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Physical deterioration refers to the process of an asset becoming outdated as a result of
the availability of improved, more efficient assets.
The company's CEO is the only person who analyzes costs variances.
A business entity is regarded as separate from the personal activities of its owners
whether it is a sole proprietorship, a partnership, or a corporation.
Under the indirect method, when machinery is sold at a gain, the gain is added in the
operating section of the statement of cash flows and the cost is added in the investing
section.
In an attempt to appeal to investors, a company may be tempted to overstate net
income.
Every adjusting entry involves the recognition of either revenue or an expense.
In determining whether to scrap or to rebuild defective units of product, the cost already
incurred in producing the defective units is not relevant.
Using only ROI as a business performance measure often leads to the best decisions.
Cost-volume-profit analysis is often complex when applied to a company with different
products.
The high-low method is the only method to be used when determining semivariable
costs.
Flexible budgets can be prepared for sales budgets but not for productions budgets.
IFRS 1 requires that management and auditors should depart from compliance with
GAAP if it is necessary to achieve a fair presentation when reporting financial results.
United Construction Company, which manufactures residential buildings, would most
likely use a process costing system.
The inventory turnover rate is equal to the average inventory divided by the cost of
goods sold.
An example of good internal control over cash is to have the person responsible for
physically handling all cash perform the bank statement reconciliations.
Effective internal control over receivables is designed to ensure that customers'
payments are promptly deposited.
The principle of consistency prohibits a company from changing an inventory valuation
method once one is selected.
Notes payable and accounts payable both require a company to pay an amount owed by
a certain date. Notes payable generally have interest, while accounts payable generally
do not.
A compensating balance is often required by a bank as a condition for granting a loan.
Manufacturing overhead is not applied to products when a process costing system is
used.
Authorization of a stock issue creates an asset on the books of the issuing corporation.
Internal control will aid in achieving accurate accounting for cash transactions.
An account receivable that arose from normal sales activity has a 16-month credit term.
This receivable will be classified as a noncurrent asset.
The future value of an investment gradually increases toward the present amount.
Equivalent units of production significantly differ from units completed and transferred
during the period only when no significant differences exist between beginning and
ending work in process.
A write down of inventory due to obsolescence reduces the amount in the Inventory
account and may increase the amount in the Cost of Goods Sold account.
The accrual basis of accounting recognizes expenses only when they are paid.
In evaluating cost variances, the accounting department determines whether variances
are favorable or unfavorable.
In a perpetual inventory system, when merchandise is purchased, it is debited to an
account called Purchases.
In setting standards, management's level of performance expectation must be something
less than ideal.
Because a budget is merely a forecast of future events, its benefits are extremely narrow
and limited.
A pension fund is an independent entity managed by a bank or insurance company.
Making accurate estimates of costs is a challenge for global companies.
A line of credit creates a liability for the borrower when it is granted by the bank.
Accumulated depletion is a contra-equity account and is recorded in the stockholders'
equity section of the balance sheet.
A company may choose to use process costing or job order costing, but never both
simultaneously.
The major outgrowth from business failures and allegations of fraudulent financial
reporting during the 1990's was the passage of the Securities and Exchange Act.
A job cost sheet usually contains a record of each of the following except:
A. The cost of direct materials charged to a particular job.
B. The overhead costs actually incurred on a particular job.
C. The cost of direct labor charged to a particular job.
D. The overhead cost applied to a particular job.
The balance of an unearned revenue account:
A. Appears in the balance sheet as a component of owners' equity.
B. Appears in the income statement along with other revenue accounts.
C. Appears in a separate section of the income statement for revenue not yet earned.
D. Appears in the liability section of the balance sheet.
Net income is:
A. The excess of debits over credits.
B. The increase in owners' equity resulting from the profitable operations of the
business.
C. The excess of liabilities over assets.
D. The increase in assets of a company during a year.
Capri Boat Corporation uses a job order cost system and applies overhead based on a
percentage of direct labor cost. Cost flows through the Work in Process Inventory
account during March are given below:
Only Job #007 was still in process at the end of March and this job had been charged
with $40,000 in direct materials cost.
Refer to the information above. The predetermined overhead application rate at Capri
Boat is what percentage of direct labor costs?
A. 38%.
B. 62%.
C. 260%.
D. 580%.
Dolphin Co. received $1,500 in fees during 2014, 1/3 of which will be earned in 2015,
the rest was earned when the amount was received. The company should report which
of the following amounts as income in 2014?
A. $1,500.
B. $500.
C. $1,000.
D. $0.
Which of the following items would cause cash per the bank statement to be smaller
than the balance of cash shown in the accounting records?
