Chapter 1 At the end of the month of October, Jack’s had made sales to customers

Document Type
Test Prep
Book Title
Financial Accounting: A Bridge to Decision Making 6th Edition
Authors
Robert W. Ingram, Thomas L. Albright
Accounting and Organizations 21
73. The term “value added” is most closely associated with
a.
sales
b.
profit
c.
expenses
d.
owned investment
74. Jack is the owner of Jack’s Pizza Parlor. At the end of the month of October, Jack’s had made sales
to customers of $12,000. The cost of resources included: ingredients of $3,500, labor of $5,000,
other costs of $2,200. Jack’s profit for the month of October is
a.
$1,300
b.
$3,500
c.
$8,500
d.
-0-
75. Accounting can be used to measure activities of a business by resources that it
Receives Spends
a.
No No
b.
Yes No
c.
No Yes
d.
Yes Yes
76. The most common form of organization in the United States is
a.
corporation
b.
partnership
c.
sole proprietorship
d.
not for profit
77. A partial profit statement for last month reveals cost of resources consumed of $32,800 and profit of
$3,650. From this information, we can determine the value of resources created from sales to
customers to be
a.
$29,150
b.
$36,450
c.
-0-
d.
cannot be determined from information provided
22 Chapter 1
MATCHING
For each of the well known national organizations that follow, indicate in the space provided which
of the terms below best describes the type of organization. An answer may be used more than once
a.
Merchandising
b.
Manufacturing
c.
Service
d.
Merchandising and Service
e.
Manufacturing and Service
f.
Manufacturing, Merchandising, and Service
1. McDonald’s
2. Exxon
3. Red Cross
4. Kroger Supermarkets
5. Disney World
6. Borders Bookstores
7. King & Spalding Law Firm
8. University of Georgia
9. Dell Computers
10. Home Depot
Accounting and Organizations 23
Match these types of organizations with the firms shown below. An answer may be used more than
once.
a.
Merchandising
b.
Manufacturing
c.
Service
d.
Nonprofit
11. Lowe’s
12. Chrysler Corp.
13. HP Computers
14. American Red Cross
15. Jane Smart, CPA
16. General Mills
17. John Savage, MD
18. Atlanta Symphony Orchestra
19. CitiBank
20. Wal-mart
24 Chapter 1
In the space provided, indicate by letter, the characteristics that are associated with the following
forms of business organization.
a.
Corporation
b.
Partnership
c.
Proprietorship
21. Has legal identity separate from owners
22. Has only one owner
23. Owners have limited liability
24. Owners have right of mutual agency
25. Organization must pay taxes on its income
26. About 70% of U.S. firms have this form
27. Subject to moral hazard
28. Organization with more than one owner but without legal identity from its owners
Accounting and Organizations 25
PROBLEM
1. Lance Legstrong owns a bicycle sales and repair shop. He had the following transactions during
May:
a.
Provided repair services at a price of $950 during the month. The cost of supplies and
materials used was $450.
b.
Rent on the shop was $750.
c.
Sold $5,000 of bicycles that cost the firm $2,750.
d.
The cost of utilities for the month was $125.
e.
Employees were paid wages of $1,100 during the month.
f.
The cost of advertising for May was $75.
g.
Miscellaneous costs for May were $150.
Required:
Determine the profit earned by Mr. Legstrong for May.
26 Chapter 1
2. Tom Greenthumb owns a lawnmower sales and repair shop. He had the following transactions
during July:
a.
Provided repair services at a price of $1,150 during the month. The cost of supplies
and materials used was $525.
b.
Rent on the shop was $550.
c.
Sold $4,900 of mowers that cost the firm $3,050.
d.
The cost of utilities for the month was $150
e.
Employees earned wages of $1000 during the month
f.
The cost of advertising for July was $110.
g.
Miscellaneous costs for July were $215.
Required:
Determine the profit earned by Tom Greenthumb for July.
Accounting and Organizations 27
3. The Horizon Diner began business exactly one week ago when Seymour and Joan obtained
permission from the college's business manager to rent a previously vacant portion of the Student
Union Building. At the end of the first week, the following information was available:
a.
Rent of $200 had been paid to the college to rent the space for the first week.
b.
Specialty and variety breads had been purchased at a cost of $220. All had been used.
c.
An ad was run in the student newspaper announcing the grand opening. It had cost
$60.
d.
Seymour and Joan took in $1,750 from sales of sandwiches.
e.
