In a corporation’s organization chart, who has/have the highest position?
A. Stockholders.
B. Board of directors.
C. CEO.
D. President.
On the adjusted trial balance, retained earnings is:
A. Stated at the period-end amount.
B. Stated at the period-beginning amount.
C. Adjusted for all revenues and expenses for the period.
D. Adjusted for the period’s dividends.
Classification of costs
Using the code letters below, indicate in the space provided how each of the following
costs should be classified for a pen manufacturing company:
Costs
____ (a) Property tax on the factory building.
____ (b) The chief financial officer’s salary.
____ (c) Plastic used to manufacture pens.
____ (d) Janitors at the factory.
____ (e) Manufactured pens waiting to be sold to customers.
____ (f) Advertising logos.
____ (g) Partially completed pens.
The current balance sheet of Gamma reports total assets of $30 million, total liabilities
of $3 million, and owners’ equity of $27 million. Gamma is considering several
financing possibilities in order to expand operations. Each question based on this data is
independent of any others.
Refer to the information above. What is the maximum amount Gamma can borrow and
not exceed a debt ratio of .2?
A. $3,750,000.
B. $600,000.
C. $6,000,000.
D. $5,750,000.
If the preferred stock of a corporation is cumulative:
A. Dividends on preferred stock are guaranteed.
B. Dividends cannot be declared in an amount less than that stated on the stock
certificate.
C. Preferred stockholders participate in dividends paid in excess of a stated amount on
the common shares.
D. Dividends in arrears must be paid on preferred stock before any dividend can be paid
on common stock.
A cost that has been incurred irrevocably by past actions is a (an):
A. Capital expenditure.
B. Incremental cost.
C. Sunk cost.
D. Fixed cost.
The matching principle is best demonstrated by:
A. Using debits to record decreases in owners’ equity and credits to record increases.
B. The equation Assets = Liabilities + Owners’ Equity.
C. Allocating the cost of an asset to expense over the periods during which benefits are
derived from the asset.
D. Offsetting the cash receipts of the period with the cash payments made during the
period.
Beech Soda, Inc. uses a perpetual inventory system. The company’s beginning
inventory of a particular product and its purchases during the month of January were as
follows:
On January 14, Beech Soda, Inc. sold 25 units of this product. The other 28 units
remained in inventory at January 31.
Refer to the information above. Assuming that Beech Soda uses the LIFO cost flow
assumption, the 28 units of this product in inventory at January 31 have a total cost of:
A. $400.
B. $395.
C. $405.
D. $410.
Accounting practices are affected by all of the following except:
A. Political systems.
B. Economic systems.
C. Technology and infrastructure.
D. Management knowledge of accounting practices.
Refer to information above. If direct labor and overhead costs totaled $172,000, what
would be the unit cost?
A. $1.23 per unit.
B. $1.08 per unit.
C. $1.56 per unit.
D. $3.44 per unit.
Uncollectible accounts
(a.) What is an uncollectible account? Explain how a business suffers losses from
uncollectible accounts.
(b.) “A competent credit manager should set credit policies so as to avoid any and all
losses from uncollectible accounts.” Is this statement accurate? Explain your answer.
When preparing a bank reconciliation, an NSF check will:
A. Increase the balance per depositor’s records.
B. Decrease the balance per depositor’s records.
C. Increase the balance per the bank statement.
D. Decrease the balance per the bank statement.
Burns Industries currently manufactures and sells 20,000 power saws per month,
although it has the capacity to produce 35,000 units per month. At the
20,000-unit-per-month level of production, the per-unit cost is $65, consisting of $40 in
variable costs and $25 in fixed costs. Burns sells its saws to retail stores for $80 each.
Allen Distributors has offered to purchase 5,000 saws per month at a reduced price.
Burns can manufacture these additional units with no change in its present level of
fixed manufacturing costs.
Refer to the information above. Which of the following is not a relevant factor in Burns’
decision concerning whether to accept the special order from Allen?
A. The opportunity cost involved in accepting Allen’s order.
B. The incremental cost of manufacturing an additional 5,000 saws per month.
C. The $65 average cost per unit to manufacture a power saw.
D. Where and at what price Allen intends to sell the saws.
Bonds issued at par – basic concepts
On March 1, Year 1, Hubbard Co. issued at a price of 100 $20 million of 8%, 25-year
bonds payable. Interest is payable semiannually each March 1 and September 1.
(a) What is the amount of cash paid to bondholders for interest during Year 1?
$________________
(b) Give the adjusting entry necessary at December 31, year 1 (if any), regarding this
bond issue.
(c) Interest expense on this bond issue reported in Hubbard’s Year 1 income statement
is:
$________________
(d) With respect to this bond issue, Hubbard’s balance sheet at December 31, Year 1,
includes bonds payable of $________________ and interest payable of
$_______________. (Indicate $0 or “none” if the item is not reported.)
(e) Give the journal entry made by Hubbard on March 1, Year 2, to record the
semiannual payment of interest to bondholders.
On September 1, 2015, Select Company borrowed $600,000 from a bank and signed a
12%, six-month note payable, with interest on the note due at maturity.
