Target cost equals target price plus profit margin.
The entity principle states that the affairs of the owners are not part of the financial
operations of a business entity and should be separated.
Total quality management centers on new product and service development as opposed
to managing the value chain for existing products.
The return on investment is calculated by multiplying the capital turnover by the return
on sales.
When preparing a statement of cash flows, money held in cash equivalents is
considered the same as cash.
A stock split changes the par value of a stock, whereas a stock dividend does not.
Activity-based costing uses multiple activity bases to assign overhead costs to units of
production.
In most companies using standard cost procedures, the costs charged to Work in
Process, Finished Goods, and Cost of Goods Sold are the actual costs, not the standard
costs.
The Code of Ethics of the AICPA calls for a member in public practice to be
independent in fact and appearance when providing auditing services.
If capital stock is issued by a corporation at a price lower than par value, the difference
represents a loss in the period in which the shares of stock are issued.
As costs flow from one production department to the next in a process costing system,
one Work in Process Inventory account shows all the changes to the units in production.
The typical starting point of a master budget would be to prepare a budgeted balance
sheet.
A collection of job cost sheets would be similar to a subsidiary ledger and the
work-in-process account would be similar to the controlling account.
Cash equivalents include money market funds, U.S. Treasury bills, and high-grade
commercial paper.
Direct labor and overhead costs that are required to convert raw materials into finished
goods are considered to be conversion costs.
Adjusting entries are needed whenever transactions affect the revenue or expenses of
more than one accounting period.
In assigning costs to centers, each center is charged with costs attributed to the center
and based on company-wide rates.
When a company uses the double-entry method, the total dollar amount of debits
recorded must equal the total dollar amount of credits recorded, but the number of debit
and credit entries may differ.
If cash increased during the year and there was also a net loss for the year, there must be
positive cash flows from financing and investing activities.
A debit balance in the manufacturing overhead account at month end indicates overhead
applied to jobs was greater than the actual overhead costs.
A line of credit is an advance agreement by a bank to lend a company any amount of
money up to a specified limit.
Wholesalers buy from retailers and sell to the general public.
Standard costs are established only for direct labor and direct materials.
Today, most large merchandising companies use a perpetual inventory system.
In a periodic inventory system, understating the amount of ending inventory will cause
an understatement of gross profit in the current year.
When a company sells bonds, the bondholders are permitted to vote for the board of
directors.
A decision to discontinue a given product on the basis of contribution margin data
should include consideration of the probable impact of the discontinuance on the sales
of other products.
An extraordinary item appears on the income statement before the section on
discontinued operations.
Financial assets describe not just cash, but all assets that are easily and directly
convertible into known amounts of cash, except marketable securities.
One purpose of generally accepted accounting principles is to make accounting
information prepared by different companies more comparable.
A master budget actually includes a number of related budgets.
If a bond is issued at a premium, the company receives more money for the bond than it
will have to pay back at the end of the bond’s life, and as a result the company records
no interest expense over the life of the bond.
A company that is profitable may not have sufficient cash on hand to meet its
immediate needs.
Large stock dividends tend to keep stock prices down.
Decreases to owners’ equity accounts are recorded using debits.
Interim financial statements usually report on a period of time less than one year.
The use of excessive quantities of material in manufacturing a product causes an
unfavorable materials quantity variance.
Direct material costs are always considered relevant costs in a make or buy decision.
The Allowance for Doubtful Accounts should be listed on the balance sheet as a current
liability.
Special order decision
Prudent Products Corporation manufactures and sells 1,000 motorcycle engines each
month. A primary component in each motor is an oil pump used to keep the motor
lubricated. Prudent Products has the monthly capacity to produce 1,500 oil pumps. The
variable unit costs associated with manufacturing each pump are shown below:
Fixed manufacturing overhead per month (for up to 1,500 units of production) averages
$46,000. Volk’s Autos, Inc., has offered to purchase 250 oil pumps from Prudent
Products per month to be used in its own motorcycles.
(a) Prudent Product’s average unit cost of manufacturing each oil pump if it rejects
Volk’s Autos’ order is $__________ per unit.
