TEST BANK
ACCOUNTING CONCEPTS AND APPLICATIONS (INTERNATIONAL EDITION) 11TH EDITION BY JAMES STICE EARL, STICE STEVE ALBRECHT SWAIN TEST BANK Chapter 1—Accounting Information: Users and Uses MULTIPLE CHOICE 1. Which of the following is NOT typically true of accounting information? a. The information is quantitative in nature. b. The information relates to future time periods. c. The information relates to specific accounting entities. d. The information is primarily financial in nature. ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 1.1
2. Which of the following is true about the double-entry system of bookkeeping? a. It was developed in the 1300s1400s in France. b. It was developed in the 1800s in Italy. c. It was developed in the 1300s1400s in Italy. d. It was developed in the 1800s in the United States. ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 1.1
3. Businesses use accounting systems to a. Analyze transactions b. Handle routine bookkeeping tasks c. Evaluate the performance and health of the business d. All of these are correct ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 1.1
4. Which of the following is the most correct definition of accounting? a. A system for providing quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions. b. An entity without a profit objective, oriented toward providing services efficiently and effectively. c. The preservation of a systematic, quantitative record of an activity. d. The procedures and processes used by a company to analyze transactions and handle routine bookkeeping tasks. ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 1.1
ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 1.1
5. Which of the following is NOT a function of accounting? a. Accumulating economic information about organizations b. Measuring economic information about organizations c. Executing sales transactions for organizations d. Communicating economic information about organizations
ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 1.1
6. Which of the following is NOT a key component of the definition of accounting? a. Financial b. Qualitative c. Useful d. Decision-oriented ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 1.1
7. Which of the following is NOT a step in the decision making process? a. Identify the issue. b. Identify alternatives. c. Select the option that will result in the greatest financial increase. d. Gather information. ANS: C PTS: 1 DIF: Easy OBJ: 1.1 NAT: AACSB Reflective Thinking | AICPA FN Decision Modeling 8. Accounting can be best described as a a. Manufacturing activity b. Service activity c. Retailing activity d. All of these are correct ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 1.1
9. Which of the following is NOT a typical source of monetary resources for a business enterprise? a. Investors b. Creditors c. Business earnings d. Employees ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 1.1
10. Accountants typically perform what action related to the financial results of business activities? a. Report the results of business activities b. Advise on how to structure business activities c. Both report the results of and advise on how to structure business activities d. None of these are correct ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.1
11. The accounting cycle includes all of the following, EXCEPT: a. Recording b. Summarizing c. Analyzing d. Interpreting ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 1.1
12. The emphasis in financial accounting is on which of the following external user groups? a. Management b. Certified public accountants c. Investors and creditors d. Educators ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.2
13. The primary internal group that uses accounting information is a. Government agencies b. Investors c. Management d. Competitors ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.2
14. Internal reports are generally used by a. Management b. Suppliers c. Lenders d. Employees ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.2
15. Which of the following is NOT an important aspect of management accounting? a. Planning b. Product design c. Implementing plans d. Controlling costs ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.2
16. The area of accounting that is concerned with providing information for external users is referred to as a. Financial accounting b. Governmental accounting c. Management accounting d. Not-for-profit accounting ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.2
17. Which of the following is NOT one of the three primary financial statements? a. Statement of cash flows b. Income statement c. Statement of retained earnings d. Balance sheet ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.2
18. Which of the following financial statements reports a company's resources, obligations, and owner's equity? a. Balance sheet b. Income statement c. Statement of retained earnings d. Statement of cash flows ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.2
19. Which of the following financial statements reports the excess of a company's revenues over its expenses? a. Balance sheet b. Income statement c. Statement of retained earnings d. Statement of cash flows ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.2
20. Which of the following financial statements reports the amount of cash collected and paid out by a company? a. Balance sheet b. Income statement c. Statement of retained earnings d. Statement of cash flows ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.2
21. Which of the following is NOT an external user of financial information? a. Competitors b. Employees c. Management d. Suppliers ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.2
22. Which of the following is NOT one of the factors that influences the accounting environment? a. International business b. Technology c. The development of generally accepted accounting principles (GAAP) d. Investors ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.3
23. Which of the following is NOT true of the Financial Accounting Standards Board (FASB)? a. It consists of five full-time members b. It is a government agency c. It seeks consistency for its proposed standards d. It has no legal power to enforce the standards it sets ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.3
24. Generally accepted accounting principles are a. Natural laws b. Based on scientific proofs c. Developed by accounting rule makers d. None of these are correct ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.3
25. The initials GAAP stand for a. General Accounting Administration Practices b. Generally Applied Accounting Procedures c. Generally Accepted Accounting Principles d. Generally Accepted Accounting Practices ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.3
26. The current standard-setting board for accounting in the private sector is the a. Financial Accounting Standards Board (FASB) b. Securities and Exchange Commission (SEC) c. International Accounting Standards Board (IASB) d. American Accounting Association (AAA) ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA BB Legal
OBJ: 1.3
27. Which of the following organizations has specific legal authority to establish accounting standards for publicly held companies? a. Financial Accounting Standards Board (FASB) b. Securities and Exchange Commission (SEC) c. Internal Revenue Service (IRS) d. American Institute of Certified Public Accountants (AICPA) ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA BB Legal
OBJ: 1.3
28. The Sarbanes-Oxley Act created the a. Financial Accounting Standards Board b. Public Company Accounting Oversight Board c. American Institute of Certified Public Accountants d. Enron-WorldCom Fraud Committee ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA BB Legal
OBJ: 1.3
29. The initials CPA stand for a. Certified Professional Appraiser b. Certified Professional Accountant c. Certified Public Accountant d. Certified Public Auditor ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA BB Legal
OBJ: 1.3
30. Which of the following is NOT a service typically provided by large public accounting firms? a. Performing audits b. Making management decisions c. Redesigning operating procedures d. Establishing accounting systems ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 1.3
31. Which of the following is the government agency that stipulates the rules and regulations that govern the collection of taxes in the United States? a. Securities and Exchange Commission b. Federal Accounting Standards Board c. Internal Revenue Service d. American Institute of Certified Public Accountants ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA BB Legal
OBJ: 1.3
32. Accountants are MOST concerned with a. Foreign companies operating in the US b. U.S. companies with domestic customers c. U.S. companies with foreign customers d. All of these are correct ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA BB Global
OBJ: 1.3
33. The organization that develops worldwide accounting standards is the a. International Committee on Accounting Standards (ICAS) b. International Accounting Standards Board (IASB) c. International Board of Accounting Standards (IBAS) d. International Accounting Standards Committee (IASC) ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA BB Global
OBJ: 1.3
34. Standards established by the International Accounting Standards Board are referred to as a. Generally Accepted Accounting Standards b. International Auditing Standards c. International Financial Reporting Standards d. International Financial Accounting Standards ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA BB Global
OBJ: 1.3
35. In 2008, the SEC began to a. Allow U.S. companies trading on the U.S. stock exchange to issue their financial reports using IASB standards b. Require U.S. companies trading on the U.S. stock exchange to issue their financial reports using IASB standards c. Require non-U.S. companies trading on the U.S. stock exchange to issue their financial reports using IASB standards d. Allow non-U.S. companies trading on the U.S. stock exchange to issue their financial reports using IASB standards ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA BB Global
OBJ: 1.3
36. Ethics are especially important in accounting because a. Independent accountants represent the public interest b. Accountants can steal money more easily than other employees c. Accountants have historically committed more company thefts than other employees d. The accounting profession does not have a code of professional conduct ANS: A PTS: 1 DIF: NAT: AACSB Ethics | AICPA FN Reporting
Easy
OBJ: 1.3
37. Which of the following is NOT one of the ways that technology has changed the way accounting is done? a. Technology easily allows companies to collect large amounts of data about transactions b. Technology allows greater access to a company's financial statements and other financial information c. Technology is able to perform the mechanics of accounting therefore, people are not required to understand the mechanics d. Technology allows for large amounts of data to be compiled quickly and accurately ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 1.3
38. Which of the following is a reason that you may need to understand accounting information in the future? a. To evaluate an employer's short and long-term potential b. To perform a personal budget c. To perform responsibilities in future employment d. All of these are reasons to study accounting ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 1.4
PROBLEM 1. Identify and describe the functions of an accounting system. ANS: The functions of an accounting system are analysis, bookkeeping, and evaluation. Analysis involves analyzing business transactions to determine what information should be captured by the accounting system. Bookkeeping is tracking activities on a day-to-day basis. Evaluation uses summary information to evaluate the financial health and performance of a business. PTS: 1 DIF: Medium OBJ: 1.1 NAT: AACSB Reflective Thinking | AICPA FN Reporting 2. The definition of accounting is a system for providing "quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions." List and explain the key components of this definition. ANS: Quantitative
Accounting relates to numbers.
Financial
The health and performance of a company are affected and reflected in many dimensions but accounting focuses only on the financial aspect.
Useful
Accounting exists only because it is useful.
Decisions
Accounting is only useful as the past information can be used to impact future decisions.
PTS: 1 DIF: Medium OBJ: 1.1 NAT: AACSB Reflective Thinking | AICPA FN Measurement 3. List the four steps in the decision making process. ANS: 1. 2. 3. 4.
Identify the issue. Gather information. Identify alternatives. Select the option that will most likely result in the desired objective.
PTS: 1 DIF: Medium OBJ: 1.1 NAT: AACSB Reflective Thinking | AICPA FN Decision Modeling
4. Identify the three primary financial statements and discuss the content of each. ANS: The balance sheet reports the assets, liabilities, and owners' equity of a business. The income statement reports the net income or net loss of a company, which represents the difference between revenues and expenses. The statement of cash flows reports the cash inflows and outflows from operating, investing, and financing activities. PTS: 1 DIF: Medium OBJ: 1.1 NAT: AACSB Reflective Thinking | AICPA FN Reporting 5. List six users of accounting information and indicate whether they are an internal or an external user. ANS: Management internal Creditors (Lenders) external Investors external Suppliers external Customers external Employees external Competitors external Government agencies external The press external PTS: 1 DIF: Medium OBJ: 1.2 NAT: AACSB Analytic | AICPA FN Reporting 6. Lenders, investors, and management are three potential users of external financial statements. Discuss how the information found in external financial statements can benefit each of these external users. ANS: Lenders want to be repaid. External financial statements help lenders predict the future ability of the borrower to repay the loan. Investors want to be able to estimate how much cash they will receive in the future if they invest in a company now. Financial statements, along with knowledge of business plans, market forecasts, and character of management, can help investors to assess future cash flows. Management can use the information found in external financial statements to state goals, calculate management bonuses, and analyze the company in order to pinpoint weaknesses. PTS: 1 DIF: Medium OBJ: 1.2 NAT: AACSB Analytic | AICPA FN Reporting
7. Describe the major difference between internal reports and external reports. ANS: Internal reports are dynamic and created to meet the needs of management. These reports may vary greatly among companies. External reports generally consist of general-purpose financial statements and must follow certain standards or guidelines. These reports are more uniform among companies. PTS: 1 DIF: Medium OBJ: 1.2 NAT: AACSB Analytic | AICPA FN Reporting 8. It is often said that companies must keep two sets of books. Isn't this dishonest? Explain. ANS: No, it is not dishonest. Companies are subject to both the rules governing financial accounting and those governing tax accounting. One set of books must be maintained according to GAAP from which the company's financial statements are prepared. The other set of books is maintained in compliance with income tax regulations, from which the company's tax return is prepared. PTS: 1 DIF: Medium OBJ: 1.3 NAT: AACSB Analytic | AICPA FN Reporting 9. FASB, GAAP, SEC, CPA, AICPA, IRS, IASB, IFRS are all acronyms used in accounting. For the preceding list of acronyms, state what the acronym stands for and then give a definition of each acronym. ANS: FASB:
Financial Accounting Standards Board. The private organization responsible for establishing the standards for financial accounting and reporting in the United States.
GAAP:
Generally Accepted Accounting Principles. Authoritative guidelines that define accounting practice at a particular time.
SEC:
Securities and Exchange Commission. The government body responsible for regulating the financial reporting practices of most publicly owned corporations in connection with the buying and selling of stocks and bonds.
CPA:
Certified Public Accountant. A special designation given to an accountant who has passed a national uniform examination and has met other certifying requirements.
AICPA:
American Institute of Certified Public Accountants. The national organization of CPAs in the United States.
IRS:
Internal Revenue Service. A government agency that prescribes the rules and regulations that govern the collection of tax revenues in the United States.
IASB:
International Accounting Standards Board. The committee formed in 1973 to develop worldwide accounting standards.
IFRS:
International Financial Reporting Standards. The accounting standards produced by the IASB and envisioned to be a set of standards that can be used by all companies regardless of where the company is based.
PTS: 1 DIF: Medium OBJ: 1.3 NAT: AACSB Reflective Thinking | AICPA FN Reporting
Chapter 2—Financial Statements: An Overview MULTIPLE CHOICE 1. The financial statement that reports resources owned, the obligations to transfer resources to other organizations, and the claims by the entity's owners is known as the a. Income statement b. Statement of retained earnings c. Balance sheet d. Statement of cash flows ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
2. Another name for the balance sheet is the a. Statement of cash flows b. Statement of earnings c. Statement of financial position d. Retained earnings statement ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
3. Which of the following types of accounts are NOT found on the balance sheet? a. Revenues b. Assets c. Liabilities d. Owners' equity ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
4. Economic resources that are owned or controlled by an enterprise are called a. Assets b. Liabilities c. Revenues d. Gains ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
5. Which of the following is generally considered to be an asset? a. Notes payable b. Mortgage payable c. Accounts receivable d. Unearned revenue ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
6. Which of the following accounts is NOT an asset account? a. Equipment b. Accounts Receivable c. Accounts Payable d. Supplies ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
7. Which of the following generally is NOT considered to be a liability? a. Notes payable b. Taxes payable c. Inventory d. Accounts payable ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
8. An enterprise's obligations to pay cash or other economic resources to others are called a. Liabilities b. Expenses c. Losses d. Assets ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
9. Which of the following is generally considered to be a liability? a. Accounts receivable b. Capital stock c. Notes payable d. Retained earnings ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
10. Which of the following types of accounts show how resources came into a firm? a. Liabilities b. Owners' equity c. Assets d. Both liabilities and owners' equity ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
11. A business owned by one person is called a a. Nonprofit organization b. Partnership c. Corporation d. Sole proprietorship ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
12. A business owned by two or more individuals or entities is called a(n) a. Nonprofit organization b. Partnership c. Institution d. Sole proprietorship ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
13. Owners of a corporation are referred to as a. Debtors b. Partners c. Stockholders d. Creditors ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
14. Distributions by a corporation to its stockholders are called a. Dividends b. Retained earnings c. Income d. Withdrawals ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
15. Which of the following usually is NOT considered to be an owners' equity account? a. Capital stock b. Retained earnings c. Inventory d. All these are owners' equity accounts ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
16. The total amount invested to acquire an ownership interest in a corporation is called a. Retained earnings b. Capital stock c. Net assets d. Owners' equity ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
17. Net assets are equal to a. Total assets minus owners' equity b. Total assets minus net income c. Total assets minus dividends paid d. Total assets minus total liabilities ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
18. Which of the following decreases owners' equity? a. Additional investments in the company are made by the owners b. Operations generate a loss c. Operations generate a profit that is retained in the company d. None of these decreases owners' equity ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
19. The basic accounting equation is a. Assets = Liabilities + Owners' Equity b. Assets + Liabilities = Owners' Equity c. Assets + Owners' Equity = Liabilities d. Liabilities Owners' Equity = Assets ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
20. Which of the following is the reason that the accounting equation is true by definition? a. Liabilities are the source that funds the purchase of assets b. Assets are the source that funds the purchase of liabilities and owner's equity c. Liabilities and owner's equity are the sources that fund the purchase of assets d. None of these are true, the accounting equation is merely a coincidence ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
21. The idea that an increase or decrease on one side of the accounting equation must be offset exactly by an increase or decrease on the other side of the accounting equation is called a. Additive concept b. Going concern assumption c. Monetary measurement concept d. Double-entry accounting ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
22. A transaction that causes an increase in an asset may also cause a. A decrease in owners' equity b. An increase in another asset c. A decrease in a liability d. An increase in a liability ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
23. If a corporation has total assets of $350,000, total liabilities of $150,000, and retained earnings of $100,000, what is the amount of capital stock? a. $150,000 b. $0 c. $100,000 d. $250,000
ANS: C Capital stock: $350,000 $150,000 $100,000 = $100,000 PTS: 1 DIF: Medium OBJ: 2.1 NAT: AACSB Analytic | AICPA FN Measurement Exhibit 2-1 The following data were taken from the records of Moss Corporation for the year ending December 31, 2012:
Assets Liabilities Owners' equity
01/01/12 $11,250 8,580 ?
12/31/12 ? $10,365 6,465
24. Refer to Exhibit 2-1. Given the above information, owners' equity on January 1, 2012 was a. $19,830 b. $2,670 c. $885 d. $7,695 ANS: B Owners' equity: $11,250 $8,580 = $2,670 PTS: 1 DIF: Medium OBJ: 2.1 NAT: AACSB Analytic | AICPA FN Measurement 25. Refer to Exhibit 2-1. Given the above information, assets on December 31, 2012, were a. $16,830 b. $5,025 c. $18,060 d. $11,250 ANS: A Assets: $10,365 + $6,465 = $16,830 PTS: 1 DIF: Medium OBJ: 2.1 NAT: AACSB Analytic | AICPA FN Measurement 26. Current assets usually are listed on a balance sheet in a. Decreasing order of liquidity b. Increasing order of liquidity c. A random fashion d. Decreasing order of profitability ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
27. Which of the following would be classified as a current asset? a. Accounts payable b. Land c. Capital stock d. Accounts receivable ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
28. Which of the following would be classified as a long-term asset? a. Accounts payable b. Land c. Inventory d. Accounts receivable ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
29. Companies prepare classified and comparative financial statements because a. They are required by international accounting principles b. They provide financial statement readers with useful information about trends in financial position and operating performance c. They are required by the IRS d. They show changes in a company's management policies ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
30. Which of the following is true of the balance sheet? a. It includes revenue and expense accounts. b. It identifies a company's assets and liabilities as of a specific date. c. It shows the results of operations for an accounting period. d. It discloses the amount of dividends paid. ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
31. Which of the following financial statements provides a picture of the enterprise at a particular point in time? a. Balance sheet b. Income statement c. Statement of cash flows d. Statement of retained earnings ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
32. Which of the following accounts is considered to be the most liquid? a. Cash b. Land c. Accounts Receivable d. Inventory ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
33. Which of the following distinguishes between current and long-term assets? a. Comparative balance sheet b. Income statement c. Classified balance sheet d. Liquidity balance sheet ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
34. Which of the following would be considered a long-term liability? a. Mortgage payable b. Notes payable c. Accounts payable d. Land ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
35. Which of the following includes a company's financial position for both the current year and the preceding year? a. Comparative balance sheet b. Income statement c. Classified balance sheet d. Liquidity balance sheet ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
36. What is the primary limitation of the balance sheet? a. It does not reflect the net assets of a company b. It does not reflect the current value of the company c. It does not reflect the number of shares of capital stock issued d. It does not reflect the undistributed earnings of a company ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
37. Which of these is an economic asset that is NOT found on the balance sheet? a. Name recognition b. Land c. Inventory d. Goodwill ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
38. The price that would be paid today for an asset is the a. Book value b. Market value c. Purchase cost d. Economic value ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.1
39. Expense and revenue accounts appear on the a. Balance sheet b. Income statement c. Retained earnings statement d. Funds statement ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
40. Another name for the income statement is a. Statement of cash flows b. Statement of financial position c. Statement of earnings d. Retained earnings statement ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
41. Which of the following would be included on an income statement? a. Cash b. Accounts receivable c. Land d. Rent expense ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
42. The financial statement that presents a summary of the revenues and expenses of a business for a specific period of time, such as a month or a year, is called a(n) a. Statement of Cash Flows b. Statement of Retained Earnings c. Income Statement d. Balance Sheet ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
43. Resource increases from the sale of goods or services are called a. Net income b. Assets c. Gains d. Revenues ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
44. Revenues cause a. An increase in net assets b. A decrease in net assets c. No change in net assets d. An increase in liabilities ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
45. Costs that are incurred during the normal operations of a business to generate revenues are called a. Losses b. Liabilities c. Expenses d. Assets ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
46. Expenses generally cause a. An increase in net assets b. A decrease in net assets c. No change in net assets d. An increase in liabilities ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
47. Which of the following is an overall measure of the performance of a business entity's activities? a. Revenues b. Net income (or net loss) c. Assets d. Owners' equity ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
48. Which of the following is a revenue generating activity? a. Borrowing money from a bank b. Paying rent c. Selling a product d. Selling capital stock ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
49. The difference between sales and cost of goods sold is called a. Gross profit b. Intermediate profit c. Net income d. Gross income ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
50. Earnings per share is equal to a. Net income divided by total number of shares of stock outstanding b. Total revenues divided by total number of shares of stock outstanding c. Total revenues divided by the number of shares of stock sold during the year d. Net income divided by the number of shares of stock sold during the year ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
51. Which of the following is the correct way to date an income statement? a. For the Year Ended December 31, 2012 b. At December 31, 2012 c. As of December 31, 2012 d. December 31, 2012 ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
52. Which of the following is an example of a nonoperating expense? a. Salary expense b. Interest expense c. Cost of goods sold d. Advertising expense ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
53. If a company sells its equipment for more than it is valued on the balance sheet, the difference is called a(n) a. Income b. Revenue c. Profit d. Gain ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
54. If a company has $528,000 of sales revenue, pays $26,400 in dividends, and has net income of $158,400, how much were the expenses for the year? a. $343,200 b. $422,400 c. $396,000 d. $369,600 ANS: D Expenses: $528,000 $158,400 = $369,600 PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement 55. During the year, Rigby Corporation earned revenues of $114,000 and incurred $98,000 for various operating expenses. There are 1,280 shares of stock outstanding. Earnings per share is a. $12.80 b. $12.50 c. $8.80 d. $8.50 ANS: B Net income: Earnings per share:
$114,000 $98,000 = $16,000 $16,000 1,280 shares = $12.50
PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement
56. The following information was taken from the records of Merle Corporation for the period ending December 31, 2012: Advertising expense Equipment Accounts receivable Notes payable Retained earnings Utilities expense Revenues Dividends Interest receivable Rent expense
$1,200 800 1,500 6,000 8,420 1,385 4,620 975 125 655
Assuming that 3,450 shares of stock are outstanding, earnings per share is approximately a. $1.40 b. $0.40 c. $0.27 d. $0.23 ANS: B Net income: Earnings per share:
$4,620 $1,200 $1,385 $655 = $1,380 $1,380 3,450 shares = $0.40
PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement 57. Eddy Corporation reported the following data for the period: Earnings per share, $3.00; Retained Earnings, $27,000; Revenues, $75,000; Capital Stock, $15,000; Expenses, $64,500. With this information, determine how many shares of stock are outstanding. a. 9,000 b. 5,000 c. 4,000 d. 3,500 ANS: D Net income: Shares of stock outstanding:
$75,000 $64,500 = $10,500 $10,500 $3.00 = 3,500
PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement Exhibit 2-2 The following information was taken from the records of Tellers Corporation for the month ended December 31, 2012: Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (12/1/12) Consulting fees revenue Rent expense Supplies expense
$20,625 13,095 13,450 14,125 57,860 93,550 11,728 16,917
58. Refer to Exhibit 2-2. Given the above information, net income is a. $45,110 b. $35,310 c. $31,185 d. $11,385 ANS: C Net income: $93,550 $20,625 $13,095 $11,728 $16,917 = $31,185 PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement 59. Refer to Exhibit 2-2. If Tellers has 2,100 shares of stock outstanding, earnings per share is approximately a. $46.51 b. $14.85 c. $16.81 d. $4.67 ANS: B Net income: Earnings per share:
$93,550 $20,625 $13,095 $11,728 $16,917 = $31,185 $31,185 2,100 shares = $14.85
PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement 60. The following information was taken from the records of McDyce Corporation for the year ended December 31, 2013: Dividends paid Service revenue Accounts payable Capital stock Total expenses Retained earnings (1/1/13) The net income at December 31, 2013 was a. $23,500 b. $54,100 c. $43,400 d. $72,750 ANS: A Net income: $90,500 $67,000 = $23,500 PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement
$ 12,800 90,500 139,750 378,750 67,000 43,400
61. The beginning balance of retained earnings will be greater than the ending balance if a. The company has a net income greater than dividends paid b. The company issues additional shares of stock during the period c. The company has a net income less than dividends paid d. The revenues earned for the period are greater than the expenses incurred and dividends paid ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
62. Which of the following is NOT included in the statement of retained earnings? a. Dividends b. Net income c. Beginning of year retained earnings d. Owner investment ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
63. Retained earnings are a. The earnings of a company that have been distributed to the owners. b. The earnings of a company that have been retained in the company. c. The amount of cash that a company has. d. The amount of cash required for company investments. ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.2
64. During the year, Roger Company earned revenues of $114,000, incurred $98,000 for various operating expenses, and distributed $5,600 in dividends. If retained earnings for the previous year was $34,600, what is retained earnings for the current year? a. $45,000 b. $24,200 c. $16,000 d. $34,600 ANS: A Net income: Retained earnings:
$114,000 $98,000 = $16,000 $34,600 + $16,000 $5,600 = $45,000
PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement
65. The following information was taken from the records of McDyce Corporation for the year ended December 31, 2013: Dividends paid Service revenue Accounts payable Capital stock Total expenses Retained earnings (1/1/13)
$
6,400 45,250 69,875 189,375 33,500 21,700
The retained earnings balance at December 31, 2013 was a. $216,425 b. $27,050 c. $146,550 d. $33,450 ANS: B Net income: Retained earnings balance:
$45,250 $33,500 = $11,750 $21,700 + $11,750 $6,400 = $27,050
PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement 66. The following information was taken from the records of Tellers Corporation for the year ended December 31, 2013: Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (12/31/13) Consulting fees revenue Rent expense Supplies expense
$20,625 13,095 13,450 14,125 57,860 93,550 11,728 16,917
Given the above information, retained earnings on December 31, 2012 was a. $45,110 b. $40,800 c. $31,185 d. $57,860 ANS: B Net income: Retained earnings 12/1/08:
$93,550 $20,625 $13,095 $11,728 $16,917 = $31,185 x + $31,185 $14,125 = $57,860 x = $40,800
PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement
67. Rolf Corporation reported the following data for the period end: Earnings per share, $6.00; Retained Earnings, $54,000; Revenues, $150,000; Capital Stock, $30,000; Expenses, $129,000; Dividends, $24,000. With this information, determine retained earnings for the prior period. a. $54,000 b. $51,000 c. $57,000 d. $180,000 ANS: C Net income: Retained earnings:
$150,000 $129,000 = $21,000 x + $21,000 $24,000 = $54,000 x = $57,000
PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement 68. The following information was taken from the records of Hart Corporation for the month ended December 31, 2013: Advertising expense $20,625 Income tax expense 13,095 Accounts payable 13,450 Dividends paid 14,125 Retained earnings (12/1/13) 57,860 Consulting fees revenue 97,875 Rent expense 11,728 Supplies expense 16,917 Given the above information, retained earnings as of December 31, 2013 is a. $79,045 b. $79,245 c. $55,795 d. $33,895 ANS: B Net income: Retained earnings:
$97,875 $20,625 $13,095 $11,728 $16,917 = $35,510 $57,860 + $35,510 $14,125 = $79,245
PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement 69. On April 1, Bonita Corporation's retained earnings account had a balance of $785,000. During April, Bonita had revenues of $135,000 and expenses of $93,000. On April 30, retained earnings had a balance of $811,500. What amount of dividends were paid during April? a. $42,500 b. $30,750 c. $15,500 d. $13,250 ANS: C Net income: Dividends:
$135,000 $93,000 = $42,000 $785,000 + $42,000 x = $811,500 x = $15,500
PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement
70. A major source of cash from operating activities is a. Receipts from sale of goods b. Receipts from borrowing c. Receipts from sale of building d. Receipts from investment by owner ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.3
71. Which of the following is a primary use of cash? a. Borrowing b. Investment by owners c. Operating expenses d. Sale of equipment ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.3
72. Which of the following financial statements shows an entity's cash receipts and payments? a. The statement of financial position b. The statement of cash flows c. The statement of earnings d. The statement of changes in owners' equity ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.3
73. Which of the following classifications does NOT appear on the Statement of Cash Flows? a. Investing b. Operating c. Borrowing d. Financing ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.3
74. Which of the following classifications refers to those activities associated with buying and selling long-term assets? a. Investing b. Operating c. Borrowing d. Financing ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.3
75. Which of the following classifications refers to those activities whereby cash is obtained or repaid to owners and creditors? a. Investing b. Operating c. Borrowing d. Financing ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.3
76. Which of the following classifications refers to those activities that are part of the day-to-day business of a company? a. Investing b. Operating c. Borrowing d. Financing ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.3
77. Which of the following activities would NOT be classified as an investing activity? a. Purchase of land b. Purchase of inventory c. Sale of Land d. Sale of equipment ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.3
78. Which of the following activities would be classified as a financing activity? a. Selling goods b. Payment of wages c. Repayment of a loan d. Purchase of equipment ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.3
Exhibit 2-3 During the month, Meridian Company had the following cash transactions: Cash collected from customers Cash received from a loan Cash paid for wages payable Cash paid for the purchase of a building Cash received for the issuance of new shares of stock Cash received from sale of land Cash paid for rent Cash paid for dividends
$ 12,500 8,000 (5,750) (15,000) 2,600 6,400 (2,500) (1,500)
79. Refer to Exhibit 2-3. Given the above information, compute cash flow from operating activities. a. $4,250 b. $20,750 c. $15,750 d. $9,250 ANS: A Operating activities: $12,500 $5,750 $2,500 = $4,250 PTS: 1 DIF: Medium OBJ: 2.3 NAT: AACSB Analytic | AICPA FN Measurement
80. Refer to Exhibit 2-3. Given the above information, compute cash flow from investing activities. a. $4,250 b. ($4,250) c. ($8,600) d. $8,600 ANS: C Investing activities: ($15,000) + $6,400 = ($8,600) PTS: 1 DIF: Medium OBJ: 2.3 NAT: AACSB Analytic | AICPA FN Measurement 81. Refer to Exhibit 2-3. Given the above information, compute cash flow from financing activities. a. $6,900 b. $3,900 c. $12,100 d. $9,100 ANS: D Financing activities: $8,000 + $2,600 $1,500 = $9,100 PTS: 1 DIF: Medium OBJ: 2.3 NAT: AACSB Analytic | AICPA FN Measurement 82. The idea that certain figures on an operating statement help to explain changes in figures on comparative balance sheets is referred to as a. Liquidity b. Double entry c. Articulation d. Classification ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.3
83. During 2013, Genoa Corporation had revenues of $198,000 and expenses of $156,000. Dividends of $28,000 were paid during the year and additional stock was issued for $21,400. If total assets and total liabilities on January 1, 2013, were $130,000 and $56,000, respectively, how much is owners' equity on December 31, 2013? a. $137,400 b. $109,400 c. $81,400 d. $65,400 ANS: B Owners' equity January 1, 2013: Net Income 2013: Owners' equity December 31, 2013:
$130,000 $56,000 = $74,000 $198,000 $156,000 = $42,000 $74,000 + $42,000 $28,000 + $21,400 = $109,400
PTS: 1 DIF: Medium OBJ: 2.3 NAT: AACSB Analytic | AICPA FN Measurement
84. In 2012, Rodney Corporation's balance sheet had the following balances: cash, $306,500; accounts receivable, $471,400; and accounts payable, $390,800. During 2013, Rodney had a net increase in cash of $68,600 and net income of $47,800. Given this information, what is the cash balance that will be reported on Rodney's 2013 balance sheet? a. $375,100 b. $237,900 c. $354,300 d. $258,700 ANS: A Cash balance 2013: $306,500 + $68,600 = $375,100 PTS: 1 DIF: Medium OBJ: 2.3 NAT: AACSB Analytic | AICPA FN Measurement 85. The following data were taken from the records of Mendez Corporation for the year ended December 31, 2013: 01/01/13 $3,750 2,860 ? 0
Assets Liabilities Owners' Equity Dividends Paid
12/31/13 ? $3,455 3,455 1,230
Given the above information and assuming that no additional stock was added for the year, net income for the year ended December 31, 2013, is a. $1,675 b. $2,120 c. $2,905 d. $3,795 ANS: D Owners' equity January 1: Net income:
$3,750 $2,890 = $890 $890 + x $1,230 = $3,455 x = $3,795
PTS: 1 DIF: Medium OBJ: 2.3 NAT: AACSB Analytic | AICPA FN Measurement 86. If a company has assets of $460,000, liabilities of $100,000, and capital stock of $210,000, what is the amount of retained earnings? a. $150,000 b. $210,000 c. $110,000 d. $310,000 ANS: A Assets = Liabilities + (Capital Stock + Retained Earnings) $460,000 = $100,000 + ($210,000 + x) x = $150,000 PTS: 1 DIF: Medium OBJ: 2.3 NAT: AACSB Analytic | AICPA FN Measurement
87. The transactions carried out by Blue Waters Corporation during the year caused an increase in total assets of $25,650 and a decrease in total liabilities of $12,250. If no additional stock was issued during the year and dividends of $7,850 were paid, what was the net income for the year? a. $53,600 b. $45,750 c. $29,100 d. $13,400 ANS: B Owners' equity Owners' equity: Net income:
= Assets Liabilities $25,650 ($12,250) = $37,900 $37,900 = x $7,850 x = $45,750
PTS: 1 DIF: Challenging OBJ: 2.3 NAT: AACSB Analytic | AICPA FN Measurement 88. Vital information that CANNOT be captured solely by dollar amounts is reported in a firm's a. Balance sheet b. Notes to financial statements c. Income statement d. Statement of retained earnings ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.4
89. Which of the following is NOT one of the four general types of financial statement notes? a. Summary of significant accounting policies b. Additional information about the summary totals found in the financial statements c. Disclosure of important information that is not recognized in the financial statements d. Supplementary information required by the Internal Revenue Service ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.4
90. Which of the following is an example of a significant accounting policy that would be explained in the notes to the financial statements? a. The description of all the individual items that comprise notes payable b. The disclosure of quarterly financial information c. The method used to estimate depreciation on a piece of equipment d. The disclosure of the uncertain, potential outcome of a lawsuit ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.4
91. Which of the following is an example of a disclosure of information NOT recognized that would be explained in the notes to the financial statements? a. The description of all the individual items that comprise notes payable b. The disclosure of quarterly financial information c. The method used to estimate depreciation on a piece of equipment d. The disclosure of the uncertain, potential outcome of a lawsuit ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.4
92. Which of the following is an example of additional information about summary totals that would be explained in the notes to the financial statements? a. The description of all the individual items that comprise notes payable b. The disclosure of quarterly financial information c. The method used to estimate depreciation on a piece of equipment d. The disclosure of the uncertain, potential outcome of a lawsuit ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.4
93. An independent audit report is usually issued by a. Management b. A government accountant c. A private detective d. A certified public accountant ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 2.5
94. In completing an audit of a company's financial statements, auditors a. Guarantee that the financial statements are accurate b. Examine every transaction underlying the financial statements c. Assume responsibility for the accuracy of the financial statements d. Provide some assurance that the financial statements are not misleading ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 2.5
95. The accuracy of the information contained in the financial statements is the responsibility of the a. Stockholders b. Certified Public Accountant c. Management d. Securities and Exchange Commission ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 2.5
96. Which of the following are the two economic factors that enable us to trust an independent auditor despite the fact that the auditor was hired by the company being audited? a. Reputation of auditor and government policy b. Risk of lawsuits and integrity of auditor c. Reputation of auditor and risk of lawsuits d. Integrity of auditor and government policy ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 2.5
97. The idea that the activities of the entity are to be separated from those of the individual owner is the a. Separate entity concept b. Arm's-length transaction assumption c. Money measurement concept d. Going concern assumption ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.6
98. The idea that both parties to a transaction must be rational and free to act independently is the a. Monetary measurement concept b. Arm's-length transaction assumption c. Going concern assumption d. Cost principle ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.6
99. The idea that transactions are recorded at their exchange prices at the transaction date is referred to as the a. Arm's-length transaction assumption b. Monetary measurement principle c. Cost principle d. Going concern assumption ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.6
100. The accounting idea that only items quantifiable in terms of U.S. currency are recorded is the a. Monetary measurement concept b. Arm's-length transaction assumption c. Going concern concept d. Double-entry assumption ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.6
101. The idea that businesses must be accounted for as though they will exist at least for the foreseeable future is the a. Going concern concept b. Entity concept c. Monetary measurement concept d. Arm's-length transaction assumption ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.6
102. Which of the following is an essential characteristic of the traditional accounting model? a. Going concern assumption b. Cost principle c. Entity concept d. All of these are essential characteristics ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 2.6
103. Suppose you decide to purchase a stereo and an independent store dealer offers to sell you a system that retails for $4,000 for a price of $3,695. After some negotiation, you purchase the system for $3,400. The $3,400 is considered the accounting measurement for the transaction because of the a. Going concern assumption b. Fair value assumption c. Double-entry assumption d. Arm's-length transaction assumption ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 2.6
104. Markanich Company purchased land for $90,000 in 2010. In 2013, the land is valued at $115,000. The land would appear on the company's books in 2013 at a. $25,000 b. $90,000 c. $75,000 d. $115,000 ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 2.6
PROBLEM 1. The following financial statement was prepared by Schenck Corporation's accountant: Schenck Corporation Balance Sheet December 31, 2012 Assets Cash Accounts Receivable Inventory Building Total Assets
$
6,000 6,500 15,000 ? $165,000
Liabilities and Stockholders' Equity Accounts Payable $ 4,000 Notes Payable ? Total Liabilities $ 9,500 Capital Stock (10,000 shares @ $10 per share) $120,000 Retained Earnings ? Total Stockholders' Equity ? Total Liabilities and Stockholders' Equity ?
Based on the above Balance Sheet for Schenck Corporation, what are the correct balances for the accounts listed below: a. b. c. d. e.
Building Notes Payable Total Liabilities and Stockholders' Equity Total Stockholders' Equity Retained Earnings
ANS: a. b. c. d. e.
$137,500 $5,500 $165,000 $155,500 $35,500
($165,000 $6,000 $6,500 $15,000) ($9,500 $4,000) (same as Total Assets) ($165,000 $9,500) ($155,500 $120,000)
PTS: 1 DIF: Medium OBJ: 2.1 NAT: AACSB Analytic | AICPA FN Measurement
2. The comparative balance sheet for Earthwork Company is presented below: Earthwork Company Comparative Balance Sheet December 31, 2013 and 2012 Assets Cash Supplies Land Equipment
12/31/13 $39,000 ? 52,000 32,500
12/31/12 $32,500 9,100 52,000 26,000
Liabilities and Stockholders' Equity Accounts payable Notes payable Capital stock Retained earnings
$23,400 26,000 52,000 35,100
$19,500 28,600 52,000 ?
Additional information for Earthwork's 2013 operations revealed that the company had revenues of $65,000 for the year and no dividends were paid. Based on this information, compute the account balances below. a. b. c. d.
Retained Earnings balance at 12/31/12 Supplies balance at 12/31/13 Total Current Assets as of 12/31/13 Total expenses incurred for 2013
ANS: a. b. c. d.
$19,500 = (Total Assets at 12/31/12 of $119,600 [$19,500 + $28,600 + $52,000]) $13,000 = (Total Liabilities and Stockholders' Equity at 12/31/13 of $136,500 [$39,000 + $52,000 + $32,500]) $52,000 = ($39,000 + $13,000) $49,400 = (R/E at 12/31/12 + revenue income at 12/31/13) = ($19,500 + $65,000 $35,100)
PTS: 1 DIF: Medium OBJ: 2.1 NAT: AACSB Analytic | AICPA FN Measurement
3. List the three categories of the balance sheet. For each category, provide the definition and examples of two types of accounts that are found in that particular category. ANS: Assets Definition: Examples: Liabilities Definition: Examples:
economic resources that are owned or controlled by a company Cash, Accounts Receivable, Inventory, Buildings (answers may vary)
obligations to pay cash, transfer other assets, or provide services to someone else Accounts Payable, Taxes Payable, Mortgage Payable, Unearned Revenue (answers may vary)
Owners' Equity Definition: the ownership interest in the net assets of an entity Examples: Capital Stock, Retained Earnings (answers may vary) PTS: 1 DIF: Medium OBJ: 2.1 NAT: AACSB Reflective Thinking | AICPA FN Measurement 4. On December 31, 2012, Pipe Company had the following account balances: Mortgage payable Taxes payable Accounts receivable Cash Land Capital stock Inventory Building Accounts payable Notes payable (due in 9 months) Retained earnings Given the above information, compute the following items: a. b. c. d. e.
Current assets Total assets Current liabilities Total liabilities Total owners' equity
ANS: a. b. c. d. e.
$135,000 = ($25,000 + $35,000 + $75,000) $460,000 = ($25,000 + $35,000 + $75,000 + $125,000 + $200,000) $110,000 = ($15,000 + $50,000 + $45,000) $260,000 = ($15,000 + $50,000 + $45,000 + $150,000) $200,000 = ($75,000 + $125,000)
PTS: 1 DIF: Medium OBJ: 2.1 NAT: AACSB Analytic | AICPA FN Measurement
$150,000 15,000 35,000 25,000 125,000 75,000 75,000 200,000 50,000 45,000 125,000
5. The following information was taken from Hemp Corporation's books as of December 31, 2013: Accounts receivable Mortgage payable Cash Service revenue Accumulated depreciation Notes payable (due in 5 months)
$ 80,000 175,000 57,000 360,000 105,000 15,000
Salaries payable Accounts payable Inventory Buildings Retained earnings Capital stock
$ 32,000 40,000 95,000 325,000 140,000 50,000
Prepare a classified balance sheet for the year ended December 31, 2013. ANS: Hemp Corporation Balance Sheet Year End December 31, 2013 Current assets: Cash Accounts receivable Inventory Total current assets Property, plant, and equipment: Buildings Less accumulated depreciation Total property, plant, and equipment Total assets Current liabilities: Accounts payable Salaries payable Notes payable Total current liabilities Long-term liabilities: Mortgage payable Total long-term liabilities Total liabilities Stockholders' equity: Capital stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity PTS: 1 DIF: Challenging OBJ: 2.1 NAT: AACSB Analytic | AICPA FN Measurement
$ 57,000 80,000 95,000 232,000 325,000 (105,000) 220,000 $452,000 $ 40,000 32,000 15,000 87,000 175,000 175,000 262,000 50,000 140,000 190,000 452,000
6. The income statement for Highline Corporation is presented below: Highline Corporation Income Statement For the Year Ended December 31, 2013 Sales revenue Expenses: Advertising expense Salaries expense Supplies expense Utilities expense Rent expense Income before taxes Income tax expense Net income Earnings per Share
$ $ 28,800 264,000 73,600 4,800 19,200
?
? ? 99,200 $230,400 $
?
Additional information for Highline's 2013 operations revealed that the company had beginning retained earnings of $65,000 for the year, $60,000 dividends were paid, and 10,000 shares of capital stock were outstanding. Based on this information, compute the items below. a. b. c. d.
Net income before taxes Total expense Sales revenue Earnings per share
ANS: a. b. c. d.
$329,600 = ($230,400 + $99,200) $390,400 = ($28,800 + $264,000 + $73,600 + $4,800 + 19,200) $720,000 = ($329,600 + $390,400) $23.04 = ($230,400/10,000 shares)
PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement
7. For the year ended December 31, 2012, Southern Company had the following account balances: Sales revenue Rent expense Salary expense Utility expense Retained earnings (1/1/2012) Dividends paid Interest expense
$445,000 60,000 200,000 45,000 130,000 75,000 25,000
Given the above information, compute the following items: a. b. c. d.
Total sales revenue Total expenses Net income Retained earnings at 12/31/2012
ANS: a. b. c. d.
$445,000 $330,000 = ($60,000 + $200,000 + $45,000 + $25,000) $115,000 = ($445,000 $330,000) $170,000 = ($130,000 + $115,000 $75,000)
PTS: 1 DIF: Medium OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement 8. The following information was taken from the Hall Corporation's books: Accounts receivable Income tax expense Retained earnings Service revenue Advertising expense
$ 78,400 49,600 201,600 360,000 14,400
Salaries expense Accounts payable Supplies expense Utilities expense Rent expense
$132,000 40,000 36,800 2,400 9,600
Prepare an income statement for the year ended December 31, 2013 (assume that 10,000 shares of stock are outstanding).
ANS: Hall Corporation Income Statement For the Year Ended December 31, 2013 Service revenue Expenses: Advertising expense Salaries expense Supplies expense Utilities expense Rent expense Income before taxes Income tax expense Net income
$360,000 $ 14,400 132,000 36,800 2,400 9,600
Earnings per Share ($115,200/10,000 shares)
195,200 164,800 49,600 $115,200 $11.52
PTS: 1 DIF: Challenging OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement 9. On January 1, 2013, Sorenson Company had a retained earnings balance of $780,000. During 2013, Sorenson Company earned a net income of $145,000. Cash dividends of $50,000 were paid during the year. Using this information, prepare a Statement of Retained Earnings, in good form, for the year 2013. ANS: Sorenson Company Statement of Retained Earnings For the Year Ended December 31, 2013 Retained earnings, January 1, 2013 Plus net income for the year Less dividends Retained earnings, December 31, 2013 PTS: 1 DIF: Challenging OBJ: 2.2 NAT: AACSB Analytic | AICPA FN Measurement
$780,000 145,000 (50,000) $875,000
10. For each of the following items, indicate whether it would be classified as an operating activity, an investing activity, or a financing activity on the statement of cash flows. a.
Cash payments for taxes
b.
Cash proceeds from the sale of land
c.
Cash receipts from providing services
d.
Cash proceeds from a long-term loan
e.
Issuance of stock for cash
f.
Cash payments for interest
g.
Cash payments for the purchase of equipment
h.
Cash payments for dividends paid to stockholders
ANS: a. b. c. d. e. f. g. h.
Cash payments for taxes Cash proceeds from the sale of land Cash receipts from providing services Cash proceeds from a long-term loan Issuance of stock for cash Cash payments for interest Cash payments for the purchase of equipment Cash payments for dividends paid to stockholders
Operating Investing Operating Financing Financing Operating Investing Financing
PTS: 1 DIF: Medium OBJ: 2.3 NAT: AACSB Analytic | AICPA FN Measurement 11. On December 31, 2013, Skidmore Company had the following cash flow data: Cash paid for dividends Cash collected from sale of building Cash paid for wages Cash received from issuing new shares of stock Cash collected from customers Cash paid to purchase inventory Cash paid for income taxes Cash paid for advertising Cash paid for purchase of equipment Cash paid on principal of loan Cash paid for rent
$
20,000 90,000 50,000 600,000 1,000,000 500,000 100,000 30,000 200,000 300,000 60,000
Skidmore Company had a cash balance of $750,000 on January 1, 2013. Given the above information, compute the following items: a. b. c. d. e.
Net cash flow provided (used) by operating activities Net cash flow provided (used) by investing activities Net cash flow provided (used) by financing activities Net increase (decrease) in cash during 2013 The cash balance at the end of 2013
ANS: a.
b.
c.
d.
e.
Operating activities: Cash paid for wages Cash collected from customers Cash paid to purchase inventory Cash paid for income taxes Cash paid for advertising Cash paid for rent Net operating activities Investing activities: Cash collected from sale of building Cash paid for purchase of equipment Net investing activities Financing activities: Cash paid for dividends Cash received from issuing new shares of stock Cash paid on principal of loan Net financing activities
$
(50,000) 1,000,000 (500,000) (100,000) (30,000) (60,000) $ 260,000
$
90,000 (200,000) $ (110,000)
$
(20,000) 600,000 (300,000) $ 280,000
Net change in cash: Operating activities Investing activities Financing activities Net increase in cash during 2013
$ 260,000 (110,000) 280,000 $ 430,000
Cash balance at end of 2013: Beginning cash balance Increase in cash during 2013 Ending cash balance
$ 750,000 430,000 $1,180,000
PTS: 1 DIF: Challenging OBJ: 2.3 NAT: AACSB Analytic | AICPA FN Measurement
12. On December 31, 2013, Halloway Company had the following financial information on its books: Total assets Net increase in operating activities Total liabilities Net decrease in financing activities Sales revenue Total expenses Net decrease in investing activities Capital stock
$365,000 425,000 185,000 250,000 680,000 605,000 135,000 30,000
Additional information for Halloway's 2013 operations revealed that the company had beginning retained earnings of $120,000 for the year, a beginning cash balance of $35,000, and dividends paid of $45,000. Based on this information, compute the following items at December 31, 2013: a. b. c. d. e.
Net increase/decrease in cash Total owner's equity Net income Cash balance Retained earnings
ANS: a. b. c. d. e.
$40,000 = ($425,000 $135,000 $250,000) $180,000 = ($365,000 $185,000) $75,000 = ($680,000 $605,000) $75,000 = ($35,000 + $40,000) $150,000 = ($120,000 + $75,000 $45,000) or ($180,000 $30,000)
PTS: 1 DIF: Medium OBJ: 2.3 NAT: AACSB Analytic | AICPA FN Measurement 13. While the three financial statements contain a lot of information, they don't tell the readers everything they may need to know about a company. Additional information can be found in the notes to the financial statements. Identify the four types of notes (be specific). ANS: 1. 2. 3. 4.
Summary of significant accounting policies. Additional information about the summary totals found in the financial statements. Disclosure of important information that is not recognized in the financial statements. Supplementary information required by the FASB or the SEC.
PTS: 1 DIF: Medium OBJ: 2.4 NAT: AACSB Reflective Thinking | AICPA FN Measurement
14. Financial accounting is based on certain fundamental concepts and assumptions. The importance of these items is that they allow the accountant to determine which events to account for and in what manner. Define the following: a. b. c. d. e.
Separate entity concept Arm's-length transactions Cost principle Monetary measurement concept Going concern assumption
ANS: a. b. c. d. e.
The idea that the activities of an entity are to be separated from those of the individual owners. Business dealings between independent and rational parties who are looking out for their own interests. The idea that transactions are recorded at their historical costs or exchange prices at the transaction date. The idea that money is the accounting unit of measurement, and that only economic activities measurable in monetary terms are included in the accounting model. The idea that an accounting entity will have a continuing existence for the foreseeable future.
PTS: 1 DIF: Medium OBJ: 2.6 NAT: AACSB Reflective Thinking | AICPA FN Measurement
Chapter 3—The Accounting Cycle: The Mechanics of Accounting MULTIPLE CHOICE 1. Which of the following is NOT a reason that business documents are used in a business? a. To confirm that a transaction has occurred b. To facilitate the analysis of business transactions c. To forecast sales d. To establish the amounts to be recorded ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.1
2. Business documents are used as records of transactions and as the basis for accounting entries. Which of the following is NOT a business document? a. Sales invoice b. Check stubs c. Receipts d. General ledger ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.1
3. Which of the following is NOT a step in the accounting cycle? a. Recording the effects of transactions b. Summarizing the effects of transactions c. Forecasting sales d. Preparing reports ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.1
4. Which of the following steps is normally first in the accounting cycle? a. Transactions are journalized. b. Journal accounts are posted. c. A trial balance is prepared. d. Business documents are analyzed. ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.1
5. Which of the following is NOT an advantage of a computerized accounting system over a manual accounting system? a. A computerized system is faster. b. A computerized system is more accurate once the data is correctly entered. c. Data can be managed more easily in a computerized system. d. A computerized system can analyze the information for decision making. ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.1
6. The basic accounting equation is a. Assets = Liabilities + Owners' Equity b. Assets + Owners' Equity = Liabilities c. Assets + Liabilities = Owners' Equity d. Liabilities Owner's Equity = Assets ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
7. Borrowing money from a bank a. Increases assets and decreases liabilities b. Increases liabilities and decreases assets c. Decreases assets and decreases liabilities d. Increases assets and increases liabilities ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
8. The basic accounting equation a. Is out of balance after each journal entry b. Should always balance c. Is balanced only at the end of the period with closing entries d. Is balanced only at the end of the period with adjusting entries ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
9. Which of the following would usually NOT happen in a single transaction? a. Increase assets, decrease liabilities b. Increase assets, increase liabilities c. Increase liabilities, decrease owners' equity d. Decrease assets, decrease owners' equity ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
10. The purchase of supplies on account a. Increases assets and decreases liabilities b. Decreases assets and increases liabilities c. Increases assets and increases liabilities d. Decreases assets and decreases liabilities ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
11. If a company purchased equipment for cash, the accounting equation would show a(n) a. Increase in assets and decrease in assets b. Decrease in liabilities and increase in assets c. Increase in liabilities and increase in assets d. Decrease in liabilities and decrease in assets ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
12. If a company paid off a loan, the accounting equation would show a(n) a. Increase in assets and decrease in liabilities b. Decrease in assets and decrease in liabilities c. Increase in liabilities and decrease in assets d. Increase in assets and increase in liabilities ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
13. If a company purchased equipment by borrowing money, the accounting equation would show a(n) a. Increase in assets and decrease in assets b. Decrease in liabilities and increase in assets c. Increase in assets and increase in liabilities d. Decrease in liabilities and decrease in assets ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
14. The purchase of supplies with cash would show a(n) a. Increase in assets and decrease in assets b. Decrease in liabilities and increase in assets c. Increase in assets and increase in liabilities d. Decrease in liabilities and decrease in assets ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
15. If a company purchased a building with a cash down payment and the balance with a loan, the accounting equation will show a(n) a. Decrease in assets and increase in liabilities b. Increase in assets and increase in liabilities c. Increase in assets and decrease in liabilities d. Decrease in assets and decrease in liabilities ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
16. If a company issues stock for cash, the accounting equation will show a(n) a. Increase in liabilities and decrease in owners' equity b. Decrease in liabilities and decrease in owners' equity c. Decrease in assets and increase in owners' equity d. Increase in assets and increase in owners' equity ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
17. An entry to the left side of an account is always called a(n) a. Debit b. Credit c. Increase d. Decrease ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
18. Liability accounts are increased a. By debits b. By credits c. On the left side d. Below the balance line ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
19. Owners' equity accounts are decreased with a. Debit entries b. Credit entries c. Liabilities d. Assets ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
20. Which of the following types of entries would NOT usually be made? a. A credit to an asset account, a debit to a liability account b. A debit to an asset account, a credit to a liability account c. A debit to an asset account, a credit to an owners' equity account d. A debit to an asset account, a debit to a liability account ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
21. An entry to the right side of an account is called a(n) a. Increase b. Credit c. Debit d. Decrease ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
22. Owners' equity accounts are increased by a. Debits b. Expenses c. Credits d. The payment of dividends ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
23. The debit and credit analysis of a transaction normally takes place a. When the entry is posted to a subsidiary ledger b. When the entry is recorded in a journal c. When the trial balance is prepared d. When the financial statements are prepared ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
24. Which of the following is true? a. Assets + liabilities = owners' equity b. Credits = assets c. Debits = credits d. Assets = liabilities owners' equity ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
25. The inventory account is increased by a. Credits b. Debits c. Either credits or debits d. Neither credits nor debits ANS: B PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
26. The capital stock account is a. Increased with a debit b. Increased with a credit c. Decreased with a credit d. None of these are correct ANS: B PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
27. Usually, when accounts receivable are collected, an asset is debited and a. Another asset is debited b. Another asset is credited c. A liability is debited d. A liability is credited ANS: B PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
28. When accounts receivable are collected, a. Total assets are increased b. Total assets are decreased c. Total assets remain constant d. Owners' equity increases ANS: C PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
29. When equipment is purchased with a cash down payment and a signed note for the balance, the net effect will be a. Only an increase in assets b. Only a decrease in liabilities c. Only a decrease in assets d. Both an increase in assets and an increase in liabilities ANS: D PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
30. When a note payable is given to settle an existing account payable, a. There is no net change in assets, liabilities, or owners' equity b. Net assets are increased c. Net liabilities are increased d. Net owners' equity is increased ANS: A PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
31. Which of the following is true of the cash account? a. It normally has a credit balance. b. It is increased with credit entries. c. It is an owners' equity account. d. It is increased with debit entries. ANS: D PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
32. Revenue accounts are a. Increased with debit entries b. Assets c. Increased with credit entries d. Subtracted from capital stock ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
33. Revenues a. Decrease assets b. Decrease owners' equity c. Increase liabilities d. Increase owners' equity ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
34. Expense and revenue accounts can be considered to be subcategories of a. An asset account b. A liability account c. An owners' equity account d. None of these are correct ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
35. Which of the following accounts would normally NOT have a credit balance? a. Accounts Payable b. Cost of Goods Sold c. Sales Revenue d. Retained Earnings ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
36. The supplies expense account a. Normally has a credit balance b. Is increased with a credit entry c. Is increased with a debit entry d. Is decreased with a debit entry ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
37. Which of the following accounts is decreased with a debit? a. Rent Expense b. Retained Earnings c. Equipment d. Accounts Receivable ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
38. The dividends account a. Is increased with a credit entry b. Is decreased with a debit entry c. Normally has a credit balance d. Normally has a debit balance ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
39. Expense accounts a. Are increased with credit entries b. Are increased with debit entries c. Normally have credit balances d. Are closed to the capital stock account ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
40. Which of the following groups of accounts have a normal debit balance? a. Revenues and Liabilities b. Owners' Equity and Assets c. Liabilities and Expenses d. Assets and Expenses ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.2
41. Which of the following types of accounts are affected when a company pays cash dividends to its shareholders? a. Owners' equity only b. Both assets and liabilities c. Both liabilities and owners' equity d. Both assets and owners' equity ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
42. Which of the following types of accounts have a normal debit balance? a. Assets and Expenses b. Liabilities and Dividends c. Revenues and Liabilities d. Owners' Equity and Dividends ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
43. A credit sale of merchandise for a price that exceeds the cost of the merchandise a. Increases net assets and increases liabilities b. Decreases net assets and increases revenues c. Increases liabilities and increases revenues d. Increases net assets and increases revenues ANS: D PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
44. A company's retained earnings balance would decrease by a. The declaration and payment of dividends b. Sales c. Investments by owners d. Net income ANS: A PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
45. The entry to record the payment of a note with interest usually includes a a. Debit to Cash b. Credit to Note Payable c. Debit to Interest Expense d. Credit to Note Receivable ANS: C PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
46. When cash dividends are paid, a. Assets are decreased and liabilities are decreased b. Assets are increased and owners' equity is increased c. Assets are decreased and owners' equity is increased d. Assets are decreased and owners' equity is decreased ANS: D PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.2
47. During March, Randolph Corporation completed the following transactions:
Purchased inventory for $36,000 on credit. Issued additional capital stock for $20,000. Purchased equipment for $15,900 cash.
As a result of these transactions, Randolph's total assets would a. Increase by $56,000 b. Increase by $40,100 c. Increase by $35,900 d. Increase by $20,100 ANS: A Change in assets: $36,000 + $20,000 + $15,900 $15,900 = $56,000 increase PTS: 1 DIF: Medium OBJ: 3.2 NAT: AACSB Analytic | AICPA FN Measurement 48. On May 1, James Corporation had total assets of $877,000. During May, the company completed the following transactions:
Barry Saunder, an owner in the firm, donated equipment to James Corporation. The equipment had a value of $6,700 at the time it was acquired by the firm. Purchased a building for $78,000 and signed a note for the purchase. Purchased $1,500 of supplies for cash.
After these transactions were recorded, total assets would have a balance of a. $963,200 b. $961,700 c. $963,000 d. $945,700 ANS: B Total assets: $877,000 + $6,700 + $78,000 + $1,500 $1,500 = $961,700 PTS: 1 DIF: Medium OBJ: 3.2 NAT: AACSB Analytic | AICPA FN Measurement
49. As of June 1, Mega Corporation had total assets of $79,500. During June, the company had the following transactions:
Collected receivables of $13,050 from previous periods. Generated revenues of $37,500, of which 40 percent were cash. Incurred total expenses of $27,000, 60 percent of which were paid.
After these transactions have been recorded, Mega would have total assets of a. $100,800 b. $100,050 c. $91,200 d. $104,250 ANS: A Total assets: $79,500 + $13,050 $13,050 + $37,500 $16,200 = $100,800 PTS: 1 DIF: Medium OBJ: 3.2 NAT: AACSB Analytic | AICPA FN Measurement 50. Miles Motor Supplies had the following transactions during December:
Paid a note of $17,000 owed since March plus $425 for interest. Sold $36,525 of merchandise to customers on account. Cost of goods sold was $21,250. Paid accounts payable of $2,050.
As a result of these transactions, at year-end, liabilities and owners' equity would show a total a. Decrease by $4,575 b. Decrease by $4,200 c. Decrease by $4,800 d. Increase by $13,425 ANS: B Change in liabilities and owners' equity: $17,000 $425 $21,250 + $36,525 $2,050 = $4,200 (decrease) PTS: 1 DIF: Medium OBJ: 3.2 NAT: AACSB Analytic | AICPA FN Measurement 51. During the period, Williams Company completed the following transactions:
Purchased $3,000 of supplies for cash. Signed a note with Firstland Bank for a $30,000 loan (ignore interest). Paid $13,200 of accounts payable.
