A manufacturing company reported total inventory of $75,000. Assuming the following
account balances, what is this company’s work in process inventory?
Finished goods $15,000 Merchandise inventory $10,000
Raw materials $40,000
a. $10,000
b. $20,000
c. $60,000
d. $65,000
Research and development costs are
a. treated as an expense when incurred.
b. capitalized but not amortized.
c. capitalized and amortized over the periods that will probably benefit from the
research and development.
d. included with the cost of the patent resulting from the research and development.
Noland, Inc. uses the LIFO method of inventory costing and is facing the possibility of
a LIFO liquidation for the current year. Merchandise purchase prices have increased
since the LIFO method was adopted. If the company does not purchase additional
merchandise before year-end, which one of the following effects will occur as a result
of a LIFO liquidation?
a. Reported earnings for the current year will be higher.
b. Income taxes for the current year will be lower.
c. Cost of goods sold for the current year will be higher.
d. Gross margin for the current year will be lower.
When the amount for a debit entry in a journal is transferred to a specific account in the
general ledger, it must be posted as a
a. debit to the account in the general ledger.
b. credit to the account in the general ledger.
c. total amount, without regard to debit or credit, since the general ledger accounts do
not have spaces for debit and credit entries.
d. decrease to the account in the general ledger.
Refer to Georgia’s Salon. On May 31, 2013, all but $1,500 of the gift cards had been
redeemed for salon services. What is the impact on the accounting equation of
recording the expired gift cards?
a. Assets and liabilities increase.
b. Assets and liabilities decrease.
c. Liabilities increase and stockholders’ equity decreases.
d. Liabilities decrease and stockholders’ equity increases.
Dunn, Inc., started the year with total assets of $1,400,000 and total liabilities of
$240,000. Net income for the year is $1,000,000 and dividends declared and paid
during the year are $450,000.
Assume that a company has an operating cash flow ratio of 0.75. Payment of accrued
wages payable would cause the operating cash flow ratio to
a. decrease.
b. increase.
c. be unchanged since the effects offset one another.
d. be unchanged since it has no impact on any current liability or operating cash flow
accounts.
A consulting firm provided services last month and billed its client. This month, the
company received payment from the customer. What impact does this month’s
transaction have on the firm’s working capital?
a. increase
b. decrease
c. no net effect
d. Unable to determine with this limited information.
The following costs were incurred to acquire and prepare land for a new parking lot:
purchase price of land, $900,000; cost to clear the land, $40,000; cost of paving,
$35,000; and cost of lighting for the parking lot, $20,000. How much should be
recorded in the Land Improvements account?
a. $20,000
b. $35,000
c. $55,000
d. $40,000
Many stockholders choose to invest in preferred stock because
a. preferred stock can always be converted into common stock at the stockholder’s
option.
b. the preferred dividend distributions are generally increased each year.
c. dividends are distributed to preferred stockholders before common stockholders.
d. preferred stock includes the right to participate in management decisions through
voting privileges.
On November 1, 2013, Aero Graphics sold merchandise to a customer and received a
10%, 90-day promissory note with a principal amount of $60,000.
A) Identify the maturity date of the note.
B) How much total interest revenue will the company earn over the term of the note?
C) By how much will net income be understated if the company fails to make a
year-end adjusting entry for the note?
During 2013, Going, Going, Gone sold 100 hot air balloons for $4,000 each. The
balloons carry a 5-year warranty for defects. Estimates indicate that repair costs will
average 4% of the total selling price. The estimated warranty liability at the beginning
of the year was $42,000. $11,000 in claims was actually incurred during the year to
honor their warranty. What was the balance in the estimated warranty liability at the end
of the year?
a. $47,000
b. $42,000
c. $37,000
d. $ 5,000
Refer to Happy Heights Country Club
b. On which date did the country club collect golf lessons revenue in advance?
a. July 2nd
b. July 3rd
c. July 5th
d. July 7th
When using the indirect method to determine operating cash flows, where is the gain
from selling a long-term investment recognized? (The proceeds from selling the
investment are considered separately.)
a. operating activity
b. investing activity
c. financing activity
d. noncash investing or financing activity
e. not reported on the statement of cash flows
Under the effective interest method, the cash paid on each interest payment date will
a. decrease if bonds are issued at a premium.
b. increase if bonds are issued at a premium.
c. remain constant regardless of the issuance price.
d. increase if bonds are issued at a discount.
A company’s current ratio is 2.00. If the company makes a payment on account, what is
the effect on the current ratio?
a. increase
b. decrease
c. no change
d. Unable to determine with this limited information.
Bennett Motors is facing the following business decisions. Which decision will
leastlikely require financial information?
a. A local bank is reviewing the company’s loan application.
b. The company is attempting to sell its stock to the public.
c. The labor union representing the company’s employees is negotiating a pay raise as
part of a new labor agreement.
d. The company’s management is deciding whether to detail its vehicles today or
tomorrow.