(b) The incremental unit cost of producing each additional oil pump is $__________
per unit.
(c) If this special order is accepted, the price per unit that Prudent Products could charge
Volk’s Autos in order to earn a $20,000 monthly pretax profit on the sale is
$__________ per unit.
Clancy Stores has sales of $1,574,000, cost of sales of $653,000, and operating
expenses of $292,000. What is Clancy’s return on sales?
A. 58.5%.
B. 41.5%.
C. 60%.
D. 40%.
A standard cost is the per-unit cost incurred under:
A. Ideal operating conditions.
B. Perfect operating conditions.
C. Normal, but efficient operating conditions.
D. Minimally acceptable operating conditions.
An employer’s total payroll-related costs always exceed the wages and salaries earned
by employees by:
A. Amounts withheld from employees’ pay.
B. Payroll taxes and mandated programs such as workers’ compensation insurance.
C. 50%.
D. Employers’ payroll-related costs actually are less than the gross wages and salaries
earned by employees, because of amounts withheld from employees’ checks.
Amortizing a discount on bonds payable:
A. Increases interest expense.
B. Increases periodic cash payments to bondholders.
C. Decreases interest expense.
D. Decreases periodic cash payments to bondholders.
Return on equity computations are used in evaluating:
A. Liquidity.
B. Profitability.
C. Gross profit.
D. Whether a ratio is improving or deteriorating over time.
A responsibility income statement generally does not show the:
A. Contribution margin of each responsibility center.
B. Traceable fixed costs allocated to each responsibility center.
C. Segment margin of each responsibility center.
D. Net income of each responsibility center.
If a 5%, four-month note receivable is acquired from a customer in settlement of an
existing account receivable of $50,000, the accounting entry for acquisition of the note
will:
A. Include a debit to Notes Receivable for $50,822.
B. Include a debit to Notes Receivable for $50,208.
C. Include a credit to Interest Revenue for $822.
D. Include a debit to Notes Receivable for $50,000 and no entry for interest.
One of the principal functions of CPAs is to:
A. Audit income tax returns to determine if taxpayers have underpaid their income
taxes.
B. Conduct audits to determine whether the employees of a business are performing
their jobs honestly and efficiently.
C. Advise individual investors on stock market investments.
D. Perform audits to determine the fairness of a company’s financial statements.
Accounting terminology
Listed below are seven accounting organizations introduced in this chapter:
Each of the following statements may (or may not) describe one of these organizations.
In the space provided below each statement, indicate the accounting organization
described, or answer “None” if the statement does not correctly describe any of the
organizations.
(A.) Private sector organization that establishes accounting standards.
(B.) A professional organization that establishes standards for the conduct of
professional services other than audits.
(C.) A government organization that establishes financial reporting requirements for
publicly-held companies in the United States.
(D.) A federal government agency that audits many other agencies of the federal
government and reports its findings to Congress.
(E.) A professional organization dedicated to the improvement of accounting education,
research, and practice.
(F.) A professional organization that influences the concepts and ethical practice of
management accounting.
(G.) A professional organization that establishes global accounting standards.
An analysis of Kenny Corporation’s Investment in Marketable Securities account during
2015 disclosed the following:
Kenny’s 2015 income statement included a $90,000 loss on sale of marketable securities
and $65,000 dividend income from marketable securities. All payments and proceeds
relating to marketable securities transactions were in cash.
Refer to the information above. Based solely on the above information, Kenny’s net
cash flow from investing activities for 2015 is:
A. $215,000 net cash used by investing activities.
B. $165,000 net cash provided by investing activities.
C. $265,000 net cash used by investing activities.
D. $290,000 net cash provided by investing activities.
Book value per share and other computations
Shown below is information relating to the stockholders’ equity of Silver Waste
Management at December 31, 2015:
(a) Silver’s total legal capital at December 31, 2015, is $_______________.
(b) The total amount of Silver’s paid-in capital at December 31, 2015, is
$_________________.