As a result of these transactions, Williams Company's total assets would a. Increase by $19,800 b. Increase by $45,600 c. Increase by $16,800 d. Increase by $14,400 ANS: C Change in total assets: $3,000 $3,000 + $30,000 $13,200 = $16,800 increase PTS: 1 DIF: Medium OBJ: 3.2 NAT: AACSB Analytic | AICPA FN Measurement
52. Assuming no other changes except a decrease in assets of $20,000, increase in liabilities of $10,000, and expenses of $60,000, by how much did owners' equity increase or decrease and what were revenues for the period? a. Owners' equity increased $30,000; revenues were $90,000 b. Owners' equity decreased $30,000; revenues were $30,000 c. Owners' equity increased $10,000; revenues were $70,000 d. Owners' equity decreased $10,000; revenues were $70,000 ANS: B A = L + OE:
($20,000) = $10,000 + OE OE = $30,000 OE = Revenues Dividends: ($30,000) = R $60,000 R = $30,000
PTS: 1 DIF: Challenging OBJ: 3.2 NAT: AACSB Analytic | AICPA FN Measurement 53. Assuming that capital stock increased $5,000, net income was $100,000, and dividends were $120,000, if total assets increased by $25,000, what was the change in liabilities? a. Liabilities increased $40,000 b. There was no change in liabilities c. Liabilities decreased $10,000 d. The answer cannot be determined from the data given ANS: A A = L + OE $25,000 = L + ($5,000 + $100,000 $120,000) L = $40,000 PTS: 1 DIF: Challenging OBJ: 3.2 NAT: AACSB Analytic | AICPA FN Measurement
54. On June 30, the balances in the General Ledger accounts of Pancho Company resulted in the following totals: Assets Liabilities Owners' equity
$517,600 323,400 200,500
Total assets do not equal total liabilities plus owners' equity because the following errors were made:
Supplies of $500 were on hand but were not included in assets because all purchases were debited to Supplies Expense. Credit sales of $15,700 were posted to the Sales Revenue account as $17,500. The Accounts Receivable account was posted correctly. Equipment purchased on credit for $51,600 was incorrectly posted to Notes Payable as $56,100. No error was made in the Equipment account.
The correct balances in the asset, liability, and owners' equity accounts, respectively, should be Assets a. $518,100; b. $517,850; c. $517,350; d. $517,850; ANS: A Assets: Liabilities: Owners' equity:
Liabilities $318,900; $327,900; $327,900; $318,900;
Owners' Equity $199,200 $189,950 $189,450 $198,950
$517,600 + $500 = $518,100 $323,400 $4,500 = $318,900 $200,500 + $500 $1,800 = $199,200
PTS: 1 DIF: Challenging OBJ: 3.2 NAT: AACSB Analytic | AICPA FN Measurement 55. Transactions are typically entered into the General Journal in which order? a. Alphabetically by account b. By account number, lowest to highest c. By dollar amount, lowest to highest d. By transaction date ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.3
56. Which of the following is NOT usually part of an entry in the General Journal? a. Account numbers for the debit and credit entry b. Account titles for the debit and credit entry c. The transaction date d. An explanation of the transaction ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.3
57. A book of original entry is called a a. Journal b. Ledger c. Trial balance d. Check register ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.3
58. A chronological listing of all economic transactions is maintained in a company's a. Work sheets b. Ledgers c. Journals d. Balance sheets ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.3
59. The following are all essential parts of the journal entry except a. A brief explanation b. The date c. A debit entry d. The journal entry number ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.3
60. Which of the following is the correct format for journalizing transactions? xxx a. Debit Credit Debit b. Credit c. Credit Debit Debit d. Credit
xxx
xxx xxx xxx xxx xxx xxx
ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.3
61. A journal entry that includes more than two accounts is called a(n) a. simple journal entry b. compound journal entry c. complex journal entry d. essential journal entry ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.3
62. Cost of Goods Sold is what type of account? a. Expense b. Asset c. Liability d. Revenue ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.3
63. Which of the following is the correct order for preparing a journal entry? a. Identify which accounts are involved; For each account, determine if it is increased or decreased; For each account, determine by how much it has changed b. For each account, determine if it is increased or decreased; For each account, determine by how much it has changed; Identify which accounts are involved c. For each account, determine if it is increased or decreased; Identify which accounts are involved; For each account, determine by how much it has changed d. Identify which accounts are involved; For each account, determine by how much it has changed; For each account, determine if it is increased or decreased ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.3
64. Northwest Company received and immediately paid a $4,000 utility bill from Green River Gas and Electric Company. The entry by Green River Gas and Electric Company to record receipt of the payment would include a. A credit to Accounts Payable b. A debit to Cash c. A credit to Utilities Expense d. A credit to Accounts Payable and a debit to Cash ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.3
65. Deano Inc. purchased $27,000 of merchandise from Jeri Co. by making a 25 percent cash down payment and signing a 90-day note for the balance. The cost of the merchandise to Jeri Co. was $22,000. The entry by Deano Inc. to record the transaction would a. Increase total assets b. Decrease total liabilities c. Decrease total assets d. Decrease total owners' equity ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.3
66. Deano Inc. purchased $27,000 of merchandise from Jeri Co. by making a 25 percent cash down payment and signing a 90-day note for the balance. The cost of the merchandise to Jeri Co. was $22,000. The entry by Jeri Co. to record the transaction would include a. A credit to Cash b. A credit to Inventory c. A debit to Sales Revenue d. A credit to Notes Receivable ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.3
67. Christopher Company purchased $20,000 of equipment for cash. The correct entry to record the purchase of equipment is a. Cash 20,000 Equipment
b. Equipment
20,000 20,000
Accounts Payable
c. Equipment
20,000 20,000
Cash
d. Accounts Payable
20,000 20,000
Equipment
20,000
ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.3
68. On January 25, Blayne Corporation bought merchandise from a supplier for $3,600 on account. On February 20, Blayne paid the $3,600 owed to the supplier. The correct entry to record the purchase on January 25 is 3,600 a. Cost of Goods Sold Inventory Accounts Payable b. Inventory c. Inventory Cost of Goods Sold d. Inventory Accounts Payable
3,600
3,600 3,600 3,600 3,600 3,600 3,600
ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.3
69. On January 25, Blayne Corporation bought merchandise from a supplier for $3,600 on account. On February 20, Blayne paid the $3,600 owed to the supplier. The correct entry to record the payment to the supplier on February 20 is 3,600 a. Accounts Payable Inventory
3,600
b. Cash
3,600
c. Accounts Payable
3,600
d. Cost of Goods Sold
3,600
Accounts Payable
3,600
Cash
3,600
Accounts Payable
3,600
ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.3
70. Solo Company borrowed $4,000 from National City Bank on June 1. On August 31, Solo Company paid off the loan plus $100 interest. The correct entry to record the borrowing transaction on June 1 is 4,000 a. Notes Payable Cash
4,000
b. Notes Payable
4,100
c. Cash
4,000
d. Cash
4,100
Cash
4,100
Notes Payable Notes Payable
4,000 4,100
ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.3
71. Solo Company borrowed $4,000 from National City Bank on June 1. On August 31, Solo Company paid off the loan plus $100 interest. The correct entry to record the August 31 payment of the loan plus interest is 4,000 a. Cash Interest Expense Notes Payable b. Notes Payable Interest Expense Cash c. Cash Notes Payable Interest Expense d. Notes Payable Interest Expense Cash
100
4,100 4,000 100 3,900 4,000 100 4,100 4,000 100 4,100
ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.3
72. On November 15, Roach Company issued 300 new shares of stock. Shareholders paid $25 for each share of stock. The correct entry to record the issue of stock on November 15 is 7,500 a. Cash Capital Stock Capital Stock b. Cash c. Cash Capital Stock d. Capital Stock Cash
7,500
7,500 7,500 300 300 300 300
ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.3
73. On December 31, Scott Corporation paid shareholders a $13,000 cash dividend. The entry by Scott Corporation to record the transaction would include a. A debit to Cash b. A credit to Dividends c. A debit to Dividends d. A debit to Capital Stock ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.3
74. On July 24, Barkdull Inc. purchased $4,000 of inventory on account. On August 3, Barkdull, sold $2,000 of inventory for $1,000 cash and $2,000 on credit. The correct entry by Barkdull Inc. to record the purchase of inventory on July 24 is a. Inventory 4,000 Cash
4,000
b. Accounts Payable
4,000
c. Inventory
4,000
d. Cash
4,000
Inventory
4,000
Accounts Payable Inventory
4,000 4,000
ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.3
75. On July 24, Barkdull Inc. purchased $4,000 of inventory on account. On August 3, Barkdull, sold $2,000 of inventory for $1,000 cash and $2,000 on credit. The correct entry by Barkdull Inc. to record the sale of inventory or August 3 is 3,000 a. Cash Sales Revenue Cost of Goods Sold Inventory b. Cash Accounts Receivable Sales Revenue Cost of Goods Sold Inventory c. Cost of Goods Sold Sales Revenue Accounts Receivable Inventory d. Cash Accounts Receivable Inventory Cost of Goods Sold Sales Revenue
3,000
2,000 2,000 1,000 2,000 3,000 2,000 2,000 3,000 3,000 2,000 2,000 1,000 2,000 3,000 2,000 2,000
ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.3
76. On May 16, Bennion Company, sold $50,000 of inventory to Bonaccorsi, Inc. for $10,000 cash and $60,000 on credit. On June 10, Bonaccorsi, Inc. paid Bennion Company cash for the $60,000 credit sale. The correct entry by Bennion Company to record the payment on June 10 is 60,000 a. Cash Accounts Receivable
60,000
b. Cash
60,000
c. Cost of Goods Sold
60,000
d. Accounts Receivable
60,000
Sales Revenue
60,000
Sales Revenue Cash
60,000 60,000
ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.3
77. On May 16, Bennion Company, sold $50,000 of inventory to Bonaccorsi, Inc. for $10,000 cash and $60,000 on credit. On June 10, Bonaccorsi, Inc. paid Bennion Company cash for the $60,000 credit sale. The entry by Bennion Company to record the transaction on May 16 would include a. A credit to Cash b. A debit to Inventory c. A credit to Sales Revenue d. A credit to Cost of Goods Sold ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.3
78. The accounting record where all accounts are posted and summarized is the a. General Ledger b. General Journal c. Balance sheet d. Posting reference ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.4
79. Each account is assigned a number. This systematic listing of all accounts is called a a. Trial Balance b. General Journal c. General Ledger d. Chart of Accounts ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.4
80. A trial balance shows that a. No transactions have been omitted b. All transactions have been properly recorded c. Journal entries have not been posted to the wrong accounts d. Total debits equals total credits ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.4
81. After all transactions have been journalized and posted to the accounts, a trial balance will be prepared. The purpose of this is to a. Determine whether there is enough cash to pay dividends b. Check that total debits equals total credits c. Close the books d. Obtain unadjusted balances that can be transferred directly to the financial statements ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.4
82. Which of the following is NOT true about a trial balance? a. A trial balance is strictly an internal document. b. A trial balance is used to summarize all of the account balances. c. A trial balance shows that the accounting equation is in balance. d. A trial balance and a balance sheet are essentially the same document. ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.4
83. Which of the following would cause a trial balance to be out of balance? a. A transaction was recorded twice b. Only the debit of a transaction was recorded c. A transaction was not recorded d. A transaction was posted to the wrong account ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.4
84. Golf Company paid a $5,000 cash dividend to its stockholders. The transaction would be posted as a. Cash Dividends b. c. d.
| | 5,000 Cash | 5,000 | Cash | | 5,000 Cash | 5,000 |
| 5,000 | Capital Stock | | 5,000 Dividend Expense | 5,000 | Revenues | | 5,000
ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.4
85. Gorbac Corporation issued stock to John Gorbac for $7,000 cash. This transaction would be posted to the ledger accounts of Gorbac Corporation as a. Cash Capital Stock b. c. d.
| | 7,000 Cash | 7,000 | Retained Earnings | 7,000 | Retained Earnings | | 7,000
| 7,000 | Capital Stock | | 7,000 Capital Stock | | 7,000 Capital Stock | 7,000 |
ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.4
86. Valenzuala Company purchased a truck for $38,000 cash. This transaction would be posted to the ledger accounts of Valenzuala Company as Cash Equipment a. b. c. d.
| | 38,000 Equipment | 38,000 | Equipment | 38,000 | Equipment | | 38,000
| 38,000 | Accounts Payable | | 38,000 Cash | | 38,000 Accounts Payable | 38,000 |
ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.4
87. Perez Company received and immediately paid a $500 utility bill. Payment of the utility bill would be posted to the ledger accounts as Utility Expense a. Accounts Payable b. c. d.
| 500 | Utility Expense | 500 | Utility Expense | | 500 Accounts Payable | | 500
| | 500 Cash | | 500 Cash | 500 | Utility Expense | 500 |
ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.4
88. Derby Inc. sold merchandise to a customer for $16,000 cash. The sale would be posted to the ledger accounts as a. Cash Sales Revenue b. c. d.
| 16,000 | Accounts Receivable | 16,000 | Cash | | 16,000 Accounts Receivable | | 16,000
| | 16,000 Sales Revenue | | 16,000 Sales Revenue | 16,000 | Sales Revenue | 16,000 |
ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.4
89. Mila Company paid $900 for merchandise previously purchased on credit. The payment would be posted to the ledger accounts as Cash a. Accounts Payable b. c. d.
| | 900 Accounts Payable | 900 | Accounts Payable | 900 | Accounts Payable | | 900
| 900 | Cash | 900 | Cash | | 900 Cash | | 900
ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.4
90. During July 2013, Hasan Corporation incurred but did NOT pay a $500 utility expense. This transaction would be posted as Utility Expense a. Accounts Payable b. c. d.
| 500 | Utility Expense | | 500 Utility Expense | 500 | Accounts Payable | | 500
| | 500 Cash | 500 | Cash | 500 | Utility Expense | 500 |
ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.4
91. During July 2013, Gutierrez Corporation sold $9,000 of merchandise on account. The revenue portion of this transaction would be posted as a. Cash Sales Revenue b. c. d.
| 9,000 | Accounts Receivable | 9,000 | Cash | | 9,000 Accounts Receivable | | 9,000
| | 9,000 Sales Revenue | | 9,000 Sales Revenue | 9,000 | Sales Revenue | 9,000 |
ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.4
92. During January 2013, Westburg Corporation paid off $9,000 of wages payable that were incurred in the prior year. This transaction would be posted as Cash a. Wages Payable b. c. d.
| 9,000 | Wages Payable | 9,000 | Wages Payable | | 9,000 Wages Payable | | 9,000
| 9,000 | Cash | | 9,000 Cash | 9,000 | Cash | | 9,000
ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.4
93. When Jim was preparing the trial balance, he accidentally recorded a $300 debit as a credit instead. By how much will this cause the trial balance columns to differ? a. $0 b. $150 c. $300 d. $600 ANS: D Credits will be $300 overstated and debits will be $300 understated, therefore causing a difference of $600 PTS: 1 DIF: Medium OBJ: 3.4 NAT: AACSB Analytic | AICPA FN Measurement 94. When Jim was preparing the trial balance, he accidentally recorded a $550 payment of accounts payable twice. By how much will this cause the trial balance columns to differ? a. $0 b. $275 c. $550 d. $1,100 ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 3.4
95. Computers can NOT do which of the following? a. Analyze transactions b. Post journal entries c. Summarize accounting data d. Prepare a variety of reports ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.5
96. Which of the following is NOT an advantage of using computers? a. Increased accuracy in the posting process b. Data is accepted without question c. Reports can be prepared with increased efficiency d. Elimination of the need to specify the terms debit and credit ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 3.5
PROBLEM 1. List the four steps, in order, of the sequence of the accounting cycle. Be sure to include any sub-steps. ANS: 1. 2. 3.
4.
Analyze transactions. Record the effects of transactions. Summarize the effects of transactions. 1. Posting journal entries. 2. Preparing a trial balance. Prepare reports. 1. Adjusting entries. 2. Preparing financial statements. 3. Closing the books.
PTS: 1 DIF: Medium OBJ: 3.1 NAT: AACSB Reflective Thinking | AICPA FN Measurement 2. The basic accounting equation can be used to show the changes in assets, liabilities, and owners' equity. Reynolds Corporation recently had the following transactions: a. b. c. d. e.
Owners invested $80,000. Purchased equipment for $50,000 on credit. Borrowed $60,000 from the bank. Purchased $25,000 of inventory for cash. Paid for the equipment purchased above.
Record the monetary consequences of these transactions under the appropriate columns shown below. Also indicate the column totals. Transaction
Assets
=
Liabilities
+
Owners' Equity
Assets +80,000 +50,000 +60,000 +25,000 25,000 50,000 +140,000
=
Liabilities
+
Owners' Equity +80,000
ANS: Transaction a. b. c. d. e.
+50,000 +60,000 50,000 +60,000
PTS: 1 DIF: Medium OBJ: 3.2 NAT: AACSB Analytic | AICPA FN Measurement
+80,000
3. The basic accounting equation can be broken into accounts that represent a firm's assets, liabilities, and owners' equity. Desler Company had the following transactions during a recent week: a. b. c. d.
Received $60,000 cash from the issuance of capital stock. Purchased equipment for $48,000. Paid $12,000 down and signed a note for the balance. Purchased $1,200 of supplies, 20 percent cash and 80 percent on credit. Paid $7,200 on the note payable.
Record these transactions in the appropriate columns shown below. Also, include account balances. Cash
Supplies
Equipment
Accounts Payable
Notes Payable
Capital Stock
Cash +60,000 12,000 240 7,200 +40,560
Supplies
Equipment
Accounts Payable
Notes Payable
Capital Stock +60,000
Transaction ANS:
Transaction a. b. c. d.
+48,000
+36,000
+1,200 +1,200
+960 +48,000
+960
7,200 +28,800
+60,000
PTS: 1 DIF: Medium OBJ: 3.2 NAT: AACSB Analytic | AICPA FN Measurement 4. Give the effect the following transactions would have on EACH side of the accounting equation. Be specific in the description of the accounts. The first transaction's effect is noted as an example for you to follow. Transaction Payment of account owed with cash
a.
Borrowing money from a bank
b.
Purchase of a truck for cash and a note
c.
Receipt of interest revenue
d.
Sale of stock
e.
Payment of dividends to shareholders
f.
Payment of electric bill
g.
Sale of merchandise for cash
Effect Decrease in assets (Cash), decrease in liabilities (Accounts Payable)
ANS: a. b. c. d. e. f. g.
Increase in assets (Cash), increase in liabilities (Note Payable) Increase in assets (Truck), decrease in assets (Cash), increase in liabilities (Note Payable) Increase in assets (Cash), increase in owners' equity (Interest Revenue) Increase in assets (Cash), increase in owners' equity (Stock) Decrease in assets (Cash), decrease in owners' equity (Dividends) Decrease in assets (Cash), decrease in owners' equity (Utilities Expense) Increase in assets (Cash), decrease in assets (Inventory), increase in owners' equity (Sales Revenue), decrease in owners' equity (Cost of Goods Sold)
PTS: 1 DIF: Medium OBJ: 3.2 NAT: AACSB Analytic | AICPA FN Measurement 5. Using the format provided, for each account identify (a) whether the account would be reported on a balance sheet or on an income statement; (b) whether it is an asset, a liability, owners' equity, a revenue, or an expense; and (c) whether the account has a debit or a credit balance. An example is provided. (a)
Account Title
Ex.: 1. 2. 3. 4. 5. 6. 7. 8.
Cash Sales Revenue Dividends Cost of Goods Sold Utilities Expense Notes Payable Accounts Receivable Capital Stock Supplies
(c)
Balance Sheet or Income Statement
(b) Asset, Liability, Owners' Equity, Revenue, or Expense
Debit/ Credit
Balance Sheet
Asset
Debit
(a)
(c) Debit/ Credit
Debit Credit Debit Debit Debit Credit Debit Credit Debit
ANS:
Ex: 1. 2. 3. 4. 5. 6. 7. 8.
Account Title
Balance Sheet or Income Statement
(b) Asset, Liability, Owners' Equity, Revenue, or Expense
Cash Sales Revenue Dividends Cost of Goods Sold Utilities Expense Notes Payable Accounts Receivable Capital Stock Supplies
Balance Sheet Income Statement Balance Sheet Income Statement Income Statement Balance Sheet Balance Sheet Balance Sheet Balance Sheet
Asset Revenue Owners' Equity Expense Expense Liability Asset Owners' Equity Asset
PTS: 1 DIF: Medium OBJ: 3.2 | 3.3 NAT: AACSB Analytic | AICPA FN Measurement
6. The balances in the General Ledger accounts of Courtney Company resulted in the following totals: Assets Liabilities Owners' equity
$1,019,000 720,000 325,000
Total assets do not equal total liabilities plus owners' equity because the following errors were made:
Supplies of $3,500 that were purchased on account were posted to Accounts Receivable as a $4,500 purchase. No error was made in the Supplies account. Credit sales of $35,000 were posted to the Sales Revenue account and Accounts Receivable account as $53,000. Equipment purchased on credit for $127,000 was incorrectly posted to Notes Payable as $172,000. No error was made in the Equipment account. Rent expense of $24,500 was incorrectly posted as an expense of $42,500. Cash was posted correctly. $50,000 of inventory bought on account was purchased but not recorded. When $250,000 was borrowed from the bank, retained earnings was debited and accounts receivable was credited.
Using the appropriate columns shown below, compute the correct balances in the asset, liability, and owners' equity accounts. Assets
Liabilities
Owners' Equity
ANS:
Beginning Balance
Correct Ending Balance
Assets $1,019,000 (1,000) (18,000) 50,000 500,000 $1,550,000
Liabilities $720,000 (45,000) 50,000 250,000
Owners' Equity $325,000 (18,000) 18,000 250,000
$975,000
$575,000
PTS: 1 DIF: Challenging OBJ: 3.2 NAT: AACSB Analytic | AICPA FN Reporting 7. Record the following transactions in journal entry form (omit explanations). a. b. c. d. e.
Sold merchandise for $3,200 on account; cost of merchandise sold was $1,600. Borrowed $32,000 from a bank. Issued stock for $7,200. Purchased equipment costing $120,000; with cash of $32,000 and a note for the remainder. Paid off the loan of $32,000 plus $400 interest.
ANS: a.
b.
c.
d.
e.
Accounts Receivable Sales Revenue
3,200
Cost of Goods Sold Inventory
1,600
Cash Notes Payable
32,000
Cash Capital Stock
7,200
Equipment Cash Notes Payable
120,000
Notes Payable Interest Expense Cash
32,000 400
3,200
1,600
32,000
7,200 32,000 88,000
32,400
PTS: 1 DIF: Medium OBJ: 3.3 NAT: AACSB Analytic | AICPA FN Measurement 8. Telecon, Inc., experienced the following transactions during May 2013. Prepare the appropriate journal entries to record these transactions (omit explanations). May 3 Purchased $160,000 of inventory, paying 50% in cash and the balance on account. 8 Paid monthly rent of $4,000. 11 Purchased equipment for $160,000, paying 40% in cash and signing a note for the balance. 15 Sold inventory costing $15,000 for $25,000 cash. 21 Purchased a 2-year insurance policy for $10,000. 25 Paid $8,000 on account. 28 Collected $5,000 in accounts receivable. 29 Sold an additional 500 shares of capital stock for $20,000. 30 Paid utilities of $3,000.
ANS: May 3
Inventory Cash Accounts Payable
8 Rent Expense Cash
160,000 80,000 80,000 4,000 4,000
11 Equipment Cash Notes Payable
160,000
15 Cash
25,000
64,000 96,000
25,000
Sales Revenue Cost of Goods Sold Inventory
15,000 15,000
21 Prepaid Insurance Cash
10,000
25 Accounts Payable Cash
8,000
28 Cash
5,000
10,000
8,000
Accounts Receivable 29 Cash
5,000 20,000
Capital Stock 30 Utilities Expense Cash
20,000 3,000 3,000
PTS: 1 DIF: Medium OBJ: 3.3 NAT: AACSB Analytic | AICPA FN Measurement 9. Marbletop, Inc. had the following transactions during a recent month: a. b. c. d. e. f. g. h. i. j. k.
Purchased $80,000 of inventory, paying 40% in cash and the balance on account. Purchased land and a building for $50,000 and $175,000, respectively, for $65,000 cash and signed a note for the balance. Paid monthly rent of $2,000. Issued stock for $100,000. Sold merchandise on account for $56,000; cost of goods sold was $35,000. Purchased $15,000 of equipment on account. Collected $24,000 from customers who had previously purchased inventory on account. Made a payment of $2,000 plus $300 interest on the notes payable. Paid $9,000 on accounts payable. Purchased supplies of $1,200 Paid monthly wages of $3,000
Prepare the appropriate journal entries to record these transactions (omit explanations).
ANS: a.
b.
c.
d.
e.
f.
g. h.
i.
j.
k.
Inventory Cash Accounts Payable
80,000
Land Building Cash Notes Payable
50,000 175,000
Rent Expense Cash
32,000 48,000
65,000 160,000 2,000 2,000
Cash Capital Stock
100,000
Accounts Receivable Sales Revenue Cost of Goods Sold Inventory
56,000
Equipment Accounts Payable
15,000
Cash Accounts Receivable
24,000
Notes Payable Interest Expense Cash
2,000 300
Accounts Payable Cash
9,000
Supplies Cash
1,200
Wages Expense Cash
3,000
PTS: 1 DIF: Medium OBJ: 3.3 NAT: AACSB Analytic | AICPA FN Measurement
100,000
56,000 35,000 35,000
15,000
24,000
2,300
9,000
1,200
3,000
10. Cloveridge, Inc. had the following transactions during a recent period: a. b. c. d. e. f.
Received $80,000 cash from the issuance of capital stock. Purchased inventory for $37,000 cash. Purchased $7,500 of equipment on account. Sold merchandise on account for $44,000; cost of goods sold was $28,500. Purchased land and a building for $30,000 and $100,000, respectively, for $25,000 cash, signing a note for the balance. Collected $23,750 from customers who had previously purchased inventory on account.
Use the T-accounts below to record these transactions. Use the alphabetical character representing each transaction to cross-reference your entries. Cash
Accounts Receivable
Inventory
Land
Equipment
Building
Accounts Payable
Notes Payable
Capital Stock
Sales Revenue
Cost of Goods Sold
ANS: Cash a 80,000 f 23,750
37,000 b 25,000 e
Accounts Receivable d 44,000 23,750 f
Inventory b 37,000
Land 28,500 d
e 30,000
Equipment
Building
c 7,500
e 100,000
Accounts Payable
Notes Payable 7,500 c
Capital Stock
105,000 e
Sales Revenue 80,000 a
44,000 d
Cost of Goods Sold d 28,500 PTS: 1 DIF: Medium OBJ: 3.4 NAT: AACSB Analytic | AICPA FN Measurement 11. Marbletop, Inc. had the following transactions during a recent month: a. b. c. d. e. f. g. h. i. j. k.
Issued stock for $100,000. Purchased land and a building for $50,000 and $175,000, respectively, for $65,000 cash and signed a note for the balance. Paid monthly rent of $2,000. Purchased $80,000 of inventory, paying 40% in cash and the balance on account. Sold merchandise on account for $56,000; cost of goods sold was $35,000. Purchased $15,000 of equipment on account. Collected $24,000 from customers who had previously purchased inventory on account. Made a payment of $2,000 plus $300 interest on the notes payable. Paid $9,000 on accounts payable. Purchased supplies of $1,200 Paid monthly salaries of $3,000
Use the T-accounts below to record these transactions. Use the alphabetical character representing each transaction to cross-reference your entries. Cash
Accounts Receivable
Inventory
Supplies
Land
Building
Equipment
Accounts Payable
Notes Payable
Capital Stock
Sales Revenue
Cost of Goods Sold
Wages Expense
Rent Expense
Interest Expense
ANS: Cash a 100,000 g 24,000
32,000 d 65,000 b 2,000 c 2,300 h 9,000 i 1,200 j 3,000 k
Accounts Receivable e 56,000 24,000 g
Inventory
Supplies
d 80,000
35,000 e
j 1,200
Land
Building
b 50,000
b 175,000 Equipment
Accounts Payable i 9,000 48,000 d 15,000 f
Notes Payable
Capital Stock
f 15,000
h 2,000
160,000 b Sales Revenue 56,000 e
Wages Expense k 3,000 Interest Expense h 300
PTS: 1 DIF: Medium OBJ: 3.4 NAT: AACSB Analytic | AICPA FN Measurement
100,000 a Cost of Goods Sold e 35,000
Rent Expense c 2,000
12. Marbletop, Inc. had the following transactions during a recent month:
Purchased $80,000 of inventory, paying 40% in cash and the balance on account. Purchased land and a building for $50,000 and $175,000, respectively, for $65,000 cash and signed a note for the balance. Paid monthly rent of $2,000. Issued stock for $100,000. Sold merchandise on account for $56,000; cost of goods sold was $35,000. Purchased $15,000 of equipment on account. Collected $24,000 from customers who had previously purchased inventory on account. Made a payment of $2,000 plus $300 interest on the notes payable. Paid $9,000 on accounts payable. Purchased supplies of $1,200 Paid monthly salaries of $3,000
At the beginning of the month, Marbletop had the following account balances: Accounts Payable Accounts Receivable Building Capital Stock Cash Cost of Goods Sold Equipment Inventory
$ 2,000 12,000 40,000 10,000 10,000 75,000 33,000 11,000
Notes Payable Rent Expense Retained Earnings Sales Revenue Supplies Land Wages Expense Interest Expense
$ 40,000 8,000 55,000 125,000 1,000 30,000 10,000 2,000
Based on this information, prepare a month-end trial balance for Marbletop, Inc. ANS: Marbletop, Inc. Trial Balance Cash (1) Accounts Receivable (2) Inventory (3) Supplies (4) Land (5) Building (6) Equipment (7) Accounts Payable (8) Notes Payable (9) Capital Stock (10) Retained Earnings (11) Sales Revenue (12) Cost of Goods Sold (13) Wages Expense (14) Rent Expense (15) Interest Expense (16)
19,500 44,000 56,000 2,200 80,000 215,000 48,000 56,000 198,000 110,000 55,000 181,000 110,000 13,000 10,000 2,300 600,000
600,000
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.
10,000 32,000 65,000 2,000 + 100,000 + 24,000 2,300 9,000 1,200 3,000 12,000 + 56,000 24,000 11,000 + 80,000 35,000 1,000 + 1,200 30,000 + 50,000 40,000 + 175,000 33,000 + 15,000 2,000 + 48,000 + 15,000 9,000 40,000 + 160,000 2,000 10,000 + 100,000 No change until year end 125,000 + 56,000 75,000 + 35,000 10,000 + 3,000 8,000 + 2,000 2,000 + 300
PTS: 1 DIF: Challenging OBJ: 3.4 NAT: AACSB Analytic | AICPA FN Measurement 13. Based on the following account balances at December 31, 2013, prepare a trial balance for Uniflex Company. Accounts Payable Accounts Receivable Building Capital Stock Cash Cost of Goods Sold Equipment Inventory
575 1,800 19,000 10,000 1,160 17,969 6,700 4,000
Notes Payable Rent Expense Retained Earnings Sales Revenue Supplies Utilities Expense Wages Expense
7,000 1,500 2,275 35,684 556 849 2,000
ANS: Uniflex Company Trial Balance December 31, 2013 Cash Accounts Receivable Inventory Supplies Building Equipment Accounts Payable Notes Payable Capital Stock Retained Earnings Sales Revenue Cost of Goods Sold Wages Expense Rent Expense Utilities Expense PTS: 1 DIF: Medium OBJ: 3.4 NAT: AACSB Analytic | AICPA FN Measurement
1,160 1,800 4,000 556 19,000 6,700 575 7,000 10,000 2,275 35,684 17,969 2,000 1,500 849 55,534
55,534
Chapter 4—Completing the Accounting Cycle MULTIPLE CHOICE 1. Under accrual-basis accounting, revenues are always recognized when a. Earned b. Cash is received c. The manufacture of the product to be sold is completed d. The selling price is firmly established ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.1
2. The idea that all expenses incurred in generating revenues should be recognized in the same period as those revenues is called the a. Time period concept b. Realization concept c. Matching principle d. Revenue recognition principle ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.1
3. In accrual basis accounting, when are expenses usually recognized? a. When cash is paid b. When assets are purchased c. When incurred d. When assets are ordered ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.1
4. The matching principle requires that a. Cash outflows be matched with cash inflows b. Expenses incurred be matched with revenues earned c. Assets be matched with liabilities d. Assets be matched with owners' equity ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.1
5. A twelve-month accounting period ending on December 31 is known as a a. Calendar year b. Reporting period c. Fiscal year d. All of these are correct ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.1
6. The idea that a company's life can be divided into distinct time periods so that accounting information can be reported on a timely basis is the a. Accrual basis accounting b. Time period concept c. Fiscal year concept d. Revenue recognition concept ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.1
7. A system of accounting in which revenues and expenses are recorded as they are earned and incurred, is called a. Revenue recognition accounting b. Accrual-basis accounting c. Realization accounting d. Cash-basis accounting ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.1
8. A system of accounting in which revenues and expenses are recorded only when cash is received or paid, is called a. Revenue recognition accounting b. Accrual-basis accounting c. Realization accounting d. Cash-basis accounting ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.1
9. Under accrual-basis accounting, revenue is recognized a. When cash is received without regard to when the services are rendered b. When the services are rendered without regard to when cash is received c. When cash is received before the time services are rendered d. If cash is received after the services are rendered ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.1
10. Under accrual-basis accounting, expenses are recognized a. When they are incurred, whether or not cash is paid b. When they are incurred and paid at the same time c. If they are paid before they are incurred d. If they are paid after they are incurred ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.1
11. Which of the following is true about accrual-basis accounting? a. Income is generally larger with accrual-basis accounting. b. Accrual-basis accounting provides a better measure of performance. c. Accrual-basis accounting is not required by GAAP. d. Accrual-basis accounting and cash-basis accounting always produce the same results. ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.1
12. During 2013, Rumbo Corporation had cash and credit sales of $21,760 and $15,225, respectively. The company also collected accounts receivable of $9,765 and incurred operating expenses of $27,700, 80 percent of which were paid during the year. In addition, Rumbo paid $4,500 for an 18-month advertising campaign that began on September 30. Rumbo's accrual-basis net income (loss) for 2009 was a. $9,285 b. $8,535 c. $14,075 d. $(775) ANS: B Net income:
$21,760 + $15,225 $27,700 $750* = $8,535 *$4,500 3/18 = $750
PTS: 1 DIF: Medium OBJ: 4.1 NAT: AACSB Analytic | AICPA FN Measurement 13. The 2013 accrual-basis income statement for Razorri Corporation reports sales revenue of $81,000. The related balance sheet accounts for the beginning and end of the year were Jan. 1, 2013 Dec. 31, 2013 Unearned Sales Revenue 0 $29,250 Accounts Receivable 6,750 2,250 Based on this information, the amount of cash collected during 2013 from Razorri's customers was a. $81,000 b. $119,250 c. $114,750 d. $99,000 ANS: C Cash collected: $81,000 + $29,250 + $6,750 $2,250 = $114,750 PTS: 1 DIF: Medium OBJ: 4.1 NAT: AACSB Analytic | AICPA FN Measurement 14. Nona Corporation, a calendar-year company, had the following transactions during 2012: Rented an office building to Erma Company. On September 1, Erma paid $27,000 for the year ending August 31, 2013. Received notice that a $1,200 dividend would be paid on January 2, 2013, by Leslie Corporation. Received a check for $13,000 from a client on December 31 for services that will be performed during 2013. Assuming cash-basis accounting for Nona Corporation, how much income should be reported on its 2012 income statement? a. $21,000 b. $27,000 c. $40,000 d. $41,200 ANS: C Income reported: $27,000 + $13,000 = $40,000 PTS: 1 DIF: Medium OBJ: 4.1 NAT: AACSB Analytic | AICPA FN Measurement
15. Adjusting entries are a. Recorded on a daily basis as transactions occur b. Not posted to the general ledger c. Made at the end of an accounting period d. Not required under accrual-basis accounting ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
16. Which of the following are usually NOT directly affected by adjusting entries? a. Asset accounts b. Liability accounts c. Revenue accounts d. Capital stock accounts ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
17. Which of the following statements about adjusting entries is NOT true? a. They are recorded on a daily basis as transactions occur. b. They are posted at the end of an accounting period. c. They do not affect the cash account. d. They are not based on transactions. ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
18. In analyzing accounts to determine which adjusting entries are necessary, accountants should determine a. Whether the amounts recorded for all assets and liabilities are correct b. What revenue or expense adjustment is required c. What accounts need debits or credits d. All of these are correct ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
19. Each adjusting entry will always affect a. Only balance sheet accounts b. At least one income statement account and one retained earnings statement account c. At least one balance sheet account and one income statement account d. Only income statement accounts ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
20. Which of the following types of accounts will always be debited to adjust for an unrecorded receivable? a. Liabilities b. Revenues c. Receivables d. Expenses ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
21. Revenue items that are earned but have NOT been collected or recognized are called a. Unearned receivables b. Deferred revenues c. Unrecorded receivables d. Prepaid revenues ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
22. Which of the following will occur if an adjusting entry to record an unrecorded receivable is NOT made? a. Both revenues and assets will be understated. b. Both revenues and assets will be overstated. c. Revenues will be understated, but assets will be overstated. d. Assets will be understated, but revenues will be overstated. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 4.2
23. What is the effect on account balances when an adjusting entry to record an unrecorded receivable is made? a. Both revenues and assets will be increased. b. Both revenues and assets will be decreased. c. Revenues will be increased, but assets will be decreased. d. Assets will be increased, but revenues will be decreased. ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
24. If rent revenue of $5,000 is earned in 2012 but will NOT be received until 2013, what is the appropriate adjusting entry at December 31, 2013? 5,000 a. Rent Receivable Cash
5,000
b. Cash
5,000
c. Rent Revenue
5,000
d. Rent Receivable
5,000
Rent Revenue
5,000
Rent Receivable
5,000
Rent Revenue
5,000
ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 4.2
25. On October 1, Doe Hunting Supplies, a calendar-year company, sold inventory that cost $60,000 for $100,000. The customer signed a six-month, 10 percent note in payment. On December 31, Woods should a. Debit Interest Receivable for $2,500 b. Debit Interest Revenue for $2,500 c. Credit Interest Revenue for $10,000 d. Debit Interest Receivable for $10,000 ANS: A Interest Receivable: $100,000 10% 3/12 = $2,500 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement
26. On October 1, Mathis Company entered into a six-month contract with Lewis Company to provide custodial services on a daily basis. The terms of the contract state that the cost will be $3,000 per month and Mathis will bill Lewis at the end of every two months. If Mathis is a calendar year company, what is the appropriate adjusting entry at December 31? 3,000 a. Cash Service Revenue b. Accounts Receivable Service Revenue c. Service Revenue Accounts Receivable d. Accounts Receivable Cash
3,000 3,000 3,000 3,000 3,000 3,000 3,000
ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 4.2
27. Which of the following types of accounts will always be debited to adjust for an unrecorded liability? a. Liabilities b. Revenues c. Receivables d. Expenses ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
28. Which of the following will occur if an adjusting entry to record an accrued but unrecorded liability is NOT made? a. Both expenses and liabilities will be understated. b. Both expenses and liabilities will be overstated. c. Expenses will be understated, but liabilities will be overstated. d. Liabilities will be understated, but expenses will be overstated. ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
29. Unrecognized interest expense on a note is an example of a(n) a. Unrecorded receivable b. Unearned revenue c. Unrecorded liability d. Prepaid expense ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
30. An adjusting entry to record an unrecorded liability usually includes a credit to a. A liability account b. An asset account c. A revenue account d. An expense account ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
31. For which of the following types of adjusting entries is there no original entry? a. Prepaid expenses b. Unearned revenues c. Unrecorded liabilities d. None of these are correct ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
32. If on December 31, 2012, interest expense of $600 is owed on a bank note that will NOT be paid until July 2013, what is the appropriate adjusting entry at the end of 2012? 600 a. Interest Expense Cash
600
b. Interest Expense
600
c. Cash
600
d. Interest Payable
600
Interest Payable
600
Interest Expense
600
Interest Expense
600
ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 4.2
33. Bay Graphics pays its employees each Friday for a five-day total workweek. The payroll is $9,000 per week. If the end of the accounting period occurs on a Wednesday, what is the adjusting entry to record wages payable? 5,400 a. Salaries Payable Cash
5,400
b. Salary Expense
5,400
c. Salaries Payable
5,400
d. Salaries Payable
9,000
Salaries Payable
5,400
Salary Expense
5,400
Salary Expense
9,000
ANS: B Wages payable: $9,000 3/5 = $5,400 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 34. Boudin Corporation, a calendar-year company, obtained a $15,000, one-year, 10 percent bank loan on October 31 of the current year. Interest is payable at the end of the loan term. The adjusting entry needed on December 31 is a. A debit to Interest Expense of $1,500 and a credit to Interest Payable of $1,500 b. A debit to Interest Payable of $1,500 and a credit to Interest Expense of 1,500 c. A debit to Interest Expense of $250 and a credit to Interest Payable of $250 d. A debit to Interest Expense of $250 and a credit to Cash of $250 ANS: C Interest payable Dec. 31: $10,000 15% 2/12 = $250 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement
35. Bay Graphics pays its employees each Friday for a five-day total workweek. The payroll is $9,000 per week. If the end of the accounting period occurs on a Wednesday, the adjusting entry to record wages payable would include a a. Debit to Salary Expense of $3,600 b. Debit to Salary Expense of $5,400 c. Credit to Cash of $5,400 d. Credit to Salaries Payable of $3,600 ANS: B Wages payable: $9,000 3/5 = $5,400 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 36. Which of the following types of accounts will always be credited when a prepaid expense account is adjusted? a. Assets b. Liabilities c. Revenues d. Expenses ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
37. Prepaid expense accounts are usually classified as a. Assets b. Liabilities c. Expenses d. Revenues ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
38. The failure to adjust a prepaid expense that has partially expired and was originally recorded by debiting a prepaid expense for the entire amount will usually result in an a. Understatement of assets and an understatement of expenses b. Overstatement of assets and an overstatement of expenses c. Understatement of assets and an overstatement of expenses d. Overstatement of assets and an understatement of expenses ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
39. An expired asset is called a(n) a. Revenue b. Expense c. Retained earning d. Cost ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
40. An adjusting entry to record the expired portion of a prepaid expense that was originally debited to a prepaid expense account always includes a. A debit to an asset b. A credit to cash c. A debit to an expense d. A credit to an expense ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
41. The original entry to record a prepaid expense will usually include a. A debit to an asset account and a credit to another asset account b. A debit to an asset account and a credit to an expense account c. A debit to an expense account and a credit to an asset account d. None of these are correct ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
42. On April 1, Ciaunna Company paid $48,000 for two years rent and recorded the entire amount as a debit to Prepaid Rent. The adjusting entry on December 31 of that year would include a a. Credit to Rent Expense of $18,000 b. Credit to Prepaid Rent of $24,000 c. Debit to Rent Expense of $24,000 d. Debit to Rent Expense of $18,000 ANS: D Prepaid rent adjustment: $48,000 9/24 = $18,000 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 43. On June 30, 2012, Sinise Co. purchased a three-year fire insurance policy at a cost of $27,000 and debited Prepaid Insurance for the entire amount. The policy covers the period July 1, 2012, to June 30, 2015. The adjusting entry needed on December 31, 2012, includes a credit to a. Insurance Expense for $9,000 b. Insurance Expense for $4,500 c. Prepaid Insurance for $4,500 d. Prepaid Insurance for $9,000 ANS: C Prepaid insurance adjustment: $27,000 6/36 = $4,500 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement
44. On August 1, 2012, Base Line Realty purchased a two-year insurance policy for $15,000. On that date, the company debited Prepaid Insurance for $15,000. The adjusting entry on December 31, 2012, would include a debit to a. Prepaid Insurance for $2,500 b. Prepaid Insurance for $3,125 c. Insurance Expense for $3,125 d. Insurance Expense for $2,500 ANS: C Prepaid insurance adjustment: $15,000 5/24 $3,125 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 45. Kim Company purchased a two-year insurance policy on October 1, 2012, for $6,000. The policy covers its buildings for the next two years. If Kim debited Prepaid Insurance to record the purchase of the policy, the adjusting entry on December 31, 2012 (year-end) would include a credit to a. Insurance Expense of $750 b. Insurance Expense of $3,000 c. Prepaid Insurance of $750 d. Prepaid Insurance of $3,000 ANS: C Prepaid insurance adjustment: $6,000 3/24 = $750 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 46. At the beginning of the period, Hann Corporation had $4,000 of supplies on hand. During the period, it purchased $1,300 of supplies and debited supplies for the same amount. At the end of the period, Hann Corporation determined that only $1,000 of supplies were still on hand. What adjusting entry should Hann Corporation make at the end of the period? 4,300 a. Supplies Supplies Expense
4,300
b. Supplies
1,300
c. Supplies Expense
1,300
d.
4,300
Supplies Expense
Supplies Supplies Expense Supplies
1,300 1,300
ANS: D Supplies used: $4,000 + $1,300 $1,000 = $4,300 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement
4,300
47. Scully Corporation purchased a three-year insurance policy on November 1 for $3,600. Assuming that Scully Corporation recorded the original transaction by debiting Prepaid Insurance, the adjusting entry on December 31 will include a a. Debit to Insurance Expense for $200 b. Credit to Prepaid Insurance for $100 c. Debit to Prepaid Insurance for $100 d. Credit to Cash for $200 ANS: A Prepaid insurance adjustment: $3,600 2/36 = $200 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 48. Given the following data, what is the amount in the supplies account to be shown as an asset on the balance sheet at the end of the period? Supplies at beginning of period Supplies purchased during period Supplies used during period a. b. c. d.
$500 425 375
$350 $550 $375 $425
ANS: B Supplies balance at end of period: $500 + $425 $375 = $550 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 49. From the following data, determine the amount of supplies on hand at the beginning of the period. Supplies on hand, end of period Supplies expense for period Supplies purchased during period a. b. c. d.
$650 $600 $1,450 $375
ANS: A Supplies at beginning of period: $1,025 $800 + $425 = $650 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement
$1,025 425 800
50. Brooklynne Company paid $25,400 in insurance premiums during 2012. Brooklynne showed $6,800 in prepaid insurance on its December 31, 2012, balance sheet and $4,600 on December 31, 2013. The insurance expense on the income statement for 2013 was a. $18,600 b. $27,600 c. $23,200 d. $30,000 ANS: B Insurance expense 2013: $25,400 + $6,800 $4,600 = $27,600 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 51. Montana Inc.'s fiscal year ended on December 31, 2012. The balance in the prepaid insurance account as of December 31, 2012, was $34,800 (before adjustment) and consisted of the following policies: Policy Number 279248 694421 800616
Date of Purchase 10/1/11 3/1/12 7/1/11
Date of Expiration 9/30/12 2/28/14 6/30/13
Balance in Account $14,400 9,600 10,800 $34,800
The adjusting entry required on December 31, 2012, would be 22,000 a. Insurance Expense
22,000
Prepaid Insurance
b. Insurance Expense
Prepaid Insurance c. Prepaid Insurance Insurance Expense d. Insurance Expense Prepaid Insurance
20,200 20,200 17,600 17,600 25,600
ANS: D Policy 279248 3 months expired last year: Policy 694421 10 months expire this year: Policy 800616 6 months expired last year, 12 months expire this year: Adjusting entry:
25,600
all $14,400 expires this year $9,600 10/24 = $4,000 $10,800 12/18 = $7,200. $14,400 + $4,000 + $7,200 = $25,600.
PTS: 1 DIF: Challenging OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 52. Amounts received before they are earned are called a. Unrecorded receivables b. Unrecorded liabilities c. Prepaid expenses d. Unearned revenues ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
53. An unearned revenue account is usually considered to be a(n) a. Liability b. Asset c. Revenue d. Expense ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
54. If a company receives rent for January 2013 from a tenant in December 2012, that rent would be a. A revenue in 2012 b. An asset in 2012 c. An expense in 2012 d. A liability in 2012 ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
55. The failure to adjust an unearned revenue that has been partially earned and was originally recorded as a credit to Unearned Revenue will usually result in an a. Overstatement of revenues and an overstatement of liabilities b. Overstatement of revenues and an understatement of liabilities c. Understatement of revenues and an understatement of liabilities d. Understatement of revenues and an overstatement of liabilities ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
56. An adjusting entry to record the portion of unearned revenue that was earned in the current period usually includes a debit to a. A liability account b. An asset account c. An expense account d. A revenue account ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
57. Garcia Company has received advance payment for services yet to be performed. This prepayment is an example of a(n) a. Unrecorded liability b. Unrecorded receivable c. Prepaid expense d. Unearned revenue ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.2
58. On June 1, 2013, Marino Corporation received $1,800 as advance payment for 12 months' advertising. The receipt was recorded as a credit to Unearned Fees. What adjusting entry is required at December 31, 2013? 1,050 a. Unearned Fees Advertising Revenue
b. Advertising Revenue
1,050
1,050
Unearned Fees
1,050
c. Cash
750
d. Unearned Fees
750
Advertising Revenue
750
Advertising Revenue
750
ANS: A Unearned fees adjustment: $1,800 7/12 = $1,050 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 59. On December 16, 2012, Keen Company received $5,400 from Smith Company for rent on an office building owned by Keen. The $1,800 covers the period December 16, 2012, through February 15, 2013. If Keen Company credited Unearned Rent to record the $5,400 rent collected on December 16, the adjusting entry needed on December 31, 2012, would include a. A credit to Rent Revenue of $1,350 b. A credit to Unearned Rent of $1,350 c. A debit to Rent Revenue of $2,700 d. A debit to Unearned Rent Revenue of $2,700 ANS: A Unearned rent adjustment: $5,400 15/60 = $1,350 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 60. On September 1, 2012, Carter's Construction Company received a $5,400 deposit towards the construction of a new house. The house will not be finished until February 28, 2013. The deposit was originally recorded as Unearned construction revenue. What adjusting entry is required at December 31, 2012? 1,800 a. Unearned Construction Revenue Construction Revenue
1,800
b. Construction Revenue
3,600
c. Cash
1,800
Unearned Construction Revenue
Construction Revenue Unearned Construction Revenue d. Construction Revenue
3,600 1,800 3,600 3,600
ANS: D Unearned construction revenue adjustment: $5,400 4/6 = $3,600 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement
61. On December 31, the trial balance of Fife Company included the following account with a credit balance: Unearned advertising revenue
$16,200
If it is determined that the amount of advertising revenue applicable to future periods is $10,400, the correct adjusting entry would be: a. Debit Unearned Advertising Revenue $10,400; credit Advertising Revenue $10,400 b. Debit Advertising Revenue $10,400; credit Unearned Advertising Revenue $10,400 c. Debit Unearned Advertising Revenue $5,800; credit Advertising Revenue $5,800 d. Debit Advertising Revenue $5,800; credit Unearned Advertising Revenue $5,800 ANS: C Amount of advertising revenue for this period = $16,200 $10,400 = $5,800 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 62. From the following data, determine the amount of rent revenue earned during the period. Unearned Rent, end of period Unearned Rent, beginning of period Cash received for rent during period a. b. c. d.
$20,300 15,200 40,700
$20,400 $35,600 $30,400 $55,900
ANS: B Rent revenue earned during the period: $15,200 + $40,700 $20,300 = $35,600 PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 63. Which of the following describes the correct order of how financial statements are prepared from the information taken from the trial balance? a. Compute net income, Identify all revenues and expenses, Compute the ending retained earnings balance, Prepare a balance sheet b. Identify all revenues and expenses, Prepare a balance sheet, Compute the ending retained earnings balance, Compute net income c. Compute the ending retained earnings balance, Compute net income, Prepare a balance sheet, Identify all revenues and expenses. d. Identify all revenues and expenses, Compute net income, Compute the ending retained earnings balance, Prepare a balance sheet. ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.3
64. Which of the following sources provides the raw material to prepare the financial statements? a. Income statement from previous year b. Balance sheet from previous year c. Adjusted trial balance d. Unadjusted trial balance ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.3
65. The notes to the financial statements tell all of the following EXCEPT a. Details about specific items b. Assumptions used by the company c. Accounting methods used by the company d. Financial analysis ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.3
66. When conducting an audit of a company's financial statements, auditors will usually be more concerned about which of the following? a. Assets and liabilities are not overstated b. Assets and liabilities are not understated c. Assets are not understated and liabilities are not overstated d. Assets are not overstated and liabilities are not understated ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.3
67. When preparing its financial statements, a company is more concerned about which of the following? a. Assets and liabilities are not overstated b. Assets and liabilities are not understated c. Assets are not understated and liabilities are not overstated d. Assets are not overstated and liabilities are not understated ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.3
68. Which of the following is a true statement about an auditor's evaluation of an accounting system? a. If a company has a haphazard accounting system then the auditor has greater confidence that the financial statements are reliable. b. If a company has an efficient and orderly accounting system then the auditor has greater confidence that the financial statements are reliable. c. If a company has an efficient and orderly accounting system then the auditor must do more detailed work to verify that the financial statements are reliable. d. None of these are correct. ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.3
69. The audit procedures conducted by the external auditor include all of the following, EXCEPT a. Review of adjustments b. Review of accounting systems c. Sample of financial ratios d. Sample of selected accounts ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.3
70. Which of the following is true of a work sheet? a. It is prepared for distribution to outsiders. b. It facilitates the preparation of financial statements. c. It is the next to last step in the accounting cycle. d. It is a required step in the accounting cycle. ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.3
71. The purpose of financial statement analysis is to a. Use the past performance to predict future performance. b. Evaluate the current performance in order to identify problem areas. c. Both use the past performance to predict future performance and evaluate the current performance in order to identify problem areas. d. Neither use the past performance to predict future performance nor evaluate the current performance in order to identify problem areas. ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.3
72. Prior to making any adjusting entries, Terra Corporation had net income of $155,100. The following adjusting entries were made: salaries payable, $1,574; interest earned on short-term investments but not yet recorded or collected, $7,268; adjustment to prepaid insurance for $5,538 for an insurance policy that expired during the period; and fees of $586 collected in advance that have now been earned. After recording these adjustments, net income would be a. $170,084 b. 158,008 c. 155,842 d. 155,836 ANS: C Adjusted net income: $155,100 $1,574 + $7,268 $5,538 + $586 = $155,842 PTS: 1 DIF: Medium OBJ: 4.3 NAT: AACSB Analytic | AICPA FN Measurement
Exhibit 4-1 The following are a selection of account balances taken from the Adjusted Trial Balance of Cajon Corporation for December 31, 2012: Debit $150 300
Cash Store Supplies Service Fees Revenue Retained Earnings (1/1/2012) Accounts Payable Dividends Unearned Service Fees Revenue Wage Expense Store Supplies Expense
Credit
$600 50 70 200 180 200 50
73. Refer to Exhibit 4-1. Given the information above, Cajon Corporation had net income in 2012 of a. $150 b. $530 c. $330 d. $350 ANS: D Net income: $600 $200 $50 = $350 PTS: 1 DIF: Medium OBJ: 4.3 NAT: AACSB Analytic | AICPA FN Measurement 74. Refer to Exhibit 4-1. Given the information above, what is the amount of total assets on Cajon Corporation's balance sheet in 2012? a. $150 b. $300 c. $450 d. $650 ANS: C Total assets: $150 + $300 = $450 PTS: 1 DIF: Medium OBJ: 4.3 NAT: AACSB Analytic | AICPA FN Measurement 75. Refer to Exhibit 4-1. Given the information above, what is the amount of total liabilities and owner's equity on Cajon Corporation's balance sheet in 2012? a. $100 b. $300 c. $250 d. $450 ANS: D Net income: Retained earnings: Liabilities and owner's equity:
$600 $200 $50 = $350 $50 + $350 $200 = $200 $70 + $180 + $200 = $450
PTS: 1 DIF: Medium OBJ: 4.3 NAT: AACSB Analytic | AICPA FN Measurement
76. The closing entry involving a net loss will include a a. Credit to sales revenue b. Debit to retained earnings c. Credit to dividends d. Debit to salaries expense ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.4
77. Nominal accounts are NOT found on which of the following financial statements? a. Balance sheet b. Income statement c. Statement of cash flows d. Retained earnings statement ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.4
78. Nominal accounts are temporary subcategories of which account? a. Sales revenue b. Inventory c. Retained earnings d. Capital stock ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.4
79. Which of the following accounts is NOT a real account? a. Dividends b. Cash c. Accounts Payable d. Retained Earnings ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.4
80. Closing entries are a. Required to bring all real accounts to a zero balance at the end of the accounting period b. Not required to be posted c. Required to bring all nominal accounts to a zero balance prior to starting a new accounting cycle d. Generally taken from the financial statements rather than from the work sheet or the accounts themselves ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.4
81. The entry to close the revenue accounts normally includes a a. Debit to each revenue account b. Credit to each revenue account c. Debit to each expense account d. Credit to each expense account ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.4
82. Which of the following is NOT a true statement? a. Expenses are closed with a credit b. Revenues are closed with a debit c. Dividends are closed with a credit d. Retained Earnings are closed with a debit ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.4
83. The entry to close the expense accounts normally includes a a. Debit to each revenue account b. Credit to each revenue account c. Debit to each expense account d. Credit to each expense account ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.4
84. The dividends account is a. An asset b. An expense c. A revenue d. None of these are correct ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.4
85. The dividends account is a. Used for partnerships b. Closed to Retained Earnings by being credited c. A real account d. Closed to Retained Earnings by being debited ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.4
86. Which of the following accounts would be closed at year-end? a. Capital Stock b. Prepaid Rent c. Dividends d. Accounts Payable ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.4
87. A post-closing trial balance does NOT include the a. Real accounts b. Balance sheet accounts c. Permanent accounts d. Income statement accounts ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.4
88. Which of the following statements is true of a post-closing trial balance? a. Its debits must equal its credits b. It lists all real and nominal account balances c. It may be prepared before the closing process to provide some assurance that the previous steps in the cycle have been performed properly d. All of these are true ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.4
89. Which of the following accounts would NOT appear in the post-closing trial balance? a. Unearned Service Fees Revenue b. Dividends c. Supplies d. Salaries Payable ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.4
Exhibit 4-2 Short Company has the following income statement for 2012: Revenues: Sales revenue Interest revenue Expenses: Interest expense Rent expense Utilities expense Salaries expense Net Loss
$630,000 21,000 $ 10,500 126,000 42,000 483,000
$651,000
661,500 $ (10,500)
90. Refer to Exhibit 4-2. Given the information above, the entry to close revenues and expenses would include a a. Credit to Retained Earnings of $10,500 b. Debit to Retained Earnings of $10,500 c. Credit to Retained Earnings of $651,000 d. Credit to Retained Earnings of $651,000 ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 4.4
91. Refer to Exhibit 4-2. Given the information above, the entry to close expenses would include a a. Debit to Utilities expense of $42,000 b. Credit to Utilities expense of $42,000 c. Credit to Sales revenue of $630,000 d. Debit to Salaries expense of $483,000 ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 4.4
Exhibit 4-3 The December 31, 2012, adjusted account balances taken from the Adjusted Trial Balance of Cajon Corporation are as follows:
Cash Store Supplies Service Fees Revenue Retained Earnings Accounts Payable Dividends Unearned Service Fees Revenue Wage Expense Store Supplies Expense
Debit $150 300
Credit
$600 50 70 200 180 200 50
92. Refer to Exhibit 4-3. Given the information above, after all closing entries have been made, the balance in Cajon's Retained Earnings account would be a. $380 b. $400 c. $330 d. $200 ANS: D Net income: Retained earnings:
$600 $200 $50 = $350 $50 + $350 $200 = $200
PTS: 1 DIF: Medium OBJ: 4.4 NAT: AACSB Analytic | AICPA FN Measurement 93. Refer to Exhibit 4-3. Given the information above, after all closing entries have been made, the balance in Cajon's Cash account would be a. $250 b. $200 c. $150 d. $0 ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 4.4
94. The December 31, 2012 closing entries for Smith Corp. are as follows:
Sales Revenue Interest Revenue Cost of Goods Sold Wages Expense Supplies Expense Retained Earnings Retained Earnings Dividends
Debit 12,500 1,250
Credit
7,000 2,250 1,575 2,925 1,000 1,000
Smith Corp. had net income in 2012 of a. $13,750 b. $1,925 c. $12,750 d. $2,925 ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 4.4
95. On December 31, 2011, the balance in the Retained Earnings account is $18,500. On December 31, 2012, the balance of Retained Earnings is $17,100. During 2012, dividends of $4,200 were declared and paid. Based on this information, net income for 2012 is a. $2,800 b. $7,000 c. $2,100 d. $4,200 ANS: A Net income:
$18,500 + x $4,200 = $17,100 x = $2,800
PTS: 1 DIF: Medium OBJ: 4.4 NAT: AACSB Analytic | AICPA FN Measurement 96. On December 31, 2011, the balance in Pacino Company's retained earnings account is $21,500. On December 31, 2012, the balance is $22,000. During 2012, net income was $5,700. Based on this information, dividends declared and paid for 2012 were a. $500 b. $6,200 c. $3,500 d. $5,200 ANS: D Dividends:
$21,500 + $5,700 x = $22,000 x = $5,200
PTS: 1 DIF: Medium OBJ: 4.4 NAT: AACSB Analytic | AICPA FN Measurement
97. Which of the following is the correct sequence of the accounting cycle a. Record the effects of transactions, Analyze transactions, Summarize the effects of transactions, Prepare reports b. Analyze transactions, Record the effects of transactions, Summarize the effects of transactions, Prepare reports c. Summarize the effects of transactions, Prepare reports, Analyze transactions, Record the effects of transactions d. Analyze transactions, Prepare reports, Summarize the effects of transactions, Record the effects of transactions ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 4.5
PROBLEM 1. In the course of your examination of the books and records of Andelin Company for the year ending December 31, 2012, you find the following data: Cost of goods sold Salaries earned by employees Rent paid Salaries paid to employees Total sales revenue Cash paid for advertising Taxes paid Cash collected from sales Cash paid on inventory purchases Interest expense incurred Advertising expense Tax assessment for the year Interest paid Rent expense
$550,000 95,000 50,000 110,000 945,000 4,000 12,000 800,000 600,000 3,000 5,000 10,000 4,500 45,000
Compute Andelin Company's net income for 2012 using cash-basis accounting. ANS: Cash collected from sales Cash expenses: Cash paid on inventory purchases Salaries paid Cash paid on advertising Taxes paid Interest paid Rent paid Total cash expenses Net cash income PTS: 1 DIF: Medium OBJ: 4.1 NAT: AACSB Analytic | AICPA FN Measurement
$800,000 $600,000 110,000 4,000 12,000 4,500 50,000 780,500 $ 19,500
2. In the course of your examination of the books and records of Andelin Company for the year ending December 31, 2012, you find the following data: Cost of goods sold Salaries earned by employees Rent paid Salaries paid to employees Total sales revenue Cash paid for advertising Taxes paid Cash collected from sales Cash paid on inventory purchases Interest expense incurred Advertising expense Tax assessment for the year Interest paid Rent expense
$550,000 95,000 50,000 110,000 945,000 4,000 12,000 800,000 600,000 3,000 5,000 10,000 4,500 45,000
Compute Andelin Company's net income for 2012 using accrual-basis accounting. ANS: Total sales revenue Expenses: Cost of goods sold Salaries expense Advertising expense Tax assessment Interest expense Rent expense Total expenses Net income
$945,000 $550,000 95,000 5,000 10,000 3,000 45,000 708,000 $237,000
PTS: 1 DIF: Medium OBJ: 4.1 NAT: AACSB Analytic | AICPA FN Measurement 3. In the course of your examination of the books and records of Griffin Company for the year ending December 31, 2012, you find the following data: Salaries earned by employees Salaries paid to employees Total sales revenue Cash collected from sales Utility expense incurred Utility bills paid Cost of goods sold Cash paid on inventory purchases Tax assessment for the year Taxes paid Rent expense Rent paid a. b.