A. Outstanding checks.
B. Interest earned on the average balance of the checking account.
C. Check no. 824, in the amount of $620.30, is recorded by the bank as $602.30.
D. Deposits in transit.
Refer to the information above. What will be the monthly margin of safety (in dollars)
if 1,800 units are sold each month?
A. $82,500.
B. $70,500.
C. $12,000.
D. $16,500.
-Wilson Trucking, Inc. reports these account balances at January 1, 2015 (shown in
alphabetical order):
On January 5, Wilson Trucking collected $175,000 of its accounts receivable, paid
$150,000 on its accounts payable, and paid $11,000 on its note payable.
Refer to the information above. In a trial balance prepared on January 6, 2015, the total
of the credit column is:
A. $1,350,000.
B. $1,399,000.
C. $1,560,000.
D. $1,721,000.
Which factor is not relevant in deciding whether or not to accept a special order?
A. Incremental revenue that will be earned.
B. Additional costs that will be incurred.
C. The effect that the order will have on the company's regular sales volume and selling
prices.
D. The average cost of production if the special order is accepted.
Which of the following is not a characteristic of a process costing system?
A. The costs incurred in each process are accumulated in separate Work in Process
Inventory accounts.
B. It is suitable for mass-produced operations.
C. Costs are accumulated separately for each unit of production as it moves through the
factory.
D. The cost of a finished unit is the sum of the unit costs of performing each
manufacturing process.
Depreciation and disposal--a comprehensive problem
Domino, Inc. uses straight-line depreciation with a half-year convention in its financial
statements. On March 10, 2010, Domino acquired a computer system at a cost of
$98,800. Estimated useful life is six years, with residual value of $5,200.
(a) Complete the following schedule, showing depreciation expense Domino expects to
recognize each year in the financial statements.
(b) Assume Domino sells the computer system on October 3, 2013, for $26,650.
The accounts receivable turnover rate for Baldwin Corporation is 8, and for Basinger
Company the turnover rate is 10. These statistics indicate that:
A. Basinger collects its accounts receivable within 10 days on average; Baldwin
collects its accounts receivable in 8 days on average.
B. Basinger writes off as uncollectible a greater percentage of its accounts receivable
than does Baldwin Company.
C. Basinger collects its accounts receivable faster than does Baldwin Company.
D. Basinger makes on average 10 credit sales annually to each of its customers, while
Baldwin makes 8 credit sales to each customer.
In a system designed to measure cost variances, goods transferred from the Work in
Process account to the Finished Goods Inventory are valued at:
A. Actual cost.
B. Market value.
C. Standard cost.
D. The lower of actual cost or market value.
The financial statements of New World, Inc., provide the following information for the
current year:
Refer to the information above. Compute the amount of cash received from customers
during the current year.
A. $3,097,500.
B. $3,129,000.
C. $3,066,000.
D. $3,612,000.
If the 150% declining balance method is being used and an asset has a useful life of 20
years. What is the depreciation rate?
A. 7.5%.
B. 10%.
C. 15%.
D. 150%.
The directors of a corporation:
A. Are hired by the officers to run the business on a day-to-day basis.
B. May not own stock in the same corporation or be officers of the same corporation.
C. Are responsible for formulating corporate policy and for hiring corporate officers.
D. Are elected by the shareholders to run day-to-day operations.
When evaluating the liquidity of a proprietorship, creditors will likely base their
decision on:
A. The business ability to generate a profit.
B. Previous debts of the business.
C. The financial strength of the owner.
D. The total assets owned by the business.
The comparative balance sheets of Greenvale Games, Inc. show a net decrease in
unexpired insurance of $400 and a net decrease in interest payable of $250. In order to
reconcile net income with net cash flow from operating activities, net income should
be:
A. Increased by $650.
B. Reduced by $650.
C. Increased by $150.
D. Reduced by $150.
A machine cost $46,000 and had a useful life of 4 years and a residual value of $7,000.
What is the net present value of the machine if the annual cash flow is $16,000 and the
company uses a discount rate of 10%? An annuity table shows the present value of $1 at
10% for 4 years to be 0.683. The present value of an ordinary annuity of $1 discounted
at 10% for 4 years is 3.170.
A. $16,501.
B. $33,118.
C. $9,501.
D. $13,000.
Morgan Company has a ROI of 5% and a capital turnover of 8%. What is its return on
sales?
A. 133%.
B. 75%.
C. 62.5%.
D. Some other percentage.
No adjusting entry should consist of:
A. A debit to an expense and a credit to an asset.
B. A debit to an expense and a credit to revenue.
C. A debit to an expense and a credit to a liability.
D. A debit to a liability and a credit to revenue.
The rights of a common stockholder do not include the right:
A. To vote for directors.
B. To withdraw a share of corporate net assets proportionate to the person's
stockholdings.
