The failure to record an adjusting entry for depreciation would cause assets to be
overstated and net income to be understated.
Contribution margin ratio is equal to contribution margin per unit divided by unit sales
price.
An opportunity cost is a relevant cost when making a business decision.
The return on equity ratio equals net income divided by common stock.
There is a tax advantage for a company to issue bonds in lieu of stocks.
The purchase of treasury stock for cash causes no change in total assets.
The account Discount on Bonds Payable actually represents interest expense and will
be amortized over the life of the bond.
A revenue expenditure is deducted from revenues in determining the net income for the
period.
To convert a foreign currency into dollars, divide the foreign currency by the foreign
exchange rate.
The quick ratio is especially useful in evaluating the liquidity of a company with fast
moving inventories.
Since most companies update their Retained Earnings balances only once per year, the
Retained Earnings balance will always have a $0 balance in the trial balance.
It is illegal for the government to double tax corporate earnings.
During periods of inflation, the LIFO cost flow assumption will yield a lower inventory
value than FIFO.
Opportunity costs are irrelevant in decision making.
When an external market exists for a transferred product or service, most companies
use either negotiated transfer prices or cost-plus transfer prices.
Identifying information relevant to a particular business decision requires an
understanding of both quantitative and qualitative considerations.
The present value of money is always less than its future value.
A common cost may become a traceable cost as it moves up to larger responsibility
centers.
The book value of an asset is equal to its cost plus accumulated depreciation.
The higher a company’s inventory turnover rate, the higher its gross profit.
The future amount of an annuity is calculated by multiplying the periodic payment
amount by the discounted factor from the future value of an annuity table.
Deferring income taxes by using legal accounting methods is one strategy to
permanently improve cash flow.
A materials quantity variance is the standard price times standard quantity, less actual
quantity.
An exchange rate represents the price of one currency stated in terms of another.
Just as there are depreciation methods to calculate the decline in market value of assets,
there are appreciation methods to record the increase in market value of assets.
The process of using activity-based costing to help reduce and eliminate
non-value-added activities is activity-based management.
The consolidated financial statements of a U.S. based corporation are expressed in U.S.
dollars and conform to International Financial Reporting Standards.
The presence of fixed costs in manufacturing overhead causes the actual amount of
manufacturing overhead per unit of output to vary, depending on the actual production
volume attained.
The report form of the balance sheet lists liabilities and owners’ equity below assets.
When making a general journal entry, there can only be one debit and one credit.
Working capital is equal to current assets less current liabilities.
A primary objective of target costing is to reduce development time.
Free cash flow refers to the excess of cash inflows over cash outflows.
Performance margin is equal to controllable fixed costs minus the contribution margin.
Since cost accounting systems provide managers with information necessary to manage
operations, the information from cost accounting systems is not useful for external
reporting purposes.
A corporation must always have more than one class of stock.
Your wealthy aunt wishes to give you a trip to Paris when you graduate from college in
three years. She estimates the trip will cost $4,000. How much must she invest now at
4% to accumulate enough for you to take this trip?
A. $3,287.72.
B. $3,556.00.
C. $4,499.44.
D. $3,161.24.
Dividends are first recorded and retained earnings are reduced on:
A. The ex-dividend date.
B. The date of record.
C. The date of declaration.
D. The date of payment.
Grayson Enterprises manufactures springs and shock absorbers. Springs account for
40% of the company’s total sales revenue, whereas shocks account for about 60%. The
contribution margin ratios for springs and shocks are 45% and 35%, respectively.
Grayson’s fixed costs average $450,000 per month.
Refer to the information above. Grayson’s monthly break-even point expressed in sales
dollars is (Rounded):
A. $1,000,000.
B. $1,285,714.
C. $1,153,846.
D. $2,285,714.
In handling of daily cash transactions, a few minor errors inevitably will occur. Which
of the following is used to adjust the accounting records for these small errors?
A. The bank reconciliation.
B. The Petty Cash account.
C. The Cash Over and Short account.
D. The cash budget.
Bonds issued at par – basic concepts
On April 1, Year 1, Olsen Products, Inc. issued at par $25 million of 10%, 10-year
bonds payable. Interest is payable semiannually each April 1 and October 1.
(a) What is the amount of cash paid to bondholders for interest during Year 1?
$________________
(b) Give the adjusting entry necessary at December 31, Year 1 (if any), regarding this
bond issue.
(c) Interest expense on this bond issue reported in Olsen Products’ Year 1 income
statement is: $________________
(d) With respect to this bond issue, Olsen Products’ balance sheet at December 31, Year
1, includes bonds payable of $___________________ and interest payable of
$________________ (indicate $0 or “none” if the item is not reported.
(e) Give the journal entry made by Olsen Products on April 1, Year 2, to record the
semiannual payment of interest to bondholders.
On January 1, 2015, Juniper Corporation issued 60,000 shares of its total 200,000
authorized shares of $4 par value common stock for $8 per share. On December 31,
2015, Juniper Corporation’s common stock is trading at $12 per share.
Refer to the information above. Assume Juniper Corporation decides to issue an
additional 1,000 shares of its common stock on December 31, 2015. How will the
above increase in value affect Jupiter?
A. Juniper can issue the 1,000 shares at a higher price than the initial 60,000 shares.
B. Juniper can sell the 1,000 shares for $12 each, as well as collect an additional $4 per
share for each of the 60,000 shares sold initially.
C. Juniper reports a gain of $4 per share on all stock sold during the year.
D. Paid-in capital at the end of 2015 will be $732,000 (i.e., 61,000 shares times $12 per
share).
The financial statements of Garver, Inc., provide the following information for the
current year:
Refer to the information above. Compute the cash payments for purchases of
merchandise during the current year.
A. $260,000.
B. $250,000.
C. $266,000.
D. $254,000.
Which of the following is not a benefit of a careful and thorough budgeting process?
A. Budgeting increases management’s awareness of the company’s external economic
environment.
B. Budgeted net income assures the company of operating profitably.
C. The budget may provide advance warning of pending problems.
D. Budgets provide a yardstick for evaluating future performance.
If current assets are $90,000 and current liabilities are $70,000, the current ratio will be:
A. 77%.
B. $20,000.
C. 1.3.
D. $160,000.
Shown below are selected data from the financial statements of Supreme Co. Dollar
amounts are in millions (except for the per share data).
Supreme reported earnings per share for the year of $4 and paid cash dividends of $1
per share. At year-end, the Wall Street Journal listed Supreme’s capital stock as trading
at $88 per share.
Refer to the information above. Supreme’s gross profit rate was:
A. 42.9%.
B. 57.7%.
C. 20.0%.
D. 31.7%.
Management accountants primarily are concerned with developing information:
A. For use in income tax returns.
B. Suited to the needs of stockholders, creditors, and other external decision makers.
C. In conformity with generally accepted accounting principles.
D. Suited to the needs of decision makers within the organization.
Division Y of the Mortisen Company produces and sells 2 products. Each product’s
operating income and average capital resources are shown below:
Product A: Operating Income $500,000; Average capital $5,000,000.
Product B: Operating Income $350,000; Average capital $4,100,000.
Refer to the information above. What is division’s Y ROI for product B (round your
answer to the nearest full percentage point)?
A. 12.0%.
B. 10.0%.
C. 9.0%.
D. 13.0%.
Treasury stock appears as:
A. An asset account.
B. A liability account.
C. An expense account.
D. An equity account.
Closing entries never involve posting a credit to the:
A. Income Summary account.
B. Accumulated Depreciation account.
C. Dividends account.
D. Depreciation Expense account.
All of the following are activities seen in “pump-and-dump” schemes except:
A. The owners of the company purchase their shares at artificially high prices.
B. High-pressure sales tactics are used to get individuals to buy the stock.
C. Limited financial information is filed with the SEC.
D. The owners of the company claim that a previously private company has high
growth potential.
If current assets are $180,000 and current liabilities are $130,000, working capital will
be:
A. 72%.
B. $50,000.
C. 1.4.
D. $310,000.
Of the following techniques of capital budgeting, which one explicitly incorporates an
estimate of an interest rate into the basic computation?
A. Payback method.
B. Average rate of return.
C. Discounted cash flows method.
D. Accounting book value method.
To identify the cause of a change in a product total unit cost, management may:
A. Compute per unit product cost in total.
B. Compute per unit total cost.
C. Compute per unit product cost for each individual production department.
D. Compare prior period to current period per unit product cost in total.
The accountant for Foster Institute, Inc., determined the cash flow for several
transactions to be as follows:
On the basis of the above transactions alone, determine the net cash flow from
financing activities.
A. $275,000 net cash used for financing activities.
B. $440,000 net cash provided by financing activities.
C. Zero: cash inflows equal cash outflows from financing activities.
D. $285,000 net cash provided by financing activities.
The collection of an account receivable is recorded by a debit to Cash and a credit to
Accounts Payable. If this error is not corrected:
A. Total liabilities are understated.
B. Total assets are understated.
C. Total liabilities are overstated.
D. Owners’ equity is overstated.
In a statement of cash flows, collections of accounts receivable are classified as:
A. Operating activities.
B. Financing activities.
C. Investing activities.
D. Revenues and Gains.
Mentha Company currently has the following statistics:
Days in accounts receivable – 68
Operating cycle – 148
What is Mentha’s days in inventory?
A. 80 days.
B. 68 days.
C. 148 days.
D. Cannot be determined from the information given.
Which of the following items would not reduce retained earnings?
