1) A company can use cost-volume-profit analysis to determine the level of sales
required to earn a target profit.
2) A potential danger from outsourcing is that a company may become too dependent
on the supplier.
3) Product costs flow from the balance sheet to the income statement.
4) The goal in allocating costs to cost objects is to achieve a rational allocation.
5) One consequence of the Sarbanes-Oxley Act is that some of the largest corporations
in the United States are taking their companies’ stock off the stock exchanges.
6) For decision-making purposes, qualitative factors are relevant if they differ among
the alternatives and relate to the future.
7) Depreciation expense on a building or equipment is an example of a sunk cost.
8) To be relevant in decision making, cost or revenue information must be
future-oriented and must differ between the alternatives.
9) The capital budget does not affect a company’s operating budgets.
10) Johns Creek Company wishes to allocate rent expense of $24,000 to its three
operating departments. Departments 1, 2, and 3 occupy 10,000, 20,000 and 30,000
square feet, respectively. Based on this information, the amount of rent expense to be
allocated to Department 3 is $8,000.
11) Income statements for three companies are provided below:
Required:
a) Prepare new income statements for the firms assuming each sells one unit less (i.e.
each firm sells 9 units).
b) Briefly describe the effect of cost structure on profitability.
12) Rosen Hardware Company recorded the following sales for the first quarter of
2012:
These amounts do not include sales taxes. The company is in a state with a sales tax rate
of 6 percent.
Required:
a) Calculate the amount of sales tax that the company collected from its customers for
each month.
b) For each month, indicate the effect of the sales and collection of sales tax on the
statements model, below. Show dollar amounts of increases and decreases; enter NA if
an item is not affected. In the cash flows column, designate cash flows as operating
activities (OA), investing activities (IA). or financing activities (FA).
c) On March 31, Rosen Hardware remitted to the state the total amount of sales tax for
the quarter. Indicate in the statements model the effect of this transaction.
13) Cash outflows from a capital investment project include
A.incremental revenues
B.a reduction in the amount of working capital
C.increases in operating expenses
D.All of these
14) Recording accrued salary expense at the end of an accounting period causes an
increase in Salaries Expense and
A.an increase in a liability
B.a decrease in an asset
C.an increase in an equity account
D.none of these
15) On January 2, 2012, Brimm Corporation purchased a delivery truck for $20,000.
The estimated useful life of the truck is 5 years, with an estimated salvage value of
$4,000. The truck is expected to be driven 200,000 miles during the five year estimated
useful life.
a) If Brimm uses double-declining balance depreciation, what is the amount of
depreciation for 2013? What is the balance of the accumulated depreciation account at
the end of 2013 after adjusting entries have been made?
b) Refer to part a. Assume Brimm used the double declining balance method for
depreciation and sold the truck at the beginning of 2014 for $12,000. What is the
amount of the gain or loss on the sale of the delivery van?
c) Assume that Brimm used units-of-production depreciation. The delivery van was
driven 50,000 miles the first year and 40,000 miles the second year. What is the amount
of depreciation expense for 2012 and for 2013? What is the balance of the accumulated
depreciation account at the end of 2013 after adjusting entries have been made?
16) Which of the following is a benefit of participative budgeting?
A.Budget planning is highly centralized
B.A twelve-month planning horizon is maintained at all times
C.Employees tend to be more motivated to achieve the budget
D.Communication is clearer because it flows in only one direction – upward
17) Accruing product warranty expense at the end of an accounting period is a/an
________ transaction.
A.asset source
B.asset use
C.asset exchange
D.claims exchange
18) On October 1, 2012, Balkan, Inc. accepted from another corporation a 1-year note
receivable in the amount of $15,000, with an interest rate of 6%. On December 31,
2012, Balkan accrued the interest income earned to date. How did this accrual affect
Balkan’s financial statements?
A. Option A
B.Option B
C.Option C
D.Option D
19) The following are examples of physical control over assets except for:
A.certificates of deposit should be kept in a fireproof vault
B.unannounced physical counts of equipment should be conducted randomly
C.serial numbers on equipment should be recorded
D.multiple personnel should have access to vaults in case of a calamity such as a fire
20) The following selected account balances were drawn from the 2012 balance sheet
and income statement of Fultz Company:
Based on the above information, what is the balance of Common Stock for Fultz
Company?
A.$750
B.$1,550
C.$1,050
D.$2,050
21) Leon wants to determine the net present value for a proposed capital investment. He
has determined the desired rate of return, the expected investment time period, a series
of cash inflows of equal amount, the salvage value of the investment, and the required
cash outflows. Which of the following tables would most likely be used to calculate the
net present value of the investment?
A.Present Value of Annuity
B.Present Value of a Lump Sum
C.Both of the above
D.None of these
22) The bank statement for Ronson Company included a debit memo for a bank service
charge of $58.