Compute Griffin Company's net income for 2012 using cash-basis accounting. Compute Griffin Company's net income for 2012 using accrual-basis accounting.
$ 40,000 50,000 700,000 750,000 4,500 4,200 400,000 370,000 5,000 3,500 30,000 25,000
ANS: a.
b.
Net Income on Cash Basis: Cash collected from sales Cash expenses: Cash paid on inventory purchases Salaries paid Utility bills paid Taxes paid Rent paid Total cash expenses Net cash income Net Income on Accrual Basis: Total sales revenue Expenses: Cost of goods sold Salaries expense Utility expense Tax assessment Rent expense Total expenses Net income
$750,000 $370,000 50,000 4,200 3,500 25,000 452,700 $297,300
$700,000 $400,000 40,000 4,500 5,000 30,000 479,500 $220,500
PTS: 1 DIF: Medium OBJ: 4.1 NAT: AACSB Analytic | AICPA FN Measurement 4. Griesbach, Inc., prepares monthly financial statements. The September 30, 2012, trial balance reveals the following:
Supplies on Hand Unearned Rent Revenue Notes Payable
Debit $1,200
Credit $ 1,800 45,000
An inventory of supplies reveals that only $675 are on hand at the end of the month. Of the unearned rent revenue, $600 remains unearned. The note payable was taken out on September 1, 2012, for 12 months, at 10%. Lastly, the weekly payroll is $3,600. Employees are paid each Friday for a 5-day work week, and September 30 is a Wednesday. Assuming Griesbach, Inc. has a year end of September 30, prepare the appropriate adjusting journal entries.
ANS: Supplies Expense Supplies on Hand ($1,200 $675 = $525)
525
Unearned Rent Revenue Rent Revenue ($1,800 $600 = $1,200)
1,200
Interest Expense Interest Payable ($45,000 10% 1/12 = $375) Wages Expense Wages Payable ($3,600 3/5 = $2,160)
525
1,200
375 375
2,160 2,160
PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 5. Jennifer, the bookkeeper of Mariners Inc., thinks that the following journal entries may lead to adjusting entries at December 31, 2012. 2012 March 1 Prepaid Insurance Cash February 28 Cash Rent Revenue
2,304 2,304 18,000 18,000
June 1 Legal Service Expense Cash
5,400
September 1 Property Tax Expense Cash
14,400
5,400 14,400
Jennifer has gathered the following information: a. b.
d.
The insurance premium is for the 12-month period ending March 1, 2013. The rent revenue represents rent received from a tenant for the period February 28, 2012, to August 31, 2012. The prepaid legal services is for the services of Dewey Cheatham, attorney-at-law, for the 12-month period ending May 31, 2013. The property tax expense is for the county's fiscal year, which ends August 31, 2013.
1.
Make any adjusting entries required at December 31, 2012. (Omit explanations.)
c.
ANS: 1.
a.
Insurance Expense Prepaid Insurance ($2,304 10/12 = $1,920)
1,920 1,920
b.
No adjusting entry required.
c.
Prepaid Legal Expense Legal Service Expense ($5,400 5/12 = $2,250)
2,250
Prepaid Property Tax Property Tax Expense ($14,400 8/12 = $9,600)
9,600
d.
2,250
9,600
PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 6. Mycro Corporation, a computer service company, had the following transactions during 2012. a.
b. c. d. e.
1. 2.
George Hale, a salesman with Mycro, signed Datum Sales to a two-year service contract for $48,000. The contract was signed on June 1, 2012, with Datum paying the full amount on that date. Mycro hired Mighty Maid Cleaning for general cleaning services. The contract was signed on October 1 and Mycro paid for the full year ($2,400) on that date. Fire insurance on Mycro's office building was purchased with cash on April 1. The insurance expires March 31, 2014, and costs $4,000. Mycro rented a floor of the office building to Gates Company for one year. Gates paid $12,000 on August 1, the rent for 12 months. Mycro paid Space Savers $1,800 to rent a storage facility for one year on December 1, 2012. Journalize these transactions. Make any adjusting entries necessary for the year ended December 31, 2012.
ANS: 1.
a. b. c. d. e.
Cash Unearned Service Revenue
48,000
Prepaid Cleaning Cash
2,400
Prepaid Insurance Cash
4,000
Cash Unearned Rent Revenue
12,000
Prepaid Rent Cash
1,800
48,000 2,400 4,000 12,000 1,800
2.
a.
b.
c.
d.
e.
Unearned Service Revenue Service Revenue ($48,000 7 / 24 = $14,000)
14,000 14,000
Cleaning Expense Prepaid Cleaning ($2,400 3 / 12 = $600)
600
Insurance Expense Prepaid Insurance ($4,000 9 / 24 = $1,500).
1,500
Unearned Rent Revenue Rent Revenue ($12,000 5 / 12 = $5,000)
5,000
Rent Expense Prepaid Rent ($1,800 1 / 12 = $150)
150
600
1,500
5,000
150
PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 7. Mancheski and Sons Inc. reported net income of $45,600 in 2012. Carl, the company bookkeeper, neglected to make the necessary adjusting entries. The necessary adjustments are given below: a. b. c. d.
1. 2.
Supplies at the beginning of the year were $4,000. Supply purchases during the year totaled $2,500 and Supplies was debited for this amount. Ending inventory was $1,000. Insurance purchased during the year was $3,500, of which $1,000 remained unexpired at year end. Prepaid Insurance was debited to record the purchase of this policy. Rent revenue collected for the year was $15,000. Only $5,000 of this was earned in 2012. The company credited Unearned Rent to record the $15,000 rent collection. The company rents storage space from a local firm. Mancheski paid the rent for September 1, 2012, to August 31, 2013, a total of $1,500, in advance on September 1. This was recorded as a prepaid expense. Prepare the necessary adjusting entries for December 31, 2012. Determine Mancheski's corrected net income for 2012.
ANS: 1.
a.
b.
c. d.
Supplies Expense Supplies ($4,000 + $2,500 $1,000)
5,500
Insurance Expense Prepaid Insurance ($3,500 $1,000)
2,500
Unearned Rent Revenue Rent Revenue
5,000
Rent Expense Prepaid Rent ($1,500 4 / 12 = $500)
500
5,500
2,500
5,000 500
2.
Original net income
$45,600
Adjustments: Supplies expense Insurance expense Rent revenue Rent expense Corrected net income
(5,500) (2,500) 5,000 (500) $42,100
PTS: 1 DIF: Medium OBJ: 4.2 NAT: AACSB Analytic | AICPA FN Measurement 8. Lincoln Company's adjusted trial balance as of August 31, 2012, is shown below: Lincoln Company Adjusted Trial Balance August 31, 2012
Cash Accounts Receivable Supplies Prepaid Rent Inventory Land Accounts Payable Capital Stock (10,000 shares outstanding as of 8/31/12) Retained Earnings (9/1/11) Dividends Sales Revenue Cost of Goods Sold Advertising Expense Salaries Expense
Prepare a balance sheet for the year ended August 31, 2012.
Debits $30,500 7,400 800 3,500 5,000 16,200
Credits
$15,300 45,400 900 800 37,800 16,600 1,800 15,000 $98,500
$98,500
ANS: Lincoln Company Balance Sheet August 31, 2012 Assets Current assets: Cash Accounts receivable Supplies Prepaid Rent Inventory Total current assets Property, plant and equipment: Land Total property, plant and equipment Total assets Liabilities and Owners' Equity Current liabilities: Accounts payable Total current liabilities Owners' equity: Capital stock Retained earnings Total owners' equity Total liabilities and owners' equity * Retained earnings balances: Beginning retained earnings Add: net income ($37,800 $16,600 $1,800 $15,000) Deduct: dividends Ending retained earnings PTS: 1 DIF: Medium OBJ: 4.3 NAT: AACSB Analytic | AICPA FN Measurement
$ 30,500 7,400 800 3,500 5,000 $47,200 16,200 $16,200 $63,400
$15,300 $15,300 $45,400 2,700* $48,100 $63,400
$
(900) 4,400 $ 3,500 800 $ 2,700
9. Palmer Pen Co. has the following adjusted trial balance: Palmer Pen Co. Adjusted Trial Balance December 31, 2012
Cash Accounts Receivable Supplies Inventory Buildings Machinery and Equipment Land Accounts Payable Notes Payable Capital Stock (100,000 shares outstanding as of 12/31/12) Retained Earnings (1/1/2012) Sales Revenue Salaries Expense Insurance Expense Dividends Cost of Goods Sold Utilities Expense Income Tax Expense
Debit $ 50,000 40,500 4,000 74,580 100,000 30,000 20,000
Credit
$ 37,400 49,180 150,000 76,000 480,750 125,000 6,000 20,000 290,900 12,000 20,350 $793,330
Prepare an income statement and a balance sheet in good form for Palmer Pen Co.
$793,330
ANS: Palmer Pen Co. Income Statement For the Year Ended December 31, 2012 $480,750
Sales revenue Less expenses: Cost of goods sold Salaries expense Utilities expense Insurance expense
$290,900 125,000 12,000 6,000
433,900
Income before taxes Income tax expense
$ 46,850 20,350
Net income
$ 26,500
Earnings per share ($26,500 / 100,000)
$0.265
Palmer Pen Co. Balance Sheet December 31, 2012 Assets Current assets: Cash Accounts receivable Supplies Inventory Total current assets Property, plant and equipment: Buildings Machinery and equipment Land Total property, plant and equipment Total assets Liabilities and Owners' Equity Current liabilities: Accounts payable Notes payable Total current liabilities Owners' equity: Capital stock Retained earnings Total owners' equity Total liabilities and owners' equity
$ 50,000 40,500 4,000 74,580 $169,080 $100,000 30,000 20,000 $150,000 $319,080
$ 37,400 49,180 $ 86,580 $150,000 82,500* $232,500 $319,080
\
* Retained earnings balances: Beginning retained earnings Add: net income Deduct: dividends Ending retained earnings PTS: 1 DIF: Challenging OBJ: 4.3 NAT: AACSB Analytic | AICPA FN Measurement
$ 76,000 26,500 $102,500 20,000 $ 82,500
10. Roosevelt Company's adjusted trial balance as of August 31, 2012, is shown below: Roosevelt Company Adjusted Trial Balance August 31, 2012
Cash Accounts Receivable Supplies Prepaid Rent Inventory Land Accounts Payable Capital Stock (10,000 shares outstanding as of 8/31/12) Retained Earnings (9/1/11) Dividends Sales Revenue Cost of Goods Sold Advertising Expense Salaries Expense
Debits $ 61,000 14,800 1,600 7,000 10,000 32,400
Credits
30,600 90,800 1,800 1,600 75,600 33,200 3,600 30,000 $197,000
$197,000
Prepare the income statement and a statement of retained earnings for the year ended August 31, 2012. ANS: Roosevelt Company Income Statement For the Year Ended August 31, 2012 Sales revenue Less expenses: Cost of goods sold Advertising expense Salaries expense
$75,600 $33,200 3,600 30,000
Net income
66,800 $ 8,800
Earnings per share ($8,800 / 10,000)
$0.88
Roosevelt Company Statement of Retained Earnings For the Year Ended August 31, 2012 Beginning retained earnings Add: Net Income Less: Dividends Ending retained earnings PTS: 1 DIF: Challenging OBJ: 4.3 NAT: AACSB Analytic | AICPA FN Measurement
$(1,800) 8,800 1,600 $ 5,400
11. Lincoln Company's trial balance as of August 31, 2012, is shown below: Lincoln Company Trial Balance August 31, 2012
Cash Accounts Receivable Supplies Prepaid Rent Inventory Land Accounts Payable Capital Stock Retained Earnings Dividends Sales Revenue Cost of Goods Sold Advertising Expense Salaries Expense
Debits $30,500 7,400 800 3,500 5,000 16,200
Credits
$15,300 45,400 900 800 37,800 16,600 1,800 15,000 $98,500
$98,500
Prepare the closing entries for the year ended August 31, 2012. ANS: Closing entries: Sales Revenue Retained Earnings Cost of Goods Sold Advertising Expense Salaries Expense Retained Earnings Dividends PTS: 1 DIF: Medium OBJ: 4.4 NAT: AACSB Analytic | AICPA FN Measurement
37,800 4,400 16,600 1,800 15,000 800 800
12. Lincoln Company's trial balance as of August 31, 2012, is shown below: Lincoln Company Trial Balance August 31, 2012 Debits $30,500 7,400 800 3,500 5,000 16,200
Cash Accounts Receivable Supplies Prepaid Rent Inventory Land Accounts Payable Capital Stock Retained Earnings Dividends Sales Revenue Cost of Goods Sold Advertising Expense Salaries Expense
Credits
$15,300 45,400 900 800 37,800 16,600 1,800 15,000 $98,500
$98,500
Prepare the post-closing trial balance for the year ended August 31, 2012. ANS: Lincoln Company Post-Closing Trial Balance August 31, 2012 Debit $30,500 7,400 800 3,500 5,000 16,200
Cash Accounts Receivable Supplies Prepaid Rent Inventory Land Accounts Payable Capital Stock Retained Earnings
$63,400 * Net Income: Retained Earnings:
$37,800 16,600 1,800 15,000 = $4,400 $(900) + 4,400 800 = $2,700
PTS: 1 DIF: Medium OBJ: 4.4 NAT: AACSB Analytic | AICPA FN Measurement
Credit
$15,300 45,400 2,700* $63,400
13. Palmer Pen Co. has the following adjusted trial balance: Palmer Pen Co. Adjusted Trial Balance December 31, 2012
Cash Accounts Receivable Supplies Inventory Buildings Machinery and Equipment Land Accounts Payable Notes Payable Capital Stock Retained Earnings Sales Revenue Salaries Expense Insurance Expense Dividends Cost of Goods Sold Utilities Expense Income Tax Expense
a. b.
Prepare the necessary closing entries. Prepare the post-closing trial balance.
Debit $ 50,000 40,500 4,000 74,580 100,000 30,000 20,000
Credit
$ 37,400 49,180 150,000 76,000 480,750 125,000 6,000 20,000 290,900 12,000 20,350 $793,330
$793,330
ANS: a.
Closing entries: Sales Revenue Retained Earnings Cost of Goods Sold Salaries Expense Utilities Expense Insurance Expense Income Tax Expense
480,750 26,500 290,900 125,000 12,000 6,000 20,350
Retained Earnings Dividends b.
20,000 20,000 Palmer Pen Co. Post-Closing Trial Balance December 31, 2012
Cash Accounts Receivable Supplies Inventory Buildings Machinery and Equipment Land Accounts Payable Notes Payable Capital Stock Retained Earnings
Debit $ 50,000 40,500 4,000 74,580 100,000 30,000 20,000
$319,080 PTS: 1 DIF: Medium OBJ: 4.4 NAT: AACSB Analytic | AICPA FN Measurement
Credit
$ 37,400 49,180 150,000 82,500 $319,080
14. For each account listed below, check whether it appears on the income statement or the balance sheet and whether it would normally have a debit or a credit balance. (Note: This covers the entire accounting cycle.) The first line has been completed as an example. Account Notes Payable Prepaid Insurance Cash Land Interest Revenue Accounts Receivable Inventory Wages Payable Tax Expense Notes Receivable Common Stock Service Revenue Supplies Supplies Expense Rent Revenue Furniture Short-Term Investments Unearned Rent Plant and Equipment Retained Earnings Selling Expense Accounts Payable Long-Term Debt Miscellaneous Expense
Balance Sheet X
Income Statement
Debit
Credit X
ANS: Account Notes Payable Prepaid Insurance Cash Land Interest Revenue Accounts Receivable Inventory Wages Payable Tax Expense Notes Receivable Common Stock Service Revenue Supplies Supplies Expense Rent Revenue Furniture Short-Term Investments Unearned Rent Plant and Equipment Retained Earnings Selling Expense Accounts Payable Long-Term Debt Miscellaneous Expense
Balance Sheet X X X X
Income Statement
Debit X X X
X X X X
X X X X
X X X
X X X X
X X X X X X X X X
X X X X X X X X
X
X
X X
PTS: 1 DIF: Medium OBJ: 4.5 NAT: AACSB Analytic | AICPA FN Measurement
Credit X
X X X
X
15. For each account listed below, mark the column that BEST describes the correct classification of the account and mark the column for the financial statement on which the account would appear. Assume that all accounts have normal balances. (NOTE: This problem covers the entire accounting cycle.) The first line has been completed as an example. Account Notes Payable Prepaid Insurance Cash Land Interest Revenue Accounts Receivable Inventory Wages Payable Tax Expense Notes Receivable Common Stock Service Revenue Supplies Supplies Expense Rent Revenue Furniture Short-Term Investment Unearned Rent Plant and Equipment Retained Earnings Selling Expense Accounts Payable Long-Term Debt Miscellaneous Expense
Asset
Liability X
Owners' Equity Expense
Revenue
Balance Sheet X
Income Statement
ANS: Account Notes Payable Prepaid Insurance Cash Land Interest Revenue Accounts Receivable Inventory Wages Payable Tax Expense Notes Receivable Common Stock Service Revenue Supplies Supplies Expense Rent Revenue Furniture Short-Term Investment Unearned Rent Plant and Equipment Retained Earnings Selling Expense Accounts Payable Long-Term Debt Miscellaneous Expense
Asset
Liability X
Owners' Equity
Expense
Revenue
X X X
Balance Sheet X X X X
X X X
Income Statement
X X X X
X X
X
X
X X
X X X
X X
X
X X
X X X
X X X X X
X X X X X X
PTS: 1 DIF: Medium OBJ: 4.5 NAT: AACSB Analytic | AICPA FN Measurement
X X X
X
X
Chapter 5—Internal Controls: Ensuring the Integrity of Financial Information MULTIPLE CHOICE 1. Which of the following is NOT a reason for problems occurring in the financial statements? a. Fraud b. Disagreement c. Errors d. Safeguards ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.1
2. Which of the following statements is true about errors in the financial statements of a company? a. Errors are a result of intentional mistakes made while recording or posting transactions. b. Errors are not intentional and when detected are immediately corrected. c. Errors are not intentional and therefore do not need to be corrected. d. Errors are usually an intentional attempt at fraud. ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.1
3. Recording $130 of insurance expense as advertising expense will result in a. An understatement of assets and an understatement of expenses b. An overstatement of assets and an overstatement of expenses c. An overstatement of assets and an understatement of expenses d. None of these are correct ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
4. If rent for 2012 is paid in advance during 2011 but is mistakenly debited to Rent Expense in 2011, a. Net income for 2011 will be overstated b. There will be no error in 2011 net income c. Net income for 2011 will be understated d. The answer cannot be determined from the information given ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
5. Recording the payment of an account payable twice will result in the a. Overstatement of total assets and total liabilities b. Understatement of total assets and total liabilities c. Overstatement of total assets and understatement of total liabilities d. Understatement of total assets and overstatement of total liabilities ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
6. Failure to record the expired amount of prepaid rent expense a. Overstates expenses b. Understates net income c. Overstates owner's equity d. Overstates liabilities ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
7. Recording the collection of accounts receivable by debiting Cash and crediting Revenue a. Overstates cash b. Understates owner's equity c. Overstates assets d. Overstates both cash and assets ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
8. Recording Rent Expense as Wage Expense a. Overstates income b. Understates expenses c. Understates owner's equity d. None of these are correct ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
9. Failure to record the used portion of supplies on hand during the month has the following effect on the financial statements prepared at the end of the month a. Overstates liabilities b. Understates net income c. Overstates assets d. Understates owner's equity ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
10. Which one of the following errors causes net income to be overstated? a. Failure to record collection of an account receivable b. Failure to record depreciation expense c. Failure to accrue revenue earned but not billed d. Failure to record fees received in advance that are earned by the end of the period ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
11. Which one of the following errors causes net income to be understated? a. Failure to record wages employees have earned but not yet been paid b. Failure to record depreciation expense c. Failure to record collection of accounts receivable d. Failure to record revenue earned but not billed ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
12. A company purchased a two-year insurance policy on September 1, debiting Prepaid Insurance for the full amount. If no adjusting entry is made at the end of the year, how does this affect the year-end financial statements? a. Overstates revenue b. Overstates expenses c. Overstates assets d. Understates owner's equity ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
13. If a company does NOT record accrued wages expense at the end of the year, how does this affect the year-end financial statements? a. Overstates revenue b. Overstates expenses c. Overstates assets d. Overstates owner's equity ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
14. If the total amount for Rent Expense is inadvertently posted to Prepaid Rent at the end of the year, what will be the effect on the year-end financial statements? a. Assets will be understated b. Revenues will be overstated c. Revenues will be understated d. Revenues will be correctly stated ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
15. If the total amount for Insurance Expense is inadvertently posted to Prepaid Insurance at the end of the year, what will be the effect on the year-end financial statements? a. Revenues will be overstated b. Revenues will be understated c. Owner's equity will be overstated d. Owner's equity will be understated ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
16. If the total amount for Rent Expense is inadvertently posted to Prepaid Rent at the end of the year, what will be the effect on the year-end financial statements? a. Expenses will be overstated b. Assets will be overstated c. Revenues will be understated d. Owner's equity will be understated ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
17. If the total amount for Insurance Expense is inadvertently posted to Prepaid Insurance at the end of the year, what will be the effect on the year-end financial statements? a. Expenses will be understated b. Owner's equity will be overstated c. Net income will be overstated d. All of these are true ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
18. A collection of an account receivable was erroneously recorded and posted as a debit to Cash and a credit to Consulting Fees Revenue. The journal entry to correct this error would be a. A debit to Cash and a credit to Accounts Receivable b. A debit to Accounts Receivable and a credit to Consulting Fees Revenue c. A debit to Consulting Fees Revenue and a credit to Unearned Consulting Fees d. A debit to Consulting Fees Revenue and a credit to Accounts Receivable ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.1
19. Blake Co. provided $5,000 of consulting services to Simmons Co. for which they have not yet received payment. When Blake billed Simmons for the consulting services, Blake mistakenly journalized and posted the transaction as a $5,000 debit to Accounts Receivable and a $5,000 credit to Unearned Consulting Fees. The entry Blake needs to make to correct this error is a. Debit Unearned Consulting Fees and credit Consulting Fees Earned for $5,000 b. Debit Unearned Consulting Fees and credit Accounts Receivable for $5,000 c. Debit Consulting Fees Earned and credit Accounts Receivable for $5,000 d. Debit Consulting Fees Earned and credit Unearned Consulting Fees for $5,000 ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.1
20. A purchase of $1,600 of supplies for cash was incorrectly journalized and posted as a $1,600 debit to Supplies Expense and a $1,600 credit to cash. The entry to correct this error is a. A $1,600 debit to Supplies on Hand and a $1,600 credit to Cash b. A $1,600 debit to Supplies on Hand and a $1,600 credit to Supplies Expense c. A $1,600 debit to Cash and a $1,600 credit to Supplies on Hand d. A $1,600 debit to Accounts Receivable and a $1,600 credit to Supplies on Hand ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.1
21. Which of the following statements is true about disagreements in the financial statements of a company? a. Disagreements are a result of intentional mistakes made while recording or posting transactions. b. Disagreements are not intentional and when detected are immediately corrected. c. Disagreements result when different people arrive at different conclusions based on the same set of facts. d. Disagreements are usually an intentional attempt at fraud. ANS: C PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.1
22. Estimates are used in many instances when recording a company's results of operations. Which of the following would NOT require an estimate to be made? a. Uncollectible accounts b. Contract percentage of completion c. Wages earned d. Expected life of machinery ANS: C PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.1
23. If two different accountants were to estimate the percentage of customers who will NOT pay their accounts (bad debts), they could arrive at different estimates. These differing estimates would affect the financial statements. Such differences in assessing estimates are due to a. Fraudulent financial reporting b. Errors in accounts and ledgers c. Disagreements in judgment d. Lack of internal controls ANS: C PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.1
24. Which of the following is true about fraudulent accounting? a. Fraudulent accounting is the result of unintentional errors in the accounting records. b. Fraudulent accounting results when different people arrive at different conclusions based on the same set of facts. c. Fraudulent accounting is the result of intentional errors in the accounting records. d. None of these are true. ANS: C PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.1
25. All of the following are likely to be methods that could be used to conduct fraud EXCEPT a. Overstating liabilities b. Not recording various expenses c. Creating fictitious invoices d. Overstating receivables ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.1
26. If an employee steals cash from a company and successfully covers up his/her actions by recording a fictitious debit to Prepaid Advertising and a credit to Cash, then a. Expenses will be understated b. Net income will be overstated c. Net income will be understated d. Net income will be stated correctly ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
27. If an employee steals cash from a company and tries to cover up his/her actions by recording a fictitious debit to Prepaid Insurance and a credit to Cash, then a. Expenses will be understated b. Assets will be overstated c. Assets will be understated d. Assets will be stated correctly ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
28. If an employee steals cash from a company and tries to cover up his/her actions by recording a fictitious debit to Insurance Expense and a credit to Cash, then a. Expenses will be overstated b. Expenses will be understated c. Cash will be overstated d. Cash will be understated ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
29. If an employee steals cash from a company and successfully covers up his/her actions by recording a fictitious debit to Accounts Payable and a credit to Cash, then a. Liabilities will be overstated b. Liabilities will be understated c. Assets will be overstated d. Assets will be understated ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.1
30. Which of the following requires that every company's annual report contain an internal control report? a. Foreign Corrupt Practices Act b. Securities Act of 1934 c. Internal Revenue Code d. Sarbanes-Oxley Act ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
31. Which of the following is NOT one of the major safeguards in the financial reporting process? a. Earnings management b. Internal controls c. Internal auditors d. External auditors ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
32. Which of the following is NOT one of the major concerns most companies have when they are designing internal controls? a. The assets and records are safeguarded b. The Securities and Exchange Commission's regulations are followed c. Management policies are followed d. The Foreign Corrupt Practices Act is complied with ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
33. Which of the following is NOT one of the five basic categories of internal control? a. Monitoring b. Control environment c. Control activities d. Auditing system ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
34. The Sarbanes-Oxley Act requires that an internal control report be included in every company's annual report. Which one of the following is NOT one of the requirements of the internal control report? a. Contain an assessment by management of the internal control structure b. State the responsibility of management to maintain an adequate control structure c. Describe in detail the internal controls of the company d. Contain an independent assessment by an independent auditor of the reliability of internal controls ANS: C PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
35. Internal controls are designed to help and protect all of the following groups of people, EXCEPT a. Creditors b. Management c. Investors d. Tax collectors ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
36. The internal control structure of a company is a system of policies and procedures established to a. Safeguard assets b. Promote operational efficiency c. Ensure accurate accounting records d. All of these are correct ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
37. Which of the following is NOT usually considered a component of a company's control environment? a. The organizational structure b. The audit committee c. The Foreign Corrupt Practices Act d. Management's philosophy and operating style ANS: C PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
38. Which of the following requires that audit committee members be financially literate? a. Securities Exchange Commission b. Sarbanes-Oxley Act c. Foreign Corrupt Practices Act d. American Institute of Certified Public Accountants ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
39. Which of the following are usually members of a company's audit committee? a. Officers of the company b. External auditors c. Internal auditors d. Members of the board of directors who are not officers of the company ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
40. The purpose of the audit committee within an organization is to a. Regulate the internal control system b. Be responsible for the external and internal auditors c. Examine the financial statements to determine if they are free from material misstatement d. Monitor operating results and financial records ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
41. If an external auditor suspects wrongdoing in financial statements, the concerns should be addressed to a. The audit committee b. The management of the company c. The Securities and Exchange Commission d. The board of directors ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
42. The control environment can be defined as a. The lines of authority and responsibility within a company. b. The actions, policies, and procedures that reflect the overall attitudes of top management about control. c. The members of a company's board of directors who are responsible for dealing with the external and internal auditors. d. The policies and procedures used by management to meet their objectives. ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
43. Control activities can be defined as a. The lines of authority and responsibility within a company. b. The actions, policies, and procedures that reflect the overall attitudes of top management about control. c. The members of a company's board of directors who are responsible for dealing with the external and internal auditors. d. The policies and procedures used by management to meet their objectives. ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
44. Which of the following categories of control activities is NOT considered a preventative control? a. Independent checks on performance b. Physical control over assets and records c. Adequate segregation of duties d. Proper procedures for authorization ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
45. Which of the following groups of control activities are considered preventative controls? a. Segregation of duties, proper procedures for authorizations, and physical control over assets and records b. Adequate documents and records, independent checks on performance, and physical control over assets and records c. Segregation of duties, adequate documents and records, and proper procedures for authorizations d. Independent checks on performance, proper procedures for authorizations, and physical control over assets and records ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
46. Which of the following groups of control activities are considered detective controls? a. Segregation of duties and physical control over assets and records b. Adequate documents and records and independent checks on performance c. Segregation of duties and adequate documents and records d. Independent checks on performance and physical control over assets and records ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
47. Which of the following are valid control procedures? a. Segregation of duties b. Adequate documents and records c. Independent checks on performance d. All of these are correct ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
48. Which of the following are the three functions that should be performed by separate departments or individuals? a. Authorization, purchasing, and custody of assets b. Record keeping, validation, and classifying c. Record keeping, validation, and authorization d. Authorization, record keeping, and custody of assets ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
49. Which of the following is generally NOT performed by an accounting clerk? a. Recording monthly insurance expense b. Making a payment on an account payable c. Authorizing credit to customers d. Authorizing dividends to be paid ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
50. Which of the following is desirable in a good system of internal accounting control? a. All accounting personnel in a company should be Certified Public Accountants b. Appropriate forms, such as checks and sales invoices, should be prenumbered c. To obtain the benefit of specialization, employees should not be rotated among jobs d. Responsibility and authority for a given function should be shared among several employees ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
51. Which of the following is a poor internal accounting control feature? a. Division of work b. Combining accountability with custodianship c. Rotation of personnel d. Internal auditing ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
52. Keeping marketable securities and cash in a fireproof vault is an example of which type of accounting procedure? a. Physical control over records b. Adequate documents and records c. Proper procedures for authorization d. Segregation of duties ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
53. Using independent reviewers, such as auditors, is an example of which type of accounting procedure? a. Physical control over records b. Adequate documents and records c. Proper procedures for authorization d. Independent checks on performance ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
54. Which of the following is NOT an objective of the accounting system? a. Make sure a company only records profitable transactions b. Make sure a company only records valid transactions c. Make sure a company values transactions properly d. Make sure a company records transactions in the proper time period ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
55. Which of the following is a characteristic of a well-designed document? a. It is easily interpreted and understood. b. It is formatted so that it can be handled quickly and efficiently. c. It has been designed with all possible uses in mind. d. All of these are characteristic of a well-designed document. ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.2
56. Which of the following is an example of an adequate segregation of duties? a. Every year, Doug is required to take one full week of vacation time. b. Greg is in charge of recording receipt of payments made to accounts receivable, while Susan is in charge of making deposits to the bank. c. Every evening, Shellie makes a back-up file of all transactions recorded in the computer that day, burns the back-up file onto a CD and then locks the CD into a fire-proof vault for the night. d. John, a clerk, is authorized to perform transactions as large as $5,000 but must maintain authorization from Andrea to perform larger transactions. ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.2
57. Which of the following is an example of a proper procedure of authorization? a. Every year, Doug is required to take one full week of vacation time. b. Greg is in charge of recording receipt of payments made to accounts receivable, while Susan is in charge of making deposits to the bank. c. Every evening, Shellie makes a back-up file of all transactions recorded in the computer that day, burns the back-up file onto a CD and then locks the CD into a fire-proof vault for the night. d. John, a clerk, is authorized to perform transactions as large as $5,000 but must maintain authorization from Andrea to perform larger transactions. ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.2
58. Which of the following is an example of a physical control over assets and records? a. Every year, Doug is required to take one full week of vacation time. b. Greg is in charge of recording receipt of payments made to accounts receivable, while Susan is in charge of making deposits to the bank. c. Every evening, Shellie makes a back-up file of all transactions recorded in the computer that day, burns the back-up file onto a CD and then locks the CD into a fire-proof vault for the night. d. John, a clerk, is authorized to perform transactions as large as $5,000 but must maintain authorization from Andrea to perform larger transactions. ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.2
59. Which of the following is an example of an independent check on performance? a. Every year, Doug is required to take one full week of vacation time. b. Greg is in charge of recording receipt of payments made to accounts receivable, while Susan is in charge of making deposits to the bank. c. Every evening, Shellie makes a back-up file of all transactions recorded in the computer that day, burns the back-up file onto a CD and then locks the CD into a fire-proof vault for the night. d. John, a clerk, is authorized to perform transactions as large as $5,000 but must maintain authorization from Andrea to perform larger transactions. ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 5.2
60. Which of the following is typically NOT a reason for managing reported earnings? a. Meet external expectations b. Desire for personal gain c. Meet internal earnings targets d. Income smoothing ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
61. As William is preparing the end of year financial statements, he has been asked to reconsider the timing of revenues and expenses in order to report less volatile earnings. This is an example of a. Window dressing b. Meeting internal targets c. Income smoothing d. Meeting external expectations ANS: C PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
62. As William is preparing the end of year financial statements, he has been asked to review the accrual judgments and estimates to see if the originally calculated net loss can be changed to a net profit. This is an example of a. Window dressing b. Meeting internal targets c. Income smoothing d. Meeting external expectations ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
63. As William is preparing the end of year financial statements, he notices that the numbers required for his personal bonus have not been met. He begins to review the estimates that he has made in order to possibly adjust some numbers to meet the requirements for his bonus. This is an example of a. Window dressing b. Meeting internal targets c. Income smoothing d. Meeting external expectations ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
64. As William is preparing the end of year financial statements, he realizes that the earnings are not quite up to par for the large loan application that is being currently processed. He decides to stretch the assumptions just enough to be able to meet the requirements for the loan application. This is an example of a. Window dressing b. Meeting internal targets c. Income smoothing d. Meeting external expectations ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
65. Which of the following items of the earnings management continuum is in the correct order? a. strategic matching, change in methods or estimates with full disclosure, change in methods or estimates with little or no disclosures, non-GAAP accounting, fictitious transactions b. strategic matching, change in methods or estimates with little of no disclosure, fictitious transactions, change in methods or estimates with full disclosure, non-GAAP accounting c. non-GAAP accounting, change in methods or estimates with little or no disclosure, strategic matching, fictitious transactions, change in methods or estimates with full disclosure d. change in methods or estimates with full disclosure, non-GAAP accounting, fictitious transactions, strategic matching, change in methods or estimates with little or no disclosure ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
66. Most companies that engage in earnings management typically do NOT go beyond which of the following activities on the earnings management continuum? a. Strategic matching b. Change in methods or estimates with full disclosure c. Change in methods or estimates with little or no disclosure d. Non-GAAP accounting ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
67. Earnings management through strategic matching is best exemplified by a. Changing the useful life of a depreciable asset. b. Timing transactions such that large one-time gains and losses occur in the same quarter. c. Changing the interest rate used in accounting for leases without describing the change in the notes to the financial statements. d. Capitalizing as assets expenditures that have no future economic benefit. ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
68. Earnings management through aggressive accounting is best exemplified by a. Changing the useful life of a depreciable asset and fully disclosing it in the notes. b. Timing transactions such that large one-time gains and losses occur in the same quarter. c. Changing the interest rate used in accounting for leases without describing the change in the notes to the financial statements. d. Capitalizing as assets expenditures that have no future economic benefit. ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
69. Earnings management through deceptive accounting is best exemplified by a. Changing the useful life of a depreciable asset and fully disclosing it in the notes. b. Timing transactions such that large one-time gains and losses occur in the same quarter. c. Changing the interest rate used in accounting for leases without describing the change in the notes to the financial statements. d. Capitalizing as assets expenditures that have no future economic benefit. ANS: C PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
70. Recording as an asset expenditures that have no future economic benefit is an example of a. Strategic matching. b. Change in methods or estimates with full disclosure. c. Non-GAAP accounting. d. A fictitious transaction. ANS: C PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
71. Which of the following typically involves the use of non-GAAP accounting? a. Delaying a transaction to be recorded in a more advantageous quarter b. Changing an interest rate and disclosing it in the financial statements c. Recording expenses as assets d. Changing an interest rate but not disclosing it in the financial statements ANS: C PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
72. Fraud is a. The deceptive concealment of transactions b. The creation of fictitious transactions c. Unintentional errors d. Both the deceptive concealment of transactions and the creation of fictitious transactions ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
73. Excessive earnings management typically begins as a result of a. a regulatory investigation. b. pressure to meet the expectations of stakeholders. c. a downturn in business. d. a violation of generally accepted accounting principles. ANS: C PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
74. The GAAP Oval best represents a. The fact that only one true earnings number exists. b. The flexibility managers have within GAAP to report one earnings number from among many possibilities. c. The philosophy that earnings management within limits is ethical. d. The fact that GAAP is not subject to interpretation. ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
75. Which of the following groups on the earnings management continuum are always considered ethical? a. Savvy transaction timing and aggressive accounting b. Aggressive accounting and fraudulent reporting c. Deceptive accounting and savvy transaction timing d. There is not a clear definition as to which of these are ethical and which are not ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.3
76. The Sarbanes-Oxley Act establishes a. Independent oversight of auditors b. Constraints on auditors c. Constraints on company management d. All of these are correct ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.4
77. The Public Company Accounting Oversight Board a. Establishes requirements for entry into the CPA profession b. Conducts inspections of accounting firms c. Reviews tax returns of public companies d. Enforces compliance with the Foreign Corrupt Practices Act ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.4
78. The Public Company Accounting Oversight Board is NOT required to a. Establish standards relating to the preparation of audit reports for public companies b. Conduct inspections of accounting firms c. Register all public accounting firms that provide audits for public companies d. Enforce compliance with the Foreign Corrupt Practices Act ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.4
79. According to Sarbanes-Oxley, which one of the following services is an accounting firm permitted to provide to its audit client? a. Bookkeeping or other services related to the accounting records or financial statements b. Internal audit outsourcing services c. Legal services and expert services unrelated to the audit d. Opinions about the reliability of internal controls ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.4
80. According to Sarbanes-Oxley, who are auditors required to report to and be retained by? a. Chief Financial Officer b. Audit committee c. Chief Executive Officer d. Internal auditors ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.4
81. Which of the following does Sarbanes-Oxley NOT require management to do? a. Develop and enforce an officer code of ethics b. Make loans to executive officers and directors c. Prepare a statement to accompany the audit report d. Support a much stronger board and audit committee in each public company ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.4
82. The internal audit manager reports directly to the a. Controller b. Public Company Accounting Oversight Board c. Accounting committee d. Audit committee ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.5
83. Which of the following activities would internal auditors NOT typically perform in a large company? a. Evaluate internal controls b. Assist with increasing the efficiency of operations c. Prepare the primary financial statements d. Detect fraud ANS: C PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.5
84. External audits are performed by a. Certified Internal Auditors b. Certified Public Accountants c. Certified Financial Analysts d. Certified Management Accountants ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.5
85. What is the most common professional designation for external auditors? a. Certified Internal Auditor b. Certified External Auditor c. Certified Professional Accountant d. Certified Public Accountant ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.5
86. Which statement best describes the role of external auditors when auditing a large public company? a. Examine the organization's accounting for a sample of business transactions to provide reasonable assurance that the financial statements are presented fairly b. Examine the organization's accounting for a sample of business transactions to guarantee that the financial statements are presented fairly c. Examine the organization's accounting for every business transaction to provide reasonable assurance that the financial statements are presented fairly d. Examine the organization's accounting for every business transaction to guarantee that the financial statements are presented fairly ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.5
87. Which of the following requires CPAs to provide reasonable assurance that significant fraud or misstatement is NOT present in financial statements? a. Generally Accepted Auditing Standards b. Generally Accepted Accounting Principles c. Sarbanes-Oxley Act d. Foreign Corrupt Practices Act ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.5
88. Which of the following audit processes is used primarily by external auditors? a. Sampling b. Interviews c. Observations d. Confirmation ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.5
89. Which of the following audit processes attempts to identify areas that may deserve attention by using techniques such as comparative ratio analysis? a. Sampling b. Analytical procedures c. Observations d. Confirmation ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.5
90. Which of the following is an incentive that influences auditors to remain independent and to provide fair and reliable financial information? a. Management would be taking a large legal risk if they interfere with the auditors. b. External auditors are taking a large legal risk if they allow their independence and integrity to be compromised. c. Auditors have a reputation to protect. d. All of these are correct. ANS: D PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.5
91. When does the Securities and Exchange Commission (SEC) typically require a company to submit a registration statement to the SEC for approval? a. When the company receives a qualified opinion from the external auditors b. When the company receives a disclaimer of opinion from the external auditors c. When the company issues new debt or stock securities to the public d. When the company has experienced a major fraud ANS: C PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.6
92. What is the detailed report that companies file annually with the Securities and Exchange Commission? a. Form 8-K b. Form 10-K c. Form 10-Q d. Form S-16 ANS: B PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.6
93. Which form must be filed quarterly by all publicly held corporations? a. 10-K b. 8-K c. 10-Q d. 8-Q ANS: C PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.6
94. Which of the following is NOT one of the effects that the Securities Exchange Act of 1934 had on accountants? a. Accountants must audit all 10-K reports. b. Accountants must audit all 10-Q reports. c. Accountants' work is subject to approval by the SEC d. All of these are effects of the Securities Exchange Act of 1934. ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Measurement
OBJ: 5.6
PROBLEM 1. Discuss the three types of problems that can occur in financial statements. ANS: 1. 2.
3.
Errors occur when care is not taken in recording, posting, and summarizing accounting data. They are not intentional and are corrected when discovered. Disagreements occur when different people arrive at different conclusions based on the same set of facts. Disagreements usually occur when judgment and estimates are required. The differences occur when those involved with producing the financial statements are motivated by differing incentives. Frauds occur when intentional errors are made by management to manipulate the financial statements for their own purposes.
PTS: 1 DIF: Medium OBJ: 5.1 NAT: AACSB Analytic | AICPA FN Measurement 2. During the end of year audit, the auditors found the following errors in Blossom Company's financial statements: a. b.
c.
d. e. f. g.
No adjusting entry was made for salaries of $15,000 that were earned in December but will not be paid until January. On November 1, Blossom Company paid an insurance payment of $12,000 for a twelve month policy. On November 1, the full $12,000 was debited to insurance expense. No adjusting entries were made to insurance expense at year end. On December 15, Blossom Company received a $5,000 prepayment for services that will be performed in January. Cash was debited and service revenue was credited when the cash was received. The recording of a payment for an accounts receivable of $15,000 was recorded twice. A note payable for $20,000 was inadvertently recorded as $200,000. Cash was credited when depreciation expense of $35,000 was recorded. Inventory of $40,000 was inadvertently recorded to the supplies account.
Prepare the necessary journal entries to correct each error (omit explanations).
ANS: a.
b.
c.
d.
e.
f.
g.
Salaries expense Salaries payable
15,000
Prepaid insurance Insurance expense ($12,000 10/12)
10,000
Service revenue Unearned service revenue
5,000
Accounts receivable Cash
15,000
Note payable Cash ($200,000 $20,000)
180,000
Cash Accumulated depreciation
35,000
Inventory Supplies
40,000
PTS: 1 DIF: Medium OBJ: 5.1 NAT: AACSB Analytic | AICPA FN Measurement
15,000
10,000
5,000
15,000
180,000
35,000
40,000
3. The income statement and the balance sheet for Trust Company for the year ended December 31, 2012 are shown below: Trust Company Income Statement For the Year Ended December 31, 2012 Sales revenue Less: Cost of goods sold Gross profit Operating expenses: Advertising Rent Salaries Net income
$900,000 500,000 $400,000 $ 35,000 42,000 150,000
227,000 $173,000
Trust Company Balance Sheet December 31, 2012 Assets Current assets: Cash Accounts receivable Inventory Total current assets Buildings Total assets Liabilities Accounts payable Notes payable Total liabilities Owners' equity Capital stock Retained earnings Total owners' equity Total liabilities and owners' equity
$ 165,000 75,000 50,000 290,000 750,000 $1,040,000 $
90,000 120,000 $ 210,000
$ 535,000 295,000 $ 830,000 $1,040,000
During the end of year audit, the auditors found the following errors: a. b.
d. e.
The payment of an account payable for $12,000 was recorded twice. On December 1, Trust Company paid a rent payment of $9,000 for three months rent. The full $9,000 was debited to rent expense on December 1. No adjusting entries were made to rent expense at year end. No adjusting entry was made for salaries of $22,000 that were earned in December but will not be paid until January. Inventory that was paid for on account was recorded as $12,000 instead of $21,000. A note payable for $20,000 was inadvertently recorded as accounts payable.
1. 2.
Prepare the necessary journal entries to correct each error (omit explanations). Prepare financial statements after the errors have been corrected.
c.
ANS: 1. a. b.
c. d.
e.
Cash Accounts payable Prepaid rent Rent expense ($9,000 2/3) Salaries expense Salaries payable Inventory Accounts payable ($21,000 $12,000) Accounts payable Notes payable
2.
12,000 12,000 6,000 6,000 22,000 22,000 9,000 9,000 20,000 20,000
Trust Company Income Statement For the Year Ended December 31, 2012 Sales revenue Less: Cost of goods sold Gross profit Operating expenses: Advertising Rent Salaries Net income
$ 900,000 500,000 $400,000 $ 35,000 36,000 172,000
243,000 $ 157,000
Trust Company Balance Sheet December 31, 2012 Assets Current assets: Cash Accounts receivable Inventory Prepaid rent Total current assets Buildings Total assets Lia bilities Accounts payable Salaries payable Notes payable Total liabilities Owners' equity Capital stock Retained earnings Total owners' equity Total liabilities and owners' equity PTS: 1 DIF: Challenging OBJ: 5.1 NAT: AACSB Analytic | AICPA FN Measurement
$ 177,000 75,000 59,000 6,000 317,000 750,000 $1,067,000 $
91,000 22,000 140,000 $ 253,000
$ 535,000 279,000 $ 814,000 $1,067,000
4. In the spaces provided, write the letter of the definition for each of the following terms. A. B. C. D.
E. F. G. H. I. J.
Policies and procedures used by management to meet their needs Internal control activities that are designed to prevent the occurrence of errors and fraud Internal control activities that are designed to detect the occurrence of error and fraud A strategy to provide an internal check on performance through separation of authorization of transactions, separation of operational responsibilities, and separation of custody of assets Physical precautions used to protect assets and records Procedures for continual internal verification of other controls The lines of authority and responsibility within a company Members of a company's board of directors who are responsible for dealing with the external and internal auditors The actions, policies, and procedures that reflect the overall attitudes of top management about control and its importance to the entity Safeguards in the form of policies and procedures established to provide management with reasonable assurance that the objectives of an entity will be achieved 1. Physical safeguards 2. Detective controls 3. Control activities 4. Organizational structure 5. Audit committee 6. Segregation of duties 7. Preventative controls 8. Independent checks 9. Control environment 10. Internal control structure
ANS: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
E C A G H D B F I J
PTS: 1 DIF: Easy OBJ: 5.2 NAT: AACSB Reflective Thinking | AICPA FN Measurement
5. List the five major concerns that companies must keep in mind when designing their internal control system. ANS: 1. 2. 3. 4. 5.
Provide accurate accounting records and financial statements containing reliable data for business decisions. Safeguard the assets and records. Effectively and efficiently run their operations, without duplication of effort or waste. Follow management policies. Comply with the Foreign Corrupt Practices Act, which requires companies to maintain proper record-keeping systems and controls.
PTS: 1 DIF: Medium OBJ: 5.2 NAT: AACSB Critical Thinking | AICPA FN Measurement 6. Control activities are the policies and procedures that management has adopted to provide reasonable assurance that the financial reports are accurate and that the company's objective are being met. List the five categories of control activities and give a specific example of each. ANS: Control Activity Adequate segregation of duties
Example* The receipt of cash collected from outstanding accounts receivable, the recording of accounts receivable, and the deposit to the bank of the cash collected are all performed by different people.
Proper procedures for authorization
Two specific people in a company are assigned to enter everything in the accounting records. No one else has direct access to make changes in the accounting records.
Physical control over assets and records
Every day, an armored car comes to a bank to transport significant sums of money.
Adequate documents and records
All purchase order forms have been pre-numbered, have adequate information needed for accounting records, and are easy to understand and complete.
Independent checks on performance
An independent auditor reviews the company's accounting records every year
*Answers will vary. PTS: 1 DIF: Challenging OBJ: 5.2 NAT: AACSB Analytic | AICPA FN Measurement
7. List and describe the four major reasons for managing reported earnings. ANS: 1.
2.
3. 4.
Meet internal targets Managers are often motivated by internal earnings targets or financial goals within the company. These same targets can also cause managers to forget the economic factors underlying the measurement and instead focus on the measured number itself. Meet external expectations A wide variety of stakeholders have an interest in the financial performance of a company. In order to avoid showing signs of weaknesses to these stakeholders, management may "tweak" the numbers in order to not show financial distress. Income smoothing Management may carefully time the recognition of revenues and expenses in order to even out the amount of reported earnings from one year to the next. Window dressing for an IPO or a loan When companies are at a critical point and need to look good (when applying for a large loan or making an IPO) managers may use accounting assumptions in order to boost their earnings for that period.
PTS: 1 DIF: Medium OBJ: 5.3 NAT: AACSB Critical Thinking | AICPA FN Measurement 8. Research has shown that numerous companies manage their earnings. A variety of earnings management techniques are available ranging from income smoothing to outright fraud. Define income smoothing and explain how it is implemented. ANS: Income smoothing is the careful timing of the recognition of revenues and expenses in order to reduce the volatility of income. Managers of many companies seek to report gradual and continual increases in income in the belief that investors view an erratic earnings trend as being more risky than a smooth trend. These managers fear the economic consequences of lower earnings in the form of reduced stock prices, higher borrowing costs, or possible technical default as a result of noncompliance with debt covenants. Income smoothing can be implemented in a number of ways. Large corporations with diverse operating units can match a large one-time loss for one operating unit with a large one-time gain of another operating unit to achieve the desired earnings result. Careful timing of the recognition of such gains and losses can eliminate much of the volatility in earnings. Other means of income smoothing include deferring revenues from sales to a later period or accelerating the recognition of sales revenue to the current period. Prices of products also can be lowered to facilitate additional sales that otherwise might not have occurred. Expenses can be used to smooth income as well. A purchaser can persuade a supplier to split a single purchase order into several orders with invoice dates in more than one accounting period. Bad debt expense, warranty expense, and other estimated expenses can be manipulated to reach a desired earnings goal. Oil and gas companies have particular flexibility in their choice of when to declare a dry well as unsuccessful thus timing needed reductions in income to suit their needs. PTS: 1 DIF: Challenging OBJ: 5.3 NAT: AACSB Analytic | AICPA FN Measurement
9. Internal earnings targets represent an important tool in motivating managers to increase sales efforts, control costs, and use resources more efficiently. Such internal targets also can cause managers to resort to extreme measures in order to meet goals established by upper management. Earnings management often appears in a variety of forms as a means of reaching these internal goals. Earnings management also is associated with earnings-based internal bonus plans which are also a form of internal target. Explain how earnings management is related to earnings-based internal bonus plans and how managers behave in response to such plans. ANS: Academic research has shown that managers subject to an earnings-based bonus plan are indeed motivated to manage earnings. Managers are likely to manage earnings upward if they are close to the bonus threshold. Conversely, research has shown that managers are more likely to manage earnings downward if reported earnings are substantially in excess of the maximum bonus level, causing managers to defer these excess earnings for use in future periods when operating results may be less favorable. Bonus plans typically provide a maximum amount that can be transferred to the bonus pool from which bonuses are paid. The maximum transfer usually is some percentage of earnings over a target earnings number, the target frequently being a percentage of shareholder equity or total assets. When earnings are below the target, no bonuses are awarded. If actual earnings are above the upper bound, managers have an incentive to reduce reported earnings by deferring earnings. Failure to defer the earnings in excess of the upper bound would resort in the loss of the bonus on the excess earnings. Alternatively, deferring the excess earnings increases expected future bonuses. If actual earnings are between the target and the upper bound, managers will take steps to ensure that the current period's earnings are equal to the upper bound in an effort to maximize the amount received currently. If earnings are below the target, then managers may engage in "big bath" accounting and recognize as much expense as possible in the current period in order to avoid recognizing such expenses in the future. PTS: 1 DIF: Challenging OBJ: 5.3 NAT: AACSB Analytic | AICPA FN Measurement 10. The Earnings Management Continuum has five levels. List, in order, the five levels of the Earnings Management Continuum and give a description of each one.
ANS: 1.
2.
3.
4. 5.
Savvy Transaction Timing or Strategic Matching A company may make strategic plans to ensure that key transactions are either delayed or completed quickly in order for them to be recognized in the most advantageous period. Aggressive Accounting or Change in Methods or Estimates with Full Disclosures Changing methods and estimates in order to benefit the company. These changes are fully disclosed and would be easy to detect with a little investigative work. Deceptive Accounting or Change in Methods or Estimates but with Little or No Disclosure Changes in methods or estimates that are not fully disclosed and thus harder to track. This causes inconsistency in the financial statements and could lead to users being misled. Fraudulent Reporting or Non-GAAP Accounting Accounting procedures that are "invented" in order to hide information from financial statement users. Fraud or Fictitious Transactions The deceptive concealment of transactions or the creation of fictitious transactions.
PTS: 1 DIF: Medium OBJ: 5.3 NAT: AACSB Critical Thinking | AICPA FN Measurement 11. Restoring public confidence in the financial reporting process requires that auditors remain independent. How does the Sarbanes-Oxley Act constrain auditors to ensure independence? ANS: 1.
Accounting firms that audit public companies are prohibited from providing several nonaudit procedures including the following: a bookkeeping or other services related to the accounting records b financial information systems design and implementation c appraisal or valuation services d actuarial services e internal audit outsourcing services f management functions or human resources g broker or dealer, investment advisor, or investment banking services h legal services and expert services unrelated to the audit i any other service that the Board determines is impermissible.
2.
All audit partners must be rotated off the audit every five years.
3.
Auditors must report to and be retained by the audit committee rather than the CFO or other members of management.
PTS: 1 DIF: Medium OBJ: 5.4 NAT: AACSB Analytic | AICPA FN Measurement 12. Restoring public confidence in the financial reporting process requires that management ensure financial statement users of the steps taken to provide quality financial information. How does the Sarbanes-Oxley Act constrain management to achieve that public confidence?
ANS: 1.
2. 3. 4.
The CEO and CFO of each public company are required to prepare a statement to accompany the audit report to certify to the appropriateness of the financial statements and disclosures. All public companies are required to develop and enforce an officer code of ethics. Loans to executive officers and directors are prohibited. Support a much stronger board and audit committee in each public company.
PTS: 1 DIF: Medium OBJ: 5.4 NAT: AACSB Analytic | AICPA FN Measurement 13. List the five different processes used by auditors in order to gain confidence in the quality of the reporting process. For each process, state who primarily uses this process (internal auditors, external auditors, or both) and give a specific example of how this process would be used. ANS: Process Interviews
User Example* Internal and External Auditors A written interview is conducted to verify that all personnel in the cash receipts department are following the same procedures.
Observation
Internal and External Auditors A physical count of inventory on hand is performed.
Sampling
Internal and External Auditors Five purchase orders per month are randomly selected for verification that they are being handled correctly.
Confirmation
External Auditors
The bank is contacted to verify that the amount of notes payable is accurate
Analytical Procedures
External Auditors
Ratios from each period are compared to previous periods.
*Answers will vary. PTS: 1 DIF: Medium OBJ: 5.5 NAT: AACSB Analytic | AICPA FN Measurement
14. List and discuss three motivations for independent auditors to fairly represent the financial information of the company. ANS: 1.
2.
3.
The Foreign Corrupt Practices and Sarbanes-Oxley acts require companies to maintain an adequate system of internal controls. If management knowingly violate this law, they can go to jail and be subject to personal fines. In addition, the company is subject to corporate fines. The legal system in the United States provides auditors with financial incentives to remain independent. Auditors can be sued by financial statement users if financial statements are found to not be presented fairly. Auditors have a reputation to protect. The reason auditors are hired at all is because the investing public believes they provide an independent check on the reliability and integrity of the financial information. If an audit firm were no longer perceived in this manner, companies would cease to employ it.