C. To receive a proportionate share of corporate assets upon liquidation, after creditors
have been paid.
D. To share in profits when the board of directors declares a dividend.
Which element of a master budget would normally be prepared last?
A. A cash budget.
B. A budgeted balance sheet.
C. A budgeted income statement.
D. A production budget.
An asset which costs $18,800 and has accumulated depreciation of $6,000 is sold for
$11,600. What amount of gain or loss will be recognized when the asset is sold?
A. A gain of $1,200.
B. A loss of $1,200.
C. A loss of $7,200.
D. A gain of $7,200.
Total owners' equity = $360,000 (capital stock issued)
-The following transactions occurred during May, the first month of operations for
Hunter Products, Inc.:
* Issued 50,000 shares of capital stock to the owners of the corporation in exchange for
$600,000 cash.
* Purchased a piece of land for $400,000, making a $150,000 cash down payment and
signing a note payable for the balance.
* Made a $60,000 cash payment on the note payable from the purchase of land.
* Purchased equipment on credit from BBW, Inc. for $63,000.
Refer to the information above. What is the total owners' equity at the end of May?
A. $810,000.
B. $600,000.
C. $790,000.
D. $660,000.
During the current year, Carl Equipment Stores had net sales of $600 million, a cost of
goods sold of $500 million, average accounts receivable of $75 million, and average
inventory of $50 million.
Refer to the information above. Assuming a 365-day year, the average number of days
required for Carl Equipment to sell its inventory is: (Round your final answer to one
decimal place.)
A. 36.5 days.
B. 73.0 days.
C. 24.3 days.
D. 304.2 days.
Operating income can be calculated by:
A. Dividing fixed costs by the contribution margin ratio.
B. Multiplying fixed costs by the contribution margin ratio.
C. Multiplying the margin of safety by the contribution margin ratio.
D. Dividing the margin of safety by the contribution margin ratio.
Refer to the information above. What is the total owners' equity at the end of March?
A. $283,000.
B. $445,000.
C. $480,000.
D. $360,000.
Financial assets-effects of transactions
Five events involving financial assets are described below:
(a.) Sold merchandise on account.
(b.) Sold available for sale marketable securities at a gain. Cash proceeds from the sale
were equal to the current market value of the securities reflected in the last balance
sheet.
(c.) Collected an account receivable.
(d.) Adjusted the allowance for doubtful accounts to reflect the portion of accounts
receivable estimated to be uncollectible at year-end.
(e.) Made the fair value accounting adjustment reducing the balance in the available for
sale marketable securities account to reflect a decrease in the market value of securities
owned.
Budgeted debt service costs
On April 1, Fisher Corporation borrowed $400,000 from its bank by signing a 9%,
5-year note payable. The note calls for 60 monthly payments of $6,150, which includes
both interest and principal components.
(a) Interest expense budgeted for April amounts to: $_______________
(b) The carrying value of the note to be reported in the company's budgeted balance
sheet as of April 30 is: $_______________
(c) Interest expense budgeted for May amounts to (round to nearest whole dollar):
$_______________
(d) The carrying value of the note to be reported in the company's budgeted balance
sheet as of May 31 is (round to nearest whole dollar): $_______________
The cost of finished goods manufactured will exceed the cost of goods sold whenever:
A. The inventory of finished goods increases over the period.
B. The inventory of work in process increases over the period.
C. The inventory of finished goods decreases over the period.
D. The inventory of work in process decreases over the period.
Closing entries should be made:
A. Every year.
B. Only when an entity goes out of business.
C. Only if there is a profit.
D. Only if there is a loss.
The way in which financial statements relate is known as:
A. Solvency.
B. Objectivity.
C. Articulation.
D. Entity.
Loss contingencies
Ocean to Coast Airlines could, at any time, incur a large loss if one of its airplanes were
to crash. Is this an example of a loss contingency which should be disclosed in the
company's financial statements? Explain.
Identify the criticisms of using ROI (Return on investment) as the only performance
measure.
Transfer prices and cash flow
Satellite Products, Inc. owns two subsidiaries, Saturn Systems and Neptune Audio.
Saturn supplies printed circuit boards used by Neptune Audio in its state of the art
stereo radio. Neptune receives 20,000 boards from Saturn annually. Each radio
produced requires a single board. The market price of these boards is $40. Their total
variable cost of production is $20. The market price of the radios is $105. The unit
variable cost of the radio is $30 excluding the cost of the circuit board.
Saturn Systems is currently operating at full capacity of 35,000 boards per year
(including those transferred to Neptune Audio). Demand for the boards is strong and all
35,000 could be sold to outside customers. Saturn uses the full market price as the
transfer price charged to Neptune Audio.
