1) The accounting term “reliability” means that information is consistent from one
accounting period to the next.
2) A substantial amount spent to improve the quality or extend the life of a long-term
asset is a revenue expenditure.
3) Expenditures that extend the useful life of a plant asset are added to the asset
account.
4) Cash-basis accounting often fails to match expenses with revenues.
5) Contribution margin cannot be calculated for a service-type business, and
cost-volume-profit analysis is not applicable for a company that provides services rather
than selling goods.
6) A company that provides services (not goods) to its customers may incur costs that
are appropriately classified as unit-level costs.
7) The term “cost accumulation” refers to the process of dividing a pool of costs among
various cost objects.
8) An increase in total fixed costs lowers the break-even point.
9) Accepting credit cards rather than offering credit directly to customers can help a
business reduce its costs.
10) Company T had contribution margin of $20,000 and net income of $4,000. If T
increased its revenue by 10%, its net income would have increased by 2%.
11) Because of the expense of applying multiple techniques, managers should use a
single capital budgeting technique to analyze potential capital investments.
12) Preferred stockholders’ claims to a corporation’s assets take precedence over the
claims of some creditors in the event of liquidation of the corporation.
13) A common size income statement is prepared by dividing all amounts on the
statement by net income.
14) An appropriation of retained earnings places a limit on the amount of dividends a
corporation can declare.
15) The collection of an account receivable is an asset source transaction.
16) Facility-level costs often are involved in decisions to eliminate a segment of a
business.
17) Vertical analysis of a company’s balance sheet can be useful in assessing its
liquidity.
18) The sales revenue volume variance is favorable if actual sales volume is lower than
expected.
19) Jackson Corporation received a special order for 2,000 clocks at $15 each. Relevant
information for this special-order decision include: the unit-level costs of $12 per clock;
the existence of idle capacity; and facility-level costs of $75,000 per year.
20) If cost of goods manufactured is understated, net income will be overstated.
21) Steve Sims started a consulting business on January 1, 2012, and the business
engaged in the following transactions during the year:
1> Issued $7,000 of common stock for cash
2> Provided services on account, $25,500
3> Incurred $11,500 of operating expense, but only paid $5,000 of this amount
4> Collected $9,000 of the revenue that was previously recorded on account
5> Paid a cash dividend of $4,000 to the stockholders
Required:
a) Show the effects of the above transactions on the accounting equation.
b) Prepare an income statement and statement of cash flows for 2012 .
22) Which form of business organization is established as a separate legal entity from
its owners?
A.Sole proprietorship
B.Corporation
C.Partnership
D.None of these
23) Which of the following is not typically found in a decentralized organization?
A.Asset center
B.Cost center
C.Investment center
D.Profit center
24) Pattillo Industries makes a product that sells for $25 a unit. The product has a $5 per
unit variable cost and total fixed costs of $9,000. At budgeted sales of 1,000 units, the
margin of safety percentage is
A.45%.
B.55%.
C.64%.
D.None of these.
25) Liabilities are
A.claims of creditors
B.the owner’s interest in the company
C.claims of investors
D.both A and B
26) For a manufacturing company, product costs include all of the following except:
A.direct material costs
B.direct labor costs
C.research and development costs
D.overhead costs
27) When would a variance be labeled as unfavorable?
A.When standard costs are more than actual costs
B.When expected sales are more than actual sales
C.When actual sales are equal to expected sales
D.None of these
28) The budgeting process that involves adding a month to the end of the budget period
at the end of each month, thus maintaining a twelve-month planning horizon, is referred
to as
A.participative budgeting
B.continuous budgeting
C.capital budgeting
D.zero-based budgeting
29) Which of the following types of labor costs will not initially flow through the
balance sheet?
A.Salaries for sales staff
B.Plant supervision
C.Material handling
D.Assembly labor
30) Budgeting that involves the development of a master budget to direct the firm’s
activities over the short-term is referred to as
A.operations budgeting
B.capital budgeting
C.strategic planning
D.None of these
31) Which of the following does not represent an advantage of the unadjusted rate of
return over the payback method for evaluating capital projects?
