Omission of the adjusting entry needed to accrue an expense at the end of the period
would cause liabilities to be understated.
Results of capital budgeting processes may have serious implications for employees.
The period of time over which the cost of an asset is allocated to depreciation expense
is called its useful life.
In a production cost report, the units transferred out refer to the equivalent units
completed during the period that have been moved to the next department or to
Finished Goods Inventory.
Comprehensive income differs from net income in that it includes events that are
recognized but not realized.
In a limited liability partnership, a partner has unlimited liability for his own actions
and limited liability for the actions of his partners.
If a company records a purchase at the gross invoice price and then takes advantage of
the discount, the discount is treated as a reduction in the cost of goods sold.
Residual income is the difference between net operating income at breakeven and actual
net operating income.
The number of shares a corporation may issue is specified in the articles of
incorporation and approved by the Securities and Exchange Commission.
A schedule of the cost of finished goods manufactured summarizes the flow of
manufacturing costs into and out of the finished goods inventory account.
When the direct write-off method is used to recognize uncollectible accounts expense,
an Allowance for Doubtful Accounts is not required.
The statement of stockholders’ equity discloses the amount of cash dividends as well as
stock dividends declared during the current year.
The statement that “the yen has fallen against the dollar” means that the yen has become
less valuable relative to the dollar.
Management can compute the per-unit cost of finished goods accurately only when a
job order cost system is in use.
All liability accounts normally have a credit balance.
A trial balance proves that equal amounts of debits and credits were posted to the
ledger.
U.S. Treasury bills that mature within a period of four to six months are cash
equivalents.
The total quality management approach to budgeting sets budgeted amounts at levels
that can be achieved through reasonably efficient operations.
In capital budgeting, one may use estimates in making decisions.
A business that is profitable and liquid will have more accounts with credit balances
than with debit balances.
Perhaps the most important financial considerations in a capital budgeting decision are
its effects upon future cash flow and future profitability.
Future contracts are used by companies to hedge against losses in foreign currencies.
If the terms of a sale are F.O.B. shipping point, the sale should not be recorded until the
goods are delivered to the buyer.
Activities that increase scrap and rework tend to increase productivity.
The current ratio is a measure of short-term debt paying ability.
Every stockholder in a corporation will have a drawing account that will be closed to
retained earnings during the closing process.
Recent rulings by the SEC now require all corporations to prepare an expanded version
of the Statement of Retained Earnings showing all equity accounts and their changes for
the last three years.
The return on average investment computation ignores the timing of an investment’s
future cash flows.
Comparative financial statements show side-by-side financial data for two or more
companies.
Any business which operates at less than capacity will have smaller fixed costs than
variable costs.
Amortization expense increases net income and reduces cash flows from investing
activities.
Worker’s compensation premiums are deducted from each employee’s gross pay.
On June 27, Healthy Life Services, Inc. performed extensive tests on lab specimens
submitted by several customers and sent invoices totaling $5,200, due in 30 days.
A. No revenue from rendering these services should be recorded until payment is
received.
B. This situation causes an increase in assets and in revenue in June, but has no effect
on owners’ equity until payment is received.
C. Revenue is earned in June, but assets are not increased until payment is received.
D. Assets, revenue, and owners’ equity are increased in June, regardless of when
payments are received for the services rendered.
Bond prices after issuance
Several years ago, Clear-Air Systems issued $100 million of 30-year, 8% bonds payable
at a small premium. Since the bonds were issued, Clear-Air’s financial strength and
credit rating have actually improved, but today the bonds are trading among investors at
a price of 98.
(a) Explain the most probable reason why the market price of these bonds has declined,
even though Clear-Air‘s credit rating has improved.
(b) How will the drop in the market value of these bonds be reported (if at all) in
Clear-Air’s income statements and balance sheets? Explain.
Costs that are traceable to a particular unit and are inventoriable are called:
A. Period costs.
B. Product costs.
C. Overhead costs.
D. Job costs.
Depreciation expense is:
A. Only an estimate.
B. An exact calculation prepared by an appraiser.
C. Not to be calculated unless the exact life of an asset can be determined.
D. To be determined for all assets owned by a company.
The financial statements of a corporation that failed during the current year to pay any
dividends on its cumulative preferred stock should:
A. Include the amount of the omitted dividends among its current liabilities.
B. Include a footnote disclosing the amount of the dividends in arrears.
C. Show the amount of the omitted dividends as a deduction from retained earnings.
D. List the omitted dividends as a long-term liability.
A debit balance in the income summary account indicates:
A. An error was made.
B. A Net Profit.
C. A Net Loss.
D. That revenues were greater than expenses.
Stupper Corporation manufactures two products; data are shown below:
If Stupper’s monthly fixed costs average $200,000, what is its break-even point
expressed in sales dollars (rounded)?