PTS: 1 DIF: Medium OBJ: 5.5 NAT: AACSB Analytic | AICPA FN Measurement
Chapter 6—Receivables: Selling a Product or a Service MULTIPLE CHOICE 1. The major activities of a business include all BUT which of the following? a. Financing activities b. Operating activities c. Investing activities d. Earning activities ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.1
2. Which type of the major activities of a business are best described as those events that raise money by means other than operations? a. Financing activities b. Operating activities c. Investing activities d. Earning activities ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.1
3. Which type of the major activities of a business are best described as those events involve the purchase of assets for use in the business? a. Financing activities b. Operating activities c. Investing activities d. Earning activities ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.1
4. Which type of the major activities of a business are best described as those events that are associated with the primary purpose of a business? a. Financing activities b. Operating activities c. Investing activities d. Earning activities ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.1
5. Buying inventory is an example of a(n) a. Operating activity b. Investing activity c. Financing activity d. Revenue activity ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.1
6. Selling property, plant, and equipment is a(n) a. Operating activity b. Investing activity c. Financing activity d. Revenue activity ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.1
7. Selling additional shares of stock is a(n) a. Operating activity b. Investing activity c. Financing activity d. Revenue activity ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.1
8. Selling products or services is a(n) a. Operating activity b. Investing activity c. Financing activity d. Revenue activity ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.1
9. Investing in stocks or bonds of another company is a(n) a. Operating activity b. Investing activity c. Financing activity d. Revenue activity ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.1
10. Revenues are most often recognized when a. A sale takes place or a service is performed b. Cash is collected c. Inventory is purchased for resale d. Inventory is manufactured for resale ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.2
11. The accounting term for the recording of a sale through a journal entry is a. Revenue Accrual b. Revenue Recognition c. Receipt of Revenue d. Sales Transaction ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.2
12. The two criteria that need to be met in order revenue to be recognized are a. Work has been started and cash collection is reasonably assured. b. Work has been started and cash collection has occurred. c. Work has been substantially completed and cash collection is reasonably assured. d. Work has been substantially completed and cash collection has occurred. ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.2
13. The Talmage Company owns several shopping malls. One of the shopping malls is undergoing an underground renovation. Copeland Construction is the construction company that is performing these renovations. According to GAAP, when is the most appropriate time to recognize revenue from this construction project? a. When the contract to perform the service was signed b. When the construction work was started c. At the end of each year, as a percentage completed for that year d. After the project is completely finished ANS: C PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.2
14. Sally is a college student who decided that she spends entirely too much time inside of the library studying. She decided to join a health club in order to become more active. After researching several Health Clubs and Gyms, Sally decided to purchase a membership at Deseret Health Club. Sally bought a contract for one year. Upon signing this contract, Sally agreed to pay an upfront membership fee, which will ensure use of the health facilities during the full year. She also agreed to pay a monthly fee that will be paid at the beginning of each month during the length of the contract. According to GAAP and assuming that the up-front fee does not relate to a specific activity and is nonrefundable, when is the best time for Deseret Health Club to recognize the revenue for the up-front fee paid by Sally? a. Recognize it as soon as cash is received from Sally b. Recognize it at the end of one year (at the end of Sally's contract) c. Recognize it six months after the contract is signed d. Allocate it over the life of the contract and recognize it as time passes ANS: D PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.2
15. Goofy Golf, sells high-quality golf clubs. On May 9, Goofy Golf sold five sets of golf clubs at a price of $500 each. Each set was sold for $100 cash and the rest on credit. The journal entry to record the recognition of revenue is 2,000 a. Accounts Receivable Sales Revenue
b. Cash
Sales Revenue Cash c. Accounts Receivable Sales Revenue d. Sales Revenue Cash Accounts Receivable
2,000
500 500 500 2,000 2,500 2,500 500 2,000
ANS: C Sales revenue: Cash: Accounts Receivable:
$500 5 = $2,500 $100 5 = $500 $2,500 $500 = $2,000
PTS: 1 DIF: Medium OBJ: 6.2 NAT: AACSB Analytic | AICPA FN Measurement 16. On June 30, Parrott Company sold goods for $800 on account. The journal entry to record the recognition of revenue would include a. A debit to cash of $800. b. A debit to sales revenue of $800. c. A credit to sales revenue of $800. d. A credit to accounts receivable of $800. ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 6.2
17. Which of the following accounts would normally be found on the income statement? a. Unearned Service Revenues b. Rent Payable c. Sales Returns and Allowances d. Cash ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.3
18. Which of the following accounts would normally be found on the income statement? a. Unearned Service Revenues b. Accounts Receivable c. Taxes Payable d. Sales Discounts ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.3
19. Sales Discounts is which type of account? a. Revenue b. Contra-revenue c. Expense d. Contra-expense ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.3
20. Sales Returns and Allowances is which type of account? a. Revenue b. Contra-revenue c. Expense d. Contra-expense ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.3
21. The difference between gross sales and net sales is a. Cost of goods sold b. Selling and administrative expenses c. Sales discounts and sales returns and allowances d. Gross margin ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.3
22. Which of the following is NOT a cash control procedure? a. Separate the handling and recording of cash b. Deposit all cash receipts daily c. Make all cash disbursements by check d. Invest excess cash in high-yielding securities ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.3
23. Goofy Golf, sells high-quality golf clubs. On May 9, Goofy Golf sold five sets of golf clubs at a price of $500 each. Each set was sold for $100 cash and the rest on credit. On June 9, Goofy Golf collected the rest of the cash on the sale. The journal entry to record the collection of cash on June 9 is 2,000 a. Accounts Receivable Sales Revenue
b. Cash
Sales Revenue Cash c. Accounts Receivable d. Accounts Receivable Cash
ANS: C Sales revenue: Cash: Accounts Receivable:
2,000
2,000 2,000 2,000 2,000 2,000 2,000
$500 5 = $2,500 $100 5 = $500 $2,500 $500 = $2,000
PTS: 1 DIF: Medium OBJ: 6.3 NAT: AACSB Analytic | AICPA FN Measurement 24. Charles Company sells foods wholesale. On May 15, Edwards sold 400 cases of beans to Robin Company for $8 per case with terms of 2/10, n/30. On May 25, Robin Company paid Charles the full amount due. Given these data, the entry to record the sale of beans on May 15 would include a a. Debit to Sales Revenue of $3,200 b. Credit to Cash of $3,200 c. Debit to Accounts Receivable of $3,200 d. Credit to Sales Revenue of $3,136 ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 6.3
25. Charles Company sells foods wholesale. On May 15, Charles sold 400 cases of beans to Robin Company for $8 per case with terms of 2/10, n/30. On May 25, Swoops Company paid Edwards the full amount due. Given these data, the entry to record the collection of cash on May 25 would include a a. Credit to Sales Discounts of $64 b. Debit to Cash of $3,200 c. Credit to Accounts Receivable of $3,200 d. Credit to Cash of $3,136 ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 6.3
26. Edwards Company sells foods wholesale. On January 15, Edwards sold 100 cases of beans to Swoops Company for $3 per case with terms of 2/10, n/30. On February 14, Swoops Company paid Edwards the full amount due. Given this information, the entry to record the collection of cash by Edwards Company on February 14 would include a debit to a. Cash of $294 b. Accounts Receivable of $300 c. Cash of $300 d. Accounts Receivable of $294 ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 6.3
27. Edwards Company sells foods wholesale. On January 15, Edwards sold 100 cases of beans to Swoops Company for $3 per case with terms of 2/10, n/30. On January 25, Swoops Company paid Edwards the full amount due. Given this information, the entry to record the collection of cash by Edwards Company on January 25 would include a debit to a. Cash of $294 b. Accounts Receivable of $300 c. Cash of $300 d. Accounts Receivable of $294 ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 6.3
28. Amy Company sold $8,000 of merchandise to Tory Turnbull with terms 2/10, n/30. If Tory paid for three-fourths of the merchandise within the discount period and one-fourth after the discount period, he paid a total of a. $7,840 b. $7,880 c. $7,920 d. $7,960 ANS: B Total paid: ($8,000 3/4 .98) + ($8,000 1/4) = $7,880 PTS: 1 DIF: Medium OBJ: 6.3 NAT: AACSB Analytic | AICPA FN Measurement
29. Amy Company sold $8,000 of merchandise to Tory Turnbull with terms 2/10, n/30. If Tory paid for all of the merchandise within the discount period, the journal entry that Amy will make to record the collection of cash would include a a. Debit to Sales Discounts of $160 b. Credit to Sales Discounts of $160 c. Credit to Cash of $7,840 d. Debit to Cash of $8,000 ANS: A Discount: $8,000 .02 = $160 PTS: 1 DIF: Medium OBJ: 6.3 NAT: AACSB Analytic | AICPA FN Measurement 30. Jones Company, a customer, has been authorized to return $1,000 of goods purchased on account. The journal entry to record this transaction is 1,000 a. Sales Returns and Allowances Accounts Receivable Sales b. Sales Returns and Allowances c. Sales Returns and Allowances Inventory d. Accounts Receivable Sales Returns and Allowances
1,000
1,000 1,000 1,000 1,000 1,000
ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
1,000
OBJ: 6.3
31. Raven Company had the following account balances Sales Revenue, $100,000; Sales Returns and Allowances, $2,400; Sales Discounts, 2,400; and Bad Debts, $400. Given these balances, the amount of net sales is a. $100,000 b. $98,000 c. $95,600 d. $95,200 ANS: D Net sales: $100,000 $2,400 $2,400 = $95,200 PTS: 1 DIF: Medium OBJ: 6.3 NAT: AACSB Analytic | AICPA FN Measurement 32. Customers who do NOT pay for the merchandise that they bought on credit are referred to as a. Delinquent accounts b. Bad debts c. Unpaid transactions d. Lost sales revenue ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
33. Bad Debt Expense is classified as a(n) a. Cost of sales expense b. Administrative expense c. Other expense d. Selling expense ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
34. The direct write-off method a. Complies with the matching principle b. Is acceptable from a theoretical point of view c. Is only acceptable if bad debts are small, insignificant amounts d. Is the primary method used to recognize Bad Debt Expense ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
35. When the direct write-off method of recognizing bad debt expense is used, which of the following accounts would NOT be used? a. Bad debt expense b. Accounts receivable c. Allowance for bad debts d. All of these accounts are used in the direct write-off method ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
36. The direct write-off method of accounting for bad debts a. Often fails to match bad debt losses with sales for the same period b. Is subject to a significant amount of estimation error c. Causes accounts receivable to appear on the balance sheet at their estimated net realizable value d. Requires that losses from bad debts be recorded in the period in which sales are made ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
37. The direct write-off method a. Results in a better matching of costs with revenues than the allowance method b. Is more precise than the allowance method c. Is the only acceptable method allowed under generally accepted accounting principles d. Is used only by large companies ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
38. When the direct write-off method of recognizing bad debt expense is used, the entry to write off a specific customer account would a. Increase net income b. Have no effect on net income c. Increase the accounts receivable balance and increase net income d. Decrease the accounts receivable balance and decrease net income ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
39. For the month of December, the records of Scrooge Corporation show the following information: Cash received on accounts receivable Cash sales Accounts receivable, December 1 Accounts receivable, December 31 Accounts receivable written off
$45,000 30,000 80,000 75,000 2,000
The corporation uses the direct write-off method in accounting for uncollectible accounts receivable. What are the gross sales for the month of December? a. $59,000 b. $60,000 c. $61,000 d. $72,000 ANS: D Credit sales: Gross sales:
$75,000 + $45,000 $80,000 + $2,000 = $42,000 $30,000 + $42,000
PTS: 1 DIF: Easy OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement 40. When the allowance method of recognizing bad debt expense is used, the entry to record the write-off of a specific uncollectible account would decrease a. Allowance for Bad Debts b. Net income c. Net realizable value of accounts receivable d. Working capital ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
41. When the allowance method of recognizing bad debt expense is used, the entries at the time of collection of a small account previously written off would a. Increase net income b. Increase Allowance for Bad Debts c. Decrease net income d. Decrease Allowance for Bad Debts ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
42. Allowance for Bad Debts is an example of a(n) a. Expense account b. Contra account c. Adjunct account d. Control account ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
43. The two methods of accounting for bad debts are the direct write-off method and the allowance method. When comparing the two, which of the following is true? a. The direct write-off method is exact and also better illustrates the matching principle b. The allowance method is less exact but it better illustrates the matching principle c. The direct write-off method is theoretically superior d. The direct write-off method requires two separate entries to write off an uncollectible account ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
44. Using the allowance method, the journal entry required to adjust the accounting records when an amount is collected that had previously been written off as uncollectible would probably include a credit to a. Notes Receivable b. Bad Debt Expense c. Allowance for Bad Debts d. Cash ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
45. When the allowance method is used to account for uncollectible accounts, the net amount of accounts receivable a. Increases when an account is written off as uncollectible b. Decreases when an account is written off as uncollectible c. Stays the same when an account is written off as uncollectible d. Is sometimes increased and sometimes decreased when an account is written off as uncollectible ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
46. The journal entry Accounts Receivable Allowance for Bad Debts
xxx xxx
would be made when a. A customer pays the account balance b. A customer defaults on the account c. A previously defaulted customer pays the outstanding balance d. Estimated uncollectible receivables are too low ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
47. The existing balance in Allowance for Bad Debts is ignored when which estimation method is used? a. Percentage of receivables method b. Percentage of sales method c. Aging method d. All of these estimations ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
48. A method of estimating bad debts that focuses on the balance sheet rather than the income statement is the allowance method based on a. Direct write-off b. Aging the accounts receivable c. Credit sales d. Specific accounts determined to be uncollectible ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.4
49. When a specific customer's account is written off by a company using the allowance method, the effect on net income and the net realizable value of the accounts receivable is
a. b. c. d.
Net Income None Decrease Increase Decrease
Net Realizable Value of Accounts Receivable None Decrease Increase None
ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 6.4
50. Based on the aging of its accounts receivable at December 31, Charman Company determined that the net realizable value of the receivables at that date is $304,000. Additional information is as follows: Accounts receivable at December 31 Allowance for bad debts at January 1 Accounts written off as uncollectible during the year Charman's Bad Debt Expense for the year ended December 31 is a. $32,000 b. $38,400 c. $48,000 d. $64,000 ANS: D Allowance for bad debts December 31: Bad Debt Expense:
$384,000 $304,000 $80,000 $51,200 $35,200 + x = $80,000 x = $64,000
PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement
384,000 51,200 (cr.) 35,200
51. The December 31 trial balance of Humming Company included the following accounts: Accounts Receivable Allowance for Bad Debts Sales Revenue Sales Returns and Allowances
$ 25,000 2,000 (cr.) 325,000 12,000
If it is estimated that 1 percent of the net sales is uncollectible, the entry to record the estimate of bad debts would include a debit to Bad Debt Expense for a. $2,000 b. $1,130 c. $3,250 d. $3,130 ANS: D Net sales: Bad Debt Expense:
$325,000 $12,000 = $313,000 $313,000 .01 = $3,130
PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement 52. Deuce Company uses the allowance method to estimate losses from uncollectible receivables. Net sales for the year are $120,000, and the company estimates its bad debts as 1 percent of net sales. If there is already a $1,200 debit balance in Allowance for Bad Debts, how much should be recorded as Bad Debt Expense? a. $1,200 b. $2,400 c. $24,000 d. No entry is required ANS: A Bad Debt Expense: $120,000 .01 = $1,200 PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement 53. Samson Corporation had sales of $1,000,000 during 2012, of which 60 percent were on credit. On December 31, 2012, Accounts Receivable totaled $80,000, and Allowance for Bad Debts had a credit balance of $1,200. Given this information, if uncollectible receivables are estimated to be 1/2 of 1 percent of credit sales, the adjusting entry to account for uncollectible receivables as of December 31, 2012, would include a a. Debit to Bad Debt Expense of $3,000 b. Debit to Bad Debt Expense of $1,800 c. Credit to Bad Debt Expense of $3,000 d. Credit to Allowance for Bad Debts of $5,000 ANS: A Credit sales: Bad debt expense:
$1,000,000 .6 = $600,000 $600,000 .005 = $3,000
PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement
54. JR Corporation has a debit balance of $3,750 in Allowance for Bad Debts. If it estimates that 2 percent of the net sales of $1,500,000 will be uncollectible, it should debit a. Allowance for Bad Debts for $30,000 b. Allowance for Bad Debts for $33,750 c. Bad Debt Expense for $33,750 d. Bad Debt Expense for $30,000 ANS: D Bad debt expense: $1,500,000 .02 = $30,000 PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement 55. Samson Corporation had sales of $1,000,000 during 2012, of which 80 percent were on credit. On December 31, 2012, Accounts Receivable totaled $80,000 and Allowance for Bad Debts had a credit balance of $1,200. Given the preceding information, if uncollectible receivables are estimated to be 1/2 of 1 percent of credit sales, the adjusting entry to account for uncollectible receivables as of December 31, 2012, would include a a. Debit to Allowance for Bad Debt Expense of $4,000 b. Debit to Bad Debt Expense of $2,800 c. Credit to Bad Debt Expense of $2,800 d. Credit to Allowance for Bad Debts of $4,000 ANS: D Credit sales: Bad debt expense:
$1,000,000 .8 = $800,000 $800,000 .005 = $4,000
PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement 56. Following are the account balances from the December 31 trial balance of Lark Company: Accounts Receivable Allowance for Bad Debts Sales Revenue Sales Returns and Allowances
$ 60,000 2,400 (dr) 405,000 15,000
If 1 percent of the net sales is estimated to be uncollectible, the entry to record the estimate of bad debts would include a debit to Bad Debt Expense for a. $3,900 b. $1,500 c. $4,050 d. $6,300 ANS: A Net sales: Bad debt expense:
$405,000 $15,000 = $390,000 $390,000 .01 = $3,900
PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement
57. Following are the account balances from the December 31 trial balance of Lark Company: Accounts Receivable Allowance for Bad Debts Sales Revenue Sales Returns and Allowances
$ 60,000 2,400 (cr) 405,000 15,000
If 10 percent of the Accounts Receivable is estimated to be uncollectible, the entry to record the estimate of bad debts would include a debit to Bad Debt Expense for a. $6,000 b. $5,760 c. $6,240 d. $3,600 ANS: D Uncollectible accounts: Bad debt expense:
$60,000 .1 = $6,000 $6,000 $2,400 = $3,600
PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement 58. Following are the account balances from the December 31 trial balance of Lark Company: Accounts Receivable Allowance for Bad Debts Sales Revenue Sales Returns and Allowances
$ 60,000 2,400 (dr) 405,000 15,000
If 10 percent of the Accounts Receivable is estimated to be uncollectible, the entry to record the estimate of bad debts would include a debit to Bad Debt Expense for a. $6,000 b. $6,240 c. $8,400 d. $3,600 ANS: C Uncollectible accounts: Bad debt expense:
$60,000 .1 = $6,000 $6,000 + $2,400 = $8,400
PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement
59. Samson Corporation had sales of $1,000,000 during 2012, of which 60 percent were on credit. On December 31, 2012, Accounts Receivable totaled $80,000, and Allowance for Bad Debts had a credit balance of $1,200. Given this information, if uncollectible receivables are estimated to be 3 percent of accounts receivable, the adjusting entry as of December 31, 2012, to account for bad debts would include a a. Debit to Bad Debt Expense of $2,400 b. Debit to Bad Debt Expense of $3,600 c. Credit to Bad Debt Expense of $1,200 d. Credit to Allowance for Bad Debts of $1,200 ANS: D Estimated uncollectible accounts: Bad debt expense:
$80,000 .03 = $2,400 $2,400 $1,200 = $1,200
PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement 60. You have just analyzed customers' accounts receivable through an "aging" process and have determined that $3,000 of the accounts receivable are probably uncollectible. Noting that your trial balance shows an Allowance for Bad Debts with a debit balance of $100, what is the correct adjusting entry? 3,100 a. Bad Debt Expense Allowance for Bad Debts
3,100
b. Allowance for Bad Debts
3,100
c. Allowance for Bad Debts
3,000
d. Bad Debt Expense
2,900
Bad Debt Expense
3,100
Bad Debt Expense
3,000
Allowance for Bad Debts
2,900
ANS: A Bad debt expense: $3,000 + $100 = $3,100 PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement 61. Samson Corporation had sales of $1,000,000 during 2012, of which 80 percent were on credit. On December 31, 2012, Accounts Receivable totaled $80,000 and Allowance for Bad Debts had a debit balance of $1,200. Given this information, if uncollectible receivables are estimated to be 3 percent of accounts receivable, the adjusting entry as of December 31, 2012, to account for bad debts would include a a. Debit to Bad Debt Expense of $1,200 b. Debit to Bad Debt Expense of $2,400 c. Debit to Bad Debt Expense of $3,600 d. Credit to Allowance for Bad Debts of $2,400 ANS: C Estimated uncollectible accounts: Bad debt expense:
$80,000 .03 = $2,400 $2,400 + $1,200 = $3,600
PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement
62. An analysis and aging of the accounts receivable of Kaiten Company at December 31 revealed the following data: Accounts receivable Allowance for bad debts (before adjustment) Accounts Receivable estimated to be uncollectible
$475,000 25,000 (cr.) 32,000
The net realizable value of the accounts receivable at December 31 should be a. $475,000 b. $443,000 c. $450,000 d. $443,000 ANS: B Net realizable value: $475,000 $32,000 = $443,000 PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement 63. Ward Company uses the allowance method of accounting for bad debts. The following summary schedule was prepared from an aging of accounts receivable outstanding on December 31 of the current year. No. of Days Outstanding 0-31 days 31-60 days Over 60 days
Amount $500,000 200,000 100,000
Probability of Collection 0.98 0.90 0.80
The following additional information is available for the current year: Net credit sales for the year Allowance for bad debts: Balance, January 1 Balance before adjustment, December 31
$4,000,000 45,000 (cr.) 2,000 (cr.)
If Ward bases its estimate of bad debts on the aging of accounts receivable, Bad Debt Expense for the current year ending December 31 is a. $47,000 b. $48,000 c. $50,000 d. $52,000 ANS: B Uncollectible accounts receivable: Bad debt expense:
($500,000 .02) + ($200,000 .10) + ($100,000 .20) = $50,000 $50,000 $2,000 = $48,000
PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement
64. Based on the aging of its accounts receivable at December 31, Dudikoff Company determined that the net realizable value of the receivables at that date is $760,000. Additional information is as follows: Accounts receivable at December 31 Allowance for bad debts at December 31 (unadjusted)
$880,000 28,000 (cr.)
Dudikoff's Bad Debt Expense for the year ended December 31 is a. $28,000 b. $80,000 c. $92,000 d. $148,000 ANS: C Estimated allowance for AR: Bad debt expense:
$880,000 $760,000 = $120,000 $120,000 $28,000 = $92,000
PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement 65. Penn Inc. reported an allowance for bad debts of $30,000 (debit) at December 31, before performing an aging of accounts receivable. As a result of the aging, Penn Inc. determined that an estimated $52,000 of the December 31, accounts receivable would prove uncollectible. The adjusting entry required at December 31, would be 52,000 a. Bad Debt Expense Allowance for Bad Debts
52,000
b. Allowance for Bad Debts
52,000
c. Bad Debt Expense
82,000
d. Allowance for Bad Debts
82,000
Accounts Receivable
52,000
Allowance for Bad Debts
82,000
Bad Debt Expense
82,000
ANS: C Bad debt expense: $30,000 + $52,000 = $82,000 PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement 66. Gordie Co. reported an Allowance for Bad Debts of $20,000 (credit) at December 31, before performing an aging of accounts receivable. As a result of the aging, Gordie determined that an estimated $28,000 of the December 31, accounts receivable would prove uncollectible. The adjusting entry required at December 31, would be 28,000 a. Bad Debt Expense Allowance for Bad Debts
28,000
b. Bad Debt Expense
20,000
c. Allowance for Bad Debts
8,000
d. Bad Debt Expense
8,000
Accounts Receivable
20,000
Bad Debt Expense
Allowance for Bad Debts
8,000 8,000
ANS: D Bad debt expense: $28,000 $20,000 = $8,000 PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement 67. Which of the following demonstrates that a company is managing its receivables well? a. The company is cash poor. b. The company has many short term loans with high interest. c. The company has cash to pay its bills. d. The company is losing interest that could be earned by investing. ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.5
68. In calculating a company's accounts receivable turnover ratio, which of the following sets of factors would be used? a. Net income and average accounts receivable b. Total assets and average accounts receivable c. Total accounts receivable and sales revenue d. Sales revenue and average accounts receivable ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.5
69. The ratio that is an attempt to determine how many times, in a year, a company collects its receivables is the a. Average collection period b. Accounts receivable turnover c. Inventory turnover d. Accounts receivable collected ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.5
70. The ratio that shows how long it takes for a company to collect its receivables is the a. Average collection period b. Accounts receivable turnover c. Number of days in receivables d. Accounts receivable collected ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.5
71. Which of the following factors are used to compute the average collection period of accounts receivable? a. Inventory turnover and 365 days b. Net sales and average inventory c. Accounts receivable turnover and 365 days d. Average accounts receivable and cost of goods sold ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.5
Exhibit 6-1 Dana Company's December 31, 2012, financial statements showed the following: Sales revenue Average receivables Cost of goods sold Average inventory Net income Average total assets
$ 750,000 125,000 555,000 215,000 105,000 1,220,000
72. Refer to Exhibit 6-1. Given the information above, Dana Company's accounts receivable turnover ratio for 2012 was a. 8.0 b. 6.0 c. 4.4 d. 7.1 ANS: B Accounts receivable turnover: $750,000 $125,000 = 6 times PTS: 1 DIF: Medium OBJ: 6.5 NAT: AACSB Analytic | AICPA FN Measurement 73. Refer to Exhibit 6-1. Given the information above, Dana Company's average collection period (rounded) for 2012 was a. 52 days b. 46 days c. 83 days d. 61 days ANS: D Accounts receivable turnover: Average collection period (rounded):
$750,000 $125,000 = 6.0 times 365 6 = 61 days
PTS: 1 DIF: Medium OBJ: 6.5 NAT: AACSB Analytic | AICPA FN Measurement 74. If a company's accounts receivable turnover ratio is 8.0 times, cost of goods sold is $360,000, and sales revenue is $480,000, the average accounts receivable balance must have been a. $60,000 b. $80,000 c. $120,000 d. $160,000 ANS: A Average accounts receivable: $480,000 8 = $60,000 PTS: 1 DIF: Medium OBJ: 6.5 NAT: AACSB Analytic | AICPA FN Measurement
Exhibit 6-2 On December 31, 2012, Seau Inc.'s financial statements showed the following: Sales revenue Average accounts receivable Cost of goods sold Average inventory Net income Total assets
$ 180,000 24,000 108,000 14,400 12,600 1,128,000
75. Refer to Exhibit 6-2. Given the information above and assuming a 365-day business year, what was Seau's average collection period (rounded) during 2012? a. 56 days b. 53 days c. 49 days d. 41 days ANS: C Accounts Receivable Turnover: Average collection period (rounded):
$180,000 $24,000 = 7.5 times 365 7.5 = 49 days
PTS: 1 DIF: Medium OBJ: 6.5 NAT: AACSB Analytic | AICPA FN Measurement 76. Refer to Exhibit 6-2. Given the information above and assuming a 365-day business year, what was Seau's accounts receivable turnover during 2012? a. 8.9 b. 12.5 c. 7.5 d. 6.3 ANS: C Accounts Receivable Turnover: $180,000 $24,000 = 7.5 times PTS: 1 DIF: Medium OBJ: 6.5 NAT: AACSB Analytic | AICPA FN Measurement
77. The following information is available for Bridges Company: Bridges Company Partial Balance Sheet December 31, 2013 and 2012 2013 $500,000 (25,000) $475,000 $600,000
Accounts receivable Allowance for bad debts Net accounts receivable Inventories at lower of cost or market.
2012 $470,000 (20,000) $450,000 $550,000
Bridges Company Partial Income Statement For the Years Ended December 31, 2013 and 2012
Net credit sales Net cash sales Net sales Cost of goods sold Selling, general, and administrative expenses Other expenses Total operating expenses
2013 $2,500,000 500,000 $3,000,000 $2,000,000 300,000 50,000 $2,350,000
The accounts receivable turnover for 2013 is computed as follows: a. $2,500,000 $462,500 b. $3,000,000 $462,500 c. $2,500,000 $475,000 d. $3,000,000 $485,000 ANS: B Average accounts receivable: ($475,000 + $450,000) 2 = $462,500 PTS: 1 DIF: Medium OBJ: 6.5 NAT: AACSB Analytic | AICPA FN Measurement 78. Estimated warranty costs associated with sales should be expensed to properly a. Recognize revenue b. Follow the historical cost concept c. Match revenues and expenses d. Satisfy SEC requirements ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.6
2012 $2,200,000 400,000 $2,600,000 $1,800,000 270,000 30,000 $2,100,000
79. The entry to record estimated service expenses related to sales would include a a. Credit to Sales Revenue b. Debit to Sales Revenue c. Debit to Estimated Liability for Service d. Credit to Estimated Liability for Service ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.6
80. The entry to record actual expenses incurred to perform service under warranty would include a a. Debit to Customer Service Expense b. Credit to Customer Service Expense c. Debit to Estimated Liability for Service d. Credit to Estimated Liability for Service ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.6
81. Eckstein Company sells television sets with a two year service warranty. Each television sells for $400. In September, Eckstein sold 50 television sets and estimates that during the warranty period Eckstein will provide an average of $40 of service costs per television set. What amount of service warranty expense should Eckstein Company recognize in September? a. $2,000 b. $40 c. $0 d. $2,500 ANS: A Service Warranty Expense: 50 $40 = $2,000 PTS: 1 DIF: Medium OBJ: 6.6 NAT: AACSB Analytic | AICPA FN Measurement 82. Eckstein Company sells television sets with a two year service warranty. Each television sells for $400. In September, Eckstein sold 50 television sets and estimates that during the warranty period Eckstein will provide an average of $40 of service costs per television set. The journal entry that Eckstein Company should record to recognize the estimated service warranty expense for September is $2,000 a. Estimated liability for service Wages payable
b. Service warranty expense
$2,000
$2,000
Wages payable
c. Estimated liability for
warranty service Service warranty expense d. Service warranty expense Estimated liability for warranty service
ANS: D Service Warranty Expense: 50 $40 = $2,000 PTS: 1 DIF: Medium OBJ: 6.6 NAT: AACSB Analytic | AICPA FN Measurement
$2,000 $2,000 $2,000 $2,000 $2,000
83. In March, Ravenna Corporation sold $85,000 of inventory. Ravenna offers a one year warranty on all of its inventory. Ravenna estimates that 6 percent of inventory sold is usually returned and replaced during the warranty period. Given this information, what amount of warranty expense should Ravenna Corporation recognize in March? a. $0 b. $3,480 c. $5,100 d. $7,650 ANS: C Warranty Expense: $85,000 .06 = $5,100 PTS: 1 DIF: Medium OBJ: 6.6 NAT: AACSB Analytic | AICPA FN Measurement 84. Bank statements provide information about all of the following EXCEPT a. Checks cleared during the period b. NSF checks c. Bank charges for the period d. Errors made by the company ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.7
85. Which of the following items would be added to the book balance on a bank reconciliation? a. Outstanding checks b. A check written for $63 entered as $36 in the accounting records c. Interest paid by the bank d. Deposits in transit ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.7
86. When reconciling a bank statement, direct deposits are a. Added to the balance per the books b. Added to the balance per the bank c. Subtracted from the balance per the books d. Subtracted from the balance per the bank ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.7
87. Alco Corporation's accountant wrote a check to a supplier for $15,000. He then wrote himself a check for $5,000. For the first check he deducted $15,000 from the books, for the second check he wrote "void" in the check register. How would the accountant conceal his theft on the bank reconciliation? a. Overstate deposits in transit b. Overstate outstanding checks c. Understate outstanding checks d. Understate NSF checks ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.7
88. In preparing a bank reconciliation, interest paid by the bank on the account is a. Added to the bank balance b. Subtracted from the bank balance c. Added to the book balance d. Subtracted from the book balance ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.7
89. In preparing a monthly bank reconciliation, which of the following items would be added to the balance reported on the bank statement to arrive at the correct cash balance? a. Outstanding checks b. Bank service charge c. Deposits in transit d. A customer's note collected by the bank on behalf of the depositor ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.7
90. Which of these is NOT one of the most common reasons for differences between the bank cash balance and the book cash balance? a. Accounting errors b. Deposits in transit c. Time period differences d. All of these are common reasons ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 6.7
91. Wilbur Company's monthly bank statement showed an ending balance of $36,928. The bank reconciliation included a deposit in transit, $3,274; outstanding checks, $4,340; an "NSF" check, $1,576; a bank service charge, $50; and proceeds of a customer's note collected by the bank, $4,600. The correct cash balance at the end of the month is a. $40,462 b. $40,202 c. $37,484 d. $35,862 ANS: D Balance at end of month: $36,928 + $3,274 $4,340 = $35,862 PTS: 1 DIF: Medium OBJ: 6.7 NAT: AACSB Analytic | AICPA FN Measurement 92. During the month, Wilson received a $1,200 check from Richard for the purchase of his 1994 Ford. Wilson deposited the check in his bank account. At the end of the month, Wilson received his monthly bank statement along with Richard's check returned and marked "NSF." What should Wilson do when reconciling his bank statement? a. Subtract $1,200 from the cash balance per the books b. Add $1,200 to the cash balance per the bank statement c. Subtract $1,200 from the cash balance per the bank statement d. Add $1,200 to the cash balance per the books ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 6.7
93. At the end of the month, a company's Cash account indicates a balance of $9,820. Upon receiving a bank statement, the following amounts are used in the bank reconciliation: deposit in transit, $2,400; outstanding checks, $926; bank service charge, $28; NSF check, $425; proceeds of a customer's note collected by the bank, $4,097. Given this information, what is the corrected Cash balance? a. $13,464 b. $11,993 c. $14,392 d. $11,294 ANS: A Cash balance: $9,820 $28 $425 + $4,097 = $13,464 PTS: 1 DIF: Medium OBJ: 6.7 NAT: AACSB Analytic | AICPA FN Measurement 94. Thorpe Company has prepared the following partial bank reconciliation for January 2012: Ending balance per bank statement Deposit in transit Outstanding checks
$37,400 6,800 (5,100)
Adjusted balance
$39,100
Balance per books Interest earned Service charge NSF check
$38,930 ? (153) (187) $39,100
Given this information, how much interest was earned? (Assume there are no other adjustments.) a. $170 b. $340 c. $510 d. $680 ANS: C Interest earned:
$38,930 + x $153 $187 = $39,100 x = $510
PTS: 1 DIF: Medium OBJ: 6.7 NAT: AACSB Analytic | AICPA FN Measurement 95. Abbott Company wrote a check for $660, but recorded it in the accounting records as $606. This error would require an adjustment on the bank reconciliation of a. Adding $54 to the balance per the bank statement b. Deducting $54 from the balance per the bank statement c. Adding $54 to the balance per the books d. Deducting $54 from the balance per the books ANS: D Cash error: $660 $606 = $54 PTS: 1 DIF: Medium OBJ: 6.7 NAT: AACSB Analytic | AICPA FN Measurement
96. Assume the following facts for Erich Company: the month-end bank statement shows a balance of $27,200; outstanding checks totaled $2,000; a deposit of $8,000 is in transit at month-end; and a check for $400 was erroneously charged against the account by the bank. What is the correct cash balance at the end of the month? a. $33,600 b. $34,400 c. $45,600 d. $46,400 ANS: A Cash balance: $27,200 $2,000 + $8,000 + $400 = $33,600 PTS: 1 DIF: Medium OBJ: 6.7 NAT: AACSB Analytic | AICPA FN Measurement 97. In preparing its bank reconciliation for the month of February, Jesse Company has available the following information: Balance per bank statement, February 28 Deposit in transit, February 28 Outstanding checks, February 28 Check erroneously deducted by bank from Jesse's account, February 10 Bank service charges for February
$20,025 3,125 2,875 25 25
What is the corrected cash balance at February 28? a. $20,025 b. $20,050 c. $20,175 d. $20,300 ANS: D Cash balance: $20,025 + $3,125 $2,875 + $25 = $20,300 PTS: 1 DIF: Medium OBJ: 6.7 NAT: AACSB Analytic | AICPA FN Measurement 98. When a U.S. company enters into a credit sales transaction denominated in a foreign currency, the transaction must be recorded in U.S. dollars. The exchange is measured at the exchange rate on the a. Date of collection b. Date of conversion c. Date of sale d. Date of record ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA BB Global
OBJ: 6.8
99. Fluctuations between the sale date and the settlement date of a foreign currency transaction are a. Not recognized b. Recognized as adjustments to Stockholders' Equity c. Recognized as exchange gains or losses d. Recognized as increases or decreases in Sales Revenue ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA BB Global
OBJ: 6.8
100. A U.S. company makes a sale to a Brazilian company for 10,000 reais on March 15. The Brazilian company will pay on May 1. The exchange rate on March 15 is 1 real = $0.529 and on May 1 is 1 real = $0.480. The average rate was 1 real = $0.505. The U.S. company will record the sale on March 15 as a. $4,800 b. $5,290 c. $5,050 d. None of these are correct ANS: B Amount of sale: 10,000 $0.529 = $5,290 PTS: 1 DIF: Medium OBJ: 6.8 NAT: AACSB Analytic | AICPA BB Global 101. A U.S. company makes a sale to a Brazilian company for 10,000 reais on March 15. The Brazilian company will pay on May 1. The exchange rate on March 15 is 1 real = $0.529 and on May 1 is 1 real = $0.480. The average rate was 1 real = $0.505. The U.S. company will receive cash on May 1 of a. $4,800 b. $5,290 c. $5,050 d. None of these are correct ANS: A Dollar amount of cash received: 10,000 $0.48 = $4,800 PTS: 1 DIF: Medium OBJ: 6.8 NAT: AACSB Analytic | AICPA BB Global 102. A U.S. company makes a sale to a Brazilian company for 10,000 reais on March 15. The Brazilian company will pay on May 1. The exchange rate on March 15 is 1 real = $0.529 and on May 1 is 1 real = $0.480. The average rate was 1 real = $0.505. The U.S. company will record a foreign currency gain (loss) of a. $0 b. ($490) c. ($240) d. $490 ANS: B Foreign currency loss = $5,290 $4,800 = $490 PTS: 1 DIF: Medium OBJ: 6.8 NAT: AACSB Analytic | AICPA BB Global
PROBLEM 1. For each of the business activities listed below, state whether it is an operating, an investing or a financing activity. a.
Purchasing equipment
b.
Selling stock
c.
Purchasing inventory for resale
d.
Paying utility bills
e.
Borrowing money from a bank
f.
Purchasing land
g.
Selling goods for a profit
h.
Buying stock from another company
i.
Paying salaries to employees
j.
Performing services in a service company
ANS: a. b. c. d. e. f. g. h. i. j.
Purchasing equipment Selling stock Purchasing inventory for resale Paying utility bills Borrowing money from a bank Purchasing land Selling goods for a profit Buying stock from another company Paying salaries to employees Performing services in a service company
Investing Financing Operating Operating Financing Investing Operating Investing Operating Operating
PTS: 1 DIF: Medium OBJ: 6.1 NAT: AACSB Analytic | AICPA FN Measurement 2. List and describe the three most common cash controls that companies use to safeguard cash.
ANS: 1.
2.
3.
Separation of duties in handling and controlling cash When the handling of cash is separated from the recording of cash, it becomes more difficult for theft or errors to occur. If the same employee that handles cash also records cash then the cash itself could be stolen and records falsified to cover up the theft. Daily deposits of all cash receipts This control ensures that personal responsibility for the handling of cash is assigned to the person responsible for making the deposits. It also prevents that accumulation of large amounts of cash. Payment of all expenditures by prenumbered check By making payments with prenumbered checks, payments are well documented. Payments made with pocket cash are easily forgotten and easily concealed.
PTS: 1 DIF: Medium OBJ: 6.2 NAT: AACSB Analytic | AICPA FN Measurement 3. On March 1, Chickadee Company sold merchandise to Oriole Company for $5,000 with terms of 3/10, net 30. On March 10, Oriole Company paid 50% of the amount due (assume the company allows the discount on partial payments). On March 25, Oriole Company returned $500 of merchandise and also paid the remaining balance due. Prepare the necessary journal entries that Chickadee Company should make on March 1, March 10, and March 25. ANS: March 1 Accounts Receivable Sales Revenue
5,000
March 10 Cash Accounts Receivable [50% $5,000 97%]
2,425
March 25 Sales Returns and Allowances Accounts Receivable Cash Accounts Receivable
5,000
2,425
500 500 2,000 2,000
PTS: 1 DIF: Medium OBJ: 6.2 | 6.3 NAT: AACSB Analytic | AICPA FN Measurement 4. The trial balance of Lozier Inc. shows a $52,000 outstanding balance in Accounts Receivable at the end of 2011. During 2012, 80 percent of the total credit sales of $2,600,000 was collected, and no receivables had been written off as uncollectible. The company uses the allowance method to account for bad debts and estimated that 1 percent of total credit sales would be uncollectible. During 2013, the account of El Cajon Company, with a balance of $3,500, was judged to be uncollectible and written off. At the end of 2013, the amount previously written off was collected from El Cajon.
Prepare the necessary journal entries to record a. b. c. d. e.
The credit sales during 2012. The collection of cash from credit sales during 2012. The bad debts expense for 2012. The write-off of the El Cajon account in 2013. The collection of the El Cajon account in 2013.
ANS: a.
b.
c.
d.
e.
Accounts Receivable Sales Revenue
2,600,000
Cash Accounts Receivable [80% $2,600,000]
2,080,000
2,600,000
2,080,000
Bad Debt Expense Allowance for Bad Debts [1% $2,600,000]
26,000
Allowance for Bad Debts Accounts Receivable El Cajon
3,500
Accounts Receivable El Cajon Allowance for Bad Debts
3,500
Cash Accounts Receivable El Cajon
3,500
26,000
3,500
3,500
3,500
PTS: 1 DIF: Medium OBJ: 6.2 | 6.3 | 6.4 NAT: AACSB Analytic | AICPA FN Measurement 5. The following information was abstracted from the records of Sydney Corporation: Accounts receivable, December 31, 2012 Allowance for bad debt before adjustment, December 31, 2012 Sales (2012) Sales discounts (2012) Sales returns and allowances (2012)
$1,160,000 36,000 (dr.) 4,360,000 36,000 54,000
Prepare the adjusting entry for Bad Debt expense under each of the following assumptions: a. b. c.
3 percent of outstanding accounts receivable are uncollectible. An aging schedule of the accounts shows that $44,600 of the accounts are uncollectible. One-half of one percent of net sales are uncollectible.
ANS: a.
b.
c.
Bad Debt Expense Allowance for Bad Debts [(3% $1,160,000) + $36,000]
70,800
Bad Debt Expense Allowance for Bad Debts ($44,600 + $36,000)
80,600
Bad Debt Expense Allowance for Bad Debts [($4,360,000 $36,000 $54,000) .005%]
21,350
70,800
80,600
21,350
PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement 6. Micah Company uses the allowance method of accounting for bad debts. The following summary schedule was prepared from an aging of accounts receivable outstanding on December 31 of the current year. No. of Days Outstanding 0-31 days 31-60 days Over 60 days
Amount $675,000 270,000 135,000
Probability of Collection 97% 90% 85%
The following additional information is available for the current year: Net credit sales for the year Allowance for bad debts: Balance, January 1 Balance before adjustment, December 31
$5,400,000 60,750 (cr.) 2,700 (cr.)
Miles bases its estimate of bad debts on the aging of accounts receivable. Prepare the appropriate journal entry to record bad debt expense for the current year ending December 31. ANS: $675,000 (1 0.97) = $270,000 (1 0.90) = $135,000 (1 0.85) =
$20,250 $27,000 $20,250 $67,500 total bad debt in current Accounts Receivable account
Current balance in "Allowance for Bad Debts" = $2,700 Entry required to bring "Allowance" account to correct balance = $67,500 $2,700 = $64,800 Journal entry: Bad Debt Expense Allowance for Bad Debts PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement
64,800 64,800
7. At the end of the year, Skipper Company had the following information: Credit sales for the year Accounts receivable, beginning of year Allowance for bad debts, beginning of year Allowance for bad debts, end of year Cash collections during the year Bad debt expense for the year
$650,000 135,000 47,000 62,000 665,000 55,000
Calculate the amount of credit accounts that were verified as being uncollectible during the year. ANS: Allowance for bad debts, beginning of year +Bad debt expense for the year Verified uncollectible accounts Allowance for bad debts, ending of year
$47,000 55,000 xxx 62,000
Credit accounts that were verified as being uncollectible are $40,000 PTS: 1 DIF: Medium OBJ: 6.4 NAT: AACSB Analytic | AICPA FN Measurement 8. The following are summary financial data of the three most recent years for two companies: Net Sales (in millions) Ayala, Inc. Mendez, Inc. Net Accounts Receivable (in millions) Ayala, Inc. Mendez, Inc. a. b.
2013
2012
2011
$ 7,400 14,650
$ 7,850 13,200
$ 7,960 12,850
1,200 4,320
1,450 4,640
1,160 4,450
Using the data above, compute the accounts receivable turnover and average collection period for each company for 2013 and 2012. (Round to two decimal places) Which company appears to have a better credit collection policy? Explain why.
ANS: a.
Accounts receivable turnover Ayala, Inc.: 2013: $ 7,400/[($1,200 + $1,450)/2] = 5.58 times 2012: $ 7,850/[($1,450 + $1,160)/2] = 6.02 times Mendez, Inc.: 2013: $14,650/[($4,320 + $4,640)/2] = 3.27 times 2012: $13,200/[($4,640 + $4,450)/2] = 2.90 times Average collection period Ayala, Inc.: 2013: 2012: Mendez, Inc.: 2013: 2012:
b.
365/5.58 = 65.41 days 365/6.02 = 60.63 days 365/3.27 = 111.62 days 365/2.90 = 125.86 days
Ayala manages accounts receivable better. The turnover is higher and the number of days to collect receivables is shorter.
PTS: 1 DIF: Medium OBJ: 6.5 NAT: AACSB Analytic | AICPA FN Measurement
9. The following are summary financial data of the three most recent years for Birch company: Net Sales Net Accounts Receivable Cost of Goods Sold Net Accounts Payable
2013 948,000 35,000 784,000 19,800
2012 876,000 45,500 798,000 25,700
2011 745,000 50,800 655,000 26,400
Using the data above compute the following ratios for 2013 and 2012: a. b.
Accounts receivable turnover Average collection period
ANS: a.
Accounts receivable turnover 2013: $948,000/[($35,000 + $45,500)/2] = 23.55 times 2012: $876,000/[($45,500 + $50,800)/2] = 18.19 times
b.
Average collection period 2013: 365/23.55 = 15.50 days 2012: 365/18.19 = 20.06 days
PTS: 1 DIF: Medium OBJ: 6.5 NAT: AACSB Analytic | AICPA FN Measurement 10. In July, Romish Company sold 1,250 financial calculators for $30 each. Each calculator had cost Romish $20 to manufacture. Romish promises a replacement calculator if the calculator fails for any reason within the next 3 years. From past experience, Romish has learned that about 2 percent of the calculators have to be replaced during this time. Also during July, Romish Company replaced 22 calculators. Based on this information: a. b.
Prepare the journal entry required to recognize Romish's estimated warranty expense for July. Prepare the journal entry required to recognize the actual expenses incurred from the returned calculators.
ANS: a.
b.
Warranty Expense Estimated Liability for Service [1,250 $20 2%]
500
Estimated Liability for Service Supplies [22 $20]
440
PTS: 1 DIF: Medium OBJ: 6.6 NAT: AACSB Analytic | AICPA FN Measurement
500
440
11. Mitchell Company has the following information from its records and from the May bank statement: Cash balance per books Ending cash balance per bank statement Deposits made, not received by bank Checks written, not processed by bank Interest earned on bank account Bank service charge Direct deposit by customer (on account receivable)
$40,000 50,000 12,000 20,000 100 140 2,040
Based on this information prepare a bank reconciliation for May. ANS: Balance per bank +Deposits in transit Outstanding checks Adjusted bank balance
$50,000 Balance per books 12,000 +Interest earned on account (20,000) +Direct deposit Service charge $42,000 Adjusted book balance
$40,000 100 2,040 (140) $42,000
PTS: 1 DIF: Medium OBJ: 6.7 NAT: AACSB Analytic | AICPA FN Measurement 12. The following information is available for Binford Company:
The May 2012 bank statement showed the following: Balance, May 1 Canceled checks Deposits Interest earned by Binford Bank service charge Balance, May 31
$21,000.00 13,904.20 16,489.65 28.75 18.00 23,596.20
Binford Company's cash accounts showed the following for May: Balance, May 1 Debits Credits Balance, May 31
$20,971.25 22,700.40 22,886.34 20,785.31
Outstanding checks totaled $9,100.14.
Deposits in transit totaled $8,000.00.
The bank statement reveals that Binford Company's account has been reduced by $100. The company had deposited a $100 check from one of its customers, which was subsequently returned to Binford's bank and marked "Not Sufficient Funds."
The bank collected an $1,800 note for Binford Company. The company was not aware of the collection until receiving the bank statement.
Prepare a bank reconciliation for May 31, 2012.
ANS: Binford Company Bank Reconciliation May 31, 2012 Balance per bank Add: Deposits in transit
$23,596.20 8,000.00
Less: Outstanding checks
(9,100.14)
Corrected bank balance
$22,496.06
Balance per books Add: Note collected Interest earned Less: Service charge NSF check
$20,785.31 1,800.00 28.75 (18.00) (100.00) $22,496.06
PTS: 1 DIF: Medium OBJ: 6.7 NAT: AACSB Analytic | AICPA FN Measurement 13. A U.S. company entered into a sales transaction with a Japanese company on September 15 for 200,000 yen. The U.S. company prepares quarterly financial statements. The Japanese company will pay for the sale on November 20. The exchange rates were as follows: 1 Yen $0.0125 0.0109 0.0114
September 15 September 30 November 20
Prepare the appropriate journal entries to record the sale, the quarterly adjustment, and the collection. ANS: September 15: Accounts Receivable Sales Revenue [200,000 $0.0125] September 30: Foreign Exchange Loss Accounts Receivable [$2,500 (200,000 $0.0109)] November 20: Cash Accounts Receivable Foreign Exchange Gain [200,000 $0.0114; $2,500 $320]
PTS: 1 DIF: Medium OBJ: 6.8 NAT: AACSB Analytic | AICPA BB Global
2,500 2,500
320 320
2,280 2,180 100
Chapter 7—Inventory and the Cost of Sales MULTIPLE CHOICE 1. Items that are either manufactured or purchased for resale in the normal course of business are called a. Supplies b. Inventory c. Purchases d. Materials ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
2. Which of the following is an inventory account for a retailer? a. Raw Materials b. Work In Process c. Finished Goods d. Merchandise ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
3. Which inventory account consists of partially finished products? a. Raw Materials b. Work In Process c. Finished Goods d. Merchandise ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
4. Which inventory account consists of goods in a relatively undeveloped state that will eventually be a major part of the finished product? a. Raw Materials b. Work In Process c. Finished Goods d. Merchandise ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
5. Which inventory account consists of the completed products waiting for sale? a. Raw Materials b. Work In Process c. Finished Goods d. Merchandise ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
6. Inventory costs include all of the following, EXCEPT a. Selling costs b. Production costs c. Purchase costs d. Freight costs ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
7. Which of the following would NOT be included in ending inventory of the seller? a. Goods shipped to customers, F.O.B. destination b. Goods purchased from suppliers, F.O.B. shipping point c. Goods held on consignment d. Goods out on consignment ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
8. Inventory accounting is most complex in a. Merchandising companies b. Service companies c. Manufacturing companies d. Wholesale companies ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
9. When products are sold, their costs are removed from inventory and reported on the income statement as an expense called a. Operating expenses b. Cost of goods sold c. Cost of goods manufactured d. Inventory expenses ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
10. Which of the following is NOT an inventory in a manufacturing company? a. Raw materials b. Finished goods c. Work-in-process d. Merchandise ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
11. The cost of finished goods inventory includes all BUT which of the following? a. Advertising costs b. Manufacturing overhead costs c. Labor costs d. Raw material costs ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
12. If the shipping terms indicate that the seller owns the goods until delivered to the buyer, this arrangement is known as a. Goods in transit b. FOB shipping point c. FOB destination d. FOB carrier ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
13. If the shipping terms indicate that the buyer owns the goods upon shipment from the seller, this arrangement is known as a. Goods in transit b. FOB shipping point c. FOB destination d. FOB carrier ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
14. Cost of goods sold is equal to a. The cost of inventory on hand at the end of a period plus net purchases minus the cost of inventory on hand at the beginning of a period b. The cost of inventory on hand at the beginning of a period minus net purchases plus the cost of inventory on hand at the end of a period c. The cost of inventory on hand at the beginning of a period plus net sales minus the cost of inventory on hand at the end of a period d. The cost of inventory on hand at the beginning of a period minus the cost of inventory on hand at the end of a period plus net purchases ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
15. If goods shipped FOB destination are in transit at the end of the year, they should be included in the inventory balance of the a. Seller b. Common carrier c. Buyer d. Bank ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
16. Merchandise shipped FOB shipping point on the last day of the year should probably be included in a. The buyer's inventory balance b. The seller's inventory balance c. Neither the buyer's nor seller's inventory balance d. Both the buyer's and the seller's inventory balances ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.1
17. Conner Company's inventory balance on December 31, 2012 was $3,100,000 before considering the following transactions:
Goods were in transit from a vendor to Conner on December 31, 2012. The invoice price was $250,000, and the goods were shipped FOB shipping point on December 29, 2012. The goods were received on January 4, 2013. Goods were shipped to Conner FOB destination on December 20, 2012, from a vendor. The invoice price was $125,000. The goods were received on January 1, 2013.
Given the above information, on December 31, 2012, Conner should report an inventory balance of a. $3,100,000 b. $2,850,000 c. $3,475,000 d. $3,350,000 ANS: D Inventory: $3,100,000 + $250,000 = $3,350,000 PTS: 1 DIF: Medium OBJ: 7.1 NAT: AACSB Analytic | AICPA FN Measurement 18. Conner Company's accounts payable balance on December 31, 2012 was $1,400,000 before considering the following transactions:
Goods were in transit from a vendor to Conner on December 31, 2012. The invoice price was $250,000, and the goods were shipped FOB shipping point on December 29, 2012. The goods were received on January 4, 2013. Goods were shipped to Conner FOB destination on December 20, 2012, from a vendor. The invoice price was $125,000. The goods were received on January 1, 2013.