Condiments (mustard, mayo, etc.) costing $100 had been purchased and used.
f.
Rental of uniforms and purchase of napkins, plastic knives, and forks totaled $155 the
first week. All supplies were used up that first week.
Required:
Prepare a profit report for the first week of business.
28 Chapter 1
4. At the beginning of the summer season, you used $10,000 of your savings to open a booth on the
boardwalk of a popular seaside resort. Your business sold the usual tourist items including T-shirts,
suntan oil, sunglasses, pennants, trinkets, etc. During the season, you purchased goods for resale
costing $25,000. Other costs included $6,000 for rental of space, $6,500 for hired help, $1,400 for
promotional activities, and $300 for electricity. You did the buying and supervised employees, but
otherwise, played on the beach. Sales during the season totaled $45,000.
Required:
a.
What was the profit of your business for the summer?
b.
What was the return on investment of your business?
c.
Thinking as a businessperson, identify the two primary choices you have regarding
how you might utilize the profits your business has created.
5. The Carnival Company recorded the following sales to customers and costs of doing business
during the month of June, 2007:
Cost of employee labor
$11,100
Sales from hourly charges on pool tables
25,875
Cost of food products
5,512
Cost of janitor and other maintenance
1,550
Sales of refreshments
16,125
Rent on the building
2,700
Required:
Prepare a profit report for June, 2007.
Accounting and Organizations 29
6. David Strum builds guitars by hand. He pays $600 for 10 board-feet of wood for the cases. Each
guitar requires 2 board-feet of wood to build. A set of strings for each guitar costs $40. Other
materials cost $50 per guitar. Strum Away pays $640 rent and $240 in utilities per month. Strum
Away produces and sells 8 guitars per month at a price of $1,000 each.
Required:
a. What is the average cost of a guitar?
b. How much profit does Strum Away earn on each guitar?
c. What is her normal profit per month?
30 Chapter 1
7. Shawn Paris builds alarm clocks by hand. He pays $900 for 50 board feet of wood for the cases.
Each clock requires 3 board feet of wood to build. The clockworks are purchased at $9 each. Other
materials cost $15 per clock. Shawn pays $300 rent and $140 in utilities per month. Shawn produces
and sells 10 clocks per month at a price of $450 each.
Required:
a. What is the average cost of a clock?
b. How much profit does Shawn earn on each clock?
c. What is his normal profit per month?
Accounting and Organizations 31
8. Dinah Malek manufactures woven reed baskets by hand on a street corner in downtown Alexandria,
Egypt not far from the Mediterranean Sea. Dried reeds cost $90 per bushel which is enough to make
60 baskets of varying sizes and shapes. Dye, to give the baskets their colorful eye-appeal, and other
materials cost an average of $80 per month. While Dinah works on the street corner (to attract
tourists), she actually has a small shop located just down a side street where employees make most
of the baskets. She pays rent of $250 per month while utilities cost another $50 monthly. Labor costs
typically run about $10 per basket.
During an average month, Dinah's operation produces and sells 200 baskets.
Required:
a.
What is the average cost to produce a basket?
b.
Assuming an average sale price of $50 per basket, how much profit does Dinah earn
on each one?
c.
On the average, what is Dinah's monthly profit?
32 Chapter 1
9. Eva’s Restaurant has just completed its fourth complete year of business at year-end 2007. The
accountant has prepared the following profit report:
Eva’s Restaurant Profit Report
For the Year 2007
Resources created
$530,000
Resources consumed:
Cost of goods sold
$235,000
Wages and salaries
110,000
Building rent
35,000
Advertising
60,000
Supplies
20,000
Total resources consumed
460,000
Profit
$ 70,000
Required:
The owners of Eva’s Restaurant wondered if the amount of profit was appropriate for this kind of a
business. Further, they wondered if it was "enough." Advise the owners regarding their questions.
What additional information would you like to have before giving your advice?
Accounting and Organizations 33
10. Make it Big Enterprises your investment brokerage house, has provided the following information
concerning three similar companies in which you might consider making an investment. All
information is given in thousands of dollars.
Apple
Bond
Corona
Resources created from sales
$200
$400
$600
Wages expense
90
200
340
Other expenses
70
150
220
Owners' investment
400
600
600
Required:
a.
Assuming the information is representative of each firm's future expectations, which
firm would you prefer to invest in and why? Show any computations that you make.
b.
Comment on the effectiveness and efficiency of these firms. Show supporting
calculations where helpful.

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