(c) The average issue price per share of Silver’s preferred stock was $_______.
(d) The book value per share of common stock is $__________ per share.
(e) The balance in Retained Earnings at the beginning of the year was $1,237,500, and
net income for 2015 was $1,600,500. What was the amount of dividend declared on
each share of common stock during 2015? $_______ per share.
An activity-based costing system would probably not be appropriate if:
A. A company produces more than one product line.
B. A company produces only one product.
C. A company is highly automated.
D. A company has more than one production facility.
If a company has a profit:
A. Assets will be equal to liabilities plus owners’ equity.
B. Assets will be less than liabilities plus owners’ equity.
C. Assets will be greater than liabilities plus owners’ equity.
D. Owners’ equity will be greater than its assets.
The method used by managers when comparing unit costs with budgeted costs or other
measures is broadly known as:
A. Sales management.
B. Cost control.
C. Employee evaluation.
D. Account reconciliation.
The Plaza Company has working capital of $540,000 and a current ratio of 3 to 1. The
amount of current assets is:
A. $405,000.
B. $540,000.
C. $810,000.
D. $270,000.
Dividends declared:
A. Reduce retained earnings.
B. Increase retained earnings.
C. Reduce net income.
D. Increase net income.
The primary difference between profit centers and cost centers is that:
A. Profit centers generate revenue.
B. Cost centers incur costs.
C. Profit centers are evaluated using return on investment criteria.
D. Profit centers provide services to other centers in the organization.
If total assets equal $270,000 and total liabilities equal $202,500, the total owners’
equity must equal:
A. $472,500.
B. $67,500.
C. $270,000.
D. Cannot be determined from the information given.
In a manufacturing company, the cost of goods sold is equal to:
A. The beginning inventory of work in process, plus total manufacturing costs, less the
ending inventory of finished goods.
B. Total manufacturing costs for the period, less selling expenses.
C. The beginning inventory of work in process, plus total manufacturing costs, less the
ending inventory of work in process.
D. The cost of goods available for sale, less the ending inventory of finished goods.
In a “pump-and-dump” scheme, the owners of the company:
A. Falsely claim the business has high growth potential.
B. Artificially raise the price of the stock.
C. Sell the stock at a high price.
D. Falsely claim that the business has high growth potential, artificially raise the price
of the stock, and sell the stock at a high price.
Stone Corporation has 25 employees and incurs total wages and salaries expense of
$900,000 per year. The following table shows various payroll amounts as a percentage
of this annual wage and salaries expense:
In addition, Stone provides group health insurance for its entire workforce. The cost of
this insurance is $350 per month for each employee.
Refer to the information above. Some of the payroll-related expenses incurred by Stone
Corporation are mandated by law, rather than negotiated with employees. During the
current year, these mandated amounts increased Stone’s payroll-related expenses by
approximately:
A. $68,850.
B. $200,700.
C. $131,850.
D. $176,850.
Starbright manufactures children car seats, strollers, and baby swings. Starbright’s
manufacturing costs are budgeted as follows:
Factory utilities $105,000
Factory foremen salaries $75,000
Machinery setup costs $30,000
Total manufacturing overhead $210,000
The company uses activity-based costing to allocate its manufacturing overhead costs to
products based on the following schedule:
During the current month, the following levels of activities were incurred:
What are the total manufacturing overhead costs allocated to the Car Seats for the
current month?
A. $69,837.
B. $102,873.
C. $37,290.
D. $210,000.
Products which emerge from a shared manufacturing process are referred to as:
A. Complementary products.
B. Joint products.
C. Contributory products.
D. Codependent products.
Salary allowances to partners when dividing net income:
A. Are not expenses of the business.
B. Do not get recorded.
C. Are recorded.
D. Are not accounted for.
Which of the following is not a period cost?
A. Depreciation on factory equipment.
B. Depreciation on the retail store building.
C. Salesperson salaries.
D. Office supplies used.
The financial statements of York, Inc., provide the following information for the current
year:
Refer to the information above. Compute the amount of cash payments for operating
expenses.