Required:
a) Show the effects of recognizing the bank service charge on the financial statements
by recording appropriate amounts in the financial statements model provided. Include
dollar amounts of increases and decreases; for cash flow, indicate whether it is an
operating activity, investing activity, or financing activity.
b) Is the recognition of the bank service charge an asset source, use, or exchange
transaction?
23) Newton Company currently produces and sells 4,000 units of a product that has a
contribution margin of $6 per unit. The company sells the product for a sales price of
$20 per unit. Fixed costs are $18,000. The company is considering investing in new
technology that would decrease the variable cost per unit to $8 per unit and double total
fixed costs. The company expects the new technology to increase production and sales
to 9,000 units of product. What sales price would have to be charged to earn a $90,000
target profit?
A.$22
B.$20
C.$18
D.$8
24) For purposes of decision making, avoidable costs are costs that
A.were incurred in the past
B.will be incurred in the future and differ between the alternatives
C.do not differ between alternatives
D.are not relevant in decision making
25) Premier Company has budgeted the following information for June:
If there is a cash shortage, the company borrows money from the bank. All cash is
borrowed at the beginning of the month in $1,000 increments and interest is paid
monthly at 1% on the first day of the following month. The company had no debt
before June 1st. The amount of interest paid on July 1 would be
A.$800
B.$580
C.$500
D.$442
26) On January 1, 2012, St. John Corp. purchased a new truck for $35,000. St. John
determined that this truck would be useful for 150,000 miles at which time it would
have a salvage value of $5,000. During the next three years the truck was driven for
25,000, 20,000, and 28,000 respectively. At the beginning of the fourth year (2015), St.
John had to overhaul the truck’s engine at a cost of $7,000. The overhaul increased the
life of the truck by adding 20,000 miles of use. During the fourth year the truck was
driven for 23,000 miles.
Required:
a) Calculate depreciation expense for the first three years. (2012, 2013, 2014)
b) Calculate depreciation expense for 2015 .
27) You are considering an investment in Baker Corporation common stock and wish to
assess the firm’s ability to generate earnings. All of the following ratios are used to
assess profitability and managerial effectiveness except:
A.Net margin
B.Asset turnover
C.Return on investment
D.Average number of days to collect receivables
28) On March 1, 2012, Cross Corporation borrowed $10,000 by issuing a note payable.
How did this transaction affect Cross’s financial statements?
A.Choice A
B.Choice B
C.Choice C
D.Choice D
29) Which of the following is not a reason why a business needs strong internal controls
over cash?
A.A small volume of high-denomination currency represents a significant amount of
value
B.Ownership of cash is difficult to prove
C.Cash has universal appeal
D.Money is the common unit of measurement in business
30) A transaction that increases cash and increases notes payable is a/an
A.claims exchange transaction
B.asset source transaction
C.asset use transaction
D.asset exchange transaction
31) The confidentiality rules in the
A.from testifying against a former client in a court of law
B.from communicating with successor auditors
C.from obtaining legal counsel prior to disclosing information obtained in an
accountant-client relationship
D.from voluntarily disclosing information obtained in an accountant-client relationship
32) On January 1, 2012, Sol Company issued bonds with a face value of $100,000 at
105 . The bonds will mature in 5 years. Interest at 10% was payable in cash on
December 31 of each year. The premium will be amortized using the straight line
method. Based on this information, the amount of interest expense shown on the 2012
income statement and the cash flow from operating activities shown on the 2012
statement of cash flows would be:
A.Choice A
B.Choice B
C.Choice C
D.Choice D
33) While performing the monthly bank reconciliation, the bookkeeper for Grace
Corporation noted that a deposit of $100 (received from a customer on account) was
recorded in the company books as $1,000. Which of the following shows the effect of
the correcting entry on the financial statements?
A.Choice A
B.Choice B
C.Choice C
D.Choice D
34) Davies Company provided the following budgeted information for 2012 .
Davies predicted that sales would be 20,000 units, but the sales actually were 22,000
units. The actual sales price was $48.50 per unit, and the actual variable manufacturing
cost was $33 per unit. Actual fixed manufacturing cost and fixed selling and
administrative cost were $104,000 and $39,000, respectively.
Required:
a) Using the form below, prepare a flexible budget; show actual results; calculate the
flexible budget variances; and indicate whether the variances are favorable (F) or
unfavorable (U).
b) Assess the company’s performance compared to the flexible budget.
35) The following data are from the income statement of Rathbun Company:
The company’s gross margin percentage is:
A.12.5%
B.37.5%
C.62.5%
D.60.0%
36) Assume that the company’s ending finished goods inventory was greater (higher)
than the beginning finished goods inventory. Which of the following misclassifications
overstates net income?