Given the above information, on December 31, 2012, Conner should report an accounts payable balance of a. $1,400,000 b. $1,150,000 c. $1,775,000 d. $1,650,000 ANS: D Accounts payable: $1,400,000 + $250,000 = $1,650,000 PTS: 1 DIF: Challenging OBJ: 7.1 NAT: AACSB Analytic | AICPA FN Measurement 19. A perpetual inventory system is most often used when a. Inventory has a small number of items with relatively high value b. Inventory has a small number of items with relatively low value c. Inventory has a large number of items with relatively low value d. Inventory has a large number of items with relatively high value ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
20. A periodic inventory system is most often used when a. Inventory has a small number of items with relatively high value b. Inventory has a small number of items with relatively low value c. Inventory has a large number of items with relatively low value d. Inventory has a large number of items with relatively high value ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
21. When the periodic inventory method is used, the entry to record a return of defective merchandise to a supplier would include a a. Credit to Accounts Payable b. Credit to Inventory c. Credit to Purchase Returns d. Credit to Cash ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
22. When a company uses the perpetual inventory method, purchase returns are recorded by a. Debiting Purchase Returns b. Crediting Purchase Returns c. Crediting Accounts Payable d. Crediting Inventory ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
23. A firm using the periodic inventory method returned defective merchandise costing $2,000 to one of its suppliers. The entry to record this transaction would include a debit to a. Accounts Receivable b. Inventory c. Purchase Returns and Allowances d. Accounts Payable ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
24. Which of the following accounts would be found on the income statement? a. Inventory b. Wages Payable c. Freight-In d. Cash ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
25. Which of the following statements is true under the periodic inventory method? a. Freight-In is subtracted from purchases in order to derive net purchases b. Freight-In is added to purchases in order to derive net purchases c. Freight-In is used only with the perpetual inventory method, not with the periodic inventory method d. Freight-In is neither subtracted nor added to purchases in order to derive net purchases ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
26. ACE Manufacturing pays a freight bill of $54 to United Trucking Company for merchandise purchased from Jackson Sales, terms FOB shipping point. When recording the payment with the periodic inventory method, ACE would debit the $54 cost of the freight to a. Purchases b. Freight-In c. Prepaid Freight d. Freight-Out ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
27. ACE Manufacturing pays a freight bill of $54 to United Trucking Company for merchandise purchased from Jackson Sales, terms FOB shipping point. When recording the payment with the perpetual inventory method, ACE would debit the $54 cost of the freight to a. Inventory b. Freight-In c. Prepaid Freight d. Freight-Out ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
28. A firm that uses the perpetual inventory method purchased $1,000 of inventory on terms 2/10, n/30. The journal entry to record this transaction would include a debit to a. Purchases b. Purchase Discounts c. Inventory d. Accounts Payable ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
29. A firm using the periodic inventory method purchased $2,000 of inventory on terms 2/10, n/30. The journal entry to record this transaction would include a debit to a. Purchases b. Purchase Discounts c. Inventory d. Accounts Payable ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
30. Company D makes the following entry in its accounting records: Inventory Cost of Goods Sold
200 200
This entry would be made when a. Merchandise is sold and the periodic inventory method is used b. Merchandise is sold and the perpetual inventory method is used c. Merchandise is returned and the perpetual inventory method is used d. Merchandise is returned and the periodic inventory method is used ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
31. The perpetual method of accounting for inventory a. Requires that a physical count of inventory be taken before the cost of goods sold can be determined with any reasonable degree of accuracy b. Is likely to be less expensive to maintain than a periodic inventory method c. Is not as helpful as a periodic method in providing management with timely reports about inventory quantities and costs d. Allows management to better estimate inventory losses from pilferage than does a periodic inventory method ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
32. The entry (or entries) required to record a sales return by a customer when using the perpetual inventory method would consist of a. A debit to Sales Revenue and a credit to Accounts Receivable b. A debit to Sales Returns and a credit to Accounts Receivable c. Debits to Sales Returns and Inventory and credits to Accounts Receivable and Cost of Goods Sold d. Debits to Sales Returns and Cost of Goods Sold and credits to Accounts Receivable and Inventory ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
33. Which of the following accounts would NOT normally have a debit balance? a. Inventory b. Cost of Goods Sold c. Purchase Discounts d. Freight-In ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
34. A firm using the perpetual inventory method returned defective merchandise costing $2,000 to one of its suppliers. The entry to record this transaction will include a debit to a. Accounts Receivable b. Inventory c. Purchase Returns d. Accounts Payable ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
35. A firm using the perpetual inventory method returned defective merchandise costing $2,000 to one of its suppliers. The entry to record this transaction will include a credit to a. Accounts Receivable b. Inventory c. Purchase Returns d. Accounts Payable ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
36. ABC Company purchased inventory on account with credit terms of 2/10, n/30. It paid the amount owed within 10 days and recorded the following entry: Account A Account B Account C
800 784 16
Given this entry, and assuming that ABC company uses a periodic inventory system, what would be the nature of Account C? a. Accounts Payable b. Inventory c. Purchase Discounts d. Cash ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
37. Which of the following accounts would be debited when making closing entries? a. Cost of Goods Sold b. Purchases c. Sales Discounts d. Purchase Returns ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.2
38. Under the periodic inventory method, if merchandise is sold for cash on December 31 and is recorded as a sale but is NOT shipped (and thus is included in the ending inventory count), the financial statements will a. Overstate assets b. Understate net income c. Understate liabilities d. Understate assets ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.2
39. If a company sold merchandise for a profit, the accounting equation would show a(n) a. Net increase in assets and increase in revenues b. Net increase in assets and decrease in liabilities c. Net decrease in assets and increase in revenues d. Increase in liabilities and increase in revenues ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.2
40. Williston Cattle Company uses a perpetual inventory system. Williston purchased sheep from Little H Ranch at a cost of $39,000, payable at time of delivery. The entry to record the delivery would be 39,000 a. Purchases Accounts Payable
39,000
b. Inventory
39,000
c. Purchases
39,000
Accounts Payable
Cash d. Inventory Cash
39,000 39,000 39,000 39,000
ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.2
Exhibit 7-1 Garfunkle Company had the following four transactions during January 2012: January 3 Purchased 200 hair dryers from Hot Aire Corporation for $30 each, terms n/30. 5 Sold 50 hair dryers purchased on January 3 for $50 each, terms n/30. 15 Returned five of the hair dryers purchased on January 3 because they were defective. 22 A customer returned two hair dryers purchased on January 5 because they were defective. 41. Refer to Exhibit 7-1. Given the information above, with the perpetual inventory method, the entry to record the January 5 transaction would include a. A debit to Cost of Goods Sold of $1,500 b. A debit to Accounts Receivable of $2,500 c. A credit to Inventory of $1,500 d. All of these ANS: D Accounts Receivable ($50 50) Sales
2,500
Cost of Goods Sold ($30 50) Inventory
1,500
2,500 1,500
PTS: 1 DIF: Medium OBJ: 7.2 NAT: AACSB Analytic | AICPA FN Measurement 42. Refer to Exhibit 7-1. Given the information above, with the perpetual inventory method, the entry to record the January 15 transaction would include a a. Debit to Purchases of $150 b. Credit to Purchases of $150 c. Credit to Inventory of $150 d. Credit to Purchase Returns of $150 ANS: C Accounts Payable ($30 5) Inventory PTS: 1 DIF: Medium OBJ: 7.2 NAT: AACSB Analytic | AICPA FN Measurement
150 150
Exhibit 7-2 Lindsey Corporation had the following account balances: Sales revenue Beginning inventory Purchases Purchase discounts Freight-in Ending inventory Purchase returns and allowances
$200,000 40,000 80,000 3,000 1,000 30,000 2,000
43. Refer to Exhibit 7-2. Given the information above, gross margin is a. $86,000 b. $94,000 c. $106,000 d. $114,000 ANS: D Cost of Goods Sold: Gross Margin:
$40,000 + $80,000 $3,000 + $1,000 $2,000 $30,000 = $86,000 $200,000 $86,000 = $114,000
PTS: 1 DIF: Medium OBJ: 7.2 NAT: AACSB Analytic | AICPA FN Measurement 44. Refer to Exhibit 7-2. Given the information above, and assuming that Lindsey's total operating expenses (exclusive of cost of goods sold) are $40,000, pretax income is a. $46,000 b. $110,000 c. $114,000 d. $74,000 ANS: D Cost of Goods Sold: Pretax Income:
$40,000 + $80,000 $3,000 + $1,000 $2,000 $30,000 = $86,000 $200,000 $86,000 $40,000 = $74,000
PTS: 1 DIF: Medium OBJ: 7.2 NAT: AACSB Analytic | AICPA FN Measurement 45. If a firm's beginning inventory is $70,000, goods purchased during the period cost $260,000, and the cost of goods sold is $300,000, what is the ending inventory? a. $30,000 b. $50,000 c. $40,000 d. $90,000 ANS: A Ending Inventory: $70,000 + $260,000 $300,000 = $30,000 PTS: 1 DIF: Medium OBJ: 7.2 NAT: AACSB Analytic | AICPA FN Measurement
46. With the perpetual inventory method, which of the following entries would be made when inventory costing $3,600 is sold for $5,000? 5,000 a. Inventory Accounts Payable
5,000
b. Cost of Goods Sold
3,600
c. Purchases
5,000
d. Inventory
3,600 5,000
Inventory
3,600
Accounts Receivable
Cost of Goods Sold Accounts Payable Purchases
5,000 3,600 5,000
ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.2
47. If cost of goods sold is $12,000 and the ending inventory balance is $6,000, the a. Beginning inventory is $18,000 b. Net income is $6,000 c. Cost of goods available for sale is $18,000 d. Purchases are $6,000 ANS: C Cost of goods available for sale: $12,000 + $6,000 = $18,000 PTS: 1 DIF: Medium OBJ: 7.2 NAT: AACSB Analytic | AICPA FN Measurement 48. If a firm's beginning inventory is $70,000, purchases are $320,000, and the cost of goods sold is $300,000, what is its ending inventory? a. $330,000 b. $260,000 c. $90,000 d. $30,000 ANS: C Ending Inventory: $70,000 + $320,000 $300,000 = $90,000 PTS: 1 DIF: Medium OBJ: 7.2 NAT: AACSB Analytic | AICPA FN Measurement 49. An entry is made to close Purchases and Purchase Discounts as: Account A Account B Account C
35,000 1,600 36,600
Based on this entry, total (gross) purchases for the year were a. $35,000 b. $1,600 c. $36,600 d. Undeterminable, given the preceding information ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.2
50. Chyna Corporation has the following income statement for the year ended December 31, 2012: Sales revenue Cost of goods sold: Beginning inventory Purchases (net) Cost of goods available for sale Cost of ending inventory Cost of goods sold Gross margin Expenses Net income
$100,000 $12,000 48,000 $60,000 12,000 48,000 $ 52,000 30,000 $ 22,000
Given this information, if ending inventory was $10,000 instead of $12,000, net income would be a. $18,000 b. $22,000 c. $20,000 d. None of these ANS: C Sales revenue Cost of goods sold: Beginning inventory Purchases (net) Cost of goods available for sale Cost of ending inventory Cost of goods sold Gross margin Expenses Net income
$100,000 $12,000 48,000 $60,000 10,000 50,000 $ 50,000 30,000 $ 20,000
PTS: 1 DIF: Medium OBJ: 7.2 NAT: AACSB Analytic | AICPA FN Measurement 51. For external reporting purposes, inventory shrinkage is usually combined with which account? a. Merchandise inventory b. Gross profit c. Cost of goods sold d. Operating expenses ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.3
52. A physical count would be necessary at the end of the accounting period under which inventory system? a. Periodic inventory system b. Perpetual inventory system c. Both periodic and perpetual inventory systems d. Neither periodic nor perpetual inventory systems ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.3
53. Under which inventory system would a company NOT be able to specifically determine the amount of inventory lost or stolen? a. Periodic inventory system b. Perpetual inventory system c. Both periodic and perpetual inventory systems d. Neither periodic nor perpetual inventory systems ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.3
54. The inventory shrinkage account is a. Used only with the perpetual inventory method b. A permanent (real) account c. A balance sheet account d. Used only with the periodic inventory method ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.3
55. If expenses are overstated on the income statement, net income a. Will be unaffected b. Will be overstated c. Will be understated d. Cannot be determined from the information given ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.3
56. If the ending inventory is overstated, net income for the same period will be a. Unaffected b. Overstated c. Understated d. Cannot be determined from the information given ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.3
57. When the current year's ending inventory amount is overstated, the a. Current year's cost of goods sold is overstated b. Current year's total assets are understated c. Current year's net income is overstated d. Next year's income is overstated ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.3
58. If the ending inventory balance is understated, net income of the same period will be a. Overstated b. Understated c. Unaffected d. Cannot be determined from the information given ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.3
59. An overstatement of ending inventory in period 1 would result in income of period 2 being a. Overstated b. Understated c. Correctly stated d. Cannot be determined from the information given ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.3
60. Which of the following will result if the current year's ending inventory amount is understated in the cost of goods sold calculation? a. Cost of goods sold will be overstated b. Total assets will be overstated c. Net income will be overstated d. Cost of goods sold and net income will be overstated ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.3
61. If ending inventory on December 31, 2011, is overstated by $60,000, what is the effect on net income for 2012? a. Net income is overstated by $60,000 b. Net income is understated by $60,000 c. Net income is overstated by $120,000 d. The answer cannot be determined from the information given ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.3
62. Following are the account balances from Connery Company's income statement: Inventory, January 1, 2012 Purchases Purchase returns Purchase discounts Freight-in Inventory, December 31, 2012 Freight-out
$34,000 50,000 5,000 4,000 6,000 15,000 8,000
Given this information, the cost of goods sold during 2012 is a. $51,000 b. $46,000 c. $56,000 d. $66,000 ANS: D Cost of Goods Sold: $34,000 + $50,000 $5,000 $4,000 + $6,000 $15,000 = $66,000 PTS: 1 DIF: Medium OBJ: 7.3 NAT: AACSB Analytic | AICPA FN Measurement
63. Following are the account balances from Samuel Company's income statement: Inventory, January 1, 2012 Purchases Purchase returns Purchase discounts Freight-in Inventory, December 31, 2012 Freight-out
$25,000 35,000 2,000 4,000 5,000 10,000 6,000
Given this information, the cost of merchandise available for sale during 2012 is a. $65,000 b. $59,000 c. $69,000 d. $61,000 ANS: B Cost of merchandise available for sale: $25,000 + $35,000 $2,000 $4,000 + $5,000 = $59,000 PTS: 1 DIF: Medium OBJ: 7.3 NAT: AACSB Analytic | AICPA FN Measurement Exhibit 7-3 The following information is provided: Beginning inventory Purchases Purchase returns and allowances Purchase discounts Freight-in Cost of goods available for sale Ending inventory Cost of goods sold 64. Refer to Exhibit 7-3. Given the information above, determine the amount of freight-in. a. $9,600 b. $12,800 c. $6,400 d. $3,200 ANS: C Freight-in:
$64,000 + $128,000 $9,600 $12,800 + x = $176,000 x = $6,400
PTS: 1 DIF: Medium OBJ: 7.3 NAT: AACSB Analytic | AICPA FN Measurement
$ 64,000 128,000 9,600 12,800 ? 176,000 ? 70,400
65. Refer to Exhibit 7-3. Given the information above, determine the amount of ending inventory. a. $73,600 b. $105,600 c. $70,400 d. $102,400 ANS: B Ending Inventory: $176,000 $70,400 = $105,600 PTS: 1 DIF: Medium OBJ: 7.3 NAT: AACSB Analytic | AICPA FN Measurement 66. Agassi Company is a wholesale electronics distributor. On December 31, 2012, it prepared the following partial income statement: Gross sales Sales discounts Net sales Cost of goods sold: Beginning inventory Net purchases
$500,400 400 $500,000 $200,000 300,000
Given this information, if the ending inventory balance was $210,000, what would be its gross margin? a. $290,000 b. $300,000 c. $310,000 d. $210,000 ANS: D Cost of Goods Sold: Gross Margin:
$200,000 + $300,000 $210,000 = $290,000 $500,000 $290,000 = $210,000
PTS: 1 DIF: Medium OBJ: 7.3 NAT: AACSB Analytic | AICPA FN Measurement 67. Montgomery Corporation has the following account balances: Sales revenue Beginning inventory Purchases Sales discounts Purchase discounts Freight-in Ending inventory Purchase returns and allowances Given this information, total cost of goods available for sale is a. $60,000 b. $57,000 c. $58,000 d. $62,000
$100,000 22,000 40,000 2,000 1,500 500 15,000 1,000
ANS: A Goods available for sale: $22,000 + $40,000 $1,500 + $500 $1,000 = $60,000 PTS: 1 DIF: Medium OBJ: 7.3 NAT: AACSB Analytic | AICPA FN Measurement 68. The net sales figure of XYZ Company in 2012 was $300,000. If the cost of goods available for sale was $280,000 and gross margin was 35 percent of net sales, ending inventory must have been a. $70,000 b. $85,000 c. $195,000 d. $105,000 ANS: B Gross Margin: Cost of Goods Sold: Ending Inventory:
$300,000 35% = $105,000 $300,000 $105,000 = $195,000 $280,000 $195,000 = $85,000
PTS: 1 DIF: Medium OBJ: 7.3 NAT: AACSB Analytic | AICPA FN Measurement 69. Which inventory cost flow assumption is most often used by businesses that sell a limited number of high-priced items? a. Average cost b. FIFO c. Specific identification d. LIFO ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.4
70. Which inventory cost flow assumption matches current costs against current revenues? a. Average cost b. FIFO c. Specific identification d. LIFO ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.4
71. Which inventory cost flow assumption best reflects the current value of inventory on the balance sheet? a. Average cost b. FIFO c. Specific identification d. LIFO ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.4
72. Which of the following would be true if inventory costs were increasing? a. LIFO would result in lower net income and lower ending inventory amounts than would FIFO b. FIFO would result in lower net income and higher ending inventory amounts than would LIFO c. LIFO would result in a lower net income amount but a higher ending inventory amount than would FIFO d. None of these would be true ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.4
73. Which of the following will occur when inventory costs are decreasing? a. LIFO will result in lower net income and lower ending inventory than will FIFO b. FIFO will result in lower net income and lower ending inventory than will LIFO c. LIFO will result in a lower net income but a higher ending inventory than will FIFO d. FIFO will result in a lower net income but a higher ending inventory than will LIFO ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.4
74. During an inflationary period, which inventory costing alternative usually results in a firm paying the lowest income taxes? a. FIFO b. LIFO c. Average cost d. Specific identification ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.4
75. During a period of continuing inflation, which inventory cost flow alternative usually results in the highest reported net income? a. FIFO b. LIFO c. Average cost d. All of these result in the same reported net income ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.4
76. Purchases and sales during a recent period for Bottineau Inc. were Purchases During the Period 1st purchase 1,400 2nd purchase 2,000 3rd purchase 1,000 4th purchase 1,000 5,400
units $ 4 units $ 6 units $ 8 units $10 units
Sales During the Period 1st sale 800 units $14 2nd sale 1,500 units $16 3rd sale 1,000 units $18 4th sale 1,000 units $20 4,300 units
Beginning inventory was 200 units at $2 each. Given this information, what is the ending inventory if the periodic FIFO costing alternative is used? a. $1,600 b. $2,000 c. $5,000 d. $12,400 ANS: D Ending inventory quantity: 200 + 5,400 4,300 = 1,300 FIFO ending inventory (newest 1,300 units): 300 units at $8 each $ 2,400 1,000 units at $10 each 10,000 $12,400 PTS: 1 DIF: Medium OBJ: 7.4 NAT: AACSB Analytic | AICPA FN Measurement Exhibit 7-4 Purchases and sales during a recent period for Casora Inc. were as follows: Purchases During the Period 1st purchase 500 2nd purchase 1,000 3rd purchase 500 4th purchase 500 2,500
units $2 units $3 units $4 units $5 units
Sales During the Period 1st sale 2nd sale 3rd sale 4th sale
600 750 500 500 2,350
units $ 7 units $ 8 units $ 9 units $10 units
77. Refer to Exhibit 7-4. Beginning inventory was 100 units at $2 each. Given this information, what is the ending inventory if the periodic LIFO costing alternative is used? a. $400 b. $500 c. $1,250 d. $3,100 ANS: B Ending inventory quantity: 100 + 2,500 2,350 = 250 LIFO ending inventory (oldest 250 units): 100 units at $2 each $200 150 units at $2 each 300 $500 PTS: 1 DIF: Medium OBJ: 7.4 NAT: AACSB Analytic | AICPA FN Measurement
78. Refer to Exhibit 7-4. Beginning inventory was 100 units at $1 each. Given this information, what is the average cost per unit available for sale during the year if the periodic inventory method is used (rounded to the nearest cent)? a. $2.61 b. $3.10 c. $3.53 d. $3.31 ANS: D Goods available for sale: Cost of goods available for sale: Average cost per unit:
100 + 2,500 = 2,600 (100 $1) + (500 $2) + (1,000 $3) + (500 $4) + (500 $5) = $8,600 $8,600 2,600 = $3.31
PTS: 1 DIF: Medium OBJ: 7.4 NAT: AACSB Analytic | AICPA FN Measurement 79. The following information is available for Harvey Corporation for the month of June: Beginning inventory Purchased, June 3 Purchased, June 5 Sold, June 9 Purchased, June 15 Sold, June 19
32 units $80 = $2,560 20 units $88 = $1,760 28 units $96 = $2,688 36 units 32 units $64 = $2,048 24 units
Given this information, the average (periodic) ending inventory balance is approximately a. $9,056 b. $4,205 c. $3,968 d. $4,320 ANS: B Ending inventory quantity: Average cost: Ending inventory:
32 + 20 + 28 + 32 36 24 = 52 ($2,560 + $1,760 + $2,688 + $2,048) (32 + 20 + 28 + 32) = $80.86 52 $80.86 = $4,205
PTS: 1 DIF: Medium OBJ: 7.4 NAT: AACSB Analytic | AICPA FN Measurement Exhibit 7-5 Warren Clothing Store sells jeans. During January, its inventory records of one brand of designer jeans were as follows: Beginning inventory January 6 purchase January 10 sale January 15 purchase January 20 sale January 25 purchase
10 pairs $22 = $220 4 pairs $25 = $100 5 pairs 7 pairs $30 = $210 10 pairs 4 pairs $30 = $120
80. Refer to Exhibit 7-5. Using the information above, periodic FIFO cost of goods sold is a. $330 b. $300 c. $430 d. $350 ANS: D FIFO Cost of goods sold: $220 10 $22 100 4 $25 30 1 $30 $350 PTS: 1 DIF: Medium OBJ: 7.4 NAT: AACSB Analytic | AICPA FN Measurement 81. Refer to Exhibit 7-5. Using the information above, periodic LIFO cost of goods sold is a. $430 b. $360 c. $330 d. $300 ANS: A LIFO Cost of goods sold: $120 4 $30 7 $30 210 100 4 $25 $430 PTS: 1 DIF: Medium OBJ: 7.4 NAT: AACSB Analytic | AICPA FN Measurement 82. Refer to Exhibit 7-5. Using the information above, average (periodic) cost of goods sold is a. $450 b. $390 c. $375 d. $330 ANS: B Cost of goods available for sale: Average cost: Average cost of goods sold:
$220 + $100 + $210 + $120 = $650 $650 25 = $26 $26 15 = $390
PTS: 1 DIF: Medium OBJ: 7.4 NAT: AACSB Analytic | AICPA FN Measurement
Exhibit 7-6 Martin Inc. is a wholesaler of office supplies. The activity for supply number 47519 during October is shown below: Date October 1 7 12 21 22 29
Balance/Transaction Inventory Purchase Sales Purchase Sales Purchase
Units 2,000 3,000 3,600 4,800 3,800 1,600
Cost $36.00 37.20 38.00 38.60
83. Refer to Exhibit 7-6. If Martin Inc. uses a FIFO periodic inventory system, the ending inventory of supply number 47519 at October 31 is reported as a. $152,960 b. $152,288 c. $150,160 d. $150,080 ANS: A FIFO ending inventory: 2,400 $38 1,600 $38.60
$ 91,200 61,760 $152,960
PTS: 1 DIF: Medium OBJ: 7.4 NAT: AACSB Analytic | AICPA FN Measurement 84. Refer to Exhibit 7-6. If Martin Inc. uses a LIFO periodic inventory system, the ending inventory of supply number 47519 at October 31 is reported as a. $152,960 b. $150,160 c. $150,080 d. $146,400 ANS: D LIFO ending inventory: 2,000 $37.20 2,000 $36
$ 74,400 72,000 $146,400
PTS: 1 DIF: Medium OBJ: 7.4 NAT: AACSB Analytic | AICPA FN Measurement 85. Refer to Exhibit 7-6. If Martin Inc. uses a periodic average cost inventory system, the ending inventory of supply number 47519 at October 31 is reported as (round the average cost to the nearest cent) a. $152,232 b. $150,160 c. $150,080 d. $146,400
ANS: C Cost of goods available for sale: 2,000 $36 $ 72,000 3,000 $37.20 111,600 4,800 $38 182,400 61,760 1,600 $38.60 $427,760 Average cost: Average cost of ending inventory:
$427,760 11,400 = $37.52 4,000 $37.52 = $150,080
PTS: 1 DIF: Medium OBJ: 7.4 NAT: AACSB Analytic | AICPA FN Measurement 86. With LIFO, cost of goods sold is $780,000, and ending inventory is $180,000. If FIFO ending inventory is $260,000, how much is FIFO cost of goods sold? a. $860,000 b. $780,000 c. $700,000 d. $260,000 ANS: C Cost of goods available for sale: FIFO Cost of goods sold:
$780,000 + $180,000 = $960,000 $960,000 $260,000 = $700,000
PTS: 1 DIF: Challenging OBJ: 7.4 NAT: AACSB Analytic | AICPA FN Measurement 87. Which of the following factors are used in calculating a company's inventory turnover? a. Cost of goods sold and average working capital b. Average accounts receivable and net sales c. Net sales and average inventory d. Average inventory and cost of goods sold ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.5
88. Which of the following factors are used in calculating a company's number of days' sales in inventory? a. Average inventory and 365 b. Inventory turnover and 365 c. Cost of goods sold and 365 d. Average accounts payable and 365 ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.5
89. The two ratios that help a company measure how effectively it is managing its inventory are a. Inventory turnover and number of days' sales in inventory b. Inventory turnover and number of days' purchases in accounts payable c. Number of days' sales in inventory and number of days' purchases in accounts payable d. Accounts receivable turnover and number of days' sales in inventory ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.5
90. Which ratio tells how many times a year a company is replenishing its inventory? a. Number of days' sales in inventory b. Accounts receivable turnover c. Number of days' purchases in accounts payable d. Inventory turnover ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.5
91. Which ratio tells how much long it takes a company to pay its suppliers? a. Number of days' sales in inventory b. Accounts receivable turnover c. Number of days' purchases in accounts payable d. Inventory turnover ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.5
92. Monica Mills Co. began the year with $100,000 in inventory and ends the year with $300,000. Purchases during the year amounted to $1,660,000. The number of days' sales in inventory for the year was a. 43.98 days b. 8.30 days c. 7.30 days d. 50.00 days ANS: D Cost of goods sold: Average inventory: Inventory turnover: Number of days' sales in inventory
$100,000 + $1,660,000 $300,000 = $1,460,000 ($100,000 + $300,000) 2 = $200,000 $1,460,000 $200,000 = 7.3 = 365 7.3 = 50 days
PTS: 1 DIF: Medium OBJ: 7.5 NAT: AACSB Analytic | AICPA FN Measurement 93. Andromeda, Inc., purchased $100,000 of inventory during the year and had average receivables and payables of $46,575 and $21,918, respectively. The number of days' purchases in accounts payable was approximately a. 60 days b. 170 days c. 80 days d. 128 days ANS: C Number of days' purchases in accounts payable: 365 ($100,000 $21,918) = 80 days PTS: 1 DIF: Medium OBJ: 7.5 NAT: AACSB Analytic | AICPA FN Measurement
94. During the current calendar year, Bowman Corporation purchased $660,000 of inventory. The beginning inventory balance was $84,000, and the inventory balance at year-end was $120,000. The inventory turnover for the current year was a. 5.20 times b. 5.50 times c. 6.12 times d. 7.86 times ANS: C Cost of goods sold: Average inventory: Inventory turnover:
$84,000 + $660,000 $120,000 = $624,000 ($84,000 + $120,000) 2 = $102,000 $624,000 $102,000 = 6.12 times
PTS: 1 DIF: Medium OBJ: 7.5 NAT: AACSB Analytic | AICPA FN Measurement 95. The following information was taken from the records of Kane Company: Beginning inventory Ending inventory Net credit sales Cost of goods sold Net income Given this information, Kane's inventory turnover is a. 5.68 b. 5.40 c. 10.11 d. 1.33 ANS: A Inventory turnover: $810,000 [($135,000 + $150,000) 2] = 5.68 PTS: 1 DIF: Medium OBJ: 7.5 NAT: AACSB Analytic | AICPA FN Measurement
$ 135,000 150,000 1,440,000 810,000 112,500
96. The December 31, 2012, balance sheet and income statement for Santana Company are presented below: Santana Company Balance Sheet December 31, 2012 Assets Cash Accounts Receivable Inventory Plant and Equipment Intangible Assets
Total Assets
$
96,000 560,000 234,000 770,000 40,000
$1,700,000
Liabilities and Stockholders' Equity Accounts Payable $ 243,000 Income Taxes Payable 67,000 Salaries Payable 46,000 Bonds Payable 760,000 Common Stock 340,000 Retained Earnings 244,000 Total Liabilities and Stockholders' Equity $1,700,000
Santana Company Income Statement For the Year Ended December 31, 2012 Net sales revenue Cost of goods sold Gross margin Operating expenses (including $40,000 of bond interest) Income before taxes Income taxes Net income
$1,800,000 945,000 $ 855,000 567,000 $ 288,000 115,000 $ 173,000
Additional information: Total assets (12/31/11) Inventory (12/31/11) Total stockholders' equity (12/31/11)
$2,400,000 238,500 616,000
Given this information, Santana's inventory turnover during 2012 was a. 4 b. 5 c. 7 d. 8 ANS: A Inventory turnover: $945,000 [($238,500 + $234,000) 2] = 4 PTS: 1 DIF: Medium OBJ: 7.5 NAT: AACSB Analytic | AICPA FN Measurement
97. The December 31, 2012, balance sheet and income statement for Santana Company are presented below. Santana Company Balance Sheet December 31, 2012 Assets Cash Accounts Receivable Inventory Plant and Equipment Intangible Assets
$
Total Assets
96,000 560,000 194,500 770,000 40,000
$1,660,500
Liabilities and Stockholders' Equity Accounts Payable $ 243,000 Income Taxes Payable 67,000 Salaries Payable 46,000 Bonds Payable 720,500 Common Stock 340,000 Retained Earnings 244,000 Total Liabilities and Stockholders' Equity $1,660,500
Santana Company Income Statement For the Year Ended December 31, 2012 Net sales revenue Cost of goods sold Gross margin Operating expenses (including $40,000 of bond interest) Income before taxes Income taxes Net income
$1,800,000 945,000 $ 855,000 567,000 $ 288,000 115,000 $ 173,000
Additional information: Total assets (12/31/11) Inventory (12/31/11) Accounts payable (12/31/11) Total stockholders' equity (12/31/11)
$2,400,000 238,500 287,000 616,000
Given this information, Santana's number of days' purchases in accounts payable during 2012 was a. 75 b. 80 c. 98 d. 102 ANS: C Purchases: Average accounts payable: Number of days' purchases in accounts payable:
$945,000 + $238,500 $194,500 = $989,000 ($287,000 + $243,000) 2 = $265,000 365 ($989,000 $265,000) = 98 days (rounded)
PTS: 1 DIF: Medium OBJ: 7.5 NAT: AACSB Analytic | AICPA FN Measurement
98. The following information is available for Belden Company: Cost of goods sold for 2012 $3,600,000 Inventories at December 31, 2011 1,050,000 Inventories at December 31, 2012 930,000 Assuming that a business year consists of 360 days, the number of days' sales in inventory for 2012 was a. 49.5 b. 93 c. 99 d. 105 ANS: C Inventory turnover: Number of days' sales in inventory:
$3,600,000 [($1,050,000 + $930,000) 2] = 3.6363 360 3.6363 = 99
PTS: 1 DIF: Medium OBJ: 7.5 NAT: AACSB Analytic | AICPA FN Measurement 99. The following information is available for Lendo Company: Lendo Company Partial Balance Sheet December 31, 2012 and 2011 Accounts receivable Allowance for uncollectible accounts Net accounts receivable Inventories at lower of cost or market
2012 $500,000 (25,000) $475,000 $600,000
2011 $470,000 (20,000) $450,000 $550,000
Lendo Company Partial Income Statement For the Years Ended December 31, 2012 and 2011 Net credit sales Net cash sales Net sales Cost of goods sold Selling, general, and administrative expenses. Other expenses Total operating expenses Lendo's inventory turnover for 2012 is computed by a. $2,000,000 / $575,000 b. $2,350,000 / $600,000 c. $2,800,000 / $575,000 d. $3,000,000 / $575,000 ANS: C Average inventory: ($600,000 + $550,000) 2 = $575,000 PTS: 1 DIF: Medium OBJ: 7.5 NAT: AACSB Analytic | AICPA FN Measurement
2009 $2,500,000 500,000 $3,000,000 $2,800,000 300,000 50,000 $2,350,000
2008 $2,200,000 400,000 $2,600,000 $1,800,000 270,000 30,000 $2,100,000
100. How many years does it take for an inventory error to correct itself assuming the ending inventory count in the second year is correct? a. 1 b. 2 c. 3 d. 4 ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.6
101. When ending inventory is overstated in period 1, net income in period 2 will be a. Understated b. Overstated c. Stated correctly d. None of these are correct ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.4
102. An understatement of purchases results in cost of goods sold being a. Overstated b. Understated c. Stated correctly d. None of these are correct ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.6
103. Under the periodic inventory method, if an inventory purchase has been made and recorded but has NOT yet arrived (and thus is not counted), the financial statements will a. Overstate assets b. Overstate net income c. Understate net income d. Understate revenues ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.6
104. The misclassification of Freight-in as an operating expense will result in a. An overstatement of cost of goods sold b. An overstatement of gross margin c. An overstatement of net income d. None of these are correct ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.6
105. Golva Company sold $15,000 of inventory on December 31. This sale was recorded in the books and was also included in the ending inventory count. How will this information affect the financial statements? a. Cost of goods sold will be overstated by $15,000 b. Gross margin will be understated by $15,000 c. Gross margin will be overstated by $15,000 d. The financial statements will not be affected ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.6
106. Cait Company sold $5,000 of inventory on December 31, 2011. This sale was recorded in the books and was also included in the ending inventory count. How will this information affect the financial statements for 2012? a. Cost of goods sold will be overstated by $5,000 b. Gross margin will be understated by $5,000 c. Gross margin will be overstated by $5,000 d. Beginning inventory will be understated by $5,000 ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.6
107. Which inventory cost flow assumption will provide the same amounts for ending inventory and cost of goods sold under both the periodic and perpetual inventory systems? a. FIFO b. LIFO c. Average cost d. NIFO ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.7
108. Under certain methods of inventory cost flow assumption, the amount of cost of goods sold can be affected by when the sale occurs. Which of the following methods is NOT affected by when the sale occurs? a. LIFO b. FIFO c. Average cost d. None of these are correct ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.7
109. Under which system must a determination of the "last in" units be evaluated at the time of each individual sale? a. Perpetual system b. Periodic system c. Both perpetual and periodic systems d. Neither periodic nor perpetual systems ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.7
110. The following information is available for Waggoner Corporation for the month of June: Beginning inventory 16 units $40 = $640 Purchased, June 3 10 units $44 = $440 Purchased, June 5 14 units $48 = $672 Sold, June 9 18 units Purchased, June 15 16 units $32 = $512 Sold, June 19 12 units Given this information, the perpetual LIFO ending inventory balance is a. $1,080 b. $960 c. $1,032 d. $1,188 ANS: C LIFO ending inventory: $ 128 4 $32 264 6 $44 640 16 $40 $1,032 PTS: 1 DIF: Medium OBJ: 7.7 NAT: AACSB Analytic | AICPA FN Measurement Exhibit 7-7 Iliescu Sporting Goods had the following inventory records for one line of skis for the month of January: Beginning inventory Sales, Jan. 1 Jan. 7 Purchase, Jan. 8 Sales, Jan. 9 Jan. 16 Purchase, Jan. 17 Sales, Jan. 18 Jan. 29 Purchase, Jan. 30
70 pairs $100 per pair = $7,000 50 pairs 46 pairs $104 per pair = $4,784 59 pairs 62 pairs $110 per pair = $6,820 56 pairs 18 pairs $112 per pair = $2,016
111. Refer to Exhibit 7-7. Assuming the perpetual FIFO inventory method is used, what is the cost of Iliescu's ending inventory? a. $3,000 b. $3,446 c. $3,276 d. $3,546 ANS: B FIFO Cost of ending inventory: $2,016 18 $112 1,430 13 $110 $3,446 PTS: 1 DIF: Medium OBJ: 7.7 NAT: AACSB Analytic | AICPA FN Measurement
112. Refer to Exhibit 7-7. Assuming the perpetual LIFO inventory method is used, what is the cost of Iliescu's ending inventory? a. $3,546 b. $3,376 c. $3,268 d. $3,124 ANS: B LIFO cost of ending inventory: $ 700 7 $100 660 6 $110 2,016 18 $112 $3,376 PTS: 1 DIF: Medium OBJ: 7.7 NAT: AACSB Analytic | AICPA FN Measurement 113. Refer to Exhibit 7-7. Assuming the perpetual LIFO inventory method is used, what is Iliescu's cost of goods sold? a. $16,986 b. $17,244 c. $17,328 d. $17,174 ANS: B LIFO cost of goods sold: 50 $100 $ 5,000 46 $104 4,784 13 $100 1,300 6,160 56 $110 $17,244 PTS: 1 DIF: Medium OBJ: 7.7 NAT: AACSB Analytic | AICPA FN Measurement 114. Monango Clothing Store sells jackets. During January, its inventory records of one brand of designer jackets were as follows: Beginning inventory 10 jackets $44 = $440 January 6 purchase 4 jackets $50 = $200 January 10 sale 5 jackets January 15 purchase 7 jackets $60 = $420 January 20 sale 10 jackets January 25 purchase 4 jackets $60 = $240 Using this information, perpetual LIFO cost of goods sold is a. $860 b. $750 c. $796 d. $806
ANS: C LIFO Cost of goods sold: $200 4 $50 44 1 $44 420 7 $60 132 3 $44 $796 PTS: 1 DIF: Medium OBJ: 7.7 NAT: AACSB Analytic | AICPA FN Measurement 115. The ceiling, or the maximum market amount at which inventory can be carried on the books, is equal to a. Current replacement cost b. Net realizable value c. Historical cost d. Selling price ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.8
116. The floor, or the minimum market amount at which inventory can be carried on the books, is equal to a. Selling price less estimated selling costs b. Current replacement cost c. Net realizable value less normal profit margin d. Historical cost ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.8
117. Inventories are carried in the accounting records at cost, EXCEPT when a. The inventory is damaged b. The market value of the inventory falls below its acquisition cost c. Either the inventory is damaged or the market value of the inventory falls below its acquisition cost d. The market price rises above cost ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.8
118. Inventory is usually carried in the accounting records at a. Lower of cost or market b. Market c. Cost d. Selling price ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.8
119. Inventory valued at lower of cost or market can never be recorded at amounts below its a. Net realizable value b. Net realizable value minus a normal profit margin c. Sales price d. Ceiling ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.8
Exhibit 7-8 Tena Company has the following information related to its two products:
Product A Product B
Original Cost $12 $15
Replacement Cost $ 9 $16
Ceiling $10 $18
Floor $ 8 $14
120. Refer to Exhibit 7-8. The net realizable value of product B is a. $15 b. $16 c. $18 d. $14 ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.8
121. Refer to Exhibit 7-8. Assuming that the lower of cost or market rule is applied to individual products, the amount at which product A should be valued is a. $12 b. $9 c. $10 d. $8 ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 7.8
122. Commodity X sells for $18.00; selling expenses are $3.60; normal profit is $4.50. If the cost of Commodity X is $11.70 and the replacement cost is $10.00, the lower of cost or market is a. $8.10 b. $9.00 c. $9.90 d. $11.70 ANS: C Ceiling: Floor: Replacement cost:
$18 $3.60 = $14.40 $14.40 $4.50 = $9.90 $10.00
PTS: 1 DIF: Medium OBJ: 7.8 NAT: AACSB Analytic | AICPA FN Measurement
123. A firm is writing its inventory down to the lower of cost or market. It has determined the following per unit costs and market prices for its product: Original cost Sales price Selling cost Normal profit Replacement cost
$104 120 20 18 78
Given these data, the firm should value its inventory at a per unit cost of a. $104 b. $100 c. $82 d. $78 ANS: C Ceiling: Floor:
$120 $20 = $100 $100 $18 = $82
PTS: 1 DIF: Medium OBJ: 7.8 NAT: AACSB Analytic | AICPA FN Measurement 124. Which of the following statements is true of the gross margin method of estimating the dollar amount of ending inventory? a. It is helpful in estimating inventory when a fire burns the warehouse b. It uses the current gross margin percentage in its calculation c. It is a method of estimating ending inventory that can be used only in retail firms d. All of these statements are true ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.9
125. The use of the gross profit method assumes a. The amount of gross profit is the same as in prior years b. Sales and cost of goods sold have not changed from previous years c. Inventory values have not increased from previous years d. The relationship between selling price and cost of goods sold is similar to prior years ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.9
126. The gross profit method of estimating inventory would NOT be useful when a. A periodic system is in use and inventories are required for interim statements b. Inventories have been destroyed or lost by fire, theft, or other casualty, and the specific data required for inventory valuation are not available c. There is a significant change in the mix of products being sold d. The relationship between gross profit and sales remains stable over time ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 7.9
127. A firm had a beginning inventory balance of $1,000, net purchases of $35,000, and sales of $40,000. Its gross margin percentage was 25 percent. Using the gross margin method, the ending inventory balance is a. $1,000 b. $7,000 c. $6,000 d. $10,000 ANS: C Cost of goods available for sale: Estimated gross margin: Estimated cost of goods sold: Estimated ending inventory:
$1,000 + $35,000 = $36,000 $40,000 25% = $10,000 $40,000 $10,000 = $30,000 $36,000 $30,000 = $6,000
PTS: 1 DIF: Medium OBJ: 7.9 NAT: AACSB Analytic | AICPA FN Measurement 128. Penn Company needs an estimate of its ending inventory balance. The following information is available: Sales revenue Beginning inventory Net purchases Gross margin percentage
$180,000 45,000 100,000 30%
Given this information, when using the gross margin estimation method, ending inventory is approximately a. $1,000 b. $9,000 c. $19,000 d. $11,650 ANS: C Cost of goods available for sale: Estimated gross margin: Estimated cost of goods sold: Estimated ending inventory:
$45,000 + $100,000 = $145,000 $180,000 30% = $54,000 $180,000 $54,000 = $126,000 $145,000 $126,000 = $19,000
PTS: 1 DIF: Medium OBJ: 7.9 NAT: AACSB Analytic | AICPA FN Measurement 129. The following information is available for the Segura Company for the three months ended June 30: Inventory, April 1 Purchases Freight In Sales
$1,200,000 4,500,000 300,000 6,400,000
The gross margin was 25 percent of sales. What is the estimated inventory balance at June 30? a. $880,000 b. $933,000 c. $1,200,000 d. $1,500,000
ANS: C Cost of goods available for sale: Estimated gross margin: Estimated cost of goods sold: Estimated ending inventory:
$1,200,000 + $4,500,000 + $300,000 = $6,000,000 $6,400,000 25% = $1,600,000 $6,400,000 $1,600,000 = $4,800,000 $6,000,000 $4,800,000 = $1,200,000
PTS: 1 DIF: Medium OBJ: 7.9 NAT: AACSB Analytic | AICPA FN Measurement 130. The following information appears in Gordon Company's records for the year ended December 31: Inventory, January 1 Purchases Purchase returns Freight in Sales Sales discounts Sales returns
$ 325,000 1,150,000 40,000 30,000 1,700,000 10,000 15,000
On December 31, a physical inventory revealed that the ending inventory was only $210,000. Gordon's gross profit on net sales has remained constant at 30 percent in recent years. Gordon suspects that some inventory may have been pilfered by one of the company's employees. At December 31, what is the estimated cost of missing inventory? a. $75,000 b. $82,500 c. $210,000 d. $292,500 ANS: B Cost of goods available for sale: Estimated gross margin: Estimated cost of goods sold: Estimated ending inventory: Estimated missing inventory:
$325,000 + $1,150,000 $40,000 + $30,000 = $1,465,000 $(1,700,000 $10,000 $15,000) 30% = $502,500 $1,675,000 $502,500 = $1,172,500 $1,465,000 $1,172,500 = $292,500 $292,500 $210,000 = $82,500
PTS: 1 DIF: Medium OBJ: 7.9 NAT: AACSB Analytic | AICPA FN Measurement 131. The following information is available for Velva Company for its most recent year: Net sales Freight in Purchase discounts Ending inventory
$7,200,000 180,000 100,000 560,000
The gross margin is 40 percent of net sales. What is the cost of goods available for sale? a. $3,360,000 b. $3,840,000 c. $4,800,000 d. $4,880,000
ANS: D Gross margin: Cost of goods sold: Cost of goods available for sale:
$7,200,000 40% = $2,880,000 $7,200,000 $2,880,000 = $4,320,000 $4,320,000 + $560,000 = $4,880,000
PTS: 1 DIF: Medium OBJ: 7.9 NAT: AACSB Analytic | AICPA FN Measurement PROBLEM 1. Minot Company's inventory balance on December 31, 2012 was $775,000 before considering the following transactions:
Goods were in transit from a vendor to Minot on December 31, 2012. The invoice price was $62,500, and the goods were shipped FOB shipping point on December 27, 2012. The goods were received on January 2, 2013. Goods were purchased from a vendor on December 31, 2012. The invoice price was $83,000, with terms FOB shipping point. The goods were shipped the same day as purchase and received on January 7, 2013. Goods were shipped to Minot Company FOB destination on December 23, 2012, from a vendor. The invoice price was $31,250. The goods were received on January 2, 2013.
Minot Company also had the following information available:
Minot had goods consisting of $15,000 on consignment with a customer that were not included in the ending inventory balance. Minot had goods on consignment from a vender of $25,000 that were included in the ending inventory balance.
Given the above information, compute Minot Company's inventory balance on December 31, 2012. ANS: $775,000 + $62,500 + $83,000 + $15,000 $25,000 = $910,500 PTS: 1 DIF: Medium OBJ: 7.1 NAT: AACSB Analytic | AICPA FN Measurement 2. Compute the missing numbers for the following three partial income statements:
Beginning inventory Purchases Purchase returns and allowances Goods available for sale Ending inventory Cost of goods sold
Dickison Company $ 65,000 106,000 (a) 167,600 (b) 133,000
Beulah Company $25,400 (c) 1,600 (d) 23,000 67,200
Grafton Company (e) $ 246,000 10,200 348,400 86,800 (f)
ANS: a. b. c. d. e. f.
$3,400 [$65,000 + $106,000 $167,600] $34,600 [$167,600 $133,000] $66,400 [$90,200 + $1,600 $25,400] $90,200 [$67,200 + $23,000] $112,600 [$348,400 + $10,200 $246,000] $261,600 [$348,400 $86,800]
PTS: 1 DIF: Medium OBJ: 7.2 NAT: AACSB Analytic | AICPA FN Measurement 3. Prepare journal entries to record the following four transactions for the Labatt Company using the perpetual inventory method. (Omit explanations for the entries.)
June 1 purchased on account inventory costing $15,000 terms 2/10 n/30. June 9 returned inventory costing $1,500 that was purchased on June 1. June 10 paid for the merchandise purchased on June 1. June 15 sold one half of its inventory for $12,000 cash. (Assume the inventory purchased on June 1 was the company's only inventory.)
ANS: June 1 Inventory Accounts Payable
15,000
9 Accounts Payable Inventory
1,500
10 Accounts Payable Inventory Cash
13,500
15 Cash Sales Revenue Cost of Goods Sold Inventory [($15,000 $1,500 $270) 0.50 = $6,615]
12,000
15,000
1,500 270 13,230
12,000 6,615 6,615
PTS: 1 DIF: Medium OBJ: 7.2 NAT: AACSB Analytic | AICPA FN Measurement 4. Prepare journal entries to record the following four transactions for Labatt Company using the periodic inventory method. (Omit explanations for the entries.)
June 1 purchased on account inventory costing $15,000 terms 2/10 n/30. June 9 returned inventory costing $1,500 that was purchased on June 1. June 10 paid for the merchandise purchased on June 1. June 15 sold one half of its inventory for $12,000 cash. (Assume the inventory purchased on June 1 was the company's only inventory.)
ANS: June 1 Purchases Accounts Payable
15,000
9 Accounts Payable Purchase Returns
1,500
10 Accounts Payable Purchase Discounts Cash
13,500
15 Cash Sales Revenue
12,000
15,000
1,500
270 13,230
12,000
PTS: 1 DIF: Medium OBJ: 7.2 NAT: AACSB Analytic | AICPA FN Measurement 5. Jahn Company had the following balances in its general ledger at December 31, 2012: Inventory (as of January 1, 2012) Purchases Purchase returns and allowances
$240,000 440,000 5,000
For the year 2012, Jahn Company's electronic sales registers showed a total cost of goods sold of $480,000. Assuming that a physical count of inventory on December 31, 2012, revealed inventory on hand costing $185,000, complete the following: a. b.
Prepare the journal entries needed to adjust the inventory records and close the related purchases accounts, assuming the periodic inventory method is used. Prepare any entries necessary to adjust the inventory records and close the appropriate accounts, assuming the perpetual inventory method is used, but that the information preceding beginning inventory, purchases, and purchase returns and allowances is known.
ANS: a.
b.
Inventory 435,000 Purchase Returns and Allowances 5,000 Purchases To close the purchases accounts. Cost of Goods Sold 490,000 Inventory To record the Cost of Goods Sold and adjust Inventory to $185,000 balance. ($440,000 + $240,000 $5,000 $185,000 = $490,000) Inventory Shrinkage 10,000 Inventory To adjust the inventory balance for the shortage revealed in the physical count ($240,000 + $440,000 $5,000 $480,000 = $195,000; $195,000 $185,000 = $10,000).
440,000
490,000
10,000
Cost of goods sold has already been determined under the perpetual method. No entry is needed to record cost of goods sold. PTS: 1 DIF: Medium OBJ: 7.2 | 7.3 NAT: AACSB Analytic | AICPA FN Measurement
6. Compute the missing numbers in the following income statements:
Sales revenue Beginning inventory Purchases Purchase returns and allowances Ending inventory Cost of goods sold Gross margin Expenses Net income (or loss)
Year 1
Year 2
$50,000 12,400 30,600 1,000 (a) (b) 14,000 7,600 (c)
(d) (e) $42,000 600 (f) 32,000 35,000 (g) 19,600
ANS: a. b. c. d. e. f. g.
6,000 [$12,400 + $30,600 $1,000 $36,000] 36,000 [$50,000 $14,000] 6,400 [$14,000 $7,600] 67,000 [$35,000 + $32,000] 6,000 [same as year 1 ending inventory] 15,400 [$6,000 + $42,000 $600 $32,000] 15,400 [$35,000 $19,600]
PTS: 1 DIF: Medium OBJ: 7.3 NAT: AACSB Analytic | AICPA FN Measurement 7. Ling Company's inventory records for the current year are as follows:
Beginning inventory First purchase Second purchase Third purchase Fourth purchase Goods available for sale Units sold during the year
Number of Units 2,200 3,000 3,500 2,800 2,500 14,000 9,000
Cost per Unit $3.00 $2.90 $2.80 $2.70 $2.60
Compute the cost of ending inventory using the following inventory costing methods: a. b. c.
FIFO periodic LIFO periodic Average Cost periodic
Total Cost $ 6,600 8,700 9,800 7,560 6,500 $39,160
ANS: a.
FIFO
2,500 2,500
$2.60 2.70
= =
$ 6,500 6,750 $13,250
b.
LIFO
2,200 2,800
$3.00 2.90
= =
$ 6,600 8,120 $14,720
c.
Average cost ($39,160/14,000) = $2.797 per unit 5,000 units = $13,985
PTS: 1 DIF: Medium OBJ: 7.4 NAT: AACSB Analytic | AICPA FN Measurement 8. Hillsboro Company's inventory records for November are as follows: Date Balance/Transaction Units November 1 Inventory 7,000 9 Purchase 10,000 15 Sales 15,000 24 Purchase 14,000 26 Sales 10,000 30 Purchase 4,000 Compute the cost of ending inventory using the following inventory costing methods: a. b. c.
FIFO periodic LIFO periodic Average Cost periodic
ANS: a.
FIFO
6,000 4,000
$50.00 45.00
= =
$300,000 180,000 $480,000
b.
LIFO
7,000 3,000
$55.00 52.00
= =
$385,000 156,000 $541,000
c. Cost of goods available for sale: 385,000 7,000 $55 520,000 10,000 $52 700,000 14,000 $50 180,000 4,000 $45 $1,785,000 Average cost: $1,785,000 (7,000 + 10,000 + 14,000 + 4,000) = $51 Average cost of ending inventory: 10,000 $51 = $510,000 PTS: 1 DIF: Medium OBJ: 7.4 NAT: AACSB Analytic | AICPA FN Measurement
Cost $55.00 52.00 50.00 45.00
9. The following information was taken from the records of Colfax Company: Beginning inventory Ending inventory Net credit sales Cost of goods sold Purchases Beginning accounts payable Ending accounts payable Net income
$ 675,000 750,000 7,200,000 4,050,000 3,250,000 825,000 975,000 562,500
Given this information, compute the following ratios for Colfax Company. a. b. c.
Inventory turnover Number of days' sales in inventory Number of days' purchases in accounts payable
ANS: a. b. c.
Inventory turnover: $4,050,000 [($675,000 + $750,000) 2] = 5.684 Number of days' sales in inventory: 365 5.684 = 64.22 days Number of days' purchases in accounts payable: 365 [$3,250,000 ($825,000 + $975,000) 2] = 101.08 days
PTS: 1 DIF: Medium OBJ: 7.5 NAT: AACSB Analytic | AICPA FN Measurement 10. The financial statements of Alphonso, Inc., reflect the following data: Sales Cost of Goods Sold Beginning Accounts Receivable Ending Accounts Receivable
$1,000,000 250,000 420,000 403,045
Beginning Inventory Ending Inventory Beginning Accounts Payable Ending Accounts Payable
$80,100 84,170 69,000 70,216
You are analyzing the company's statements to determine how much of the company's operating cycle must be financed through external financing. 1. 2. 3.
Determine the length of the company's operating cycle. Determine the number of days the company will need external financing. Identify the means of obtaining the necessary external financing.
ANS: 1.
Inventory turnover
Number of days, sales in inventory
2.
= Cost of goods sold Average inventory = $250,000 [($80,100 + $84,170)/2] = 3.04 = 365 3.04 = 120 days
Accounts receivable turnover
= Sales Average accounts receivable = $1,000,000 [($420,000 + $403,045)/2] = 2.43
Average collection period
= 365 2.43 = 150 days
Operating cycle
= 120 days + 150 days = 270 days
Cost of goods sold Add: Increase in inventory Purchases Number of days' purchases in accounts payable
$250,000 4,070 $254,070 = 365 days (Purchases/Average accounts payable) = 365 [$254,070/($69,000 + $70,216)/2)] = 365 3.65 = 100 days
Operating cycle Less: Number of days' purchases in accounts payable Number of days company will need external financing 3.
a. b. c.
270 days 100 days 170 days
Borrowing Issuing additional shares of stock Charging interest on their credit card sales
PTS: 1 DIF: Challenging OBJ: 7.5 NAT: AACSB Analytic | AICPA FN Measurement 11. The following data are available for Toltec Company: Beginning inventory Purchases Cost of goods available for sale Ending inventory Cost of goods sold
Year 1 $ 90,000 150,000 240,000 60,000 180,000
Year 2 $ 60,000 180,000 240,000 50,000 190,000
Based on these data, answer the following three independent questions: a. b. c.
If ending inventory in year 1 is understated by $5,000 (it is recorded as $55,000), how much is cost of goods sold in year 1? Assuming the same error as in (1), how much is total cost of goods sold for the two years combined? If beginning inventory in year 2 is understated by $15,000 (it is recorded as $45,000), how much is cost of goods sold in year 2?
ANS: (a) Beginning inventory Purchases Cost of goods available for sale Ending inventory Cost of goods sold
$ 90,000 150,000 $240,000 55,000 $185,000
(b) Year 1 Year 2 $ 90,000 $ 55,000 150,000 180,000 $240,000 $235,000 55,000 50,000 $185,000 $185,000 $370,000
(c) $ 45,000 180,000 $225,000 50,000 $175,000
PTS: 1 DIF: Medium OBJ: 7.6 NAT: AACSB Analytic | AICPA FN Measurement 12. Palermo Company is a wholesaler of sporting goods. The activity for NBA-sanctioned basketballs during November is shown below: Date November 1 5 9 17 23 29
Balance/Transaction Inventory Purchase Sales Purchase Sales Purchase
Units 1,000 1,500 1,800 2,400 1,900 800
Cost $40.00 43.00 44.00 45.00
Given this information, compute the cost of ending inventory using the following inventory costing methods: a. b. c.
FIFO perpetual LIFO perpetual Average Cost perpetual
ANS: a.
FIFO
1,200 800
$44.00 45.00
= =
$52,800 36,000 $88,800
b.
LIFO
700 500 800
$40.00 44.00 45.00
= = =
$28,000 22,000 36,000 $86,000
c.
Average cost on November 9:
Average cost on November 23: Average cost on November 30:
[(1,000 $40) + (1,500 $43)]/2,500 = $41.80 per unit $41.80 700 = $29,260 [$29,260 + (2,400 $44)]/3,100 = $43.50 per unit $43.50 1,200 = $52,200 $52,200 + (800 $45.00) = $88,200
PTS: 1 DIF: Medium OBJ: 7.7 NAT: AACSB Analytic | AICPA FN Measurement
13. Rawson Company's inventory records for April are as follows: Date April 1 9 15 24 26 30
Balance/Transaction Inventory Purchase Sales Purchase Sales Purchase
Units 3,500 5,000 7,500 7,000 5,000 2,000
Cost $110.00 104.00 100.00 90.00
Compute the cost of ending inventory using the following inventory costing methods: a. b. c.
FIFO perpetual LIFO perpetual Average Cost perpetual
ANS: a.
FIFO
3,000 2,000
$100.00 90.00
= =
$300,000 180,000 $480,000
b.
LIFO
1,000 2,000 2,000
$110.00 $100.00 90.00
= = =
$110,000 200,000 180,000 $490,000
c.
Average cost on April 15:
Average cost on April 26: Average cost on April 30:
[(3,500 $110) + (5,000 $104)]/8,500 = $106.47 per unit $106.47 1,000 = $106,470 [$106,470 + (7,000 $100)]/8,000 = $100.81 per unit $100.81 3,000 = $302,430 $302,430 + (2,000 $90.00) = $482,430
PTS: 1 DIF: Medium OBJ: 7.7 NAT: AACSB Analytic | AICPA FN Measurement 14. Rhame Company has the following information related to its two products:
Product M Product N
Original Cost $ 96 $120
Replacement Cost $ 72 $128
Ceiling $ 80 $144
Floor $ 64 $112
Given the above information, determine the following items: a. b. c. d.
Net realizable value of each product. Normal profit margin for each product. Assuming that the lower of cost or market rule is applied to individual products, the amount at which product M should be valued. Assuming that the lower of cost or market rule is applied to individual products, the amount at which product N should be valued.
ANS: a. b. c. d.
Product M: $80 Product N: $144 Product M: $80 $64 = $16 Product N: $144 $112 = $32 Lower of cost or market: $72 Lower of cost or market: $120
PTS: 1 DIF: Medium OBJ: 7.8 NAT: AACSB Analytic | AICPA FN Measurement 15. Feldman Company has the following inventory information for the current year:
Item 1A 2A 3A 4A
Quantity 100 150 50 200
Unit Cost $34 16 25 41
Replacement Cost $36 13 20 36
Net Realizable Value $45 19 21 35
Floor $41 14 18 34
Determine the total inventory cost to appear on Feldman's balance sheet under the lower of cost or market rule assuming a. b.
The rule is applied to inventory as a whole. The rule is applied on an item-by-item basis.
ANS: Item 1A 2A 3A 4A
a. b.
Qty 100 150 50 200
Original Cost 100 $34 = $ 3,400 150 16 = 2,400 50 25 = 1,250 = 8,200 200 41 $15,250
Market Value 100 $41 = $ 4,100 150 14 = 2,100 50 20 = 1,000 = 7,000 200 35 $14,200
LCM $ 3,400 2,100 1,000 7,000 $13,500
$14,200 $13,500
PTS: 1 DIF: Medium OBJ: 7.8 NAT: AACSB Analytic | AICPA FN Measurement 16. Hughes Medical Supply, a retail business, had net sales of $92,400 during January. Purchases of merchandise during the month amounted to $42,700, of which $27,400 had been paid for by the end of January. The merchandise purchased had a retail sales value of $59,000. On January 1, inventory on hand cost $26,180 and had a retail sales value of $39,400. Traditionally, Hughes' gross margin percentage has been 30 percent. Use the gross margin estimation method to determine the cost of Hughes' inventory at the end of January.