A.The unadjusted rate of return method considers the investment’s profitability
B.The unadjusted rate of return method measures the recovery of the initial investment
in the project
C.The unadjusted rate of return is a percentage that can be compared to a stated hurdle
rate
D.All of these are advantages
32) Classify each of the following events as an asset source (AS), asset use (AU), or
asset exchange (AX).
1>issued common stock for cash
2>paid cash for operating expenses
3>performed services and collected cash from customers
4>paid dividends to company owners
5>borrowed cash from bank
6>repaid bank loan with cash
7>purchased land by paying cash
A. asset source
B. asset source
C. asset source
D. asset use
E. asset exchange
F. asset use
G. asset use
33) Which of the following is a factor involved in communicating useful financial
information?
A.Attributes of the users
B.Purpose for which the information will be used
C.Process by which the information is analyzed
D.All of these
34) Harker Company budgeted the following transactions for April 2012:
The beginning and ending cash balance was $25,000. What is the amount of the cash
surplus or shortage?
A.$20,000 surplus
B.$40,000 shortage
C.$5,000 surplus
D.There is no surplus or shortage
35) Flynn Company issued 2,000 shares of $10 par value common stock at a market
price of $16. As a result of this accounting event, total paid-in capital would
A.increase by $12,000
B.be unaffected by the event
C.increase by $32,000
D.increase by $20,000
36) The margin of safety can be defined as the
A.Excess of budgeted sales over break-even sales
B.Excess of budgeted sales over net income
C.Excess of budgeted sales over fixed costs
D.Excess of budgeted sales over variable costs
37) Merchandising businesses
A.manufacture the goods they sell
B.generate revenue primarily by providing services to customers
C.buy the merchandise they sell from suppliers
D.include dry cleaning companies and law firms
38) The following accounts and balances were drawn from the records of Rayburn
Company on December 31, 2012:
Which of the following accounts would not be closed at the end of an accounting cycle?
A.Common Stock
B.Revenue
C.Dividends
D.Salaries Expense
39) Which of the following terms is used to identify the expense recognition for
intangible assets?
A.amortization
B.depletion
C.depreciation
D.allocation
40) Which of the following cash budget equations is incorrect?
A.Period one ending cash balance = period two beginning cash balance
B.Beginning cash + cash receipts = total cash available
C.Cash payments + desired ending cash balance = total cash needed
D.Cash available – cash needed = cash requirements
41) During November 2012, Cooper Company sold 120 units of a product for $375
each. Selling and administrative expenses for the year were $14,000. All transactions
were cash transactions. The following information is also available about Cooper’s
inventory and purchases:
The company’s income tax rate is 30%.
Required:
a) Prepare an income statement for Cooper Company for 2012 assuming:
1) FIFO inventory cost flow
2) LIFO inventory cost flow
b) Prepare the operating activities section of the Statement of Cash Flows for 2012
assuming:
1) FIFO inventory cost flow
2) LIFO inventory cost flow
42) Melanie Company is considering a capital project that costs $16,000. The project
will deliver the following cash flows:
Using the incremental approach, the payback period for the investment is
A.5 years
B.2.4 years
C.2 years
D.1.66 years
43) Hardt Corporation began business operations and experienced the following
transactions during 2012:
1) Issued common stock for $10,000 cash.
2) Provided services to customers for $40,000 on account.
3) Incurred $18,000 of operating expenses on credit.
4) Collected $23,000 cash from customers.
5) Paid $15,000 on accounts payable.
Required:
a) Record the above transactions in a horizontal financial statements model to reflect
their effect on Hardt’s financial statements.
b) Prepare an income statement, balance sheet and statement of cash flows for 2012 .
44) Chen Company paid $3,000 cash for utility expenses. What kind of transaction is
this?
