Accounting Standards Codification was developed by:
A. The Financial Accounting Standards Board.
B. Certified public accountants.
C. The Securities and Exchange Commission.
D. The Internal Revenue Service.
Refer to the information above. In the production process described, what is the Work
in Process Inventory: Packaging Department debited for?
A. Costs transferred from the Work in Process Inventory: Mixing Department only.
B. The cost of materials, direct labor, and overhead applicable to the packaging
operation only.
C. Costs transferred from the Work in Process Inventory: Mixing Department, as well
as materials, direct labor, and overhead applicable to the packaging operation.
D. Costs transferred to the Finished Goods Inventory.
Improving the current ratio
Carter Corporation financed construction of a new addition to its facilities with a large
long-term note payable. As a condition of obtaining the loan, Carter agreed to maintain
a current ratio at year-end of at least 1.7 to 1. If Carter fails to maintain this ratio, the
lender may demand immediate repayment of the principal amount of the note and all
unpaid accrued interest. As the end of the year approaches, Carter is concerned about
the magnitude of its current ratio. Suggest some actions that the company might take to
increase the magnitude of the current ratio.
Alice Blue is a wholesale dress manufacturer. In manufacturing dresses, the following
costs were incurred in March:
Projected overhead for the year was $560,000 to be allocated based on project direct
labor cost of $395,000. What are the total manufacturing costs for March (round your
answers)?
Product cost vs. period cost
Briefly define the terms product cost and period cost. Explain why the distinction
between these two types of costs is important.
Pool-Glow, Inc. has developed a new light for lighting swimming pools. After doing
market research, it has determined that customers would be willing to pay $140 for this
light. Pool-Glow seeks to earn 25% profit on the light. At present, Pool-Glow makes an
old style light for $101.25, which sells for $130.
(1.) What must the target cost be in order to earn the 25% profit that the company
demands?
(2.) If Pool-Glow can adjust its costs to the target cost, the company estimates that it
can sell 50,000 lights. What would Pool-Glow’s profit be at this point?
(3.) How many of the old style lights would have to be sold to reach the same profit?
Scrap or rework decision
Nielson has 5,000 defective televisions on hand which cost $380,000 to manufacture.
Nielson can either sell these defective televisions as scrap for $65 per unit, or spend an
additional $120,000 on repairs and then sell the televisions for $135 per unit.
Should Nielson repair the defective TVs to sell them as scrap?
Show your supporting computations:
The following information pertains to the Galaxy Company:
Work in Process, balance as of January 1 $54,500
Work in Process, balance as of December 31 $56,275
During the year, the company used $575,500 in raw materials, incurred $420,500 in
direct labor costs, and $500,000 in manufacturing overhead costs were applied to work
in process. Determine the Costs of Goods Manufactured for the Galaxy Company.
Inventory systems
Bookmarks, Inc. sells used books at its store in the resort community of Lake Bryn
Mawr. The owner maintains a large inventory of used books purchased from estate
sales, flea markets, and customers. During the tourist seasons of summer and winter, the
store is exceptionally busy with customers. Each customer usually makes small
purchases ranging in amount from one to twenty dollars. What type of inventory system
would you recommend to the owner of Bookmarks, Inc.? Explain the reasoning behind
your advice.
Define the measurement model known as the DuPont system used for evaluating
business performance.
Cash dividends and two classes of stock
Raymond Inc., has two classes of capital stock outstanding: 25,000 shares of 5%, $100
par value cumulative preferred and 30,000 shares of $10 par value common. The
company had a deficit (negative balance in retained earnings) of $160,000 at the
beginning of the current year, and preferred dividends were three years in arrears.
During the current year, the company earned net income of $970,000. What will be the
balance in the Retained Earnings account at the end of the current year if the company
takes all the actions necessary to pay a dividend of $2.50 per share on the common
stock? $________________