ANS: Sales revenue Cost of goods sold Beginning inventory Purchases Goods available for sale Less: Ending inventory Cost of goods sold Gross margin (0.30 $92,400) Ending inventory at cost
$92,400 $26,180 42,700 $68,880 4,200 64,680 $27,720 $ 4,200
PTS: 1 DIF: Medium OBJ: 7.9 NAT: AACSB Analytic | AICPA FN Measurement 17. The following information is available for the Williston Company for the month ended September 30: Inventory, September 1 Purchases Freight In Sales
$ 600,000 2,250,000 150,000 3,200,000
The gross margin was 40 percent of sales. What is Williston's estimated inventory balance at September 30? ANS: Cost of goods available for sale: Estimated gross margin: Estimated cost of goods sold: Estimated ending inventory:
$600,000 + $2,250,000 + $150,000 = $3,000,000 $3,200,000 40% = $1,280,000 $3,200,000 $1,280,000 = $1,920,000 $3,000,000 $1,920,000 = $1,080,000
PTS: 1 DIF: Medium OBJ: 7.9 NAT: AACSB Analytic | AICPA FN Measurement
Chapter 8—Completing the Operating Cycle MULTIPLE CHOICE 1. To properly recognize the expense associated with compensated absences, a company should a. Expense these obligations in the period the employee is absent b. Estimate and expense these obligations when a new employee is hired c. Estimate and expense these obligations in the period that the employee earns those days d. Not recognize any expense for compensated absences ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
2. Which of the following is NOT true regarding taxes deducted from an employee's earnings? a. These items are expenses to the employer b. These items are liabilities that must be paid to federal and state governments c. These items are credited within the entry to record wage or salary expense d. The employer serves as an agent for the governments for collecting these taxes ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
3. Which of the following taxes is NOT included in the payroll tax expense of the employer? a. State unemployment taxes b. Federal unemployment taxes c. FICA taxes d. Federal income taxes ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
4. Which of the following taxes must be paid by both the employee and the employer? a. Social security tax (FICA) b. State unemployment tax c. State withholding tax d. Federal unemployment tax ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
5. Which of the following would probably be classified as a current liability? a. Accumulated depreciation on equipment b. Payroll taxes payable c. Lease obligation d. Pension liability ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
6. The entry to recognize the estimated expense related to sick days would include a a. Credit to Salaries Expense b. Credit to Cash c. Credit to Sick Days Payable d. Debit to Sick Days Payable ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
7. The entry to record sick days taken by an employee would include a a. Credit to Salaries Expense b. Debit to Cash c. Credit to Sick Days Payable d. Debit to Sick Days Payable ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
8. The gross pay for all employees is debited to a. Salaries Payable b. Salaries Expense c. Payroll Tax Expense d. Cash ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
9. Which accounting principle requires that the expense associated with compensated absences be accounted for in the period in which it is earned by the employee? a. Revenue recognition principle b. Expense recognition principle c. Matching principle d. Economic entity principle ANS: C PTS: 1 DIF: NAT: AACSB Analytic | AICPA FN Reporting
Medium
OBJ: 8.1
10. During the first week of January, Nathan Mills earned $800. Assume that FICA taxes are 7.65 percent of wages up to $50,000; state unemployment tax is 5.0 percent of wages up to $13,000; and federal unemployment tax is 0.8 percent of wages up to $13,000. Assume that Nathan has voluntary withholdings of $40 (in addition to taxes) and that federal and state income tax withholdings are $72 and $24, respectively. What amount is the check, net of all deductions, that Nathan received for the week's pay? a. $602.80 b. $566.80 c. $560.40 d. $620.80 ANS: A Nathan's net pay: $800 ($800 7.65%) $40 $72 $24 = $602.80 PTS: 1 DIF: Medium OBJ: 8.1 NAT: AACSB Analytic | AICPA FN Measurement
11. During the month of July, Joel Mayer earned $2,000. Joel has been on the payroll all year at a salary of $2,000 per month. Salaries are paid at the end of each month. Assume that FICA taxes are 7.65 percent of wages up to $50,000; state unemployment tax is 5.0 percent of wages up to $13,000; and federal unemployment tax is 0.8 percent of wages up to $13,000. Assume that Joel has voluntary withholdings of $75 (in addition to taxes) and that federal and state income tax withholdings are $300 and $100, respectively. What amount is the check, net of all deductions, that Joel received for his July pay? a. $1,372 b. $1,256 c. $1,314 d. $1,525 ANS: A Joel's net pay: $2,000 ($2,000 7.65%) $75 $300 $100 = $1,372 PTS: 1 DIF: Medium OBJ: 8.1 NAT: AACSB Analytic | AICPA FN Measurement 12. During the first week of January, Nathan Mills earned $800. Assume that FICA taxes are 7.65 percent of wages up to $50,000; state unemployment tax is 5.0 percent of wages up to $13,000; and federal unemployment tax is 0.8 percent of wages up to $13,000. Assume that Nathan has voluntary withholdings of $40 (in addition to taxes) and that federal and state income tax withholdings are $72 and $24, respectively. What is the employer's payroll tax expense for the week, assuming that Nathan Mills is the only employee? a. $46.40 b. $107.60 c. $40.00 d. $101.20 ANS: B FICA taxes: State unemployment taxes: Federal unemployment tax: Employer's payroll tax expense:
$800 7.65% = $61.20 $800 5% = $40 $800 0.8% = $6.40 $61.20 + $40 + $6.40 = $107.60
PTS: 1 DIF: Medium OBJ: 8.1 NAT: AACSB Analytic | AICPA FN Measurement 13. During the month of July, Joel Mayer earned $2,000. Joel has been on the payroll all year at a salary of $2,000 per month. Salaries are paid at the end of each month. Assume that FICA taxes are 7.65 percent of wages up to $50,000; state unemployment tax is 5.0 percent of wages up to $13,000; and federal unemployment tax is 0.8 percent of wages up to $13,000. Assume that Joel has voluntary withholdings of $75 (in addition to taxes) and that federal and state income tax withholdings are $300 and $100, respectively. What is the employer's payroll tax expense for the month of July, assuming that Joel Mayer is the only employee? a. $58 b. $211 c. $75 d. $611
ANS: B FICA taxes: State unemployment taxes: Federal unemployment tax: Employer's payroll tax expense:
$2,000 7.65% = $30.60 $1,000 5% = $50* $1,000 0.8% = $8* $153 + $50 + $8 = $211
*Only $1,000 is used to calculate the federal and state unemployment tax due to the $13,000 limit. PTS: 1 DIF: Challenging OBJ: 8.1 NAT: AACSB Analytic | AICPA FN Measurement 14. When managers are compensated based on the achievement of certain objectives, the company is said to be paying a(n) a. Incentive b. Bonus c. Salary d. Post-retirement benefit ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 8.1
15. Which of the following is NOT true about an earnings-based bonus plan? a. Managers are encouraged to work harder and smarter to improve the performance of the company with an earnings-based bonus plan. b. An earnings-based bonus plan is most often restricted to top management. c. An earnings-based bonus plan gives managers incentive to manipulate reported earnings. d. Auditors do not consider a company with an earnings-based bonus plan to be at a higher risk of financial statement fraud. ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 8.1
16. When the right to purchase stock in the future is used as a substitute for a cash bonus, the company is granting a. Post-retirement benefits b. Compensated absences c. Stock options d. Post-employment benefits ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
17. A severance package would best be termed a a. Post-retirement benefit b. Compensated absence c. Stock option d. Post-employment benefit ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
18. When recording the costs associated with a postemployment benefit of an employer that was just laid off in the current period, a debit will be made to a. Salaries expense for the total estimated cost of the postemployment benefit b. Salaries expense for the current period cost of the unemployment benefit c. Benefits payable for the total estimated cost of the postemployment benefit d. Benefits payable for the current period cost of the unemployment benefit ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
19. Which of the following is the proper method used to account for employee stock options? a. Fair value b. Intrinsic value c. Book value d. Realizable value ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
20. Bernal Company laid off 10 employees during the month of May. Bernal has determined that the postemployment cost of laying off these 10 employees will be a total of $120,000. What journal entry should Bernal make to record the termination of these employees? $120,000 a. Salaries expense Benefits payable
$120,000
b. Benefits payable
$120,000
c. Salaries payable
$120,000
Salaries expense
$120,000
Benefits expense
$120,000
d. No journal entry should be made ANS: A PTS: 1 DIF: NAT: AACSB Analytic | AICPA FN Reporting
Medium
OBJ: 8.1
21. A cash compensation received by an employee after that employee has retired is a(n) a. Stock option b. Severance package c. Employee bonus d. Pension ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
22. Which type of pension plan requires a company to place a certain amount of money into a pension fund each year on behalf of the employees? a. Defined benefit plan b. Defined payment plan c. Defined contribution plan d. Defined employee plan ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
23. Which type of pension plan promises employees a certain monthly cash amount after they retire? a. Defined benefit plan b. Defined payment plan c. Defined contribution plan d. Defined employee plan ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
24. Which of the following is NOT true about a defined contribution plan? a. No balance sheet liability is reported in connection with the defined contribution plan. b. Upon retirement, the employee will receive all the money contributed to the pension fund along with the earnings of those contributions c. The amount distributed in the defined contribution plan is dependent upon various factors such as salary increases, employee turnover, and employee life span. d. Each year a company reports a pension expense of the amount contributed to the employees' pensions. ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
25. Which of the following is NOT a component of pension expense? a. Interest cost b. Pension payment c. Service cost d. Return on pension fund assets ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
26. The earnings from assets in a company's pension fund that are used to offset the cost of the pension plan is the a. Pension-related interest cost b. Pension payment c. Service cost d. Return on pension fund assets ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
27. The yearly increase in the pension obligation associated with work done during the year is the a. Pension-related interest cost b. Pension payment c. Service cost d. Return on pension fund assets ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
28. A large investment fund of stocks and bonds that is used to pay pension benefits to employees is a a. Pension fund b. Pension obligation c. Net pension asset or liability d. Pension-related interest cost ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
29. Which of the following is the liability that represents a company's promise to make defined benefit pension payments to employees? a. Pension fund b. Pension obligation c. Net pension asset or liability d. Pension-related interest cost ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.1
30. A pension fund is "under-funded" when the a. Market value of the pension fund assets is greater than the estimated pension liability b. The pension expense is greater than the annual payment to the pension fund c. The pension expense is less than the annual payment to the pension fund d. Market value of the pension fund assets is less than the estimated pension liability ANS: D PTS: 1 DIF: NAT: AACSB Analytic | AICPA FN Reporting
Medium
OBJ: 8.1
31. The following information relates to the defined benefit pension plan of Williams Corporation for the year ending December 31, 2012: Pension benefit obligation Pension fund assets Service cost Interest cost Expected return on fund assets What is the net pension expense for Williams Corporation in 2012? a. $1,145,000 b. $605,000 c. $900,000 d. $655,000 ANS: D Net pension expense: $900,000 + $605,000 $850,000 = $655,000 PTS: 1 DIF: Medium OBJ: 8.1 NAT: AACSB Analytic | AICPA FN Reporting
$9,200,000 6,070,000 900,000 605,000 850,000
32. The following information relates to the defined benefit pension plan of Wendy Corporation for the year ending December 31, 2012: Pension benefit obligation Pension fund assets Service cost Interest cost Expected return on fund assets
$4,600,000 5,035,000 450,000 32,500 425,000
What is the net pension asset or liability for Wendy corporation in 2012? a. $435,000 pension asset b. $435,000 pension liability c. $425,000 pension asset d. $425,000 pension liability ANS: A Net pension asset: $5,035,000 $4,600,000 = $435,000 PTS: 1 DIF: Challenging OBJ: 8.1 NAT: AACSB Analytic | AICPA FN Reporting 33. Unger Sporting Goods Company sold a pair of skis for cash. It recorded the sale as: Account A Account B Account C
210 200 10
Given this entry, what would be the nature of Account C? a. Account C is a current liability b. Account C is a long-term liability c. Account C is a revenue d. Account C is an asset ANS: A PTS: 1 DIF: Easy NAT: AACSB Critical Thinking | AICPA FN Reporting
OBJ: 8.2
34. Sales Taxes Payable is normally classified as a(n) a. Current liability b. Long-term liability c. Asset d. Expense ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.2
35. Prepaid Property Taxes would typically appear on the balance sheet as a(n) a. Deferred liability b. Liability c. Asset d. Long-term asset ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.2
36. Property taxes are usually assessed by county or city governments based on a company's a. Owners' equity b. Cash-basis net income c. Accrual-basis net income d. Land, buildings, and other assets ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.2
37. Income taxes shown on the income statement are based on a. Net income b. Gross margin c. Income before taxes d. Sales ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.2
38. Deferred income taxes arise from a. Differences between accounting standards and IRS rules b. The postponement of tax payments due to cash shortage c. A special tax created by the IRS d. A net loss ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.2
39. The period covered by the assessment of property taxes usually covers a a. Calendar year b. Fiscal year c. Budgeted year d. Taxable year ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.2
40. Which of the following is NOT a legal liability? a. Accounts Payable b. Pension Benefit Obligation c. Sales Tax Payable d. Deferred Tax Liability ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.2
41. Marino, Inc. makes a sale and collects a total of $378, which includes an 8 percent sales tax. The amount credited to Sales Revenue is a. $378 b. $348 c. $400 d. $350 ANS: D Sales revenue: $378 1.08 = $350 PTS: 1 DIF: Medium OBJ: 8.2 NAT: AACSB Analytic | AICPA FN Reporting
42. Marino, Inc. makes a sale and collects a total of $378, which includes an 8 percent sales tax. The amount credited to Sales Tax Payable is a. $28 b. $30 c. $32 d. None of these are correct ANS: A Sales revenue: Sales tax payable:
$378 1.08 = $350 $378 $350 = $28
PTS: 1 DIF: Medium OBJ: 8.2 NAT: AACSB Analytic | AICPA FN Reporting 43. Eldora, Inc. paid property taxes of $16,500 on June 30, 2012, for the period July 1, 2012, to June 30, 2013, and debited prepaid property tax expense. Eldora, Inc. uses a fiscal year end of September 30 for financial purposes. What is the adjusting entry Eldora, Inc. should make on September 30, 2012? $16,500 a. Prepaid property taxes Property tax expense
$16,500
b. Property tax expense
$16,500
c. Property tax expense
$4,125
d. Property tax expense
$12,375
Prepaid property taxes
$16,500
Prepaid property taxes
$4,125
Prepaid property taxes
$12,375
ANS: C Property tax expense: $16,500 3/12 = $4,125 PTS: 1 DIF: Medium OBJ: 8.2 NAT: AACSB Analytic | AICPA FN Reporting 44. Eldora, Inc. paid property taxes of $16,500 on June 30, 2012, for the period July 1, 2012, to June 30, 2013, and debited prepaid property tax expense. Eldora, Inc. uses a fiscal year end of September 30 for financial purposes. What journal entry should be made to recognize property tax expense for the period October 1, 2012, to June 30, 2013? $16,500 a. Prepaid property taxes Property tax expense
$16,500
b. Property tax expense
$16,500
c. Property tax expense
$4,125
d. Property tax expense
$12,375
Prepaid property taxes
$16,500
Prepaid property taxes
$4,125
Prepaid property taxes
ANS: D Property tax expense: $16,500 9/12 = $12,375 PTS: 1 DIF: Medium OBJ: 8.2 NAT: AACSB Analytic | AICPA FN Reporting
$12,375
45. On June 1, Jenni invested $4,000 into a mutual fund. By December 31, the value of the mutual fund had decreased to $3,200. Jenni did not sell any portion of the mutual fund during the year. Assuming Jenni's income tax rate on this investment will be 35%, the journal entry to record the income tax expense is $800 a. Deferred income tax asset $800
Income tax expense b. Deferred income tax asset Income tax expense c. Income tax expense Deferred income tax liability d. Income tax expense Deferred income tax liability
$280 $280 $280 $280 $800 $800
ANS: B Deferred income tax asset: $800 35% = $280 PTS: 1 DIF: Medium OBJ: 8.2 NAT: AACSB Analytic | AICPA FN Reporting 46. On June 1, Jenni invested $4,000 into a mutual fund. By December 31, the value of the mutual fund had increased to $5,200. Jenni did not sell any portion of the mutual fund during the year. Assuming Jenni's income tax rate on this investment will be 25%, the journal entry to record the income tax expense is $1,200 a. Deferred income tax asset $1,200
Income tax expense
$300
b. Deferred income tax asset
$300
Income tax expense
c. Income tax expense
$1,200
Deferred income tax liability Income tax expense d. Deferred income tax liability
$1,200 $300 $300
ANS: D Deferred income tax liability: $1,200 25% = $300 PTS: 1 DIF: Medium OBJ: 8.2 NAT: AACSB Analytic | AICPA FN Measurement 47. The accounting term for an uncertain circumstance involving a potential gain or loss that will NOT be resolved until the future is a(n) a. Extraordinary item b. Contingency c. Pension d. Deferred liability ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.3
48. Which of the following types of contingencies would NOT be disclosed on the financial statements until it has been resolved? a. A lawsuit against our company and it is probable that we will lose b. A lawsuit against our company and it is reasonably possible we will lose c. A lawsuit we have filed against a competitor and it is probable that we will win d. All of these must be disclosed on the financial statements ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.3
49. A contingent liability is recorded by making the appropriate journal entry if the likelihood of a loss from a contingency is a. Remote b. Reasonably possible c. Probable d. Negligible ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.3
50. A footnote disclosure only is required if the likelihood of a loss due to a contingency is a. Remote b. Reasonably possible c. Probable d. Negligible ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.3
51. What makes environmental liabilities unique among contingent liabilities? a. It is more difficult to estimate the costs b. It is more difficult to estimate the likelihood of a loss c. A company need not disclose environmental liabilities d. All of these are true of environmental liabilities ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.3
52. Which of the following is the appropriate disclosure in the financial statements for a contingent gain? a. Estimate the amount of the gain and make the appropriate journal entry b. Provide detailed disclosure of the gain in the notes c. No disclosure until the future event resolves itself d. None of these are correct ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.3
53. No disclosure is required for contingent liabilities that are a. Probable b. Remote c. Possible d. Reasonably possible ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.3
54. Which of the following expenditures should be expensed in the year incurred? a. Equipment b. Targeted advertising c. Prepaid rent d. Research and development ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.4
55. The required recording of research and development expenditures has which of the following effects on the financial statements? a. Understatement of research and development expense b. Understatement of research and development assets c. Overstatement of research and development assets d. None of these are correct ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.4
56. Which of the following is the required treatment of research and development costs under FASB? a. Research and development costs are expensed as incurred b. Research and development costs are capitalized c. Research costs are expensed and development costs are capitalized d. Research costs are capitalized and development costs are expensed ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.4
57. Which of the following is the required treatment of research and development costs under international accounting rules? a. Research and development costs are expensed as incurred b. Research and development costs are capitalized c. Research costs are expensed and development costs are capitalized d. Research costs are capitalized and development costs are expensed ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.4
58. Which of the following types of advertising is typically capitalized? a. Specialty catalogs b. Radio c. Television d. Newspaper ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.4
59. The general rule for advertising costs is a. Advertising costs should be expensed because of the uncertainty of future events b. Advertising costs should be capitalized because of the uncertainty of future events c. Advertising costs should be capitalized except for target advertising which should be expensed. d. None of these are correct ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.4
60. On December 31, the trial balance of Cubico Company included the following accounts with debit balances: Prepaid Advertising Advertising Expense
$1,500 5,400
If it is determined that the cost of advertising applicable to future periods is $3,300, the correct adjusting entry would a. Debit Advertising Expense $3,300; credit Prepaid Advertising $3,300 b. Debit Prepaid Advertising $1,800; credit Advertising Expense $1,800 c. Debit Advertising Expense $1,800; credit Prepaid Advertising $1,800 d. Debit Prepaid Advertising $3,300; credit Advertising Expense $3,300 ANS: B Prepaid advertising: $3,300 $1,500 = $1,800 PTS: 1 DIF: Medium OBJ: 8.4 NAT: AACSB Analytic | AICPA FN Reporting 61. Which type of income shows how much a company earns from carrying on its normal operations? a. Income before extraordinary items b. Net income after taxes c. Operating income d. Income after extraordinary items ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.5
62. Items incurred or earned from activities peripheral to normal operations are classified as a. Extraordinary gains and losses b. Other revenues and expenses c. Discontinued operations d. Operating gains and losses ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.5
63. Which of the following is NOT a criterion for qualifying as an extraordinary item? a. Material in amount b. Infrequent in occurrence c. Unusual in nature d. Peripheral to normal operations ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.5
64. Which of the following are reported on the income statement along with their tax effects? a. Other revenues b. Extraordinary items c. Operating expenses d. Other expenses ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.5
65. Earnings per share is NOT calculated on which of the following amounts? a. Net income b. Extraordinary items c. Other revenue and gains d. Income before extraordinary items ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.5
66. Which of the following items would NOT be classified in the "Other Revenues and Expenses" section of the income statement? a. Dividends on investments b. Gain on sale of buildings c. Interest expense d. Property tax expense ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.5
67. Which of the following items would be classified in the "Other Revenues and Expenses" section of the income statement? a. Loss due to hurricane in a location where hurricanes are very unlikely b. Loss on sale of land c. Administrative salaries expense d. Income tax expense ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.5
68. Earnings per share is equal to a. Total revenues divided by total shares of capital stock b. Net income divided by total shares of capital stock c. Total expenses divided by total shares of capital stock d. Net income divided by retained earnings ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.5
69. Which of the following items should be reported as an extraordinary item? a. Gains or losses from major foreign currency revaluations b. The effects of a strike c. Earthquake damage d. Gain or loss on disposal of a business segment ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.5
70. What effect does an extraordinary item have on the taxes of a company? a. Taxes are increased with an extraordinary gain or loss b. Taxes are decreased with an extraordinary gain or loss c. Taxes are increased with an extraordinary loss and decreased with an extraordinary gain d. Taxes are increased with an extraordinary gain and decreased with an extraordinary loss ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.5
71. Diluted earnings per share includes stock transactions that might occur in the future such as a. Sale of additional shares of stock b. Exercise of stock options c. Declaration of dividends d. All of these are correct ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 8.5
72. Which of the following events would be considered an extraordinary item? a. An airline experienced a significant loss due to a strike by employees of the company who provide its aircraft maintenance. b. A food cannery was faced with a large loss of inventory of canned soups due to government condemnation because of possible botulism contamination; the company had never experienced a similar situation in its history. c. A company, located on an island which has experienced severe flooding three times in the past 25 years, was subjected to a heavy loss of physical plant due to flooding. d. A medical corporation was required to pay a patient damages equal to three times its average net income. The corporation had experienced suits of this nature in the past, but the amount of the losses had never exceeded 5 percent of the corporation's average net income. ANS: B PTS: 1 DIF: NAT: AACSB Analytic | AICPA FN Reporting
Medium
OBJ: 8.5
73. Under which of the following conditions would hurricane damage be considered an extraordinary item for financial reporting purposes? a. Under any circumstance, hurricane damage should be classified as an extraordinary item b. Only if hurricanes are unusual in nature and infrequent in occurrence in the geographic area c. Only if hurricanes are normal in the geographic area but do not occur frequently d. Only if hurricanes occur frequently in the geographic area but have been insured against ANS: B PTS: 1 DIF: NAT: AACSB Analytic | AICPA FN Reporting
Medium
OBJ: 8.5
74. Dike Corporation incurred the following losses during 2012:
Loss of $480,000 was incurred in the abandonment of equipment Accounts receivable of $96,000 were written off as uncollectible Several factories were shut down during a strike at a cost of $768,000 Loss of $320,000 was sustained as a result of flood damage, an unusual and infrequent occurrence
Ignoring income taxes, what amount of loss should Dike report as extraordinary on its annual income statement? a. $320,000 b. $480,000 c. $864,000 d. $1,664,000 ANS: A PTS: 1 DIF: NAT: AACSB Analytic | AICPA FN Reporting
Medium
OBJ: 8.5
75. During the year, Perez Company earned revenues of $113,625 and incurred $98,000 for various operating expenses. There are 1,250 shares of stock outstanding. Earnings per share is a. $12.50 b. $12.80 c. $8.80 d. $8.50 ANS: A Earnings per share: ($113,625 $98,000) 1,250 = $12.50 PTS: 1 DIF: Medium OBJ: 8.5 NAT: AACSB Analytic | AICPA FN Reporting 76. Assante Corporation reported the following data for the period: earnings per share, $4.80; retained earnings, $54,000; revenues, $150,000; capital stock, $30,000; expenses, $126,000. Given the above information, how many shares of stock are outstanding? a. 9,000 b. 5,000 c. 4,000 d. 3,500 ANS: B Shares of stock outstanding:
($150,000 $126,000) x = $4.80 x = 5,000
PTS: 1 DIF: Medium OBJ: 8.5 NAT: AACSB Analytic | AICPA FN Reporting 77. The following information was taken from the records of Elton Corporation for the period ending December 31, 2012: Advertising expense Equipment Depreciation expense Accounts receivable Notes payable Retained earnings Utilities expense Revenues Dividends Interest receivable Rent expense Assuming that 6,000 shares of stock are outstanding, earnings per share is approximately a. $1.40 b. $0.40 c. $0.27 d. $0.23
$1,200 800 50 1,500 6,000 8,420 1,335 4,865 975 125 660
ANS: C Revenues: Expenses: Earnings per share:
$4,865 $1,200 + $50 + $1,335 + $660 = $3,245 ($4,865 $3,245) 6,000 = $0.27
PTS: 1 DIF: Medium OBJ: 8.5 NAT: AACSB Analytic | AICPA FN Reporting 78. The following information is from Everly Corp.'s records at December 31, 2012: Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (12/1/12) Consulting fees revenue Rent expense Supplies expense
$ 30,440 28,250 26,900 19,600 115,720 195,350 25,520 20,900
If Everly has 4,000 shares of stock outstanding, earnings per share is approximately a. $34.62 b. $22.56 c. $16.94 d. $15.59 ANS: B Revenues: Expenses: Earnings per share:
$195,350 $30,440 + $28,250 + $25,520 + $20,900 = $105,110 ($195,350 $105,110) 4,000 = $22.56
PTS: 1 DIF: Medium OBJ: 8.5 NAT: AACSB Analytic | AICPA FN Reporting 79. On December 31, 2012, Johnson Corporation reported total revenue of $750,000 and total expenses of $425,000. Johnson had 4,000 shares of stocks outstanding. Also, as of January 1, 2012, Johnson had issued stock options that allowed employees to receive 1,000 shares of stock for free at a time of their choosing in the future. As of December 31, none of these stock options had been exercised. What is basic earnings per share for Johnson Corporation? a. $106.25 b. $85 c. $81.25 d. $75 ANS: C Basic earnings per share: ($750,000 $425,000) 4,000 = $81.25 PTS: 1 DIF: Medium OBJ: 8.5 NAT: AACSB Analytic | AICPA FN Reporting
80. Romulus Corporation incurred the following losses during 2012:
Loss of $240,000 was incurred in the abandonment of equipment Accounts receivable of $48,000 were written off as uncollectible Several factories were shut down during a strike at a cost of $384,000 Loss of $160,000 was sustained as a result of flood damage, an unusual and infrequent occurrence
Assuming that Romulus has a 40% income tax rate, what amount of net loss should Romulus report as extraordinary on its annual income statement? a. $96,000 b. $144,000 c. $259,200 d. $499,200 ANS: A Income tax effect: Net loss on extraordinary item:
$160,000 40% = $64,000 $160,000 $64,000 = $96,000
PTS: 1 DIF: Challenging OBJ: 8.5 NAT: AACSB Analytic | AICPA FN Reporting 81. On December 31, 2012, Johnson Corporation reported total revenue of $750,000 and total expenses of $425,000. Johnson had 4,000 shares of stocks outstanding. Also, as of January 1, 2012, Johnson had issued stock options that allowed employees to receive 1,000 shares of stock for free at a time of their choosing in the future. As of December 31, none of these stock options had been exercised. What is diluted earnings per share for Johnson Corporation? a. $106.25 b. $85 c. $81.25 d. $65 ANS: D Diluted earnings per share: ($750,000 $425,000) (4,000 + 1,000) = $65 PTS: 1 DIF: Challenging OBJ: 8.5 NAT: AACSB Analytic | AICPA FN Reporting PROBLEM 1. Amy Tan earns $7,200 per month as the only employee of a small shop. FICA taxes on her salary are 7.65 percent of the first $50,000. Federal income taxes are withheld at the rate of 30 percent and state income taxes at the rate of 7 percent. Her employer is subject to 0.8 percent FUTA tax and 3.0 percent SUTA tax. Prepare the journal entries to be made by her employer for the month of January. (Round to the nearest dollar.)
ANS: January 31 Salaries Expense Federal Withholding Taxes Payable State Withholding Taxes Payable FICA Taxes Payable (employee) Cash (or Wages Payable)
7,200
January 31 Payroll Tax Expense FICA Taxes Payable (employer) Federal Unemployment Taxes Payable State Unemployment Taxes Payable * rounded
825
2,160 504 551* 3,985
551* 58* 216
PTS: 1 DIF: Medium OBJ: 8.1 NAT: AACSB Analytic | AICPA FN Reporting 2. John Ackley and Susan Baldwin are employees of Clarion Company. Both John and Susan work 8 hours a day and are paid monthly on the last day of the month. John is paid at a rate of $15 per hour and Susan is paid $12 per hour. John and Susan accrue compensated absences throughout the year at a rate of 1.5 days per month. In March, John missed three days of work due to illness and Susan missed one day of work. Both John and Susan have payroll withholdings of 25%. a. b.
Prepare the journal entries to record the monthly accrual of compensated absences on January 31 and February 28. Prepare the journal entries for March 31 to record the accrual of compensated absences and the use of John and Susan's accrued compensated absences. Use the account Various Taxes Payable for the payroll withholdings.
ANS: a.
b.
January 31 Salaries Expense Sick Days Payable John (8 $15 1.5) Sick Days Payable Susan (8 $12 1.5)
324
February 28 Salaries Expense Sick Days Payable John Sick Days Payable Susan
324
March 31 Salaries Expense Sick Days Payable John Sick Days Payable Susan
324
180 144 180 144 180 144
Sick Days Payable John (8 $15 3) Various Taxes Payable ($360 25%) Cash
360
Sick Days Payable Susan (8 $12 1) Various Taxes Payable ($96 25%) Cash
96
PTS: 1 DIF: Medium OBJ: 8.1 NAT: AACSB Analytic | AICPA FN Reporting
90 270
24 72
3. Bristol Company's accounting records contained the following information for a current year: Pension service cost Pension fund assets, year-end Pension related interest cost for the year Pension obligation, year-end Return on pension fund assets for the year a. b.
$ 285,000 3,515,000 304,000 3,306,000 380,000
Indicate what pension amount Bristol will report in its balance sheet at year-end. Compute the amount of pension expense shown on the income statement for the year.
ANS: a.
Pension fund assets and pension obligation are offset against each other to show a net pension asset or net pension obligation. $3,515,000 3,306,000 = $209,00 net pension asset
b.
Pension service cost Pension related interest Return on fund assets Pension expense
$285,000 304,000 (380,000) $209,000
PTS: 1 DIF: Medium OBJ: 8.5 NAT: AACSB Analytic | AICPA FN Reporting 4. Fonda Company's fiscal year is the calendar year. During the month of June 2012, Fonda received a bill for $46,500 of property tax assessed that is due on July 15, 2012 for the period July 1, 2012 through June 30, 2013. Prepare journal entries to record a. b.
The payment of the property taxes on July 15, 2012. The adjusting entry for property taxes on December 21, 2012.
ANS: a.
b.
Prepaid property tax Cash
46,500
Property tax expense Prepaid property tax ($46,500 6/12)
23,250
PTS: 1 DIF: Medium OBJ: 8.2 NAT: AACSB Analytic | AICPA FN Reporting
46,500
23,250
5. Gribble's fiscal year is the calendar year. During the month of July 2012, the following tax related events occurred at the Gribble Company:
Received a property tax summary from the county government for the period July 1, 2011 through June 30, 2012. The property tax for that period was $7,500. This bill was prepaid on December 30, 2011. Sales of $100,000 were made during the month. The sales tax rate is 6 percent and the sales tax liability was recorded as sales were recorded. Income before taxes for the second quarter (ended on June 30, 2012) was $70,000 and the income tax rate is 30 percent.
Prepare journal entries to record a. b. c.
The proper amount of property tax expense on June 30, 2012 The payment of the sales tax collected during June The recognition of the income taxes for the second quarter
ANS: a.
b.
c.
Property Tax Expense Prepaid Property Taxes ($7,500 6/12)
3,750
Sales Tax Payable Cash ($100,000 6%)
6,000
Income Tax Expense Income Taxes Payable ($70,000 30%)
21,000
3,750
6,000
21,000
PTS: 1 DIF: Medium OBJ: 8.2 NAT: AACSB Analytic | AICPA FN Reporting 6. Gowrie, Inc. began operations on January 1, 2012. At the end of its first year of business, Gowrie reported $465,000 income before taxes on its income statement. At the end of 2012, Gowrie also had $45,000 of incurred expenses that were not yet tax deductible according to income tax regulations. Gowrie's tax rate is 35%. a. b. c.
Compute the amount of income tax expense to be reported on Gowrie, Inc.'s income statement for 2012. Compute the amount of income tax that Gowrie, Inc. legally owes for taxable income generated during 2012. Determine the amount of deferred income tax liability or deferred income tax asset that Gowrie, Inc. has as of the end of 2012.
ANS: a. b. c.
Income tax expense: $465,000 35% = $162,750 Income tax payable: ($465,000 + $45,000) 35% = $178,500 Deferred income tax asset: $45,000 35% = $15,750
PTS: 1 DIF: Challenging OBJ: 8.2 NAT: AACSB Analytic | AICPA FN Reporting 7. A contingency is an uncertain circumstance involving a potential gain or loss that will not be resolved until some future event occurs. The following table lists the possible outcomes of a contingency. Complete the table by filling in the definition and required accounting for each possible outcome. Term Probable loss
Definition
Accounting
Term Probable loss
Definition The future event is likely to create a loss.
Accounting Estimate the amount of the contingency and make the appropriate journal entry; provide detailed disclosure in the notes.
Reasonably possible loss
The chance of the future event Provide detailed disclosure of occurring is more than remote the possible liability in the but less than likely to cause a notes. loss.
Remote loss
The chance of the future event No disclosure is required. occurring and causing a loss is slight.
Gain
The future event will cause a gain for the company.
Reasonably possible loss Remote loss Gain
ANS:
PTS: 1 DIF: Medium OBJ: 8.3 NAT: AACSB Reflective Thinking | AICPA FN Reporting
No disclosure is required.
8. Indicate the appropriate accounting treatment for each independent situation shown below. a.
b.
c. d.
Assante Corporation is the defendant in an age-discrimination lawsuit for $10 million. The company's lawyers believe there is a 95 percent probability that Assante will lose the case and that the loss will more than likely be $9 million. Otay, Inc. has been accused of violating several federal regulatory laws. If found guilty, the company will incur significant fines and penalties. The company's attorneys feel the accusations are baseless and that there is only a 5 percent chance that the company will be found guilty. Grammar Company is being accused of fraudulent reporting. The company's lawyers believe there is a 45 percent chance of losing the case. Ortiz Corporation is suing another company for patent infringement. The attorneys for Ortiz feel there is an 80 percent chance that they will win the case and that the court will award them a $5 million judgment.
ANS: a.
b. c. d.
A 95 percent probability is likely to be interpreted as probable. The liability and associated loss should be formally recorded in the accounting records, and a footnote disclosure should be made as well. A 5 percent chance is likely to be interpreted as remote. No information need be disclosed in the notes to the financial statements. A 45 percent probability falls somewhere between remote and probable. This would typically be interpreted as reasonably possible. If so, a footnote disclosure is appropriate. Gain contingencies are not recognized.
PTS: 1 DIF: Medium OBJ: 8.3 NAT: AACSB Analytic | AICPA FN Reporting 9. Accounting rules give specific instructions on whether to expense or capitalize research and development costs and advertising costs. List the rules associated with these two costs. ANS: Research and development costs: Expense costs as incurred Advertising costs: Expense costs as incurred unless costs are due to targeted advertising directed at specific past customers. PTS: 1 DIF: Medium OBJ: 8.4 NAT: AACSB Reflective Thinking | AICPA FN Reporting 10. Indicate whether the following independent expenditures should be capitalized or expensed. Explain your answers. a. b.
c. d.
Cruz Company spent $500,000 on new equipment. The equipment has an estimated useful life of 12 years. Carver Corporation spent $5 million researching a new production process. The company expects to reduce operating costs significantly when the result of the research is implemented next year. Kids Klothes, Inc. has spent $2 million creating a targeted advertising campaign that will motivate regular customers of the company's on-line service to buy new clothes. Hype.com is paying $400,000 for newspaper advertising on its new product line. The company expects the ad will generate increased sales for the next 2 years.
ANS: a. b. c. d.
Capitalize. This is a depreciable asset whose service will help generate future revenues over its useful life. Expense. Research and development costs are expensed as incurred. Capitalize. This is targeted advertising directed at specific past customers. Expense. This is advertising pertaining to a new product and not directed at specific past customers.
PTS: 1 DIF: Medium OBJ: 8.4 NAT: AACSB Analytic | AICPA FN Reporting 11. On December 31, 2012, Rippey Corporation reported total revenue of $3,750,000 and total expenses of $2,125,000. Rippey had 50,000 shares of stocks outstanding. Also, as of January 1, 2012, Rippey had issued stock options that allowed employees to receive 15,000 shares of stock for free at a time of their choosing in the future. As of December 31, none of these stock options had been exercised. a. b.
What is basic earnings per share for Rippey Corporation? What is diluted earnings per share for Rippey Corporation?
ANS: a. b.
Basic earnings per share: ($3,750,000 $2,125,000) 50,000 = $32.50 Diluted earnings per share: ($3,750,000 $2,125,000) (50,000 + 15,000) = $25
PTS: 1 DIF: Challenging OBJ: 8.5 NAT: AACSB Analytic | AICPA FN Reporting 12. Kline Corporation has taken the following information from the accounting records on December 31, 2012. Prepare an income statement, in good form, for the year ended December 31, 2012. Assume that there are 50,000 shares of capital stock outstanding. Gross sales revenue Income tax expense Insurance expense (general and administrative) Automobile expense (selling) Miscellaneous selling expense Payroll tax expense (selling) Rent expense (selling) Sales salaries expense Cost of goods sold Interest expense Interest revenue Advertising and promotion expense (selling) Sales returns and allowances Office supplies expense Administrative salaries expense Earthquake loss (net of taxes)
$1,721,500 48,000 950 1,750 6,600 1,550 9,000 150,000 1,270,500 23,000 6,500 80,000 6,000 5,550 70,000 20,000
ANS: Kline Corporation Income Statement For the Year ended December 31, 2012 Gross sales revenue Less: Sales returns and allowances Net sales revenue Less: Cost of goods sold Gross margin Operating Expenses Selling expenses: Sales salaries expense Advertising and promotion expense Automobile expense Rent expense Payroll tax expense Miscellaneous selling expenses Total selling expenses General and administrative expenses: Administrative salaries expense Office supplies expense Insurance expense Total general and administrative expenses Total selling, general and administrative expenses Operating income Other expenses and revenues: Interest revenue Interest expense Income before taxes Income tax expense Income before extraordinary items Earthquake loss (net of taxes) Net income Earnings per share: Before extraordinary items Extraordinary loss Net income PTS: 1 DIF: Challenging OBJ: 8.5 NAT: AACSB Analytic | AICPA FN Reporting
$1,721,500 6,000 $1,715,500 1,270,500 $ 445,000
$ 150,000 80,000 1,750 9,000 1,550 6,600 $ 248,900 $
$
70,000 5,550 950 76,500 325,400 $ 119,600
$
6,500 (23,000)
(16,500) $ 103,100 48,000 $ 55,100 20,000 $ 35,100 $1.10 0.40 $0.70
Chapter 9—Investments: Property, Plant, and Equipment and Intangible Assets MULTIPLE CHOICE 1. Which of the following is NOT a current asset? a. Marketable Securities b. Cash c. Accounts Receivable d. Property, Plant, and Equipment ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
2. The caption "property, plant, and equipment" generally includes a. Assets purchased for sale b. Depreciable assets c. Current assets d. Assets that have no future service potential ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
3. Which of the following is considered to be a long-term asset? a. Land b. Goodwill c. Equipment d. All of these are long-term assets ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
4. Assets that are NOT acquired for resale, but used by a business to generate revenues, are a. Land b. Goodwill c. Inventory d. Both land and goodwill ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
5. Which of the following is an asset that does NOT have physical substance? a. Land b. Patents c. Equipment d. Supplies ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
6. The process of comparing the cost of an asset to the value of expected cash inflows, after adjusting for the time value of money, is called a. Acquisition analysis b. Present value analysis c. Capital budgeting d. Long-term asset budgeting ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.2
7. To properly evaluate the purchase of a long-term asset, the expected future cash flows must be adjusted for a. Property taxes b. Interest c. Time value of money d. Future revenues ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.2
8. Long-term operating assets have value because they are expected to a. Help a company generate expenses this period b. Help a company generate cash flows this period c. Help a company generate expenses in the future d. Help a company generate cash flows in the future ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.2
9. A long-term operating asset should be acquired if a. The cost of purchasing the long-term operating asset is less than the expected cash inflows, adjusted for the time-value of money, generated by the long-term operating asset b. The cost of purchasing the long-term operating asset is more than the expected cash inflows, adjusted for the time-value of money, generated by the long-term operating asset c. The cost of purchasing the long-term operating asset is less than the expected cash inflows, not adjusted for the time-value of money, generated by the long-term operating asset d. The cost of purchasing the long-term operating asset is more than the expected cash inflows, not adjusted for the time-value of money, generated by the long-term operating asset ANS: A PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.2
10. Freight costs incurred when an operating asset is purchased should generally be a. Expensed in the period incurred b. Deducted from the accumulated depreciation account c. Added to the cost of the new asset d. Not recorded in the accounts ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.3
11. The party who owns an asset that is rented to another is referred to as the a. Lessor b. Mortgagee c. Lessee d. Principal ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.3
12. Which of the following is NOT a consideration in classifying a lease? a. Value of the asset on the lessor's books b. Economic life of the asset c. Present value of the lease payments d. Whether the lease is cancelable ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.3
13. A noncancelable lease should be recorded as a capital lease if a. The present value of the lease payments is 75% or more of the fair market value of the leased asset b. Title to the asset transfers to the lessee by the end of the lease term c. The lessee is given an option to purchase the asset at its fair market value d. Any one of these criterion are met ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.3
14. How would a company classify a 2-year lease that requires monthly rental payments of $1,000 and also requires that the company must move out of the building, or negotiate a new lease when the current one ends? a. Capital lease b. Sales lease c. Operating lease d. Buy-back lease ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.3
15. Leased assets are capitalized at a. Their historical cost b. The future value of the future lease payments c. The sum of the future lease payments d. The present value of the future lease payments ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.3
16. How many of the criteria for determining whether a lease should be classified as an operating lease or a capital lease must a noncancelable lease meet to be recorded as a capital lease? a. 1 b. 2 c. 3 d. 4 ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.3
17. Which of the following is NOT a reason for leasing rather than purchasing an asset? a. Avoiding a significant cash outlay for a down payment b. Avoiding the risks of obsolescence c. Avoiding the recognition of additional debt on the balance sheet d. All of these are reasons for leasing rather than purchasing an asset ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.3
18. Which of the following is NOT a capitalizable cost on a self-constructed asset? a. Total materials used b. Total labor costs incurred c. Total company overhead d. Interest associated with money borrowed to finance the construction project ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.3
19. The cost assigned to the individual assets acquired in a basket purchase is based on their relative a. Historical costs b. Fair market values c. Book values d. Depreciable costs ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.3
20. When purchasing an entire company, what is the accounting term for the purchase price in excess of identifiable assets? a. Goodwill b. Excess value c. Patent d. Intangible asset ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.3
21. Furniture with a list price of $6,000 is purchased on account for $5,000. Which of the following entries properly records this transaction? a. Furniture 5,000 Cash
b. Furniture
5,000 6,000
Accounts Payable
c. Furniture
6,000 5,000
Accounts Payable
d. Furniture
5,000 6,000
Cash
6,000
ANS: C PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.3
22. Boone Company purchased a piece of machinery by paying $5,000 cash. In addition to the purchase price, the company incurred $100 freight charges. The machine has an estimated useful life of 5 years and will require $125 for insurance over that period. Boone Company would record the cost of the machine at a. $5,000 b. $5,100 c. $5,125 d. $5,225 ANS: B Cost of machine: $5,000 + $100 = $5,100 PTS: 1 DIF: Medium OBJ: 9.3 NAT: AACSB Reflective Thinking | AICPA FN Measurement 23. Radner Shipping purchased a truck and a trailer for $54,000. An appraisal has set the fair market values of the truck and the trailer at $19,000 and $38,000, respectively. At what amount should Radner record the truck? a. $18,000 b. $19,000 c. $36,000 d. $38,000 ANS: A Purchase value of truck: $54,000 ($19,000/$57,000) = $18,000 PTS: 1 DIF: Medium OBJ: 9.3 NAT: AACSB Analytic | AICPA FN Measurement
24. Henner Corporation made a basket purchase of three pieces of machinery for $72,000. The fair market values of the machinery were determined to be as follows: Machine A Machine B Machine C
$13,500 27,000 40,500
What cost should Henner record for Machine C? a. $40,500 b. $31,500 c. $27,000 d. $36,000 ANS: D Purchase cost for Machine C: $72,000 $40,500/$81,000 = $36,000 PTS: 1 DIF: Medium OBJ: 9.3 NAT: AACSB Analytic | AICPA FN Measurement 25. Land and a building were purchased for a sum of $200,000. If appraisals set the value of the land at $140,000 and the building at $70,000, the building will be recorded at a. $60,000 b. $66,667 c. $80,000 d. $133,333 ANS: B Cost of building: $200,000 $70,000/$210,000 = $66,667 PTS: 1 DIF: Medium OBJ: 9.3 NAT: AACSB Analytic | AICPA FN Measurement 26. On January 1, 2012, Alberta Company purchased land and a building for $1,120,000. At the time of the purchase, it was estimated that the building had a market value of $700,000. On January 5, Alberta installed a fence around the property at a cost of $7,000. Given this information, the journal entry to record the purchase of the land and building would include a a. Debit to Land for $427,000 b. Debit to Land for $420,000 c. Debit to Land for $413,000 d. Debit to Land for $700,000 ANS: B Cost of land: $1,120,000 $700,000 = $420,000 PTS: 1 DIF: Medium OBJ: 9.3 NAT: AACSB Analytic | AICPA FN Measurement
27. A company leases an asset for a 7-year period under a capital lease and agrees to pay an annual rental of $15,000. The initial entry to record this transaction, assuming the present value of the lease payments is $84,000, would include a. Debit to Lease Expense for $15,000 b. Debit to Lease Expense for $12,000 c. Debit to Lease Asset for $84,000 d. Credit to Lease Liability for $12,000 ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 9.3
28. Assume a company enters into a capital lease on January 1, 2012, to acquire the use of a machine for 5 years. The present value of the lease payments is $60,000, and the interest rate is 12 percent. If annual rental payments of $18,000 are due at the end of each year, the journal entry to record the first annual payment on December 31, 2012, would include a debit to a. Lease Expense, $18,000 b. Interest Expense, $7,200 and Lease Expense, $10,800 c. Interest Expense, $7,200 and Lease Liability, $10,800 d. Interest Expense, $9,000 and Lease Liability, $9,000 ANS: C Interest expense: Lease liability:
$60,000 12% = $7,200 $18,000 $7,200
PTS: 1 DIF: Medium OBJ: 9.3 NAT: AACSB Analytic | AICPA FN Measurement 29. Assume that a company leases equipment for a 5-year period under a capital lease and agrees to pay an annual rental of $16,000 at the end of each year. If the present value of the lease payments is $59,200, the entry to record the leasing transaction would include a. A debit to Lease Expense of $59,200 b. A debit to Leased Equipment of $59,200 c. A debit to Leased Equipment of $80,000 d. A credit to Rent Payable of $16,000 ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 9.3
30. On January 1, 2012, Eugene Inc. entered into a capital lease to acquire the use of a computer for 5 years. The present value of the lease payments is $85,000, the applicable interest rate is 10 percent, and payments of $24,000 are due at the end of each year. The entry to record the first $24,000 payment on December 31, 2012, will include a debit to a. Lease Expense, $24,000 b. Interest Expense, $24,000 c. Leased Computer, $85,000 d. Lease Liability, $15,500 ANS: D Interest expense: Lease liability:
$85,000 10% = $8,500 $24,000 $8,500 = $15,500
PTS: 1 DIF: Medium OBJ: 9.3 NAT: AACSB Analytic | AICPA FN Measurement
31. During 2012, Bernard Inc. constructed a new factory. Bernard used its current employees to build the factory. Building material costs for the new factory were $2,700,000; total labor costs were $1,400,000; total company overhead was $7,500,000 (20% of which could be assigned to the new project); and interest paid on a new construction loan for the project was $750,000. What was the total cost of the self-constructed factory? a. $6,350,000 b. $4,850,000 c. $5,600,000 d. $12,350,000 ANS: A Cost of new building: $2,700,000 + $1,400,000 + ($7,500,000 20%) + $750,000 = $6,350,000 PTS: 1 DIF: Medium OBJ: 9.3 NAT: AACSB Analytic | AICPA FN Measurement 32. Chapman Company purchased Horace Company for $54,000,000. At the time of purchase, Horaces's identifiable assets equaled $30,000,000. What was the amount of goodwill recorded by Chapman Company at the time of purchase? a. $84,000,000 b. $54,000,000 c. $30,000,000 d. $24,000,000 ANS: D Goodwill: $54,000,000 $30,000,000 = $24,000,000 PTS: 1 DIF: Medium OBJ: 9.3 NAT: AACSB Analytic | AICPA FN Measurement 33. The undepreciated cost of an asset is referred to as a. Salvage value b. Book value c. Market value d. Sales value ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.4
34. How is Accumulated Depreciation classified? a. Equity b. Liability c. Contra-asset d. Expense ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.4
35. A depreciable asset's book value can never be less than its a. Historical cost b. Fair market value c. Capitalized cost d. Salvage value ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.4
36. The Accumulated Depreciation account is credited when a. An asset is traded for a similar asset b. A new asset is purchased c. The depreciation expense for the year is recorded d. An asset is traded for a dissimilar asset ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.4
37. Which of the following assets is NOT usually depreciated, depleted, or amortized? a. Furniture b. Mineral deposits c. Land d. Patents ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.4
38. Depreciation can best be described as a method of a. Accumulating funds for the replacement of assets b. Reducing the carrying cost of assets to current market values c. Deriving tax benefits d. Allocating the costs of assets over their useful lives ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.4
39. Another name for residual value is a. Book value b. Salvage value c. Carrying value d. Current value ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.4
40. The book value of an asset is the a. Original cost of the asset b. Market value of the asset c. Total of all expenses associated with the asset d. Acquisition cost of the asset less any accumulated depreciation on the asset ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.4
41. When the cost of equipment is divided by its estimated useful life, the result is referred to as a. Book value b. Accumulated depreciation c. Carrying value d. Depreciation expense ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.4
42. In order to calculate periodic depreciation expense, which of the following need NOT be known about an asset? a. Its acquisition cost b. Its estimated salvage value c. The amount of the cash down payment d. Its estimated useful life ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.4
43. The calculation for depletion of natural resources is similar to the calculation for a. Straight-line depreciation b. Units-of-production depreciation c. Sum-of-the-years'-digits depreciation d. Declining-balance depreciation ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.4
44. On January 1, 2012, Bushong Company purchased equipment at a cost of $12,600. The equipment had an estimated useful life of 6 years or 30,000 hours. The equipment will have a $1,200 salvage value at the end of its life. The depreciation expense for the year ending December 31, 2012, using the straightline method would be a. $1,900 b. $1,883 c. $475 d. $471 ANS: A Depreciation expense: ($12,600 $1,200) 6 = $1,900 PTS: 1 DIF: Medium OBJ: 9.4 NAT: AACSB Analytic | AICPA FN Measurement 45. On January 1, 2012, Bushong Company purchased equipment at a cost of $12,600. The equipment had an estimated useful life of 6 years or 30,000 hours. The equipment will have a $1,200 salvage value at the end of its life. The equipment was used 6,500 hours in 2012. The depreciation expense for the year ending December 31, 2012, using the units-of-production method would be a. $3,800 b. $2,470 c. $6,500 d. $2,730 ANS: B Depreciation expense: [($12,600 $1,200) 30,000] 6,500 = $2,470 PTS: 1 DIF: Medium OBJ: 9.4 NAT: AACSB Analytic | AICPA FN Measurement
46. Rapid Deliveries purchased a delivery truck on July 1, 2012, at a cost of $16,800. The truck has an estimated useful life of 4 years or 40,000 miles and a salvage value of $1,200. If the truck was driven 5,200 miles during 2012, the depreciation expense for 2012 under the units-of-production method would be a. $1,950 b. $2,028 c. $2,184 d. $1,092 ANS: B Depreciation expense: [($16,800 $1,200) 40,000] 5,200 = $2,028 PTS: 1 DIF: Medium OBJ: 9.4 NAT: AACSB Analytic | AICPA FN Measurement 47. Rapid Deliveries purchased a delivery truck on July 1, 2012, at a cost of $16,800. The truck has an estimated useful life of 4 years or 40,000 miles and a salvage value of $1,200. The depreciation expense for the year ending December 31, 2012, under the straight-line depreciation method would be a. $1,950 b. $1,352 c. $3,900 d. $1,092 ANS: A Depreciation expense: [($16,800 $1,200) 4] 6/12 = $1,950 PTS: 1 DIF: Medium OBJ: 9.4 NAT: AACSB Analytic | AICPA FN Measurement 48. Spears Corporation bought a machine on January 1, 2011. In purchasing the machine, the company paid $50,000 cash and signed an interest-bearing note for $100,000. The estimated useful life of the machine is 5 years, after which time the salvage value is expected to be $15,000. The machine is expected to produce 67,500 widgets during its useful life. Given this information, if 10,000 widgets are produced in 2012, how much depreciation should be recorded in 2012, assuming that Spears Corporation uses the units-of-production depreciation method? a. $22,222 b. $20,000 c. $30,000 d. $40,000 ANS: B Depreciation expense 2012: [($150,000 $15,000) 67,500] 10,000 = $20,000 PTS: 1 DIF: Medium OBJ: 9.4 NAT: AACSB Analytic | AICPA FN Measurement
49. Coppola Company purchased a machine on January 1, 2011, for $20,000 cash. In addition, Coppola paid $4,000 to have the machine delivered and installed. The estimated useful life of the machine is 4 years, after which time it is expected to have a salvage value of $8,000. It is also estimated that the machine will produce 200,000 units of product during its useful life. Assuming that the straight-line depreciation method is used, what will be the machine's book value on December 31, 2013? a. $8,000 b. $12,000 c. $16,000 d. $14,000 ANS: B Depreciation expense 2011 2013: Book value December 31, 2013:
[($24,000 $8,000) 4] 3 = $12,000 $24,000 $12,000 = $12,000
PTS: 1 DIF: Medium OBJ: 9.4 NAT: AACSB Analytic | AICPA FN Measurement 50. Wings Manufacturing Company purchased a new machine on July 1, 2011. It was expected to produce 200,000 units of product over its estimated useful life of eight years. Total cost of the machine was $600,000, and salvage value was estimated to be $60,000. Actual units produced by the machine in 2011 and 2012 are shown below: 2011 2012
16,000 units 30,000 units
Wings reports on a calendar-year basis and uses the units-of-production method of depreciation. The amount of depreciation expense for this machine in 2012 would be a. $124,200 b. $90,000 c. $81,000 d. $74,520 ANS: C Depreciation expense 2012: [($600,000 $60,000) 200,000] 30,000 = $81,000 PTS: 1 DIF: Medium OBJ: 9.4 NAT: AACSB Analytic | AICPA FN Measurement 51. On January 1, 2012, Brown Company purchased a mine for $100,000. On this same date, it was estimated that the mine contained 1,000 tons of ore. During 2012, 300 tons of ore were extracted from the mine. The amount of depletion expense for 2012 would be a. $3,000 b. $100,000 c. $1,000 d. $30,000 ANS: D Depletion expense 2012: $100,000 1,000 300 = $30,000 PTS: 1 DIF: Medium OBJ: 9.4 NAT: AACSB Analytic | AICPA FN Measurement
52. Which of the following is a criterion for a capital expenditure? a. It must be significant in amount b. It should benefit several periods c. It should increase the productive life or capacity of an asset d. All of these are criteria for a capital expenditure ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.5
53. An expenditure for the repair of an asset must be capitalized if it a. Maintains an asset in working order b. Requires prior approval by management c. Exceeds a fixed percentage of the asset's book value d. Benefits the company over several periods ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.5
54. If a truck's engine is overhauled for $8,000, the journal entry would normally include a debit to a. Truck b. Notes Payable c. Depreciation d. Cash ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 9.5
55. On January 1, 2012, Salina Company purchased land and a building for $2,240,000. At the time of the purchase, it was estimated that the building had a market value of $1,400,000. On January 5, Alberta installed a fence around the property at a cost of $14,000. Given this information, the entry to record the cost of the fence would include a a. Debit to Land for $14,000 b. Debit to Fence Expense for $14,000 c. Credit to Land for $14,000 d. Debit to Land Improvements Expense for $14,000 ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 9.5
56. On January 1, 2010, Wayne's Waffle House purchased a freezer for $45,000. The freezer had an estimated useful life of 10 years and an estimated residual value of $3,000 at the time of purchase. Wayne spent $10,000 on January 1, 2012, to replace the freezer motor. This replacement increased the freezer's life by 5 years and the residual value by $2,000. Assuming that straight-line depreciation is used, what will be the depreciation expense for 2012? a. $3,200 b. $3,585 c. $8,320 d. $3,431
ANS: A Depreciation expense per year prior to motor replacement: Book value before motor replacement: Depreciation expense 2012:
($45,000 $3,000) 10 = $4,200 $45,000 ($4,200 2) = $36,600 ($36,600 + $10,000 $5,000) 13 = $3,200
PTS: 1 DIF: Medium OBJ: 9.5 NAT: AACSB Analytic | AICPA FN Measurement 57. The Giovanni Company purchased a tooling machine in 2002 for $120,000. The machine was being depreciated by the straight-line method over an estimated useful life of 20 years, with no salvage value. At the beginning of 2012, after 10 years of use, Giovanni paid $20,000 to overhaul the machine. Because of this improvement, the machine's estimated useful life would be extended an additional 5 years. What would be the depreciation expense recorded for the above machine in 2012? a. $4,000 b. $5,333 c. $6,000 d. $7,333 ANS: B Depreciation expense per year prior to overhaul: Book value before overhaul: Depreciation expense in 2012:
$120,000 20 = $6,000 $120,000 ($6,000 10) = $60,000 ($60,000 + $20,000) 15 = $5,333
PTS: 1 DIF: Medium OBJ: 9.5 NAT: AACSB Analytic | AICPA FN Measurement 58. The entry to record an impairment loss on equipment would include which of the following? a. Credit to Loss on Impairment of Equipment b. Credit to Equipment Impairment c. Debit to Accumulated Depreciation, Equipment d. Debit to Cash ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.6
59. The entry to record a gain on the increase in value of land would include which of the following? a. Credit to Gain on Land Increase b. Debit to Land c. Credit to Non-Impairment of Land d. No entry is required ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Reporting
OBJ: 9.6
60. Occasionally, events occur that change an asset's value after purchase. Which of the following is true regarding these changes in value? a. Reductions in asset value are recognized. b. Increases in asset value are recognized. c. Both decreases and increases are recognized. d. Neither decreases nor increases are recognized. ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.6
61. Under U.S. accounting rules (generally accepted accounting principles), an asset is impaired when a. The asset's fair value is less than the book value b. The asset's future cash inflows are less than the book value c. The asset's market value is less than the book value d. The asset's cost is less than the book value ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.6
62. Once an asset has been determined to be impaired, the amount of impairment is measured as a. The asset's book value minus the fair value b. The asset's future cash inflows minus the book value c. The asset's cost minus the book value d. The asset's cost minus the fair value ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.6
63. If an asset value recovers after an impairment loss has been recognized for the asset, what amount of restoration of that loss is recognized? a. The difference between the original loss and the new value b. The difference between the original cost and the new value c. The difference between the value recognized at the impairment and the new value d. None of the recovered value is recognized ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.6
64. Zenda Corporation purchased a building for $800,000. The current book value of the building is $400,000 and the fair value is $360,000. The sum of future cash flows from the building is $320,000. The amount of impairment loss that should be recognized is a. $0 b. $40,000 c. $80,000 d. $240,000 ANS: B Amount of impairment loss: $400,000 $360,000 = $40,000 PTS: 1 DIF: Medium OBJ: 9.6 NAT: AACSB Analytic | AICPA FN Measurement 65. Tanner Company purchased a building during 2010 for $600,000. From 2010 to 2012, $240,000 of depreciation was recorded. The current fair value is $350,000 and the sum of future cash flows from the building is $370,000. The amount of impairment that should be recognized is a. $0 b. $10,000 c. $20,000 d. $30,000 ANS: A Current book value of building: $600,000 $240,000 = $360,000 Sum of future cash flows is greater than book value, no impairment is recognized PTS: 1 DIF: Medium OBJ: 9.6 NAT: AACSB Analytic | AICPA FN Measurement
66. Which of the following is necessary when recording the disposal of a piece of equipment? a. Update the depreciation expense on the equipment to the date of sale b. Remove the equipment and related accumulated depreciation balances from the accounts c. Record any gain or loss on the disposal d. All of these are necessary when recording the disposal of a piece of equipment ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.7
67. Which of the following is NOT a way to dispose of an asset? a. Discard or scrap it b. Sell it c. Exchange it for another asset d. All of these are ways to dispose of an asset ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.7
68. On January 1, 2011, Kinnear Company purchased equipment at a cost of $20,000. The equipment has an estimated useful life of 5 years and a salvage value of $2,000. Kinnear Company uses the straightline depreciation method for all its assets. Given this information, if Kinnear Company sells the equipment for $13,600 on December 31, 2012, it will have a(n) a. $2,000 loss b. $2,000 gain c. $800 loss d. $800 gain ANS: D Yearly depreciation expense: Book value of equipment on December 31, 2012: Gain on equipment:
($20,000 $2,000) 5 = $3,600 $20,000 ($3,600 2) = $12,800 $13,600 $12,800 = $800
PTS: 1 DIF: Medium OBJ: 9.7 NAT: AACSB Analytic | AICPA FN Measurement 69. On January 1, 2011, Kinnear Company purchased equipment at a cost of $20,000. The equipment has an estimated useful life of 5 years and a salvage value of $2,000. Kinnear Company uses the straightline depreciation method for all its assets. Given this information, if Kinnear Company scraps the equipment on December 31, 2012, it will have a loss of a. $18,000 b. $0 c. $12,800 d. $5,600 ANS: C Yearly depreciation expense: Book value of equipment on December 31, 2012: Loss on equipment:
($20,000 $2,000) 5 = $3,600 $20,000 ($3,600 2) = $12,800 $12,800 $0 = $12,800
PTS: 1 DIF: Medium OBJ: 9.7 NAT: AACSB Analytic | AICPA FN Measurement
70. What is the gain or loss on the sale of an asset that originally cost $12,000, has accumulated depreciation of $5,000, and is sold for $6,000? a. $1,000 loss b. $3,000 loss c. $1,000 gain d. $6,000 loss ANS: A Book value: Loss on sale:
$12,000 $5,000 = $7,000 $7,000 $6,000 = $1,000
PTS: 1 DIF: Medium OBJ: 9.7 NAT: AACSB Analytic | AICPA FN Measurement 71. A truck that cost $19,200 and was expected to last 5 years was scrapped after 3 years. If the truck was being depreciated on a straight-line basis (with no salvage value), the loss recognized on disposal would be a. $19,200 b. $7,680 c. $9,600 d. $11,520 ANS: B Annual depreciation expense: Book value after 3 years:
$8,000 5 = $3,840 $19,200 ($3,840 3) = $7,680
PTS: 1 DIF: Medium OBJ: 9.7 NAT: AACSB Analytic | AICPA FN Measurement 72. A truck that cost $19,200 and was expected to last 5 years was scrapped after 3 years. If the truck was being depreciated on a straight-line basis (with no salvage value), the book value of the truck at the time of disposal was a. $19,200 b. $11,520 c. $4,800 d. $7,680 ANS: D Annual depreciation expense: Book value after 3 years:
$8,000 5 = $3,840 $19,200 ($3,840 3) = $7,680
PTS: 1 DIF: Medium OBJ: 9.7 NAT: AACSB Analytic | AICPA FN Measurement 73. The Suvari Company purchased a machine on November 1, 2003, for $148,000. At the time of acquisition, the machine was estimated to have a useful life of 10 years and a salvage value of $4,000. Suvari recorded monthly depreciation using the straight-line method. On July 1, 2012, the machine was sold for $13,000. What should be the loss recognized from the sale of the machine? a. $4,000 b. $5,000 c. $10,200 d. $13,000
ANS: C Annual depreciation expense: Book value on July 1, 2012: Loss on machine:
($148,000 $4,000) 10 = $14,400 $148,000 [($14,400 8) + ($14,400 8/12)] = $23,200 $23,200 $13,000 = $10,200
PTS: 1 DIF: Challenging OBJ: 9.7 NAT: AACSB Analytic | AICPA FN Measurement 74. The balance sheet category "intangible assets" includes a. Patents, trademarks, and franchises b. Equipment, land, and buildings c. Investments, receivables, and customer lists d. Goodwill, inventory, and furnishings ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.8
75. Intangible assets are usually amortized using a. The straight-line method b. The units-of-production method c. The declining-balance method d. The sum-of-the-years'-digits method ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.8
76. When a franchisee purchases a franchise, the amount recorded in the books for the franchise asset would be equal to a. The value of the franchise b. The total cost paid for the franchise c. The cost paid for the franchise less expenses for equipment d. None of these are correct ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.8
77. Which of the following is considered to be an intangible asset? a. A gold mine b. A copyright c. Land improvement d. Building ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.8
78. Which of the following assets would normally involve a straight-line method of cost allocation? a. An oil well b. Land c. A timber tract d. Patent ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.8
79. The periodic allocation to expense of an intangible asset's cost is a. Amortization b. Depletion c. Depreciation d. Allocation ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.8
80. The exclusive right to use a certain name or symbol is called a a. Franchise b. Patent c. Trademark d. Copyright ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.8
81. When Scranton Tools bought Tipton Hardware, included in the purchase price was a patent valued at $26,000. The patent still has 10 years remaining of its legal life. However, it is estimated that the useful life of the patent is only 8 years. The journal entry to record the annual patent amortization expense would include a a. Debit to Amortization Expense, patent for $2,600 b. Credit to Patent for $2,600 c. Debit to Amortization Expense, patent for $3,250 d. Debit to Patent for $3,250 ANS: C Amortization expense: $26,000 8 = $3,250 PTS: 1 DIF: Medium OBJ: 9.8 NAT: AACSB Analytic | AICPA FN Measurement 82. On March 3, 2012, Binford Tools acquired the following assets from Mace Hardware for $360,000: Book Value $ 58,000 92,000 139,000 13,000
Accounts Receivable Inventory Equipment Patent How much goodwill should Binford record for this acquisition? a. $61,000 b. $58,000 c. $39,000 d. $0 ANS: A Total market value: Goodwill:
$33,000 + $76,000 + $182,000 + $8,000 = $299,000 $360,000 $299,000 = $61,000
PTS: 1 DIF: Medium OBJ: 9.8 NAT: AACSB Analytic | AICPA FN Measurement
Fair Market Value $ 33,000 76,000 182,000 8,000
83. The ratio that measures how efficiently a company is using its property, plant, and equipment is the a. Property, plant, and equipment usage ratio b. Accounts receivable turnover ratio c. Asset turnover ratio d. Fixed asset turnover ratio ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.9
84. The fixed asset turnover ratio is interpreted as the a. Number of dollar sales generated by each dollar of fixed assets b. Number of dollar in notes payable generated by each dollar of fixed assets c. Rate at which fixed asset inventories are being rotated d. Number of dollar sales generated by each dollar of total assets ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.9
85. Johnston Company's financial statements on December 31, 2012, showed the following: Sales Property, plant, and equipment, 1/1/12 Property, plant, and equipment, 12/31/12 Total assets, 1/1/12 Total assets, 12/31/12
$275,000 $ 73,000 $ 67,000 $ 97,000 $100,000
Given this information, Johnston Company's fixed asset turnover ratio for 2012 was (round to two decimal places) a. 4.10 b. 3.93 c. 2.79 d. 2.60 ANS: B Average fixed assets: Fixed asset turnover ratio:
($73,000 + $67,000) 2 = $70,000 $275,000 $70,000 = 3.93 (rounded)
PTS: 1 DIF: Medium OBJ: 9.9 NAT: AACSB Analytic | AICPA FN Measurement 86. In order to calculate the third year's depreciation on an asset using the sum-of-the-years'-digits method, which of the following must be known about the asset? a. Its acquisition cost b. Its estimated salvage value c. Its estimated useful life d. All of these must be known ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
87. Which of the following methods will always produce more depreciation expense in the early years of an asset's useful life than in the later years? a. Straight-line method b. Sum-of-the-years'-digits method c. Units-of-production method d. All of these are correct ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
88. Which depreciation formula does NOT include salvage value? a. Units-of-production method b. Straight-line method c. Sum-of-the-years'-digits method d. Double-declining-balance method ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
89. Four widely used methods of allocating the cost of equipment over its useful life are a. Depreciation, allocation, amortization, and depletion b. Straight-line, units-of-production, declining-balance, and sum-of-the-years'-digits c. FIFO, LIFO, weighted average, and specific identification d. None of these are correct ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
90. The straight-line depreciation method usually provides for a higher amount of depreciation expense during the last year of an asset's life than does a. The sum-of-the-years'-digits method b. The 200% declining-balance method c. The 150% declining-balance method d. All of these methods ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
91. Which depreciation method usually allows the highest amount of net income to be reported during the first year an asset is owned? a. Straight-line method b. Double-declining-balance method c. Sum-of-the-years'-digits method d. Either double-declining-balance method or sum-of-the-years'-digits method ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
92. Which of the following depreciation methods can NOT depreciate an asset below its salvage value? a. Straight-line method b. Units-of-production method c. Sum-of-the-years'-digits method d. All of these cannot depreciate below salvage value ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
93. Which of the following methods applies a declining depreciation rate each period to an asset's constant value? a. Straight-line method b. Units-of-production method c. Double-declining-balance method d. Sum-of-the-years'-digits method ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
94. Which of the following depreciation methods initially ignores salvage value in its calculation? a. Straight-line b. Sum-of-the-years'-digits c. Declining-balance d. Units-of-production ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
95. Which of the following depreciation methods applies a uniform depreciation rate each period to an asset's book value? a. Straight-line b. Units-of-production c. Declining-balance d. Sum-of-the-years'-digits ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.1
96. The sum-of-the-years'-digits method of depreciation is being used for a machine with a 5-year estimated useful life. Which fraction would be applied to the cost to be depreciated in the second year? a. 4/5 b. 2/5 c. 4/15 d. 2/15 ANS: C Sum-of-the-years'-digits: 5 6 2 = 15 PTS: 1 DIF: Medium OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement 97. Rexford Company purchased a machine on January 1, 2012, for $57,600 cash. The machine has an estimated useful life of 8 years and a salvage value of $15,040. Rexford uses the double-decliningbalance method of depreciation for all its assets. What will be the depreciation expense for 2012? a. $15,600 b. $14,400 c. $10,640 d. $7,200
ANS: B Annual depreciation rate: Deprecation expense 2012:
1/8 2 = 25% $57,600 25% = $14,400
PTS: 1 DIF: Medium OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement 98. Rexford Company purchased a machine on January 1, 2012, for $57,600 cash. The machine has an estimated useful life of 8 years and a salvage value of $15,040. Rexford uses the double decliningbalance method of depreciation for all its assets. What will be the machine's book value as of December 31, 2013? a. $10,800 b. $32,400 c. $43,200 d. $14,400 ANS: B Annual depreciation rate: Depreciation expense 2012: Depreciation expense 2013: Book value 2013:
1/8 2 = 25% $57,600 25% = $14,400 ($57,600 $14,400) 25% = $10,800 $57,600 $14,400 $10,800 = $32,400
PTS: 1 DIF: Medium OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement 99. Spears Corporation bought a machine on January 1, 2011. In purchasing the machine, the company paid $50,000 cash and signed an interest-bearing note for $100,000. The estimated useful life of the machine is 5 years, after which time the salvage value is expected to be $15,000. The company uses the sum-of-the-years'-digits depreciation method. Given this information, how much depreciation expense would be recorded for the year ending December 31, 2012? a. $45,000 b. $40,000 c. $36,000 d. $34,000 ANS: C Depreciation expense 2012: 4/15 ($150,000 $15,000) = $36,000 PTS: 1 DIF: Medium OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement 100. On September 1, 2012, Tan Party Supplies purchased catering equipment for $4,680. The equipment is estimated to have a useful life of 8 years and no salvage value. If Tan selected the sum-of-the-years'digits method, what will be the depreciation expense for 2012? a. $1,040 b. $347 c. $260 d. $130
ANS: B Depreciation expense for 2012: 8/36 $4,680 4/12 = $347 PTS: 1 DIF: Medium OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement 101. Ferrott Company purchased a machine that was installed and placed in service on January 2, 2011, at a total cost of $480,000. Salvage value was estimated at $80,000. The machine is being depreciated over ten years by the double-declining-balance method. For the year 2012, Ferrott should record depreciation expense of a. $64,000 b. $76,800 c. $80,000 d. $96,000 ANS: B Annual depreciation rate: Depreciation expense 2011: Depreciation expense 2012:
1/10 2 = 20% $480,000 20% = $96,000 ($480,000 $96,000) 20% = $76,800
PTS: 1 DIF: Medium OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement 102. On January 1, 2009, McMahan Company purchased equipment at a cost of $420,000. The equipment was estimated to have a useful life of 5 years and a salvage value of $60,000. McMahan uses the sumof-the-years'-digits method of depreciation. What should the accumulated depreciation be at December 31, 2012? a. $240,000 b. $280,000 c. $336,000 d. $360,000 ANS: C Depreciation expense 2009: Depreciation expense 2010: Depreciation expense 2011: Depreciation expense 2012: Accumulated depreciation 2012:
5/15 ($420,000 $60,000) = $120,000 4/15 ($420,000 $60,000) = $96,000 3/15 ($420,000 $60,000) = $72,000 2/15 ($420,000 $60,000) = $48,000 $120,000 + $96,000 + $72,000 + $48,000 = $336,000
PTS: 1 DIF: Medium OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement 103. On January 1, 2010, Mena Co. purchased a new machine for $2,000,000. The machine has an estimated useful life of 5 years and a salvage value of $200,000. Mena uses the sum-of-the-years'digits method of depreciation. The amount of depreciation expense for 2012 is a. $360,000 b. $480,000 c. $533,333 d. $600,000 ANS: A Depreciation expense 2012: 3/15 ($2,000,000 $200,000) = $360,000 PTS: 1 DIF: Medium OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement
104. On January 1, 2010, Mena Co. purchased a new machine for $2,000,000. The machine has an estimated useful life of 5 years and a salvage value of $200,000. Mena uses the double-decliningbalance method of depreciation. The amount of depreciation expense for 2012 is a. $480,000 b. $288,000 c. $432,000 d. $259,200 ANS: B Annual depreciation rate: Depreciation expense 2010: Depreciation expense 2011: Depreciation expense 2012:
1/5 2 = 40% $2,000,000 40% = $800,000 ($2,000,000 $800,000) 40% = $480,000 ($1,200,000 $480,000) 40% = $288,000
PTS: 1 DIF: Medium OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement 105. A machine is purchased on January 1, 2012, for $72,000 cash. The machine has an estimated useful life of 8 years and a salvage value of $17,200. If the double-declining-balance method of depreciation is used, what will be the machine's book value as of December 31, 2013? a. $54,000 b. $40,500 c. $13,500 d. $31,500 ANS: B Depreciation expense 2012: Depreciation expense 2013: Book value December 31, 2013:
(1/8 2) $72,000 = $18,000 (1/8 2) ($72,000 $18,000) = $13,500 $72,000 $18,000 $13,500 = $40,500
PTS: 1 DIF: Medium OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement 106. On January 1, 2011, Meri-Ann Corporation purchased computer equipment for $23,000. The equipment had an estimated useful life of 4 years and a salvage value of $400. Meri-Ann uses the sumof-the-years-digits method of depreciation. The accumulated depreciation at December 31, 2012, would be a. $9,040 b. $9,200 c. $15,820 d. $16,100 ANS: C Depreciation expense 2011: (4/10) ($23,000 $400) = $9,040 Depreciation expense 2012: (3/10) ($23,000 $400) = $6,780 Accumulated depreciation: $9,040 + $6,780 = $15,820 PTS: 1 DIF: Medium OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement
107. On January 1, 2011, Gecho Corporation purchased computer equipment for $23,000. The equipment has an estimated useful life of 4 years and a salvage value of $400. Given this information, if Gecho uses the double-declining-balance method of depreciation and sells the equipment of December 31, 2012, for $250, it will have a a. $250 gain b. $3,124 gain c. $3,600 loss d. $5,500 loss ANS: D Depreciation expense 2011: Depreciation expense 2012: Loss on sell of equipment:
(1/4 2) $23,000 = $11,500 (1/4 2) ($23,000 $11,500) = $5,750 ($11,500 $5,750) $250 = $5,500
PTS: 1 DIF: Challenging OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement 108. On September 1, 2012, Tan Party Supplies purchased catering equipment for $4,680. The equipment is estimated to have a useful life of 8 years and no salvage value. Assuming that the sum-of-the-years'digits method is used, what will be the depreciation expense for 2013? a. $1,040 b. $1,008 c. $997 d. $910 ANS: C Depreciation expense 2013: (8/36 $4,680 8/12) + (7/36 $4,680 4/12) = $997 (rounded) PTS: 1 DIF: Challenging OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement 109. On January 1, 2011, Heather Locks Corporation purchased drilling equipment for $11,500. The equipment has an estimated useful life of 4 years and a salvage value of $200. Given this information, if Heather uses the double-declining-balance method of depreciation and sells the equipment on December 31, 2012, for $3,000, it will have a a. $2,750 loss b. $1,800 loss c. $1,562 gain d. $125 gain ANS: D Annual depreciation rate: Depreciation first year: Depreciation second year: Gain on equipment:
1/4 2 = 50% $11,500 50% = $5,750 ($11,500 $5,750) 50% = $2,875 $3,000 ($5,750 $2,875) = $125
PTS: 1 DIF: Challenging OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement
110. Luray Company purchased a new $40,000 truck on January 1, 2012. The truck was expected to last 4 years and have no salvage value. During 2013, Loray's depreciation expense on the truck was $12,000. Which of the following depreciation methods is Loray Company using to depreciate the truck? a. Sum-of-the-years'-digits b. Double-declining-balance c. 150-percent-declining balance d. Straight-line ANS: A Sum-of-the-years'-digits for 2013: 3/10 $40,000 = $12,000 PTS: 1 DIF: Challenging OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement 111. If the estimate of an asset's useful life is changed, then a. Depreciation expense for all past periods must be recalculated b. There is no change in the amount of depreciation expense recorded for future years c. Only the depreciation expense in the remaining years is changed d. None of these are true ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 9.11
112. Shanahan Construction purchased a crane on January 1, 2010, for $102,750. At the time of purchase, the crane was estimated to have a life of 6 years and a residual value of $6,750. In 2012, Shanahan determined that the crane had a total useful life of 7 years and a residual value of $4,500. If Shanahan uses the straight-line method of depreciation, what will be the 2012 depreciation expense for the crane? a. $16,000 b. $13,250 c. $9,464 d. $8,000 ANS: B Annual depreciation for the first two years: Book value after two years: Annual depreciation for last five years:
($102,750 $6,750) 6 = $16,000 $102,750 ($16,000 2) = $70,750 ($70,750 $4,500) 5 = $13,250
PTS: 1 DIF: Medium OBJ: 9.11 NAT: AACSB Analytic | AICPA FN Measurement 113. A truck that cost $8,000 was originally being depreciated over 4 years using the straight-line method with no salvage value. At the beginning of year two, it was decided that the truck would last 5 more years. Given this information, the second year's depreciation would be a. $2,000 b. $1,200 c. $1,500 d. $2,500
ANS: B Depreciation expense in year one: Book value after one year: Depreciation expense for last 5 years:
$8,000 4 = $2,000 $8,000 $2,000 = $6,000 $6,000 5 = $1,200
PTS: 1 DIF: Medium OBJ: 9.11 NAT: AACSB Analytic | AICPA FN Measurement 114. Trans-State Movers purchased a truck on January 1, 2011, for $51,375. At the time of purchase, the truck was estimated to have a useful life of 6 years and a residual value of $3,375. In 2012, Trans-State determined that the truck had a total useful life of 10 years and the residual value is unchanged. If Trans-State uses the straight-line method of depreciation, what will be the 2012 depreciation expense for the truck? a. $4,444 b. $4,732 c. $6,625 d. $8,000 ANS: A Annual depreciation expense before change in estimate: Book value before change in estimate: Annual depreciation expense after change in estimate:
($51,375 $3,375) 6 = $8,000 $51,375 ($8,000) = $43,375 ($43,375 $3,375) 9 = $4,444
PTS: 1 DIF: Medium OBJ: 9.11 NAT: AACSB Analytic | AICPA FN Measurement 115. Claflin Construction Company purchased a machine on January 1, 2011 for $411,000. The machine has an estimated useful life of 8 years and a salvage value of $27,000. In 2013, Claflin determines that the machine will actually have a total useful life of 5 years and the salvage value will be $15,000. If Claflin uses straight-line depreciation, what will be the balance of the accumulated depreciation account on December 31, 2013? a. $100,000 b. $144,000 c. $244,000 d. $196,000 ANS: D Annual depreciation expense before change in estimates: Book value before change in estimate: Annual depreciation expense after change in estimate: Accumulated depreciation on Dec. 31, 2013:
($411,000 $27,000) 8 = $48,000 $411,000 ($48,000 2) = $315,000 ($315,000 $15,000) 3 = $100,000 $96,000 + $100,000 = $196,000
PTS: 1 DIF: Medium OBJ: 9.11 NAT: AACSB Analytic | AICPA FN Measurement
116. Norton Company owns a machine that was bought on January 2, 2009, for $376,000. The machine was estimated to have a useful life of 5 years and a salvage value of $24,000. Norton uses the sum-of-theyears'-digits method of depreciation. At the beginning of 2012, Norton determined that the useful life of the machine should have been 4 years and the salvage value $35,200. For the year 2012, Norton should record depreciation expense on this machine of a. $19,200 b. $44,400 c. $59,200 d. $70,400 ANS: C Depreciation expense for 2009: Depreciation expense for 2010: Depreciation expense for 2011: Book value in 2012: Depreciation expense in 2012:
5/15 ($376,000 $24,000) = $117,333 (rounded) 4/15 ($376,000 $24,000) = $93,867 (rounded) 3/15 ($376,000 $24,000) = $70,400 $376,000 $117,333 $93,867 $70,400 = $94,400 $94,400 $35,200 = $59,200
PTS: 1 DIF: Challenging OBJ: 9.11 NAT: AACSB Analytic | AICPA FN Measurement PROBLEM 1. On January 1, 2012, Versachi Industries, a calendar-year corporation, leased an airplane under a 7year, noncancelable lease agreement that requires Versachi to pay the lessor $30,000 at the end of each year. The first payment is due December 31, 2012. The present value of the lease payments is $150,990, assuming an interest rate of 9 percent. At the end of the 7-year lease term, the airplane will be returned to the lessor unless Versachi Corporation chooses to purchase the airplane at its appraised market value. At January 1, 2012, the airplane has an estimated economic life of 10 years and a fair market value of $190,000. 1. 2.