A. $138,600.
B. $141,750.
C. $189,000.
D. $174,825.
Mell Co. manufactured 100 personal computers at a cost of $30,000. It can sell them as
is for $65,000, or install hard disks in them for $25,000 and sell them for $105,000. The
$30,000 original manufacturing cost is:
A. An out-of-pocket cost because it has already been paid.
B. A sunk cost because it is not relevant to the decision.
C. An incremental cost because it is relevant to the decision.
D. A fixed cost because it will remain the same no matter which action is taken.
In which of the following situations would Daystar Company record unearned revenue
in May?
A. In April, Daystar Company received payment from a customer for services that are
performed in May.
B. Daystar Company completes a job for a customer in May; payment will be received
in June.
C. Daystar Company is paid on May 25 for work done in the first two weeks of May.
D. Daystar Company receives payment in May for work to be performed in June and
July.
Forms of Business Organization
State and describe the three most common forms of business organizations in the
United States.
Stock splits
Bainbridge Corporation recently patented an extraordinary invention that will allow
average homeowners to cheaply generate a large fraction of the electricity consumed in
their houses. As a result, the market price of Bainbridge’s common stock has soared to
$160 per share. Bainbridge is about to announce a 4 for 1 stock split. Explain why the
company would take this action?
Make-or-buy decision
Currier, Inc., manufactures and distributes a large number of products. The costs per
unit for one product, a pole, are as follows:
Currier recently decided to buy the pole from another manufacturer for $32 per unit
because the unit cost was less than its unit cost of $34. Solely on the basis of the cost
data given, evaluate this decision.
The shortcomings of the payback method
What are the major shortcomings of relying too heavily upon the payback period in
evaluating capital investment decisions?
Explain what is meant by the “time value of money.” Provide examples.
Calculate and explain residual income and economic value added.
What’s so “preferred” about preferred stocks?
Most preferred stocks do not have voting power, a basic right of common stock.
Identify at least two features of most preferred stocks that justify or support use of the
term preferred in describing these types of stock issues.
118. Match the organizations on the left with the descriptions on the right. Each
description should be used only once.
1> Financial Accounting Standards Board – Private organization most directly
involved in the development and issuance of accounting standards –
2> Institute of Management Accountants – Government agency that regulates
financial reporting by publicly-held companies –
3> Internal Revenue Service – Organization dedicated to the advancement of
accounting education and research –
4> Securities and Exchange Commission – International organization dedicated to the
advancement of internal auditing –
5> Institute of Internal Auditors – Organization which develops formal standards for
auditing in the United States –
6> American Accounting Association – Organization most involved with the ethical
conduct of the accountants working within a company –
7.> Public Company Accounting Oversight Board – A governmental agency that
handles income tax returns of individuals and businesses and performs an audit function
to verify the data presented –
Purpose of adjusting entries
The president of Crown Construction was informed that the first quarter financial
statements would be available “as soon as the adjusting entries are made.” Being a
non-accountant, the president feels adjustments should not be necessary if the
accounting department is operating in a competent manner. Does the need for adjusting
entries at the end of the quarter imply that transactions are not being recorded properly?
Explain.
The following information is for the Harding Company for 2015:
Required:
(1) What is the cost of materials purchased?
(2) What is the cost of goods sold?
(3) What is gross profit?
(4) What is net profit?
Valuation of assets under generally accepted accounting principles
Under generally accepted accounting principles, the assets owned by a business are
reported in the balance sheet at their historical cost. Identify and briefly explain two
accounting principles other than the cost principle that support the valuation of assets at
cost in the balance sheet.
Provide a brief example to illustrate that externally reported financial accounting
information must be based in part on estimates, judgments, and assumptions.
Earnings per share-basic and diluted
Greenwich Corporation had net income of $1,712,500 in 2015. The company had
300,000 shares of $4 par value common stock and 25,000 shares of 8%, $100 par,
preferred stock outstanding throughout the year. Each share of preferred stock is both
cumulative and convertible. Each share of preferred stock is convertible into four shares
of common stock. Compute the following for 2015:
