COMPREHENSIVE EXAMINATION B
(Chapters 6 – 8)
Approximate
Problem Topic Points Minutes
B – I Multiple Choice ……………………………………… 20 17
B – II Ratios …………………………………………………. 12 10
B – III Bank Reconciliation ………………………………. 16 15
B – IV Periodic Inventories ……………………………….. 16 10
B – V Journal Entries ……………………………………… 9 6
B – VI Cash Budget …………………………………………. 15 12
B – VII Notes Receivable ………………………………….. 12 10
100 80
Checking Work …………………………………….. 10
90
Test Bank for Accounting, Fifth Edition
B-2
Problem B – I — Multiple Choice (20 points)
1. Which one of the following is not a key principle of cash management?
a. Plan the timing of major expenditures
b. Invest idle cash
c. Keep inventory levels low
d. Maintain as much cash as possible in order to pay obligations when due
2. For what purpose does a company use LIFO, FIFO, or average cost?
a. To determine the proper valuation of each individual inventory item
b. To determine the quantity and selling price of inventory items sold
c. To determine the amount to assign to inventory items under a particular cost flow
d. To parallel the physical flow of goods as they are sold
3. Which one of the following is not reported as part of ‘cash and cash equivalents’ on the
balance sheet?
a. Money orders
b. Restricted cash
c. Treasury bills
d. Commercial paper
4. Which one of the following indicates when Bad Debt Expense should be recorded?
a. Each time a credit sale is made
b. At the end of an accounting period during the adjusting process
c. Whenever a customer gets behind in paying for receivables
d. Whenever an account is written off as uncollectible
5. Which one of the following is a principle of internal control that requires that different
individuals should be responsible for related activities?
a. Establishment of responsibility
b. Documentation procedures
c. Management responsibility
d. Segregation of duties
6. What happens when a company writes off an uncollectible account under the allowance
method?
a. The cash realizable value stays the same.
b. Expenses increase.
c. The allowance account increases.
d. The amount the company expects to collect declines.
7. A company began operations on January 1. It purchased three shredders as part of its
inventory. The first shredder had a cost of $45; the second one cost $52; and the third
shredder cost $58. The company decided to use LIFO and sold two shredders in January.
If the company had used FIFO, by how much would gross profit for the period be greater
or less than using the LIFO method?
a. Gross profit would be $13 greater.
b. Gross profit would be $13 less.
c. Gross profit would be the same because only the inventory cost changes.
d. Gross profit would be $6 less.
Comprehensive Examination B
B-3
8. Buzios, Inc. made an error in the physical count of goods on hand at the end of June
which resulted in a $1,200 understatement of the ending inventory. Which of the following
is one effect of the error?
a. Net income will be understated.
b. Cost of goods available for sale will be overstated.
c. Cost of goods sold will be understated.
d. Gross profit will be overstated.
9. What is a LIFO reserve?
a. The amount of income taxes saved when using LIFO instead of FIFO
b. The difference between ending inventory using LIFO compared to FIFO
c. The difference between inventory cost using LIFO in the balance sheet and cost of
goods sold in the income statement using LIFO
d. The extra cost a company incurs as a result of using LIFO compared to FIFO in
periods of rising prices
10. Which of the following is not a method a company may use to accelerate cash receipts?
a. Decrease the turnover of receivables by more aggressive collections efforts
b. Sell receivables
c. Use national credit cards
d. Factoring
Problem B – II — Ratios (12 points)
The following information is available for Hanover Products:
2014 2013
Accounts receivable $60,000 $74,000
Cost of goods sold 528,000 580,000
Inventory (ending) 52,000 68,000
Net cash provided by operating activities 220,000 170,000
Net sales 904,500 940,000
Capital expenditures 40,000 38,000
Dividends 24,300 32,000
Instructions: Compute the following for 2014:
1. Inventory turnover
2. Days in inventory
3. Accounts receivable turnover
4. Average collection period
Test Bank for Accounting, Fifth Edition
B-4
Problem B – III — Bank Reconciliation (16 points)
Heavenrook Candies received a bank statement for the month of August 2014, which showed a
balance per bank of $6,450. The company’s cash account in the general ledger showed a
balance of $5,780 at August 31. Other information that may be relevant in preparing a bank
reconciliation for August follows:
1. The bank returned a NSF check from a customer for $55.
2. The company recorded cash receipts of $980 on August 31 but this amount does not appear
on the bank statement.