A.Recording administrative salaries as a product cost
B.Recording depreciation on production equipment as an expense
C.Expensing raw material costs instead of including them in inventory
D.B and C
37) Classify each of the following costs as an asset (1) or expense (2).
A. Paid advertising for the current month.
B. Used supplies to generate revenue.
C. Purchased a building with cash.
D. Paid two years rent in advance.
38) Which of the following should not be included in the investment base used to
compute residual income?
A.accounts receivable
B.an idle warehouse
C.cash
D.inventory
39) Some costs that possibly could be traced directly to cost objects are nonetheless
classified as indirect costs because
A.such practice results in a more accurate accumulated cost for the object
B.such costs cannot be traced to objects in a cost-effective manner
C.generally accepted accounting principles require some costs to be treated as indirect
D.All of these
40) The following information is available for Parsons Corporation, which uses the
allowance method of accounting for uncollectible accounts.
Parsons expects 1% of sales on account to be uncollectible.
Required:
a) What is the balance of Accounts Receivable at the end of 2012?
b) What is the amount of uncollectible accounts expense for 2012? Use the financial
statements model below to indicate the effect of recording uncollectible accounts
expense. Include dollar amounts of increases and decreases.
c) In 2013, after several attempts of collection, Parsons wrote off accounts that could
not be collected in the amount of $300. Use the financial statements model that is
provided to indicate the effect of the write-off on the financial statements, indicating
amounts of increases and decreases.
d) Later in 2013, Erin received a check for $50 from one of the customers whose
account had been written off in c) above. Use the financial statements model to indicate
the effect of the collection of the $50 on the financial statements, indicating amounts of
increases and decreases.
41) Select the incorrect statement concerning the present value index (PVI).
A.The PVI is computed by dividing the total present value of the cash inflows by the
present value of the cash outflows
B.The PVI should be used to evaluate two or more projects whose initial investments
differ
C.The lower the PVI, the better
D.A project whose PVI is positive will also have a positive net present value
42) Halt Company employs material handling employees who move materials between
production divisions at a labor cost of $160,000 a year. It is estimated that these
employees move 800,000 pounds of material per year. If 60,000 pounds are moved in
March, how much of the material handling cost should be assigned to products made in
March?
A.$12,000
B.$12,800
C.$26,666
D.$13,333
43) Select the incorrect statement regarding flexible budgets.
A.Standard prices and costs are used in preparing a flexible budget
B.A flexible budget is also known as a master budget
C.Flexible budgets show estimated revenues and costs at multiple volume levels
D.A flexible budget represents an extension of the master budget
44) Chatooga Company provided the following selected information about its consumer
products division for 2012:
Based on this information, the division’s investment amount (amount of operating
assets) was
A.$500,000
B.$1,200,000
C.$1,240,000
D.$160,000
45) Which of the following measurements would not be affected by the choice of
depreciation methods?
A.debt to assets ratio
B.total assets
C.the ratio of current assets to current liabilities
D.return on equity ratio
46) The following income statements are provided for two companies operating in the
same industry
Assuming sales increase by $1,000, select the incorrect statement from the following:
A.Both companies will experience an increase in profit
B.Davis’s net income will be more than Morgan’s
C.Davis’s net income will increase by $250
D.Morgan’s net income will increase by 6%
47) Cannon Company produces and sells air compressors for $250. The variable costs
per unit are $150 plus a sales commission of 10% of the selling price. Total fixed costs
consist of $14,000 in fixed overhead and $16,000 in fixed selling and administrative
costs.
Required:
1) Compute the contribution margin per unit.
2) Compute the break-even point in units and dollars.
3) How many units must be sold to earn a profit of $60,000?
4) What would be the break-even point in units if the sales commission is reduced to
$10 per unit sold?
48) Indicate whether each of the following statements is true or false.
1>Classifying a cost as unit-level, batch-level, product-level, or facility-level is based
primarily on the dollar amount of the cost
2>Facility-level costs generally are not relevant in special order decisions
3>An outsourcing decision typically affects unit-level and batch-level costs but not
product-level costs
4>Accepting a special order will involve incurring unit-level costs
5>Eliminating a business segment often allows a company to avoid some facility-level
costs
49) Mindy Norton Company reported the following information for 2012:
Required:
Based on this information, calculate the company’s residual income for 2012 .
50) Explain the meaning of the terms “tangible” and “intangible” and discuss how these
terms are used in describing assets.
51) Ratios can be used for different purposes. For example, a variety of ratios have been
developed to assess a firm’s liquidity. Similarly, ratios have been developed to assess
solvency, management effectiveness (profitability), and stock market strength. A sample
of commonly used ratios for these purposes is provided in the table below.
Required:
In the middle column of the table, provide the formula to compute the specified ratio. In
the final column, indicate the purpose (Liquidity, Solvency, Profitability, and Stock
market strength) for which the ratio is most commonly used. The first item is completed
as an example.