Determine whether the airplane lease is an operating or a capital lease and explain your classification. Without regard to your answer to (1), assume the lease is a capital lease and interest for 2012 is $13,600. Give the journal entries to record the lease at January 1 and the first payment at December 31, 2012.
ANS: 1.
The airplane lease is an operating lease (a simple rental agreement) because it does not meet any of the four criteria for classification as a capital lease. a. Title to the airplane will not be transferred to the lessee. b. There is no bargain purchase option. c. The lease term is less than 75 percent of the asset's economic life (7 years / 10 years = 70 percent). d. The present value of the lease payments is less than 90 percent of the asset's market value at the beginning of the lease term ($150,990 / $190,000 = 79.5 percent).
2.
January 1 Leased Airplane Lease Liability
150,990 150,990
December 31 Lease Liability Interest Expense Cash
16,400 13,600 30,000
PTS: 1 DIF: Medium OBJ: 9.3 NAT: AACSB Analytic | AICPA FN Measurement 2. Atchison Corporation purchased equipment, a building, and land for $1,000,000 ($200,000 in cash and $800,000 in notes). After the purchase, the property was appraised. Fair market values were determined to be $240,000 for the equipment, $540,000 for the building, and $420,000 for the land. Prepare the entry to record the purchase of this property by Atchison Corporation. ANS: Equipment Building Land Cash Notes Payable
200,000 450,000 350,000 200,000 800,000
Allocation of basket purchase price: Asset Equipment Building Land
FMV $ 240,000 540,000 420,000 $1,200,000
Allocation 20% $1,000,000 45% $1,000,000 35% $1,000,000
PTS: 1 DIF: Medium OBJ: 9.3 NAT: AACSB Analytic | AICPA FN Measurement
Cost $ 200,000 450,000 350,000 $1,000,000
3. Belpre Inc. constructed a new office building. Building material costs for the new building were $3,000,000; total labor costs were $2,500,000; total company overhead was $9,000,000 (25% of which could be assigned to the new project); and interest paid on a new construction loan for the project was $1,250,000. Calculate the total cost of the self-constructed building. ANS: Materials Labor costs Overhead ($9,000,000 .25) Interest Total building cost
$3,000,000 2,500,000 2,250,000 1,250,000 $9,000,000
PTS: 1 DIF: Medium OBJ: 9.3 NAT: AACSB Analytic | AICPA FN Measurement 4. Saria Supply Printing Company, a calendar-year corporation, purchased a new scale for $165,000 on April 1, 2012. Additional costs of the scale included sales tax of 5 percent, freight-in of $5,800, and installation costs of $5,100. The scale has a useful life of 5 years with no salvage value. a. b.
Compute the amount at which the scale should be recorded as an asset. Compute the depreciation expense for 2012 and 2013 using the straight-line depreciation method.
ANS: a.
$165,000 + ($165,000 .05) + $5,800 + $5,100 = $184,150
b.
2012: ($184,150 5) 9/12 2013: ($184,150 5)
$27,622.50 $36,830.00
PTS: 1 DIF: Medium OBJ: 9.3 | 9.4 NAT: AACSB Analytic | AICPA FN Measurement 5. Smolan Company purchased a new machine on September 1, 2011. It was expected to produce 200,000 units of product over its estimated useful life of eight years. Total cost of the machine was $900,000, and salvage value was estimated to be $90,000. Actual units produced by the machine in 2011 and 2012 are shown below: 2011 2012 a. b. c.
10,000 units 28,000 units Compute the depreciation expense for 2011 and 2012 using the straight-line depreciation method. Compute the depreciation expense for 2011 and 2012 using the units-of-production method. Prepare the journal entries to record depreciation expense at the end of 2011 and 2012 using the straight-line depreciation method.
ANS: a.
b.
c.
Straight-line 2011: 2012:
($900,000 $90,000)/8 4/12 ($900,000 $90,000)/8
$ 33,750 $101,250
Units-of-production 2011: [($900,000 $90,000) 200,000] 10,000 2012: [($900,000 $90,000) 200,000] 28,000
$ 40,500 $113,400
2011: Depreciation Expense Accumulated Depreciation
33,750
2012: Depreciation Expense Accumulated Depreciation
101,250
33,750
101,250
PTS: 1 DIF: Medium OBJ: 9.4 NAT: AACSB Analytic | AICPA FN Measurement 6. Whiting Company purchased a machine in 2007 for $150,000. The machine was being depreciated by the straight-line method over an estimated useful life of 10 years, with no salvage value. At the beginning of 2012, after 5 years of use, Whiting paid $30,000 on maintenance to the machine. Whiting determined that $5,000 of this expense was normal maintenance and did not extend the life of the machine. However, the rest of the expenditure was an overhaul of the machine and was expected to extend the machine's estimated useful life by an additional 5 years. What would be the depreciation expense recorded for the above machine in 2012? a. b.
Prepare the appropriate journal entries to record the expenditures on January 1, 2012. Prepare the appropriate journal entry to record depreciation on December 31, 2012
ANS: a.
b.
Repairs and Maintenance Expense Cash Machine Cash Depreciation Expense* Accumulated Depreciation
5,000 5,000 25,000 25,000 10,000
* Depreciation expense per year prior to overhaul: $150,000 10 = $15,000 Book value before overhaul: $150,000 ($15,000 5) = $75,000 Depreciation expense in 2012: ($75,000 + $25,000) 10 = $10,000 PTS: 1 DIF: Medium OBJ: 9.5 NAT: AACSB Analytic | AICPA FN Measurement
10,000
7. In 2002, Yates Company purchased land and a building at a cost of $2,000,000, with $600,000 allocated to land and $1,400,000 to the building. On December 31, 2011, the accounting records showed the following: Land Building Accumulated Depreciation Building
$600,000 1,400,000 800,000
During 2012, it is determined that the building is on the site of a toxic waste dump and the future cash flows associated with the land and building are less than the recorded total book value for these two assets. The fair value of the land and building is $200,000, of which $60,000 is land. Make any journal entries necessary to record the asset impairment. ANS: Loss on Impairment of Land and Building Accumulated Depreciation Building Land ($600,000 $60,000) Building ($1,400,000 $140,000)
1,000,000 800,000 540,000 1,260,000
PTS: 1 DIF: Medium OBJ: 9.6 NAT: AACSB Analytic | AICPA FN Measurement 8. Mini Computers purchased a delivery truck 4 years ago for $30,000. Currently the accumulated depreciation on the truck is $14,000. Prepare journal entries to show the sale of the truck assuming: a. b. c.
The truck is sold for $17,000. The truck is sold for $14,000. The truck is scrapped.
ANS: a.
b.
c.
Cash Accumulated Depreciation Delivery Truck Delivery Truck Gain on Sale of Delivery Truck
17,000 14,000
Cash Accumulated Depreciation Delivery Truck Loss on Sale of Delivery Truck Delivery Truck
14,000 14,000 2,000
Accumulated Depreciation Delivery Truck Loss on Disposal of Delivery Truck Delivery Truck
14,000 16,000
PTS: 1 DIF: Medium OBJ: 9.7 NAT: AACSB Analytic | AICPA FN Measurement
30,000 1,000
30,000
30,000
9. On July 1, 2011, Macro Inc. purchased a franchise to operate a Blended Coffee Corner at a cost of $180,000. Assuming that Macro amortizes franchises over a 10-year period, prepare journal entries to record: a. b. c.
The purchase of the franchise on July 1, 2011. The amortization of the franchise on December 31, 2011. The amortization of the franchise on December 31, 2012.
ANS: a. b.
c.
Franchise Cash
180,000 180,000
Amortization Expense Franchise Franchise ($180,000/10 6/12)
9,000
Amortization Expense Franchise Franchise ($180,000/10)
18,000
9,000
18,000
PTS: 1 DIF: Medium OBJ: 9.8 NAT: AACSB Analytic | AICPA FN Measurement 10. Thayer Company's financial statements on December 31, 2012, showed the following:
Sales Property, plant, and equipment Total assets
2012 $600,000 180,000 220,000
2011 $525,000 112,000 201,000
2010 $430,000 94,000 230,000
Given this information, compute Thayer Company's fixed asset turnover ratio for 2011 and 2012 (round to two decimal places). ANS: 2011: Average fixed assets: Fixed asset turnover ratio:
($94,000 + $112,000) 2 = $103,000 $525,000 $103,000 = 5.10 (rounded)
2012: Average fixed assets: Fixed asset turnover ratio:
($112,000 + $180,000) 2 = $146,000 $600,000 $146,000 = 4.11 (rounded)
PTS: 1 DIF: Medium OBJ: 9.9 NAT: AACSB Analytic | AICPA FN Measurement
11. On January 1, 2011, Milner Company purchased a machine for $138,000. The machine cost $1,200 to deliver and $4,800 to install. At the end of 10 years, Milner expects to sell the machine for $12,000. Compute depreciation expense for 2011 and 2012 using the following methods: a. b. c.
Double-declining-balance 150 percent declining-balance Sum-of-the-years'-digit's
ANS: a.
Double-declining-balance [(1/10)2] = 20% Cost of machine: $138,000 + $1,200 + $4,800 = $144,000 2011: 2012:
b.
$28,800 $23,040
150 percent declining-balance [(1/10)1.5] = 15% 2011: 2012:
c.
$144,000 20% ($144,000 $28,800) 20%
$144,000 15% ($144,000 $21,600) 15%
$21,600 $18,360
Sum-of-the-years'-digits: [10(11) / 2] = 55 2011: 2012:
($144,000 $12,000) 10/55 ($144,000 $12,000) 9/55
$24,000 $21,600
PTS: 1 DIF: Medium OBJ: 9.1 NAT: AACSB Analytic | AICPA FN Measurement 12. Sylvia Supply Company, a calendar-year corporation, purchased a new scale for $495,000 on April 1, 2012. Additional costs of the scale included sales tax of 5 percent, freight-in of $17,400, and installation costs of $15,300. The scale has a useful life of 5 years with no salvage value. 1. 2.
Compute the amount at which the scale should be recorded as an asset. Compute the depreciation expense for 2012 and 2013 for each of the following depreciation methods: a. Double-declining balance, and b. Sum-of-the-years'-digits.
ANS: 1.
$495,000 + $24,750 + $17,400 + $15,300 = $552,450
2. 2012 2013
Double-Declining-Balance $165,735 $154,686
Calculations: Double-declining-balance 2012: Double-declining-balance 2013: Sum-of-the-years'-digits 2012: Sum-of-the-years'-digits 2013:
Sum-of the-Years'-Digits $138,112.50 $156,527.50
1/5 2 $552,450 9/12 = $165,735 1/5 2 ($552,450 $165,735) = $154,686 5/15 $552,450 9/12 = $138,112.50 (5/15 $552,450 3/12) + (4/15 $552,450 9/12) = $156,527.50
PTS: 1 DIF: Challenging OBJ: 9.3 | 9.10 NAT: AACSB Analytic | AICPA FN Measurement 13. On May 1, 2011, Dominquez Inc. purchased equipment at a cost of $280,000. The equipment has an estimated salvage value of $12,000 and is being depreciated over an estimated life of six years. The company's policy is to recognize depreciation to the nearest whole month. Compute the depreciation expense (rounded to the nearest dollar) on this equipment for the years ended December 31, 2011 and 2012, using a. b. c.
Double-declining-balance Sum-of-the-years'-digits Straight line
ANS: a.
Double-declining-balance [(1/6)2] = 33 1/3% 2011: 2012:
b.
$62,222 $72,593
Sum-of-the-years'-digits: [6(7) / 2] = 21 2011: 2012:
c.
$280,000 33 1/3% 8/12 ($280,000 $62,222) 33 1/3%
($280,000 $12,000) 6/21 8/12 ($280,000 $12,000) 6/21 4/12 ($280,000 $12,000) 5/21 8/12
$51,048 $25,524 42,540 $68,064
($280,000 $12,000)/6 8/12 ($280,000 $12,000)/6 =
$29,778 $44,667
Straight line 2011: 2012:
PTS: 1 DIF: Challenging OBJ: 9.4 | 9.10 NAT: AACSB Analytic | AICPA FN Measurement
14. The following information is for Brown Company: January 1, 2011 January 1, 2011 During 2011 January 1, 2012 During 2012 December 31, 2012 During 2013
Purchased a mine for $100,000 Estimated that the mine contained 1,500 tons of ore Extracted 300 tons of ore Spent $40,000 on capitalized mine improvements Extracted 1,200 tons of ore Estimated that the mine still contained an additional 500 tons of ore Extracted 400 tons of ore
Compute the depletion expense (rounded to the nearest dollar) on this mine for the years ended December 31, 2011, 2012, and 2013. ANS: Depletion Expense 2011: ($100,000 1,500) 300 2012: [($100,000 + $40,000) 1,500] 1,200 ($140,000 2,000) 400 2013: PTS: 1 DIF: Challenging OBJ: 9.4 | 9.11 NAT: AACSB Analytic | AICPA FN Measurement
$ 20,000 $112,000 $ 28,000
Chapter 10—Financing: Long-Term Liabilities MULTIPLE CHOICE Instructions: Use the present value and future value tables included in Appendix 8 and on the textbook companion website. 1. Which of the following statements is FALSE? a. A liability is an item that involves a future transfer of resources. b. A liability is an item that is measurable in monetary terms. c. A liability is an item that represents an obligation of an enterprise. d. A liability is an item that must be paid in cash. ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.1
2. Assuming an annual interest rate of 10 percent, what factor from the tables would be used to calculate the present value of a specified payment to be received nine years from today? a. 0.4241 b. 0.4224 c. 2.3579 d. 2.3674 ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.1
3. Assuming an annual interest rate of 8 percent, what factor from the tables would be used to calculate the amount that should be deposited in a bank today to grow to a specified amount nine years from today? a. 0.5002 b. 0.5019 c. 1.9926 d. 1.9990 ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.1
4. You are purchasing a home. You know the monthly mortgage payment amount that you can afford, and you want to calculate the corresponding mortgage total amount. The technique you will use is the a. Future amount of $1 b. Present value of $1 c. Future amount of an annuity of $1 d. Present value of an annuity of $1 ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.1
5. An investor wants to withdraw $8,000 (including principal) from an investment fund at the end of each year for 10 years. How should the investor compute the required initial investment at the beginning of the first year if the fund earns 10 percent compounded annually? a. $8,000 times the amount of an annuity of $1 at 10 percent at the end of each year for 10 years b. $8,000 divided by the amount of an annuity of $1 at 10 percent at the end of each year for 10 years c. $8,000 times the present value of an annuity of $1 at 10 percent at the end of each year for 10 years d. $8,000 divided by the present value of an annuity of $1 at 10 percent at the end of each year for 10 years ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.1
6. For a 10-year bond paying semiannual interest, how many compounding periods are there over the life of the bond? a. 5 b. 10 c. 15 d. 20 ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.1
7. You have just purchased an automobile for $15,000 and will be financing it at 12 percent interest compounded monthly for 5 years. Your monthly payment will be a. $4,161.15 b. $3,068.49 c. $1,802.02 d. $333.67 ANS: D Interest periods: 60; Interest per payment: 1%; Present value: $15,000 PTS: 1 DIF: Medium OBJ: 10.1 NAT: AACSB Analytic | AICPA FN Measurement 8. If Cheng Corporation can invest $10,000 at 10 percent interest compounded annually, approximately how many years will it take for the $10,000 to grow to $20,000? a. Slightly more than 5 years b. Slightly more than 7 years c. Slightly more than 10 years d. Slightly more than 25 years ANS: B Present value: $10,000; Future value: $20,000; Interest: 10% PTS: 1 DIF: Medium OBJ: 10.1 NAT: AACSB Analytic | AICPA FN Measurement
9. Which of the following has the smallest present value? a. $2,000 discounted for 4 years at 8 percent compounded annually b. $2,000 discounted for 4 years at 8 percent compounded semiannually c. $3,000 discounted for 4 years at 8 percent compounded annually d. $3,000 discounted for 4 years at 8 percent compounded semiannually ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 10.1
10. The present value of an annuity of $500 for 10 years at 10 percent interest compounded annually is a. Less than $5,000 b. Greater than $5,000 c. Exactly $5,000 d. Not determinable from the above data ANS: A Payment: $500; Interest: 10%; Number of payments: 10 PTS: 1 DIF: Medium OBJ: 10.1 NAT: AACSB Analytic | AICPA FN Measurement 11. What is the approximate present value of $500 to be received in 1 year if interest is 8 percent compounded annually? a. $415 b. $423 c. $460 d. $463 ANS: D Future value: $500; Interest: 8%; Number of years: 1 PTS: 1 DIF: Medium OBJ: 10.1 NAT: AACSB Analytic | AICPA FN Measurement 12. The present value of $1,000 to be received in 3 years when interest is 12 percent compounded quarterly is computed by discounting at a. 3 percent for 12 periods b. 12 percent for 3 periods c. 4 percent for 9 periods d. 6 percent for 6 periods ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 10.1
13. What is the approximate present value of $100 to be received in 2 years if interest is 10 percent compounded annually? a. $83 b. $90 c. $110 d. $121 ANS: A Future value: $100; Number of periods: 2; Interest rate: 10% PTS: 1 DIF: Medium OBJ: 10.1 NAT: AACSB Analytic | AICPA FN Measurement 14. The present value of $1 discounted for 10 years at 8 percent compounded annually is 0.4632. The present value of an annuity of $1 discounted for 10 years at 8 percent compounded annually is 6.7101. Given this information, the present value of $80 to be received in 10 years at 8 percent compounded annually is a. $11.92 b. $37.06 c. $172.71 d. $536.81 ANS: B Present value: $80 0.4632 = $37.06 PTS: 1 DIF: Medium OBJ: 10.1 NAT: AACSB Analytic | AICPA FN Measurement 15. The present value of $1 discounted for 12 years at 9 percent compounded annually is 0.3555. The present value of an annuity of $1 discounted for 12 years at 9 percent compounded annually is 7.1607. Given this information, how much must be invested today so that $100 can be received each year for 12 years if money is worth 9 percent compounded annually? a. $13.97 b. $35.55 c. $281.29 d. $716.07 ANS: D Present value: $100 7.1607 = $716.07 PTS: 1 DIF: Medium OBJ: 10.1 NAT: AACSB Analytic | AICPA FN Measurement 16. The present value of $2,500 to be received in 4 years when interest is 12 percent compounded quarterly is computed by discounting at a. 12 percent for 4 periods b. 6 percent for 8 periods c. 4 percent for 12 periods d. 3 percent for 16 periods ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 10.1
17. Which of the following has the smallest present value? a. $3,500 discounted for 6 years at 8 percent compounded annually b. $3,500 discounted for 6 years at 8 percent compounded semiannually c. $3,500 discounted for 6 years at 8 percent compounded quarterly d. $4,000 discounted for 6 years at 8 percent compounded annually ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 10.1
18. Arsenio plans to invest $10,000 at the end of each of the next ten years. Assume that Arsenio will earn interest at an annual rate of 6 percent compounded annually. The investment at the end of ten years would be (rounded) a. $137,390 b. $131,808 c. $106,000 d. $100,000 ANS: B Payment: $10,000; Number of periods: 10; Interest rate: 6% PTS: 1 DIF: Medium OBJ: 10.1 NAT: AACSB Analytic | AICPA FN Measurement 19. Assuming an interest rate of 12 percent, an ordinary annuity of eight annual $30,000 payments will grow to a. $74,279 b. $149,029 c. $368,991 d. $569,314 ANS: C Payment: $30,000; Number of periods: 8; Interest rate: 12% PTS: 1 DIF: Medium OBJ: 10.1 NAT: AACSB Analytic | AICPA FN Measurement 20. The two major categories of liabilities on a typical balance sheet are a. Current Liabilities and Long-Term Liabilities b. Wages Payable and Long-Term Liabilities c. Accounts Payable and Notes Payable d. Current Liabilities and Bonds Payable ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.2
21. Which of the following is LEAST likely to be classified as a long-term liability? a. Salaries payable b. Mortgage payable c. Lease obligations d. Deferred income taxes payable ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.2
22. Which of the following is LEAST likely to be classified as a current liability? a. Wages Payable b. Income Taxes Payable c. Unemployment Taxes Payable d. Bonds Payable ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.2
23. Which of the following is NOT true? a. Bonds allow a company to borrow a lot of money from a lot of different people b. Notes involve borrowing a lot of money from one lender c. Mortgages typically have a higher interest rate because of collateral on the loan d. Leases typically require a lower down payment as there are no risks associated with product obsolescence ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.2
24. If no interest payments are made on a note, then the difference between the present value of the cash flows associated with the note and the face value of the note represents a. Principal b. Amortization c. Interest d. Principal reduction ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.2
25. Which of the following is prepared to identify how much of each mortgage payment is interest and how much is principle reduction? a. Mortgage depreciation schedule b. Mortgage amortization schedule c. Mortgage depletion schedule d. Mortgage reduction schedule ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.2
26. At the end of each year, a mortgage is reported under how many sections of the balance sheet? a. 1 b. 2 c. 3 d. 4 ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.2
27. A 4-month, $6,500 note payable at 9 percent incurs interest (rounded to nearest dollar) of a. $195 b. $146 c. $292 d. $585 ANS: A Interest: $6,500 .09 4/12 = $195 PTS: 1 DIF: Medium OBJ: 10.2 NAT: AACSB Analytic | AICPA FN Measurement 28. The following entry is made to record the first monthly payment on a $60,000, 9 percent mortgage: Account A Account B Account C
450 32 482
Given this entry, the amount of interest included with this payment is a. $450 b. $32 c. $482 d. Not determinable without more information ANS: A Monthly interest: $60,000 .09 12 = $450 PTS: 1 DIF: Medium OBJ: 10.2 NAT: AACSB Analytic | AICPA FN Measurement 29. A 1-year, $15,000, 12 percent (payable annually) note is signed on April 1. If the note is prematurely repaid on September 1 of the same year, how much interest expense is incurred? a. $1,800 b. $900 c. $750 d. $600 ANS: C Interest expense: $15,000 .12 5/12 = $750 PTS: 1 DIF: Medium OBJ: 10.2 NAT: AACSB Analytic | AICPA FN Measurement 30. Interest expense on a 6-month, 8 percent, $6,000 note payable would be approximately a. $360 b. $120 c. $480 d. $240 ANS: D Interest expense: $6,000 .08 6/12 = $240 PTS: 1 DIF: Medium OBJ: 10.2 NAT: AACSB Analytic | AICPA FN Measurement
31. An $18,000, 8 percent (payable annually), one-year note is accepted by the bank on April 1. If the note is prematurely repaid on November 1 of the same year (without penalty), how much interest is paid? a. $700 b. $840 c. $980 d. $1,440 ANS: B Interest paid: $18,000 .08 7/12 = $840 PTS: 1 DIF: Medium OBJ: 10.2 NAT: AACSB Analytic | AICPA FN Measurement 32. If equipment is purchased by issuing a 10-year, $200,000 interest bearing note at a stated rate of 8 percent (payable annually), the transaction would be entered in the accounting records by crediting a. Notes payable for $29,806 b. Notes payable for $92,640 c. Notes payable for $185,280 d. Notes payable for $200,000 ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 10.2
33. If equipment is purchased by issuing a 10-year, $200,000 interest bearing note at a stated rate of 8 percent (payable annually), the first interest payment, assuming it has not been previously accrued, would be entered in the accounting records by a. Crediting interest expense for $16,000 b. Debiting notes payable for $16,000 c. Debiting cash for $16,000 d. Debiting interest expense for $16,000 ANS: D Interest expense: $200,000 8% = $16,000 PTS: 1 DIF: Medium OBJ: 10.2 NAT: AACSB Analytic | AICPA FN Measurement 34. Assume you are going to purchase a house. You have $40,000 to use as a down payment and can afford a payment of $16,000 per year for 30 years. If interest is 8 percent per year, what is the largest purchase price of the house that you can buy? a. $20,795 b. $225,156 c. $260,000 d. $220,125 ANS: D Payment: $16,000; Number of payments: 30; Interest rate: 8% Present value of loan payments: $180,125 Affordable purchase price of house: $180,125 + $40,000 = $220,125 PTS: 1 DIF: Medium OBJ: 10.2 NAT: AACSB Analytic | AICPA FN Measurement
35. Suppose you want to determine the payments you will have to make on a loan for a house. The house will cost $100,000, and your bank requires a 20 percent down payment. The remainder will be financed at 12 percent compounded annually for 25 years. What will be the annual payment? a. $750 b. $4,704 c. $5,882 d. $10,200 ANS: D Loan amount: $100,000 ($100,000 .20) = $80,000 Interest rate: 12%; Number of periods: 25; Present value: $80,000 PTS: 1 DIF: Medium OBJ: 10.2 NAT: AACSB Analytic | AICPA FN Measurement 36. Byers Corporation purchased equipment by issuing a 10-year, $400,000 interest-bearing note at a stated rate of 10 percent (payable annually). Given this information and assuming that a market interest rate of 8%, the equipment would be entered in the accounting records at a. $400,000 b. $453,680 c. $422,620 d. $431,059 ANS: B Present value of interest payments: $268,403 (using the market interest rate of 8%) Present value of principal payment: $185,277 (using the market interest rate of 8%) Present value of interest and principal: $453,680 PTS: 1 DIF: Challenging OBJ: 10.2 NAT: AACSB Analytic | AICPA FN Measurement 37. The entry to record the annual lease payment on a capitalized lease includes a a. Credit to Lease Obligation b. Debit to Cash c. Credit to Depreciation Expense d. Debit to Interest Expense ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.3
38. A long-term, noncancelable lease for a period that is equal to the life of the leased asset is accounted for as a(n) a. Operating lease b. Rental agreement c. Capital lease d. None of these are correct ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.3
39. Generally accepted accounting principles specify that a long-term noncancelable lease for a period equal to the life of the equipment is a. An operating lease b. Essentially equivalent to a purchase c. Not mentioned in the financial statements unless payment is reasonably possible d. Expensed in the year signed ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.3
40. Which of the following is an example of off-balance-sheet financing? a. Mortgages b. Bonds c. Operating leases d. Notes payable ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.3
41. The amount of a company's future operating lease payments must be disclosed in the a. Current liabilities section of the balance sheet b. Long-term liabilities section of the balance sheet c. Notes to the financial statements d. Operating expenses section of the income statement ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.3
42. A 10-year capital lease requiring payments of $25,000 per year is signed. The entry to record the first payment would probably include a a. Debit to Lease Obligation that is of a larger amount than the debit to Interest Expense b. Debit to Lease Obligation that is of a smaller amount than the debit to Interest Expense c. Debit to Lease Obligation that is of a smaller amount than the debit to Cash d. Debit to Lease Obligation that is of a larger amount than the credit to Cash ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 10.3
43. On January 1, Cromwell Corp. leased a mainframe computer from Fairview Company for $42,000 per year (payable on each December 31) for 10 years. The lease is a capital lease, and the current market rate of interest is 12 percent. The market value of the computer is $237,300, which is equal to its discounted present value at 12 percent. Given this data, interest expense on the lease for the first year is a. $42,000 b. $28,476 c. $25,200 d. $13,524 ANS: B Interest expense: $237,300 12% = $28,476 PTS: 1 DIF: Medium OBJ: 10.3 NAT: AACSB Analytic | AICPA FN Measurement
44. On January 1, Cromwell Corp. leased a mainframe computer from Fairview Company for $42,000 per year (payable on each December 31) for 10 years. The lease is a capital lease, and the current market rate of interest is 12 percent. The market value of the computer is $237,300, which is equal to its discounted present value at 12 percent. Given this data, the amount of the lease obligation at the end of the first year is a. $237,300 b. $420,000 c. $208,824 d. $223,776 ANS: D Interest expense: Principal paid: Amount of lease obligation:
$237,300 12% = $28,476 $42,000 $28,476 = $13,524 $237,300 $13,524 = $223,776
PTS: 1 DIF: Medium OBJ: 10.3 NAT: AACSB Analytic | AICPA FN Measurement 45. Which of the following is one of the ways bonds can be categorized? a. The extent to which bondholders are protected b. How the bond interest is paid c. How the bonds mature d. All of these are correct ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
46. Bonds that have a pledge of company assets are called a. Secured bonds b. Debenture bonds c. Registered bonds d. Convertible bonds ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
47. When a company issues bonds that promise only to pay the face amount at the maturity date, the bonds issued are called a. Junk bonds b. Debenture bonds c. Term bonds d. Zero coupon bonds ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
48. High-risk bonds issued by companies in weak financial condition are called a. Zero coupon bonds b. Junk bonds c. Debenture bonds d. Coupon bonds ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
49. Which of the following is NOT a synonymous term to the others? a. Principal b. Face value c. Maturity value d. Future value ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
50. Debentures are a. Unsecured bonds b. Secured bonds c. Ordinary bonds d. Serial bonds ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
51. Callable bonds a. Can be redeemed by the issuer at any time at a specified price b. Can be converted to stock c. Mature in a series of payments d. Mature in one single sum on a specified future date ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
52. The issuance price of a bond does NOT depend on the a. Face value of the bond b. Riskiness of the bond c. Method used to amortize the bond discount or premium d. Effective interest rate ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
53. The effective interest rate on bonds is higher than the stated rate when bonds sell a. At face value b. Above face value c. Below face value d. At maturity value ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
54. If the effective interest rate equals the stated interest rate, a bond will sell at a. A premium b. A discount c. Face value d. Unable to determine from the data given ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
55. Bonds usually sell at a discount when a. Investors are willing to invest in the bonds at the stated interest rate b. Investors are willing to invest in the bonds at rates that are lower than the stated interest rate c. Investors are willing to invest in the bonds only at rates that are higher than the stated interest rate d. A capital gain is expected ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
56. When do bonds usually sell at a premium? a. When the market rate of interest is greater than the stated rate of interest on the bonds b. When the stated rate of interest on the bonds is greater than the market rate of interest c. When the price of the bonds is less than their maturity value d. When the market rate of interest is equal to the stated rate of interest on the bonds ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
57. The effective interest rate on bonds is lower than the stated rate when bonds sell a. At maturity value b. Above face value c. Below face value d. At face value ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
58. Bonds usually sell at a premium when a. Investors are willing to invest in the bonds at the stated interest rate b. Investors are willing to invest in the bonds at rates that are lower than the stated interest rate c. Investors are willing to invest in the bonds only at rates that are higher than the stated interest rate d. The bond issuer expects a capital gain ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
59. To compute the price to pay for a bond, you use a. Only the present value of $1 concept b. Only the present value of an annuity of $1 concept c. Both the present value of $1 concept and the present value of an annuity of $1 concept d. Neither the present value of $1 concept and the present value of an annuity of $1 concept ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
60. The effective interest rate on bonds is also called a. The stated rate b. The yield rate c. The nominal rate d. None of these are correct ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.6
61. If the market rate of interest is 12 percent and a company is issuing long-term bonds paying 10 percent, at what percent would those liabilities have to be discounted, assuming semiannual compounding? a. 5 percent b. 6 percent c. 10 percent d. 12 percent ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 10.4
62. Flute Corporation issued $200,000, 10-year, 9 percent bonds at a time when the market rate of interest was 12 percent. These bonds will be issued for a. $200,000 b. More than $200,000 c. Less than $200,000 d. An unknown price; more information is needed ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 10.4
63. Flute Corporation issued $200,000, 10-year, 9 percent bonds at a time when the market rate of interest was 7 percent. These bonds will be issued for a. $200,000 b. More than $200,000 c. Less than $200,000 d. An unknown price; more information is needed ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 10.4
64. Flute Corporation issued $200,000, 10-year, 9 percent bonds at a time when the market rate of interest was 9 percent. These bonds will be issued for a. $200,000 b. More than $200,000 c. Less than $200,000 d. An unknown price; more information is needed ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 10.4
65. LaFluer Corporation issued $400,000 of 15-year bonds on January 1. The bonds pay interest on January 1 and July 1 with a stated rate of 8 percent. If the market rate of interest at the time the bonds are sold is 6 percent, what will be the issuance price (approximate) of the bonds? a. $478,406 b. $399,992 c. $400,005 d. $632,205 ANS: A Amount of semi-annual interest payment: Present value of interest payments: Present value of principal amount: Issuance price of bond:
$400,000 .08 2 = $16,000 $16,000 19.6004 = $313,606 $400,000 .4120 = $164,800 $478,406
If you use textbook tables, a is correct at 478,406. If you use a calculator, a would be 478,401. PTS: 1 DIF: Medium OBJ: 10.4 NAT: AACSB Analytic | AICPA FN Measurement 66. LaFluer Corporation issued $400,000 of 15-year bonds on January 1. The bonds pay interest on January 1 and July 1 with a stated rate of 8 percent. If the market rate of interest at the time the bonds are sold is 10 percent, what will be the issuance price (approximate) of the bonds? a. $371,126 b. $369,664 c. $339,154 d. $338,520 ANS: D Amount of semi-annual interest payment: Present value of interest payments: Present value of principal amount: Issuance price of bond:
$400,000 .08 2 = $16,000 $16,000 15.3725 = $245,960 $400,000 .2314 = $92,560 $338,520
If you use textbook tables, d is correct at 338,520. If you use a calculator, d should be 338,510. PTS: 1 DIF: Medium OBJ: 10.4 NAT: AACSB Analytic | AICPA FN Measurement 67. When bonds are first issued, the liability is entered in the Bonds Payable account at the bond's a. Face value b. Face value plus any discount c. Issuance price when that amount is greater or less than face value d. Face value plus accrued interest ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
68. The entry to record a bond retirement at maturity usually involves a. No gain or loss b. A credit to Gain on Retirement c. A debit to Loss on Retirement d. A credit to Bonds Payable ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
69. Just before bonds are retired, the balance in the Bonds Payable account is equal to the bond's a. Face value b. Face value plus any discount or premium amortized c. Issuance price d. Face value plus interest to be paid ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
70. A bond retired before maturity usually involves a a. Debit to Gain on Retirement of Bond b. Credit to Bond Interest Expense c. Debit to Cash d. Debit to Bonds Payable ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
71. If a gain occurs on the early retirement of bonds, it is a. Not reported in the financial statements b. Reported on the income statement c. Only reported in the notes to the financial statements d. Reported on the balance sheet ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.4
72. On January 1, 2012, Lawton Corporation issued 10-year, $1,000,000 bonds with a stated interest rate of 10%. The effective interest rate is 10% and interest is paid semi-annually on January 1 and July 1. The journal entry to record the bond issuance would include a a. Debit to Cash of $1,000,000 b. Credit to Cash of $1,000,000 c. Debit to Bonds Payable of $1,000,000 d. Credit to Bond Interest Expense of $1,000,000 ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 10.4
73. On January 1, 2012, Lawton Corporation issued 10-year, $1,000,000 bonds with a stated interest rate of 10%. The effective interest rate is 10% and interest is paid semi-annually on January 1 and July 1. The journal entry to record the first semi-annual interest payment on July 1, 2012 would include a a. Debit to Cash of $50,000 b. Credit to Bonds Payable of $50,000 c. Debit to Bonds Interest Expense of $50,000 d. Credit to Bonds Interest Expense of $50,000 ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 10.4
74. On January 1, 2012, Lawton Corporation issued 10-year, $1,000,000 bonds with a stated interest rate of 10%. The effective interest rate is 10% and interest is paid semi-annually on January 1 and July 1. The journal entry to record the retirement of the bonds on January 1, 2022, assuming all interest has been accounted for, would include a a. Debit to Cash of $1,000,000 b. Credit to Bonds Payable of $1,000,000 c. Debit to Bonds Payable of $1,000,000 d. Credit to Bond Interest Expense of $1,000,000 ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 10.4
75. Which of the following ratios is used to evaluate a company's ability to meet its periodic interest payments? a. Times interest paid ratio b. Times interest earned ratio c. Times interest recorded ratio d. Times interest expensed ratio ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.5
76. Which of the following is NOT used to evaluate a company's financial leverage? a. Debt ratio b. Times interest earned ratio c. Debt-to-equity ratio d. All of these are used to evaluate a company's financial leverage ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.5
77. Hakeem, Inc. reported the following data in its 2011 financial statements: total liabilities $38,400; total stockholders' equity, $19,200; net income, $4,320; income tax expense, $2,880; and interest expense, $2,400. The debt-to-equity ratio is a. 0.50 b. 0.67 c. 3.00 d. 2.00
ANS: D Debt-to-equity ratio: $38,400 $19,200 = 2.0 PTS: 1 DIF: Medium OBJ: 10.5 NAT: AACSB Analytic | AICPA FN Measurement 78. Hakeem, Inc. reported the following data in its 2011 financial statements: total liabilities $38,400; total stockholders' equity, $19,200; net income, $4,320; income tax expense, $2,880; and interest expense, $2,400. The debt ratio is a. 50% b. 67% c. 300% d. 200% ANS: B Total assets: Debt ratio:
$38,400 + $19,200 = $57,600 $38,400 $57,600 = 67%
PTS: 1 DIF: Medium OBJ: 10.5 NAT: AACSB Analytic | AICPA FN Measurement 79. Hakeem, Inc. reported the following data in its 2011 financial statements: total liabilities $38,400; total stockholders' equity, $19,200; net income, $4,320; income tax expense, $2,880; and interest expense, $2,400. The times interest earned ratio is a. 4.0 times b. 1.8 times c. 2.8 times d. 3.0 times ANS: A Income before interest and taxes: Times interest earned:
$4,320 + $2,880 + $2,400 = $9,600 $9,600 $2,400 = 4.0
PTS: 1 DIF: Medium OBJ: 10.5 NAT: AACSB Analytic | AICPA FN Measurement 80. The method of bond amortization that results in a varying amount of amortization each period is the a. Straight-line amortization b. Effective-interest amortization c. Accelerated amortization d. None of these are correct ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.6
81. Which of the following is true of a premium on bonds payable? a. It is a contra-stockholders' equity account b. It is an account that appears only on the books of the investor c. It increases when amortization entries are made until it reaches its maturity value d. It decreases when amortization entries are made until its balance reaches zero at the maturity date ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.6
82. A bond discount is reported on the financial statements in the a. Liabilities section of the balance sheet b. Expenses section of the income statement c. Asset section of the balance sheet d. Revenues section of the income statement ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.6
83. The net amount of a bond liability that appears on the balance sheet is the a. Call price of the bond plus bond discount or minus bond premium b. Face value of the bond plus related premium or minus related discount c. Face value of the bond plus related discount or minus related premium d. Maturity value of the bond plus related discount or minus related premium ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.6
84. When a company issues bonds, how are unamortized bond discounts and premiums classified on the balance sheet? a. Bond discounts are classified as assets, and bond premiums are classified as contra-asset accounts b. Bond discounts are classified as expenses, and bond premiums are classified as revenues c. Bond premiums are classified as additions to, and bond discounts are classified as deductions from, the face value of bonds d. None of these are correct ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.6
85. When interest expense is calculated using the effective-interest amortization method, interest expense (assuming that interest is paid annually) always equals the a. Actual amount of interest paid b. Bond carrying value multiplied by the stated interest rate c. Bond carrying value multiplied by the effective-interest rate d. Maturity value of the bonds multiplied by the effective-interest rate ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.6
86. The effective-interest method of amortizing bond premiums a. Is too complicated for practical use b. Recognizes the time value of money c. Is another name for the straight-line method d. Is needed to determine the amount of cash to be paid to bondholders at each interest date ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.6
87. The net amount required to retire a bond before maturity (assuming no call premium and constant interest rates) is the a. Issuance price of the bond plus any unamortized discount or minus any unamortized premium b. Face value of the bond plus any unamortized premium or minus any unamortized discount c. Face value of the bond plus any unamortized discount or minus any unamortized premium d. Maturity value of the bond plus any unamortized discount or minus any unamortized premium ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 10.6
88. On January 1, 2012, $50,000 of 20-year, 6 percent debentures were issued for $56,275.20. Interest payment dates on the bonds are January 1 and July 1. When using the straight-line method, the amount of premium to be amortized on July 1, 2012 is a. $313.76 b. $156.88 c. $776.50 d. $93.11 ANS: B Total amount of premium: Semi-annual amortization amount:
$56,275.20 $50,000 = $6,275.20 $6,275.20 40 = $156.88
PTS: 1 DIF: Medium OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement 89. The total interest expense on a $600,000, 8 percent, 10-year bond issued at 106 would be a. $444,000 b. $480,000 c. $600,000 d. $636,000 ANS: A Amount of premium: Total interest to be paid:
($600,000 1.06) $600,000 = $36,000 [($600,000 .08) 10] $36,000 = $444,000
PTS: 1 DIF: Medium OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement 90. The effective interest rate of a 10-year, 8 percent, $1,000 bond issued at 103 would be approximately a. 7.5 percent b. 7.8 percent c. 8.0 percent d. 8.2 percent ANS: A Amount of premium: Total interest to be paid: Average annual interest expense: Effective interest rate:
($1,000 1.03) $1,000 = $30 [($1,000 .08) 10] $30 = $770 $770 10 = $77 $77 ($1,000 1.03) = 7.5%
PTS: 1 DIF: Medium OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement
91. On January 1, 2012, Cabuki Corporation issued $500,000 of 10 percent, 10-year bonds at 88.5. Interest is payable on December 31. If the market rate of interest was 12 percent at the time the bonds were issued, how much cash was paid for interest in 2012? a. $44,250 b. $50,000 c. $53,100 d. $60,000 ANS: B Cash paid for interest 2012: $500,000 10% = $50,000 PTS: 1 DIF: Medium OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement 92. On January 1, 2012, Cabuki Corporation issued $500,000 of 10 percent, 10-year bonds at 88.5. Interest is payable on December 31. If the market rate of interest was 12 percent at the time the bonds were issued, how much was interest expense in 2012 (assuming Cabuki uses the effective-interest amortization method)? a. $44,250 b. $50,000 c. $53,100 d. $60,000 ANS: C Interest expense 2012: $442,500 12% = $53,100 PTS: 1 DIF: Medium OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement 93. Kwancom Corporation, a calendar-year firm, is authorized to issue $200,000 of 10 percent, 20-year bonds dated January 1, 2012, with interest payable on January 1 and July 1 of each year. The entry to account for the discount amortization and accrual of interest on December 31, 2012, would include a a. Debit to Discount on Bonds Payable b. Credit to Cash c. Credit to Bond Interest Payable d. Debit to Bonds Payable ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 10.6
94. Assuming the straight-line method of amortization is used, the average yearly interest expense on a $450,000, 11 percent, 20-year bond issued at 106 would be a. $48,150 b. $49,500 c. $50,850 d. $53,100 ANS: A Average yearly interest expense: ($450,000 11%) [($477,000 $450,000) 20] = $48,150 PTS: 1 DIF: Medium OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement
95. On January 1, 2012, Santos Hospital issued a $250,000, 10 percent, 5-year bond for $231,601. Interest is payable on June 30 and December 31. Santos uses the effective-interest method to amortize all premiums and discounts. Assuming an effective interest rate of 12 percent, how much interest expense should be recorded on June 30, 2012? a. $11,935.14 b. $12,500.00 c. $13,896.06 d. $14,729.82 ANS: C Interest expense: $231,601 12% 0.5 = $13,896.06 PTS: 1 DIF: Medium OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement 96. On January 1, 2012, Santos Hospital issued a $250,000, 10 percent, 5-year bond for $231,601. Interest is payable on June 30 and December 31. Santos uses the effective-interest method to amortize all premiums and discounts. Assuming an effective interest rate of 12 percent, approximately how much discount will be amortized on December 31, 2012? a. $2,230 b. $1,480 c. $1,396 d. $987 ANS: B Interest expense June 30, 2012: Discount amortization June 30, 2012: Carrying value after 1st interest payment: Interest expense Dec. 31, 2012: Discount amortization Dec. 31, 2012:
$231,601 12% 0.5 = $13,896 $13,896 ($250,000 10% 0.5) = $1,396 $231,601 + $1,396 = $232,997 $232,997.06 12% 0.5 = $13,980 $13,980 ($250,000 10% 0.5) = $1,480
PTS: 1 DIF: Medium OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement 97. Riverview County issued a $500,000, 10 percent, 10-year bond on January 1, 2012, for 113.6 when the effective interest rate was 8 percent. Interest is payable on June 30 and December 31. Riverview uses the effective-interest method to amortize all premiums and discounts. How much premium or discount should be amortized on June 30, 2012? a. $2,790 b. $2,280 c. $2,000 d. $1,970 ANS: B Carrying value of bond: Semiannual interest expense on June 30, 2012: Premium to be amortized:
$500,000 1.136 = $568,000 $568,000 8% 1/2 = $22,720 ($500,000 10% 1/2) $22,720 = $2,280
PTS: 1 DIF: Medium OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement
98. Riverview County issued a $500,000, 10 percent, 10-year bond on January 1, 2012, for 113.6 when the effective interest rate was 8 percent. Interest is payable on June 30 and December 31. Riverview uses the effective-interest method to amortize all premiums and discounts. How much interest expense should Riverview record on December 31, 2012? a. $25,000.00 b. $23,810.15 c. $22,628.80 d. $19,920.10 ANS: C Carrying value of bond: Semiannual interest expense on June 30, 2012: Premium to be amortized: Carrying value of bond on December 31, 2012: Semiannual interest expense on Dec. 31, 2012:
$500,000 1.136 = $568,000 $568,000 8% 1/2 = $22,720 ($500,000 10% 1/2) $22,720 = $2,280 $568,000 $2,280 = $565,720 $565,720 8% 1/2 = $22,628.80
PTS: 1 DIF: Medium OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement 99. A $200,000 bond with a carrying value of $208,000 was called at 103 and retired. In recording the retirement, the issuing company should a. Record no gain or loss b. Record a $6,000 loss c. Record a $8,000 gain d. Record a $2,000 gain ANS: D Gain on bond: $208,000 ($200,000 1.03) = $2,000 PTS: 1 DIF: Challenging OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement 100. A $100,000 bond with a carrying value of $104,000 was called at 107 and retired. In recording the retirement, the issuing company should a. Record no gain or loss b. Record a $3,000 loss c. Record a $4,000 gain d. Record a $1,000 gain ANS: B Loss on bond: $104,000 ($100,000 1.07) = (3,000) PTS: 1 DIF: Challenging OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement
101. Smith Corporation issued a $100,000, 10-year, 10 percent bond on January 1, 2010, for $112,000. Smith uses the straight-line method of amortization. On April 1, 2013, Smith reacquired the bonds for retirement when they were selling at 102 on the open market. Assuming no call premiums, how much gain or loss should Smith recognize on the retirement of the bonds? a. $2,000 loss b. $3,900 gain c. $6,100 gain d. $8,200 loss ANS: C Total discount amortization: Carrying value: Gain on bond retirement:
[($112,000 $100,000) 10) 3.25 = $3,900 $112,000 $3,900 = $108,100 $108,100 ($100,000 1.02) = $6,100
PTS: 1 DIF: Challenging OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement PROBLEM 1. Use the present value and the future value tables or a financial calculator to calculate answers to the following problems. a. b. c. d. e.
What is the present value of receiving $900 annually for 5 years at an interest rate of 12% compounded annually? If $5,000 is deposited in the bank today, what will be its future value in 10 years with an interest rate of 10%, compounded semi-annually? In order to accumulate $20,000 in 20 years, what annual payment must be made assuming an interest rate of 8% compounded annually? If $9,000 is desired in five years, what amount must be deposited today assuming an interest rate of 12% compounded quarterly. If $1,000 is deposited in an account every year for 15 years, what will be its value in 15 years assuming an interest rate of 9% compounded annually?
ANS: a. b. c. d. e.
$900 3.6048 = $3,244.32; PMT = $900, I/YR = 12, N = 5, PV = $3244.30 $5,000 2.6533 = $13,266.50; PV = $5,000, I/YR = 5, N = 20, FV = $13,266.49 $20,000 45.7620 = $437.04; FV = $20,000, I/YR = 8, N = 20, PMT = $437.04 $9,000 .5537 = $4983.30; FV = $9,000, I/YR = 3, N = 20, PV = $4983.08 $1,000 29.3609 = $29,360.90; PMT = $1,000, I/YR = 9, N = 15, FV = $29,360.92
PTS: 1 DIF: Medium OBJ: 10.1 NAT: AACSB Analytic | AICPA FN Measurement
2. Altus Company just borrowed $300,000 from its bank. Compute Altus' payment amount under each of the following set of independent terms. a. b. c. d.
Payments are made annually; interest rate of 10% compounded annually; five year loan Payments are made annually; interest rate of 8% compounded annually; eight year loan Payments are made semi-annually; interest rate of 10% compounded semi-annually; five year loan Payments are made monthly; interest rate of 12% compounded monthly; five year loan
ANS: a. b. c. d.
$300,000 3.7908 = $79,138.97; PV = $300,000, I/YR = 10, N = 5, PMT = $79,139.24 $300,000 5.7466 = $52,204.78; PV = $300,000, I/YR = 8, N = 8, PMT = $52,204.43 $300,000 7.7217 = $38,851.55; PV = $300,000, I/YR = 5, N = 10, PMT = $38,851.37 $300,000 44.955 = $6,673.34; PV = $300,000, I/YR = 1, N = 60, PMT = $6,673.33
PTS: 1 DIF: Medium OBJ: 10.1 NAT: AACSB Analytic | AICPA FN Measurement 3. On June 1, 2012, Bellamy Corporation borrowed $400,000 on a 15-year mortgage to purchase land and a building. The land and building are pledged as collateral on the mortgage, which has an interest rate of 12 percent compounded monthly. The payments of $4,800 are made at the end of each month, beginning on June 30, 2012. (Round amounts to the nearest dollar.) a. b. c.
Prepare the journal entry for the purchase of the land and building, assuming that $100,000 is assignable to the land. Prepare journal entries for the monthly payments on June 30, July 31, and August 31. Round the amounts to the nearest dollar. Calculate the balance in the mortgage liability account after the August 31 payment.
ANS: a.
b.
c.
