Total fixed costs remain constant as the level of activity changes within the relevant
range.
a. True
b. False
If the cost of materials is not a significant portion of the total product cost, the materials
may be classified as a part of factory overhead cost.
a. True
b. False
Dim Co. issues common stock of $15,000. Which of the following statements regarding
the effect of this transaction on the company’s liquidity and profitability metric is true?
a. The transaction increases the liquidity and decreases the profitability of the company.
b. The transaction decreases the liquidity and increases the profitability of the company.
c. The transaction increases the liquidity and has no effect on the profitability of the
company.
d. The transaction has no effect on the liquidity and increases the profitability of the
company.
The major advantage of using the rate of return on investment over operating income as
a divisional performance measure is that, divisional investment is directly considered
and thus comparability of divisions is facilitated.
a. True
b. False
Return on stockholders’ equity is calculated as the ratio of average stockholders’ equity
to operating income.
a. True
b. False
For each of the following items indicate whether the transactions listed below
increased (+), decreased (–) or had no effect (0) by inserting the appropriate symbol.
Net
Income
Assets
Liab.Owners’
EquityCash
Flows
(a)Record depreciation expense
(b)Sold equipment for cash at a loss
(c)Recorded loss on impaired goodwill
(d)Recorded depletion expense
(e)Recorded a capital expenditure and issued a note payable
If 50,000 shares are authorized, 37,000 shares are issued, and 2,000 shares are
reacquired, the number of outstanding shares is 35,000.
a. True
b. False
Unearned rent, representing rent for the next six months’ occupancy, would be reported
on the landlord’s balance sheet as a(n):
a. asset.
b. liability.
c. common stock.
d. revenue.
The exclusive right to use a certain name or symbol is called a:
a. franchise.
b. patent.
c. trademark.
d. copyright.
Identify the type of organization in which all major planning and operating decisions
are made by top management.
a. Decentralized
b. Centralized
c. Consolidated
d. Segmented
What is a production constraint?
a. The point in the manufacturing process where the demand for the company’s products
exceeds its ability to produce the products
b. A manufacturing strategy used to reduce production cost by eliminating waste of
inventory
c. A manufacturing strategy that focuses on increasing the influence of constraints on
production processes
d. The point in the manufacturing process where total variable costs and total fixed
costs equals total revenues
The amount of capital paidin by the stockholders of the corporation is called legal
capital.
a. True
b. False
A decrease in the ratio of liabilities to stockholders’ equity indicates an improvement in
the margin of safety for creditors.
a. True
b. False
Where are selling and administrative expenses found on the multistep income
statement?
a. Before gross profit
b. After sales and before gross profit
c. After net income and before expenses
d. After gross profit
Alpha Inc. is evaluating the purchase of a machine costing $350,000. The expected
useful life of the machine is 5 years at the end which it would have no residual value,
and the depreciation is assumed to be on straightline basis. The estimated total income
from the machine is $500,000. The expected average rate of return for this machine is:
a. 26.4%.
b. 42.6%.
c. 38.5%.
d. 57.1%.
In reference to a promissory note, the person who makes the promise to pay is called
the:
a. maker.
b. payee.
c. seller.
d. receiver.
The issuance of common stock affects both paidin capital and retained earnings.
a. True
b. False
The total depreciation across the years of an asset’s life is the same under the
doubledecliningbalance method or the straightline method.
a. True
b. False
Where is interest expense listed on the income statement?
a. Other expense section
b. Cost of merchandise sold
c. Operating expenses
d. Interest expense is listed on the balance sheet, not the income statement.
Which of the following is an example of a mixed cost?
a. Depreciation on factory machinery
b. Direct material cost
c. Maintenance expense
d. Property tax
The management of London Corporation is considering the purchase of a new machine
costing $750,000. The company’s desired rate of return is 6%. The present value factors
for $1 at compound interest of 6% for 1 through 5 years are 0.943, 0.890, 0.840, 0.792,
and 0.747, respectively. In addition to this information, use the following data in
determining the acceptability in this situation:
YearIncome from OperationsNet Cash Flow
1$37,500$187,500
2 37,500 187,500
3 37,500 187,500
4 37,500 187,500
5 37,500 187,500
The average rate of return for this investment is:
a. 5%.
b. 10%.
c. 25%.
d. 15%.
When a business sells more than one product at varying selling prices, the business’s
breakeven point can be determined as long as the number of products does not exceed:
a. two.
b. three.
c. fifteen.
d. there is no limit.
Which of the following is considered under the straightline method but not under
doubledecliningbalance method?
a. The asset’s book value
b. The asset’s salvage value
c. The asset’s expected useful life
d. The asset’s initial cost
A(n) _____ is a contract for the use of an asset for a period of time without having to
buy the asset.
a. indenture
b. depreciation hedge
c. revenue option
d. lease
HTMLENTITY#8203HTMLENTITYData Inc. buys merchandise worth $275 on
account, terms FOB shipping point, and pays the freight cost of $35. As a result of this
transaction, Data’s:
a. HTMLENTITY#8203HTMLENTITYliquidity increases.
b. HTMLENTITY#8203HTMLENTITYprofitability remains unchanged.
c. HTMLENTITY#8203HTMLENTITYliquidity decreases.
d. HTMLENTITY#8203HTMLENTITYprofitability increases.
Purchases discounts are discounts given to the seller.
a. True
b. False
If operating income for a division is $6,000, invested assets are $25,000, and sales are
$30,000, the investment turnover would be 1.2.
a. True
b. False
Flourish Co. is considering replacing a machine that originally cost $850,000 and has
$500,000 accumulated depreciation to date. A new machine will cost $450,000. What is
the sunk cost in this situation?
a. $250,000
b. $507,500
c. $350,000
d. $500,000
Gamma Inc. is considering the purchase of a machine costing $450,000, having a useful
life of five years. Depreciation would be recognized using the straightline method, and
the machine would have no residual value at the end of its useful life. The estimated
total net income from the machine is $600,000. The average investment for the machine
is:
a. $600,000.
b. $150,000.
c. $225,000.
d. $300,000.
If merchandise inventory is being valued at cost and the price level is steadily rising,
the method of costing that will yield the highest net income is:
a. average cost.
b. LIFO.
c. FIFO.
d. All methods will generate the same net income.
Which of the following is true of an accrual?
a. It is normally the result of cash being received or paid before the revenue is earned or
the expense is incurred.
b. It is initially recorded as an asset but becomes an expense over time.
c. It is initially recorded as a liability but become revenue over time.
d. It is normally the result of cash being received or paid after revenue has been earned
or an expense has been incurred.