A. A common stock dividend.
B. A preferred stock dividend.
C. A cash dividend.
D. Cash payment of a previously declared dividend.
All of the following are examples of current liabilities except:
A. Accounts payable.
B. Pledged assets.
C. Unearned revenue.
D. Income taxes payable.
Recently, Bon Appetite Caf contracted and paid for a relatively expensive advertisement
in Haute Cuisine magazine. Despite the fact that the ad will appear in Haute Cuisine
three months after the end of Bon Appetite Caf’s current fiscal year, the Cafe’s
accountant recorded the disbursement to advertising expense. If no adjusting entry is
made, how will this year’s financial statements of Bon Appetite Caf be affected?
A. Net income will be overstated and total assets will be understated.
B. Net income will be overstated and total assets will be overstated.
C. Net income will be understated and total assets will be understated.
D. Net income will be understated and total assets will be overstated.
Shown below is a trial balance for Cornell Products Inc., on December 31, after
adjusting entries:
Refer to the information above. The total debits in the After-Closing Trial Balance will
equal:
A. $23,500.
B. $31,000.
C. $50,750.
D. $58,250.
The Gillett Company’s breakeven point in units is 25,000. Assuming that variable costs
are 50% and fixed costs are $500,000, what is the company’s projected operating
income if sales are $1,250,000?
A. $750,000.
B. $100,000.
C. $125,000.
D. $400,000.
Cost-volume relationships
(a) What is the effect of an increase or decrease in activity upon variable costs per unit
of activity?
(b) What is the effect of an increase or decrease in activity upon total fixed costs?
Which of the following statistics is generally computed for both common and preferred
stock?
A. Earnings per share.
B. Price-earnings ratio (p/e ratio).
C. Annual dividend per share.
D. Retained earnings per share.
In the area of cost-volume-profit analysis, the contribution margin ratio shows how
much each dollar of sales contributes to:
A. Cover the fixed costs of the business and providing operating income.
B. Fixed expenses and variable expenses.
C. Variable expenses and interest charges.
D. Variable expenses when production is at normal capacity.
Periodic inventory system
Soundview Centre uses a periodic inventory system. At the end of 2015, the accounting
records include the following information:
Compute the following for 2015:
Discuss the benefits that a company may derive from a formal budgeting process.
Overhead application rate
Define the term cost driver and explain the role of this item in the computation of an
overhead application rate.
Match the following terms with the explanations below. If no term fits the explanation
write none
_________ (1) A means of accounting for uncollectibles which does not recognize any
expense until specific receivables are determined to be worthless.
_________ (2) An account showing the amount of estimated uncollectible receivables.
_________ (3) The process of estimating uncollectible accounts by classifying accounts
receivables by age groups.
_________ (4) Dividing net sales by average receivables to create a ratio to measure the
liquidity of accounts receivable.
_________ (5) Very short-term liquid investments which must mature within 90 days of
acquisition.
_________ (6) Cash and assets convertible directly into known amounts of cash.
_________ (7) An account showing the difference between the cost of an investment in
marketable securities and its market value.
_________ (8) The value of a note at its maturity date.
_________ (9) Highly liquid investments that can be sold in organized securities
exchanges.
Computation of goodwill
Chopin Corporation has net assets (total assets minus total liabilities) valued at
$880,000 and has earned an average net income of $132,000 per year for the past
several years. Sands Company is negotiating the purchase of the company and has
agreed to pay an amount equal to the value of the net identifiable assets, assume the
liabilities, and pay a sum for goodwill equal to the earnings in excess of 12% on net
assets, expected to continue for five years. What is the amount for goodwill Sands is
including in its offer? $_______________.
The following information is available for the Grant Company for 2015:
Required:
What are earnings per share for the current year?
What is the P/E ratio?
What is the book value per share of common stock?
What is the dividend yield on common stock?
What is the net profit ratio?
What is the return on equity?
Significance of cash flows
Saxony, Inc. is a relatively new business. In its first three years of operations, the
company has recorded positive and increasing net cash flows from its operating
activities. In each of these three years, the company has also reported a net loss on its
income statement. Suggest at least one plausible explanation for these financial results.
Given the net losses in the first three years of operations, should investors be concerned
about the solvency and future profitability of Saxony? Explain.
Retained earnings
At the beginning of 2015, Falcon Corporation had 2 million shares of $2 par value
common stock outstanding and retained earnings of $17 million. During 2015, Falcon
earned $12 million, declared a 5% stock dividend when the price of the stock was $19
per share, and paid a year-end cash dividend of $2.50 per share. (The cash dividend was
declared after the stock dividend had been distributed.) At the end of 2015, what are the
company’s retained earnings?
AICPA Code of Professional Conduct
State and discuss the six articles of the AICPA Code of Professional Conduct that guide
members in performing their professional responsibilities.
Establishing standard cost amounts
Explain why the determination of standard cost amounts should not be the sole
responsibility of a company’s cost accountant.
Caesar, Inc. purchased and used 47,600 pounds of goods to produce an actual quantity
of 15,300 units. Each unit required 3 pounds of goods. The quantity variance was
$10,200 unfavorable and the price variance was $7,140 unfavorable. What was the
actual price and the standard price per pound?