Refer to Fabian Woodworks. If the company uses the double-declining-balance
depreciation method, what amount is the depreciation expense for 2013?
a. $4,800
b. $2,880
c. $1,728
d. $2,000
The accountant preparing the January bank reconciliation identified the following
items:
Cash balance per company records $35,900
Outstanding checks 12,050
Interest earned on the checking account 75
Customer’s NSF check returned by the bank 325
There was also an error in the accounting records whereby a customer’s check for $101
was recorded as $110. What is the company’s adjusted cash balance at January 31st?
a. $23,591
b. $35,641
c. $35,659
d. $47,691
Refer to Gainesville Truck Center. What is the impact on the accounting equation of the
journal entry for the employer’s tax expenses and related liabilities for this payroll
transaction?
a. Assets and liabilities will increase.
b. Assets and stockholders’ equity will increase.
c. Assets and liabilities will decrease.
d. Liabilities will increase and stockholders’ equity will decrease.
Absolute Appliances
The company sold merchandise to a customer on December 1, 2013, for $120,000. The
company accepted a promissory note as payment. The note has a term of three months
and an annual interest rate of 10%. The company’s accounting period ends on
December 31.
Refer to Absolute Appliances. What is the maturity date of the note?
a. December 31, 2013
b. January 31, 2014
c. February 28, 2014
d. March 1, 2014
A tax service prepared tax returns for twenty clients at $200 each. By the end of June,
the service had collected from eight clients. Under the accrual basis, what amounts will
be reported on the income statement and the statement of cash flows for June?
Income Statement Statement of Cash Flows
a. $4,000 $1,600
b. $4,000 $4,000
c. $2,400 $2,400
d. $1,600 $1,600
Refer to A&B Foods. If the company uses the aging of accounts receivable method to
estimate its bad debts, what amount will be reported as bad debt expense for 2013?
a. $50,000
b. $75,000
c. $78,000
d. $53,000
What effects on a retail store’s accounting equation occur when merchandise returned
by customers is recorded?
a. Assets and stockholders’ equity decrease.
b. Assets and stockholders’ equity increase.
c. Assets decrease and liabilities increase.
d. Stockholders’ equity decreases and liabilities increase.
Items should be included as part of the company’s inventory if they are
a. purchased from a creditor, although not paid for by year end.
b. held in anticipation of an increase in market value.
c. determined to be part of cost of goods sold.
d. sold during the period.
The following costs were incurred to acquire and prepare land for a new parking lot:
purchase price for land, cost to clear the land, cost of paving, cost of lighting for the
parking lot, and cost of landscaping for the parking lot. How should the company
determine which costs should be recorded as Land Improvements and which costs
should be recorded as Land?
a. The costs with an unlimited life are debited to Land, and the costs with a limited
useful life are debited to Land Improvements.
b. The costs with a limited life are debited to Land, and the costs with an unlimited
useful life are debited to Land Improvements.
c. The costs to be depreciated are debited to Land, and the costs that will not be
depreciated are debited to Land Improvements
d. Costs that are depreciable are debited to Land Improvements, while other costs are
expensed immediately because of a lack of definite life.
Refer to Beard Marine. What was the economic effect of the dividend payment?
a. The dividend reduced net income for 2013.
b. The dividend should be added to net income if the company’s accounting equation is
in balance.
c. The dividend reduced total retained earnings.
d. The dividends must be paid whenever the company reports net income.
Flag Financial uses straight-line depreciation for its equipment with an estimated useful
life of 10 years and zero residual value. The CEO points out that the equipment will last
much shorter than 10 years, perhaps 5 years. What is the impact on earnings per share
and net income of depreciating equipment over 5 years rather than 10 years?
a. Both earnings per share and net income will decrease.
b. Both earnings per share and net income will increase.
c. Earnings per share will decrease and net income will increase.
d. Earnings per share will increase and net income will decrease.
Refer to Ladder Distributors. What is the total amount of stockholders’ equity that will
be presented on the company’s March 31, 2015, balance sheet?
a. $1,340,000
b. $1,372,000
c. $1,708,000
d. $1,740,000
On January 2, Alfredo Corporation sold merchandise with a gross price of $100,000 to
a customer with terms of 2/10, n/30. How much Sales Discounts would be recorded if
payment was received from the customer on January 8? Assume the company uses the
Gross Method of recording receivables.
a. $0
b. $2,000
c. $98,000
d. $100.000
Issued shares represent the
a. number of previously issued shares that have been repurchased by the corporation.
b. number of shares that the corporation has sold.
c. number of shares that are currently held by stockholders.
d. maximum number of shares that can be sold by the corporation.