Refer to the information above. Assume Select made no adjusting entry with respect to
this note before preparing the financial statements at December 31, 2015. What is the
effect of this error on the financial statements for 2015?
A. Total liabilities are overstated.
B. Net income is overstated.
C. Owners’ equity is understated.
D. Interest Payable is overstated.
Operating income excludes each of the following, except:
A. Interest expense.
B. Income taxes.
C. Depreciation.
D. Purchase discounts lost.
The unused portion of a line of credit:
A. Is reported as a current liability in the balance sheet.
B. Decreases a company’s liquidity.
C. Can be used at any time by drawing a check on a special bank account.
D. Requires a compensating balance in order to keep the line of credit open.
The Starbright Corporation has compiled the following data. The company intends to
use this information to develop standard costs per unit for its single product:
Direct materials = $50 per ton
Direct labor = $12.75 per hour
Variable manufacturing overhead = $5 per direct labor hour
Fixed manufacturing overhead = $18,700
Expected production = 1,700 units
Each unit of the company’s single product requires 2.5 tons of direct materials and 22.5
hours to manufacture.
Refer to the information above. What is the standard total manufacturing overhead
cost?
A. $191,250.
B. $18,700.
C. $487,900.
D. $209,950.
Bert’s Bungy Jumping, Inc. paid $650,000 cash for casualty insurance during the year
2015. If the income statement for the year reports insurance expense of $620,000 then:
A. Bert’s prepaid insurance decreased $30,000.
B. Bert’s cash account balance decreased $30,000.
C. Bert’s prepaid insurance increased $30,000.
D. Bert’s prepaid insurance was $30,000 at year-end.
In evaluating the efficiency of a production department, management should:
A. Consider all costs of production across departments.
B. Consider that department activities only.
C. Consider all corporate-wide period costs.
D. Compare the costs of production across departments.
When preparing a bank reconciliation, outstanding checks will:
A. Increase the balance per depositor’s records.
B. Decrease the balance per depositor’s records.
C. Increase the balance per the bank statement.
D. Decrease the balance per the bank statement.
Which of the following would be an example of a sunk cost?
A. The cost of a new oil burner that replaced a destroyed one.
B. The cost of an old inefficient oil burner that will be replaced by a more modern and
efficient one.
C. Depreciation expense.
D. Lost revenue from a bad debt.
If the standard quantity of materials is 84,500 units @ $0.15 per unit and the actual
quantity is 95,000 units @ $0.12 per unit, then the journal entry to record the cost of
materials used includes:
A. A debit to Work in Process Inventory of $11,400.
B. A debit to Work in Process Inventory of $12,675.
C. A debit to Materials Price variance of $2,850.
D. A credit to Materials Price variance of $1,575.
Vision Corporation has the following information on its financial statement:
Refer to the information above. If Vision paid a total of $55,800 in dividends, how
much would each common stockholder receive for each share of stock owned?
(Assume there are no dividends in arrears)
A. $0.12 per share.
B. $0.24 per share.
C. $0.06 per share.
D. $0.18 per share.
In relation to a bond issue, the role of the underwriter is to:
A. Guarantee payment to bondholders of both the periodic interest payments and the
maturity value.
B. Purchase the entire bond issue from the issuing corporation and then sell the bonds
to the public.
C. Represent the interests of the bondholders and, if necessary, to take legal action on
their behalf.
D. Maintain a subsidiary ledger of individual bondholders and mail out the periodic
interest checks.
Company MHF operates subsidiaries in two countries. One of the subsidiaries
consumes the output of the other in the production of a good for sale to the public. The
company could increase cash flows by:
A. Using a transfer price based on full cost.
B. Using a transfer price to transfer as much income as possible to the subsidiary
located in the lower tax country.
C. Using a transfer price based on market value.
D. Using a transfer price to transfer as much income as possible to the subsidiary
located in the higher tax country.
Accounting terminology
Listed below are nine technical accounting terms introduced or emphasized in this
chapter:
Each of the following statements may (or may not) describe one of these technical
terms. In the space provided beside each statement, indicate the accounting term
described, or answer “None” if the statement does not correctly describe any of the
terms.
____ (a) The amount by which sales revenue exceeds total variable cost expressed as a
percentage of sales.
____ (b) The amount by which sales volume exceeds the break-even point.
____ (c) The study of financial statements by a potential investor or creditor as a means
of evaluating the profitability and solvency of a business.
____ (d) A type of activity that has a causal effect in the occurrence of a particular cost.
____ (e) The level of sales at which revenue equals operating expenses.
____ (f) A cost that responds to changes in sales volume by less than a proportionate
amount.
____ (g) A mathematical technique used to determine the fixed and variable elements of
a mixed or semi-variable cost.
Refer to the information above. What is the balance in the Note Payable account at the
end of March?
A. $120,000.
B. $85,000.
C. $35,000.
D. $155,000.
Which of the following financial statements is usually prepared last?
A. Income statement.
B. Statement of retained earnings.
C. Income tax return.
D. Balance sheet.
If the hourly wage rate actually paid during January is higher than the standard rate, the
result is:
A. An unfavorable labor rate variance.
B. A favorable labor rate variance.
C. An unfavorable labor efficiency variance.
D. A favorable total labor variance.