A. $320,000.
B. $250,000.
C. $370,370.
D. $152,632.
The return on assets ratio usually is computed as:
A. Net sales divided by average total assets.
B. Gross profit divided by average total assets.
C. Operating income divided by average total assets.
D. Net income divided by average total assets.
In the statement of cash flows, the purchase of supplies is classified as:
A. Operating activities.
B. Financing activities.
C. Investing activities.
D. This would not appear on a statement of cash flows.
Which financial statement is primarily concerned with reporting the financial position
of a business at a particular time?
A. The balance sheet.
B. The income statement.
C. The statement of cash flows.
D. All three statements are concerned with the financial position of a business at a
particular time.
The debt ratio indicates the percentage of:
A. Total assets financed by long-term mortgages.
B. Revenue consumed by interest expense.
C. Total assets financed by creditors.
D. Total liabilities classified as current.
Steel Fabricating, Inc. manufactures furniture at its plants in Akron, Greensboro, and
Schenectady. The company prepares monthly income statements segmented by plant.
These income statements are organized to disclose contribution margin, performance
margin, and responsibility margin for each plant, in addition to operating income for the
company as a whole.
Refer to the information above. Of the following, which should be classified as a
common fixed cost?
A. Depreciation on the Schenectady factory.
B. Salaries of the plant managers.
C. Salaries of the company’s legal staff.
D. Property taxes on the Akron factory.
Fancy Furniture produced a batch of 2,000 coffee tables at a cost of $355,000. It was
discovered that the entire batch was finished improperly. Fancy can sell the tables as
seconds for $305,000 or spend an additional $315,000 to refinish them and sell them for
$605,000.
Refer to the information above. Which of the following is not relevant to management’s
decision regarding refinishing the tables or selling them as is?
A. The additional $300,000 revenue that can be generated if the tables are refinished.
B. The $355,000 manufacturing cost of the tables already incurred.
C. The additional $315,000 cost to refinish the tables.
D. The effect of selling “seconds” on Fancy’s reputation as a fine-furniture
manufacturer.
Which of the following is not considered an end-of-period adjusting entry?
A. The entry to record the portion of unexpired insurance which has become expense
during the period.
B. An entry to record revenue which has been earned but has not yet been billed to
customers.
C. The entry to record depreciation expense.
D. An entry to record repayment of a bank loan and to recognize related interest
expense.
Shown below are selected data from the balance sheet of Bill’s Auto Parts, a retail store
(dollar amounts are in thousands):
Refer to the information above. Bill’s debt ratio is:
A. 22%.
B. 27%.
C. 57%.
D. 49%.
The price of the goods sold or services rendered during a given accounting period is
called:
A. Net income.
B. Profit.
C. Revenue.
D. Equity.
The selection of an appropriate discount rate for determining net present value of a
particular investment proposal does not depend upon:
A. The present value of the proposal’s future cash flows.
B. Alternative investment opportunities available.
C. The nature of the investment proposal.
D. The investor’s cost of capital.
In a perpetual inventory system, two entries are normally made to record each sales
transaction. The purpose of these entries is best described as follows:
A. One entry recognizes the sales revenue and the other recognizes the cost of goods
sold.
B. One entry records the purchase of merchandise and the other records the sale.
C. One entry records the cost of goods sold and the other reduces the balance in the
Inventory account.
D. One entry updates the subsidiary ledger and the other updates the general ledger.
On April 30, 2014, Tilton Products purchased machinery for $88,000. The useful life of
this machinery is estimated at 8 years, with an $8,000 residual value.
Refer to the information above. Assume that in its financial statements, Tilton Products
uses straight-line depreciation and the half-year convention. Depreciation expense
recognized on this machinery in 2014 and 2015 will be:
A. $7,500 in 2014 and $11,000 in 2015.
B. $6,000 in 2014 and $12,000 in 2015.
C. $5,000 in 2014 and $10,000 in 2015.
D. $5,500 in 2014 and $11,000 in 2015.
Dalton Co. follows a policy of allocating all common costs equally among its profit
centers. A partial responsibility income statement for a typical month is shown below:
After evaluating these data, Dalton Co. decides to close Profit Center 3. This action
eliminates all revenue, variable costs, and fixed costs traceable to Center 3, but
eliminates only $35,000 in common fixed costs. Closing Profit Center 3 has no effect
upon the responsibility margins of Centers 1 and 2.
Refer to the information above. After the closing of Profit Center 3, the monthly income
from operations for Profit Center 1, as measured by Dalton Co. should be
approximately:
A. $25,000.
B. $17,500.
C. $10,000.
D. $15,000.
The difference between the present value and the future value of a sum of money
depends upon:
A. The rate of interest.
B. The length of time.
C. The rate of interest and the length of time.
D. Neither the rate of interest nor the length of time.
Great Kids Co. began providing day care for the children of employees of a large
corporation on January 15 for an agreed monthly fee of $9,000. The first payment is to
be received on February 15. The adjusting entry required by Great Kids Co. on January
31 includes:
A. A credit to Child Care Fees Earned of $4,500.
B. A debit to Child Care Fees Receivable of $9,000.
C. A debit to Unearned Child Care Revenue of $4,500.
D. A debit to Fees Receivable of $9,000.
When making sales, the sales taxes received are:
A. Revenue.
B. A liability.
C. An expense if incurred.
D. A reduction in inventory value.
Business units
(a) Define what is meant by each of the following: profit center, investment center, and
cost center. Your answer should make clear the distinction between each of these types
of centers.