Refer to AT&U Company. If the company uses the aging of accounts receivable
approach to estimate its bad debts, what will be the net realizable value of its accounts
receivable after the adjustment for bad debt expense?
a. $640,000
b. $595,000
c. $620,000
d. $615,000
When using the direct method to determine operating cash flows, how is the issuance of
stock for cash shown on the Statement of Cash Flows?
a. operating activity
b. investing activity
c. financing activity
d. noncash investing and financing activity
e. not reported on the statement of cash flows
Transportation-in is
a. an operating expense.
b. part of purchase returns and allowances.
c. added to transportation-out as part of the calculation of cost of goods sold.
d. part of the net cost of purchases.
The sole purpose for creating an internal control system is to deter embezzlement.
When computing the dividend payout ratio, net income is divided by the common stock
dividends.
The purpose of financial reporting is to provide economic information to investors,
creditors, and other financial statement users.
The accounts receivable turnover ratio is used to evaluate how well a company does in
collecting its accounts receivable.
A corporation was incorporated on January 1, 2013. Its corporate charter provided for a
maximum of 1,000,000 shares of common stock to be sold in the future of the
corporation. In January, 150,000 shares were sold to the public and an additional
100,000 shares were sold in October. In November, 15,000 of the issued shares were
bought back by the corporation. Complete the table below as of the end of 2013.
Quantities:
Authorized Shares
Issued Shares
Outstanding Shares
Treasury Shares
Interest is the time value of money.
Publicly traded companies must prepare an additional financial statement called The
Worksheet.
Internal users of accounting information include present creditors and management.
The designated price for which employees may exercise stock options is called the
____________________ price.
Merry Maids Company
Merry Maids Company began 2013 with a cash and cash equivalents balance of
$7,670. Consolidated statements of cash flows for the years ended December 31, 2014
and 2013, are presented below:
(in thousands) 2014 2013
Operating Activities:
Net income $6,300 $6,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 4,500 4,020
Amortization of software 520 980
Effect of restructuring charges (350) (440)
Deferred income taxes (600) 360
Gain on the disposal of fixed assets and other assets (260) (270)
Changes in assets and liabilities (net of businesses acquired)
Accounts receivable (2,740) (3,730)
Inventories 75 430
Other assets 880 (1,090)
Accounts payable and accrued liabilities 362 700
Other liabilities 595 1,815
Net cash provided by operating activities $9,282 $8,775
Net cash used by investing activities ($6,131) ($6,155)
Net cash provided by financing activities ($4,993) ($3,090)
Cash and cash equivalents at end of year $5,358 $7,200
Refer to Merry Maids Company. What method is used to calculate the net cash
provided by operating activities?
A company in the process of liquidation is considered to be under the going concern
assumption.
In a sound system of internal control, cash receipts should be deposited daily.
Refer to Baloon-E-Tunes. Calculate the amount of working capital at December 31,
2013. What can you learn from the current ratio that you cannot learn from the amount
of working capital?
You own a thriving book store in a major college town. You have been talking with
your CPA about borrowing $5,000,000 to finance a larger and more modern building.
One option is to issue 20-year bonds with a fixed rate of 8% while another option is to
issue 20-year bonds with a variable rate of one-year LIBOR (London Interbank Offered
Rate) plus 5%. For the first year, this will result in a 6.2% rate, but the rate will be
adjusted annually. The current market interest rate is 8%.
What things should you consider in making the decision about which borrowing option
is better for your company?
The accounting records for Dusek Dentistry, Inc. show the following information for
February 28, 2013:
Date Amount Number Date Amount
Balance Feb. 1 $ 8,510 Checks: 343 Feb. 2 4,100
Receipts 10,600 344 Feb. 4 1,800
Payments (11,300) 345 Feb. 11 2,100
Balance Feb. 28 7,810 346 Feb. 12 1,200
347 Feb. 18 300
348 Feb. 26 400
Deposits: Feb. 4 $ 1,200 349 Feb. 28 1,400
Feb. 11 1,200 $11,300
Feb. 18 2,700
Feb. 25 3,400
Feb. 26 700
Feb. 27 200
Feb. 28 1,200
$10,600
Additional information pertaining to this checking account was obtained by comparing
the monthly bank statement with the company’s records. The following was revealed:
1. The ending cash balance per the bank statement was $7,960.
2. Deposits of 2,100 from February 26-28 are in transit.
3. Checks 347 and 349 are outstanding.
4. An $100 NSF check from a customer did not clear the bank. This NSF check was
included in the February 25th deposit.
5. Check #343 was prepared correctly as a $1,400 payment on account. This check
was properly recorded by the bank, but was erroneously included on the company’s
records in the amount of $4,100.
6. A debit memo for $2,000 was shown on the bank statement as notice that the
company’s rent was automatically paid from the checking account on February 1st.
7. A credit memo for $15 was shown on the bank statement as notice that the
company had earned interest on its average daily balance in this checking account.
8. The bank’s fees for the month totaled $65.
A) Prepare a bank reconciliation to calculate the company’s adjusted cash balance at
February 28, 2013.
B) Prepare the journal entries that must be recorded to adjust the cash records as a result
of these bank reconciliation procedures.