3. A check correctly written and paid by the bank for $970 was incorrectly recorded in the cash
payments journal for $790. The check was a payment on account.
4. Checks that were written in August but still had not been presented to the bank for payment
at August 31 amounted to $510.
5. The bank posted $1,400 to the company’s account on August 31 representing an EFT
payment from a customer that does not appear in the company’s ledger.
6. The bank included a $25 debit memorandum for service charges for the month of August.
Instructions:
1. Prepare a bank reconciliation for the Heavenrook Candies for August, which reconciles the
balance per books and the balance per bank to their adjusted correct balances.
2. Prepare the necessary adjusting entries for Heavenrook Candies at August 31, 2014.
Comprehensive Examination B
B-5
Problem B – IV — Periodic Inventories (16 points)
Tondo Trucks uses the periodic inventory method and had the following purchases of toy trucks
during the month of December. Tondo sold 84 trucks during the month.
Date Transaction Units Unit Cost
12/1 Beginning inventory 10 $40
12/8 Purchase No. 1 45 $45
12/15 Purchase No. 2 30 $50
12/26 Purchase No. 3 15 $60
Instructions: Answer the following independent questions. Show supporting computations.
1. How much is the dollar value of the ending inventory on December 31 if the average cost
method is used?
2. How much is the dollar value of the ending inventory on December 31 and the cost of goods
sold during December if the LIFO inventory method is used?
3. How much is the dollar value of the ending inventory on December 31 and the cost of goods
sold during December if the FIFO inventory method is used?
Test Bank for Accounting, Fifth Edition
B-6
Problem B – V — Journal Entries (9 points)
Amazing Tools uses the allowance method to account for uncollectible accounts.
Instructions: Prepare the appropriate journal entries to record the following transactions during
2014. You may omit journal entry explanations.
May 20 The account of Barack Obama for $1,240 was deemed to be uncollectible and is
written off as a bad debt.
Aug. 7 Received a check for $300 from Barack Obama whose account had previously been
written off as uncollectible.
Dec. 31 Use the following information for the year-end adjusting entry:
The balances of Accounts Receivable and Allowance for Doubtful Accounts at year–
end are $121,000 and $120, respectively, both with debit balances. It is estimated that
bad debts will be 1.5% of accounts receivable.
Comprehensive Examination B
B-7
Problem B – VI — Cash Budget (15 points)
Pansetta Bakery has budgeted sales revenues as follows:
April May
Credit sales $45,000 $48,000
Cash sales 12,000 16,000
Total sales $57,000 $64,000
Past experience indicates that 40% of the credit sales will be collected in the month of sale, and
the remaining 60% will be collected in the following month.
Purchases of inventory are all on credit, and 20% will be paid in the month of purchase with the
balance paid in the month following purchase. Budgeted inventory purchases are:
April $34,000
May 37,000
Other budgeted amounts include: (a) selling and administrative expenses of $24,800 each month
and (b) dividends of $8,200 to be paid in May. Included in the selling and administrative expenses
is depreciation expense of $1,900.
The company wishes to maintain a minimum cash balance of $4,000 at the end of each month.
The company borrows money from the bank at 4% interest if necessary to maintain the minimum
cash balance. Borrowed money is repaid in months when there is an excess cash balance. The
beginning cash balance on May 1 was $4,500. Money is borrowed in $100 increments.
Instructions: Prepare a cash budget for the month of May. Prepare separate schedules for
expected collections from customers and expected payments for purchases of inventory.
Test Bank for Accounting, Fifth Edition
B-8
Problem B – VII — Notes Receivable (12 points)
Instructions: Prepare journal entries to record the following events:
July 1 Hala Catering accepted a 5%, 3-month, $8,400 note dated July 1 from VIP
Productions for the balance due on account.
July 31 Hala Catering accrued interest on the July 1 note form VIP Productions.
Oct. 1 Collected the VIP Productions note in full. Interest was correctly accrued on July 31,
August 31, and September 30.
Oct. 1 Assume instead, that the note is dishonored and that no interest has been accrued.
Hala Catering expects VIP Productions to eventually pay the amount owed.
Comprehensive Examination B
B-9
Solutions — Comprehensive Examination B
Problem B – I — Solution
Problem B – II — Solution
Problem B – III — Solution
Test Bank for Accounting, Fifth Edition
B-10
Problem B – IV — Solution
Problem B – V — Solution
Comprehensive Examination B
B-11
Problem B – VI — Solution
Problem B – VII — Solution