(b) Briefly describe the criteria used to evaluate each of the three types of centers listed
in part a.
The entry to record amortization on a copyright would include:
A. A debit to amortization expense.
B. A debit to accumulated amortization.
C. A debit to copyright.
D. A credit to amortization expense.
Joseph Company is considering replacing an existing piece of machinery with newer
technology. In deciding whether to replace the existing machinery, management should
consider which costs as relevant?
A. Future costs which will be classified as fixed rather than variable.
B. Future costs which will be different under the two alternatives.
C. Sunk costs associated with the old machine.
D. Historical costs associated with the old machine.
Hoffman, Inc. adjusts its books each month but closes its books at the end of the year.
The trial balance at March 31 before adjustments is as follows:
Refer to the information above. According to service contracts, $4,810 of the Unearned
Service Revenue has been earned in March. The amount of Service Revenue Earned to
be reported in the March income statement is:
A. $16,510.
B. $21,320.
C. $11,700.
D. $20,410.
Aircraft Products, a manufacturer of aircraft landing gear, makes 1,000 units each year
of a special valve used in assembling one of its products. The unit cost of producing this
valve includes variable costs of $70 and fixed costs of $60. The valves could be
purchased from an outside supplier at $77 each. If the valve were purchased from the
outside supplier, 40% of the total fixed costs incurred in producing this valve could be
eliminated. Buying the valves from the outside supplier instead of making them would
cause the company’s operating income to:
A. Increase by $26,000.
B. Increase by $17,000.
C. Decrease by $9,000.
D. Decrease by $29,000.
Refer to the information above. What is the capital turnover for Mahen, Inc.?
A. 166%.
B. 5%.
C. 10%.
D. 60%.
When deciding the form of organization of a new business the factors to consider would
be all of the following except:
A. The need to raise large amounts of capital.
B. The need for continuity in business operations.
C. The potential profits of the organization.
D. The personal liabilities of the owners.
Bonds payable-issued between interest dates
Barney Corporation received authorization on December 31, Year 1, to issue
$2,500,000 of 6%, 10-year bonds. The interest payment dates are June 30 and
December 31. All the bonds were issued at a price of 100, plus accrued interest, on
February 28, Year 2, two months after the authorization of the bond issue.
(d) Prepare the journal entry at February 28, Year 2, to record the issuance of the bonds.
(e) Prepare the journal entry at June 30, Year 2 to record the first semiannual interest
payment on the bonds.
List the following accounts in the order that they would appear in a balance sheet.
Capital Stock
Equipment
Accounts Receivable
Retained Earnings
Revenue
Accounts Payable
Cash
Rent Expense
Investors and creditors are interested in a company’s “cash flow prospects.” What two
specific concerns of investors and creditors are summarized by the term “cash flow
prospects?”
Relevant range
What is meant by the phrase relevant range of activity?
Information for the Hooper Company is as follows:
(1) What is the amount of uncollectible account expense for 2015 if the company uses
the Percentage of Sales method and 2% of credit sales are deemed uncollectible?
(2) What is the amount of uncollectible account expense if the company uses the
balance sheet approach and estimates $2,200 as uncollectible in 2015?
(3) What is the net realizable value of accounts receivable if the company uses the
balance sheet approach?
(4) If the company uses the balance sheet approach and writes-off a receivable of $450
what will be the net realizable value of accounts receivable after the write off?
Overhead application
For a single product manufacturing company, all overhead must be assigned to the one
product. Since this is the case, why would such a firm not simply assign actual
overhead cost to production as it is incurred throughout the year?
Stewart and Brooke form a partnership. Stewart invests $80,000 and Brooke invests
$120,000. If there are any profits or losses they will share them as follows:
They will each receive a salary of $25,000.
Any remaining amount will be allocated to Brooke and to Stewart.
(1) If the partnership income for the year is $115,000 what amount will be allocated to
Brooke?
(2) If the partnership income for the year is $125,000 what amount will be allocated to
Stewart?
(3) If the partnership income for the year is $45,000 what amount will be allocated to
Stewart and what amount to Brooke?
The accounts and their amounts for Belgrave Co. at December 31, 20__ are listed
below. Prepare closing entries and an After-Closing Trial Balance.
List the three financial statements that are used to communicate financial accounting
information to interested external parties.
Gains and losses in financial statements and tax returns
Explain why the amount of gain or loss resulting from the sale of a depreciable asset
usually differs between the seller’s financial statements and income tax return. In which
of these accounting reports is the gain usually larger (or the loss smaller)? Explain your
reasoning.