A.asset source transaction
B.asset use transaction
C.asset exchange transaction
D.claims source transaction
45) Which of the following statements is a reason why a company would buy treasury
stock?
A.because management believes the market price of stock is undervalued
B.to have stock available to issue to employees in stock option plans
C.to avoid a hostile takeover
D.all of these are reasons a company would buy treasury stock
46) Tawanna is considering starting a small business. She plans to purchase equipment
costing $145,000. Rent on the building used by the business will be $24,000 per year
while other operating costs will total $30,000 per year. A market research specialist
estimates that Tawanna’s annual sales from the business will amount to $90,000.
Tawanna plans to operate the business for 6 years. Disregarding the effects of taxes,
what will be the amount of annual net cash flow generated by the business?
A.$36,000
B.$54,000
C.$90,000
D.None of these
47) Ruthven Company had the following transactions for 2012, the first year of
operations:
1) Issued common stock for $50,000 cash.
2) Purchased merchandise on account, $40,000, terms 1/10, n/30 .
3) Sold merchandise on account for $25,000. The inventory sold had cost $14,000.
4) Paid for the merchandise purchased within the discount period.
5) Collected $20,000 on the merchandise sold on account.
6) Paid operating expense of $5,000.
Required:
a) What are total assets at the end of 2012?
b) What is the balance of the cash account at the end of 2012?
c) What is gross margin for 2012?
d) What is net income for 2012?
e) What are total liabilities at the end of 2012?
f) What is total equity at the end of 2012?
g) What is total retained earnings at the end of 2012?
h) What was the amount of cash flows from operating activities?
48) Reno Company experienced a transaction that had the following effect on the
financial statements:
Which transaction would have this effect?
A.Freight-in cost incurred; payment to be made in 30 days
B.Return to a supplier of merchandise that was purchased on account
C.Return by a customer of a sale that was made on account
D.A loss on land that was sold for cash
49) Select the correct statement regarding relevant costs and revenues.
A.Sunk costs are not relevant for decision-making purposes
B.Relevant costs are frequently called unavoidable costs
C.Direct labor is an example of a batch-level cost
D.Only variable costs are relevant for decision making
50) Which of the following cash flow patterns represents an annuity?
A.Choice A
B.Choice B
C.Choice C
D.Choice D
51) Indicate whether each of the following statements is true or false.
1>The amount of a depreciation tax shield is calculated by multiplying the amount of
depreciation by (1 – the tax rate)
2>Capital investment analyses for a business should take tax consequences into account
3>The higher the internal rate of return, the more profitable is an investment
4>A spreadsheet program is useful in doing internal rate of return analyses
5>Depreciation on equipment or a building has the effect of sheltering some of a
corporation’s income from income taxes
52) Romo Company is considering investing in one of the following two projects:
Required:
1) Which project is more desirable strictly in terms of cash inflows? Why?
2) Compute the present value of each project’s cash inflows assuming the company’s
required rate of return is 10%.
53) Why is the accuracy of the sales budget critical to the overall success of the
budgeting process?
54) Indicate whether each of the following statements is true or false.
1>Most companies do not expect to receive the full face value of their receivables
2>Use of the percent of receivables method of estimating uncollectible accounts
expense may include an aging of accounts receivable
3>The percent revenue method of estimating uncollectible accounts expense is
sometimes called an income statement approach
4>The estimated amount of uncollectible accounts is called the net realizable value
5>The practice of reporting the net realizable value of receivables is commonly called
the allowance method of accounting for uncollectible accounts
55) Acme Calendar Company manufactures wall and desktop calendars for business
use. The company expects production of 10,000 units this year. Various costs and items
associated with calendar production are described below:
Required:
Assume that management is interested in determining the average cost per calendar. For
each item in the table, place a check mark or X in every column that applies. When
labeling costs as fixed or variable, select your response on the basis of whether the total
cost of that item will change when changes occur in volume of calendars produced.