The manager of Neptune Audio argues that Saturn Systems benefits from intercompany
transfers because of reduced advertising and other selling costs. Thus, he wants to
negotiate a lower transfer price of $35.
Required:
1. Calculate the contribution margins for the two subsidiaries using the $40 transfer
price.
2. Recalculate the contribution margins at the $35 price suggested by the manager of
Neptune Audio. What effect would the change in transfer price have on the company as
a whole?
3. Suppose that Neptune Audio operates in a country that imposes a 40% tax rate on
corporate income. Saturn Systems is located in a country where the tax rate is only
10%. What would you recommend regarding the transfer price charged by Saturn for
the boards transferred to Neptune?
Completion of balance sheet
Use the following information to complete the balance sheet of Adelphi Construction as
of December 31, 2014.
(1) The company was organized on January 1, 2014 and has operated for the full year
2014.
(2) Earnings were $275,000 and dividends of $70,000 were paid to stockholders.
(3) Cash and accounts receivable together amount to one and one-half times as much as
notes payable.
Prepare a stockholders' equity section
When Haven Corporation was incorporated in 2013, authorization was obtained to issue
200,000 shares of $5 par value common stock and 6,000 shares of 8% cumulative
preferred stock. The preferred stock has a par value of $100. All the preferred stock was
issued at $107 per share, and 110,000 shares of the common stock were sold for $9 per
share. The operations of the company resulted in a net loss of $19,000 in 2013 and net
income of $125,000 in 2014. In 2015, net income was $352,000, and the cash position
was sufficient to allow the board of directors to declare a cash dividend of $1 per share
to the common shareholders, as well as satisfy all preferred stock dividend
requirements.
Complete in good form the stockholders' equity section of Haven Corporation's balance
sheet at December 31, 2015. (Hint: First determine the total amount of dividends
declared in 2015.)
The following information is available for the LBB Company for the year 2015:
Required
(1) What are total manufacturing costs charged to work in process?
(2) What are costs of finished goods manufactured?
(3) What is the cost of goods sold?
(4) What is gross profit?
(5) What is operating income?
A and B are partners. A has $50,000 in his capital account and B has $75,000 at the
beginning of the year. A receives a salary of $15,000 and B receives $12,000. Each
partner receives 5% of the beginning balance of their capital accounts. The remainder is
split 45% to A and 55% to B. Net income for the year was $125,000. What is the
amount of each capital account at year-end?
Stan Todd, Inc. wants to manufacture a new cell phone that can be worn on the wrist.
Information from doing market research shows that he can sell this phone for $25 each.
His fixed costs would be $145,000 a year and variable costs would amount to $10 per
phone.
(1) What would the contribution margin ratio be?
(2) What sales volume in units would Stan need to break-even?
(3) What sales volume in units would Stan need to earn $200,000 profit?
(4) What would be the margin of safety if he sold 25,000 units (use the information
calculated in #2)?
Completion of balance sheet
Use the following information to complete the December 31, 2014 balance sheet of
Copper Supplies Company.
(1) Owners' equity as of January 1, 2014, totaled $175,000, which included capital
stock of $150,000.
(2) Additional capital stock was issued during 2014 in exchange for $40,000 cash.
(3) Net income for 2014 amounted to $200,000; no dividends were paid during 2014.
(4) Cash and accounts receivable together amount to 3 times as much as accounts
payable.
The following expenditures are related to land, land improvements, and buildings,
which were acquired on November 1, 2015.
Required:
Determine the cost of the land, the building and the improvements (Round to the
nearest dollar)
Prepare journal entries on December 31, 2015 for depreciation assuming the building
will have a useful life of 20 years and no residual value. Use double declining balance
method and the half-year convention. Depreciate the land improvements using
straight-line method, a 5 year life, to the nearest month with zero residual value (to the
nearest dollar).
Pricing special orders
Explain why an American corporation might sell a product in Eastern Europe at a price
significantly below that for which it sells the same product in the United States.
Evaluating the adequacy of net income
Assume that Delta Corp. earns net income of $1,000,000 in the current year. Identify
two important factors that investors should consider in evaluating the reasonableness of
this dollar amount. Explain what investors may learn from each of these considerations.
Gross profit method
Horizon Company had sales of $1,750,000 during the current period and a gross profit
rate of 40%. The company's cost of goods available for sale during the period was
$1,400,000. The company's ending inventory must have amounted to
$_______________.
Components of the total cost of quality
Explain how it is possible to reduce the total cost of quality by increasing the amount
spent on prevention and appraisal activities.
JIT manufacturing
Briefly explain the nature and goals of a JIT manufacturing system.