06/01/12 Land Building Mortgage Payable
100,000 300,000
06/30/12 Mortgage Payable Interest Expense ($400,000 12% 12) Cash
800 4,000
07/31/12 Mortgage Payable Interest Expense ($399,200 12% 12) Cash
808 3,992
08/31/12 Mortgage Payable Interest Expense ($398,392 12% 12) Cash
816 3,984
($400,000 $800 $808 $816) = $397,576
PTS: 1 DIF: Medium OBJ: 10.2 NAT: AACSB Analytic | AICPA FN Measurement
400,000
4,800
4,800
4,800
4. On March 1, 2012, Enid Corporation borrowed $800,000 on a 30-year mortgage to purchase land and a building. The land and building are pledged as collateral on the mortgage, which has an interest rate of 6 percent compounded monthly. The payments of $4,800 are made at the end of each month, beginning on March 31, 2012. Prepare a mortgage amortization schedule for the first year of the mortgage. (Round amounts to the nearest dollar.) ANS:
03/01/12 03/31/12 04/30/12 05/31/12 06/30/12 07/31/12 08/31/12 09/30/12 10/31/12 11/30/12 12/31/12 01/31/13 02/28/13
Monthly Payment
Interest Portion
Principal Portion
$4,800 4,800 4,800 4,800 4,800 4,800 4,800 4,800 4,800 4,800 4,800 4,800
$4,000 3,996 3,992 3,988 3,984 3,980 3,976 3,972 3,967 3,963 3,959 3,955
$800 804 808 812 816 820 824 828 833 837 841 845
Outstanding Mortgage Balance $800,000 799,200 798,396 797,588 796,776 795,960 795,140 794,316 793,488 792,655 791,818 790,977 790,132
PTS: 1 DIF: Medium OBJ: 10.2 NAT: AACSB Analytic | AICPA FN Measurement 5. On January 1, 2011, Bixby Corporation borrowed $80,000 on a 2-year interest bearing note from Cache Bank at an annual interest rate of 8 percent (Note A). Also on January 1, 2011, Bixby borrowed $50,000 from Dewey Bank, signing a 3-year interest bearing note at an annual interest rate of 14 percent (Note B). For both notes, interest is payable yearly on January 1. Prepare the following journal entries. (Round all amounts to the nearest dollar.) 1.
2. 3. 4.
January 1, 2011 borrowings on: a. Note A b. Note B Recognition of interest December 31, 2011 (Interest on both notes can be in one entry). Interest payment on January 1, 2012 (Interest on both notes can be in one entry). Repayment of Note B on January 1, 2014.
ANS: 1.
a.
b.
2.
3.
4.
01/01/11 Cash Notes Payable (Note A)
80,000
01/01/11 Cash Notes Payable (Note B)
50,000
12/31/11 Interest Expense Interest Payable ($80,000 0.08) + ($50,000 0.14)
13,400
01/01/12 Interest Payable Cash
13,400
80,000
50,000
13,400
13,400
01/01/14 Notes Payable (Note B) 50,000 Interest Payable 7,000 Cash ($50,000 0.14) Interest expense would have been recognized on 12/31/2013.
57,000
PTS: 1 DIF: Medium OBJ: 10.2 NAT: AACSB Analytic | AICPA FN Measurement 6. On January 1, 2011, Watters Corporation leased a truck under a capital lease. The lease agreement specified payments of $15,000 per year (payable each year on January 2, starting in 2012) for 6 years. The market rate of interest for lease transactions of this type is 12 percent compounded annually. a. b.
What is the present value of the lease? (Round to the nearest dollar) Prepare journal entries for the initiation of the lease on January 1, 2011, and for the required entries on December 31, 2011, and January 2, 2012. (Round to the nearest dollar.)
ANS: a.
b.
$61,671
[$15,000 4.1114 (Table II, 6 periods at 12%)] or N = 6, I/Yr = 12, PMT = 15,000
01/01/11 Leased Truck Lease Obligation
61,671
12/31/11 Interest Expense Lease Interest Payable ($61,671 12%)
7,401
01/02/12 Lease Interest Payable Lease Obligation Cash ($15,000 $7,401)
7,401 7,599
PTS: 1 DIF: Medium OBJ: 10.3 NAT: AACSB Analytic | AICPA FN Measurement
61,671
7,401
15,000
7. On January 1, 2011, Geary Corporation leased equipment under a capital lease. The lease agreement specified payments of $37,000 per year (payable each year on December 31, starting at the end of 2011) for 8 years. The market rate of interest for lease transactions of this type is 8 percent compounded annually. a. b.
Calculate the present value of the lease. (Round to the nearest dollar) Prepare a schedule of all the lease payments. (Round to the nearest dollar)
ANS: a.
$212,624
b. 01/01/11 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18
[$37,000 5.7466 (Table II, 8 periods at 8%)] or N = 8, I/Yr = 8, PMT = 37,000 Annual Payment
Interest Expense
Principal
$37,000 37,000 37,000 37,000 37,000 37,000 37,000 36,998
$17,010 15,411 13,684 11,818 9,804 7,628 5,278 2,741
19,990 21,589 23,316 25,182 27,196 29,372 31,722 34,257
Lease Liability $212,624 192,634 171,045 147,729 122,547 95,351 65,979 34,257 0
PTS: 1 DIF: Medium OBJ: 10.3 NAT: AACSB Analytic | AICPA FN Measurement 8. On January 1, 2012, Almond Corporation issued $750,000 bonds with a stated interest rate of 10%, compounded semiannually. Interest is paid on January 1 and July 1 and the bonds mature in 10 years. The effective interest rate is also 10%. Prepare the journal entries that are appropriate to account for these bonds on the following dates: January 1, 2012; July 1, 2012; December 31, 2012; and January 1, 2013. ANS: 01/01/12 Cash Bond Payable
750,000
07/01/12 Bond Interest Expense Cash
37,500
12/31/12 Bond Interest Expense Bond Interest Payable
37,500
01/01/13 Bond Interest Payable Cash
37,500
PTS: 1 DIF: Medium OBJ: 10.4 NAT: AACSB Analytic | AICPA FN Measurement
750,000
37,500
37,500 37,500
9. On July 1, 2011, Meeker Corporation issued $375,000 bonds with a stated interest rate of 12%, compounded semiannually. Interest is paid on January 1 and July 1 and the bonds mature in 10 years. The effective interest rate is also 12%. a. b. c. d. e.
Prepare the journal entry to record the issuance of the bonds on July 1, 2011. Prepare the journal entry to record the interest expense on December 31, 2011. Prepare the journal entries made during 2012 relating to the bond. Prepare the journal entry required on January 1, 2013 relating to bond interest. On March 31, 2013, Meeker Corporation elected to retire the bonds early when the bonds were callable at 104. Prepare the journal entries to record the bond retirement.
ANS: a.
b.
c.
d.
e.
07/01/11 Cash Bonds Payable
375,000
12/31/11 Bond Interest Expense ($375,000 12% 6/12) Bond Interest Payable
22,500
01/01/12 Bond Interest Payable Cash
22,500
07/01/12 Bond Interest Expense ($375,000 12% 6/12) Cash
22,500
12/31/12 Bond Interest Expense ($375,000 12% 6/12) Bond Interest Payable
22,500
01/01/13 Bond Interest Payable Cash
22,500
03/31/13 Bond Interest Expense (375,000 12% 3/12) Cash
11,250
03/31/13 Bonds Payable Loss on Bond Retirement Cash ($375,000 1.04)
375,000 15,000
PTS: 1 DIF: Medium OBJ: 10.4 NAT: AACSB Analytic | AICPA FN Measurement
375,000
22,500
22,500
22,500
22,500
22,500
11,250
390,000
10. Shidler Corporation reported the following data in its financial statements for 2011: Current liabilities Long-term liabilities Stockholders' equity
$ 72,000 120,000 100,000
Interest expense Income tax expense Net income
$12,000 4,800 11,200
Compute the following: a. b. c.
Debt-to-equity ratio Debt ratio Times interest earned ratio
ANS: a.
Debt-to-equity ratio
b.
Debt ratio
c.
Times interest earned ratio
= Total liabilities Total stockholders' equity = ($72,000 + 120,000) $100,000 = 1.92
= Total liabilities Total assets = ($72,000 + 120,000) ($72,000 + 120,000 + 100,000) = 65.75% = Income before interest and taxes interest expense = ($11,200 + 4,800 + 12,000) $12,000 = 2.33 times
PTS: 1 DIF: Medium OBJ: 10.5 NAT: AACSB Analytic | AICPA FN Measurement 11. On March 1, 2012, Lloyd Corporation sold $400,000 of 12 percent, 5-year bonds at a yield of 10 percent compounded semiannually. Interest is payable on March 1 and September 1 of each year. The corporation is a calendar-year corporation. Bond premiums and discounts are amortized on interestpaying dates and at year-end. Prepare the journal entries that are appropriate to account for these bonds on the following dates (Round amounts to the nearest dollar.): March 1, 2012; September 1, 2012; and December 31, 2012. Use the effective-interest method of amortization.
ANS: 03/01/09 Cash Bond Payable Bond Premium
430,881* 400,000 30,881
09/01/09 Bond Interest Expense** Bond Premium Cash
21,544 2,456
12/31/09 Bond Interest Expense*** Bond Premium Bond Interest Payable
14,281 1,719
* Amount of semi-annual interest payment: Present value of interest payments: Present value of principal amount: Issuance price of bond: Using a calculator results in $430,887
24,000
16,000 $400,000 .12 2 = $24,000 $24,000 7.7217 = $185,321 $400,000 .6139 = $245,560 $430,881
** $430,881 10% 1/2 = $21,544 *** ($430,881 $21,544) .05 4/6 = $14,281 PTS: 1 DIF: Medium OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement 12. On April 1, 2011, Jenkins Corporation issued $500,000 of 10 percent, 5-year bonds at a yield of 12 percent compounded semiannually. Interest is payable on April 1 and October 1 of each year. The corporation is a calendar-year corporation. Bond premiums and discounts are amortized on interestpaying dates and at year-end. On October 1, 2012, Jenkins reacquired the bonds for retirement when they were selling at 99 on the open market (assume no call premium). 1. 2. 3.
Determine the issue price of the bonds. Show your computations. (Round to the nearest dollar.) Prepare an amortization table through the first three interest periods using the effectiveinterest method. (Round to the nearest dollar.) Prepare the journal entries to record bond-related transactions on the following dates (Round to the nearest dollar.): a. April 1, 2011 b. October 1, 2011 c. December 31, 2011 d. April 1, 2012 e. October 1, 2012
ANS: 1.
Present value of principal amount ($500,000 .5584) Present value of interest payments ($25,000 7.3601) Issuance price of bonds *using a calculator results in $463,200
2. 04/01/11 10/01/11 04/01/12 10/01/12 3.
a.
b.
c.
d.
e.
Interest Payment
Interest Expense
Discount Amortization
$25,000 25,000 25,000
$27,792 27,960 28,137
$2,792 2,960 3,137
$279,200 184,002 463,202
Carrying Value $463,202 465,994 468,954 472,091
04/01/11 Cash Bond Discount Bonds Payable
463,202 36,798
10/01/11 Bond Interest Expense Bond Discount Cash
27,792
12/31/11 Bond Interest Expense Bond Discount Bond Interest Payable
13,980
04/01/12 Bond Interest Expense Bond Interest Payable Bond Discount Cash
13,980 12,500
10/01/12 Bond Interest Expense Bond Discount Cash
28,137
Bonds Payable Loss on Bond Retirement Bond Discount Cash PTS: 1 DIF: Challenging OBJ: 10.6 NAT: AACSB Analytic | AICPA FN Measurement
500,000
2,792 25,000
1,480 12,500
1,480 25,000 3,137 25,000 500,000 22,909 27,909 495,000
Chapter 11—Financing: Equity MULTIPLE CHOICE 1. Which form of financing allows the source of the funds to share in the wealth if the company who received the financing does well? a. A loan b. An investment c. Both a loan and an investment d. Neither a loan nor an investment ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.1
2. Which form of financing requires repayment, regardless of whether the company receiving the funds does well? a. A loan b. An investment c. Both a loan and an investment d. Neither a loan nor an investment ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.1
3. Which type of business organization is characterized by unlimited liability and limited life? a. Proprietorship b. Partnership c. Corporation d. Proprietorship and partnership ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.1
4. Which of the following types of business organization is owned by one person? a. Corporation b. Partnership c. Proprietorship d. Corporation, partnership, and proprietorship ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.1
5. Which of the following types of business organization is NOT a separate legal entity from its owner or owners? a. Proprietorship b. Partnership c. Corporation d. Only proprietorship and partnership ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.1
6. Which of the following events would NOT dissolve a partnership? a. The retirement of a partner b. The earning of a partnership loss c. The admission of a new partner d. The bankruptcy of a partner ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.1
7. Which of the following types of business organization is easy to start and easy to terminate? a. Proprietorship b. Partnership c. Corporation d. Only proprietorship and partnership ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.1
8. Which type of business organization allows the business to be a separate, distinct entity from the owners? a. Proprietorship b. Partnership c. Corporation d. Proprietorship, partnership, and corporation ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.2
9. Which of the following is a characteristic of corporations? a. They pay taxes on their profits. b. They provide their investors with no liability. c. A change in ownership usually affects the corporation's legal and economic status. d. In case of bankruptcy, stockholders receive corporate assets before the claims of debt holders are satisfied. ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.2
10. The right of current stockholders to purchase additional shares in order to maintain the same percentage ownership of new shares is called a. Liquidation b. The voting rights privilege c. Preemptive right d. The cumulative preference ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.2
11. Which of the following organizations has a Retained Earnings account? a. Partnership b. Proprietorship c. Corporation d. A Retained Earnings account is used in all three types of businesses ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.2
12. Which of the following is NOT true of a corporation? a. A corporation has easy transferability of ownership. b. A corporation is taxed separately from its owners. c. A corporation has the ability to raise large amounts of capital. d. The owners of a corporation have unlimited liability. ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.2
13. Which of the following statements is true of a corporation? a. Ownership rights can be transferred only after lengthy legal proceedings. b. In the case of bankruptcy, owners are not personally liable to debt holders. c. By law, the income of both corporation and owners is always taxed together. d. Incorporation allows a company to enjoy increased freedom from government regulations. ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.2
14. Which type of business organization is characterized by limited liability? a. Corporation b. Proprietorship c. Partnership d. Corporation, proprietorship, and partnership ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.2
15. Which of the following is a characteristic of the corporate form of business organization? a. Unlimited liability b. Limited life c. Ease of formation d. Double taxation ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.2
16. Which of the following is NOT a basic right of a common stockholder? a. The right to vote for the board of directors b. The preemptive right c. The right to receive a dividend d. The right to receive all excess assets once the obligations to others have been satisfied ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.2
17. The investors in a corporation are called a. Management b. Board of directors c. Corporate owners d. Stockholders ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.2
18. Which of the following is NOT a step that must be taken when starting a corporation that will operate across state lines? a. Apply to the appropriate state official for a charter b. Sell shares of stock in an initial public offering c. Apply for a charter with the Securities and Exchange Commission d. Provide a prospectus to each potential investor ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.2
19. Which of the following is a basic right of a preferred stockholder? a. The right to vote for the board of directors b. The preemptive right c. The right to receive a dividend d. The right to excess assets after creditor claims are satisfied ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.2
20. Which of the basic stockholder rights do preferred stockholders normally give up? a. The right to vote b. The preemptive right c. The right to receive dividends when they are declared d. The right to excess assets after creditor claims are satisfied ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.2
21. Compared with preferred stock, common stock usually has a favorable preference in terms of a. Dividends b. Voting rights c. Liquidated assets d. Resale value ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.2
22. Which of the following is NOT true regarding "legal capital"? a. It is intended as a means to protect a company's creditors. b. It represents an amount that cannot be returned to the owners so long as the corporation exists. c. The dollar amount of legal capital is established by federal statutes. d. It is intended to prevent corporations from paying excessive dividends. ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.3
23. When common stock is issued in exchange for a noncash asset and the market value of the stock is determinable, the acquired asset should usually be recorded at an amount equal to a. The book value of the noncash asset b. The par value of the stock c. The market value of the stock d. The market value of the noncash asset ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.3
24. A Paid-In Capital account can be credited with all of the following transactions EXCEPT a. The issuance of par stock issued at a price greater than par value b. The issuance of no-par stock with a stated value c. The reissuance of treasury stock d. The purchase of treasury stock ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.3
25. Treasury stock is stock that is a. Authorized but not issued b. Issued and outstanding c. Issued but not outstanding d. Authorized and outstanding ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.3
26. A loss on the sale of treasury stock is recognized when treasury stock is sold at a. A higher price than the stock's market value b. A higher price than the stock's cost c. A higher price than the stock's par or stated value d. None of these are correct ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.3
27. Treasury stock is classified on the balance sheet as what type of account? a. Current asset b. Long-term investment c. Contributed capital d. Contra-stockholders' equity ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.3
28. If treasury stock is sold for less than its cost, and there were no previous treasury stock sales, the difference between the sales price and cost is debited to a. Paid-In Capital, Treasury Stock b. Common Stock c. Retained Earnings d. Paid-In Capital in Excess of Par ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.3
29. When common stock is issued in exchange for a noncash asset and the market value of the stock cannot be determined, the acquired asset should usually be recorded at an amount equal to the a. Book value of the stock b. Book value of the noncash asset c. Market value of the noncash asset d. Undepreciated cost of the noncash asset ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.3
30. Which of the following statements is true of treasury stock? a. It is classified as an asset on the balance sheet. b. It allows management to vote for members of the board of directors. c. It is considered outstanding stock. d. It usually has a debit balance. ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.3
31. A corporation's contributed capital is a. The total par value of the common and preferred stock, along with the associated amounts of paid-in capital in excess of par b. The total par value of the common and preferred stock c. The total par value of the common stock and the associated amounts of paid-in capital in excess of par d. The total par value of the preferred stock and the associated amounts of paid-in capital in excess of par ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.3
32. Which of the following is NOT one of the common reasons for a firm to buy back its own stock? a. Management feels that the stock is selling for an unusually low price and is a good buy b. Management wants to remove some shares from the market in order to promote a hostile takeover c. Management wants to stimulate trading in the company's stock d. Management wants to increase earnings per share by reducing the number of shares of stock outstanding ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.3
33. When 30,000 shares of $10 par-value common stock are issued at $30 per share, Paid-In Capital in Excess of Par, Common Stock is credited for a. $300,000 b. $900,000 c. $600,000 d. $30,000 ANS: C Paid-in capital in excess of par: 30,000 ($30 $10) = $600,000 PTS: 1 DIF: Medium OBJ: 11.3 NAT: AACSB Analytic | AICPA FN Measurement 34. On January 1, 2012, Georgi Company was authorized to issue 10,000 shares of $2 par common stock and 5,000 shares of $5 preferred stock. Given this information, if Georgi Company issued 2,000 shares of common stock (with no known market value) for land with a book value of $15,000 (market value $10,000), the entry to record the transaction would include a a. Debit to Land of $10,000 b. Credit to Common Stock of $15,000 c. Credit to Paid-In Capital in Excess of Par, Common Stock of $11,000 d. Debit to Land of $15,000 ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 11.3
35. On January 1, 2012, Georgi Company was authorized to issue 10,000 shares of $2 par common stock and 5,000 shares of $5 preferred stock. Given this information, if Georgi Company issued 3,000 shares of common stock for $7 per share on January 10, 2012, the entry to record the issuance of the stock would include a a. Debit to Cash of $6,000 b. Credit to Paid-In Capital in Excess of Par, Common Stock of $6,000 c. Credit to Common Stock of $6,000 d. Debit to Cash of $15,000 ANS: C Common stock: $2 3,000 = $6,000 PTS: 1 DIF: Medium OBJ: 11.3 NAT: AACSB Analytic | AICPA FN Measurement 36. On January 1, 2012, Georgi Company was authorized to issue 10,000 shares of $2 par common stock and 5,000 shares of $5 preferred stock. Given this information, if Georgi Company issued 2,000 shares of preferred stock for $20 per share on January 31, 2012, the entry to record the issuance of the stock would include a a. Debit to Cash of $30,000 b. Credit to Paid-In Capital in Excess of Par, Preferred Stock of $10,000 c. Credit to Preferred Stock of $40,000 d. Debit to Cash of $40,000 ANS: D Cash: $20 2,000 = $40,000 PTS: 1 DIF: Medium OBJ: 11.3 NAT: AACSB Analytic | AICPA FN Measurement 37. At the beginning of the year, Salina Company issued 10,000 shares of no par common stock for $100 each. The journal entry to record this transaction would include a a. Debit to Cash of $20,000 b. Credit to Common Stock of $1,000,000 c. Credit to Cash of $1,000,000 d. Debit to Common Stock of $1,000,000 ANS: B Common stock: 10,000 $100 = $1,000,000 PTS: 1 DIF: Medium OBJ: 11.3 NAT: AACSB Analytic | AICPA FN Measurement 38. At the beginning of the year, Brandt Company issued 5,000 shares of $1 par common stock in exchange for land with a book value of $130,000 and a market value of $100,000. The market value of the stock at the date of the transaction was $20 per share. The entry to record this transaction would include a a. Debit to Land of $130,000 b. Credit to Common Stock for $100,000 c. Credit to Paid-in Capital in Excess of Par, Common Stock of $95,000 d. Debit to Common Stock for $5,000
ANS: C Paid-in capital in excess of par, common stock: (5,000 $20) (5,000 $1) = $95,000 PTS: 1 DIF: Medium OBJ: 11.3 NAT: AACSB Analytic | AICPA FN Measurement 39. Moony Corporation had 20,000 shares of $4 par-value common stock outstanding on January 1, 2012. On January 10, 2012, the firm purchased 2,000 of its outstanding shares for $18 per share. On July 22, 2012, it reissued 1,000 shares at $22 per share. Given this information, the entry to record the purchase of this stock on January 10 would include a debit to a. Treasury Stock of $36,000 b. Common Stock of $36,000 c. Treasury Stock of $8,000 d. Common Stock of $8,000 ANS: A Treasury stock: $18 2,000 = $36,000 PTS: 1 DIF: Medium OBJ: 11.3 NAT: AACSB Analytic | AICPA FN Measurement 40. Moony Corporation had 20,000 shares of $4 par-value common stock outstanding on January 1, 2012. On January 10, 2012, the firm purchased 2,000 of its outstanding shares for $18 per share. On July 22, 2012, it reissued 1,000 shares at $22 per share. Given this information, the entry to record the reissuance of the stock on July 22 would include a credit to a. Treasury Stock of $4,000 b. Common Stock of $4,000 c. Paid-In Capital, $18,000 d. Paid-In Capital, Treasury Stock of $4,000 ANS: D Paid-in capital, treasury stock: 1,000 ($22 $18) = $4,000 PTS: 1 DIF: Medium OBJ: 11.3 NAT: AACSB Analytic | AICPA FN Measurement 41. Moony Corporation had 20,000 shares of $4 par-value common stock outstanding on January 1, 2012. On January 10, 2012, the firm purchased 2,000 of its outstanding shares for $18 per share. On July 22, 2012, it reissued 1,000 shares at $22 per share. Given this information, the entry to record the reissuing of the remaining 1,000 shares on August 17, 2012, at $12 per share would probably include a a. Credit to Treasury Stock of $4,000 b. Debit to Retained Earnings of $2,000 c. Debit to Paid-In Capital, Treasury Stock of $6,000 d. Debit to Loss on Sale of Stock of $6,000 ANS: B Paid-in capital, treasury stock balance: Retained earnings:
1,000 ($22 $18) = $4,000 [1,000 ($18 $12)] $4,000 = $2,000
PTS: 1 DIF: Medium OBJ: 11.3 NAT: AACSB Analytic | AICPA FN Measurement
42. During the year, Trenton Company purchased 3,000 shares of its $10 par common stock at $50 per share and later sold it for $40 per share. How much did total stockholders' equity change because of these treasury stock transactions? a. $150,000 decrease b. $120,000 increase c. $30,000 decrease d. $20,000 decrease ANS: C Decrease in stockholders' equity: Increase in stockholders' equity: Total change:
3,000 $50 = $150,000 3,000 $40 = $120,000 $150,000 $120,000 = $30,000 decrease
PTS: 1 DIF: Medium OBJ: 11.3 NAT: AACSB Analytic | AICPA FN Measurement 43. Which of the following is NOT an important date associated with dividends? a. Dividend payment date b. Date of information c. Date of record d. Declaration date ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.4
44. Which of the following statements about retained earnings is true? a. It is the amount of cash that has been retained from a company's earnings. b. It is the amount of creditors' claims on assets. c. It is increased when treasury stock is bought. d. It is the amount of corporate earnings that have been reinvested in the business ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.4
45. When do dividends become liabilities? a. On the date of record b. On the declaration date c. On the payment date d. Dividends are never liabilities because a company is not legally required to pay dividends ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.4
46. The declaration of a common cash dividend a. Decreases a company's retained earnings balance b. Decreases the par value of outstanding stock c. Decreases the number of shares of outstanding stock d. Decreases the amount of cash ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.4
47. The declaration and payment of cash dividends a. Reduces the amount of resources a company has to invest in productive assets b. Sometimes does not reduce a company's retained earnings balance c. Reduces a company's net income d. Sometimes does not reduce a company's cash balance ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.4
48. Which of the following dividend preferences is associated with common stock? a. Cumulative-dividend preference b. Current-dividend preference c. Both cumulative-dividend and current-dividend preference d. Neither cumulative-dividend nor current-dividend preference ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.4
49. Dividends in arrears on preferred stock are classified as a. A current liability account b. A stockholder's equity account c. A long-term liability account d. None of these are correct ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.4
50. Dividends in arrears on preferred stock are a. A current liability account b. A stockholder's equity account c. A long-term liability account d. Disclosed in the notes to the financial statements ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.4
51. As compared with preferred stock, common stock usually has favorable preferences in terms of a. Liquidated assets b. Dividends c. Voting rights d. Both liquidated assets and voting rights ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.4
52. The declaration of dividends by a company a. Always decreases the balance in Retained Earnings b. Always reduces the Cash balance c. Always increases the balance in Retained Earnings d. Always increases the balance in Common Stock ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.4
53. Dividends in arrears are associated with the a. Current-dividend preference b. Cumulative-dividend preference c. Noncumulative-dividend preference d. None of these are correct ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.4
54. Dividends declared are reported on the a. Income statement as an expense b. Balance sheet as an asset c. Statement of retained earnings d. Income statement as a revenue ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.4
55. Which of the following groups of stockholders receive first priority to the receipt of a dividend? a. Current-dividend preference b. Cumulative-dividend preference c. Common d. Both current-dividend preference and cumulative-dividend preference ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.4
56. The dividend payout ratio is a measure of a. Percentage of net income paid in dividends b. Capital structure c. Common stock outstanding d. Efficiency ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.4
57. On April 30, 2012, Loufti Company declared a dividend of $40,000. Loufti Company decided that the dividend would be paid on June 15, 2012, to all shareholders of record on May 25, 2012. The journal entry to record the declaration of the dividend on April 30 would include a a. Credit to Dividends of $40,000 b. Debit to Dividends Payable of $40,000 c. Debit to Cash of $40,000 d. Credit to Dividends Payable of $40,000 ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 11.4
58. On April 30, 2012, Loufti Company declared a dividend of $40,000. Loufti Company decided that the dividend would be paid on June 15, 2012, to all shareholders of record on May 25, 2012. The journal entry to record the date of record on May 25 would include a a. Credit to Dividends Payable of $40,000 b. Debit to Dividends of $40,000 c. Debit to Cash of $40,000 d. No entry would be recorded on this date ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 11.4
59. On April 30, 2012, Loufti Company declared a dividend of $40,000. Loufti Company decided that the dividend would be paid on June 15, 2012, to all shareholders of record on May 25, 2012. The journal entry to record the payment of the dividend on June 15 would include a a. Credit to Dividends of $40,000 b. Debit to Dividends of $40,000 c. Debit to Cash of $40,000 d. Debit to Dividends Payable of $40,000 ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 11.4
60. Goshen Co. has 24,000 shares of no-par common stock with a $20 stated value and 10,000 shares of $30 par, 5 percent noncumulative preferred stock outstanding. If the company declares cash dividends of $68,000, the total amount of the dividend paid to preferred stockholders is a. $5,000 b. $17,000 c. $15,000 d. $8,500 ANS: C Divided paid to preferred stockholders: $30 5% 10,000 = $15,000 PTS: 1 DIF: Medium OBJ: 11.4 NAT: AACSB Analytic | AICPA FN Measurement 61. The Retained Earnings balance of Mantua Company was $128,700 on January 1, 2012. Net income for 2012 was $72,820. If Retained Earnings had a credit balance of $57,750 after closing entries were posted on December 31, 2012, and if additional stock of $35,750 was issued during the year, dividends declared during 2012 were a. $106,700 b. $143,770 c. $179,520 d. $158,125 ANS: B Dividends declared:
$128,700 + $72,820 x = $57,750 x = $143,770
PTS: 1 DIF: Medium OBJ: 11.4 NAT: AACSB Analytic | AICPA FN Measurement
Exhibit 11-1 Pelletier Corporation has the following stock outstanding: Preferred Stock (6 percent, $10 par, 45,000 shares authorized, 10,000 shares issued and outstanding) Common Stock ($7 par, 250,000 shares authorized, 120,000 shares issued and outstanding)
$100,000 840,000
62. Refer to Exhibit 11-1. Given the information above, if Pelletier pays a $9,000 cash dividend, and if the preferred stock is noncumulative, common stockholders will receive a. $3,000 b. $9,000 c. $6,000 d. $4,500 ANS: A Preferred stock dividend: Common stock dividend:
10,000 $10 6% = $6,000 $9,000 $6,000 = $3,000
PTS: 1 DIF: Medium OBJ: 11.4 NAT: AACSB Analytic | AICPA FN Measurement 63. Refer to Exhibit 11-1. Given the information above, if Pelletier pays a $64,000 dividend, and if the preferred stock is cumulative and two years' dividends are in arrears, common stockholders will receive a. $32,000 b. $52,000 c. $58,000 d. $46,000 ANS: D Preferred stock dividend: Common stock dividend:
10,000 $10 6% 3 = $18,000 $64,000 $18,000 = $46,000
PTS: 1 DIF: Medium OBJ: 11.4 NAT: AACSB Analytic | AICPA FN Measurement 64. Refer to Exhibit 11-1. Given the information above, if Pelletier pays a $64,000 dividend, and if the preferred stock is noncumulative and the two previous years' dividends have not been paid, common stockholders will receive a. $32,000 b. $52,000 c. $58,000 d. $46,000 ANS: C Preferred stock dividend: Common stock dividend:
10,000 $10 6% = $6,000 $64,000 $6,000 = $58,000
PTS: 1 DIF: Medium OBJ: 11.4 NAT: AACSB Analytic | AICPA FN Measurement
65. Refer to Exhibit 11-1. Given the information above, if Pelletier pays a $108,000 dividend, and if the preferred stock is cumulative and three years' dividends are in arrears, preferred stock will receive a. $18,000 b. $24,000 c. $90,000 d. $84,000 ANS: B Preferred stock dividend: 10,000 $10 6% 4 = $24,000 PTS: 1 DIF: Medium OBJ: 11.4 NAT: AACSB Analytic | AICPA FN Measurement 66. The following information is available for Snipes Company: Current assets Current liabilities Long-term assets Long-term liabilities Stockholders' equity Net sales Net income Dividends paid
2012 $24,000 8,400 18,400 12,000 22,000 88,000 3,200 1,800
2011 $23,600 7,400 15,000 11,200 20,000 76,000 2,800 1,600
The dividend payout ratio for 2012 is a. 17.77% b. 88.89% c. 57.14% d. 56.25% ANS: D Dividend payout ratio: $1,800 $3,200 = 56.25% PTS: 1 DIF: Medium OBJ: 11.4 NAT: AACSB Analytic | AICPA FN Measurement 67. The term used to describe the equity section of the balance sheet that reports the effect on equity that results from market-related gains and losses that are NOT included in the computation of net income is a. Equity income b. Market income c. Accumulated other comprehensive income d. Valuation income ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.5
68. The purpose of a statement of stockholders' equity is to a. Report the balances in the stockholders' equity accounts as of a particular date b. Reconcile beginning and ending balances of all stockholders' equity accounts reported on the balance sheet c. Report changes in all stockholders' equity accounts except Retained Earnings d. Summarize treasury stock transactions for a period of time ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.5
69. The foreign currency translation adjustment is reported in the a. Gains and losses section of the income statement b. Equity section of the balance sheet c. Extraordinary items section of the income statement d. Investments section of the balance sheet ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.5
70. Unrealized gains and losses on available-for-sale securities are reported in the a. Gains and losses section of the income statement b. Equity section of the balance sheet c. Extraordinary items section of the income statement d. Investments section of the balance sheet ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.5
71. Which of the following is NOT a component of comprehensive income? a. Net income b. Foreign currency translation adjustment c. Unrealized gains and losses on available-for-sale securities d. Treasury stock ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.5
72. Which of the following would NOT appear on a statement of stockholders' equity? a. Unrealized gains and losses on trading securities b. Accumulated other comprehensive income c. Treasury stock d. Additional paid-in capital ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.5
73. Which of the following arises because of the change in the equity of foreign subsidiaries that occurs as a result of changes in foreign currency exchange rates? a. Unrealized gains on available-for-sale securities b. Unrealized losses on available-for-sale securities c. Foreign currency translation adjustment d. Minimum pension liability ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 11.5
74. The following information is available for Janeway Corporation for the year 2012: Net income Foreign currency translation adjustment Net unrealized gain (loss) on available-for-sale securities Dividends paid
$37,500 3,750 (1,800) 18,000
Given this information, what is Janeway's comprehensive income for 2012? a. $41,250 b. $39,450 c. $37,500 d. $57,450 ANS: B Comprehensive income: $37,500 + $3,750 $1,800 = $39,450 PTS: 1 DIF: Medium OBJ: 11.5 NAT: AACSB Analytic | AICPA FN Measurement 75. The following information is available for Pluto Company for the year 2012: Comprehensive income Foreign currency translation adjustment Net unrealized gain (loss) on available-for-sale securities Dividends paid Given this information, what is Pluto's net income for 2012? a. $26,500 b. $40,500 c. $37,500 d. $33,500 ANS: D Net income: $50,000 $12,500 $4,000 = $33,500 PTS: 1 DIF: Medium OBJ: 11.5 NAT: AACSB Analytic | AICPA FN Measurement
$50,000 12,500 4,000 7,000
PROBLEM 1. Identify the three types of organizations and list the characteristics of each one. ANS: Proprietorship: Owned by one person Formed with few legal formalities Easily terminated Unlimited liability Partnership: Owned by two or more persons Formed with few legal formalities Easily terminated Unlimited liability Corporation: Limited liability Easy transferability of owners Ability to raise large amounts of capital Double taxation Close government regulation PTS: 1 DIF: Easy OBJ: 11.1 | 11.2 NAT: AACSB Reflective Thinking | AICPA FN Measurement 2. Identify the two types of stock that are sold by a corporation and list the characteristics of each one. ANS: Common Stock: Confers the right to vote in corporate matters Confers the right to maintain proportionate ownership Confers the right to receive cash dividends Confers the ownership of all excess corporate assets upon liquidation of the corporation Preferred Stock: Confers preferential claims to dividends Confers preferential claims to liquidation privileges Has no voting rights PTS: 1 DIF: Easy OBJ: 11.2 NAT: AACSB Reflective Thinking | AICPA FN Measurement
3. The stockholders' equity section of the balance sheet for Beryl Corporation as of December 31, 2012, is as follows: Stockholders' Equity Preferred stock (6 percent, $24 par, cumulative, 100,000 shares authorized) Common stock (no par, $10 stated value, 200,000 shares authorized) Paid-in capital in excess of stated value, common stock Total contributed capital
$1,200,000 1,600,000 900,000 $3,700,000
Retained earnings: Retained earnings, unrestricted Retained earnings, restricted Total contributed capital and retained earnings Less: Treasury stock, common (5,000 shares at $30 per share) Total stockholders' equity
1,600,000 $5,300,000 (150,000) $5,150,000
a. b. c. d.
$1,200,000 400,000
How many shares of preferred stock have been issued? How many shares of common stock have been issued? How many shares of preferred stock are outstanding? How many shares of common stock are outstanding?
ANS: a. b. c. d.
$1,200,000 $24 par = 50,000 shares $1,600,000 $10 stated value = 160,000 shares 50,000 shares (no preferred treasury stock) 160,000 shares issued 5,000 treasury shares = 155,000 shares
PTS: 1 DIF: Medium OBJ: 11.3 NAT: AACSB Analytic | AICPA FN Measurement 4. On January 1, 2012, Dkembe Corporation was authorized to issue 100,000 shares of common stock, par value $5 per share, and 20,000 shares of 5 percent cumulative preferred stock, par value $40 per share. Prepare journal entries to record the following 2012 transactions: a. b. c. d. e.
Issued 60,000 shares of common stock at $12 per share. Issued 12,000 shares of preferred stock at $56 per share. Reacquired 1,000 shares of common stock at $12 per share. Reissued 200 of the treasury shares for $2,600. Declared a cash dividend sufficient to meet the current-dividend preference on preferred stock and pay common stockholders $1 per share.
ANS: a.
b.
c.
Cash Common Stock Paid-In Capital in Excess of Par Value, Common Stock Issued 60,000 shares of common stock at $12 per share.
720,000
Cash Preferred Stock Paid-In Capital in Excess of Par, Preferred Stock Issued 12,000 shares of preferred stock at $56 per share.
672,000
Treasury Stock Cash Reacquired 1,000 shares of common stock at $12 per share.
12,000
300,000 420,000
480,000 192,000
12,000
d.
Cash 2,600 Treasury Stock 2,400 Paid-In Capital, Treasury Stock 200 Reissued 200 shares of treasury stock at $13 per share; cost of shares reissued, $12 per share.
e.
Dividends, Common 59,200 Dividends, Preferred 24,000 Dividends Payable, Common Stock 59,200 Dividends Payable, Preferred Stock 24,000 Declared current-year dividend on preferred stock ($480,000 0.05 = $24,000) and a $1 per share dividend on common stock (60,000 common shares issued 1,000 treasury shares purchased + 200 treasury shares reissued = 59,200 shares of common outstanding).
PTS: 1 DIF: Medium OBJ: 11.3 NAT: AACSB Analytic | AICPA FN Measurement 5. Assume that 2,000 shares of common stock with a par value of $12 and a market price of $16 per share are issued in exchange for land with a fair market value of $32,000. a. b. c. d.
Prepare the journal entry to record the transaction. If the land's appraised fair market value were $33,000, what would be the correct entry to record the transaction? Prepare the necessary journal entry, assuming the same facts as in (b), except that the stock is not actively traded and therefore its market price is unknown. Prepare the necessary journal entry, assuming the stock has a par value of $10 and a market price of $15 per share.
ANS: a.
Land 32,000 Common Stock 24,000 Paid-In Capital in Excess of Par Value, Common Stock 8,000 Issued 2,000 shares of $12 par common stock, market price $16 per share, in exchange for land.
b.
Same entry as in (a); the land would be valued at the fair market value of the stock given up, which is $32,000.
c.
Land 33,000 Common Stock 24,000 Paid-In Capital in Excess of Par, Common Stock 9,000 Issued 2,000 shares of $12 par common stock in exchange for land with an appraised fair market value of $33,000.
d.
Land 30,000 Common Stock 20,000 Paid-In Capital in Excess of Par, Common Stock 10,000 Issued 2,000 shares of $10 par common stock, market price $15 per share, in exchange for land.
PTS: 1 DIF: Medium OBJ: 11.3 NAT: AACSB Analytic | AICPA FN Measurement 6. Provide the necessary journal entries to record the following: a. b. c. d. e. f. g.
Delta Corporation was granted a charter authorizing the issuance of 600,000 shares of $2 par value common stock. The company issued 150,000 shares of common stock at a price of $12 per share. The company reacquired 4,000 shares of its own stock at $14 per share, to be held in treasury. Another 4,000 shares were reacquired at $16 per share. Of the shares reacquired in (c), 1,500 were reissued for $18 per share. Of the shares reacquired in (d), 1,000 were reissued at $12.80 per share. Given the preceding transactions, what is the balance in the treasury stock account?
ANS: a.
No entry required
b.
Cash 1,800,000 Common Stock Paid-In Capital in Excess of Par, Common Stock Issued 150,000 shares of $2 par common stock, market price $12 per share.
c.
d.
e.
f.
g.
Treasury Stock Cash Reacquired 4,000 shares at $14 per share.
56,000
Treasury Stock Cash Reacquired 4,000 shares at $16 per share.
64,000
300,000 1,500,000
56,000
27,000 Cash Treasury Stock Paid-In Capital, Treasury Stock Reissued 1,500 shares of treasury stock, cost of $14, market price of $18. Cash 12,800 Paid-In Capital, Treasury Stock 3,200 Treasury Stock Reissued 1,000 shares of treasury stock, cost of $16, market price of $12.80.
64,000
21,000 6,000
16,000
Balance in treasury stock is $56,000 + 64,000 21,000 16,000 = $83,000 or (2,500 $14) + (3,000 $16) = $83,000
PTS: 1 DIF: Medium OBJ: 11.3 NAT: AACSB Analytic | AICPA FN Measurement 7. Halsey Corporation first issued stock on January 1, 2010. Halsey has the following stock outstanding on December 31, 2013: Preferred Stock (5 percent cumulative, $45 par, 10,000 shares authorized, 6,000 shares issued and outstanding) Common Stock ($5 par, 100,000 shares authorized, 75,000 shares issued and outstanding)
$270,000 375,000
Halsey Corporation paid cash dividends as follows: 2010: 2011: 2012: 2013:
$10,000 $ 0 $25,000 $20,000
Calculate the total cash dividends received by preferred and common stockholders during the years of 20102013.
ANS: 2010:
Preferred Common
$10,000 ($270,000 5% = $13,500; only $10,000 paid) $0
2011:
Preferred Common
$0 $0
2012:
Preferred Common
$25,000 ($3,500 + $13,500 = $17,000 in arrears + $8,000 current) $0
2013:
Preferred Common
$19,000 ($5,500 in arrears + $13,500 current) $1,000 ($20,000 $19,000)
PTS: 1 DIF: Medium OBJ: 11.4 NAT: AACSB Analytic | AICPA FN Measurement 8. On February 15, 2012, Portage Company declared a dividend of $115,000. Portage Company decided that the dividend would be paid on May 31, 2012, to all shareholders of record on April 20, 2012. Prepare the appropriate journal entries to record the transactions on the following dates:
February 15, 2012 April 20, 2012 May 31, 2012
ANS: 2/15/12 Dividends Dividends Payable
115,000 115,000
4/20/12 No entry required 5/31/12 Dividends Payable Cash
115,000 115,000
PTS: 1 DIF: Medium OBJ: 11.4 NAT: AACSB Analytic | AICPA FN Measurement 9. The following information is given for Wellington Company, Torrey Company, and Sunset Company.
Accounts receivable Retained earnings Cash dividends Capital stock Total assets Sales Net income
Wellington $ 30,000 90,000 10,000 320,000 200,000 800,000 40,000
Compute the dividend payout ratio for each company.
Torrey $ 100,000 200,000 20,000 400,000 300,000 1,200,000 140,000
Sunset $ 35,000 205,000 30,000 125,000 150,000 350,000 45,000
ANS: Wellington: Torrey: Sunset:
$10,000 $40,000 = 25% $20,000 $140,000 = 14.29% 30,000 $45,000 = 66.67%
PTS: 1 DIF: Medium OBJ: 11.4 NAT: AACSB Analytic | AICPA FN Measurement 10. The accounting records of Jackson Corporation reveal the following data: December 31, 2011 balances Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income a. b.
$ 80,000 120,000 60,000 5,000
2012 transactions Net income Translation adjustment Unrealized loss on availablefor-sale securities Dividends paid
$25,000 2,500 (1,200) 12,000
Compute the comprehensive income for 2012. Prepare the statement of stockholders' equity for 2012.
ANS: a.
Comprehensive income = $25,000 + 2,500 1,200 = $26,300
b.
Jackson Corporation Statement of Stockholders' Equity For the Year Ended December 31, 2012
Balance, Jan. 1, 2012 Net income 2012 Translation adjustment Unrealized loss on AFSS Comprehensive income Dividends Balance, Dec. 31, 2012
Common stock $80,000
Additional Paid-In Capital $120,000
Retained Earnings $60,000 25,000
Accumulated Other Comprehensive Income $5,000 2,500 (1,200)
$80,000
$120,000
(12,000) $73,000
$6,300
Total $265,000 25,000 2,500 (1,200) 26,300 (12,000) $279,300
PTS: 1 DIF: Medium OBJ: 11.5 NAT: AACSB Analytic | AICPA FN Measurement 11. The accounting records of Janeway Corporation reveal the following data: Net income Foreign currency translation adjustment Net unrealized loss on available-for-sale securities Cost of goods sold Interest expense Dividends paid Prepare a statement of comprehensive income for Janeway Corporation.
$ 50,000 5,000 (2,400) 175,000 4,000 24,000
ANS: Janeway Corporation Statement of Comprehensive Income Net income Foreign currency translation adjustment Net unrealized loss on available-for-sale securities Comprehensive income PTS: 1 DIF: Medium OBJ: 11.5 NAT: AACSB Analytic | AICPA FN Measurement
$50,000 5,000 (2,400) $52,600
Chapter 12—Investments: Debt and Equity Securities MULTIPLE CHOICE 1. Which of the following is NOT typically a reason why one company would invest in another company? a. To diversify product offerings b. To ensure a supply of raw materials c. To recruit key personnel d. To acquire a new product ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.1
2. Which of the following is NOT typically a reason why one company would invest in another company? a. To earn higher returns than those offered by banks b. To make a safer investment than those offered by banks c. To influence the board of directors d. To make use of seasonal increases in cash flows ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.1
3. Which type of securities are purchased with the intent of selling them in the near future? a. Marketable equity securities b. Available-for-sale securities c. Trading securities d. Held-to-maturity securities ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
4. Unless there is compelling evidence to the contrary, significant influence is presumed when a company owns a. 20 to 50 percent of the outstanding voting stock of another company b. 50 percent or more of the outstanding voting stock of another company c. 0 to 20 percent of the outstanding voting stock of another company d. 10 to 40 percent of the outstanding voting stock of another company ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
5. Which category includes only debt securities? a. Marketable equity securities b. Available-for-sale securities c. Trading securities d. Held-to-maturity securities ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
6. Accounting for investments under the equity method generally applies when the level of ownership in another company is at what percentage? a. Less than 20 percent b. 20 percent to 30 percent c. 20 percent to 50 percent d. More than 50 percent ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
7. The equity method of accounting for an investment in the common stock of another company should be used when the investment a. Is composed of common stock and it is the investor's intent to vote on corporate matters b. Ensures a source of supply such as raw materials c. Enables the investor to exercise significant influence over the investee d. Gives the investor voting control over the investee ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
8. Consolidated financial statements are typically prepared when one company has a. Accounted for its investment in another company by the equity method b. Significant influence over the operating and financial policies of another company c. The controlling financial interest in another company d. A substantial equity interest in the net assets of another company ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
9. What are the two general types of securities purchased by companies? a. Debt and bonds b. Debt and equity c. Stock and equity d. Common and preferred ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
10. Which category of security does NOT include debt securities? a. Available-for-sale b. Trading c. Equity method d. Held-to-maturity ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
11. The equity method is used to account for an investment of more than 20% of another company's a. Bonds b. Preferred stock c. Common stock d. Convertible bonds ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
12. Which of the following is NOT one of the acceptable classifications for investments? a. Trading securities b. Available-for-sale securities c. Equity method securities d. Control securities ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
13. A financial instrument that carries with it the promise to pay interest payments and repay the principal amount is a(n) a. Debt security b. Equity security c. Both debt and equity security d. Neither debt nor equity security ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
14. A financial instrument that represents actual ownership in a corporation is a(n) a. Debt security b. Equity security c. Both debt and equity security d. Neither debt nor equity security ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
15. The most common type of debt security is a. Common stock b. Preferred stock c. Bonds d. None of these are debt securities ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
16. Which of the following is NOT a typical reason that a company would prefer a debt security over an equity security? a. Certainty of income b. Low risk level c. Certainty of repayment at maturity d. Voting rights ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
17. Which type of securities is purchased with the intent of holding the security until it matures? a. Marketable equity securities b. Available-for-sale securities c. Trading securities d. Held-to-maturity securities ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.2
18. Harvey Corporation purchased 1,200 of the 3,000 outstanding shares of Michael Company common stock for $50 per share. Given this information, Harvey Corporation should account for the investment in Michael Company stock using the a. Cost method b. Equity method c. Effective-amortization method d. Straight-line amortization method ANS: B Percentage of ownership: 1,200 3,000 = 40% = significant influence PTS: 1 DIF: Medium OBJ: 12.2 NAT: AACSB Analytic | AICPA FN Measurement 19. If a trading security is bought, the investment account is a. Debited for the cost of the security NOT including any extra expenditures required in making the purchase b. Credited for the cost of the security NOT including any extra expenditures required in making the purchase c. Credited for the cost of the security including any extra expenditures required in making the purchase d. Debited for the cost of the security including any extra expenditures required in making the purchase ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.3
20. If a trading security is sold, the investment account is a. Debited for the market value of the security b. Credited for the cost of the security c. Credited for the market value of the security d. Debited for the cost of the security ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.3
21. Which of the following is NOT one of the issues associated with accounting for securities? a. Accounting for the purchase b. Accounting for the dividend revenue earned c. Accounting for the changes in value d. All of these are an issue associated with accounting for securities ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.3
22. A realized gain or loss indicates that a. An arm's-length transaction has occurred b. The securities have actually been sold c. Both an arm's-length transaction has occurred and the securities have actually been sold d. Neither an arm's-length transaction has occurred nor the securities have actually been sold ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.3
23. On January 1, 2011, Ailey Company purchased a $30,000, 8% bond, at face value. Interest is paid annually each January 1. The entry related to this investment on December 31, 2011, would include a a. Debit to Interest Receivable for $2,400 b. Credit to Interest Expense for $2,400 c. Debit to Interest Revenue for $2,400 d. Credit to Cash for $2,400 ANS: A Interest receivable: $30,000 8% = $2,400 PTS: 1 DIF: Medium OBJ: 12.3 NAT: AACSB Analytic | AICPA FN Measurement Exhibit 12-1 Augsburg Corporation recorded the following transactions for its long-term investments during 2012: May 22 Purchased 1,000 shares of Miller Corporation stock at $55 per share plus brokerage fees of $1,000 and classified the shares as trading securities. Miller Corporation has 30,000 shares outstanding. June 30 Received a cash dividend of $0.80 per share on Miller Corporation stock. August 26 Sold 400 shares of Miller Corporation stock for $60 per share. December 31 Miller common stock had a closing market price of $50 per share. The decline is considered to be temporary. 24. Refer to Exhibit 12-1. Given the information above, on May 22, Augsburg should a. Credit Investment in Trading Securities for $55,000 b. Debit Investment in Trading Securities for $56,000 c. Credit Cash for $56,000 d. Debit Cash for $55,000 ANS: B Cost of investment: (1,000 shares $55) + $1,000 brokerage fees = $56,000 PTS: 1 DIF: Medium OBJ: 12.3 NAT: AACSB Analytic | AICPA FN Measurement 25. Refer to Exhibit 12-1. Given the information above, on August 26, Augsburg should a. Credit Investment in Trading Securities for $22,000 b. Credit Realized Gain on Sale of Securities for $1,600 c. Credit Realized Gain on Sale of Securities for $1,200 d. Debit Dividend Revenue for $23,600 ANS: B Realized gain:
400 ($60 $56*) = $1,600 *(1,000 shares $55) + $1,000 brokerage fees = $56,000 $56,000 / 1,000 = $56
PTS: 1 DIF: Medium OBJ: 12.3 NAT: AACSB Analytic | AICPA FN Measurement
26. On January 5, 2012, Gannon Corporation purchased 100 shares of Hedney Company stock at $12 per share and paid a $50 brokerage commission. Gannon classified the shares as available-for-sale securities. On May 31, 2012, the entry to record the receipt of the 60-cent-per-share dividend would include a credit to a. Dividend Revenue for $100 b. Long-Term Investments for $60 c. Dividend Revenue for $60 d. Long-Term Investments for $100 ANS: C Dividend: 100 $0.60 = $60 PTS: 1 DIF: Medium OBJ: 12.3 NAT: AACSB Analytic | AICPA FN Measurement 27. If 2,500 shares of stock are purchased for $90 per share and are sold one year later for $82 per share, what is the net gain or loss on sale? (Assume that there are no transaction costs.) a. $20,000 gain b. $20,000 loss c. $2,500 gain d. $2,500 loss ANS: B Loss on sale: 2,500 ($90 $82) = $20,000 PTS: 1 DIF: Medium OBJ: 12.3 NAT: AACSB Analytic | AICPA FN Measurement 28. In July 2011, Leaf Company acquired 5,000 shares of the common stock of Ryan Corporation and classified the shares as trading securities. The following January, Ryan announced net income of $100,000 for 2011 and declared a cash dividend of $0.50 per share on its 100,000 shares of outstanding common stock. The Leaf Company dividend revenue from Ryan Corporation in January 2012 would be a. $0 b. $2,500 c. $5,000 d. $10,000 ANS: B Dividend revenue: $0.50 5,000 = $2,500 PTS: 1 DIF: Medium OBJ: 12.3 NAT: AACSB Analytic | AICPA FN Measurement
29. On January 2, 2012, Murray Corporation bought 15 percent of Castro Corporation's capital stock for $60,000 and classified it as available-for-sale securities. Castro's net income for the year ended December 31, 2012, was $100,000. During 2012, Castro declared a dividend of $140,000. On December 31, 2012, the fair value of the Castro stock owned by Murray had increased to $90,000. How much should Murray show on its 2012 income statement as income from this investment? a. $3,150 b. $15,000 c. $21,000 d. $51,000 ANS: C Income from investment: $140,000 15% = $21,000 PTS: 1 DIF: Medium OBJ: 12.4 NAT: AACSB Analytic | AICPA FN Measurement 30. On January 2, 2012, Forsyth Co. acquired 4,000 shares of Hiram Company common stock for $44,000 and classified these shares as available-for-sale securities. During 2012, Forsyth received $12,000 of cash dividends. The fair value of Hiram's stock on December 31, 2012, was $14 per share. Forsyth should report the following amount in 2012 related to Hiram Co. a. Revenue of $12,000 b. Revenue of $24,000 c. A $56,000 decrease in the investment account d. A $56,000 increase in the investment account ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 12.4
31. Unrealized holding gains or losses which are recognized in income are from securities classified as a. Trading b. Available-for-sale c. Held-to-maturity d. Income producing ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.4
32. Changes in fair value of securities are reported in the income statement for which type of securities? a. Marketable equity securities b. Available-for-sale securities c. Trading securities d. Held-to-maturity securities ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.4
33. Changes in fair value of securities are reported in the stockholders' equity section of the balance sheet for which type of securities? a. Marketable equity securities b. Available-for-sale securities c. Trading securities d. Held-to-maturity securities ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.4
34. Unrealized losses on trading securities are a. Classified as contra-owners' equity accounts b. Recorded only when the stock is sold c. Classified as a contra-investment asset account d. Included in a section on the income statement ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.4
35. A net unrealized increase in the value of available-for-sale securities (considered as a whole) should be reflected in the current financial statements as a. An extraordinary item on the income statement which increases retained earnings b. A current revenue resulting from holding securities c. Only a disclosure in the footnotes to the financial statements d. A valuation allowance which is included in the equity section of the balance sheet ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.4
36. A net unrealized decrease in the value of available-for-sale securities (considered as a whole) should be reflected in the current financial statements as a. An extraordinary item on the income statement which reduces retained earnings b. A current liability resulting from holding securities c. Only a disclosure in the footnotes to the financial statements d. A valuation allowance which is included in the equity section of the balance sheet ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.4
37. Augsburg Corporation recorded the following transactions for its short-term investments during 2012: May 22 Purchased 1,000 shares of Miller Corporation stock at $55 per share plus brokerage fees of $1,000 and classified the shares as trading securities. Miller Corporation has 30,000 shares outstanding. June 30 Received a cash dividend of $0.80 per share on Miller Corporation stock. August 26 Sold 400 shares of Miller Corporation stock for $60 per share. December 31 Miller common stock had a closing market price of $53 per share. The decline is considered to be temporary. Given this information, the adjusting entry that Augsburg needs to make on December 31 is a. Market Adjustment Trading Securities Unrealized Loss on Trading Securities - Income b. Unrealized Loss on Trading Securities - Income Market Adjustment - Trading Securities c. Market Adjustment - Trading Securities Unrealized Loss on Trading Securities - Income d. Unrealized Loss on Trading Securities - Income Market Adjustment - Trading Securities
1,800 1,800 1,800 1,800 3,000 3,000 3,000 3,000
ANS: B Unrealized loss:
600 ($56* $53) = $1,800 *(1,000 shares $55) + $1,000 brokerage fees = $56,000 $56,000 / 1,000 = $56
PTS: 1 DIF: Medium OBJ: 12.4 NAT: AACSB Analytic | AICPA FN Measurement 38. During 2012, Walker Corp. acquired 500 shares of Wychek stock at $30 per share. Walker accounted for the stock as trading securities. The market price per share of Wychek's stock as of December 31, 2012 and 2013, is $22.50 and $37.50, respectively. How much unrealized gain or loss on long-term investments should Walker report on its December 31, 2012, income statement? a. $3,750 unrealized loss b. $11,250 unrealized loss c. $1,875 unrealized gain d. No unrealized gain or loss ANS: A Unrealized loss: 500 ($30 $22.50) = $3,750 PTS: 1 DIF: Medium OBJ: 12.4 NAT: AACSB Analytic | AICPA FN Measurement 39. During 2012, Walker Corporation acquired 500 shares of Wychek stock at $30 per share. Walker Corporation accounted for the stock as available-for-sale securities. All declines in market value are considered to be temporary. The market price per share of Wychek's stock as of December 31, 2012 and 2013, is $22.50 and $37.50, respectively. Given this information, the correct adjusting entry by walker at December 31, 2013, would include a credit to a. Market Adjustment Available-for-Sale Securities of $3,750 b. Unrealized Increase in Value of Available-for-Sale Securities Equity of $7,500 c. Market Adjustment Available-for-Sale Securities of $7,500 d. Unrealized Increase in Value of Available-for-Sale Securities Equity of $3,750 ANS: B Unrealized loss 2012: Unrealized gain 2013:
500 ($30 $22.50) = $3,750 500 ($37.50 $22.50) = $7,500
PTS: 1 DIF: Medium OBJ: 12.4 NAT: AACSB Analytic | AICPA FN Measurement 40. On May 1, one hundred shares of stock were originally purchased for $124 per share and are being held as trading securities. The price decreased to $116 per share on August 1 and then increased to $132 on December 31. At what amount should the investment be valued in the December 31 balance sheet? a. $11,600 b. $12,400 c. $13,200 d. Some other amount ANS: C Value on December 31: 100 $132 = $13,200 PTS: 1 DIF: Medium OBJ: 12.4 NAT: AACSB Analytic | AICPA FN Measurement
41. On January 1, 2012, Ya-Ling Co. paid $500,000 for 20,000 shares of Chen Co.'s common stock and classified these shares as trading securities. The fair value of Chen Co.'s stock at December 31, 2012, is $27 per share. What is the net asset amount (which includes both investments and any related market adjustments) attributable to the investment in Chen that will be included on Ya-Ling's balance sheet at December 31, 2012? a. $0 b. $40,000 c. $500,000 d. $540,000 ANS: D Unrealized gain: Net asset amount:
20,000 ($27 $25) = $40,000 $500,000 + 40,000 = $540,000
PTS: 1 DIF: Medium OBJ: 12.4 NAT: AACSB Analytic | AICPA FN Measurement 42. Nguyen Inc. began business on January 1, 2012, and at December 31, 2012, Nguyen had the following investment portfolios of equity securities:
Trading $150,000 110,000
Total cost Total market value
AvailableFor-Sale $225,000 195,000
Unrealized losses at December 31, 2012, should be recorded with corresponding charges against Income and Stockholders' Equity of a. $70,000 and $0, respectively b. $40,000 and $30,000, respectively c. $30,000 and 40,000, respectively d. $0 and $70,000, respectively ANS: B Unrealized loss trading: Unrealized loss available-for-sale:
$150,000 $110,000 = $40,000 $225,000 $195,000 = $30,000
PTS: 1 DIF: Medium OBJ: 12.4 NAT: AACSB Analytic | AICPA FN Measurement
43. Rouen Corporation recorded the following transactions for its short-term investments during 2012: April 22 Purchased 1,000 shares of Miller Corporation stock at $110 per share plus brokerage fees of $2,000 and classified the shares as trading securities. Miller Corporation has 30,000 shares outstanding. June 30 Received a cash dividend of $0.80 per share on Miller Corporation stock. September 26 Sold 400 shares of Miller Corporation stock for $120 per share. December 31 Miller common stock had a closing market price of $106 per share. The decline is considered to be temporary. Given this information, the adjusting entry that Rouen needs to make on December 31 is a. Market Adjustment - Trading Securities Unrealized Loss on Trading Securities - Income b. Unrealized Loss on Trading Securities - Income Market Adjustment - Trading Securities c. Market Adjustment - Trading Securities Unrealized Loss on Trading Securities - Income d. Unrealized Loss on Trading Securities - Income Market Adjustment - Trading Securities
ANS: B Unit cost of Miller stock: Unrealized loss on Miller stock:
3,600 3,600 3,600 3,600 6,000 6,000 6,000 6,000
[(1,000 $110) + $2,000] 1,000 = $112 (600 $112) (600 $106) = $3,600
PTS: 1 DIF: Medium OBJ: 12.4 NAT: AACSB Analytic | AICPA FN Measurement 44. When investors purchase bonds between interest dates, they a. Earn "extra" interest b. Do not earn any interest until after the first interest date has passed c. Must purchase the accrued interest from the seller d. Receive interest based on the market price at the beginning of the period ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.5
45. The total amount of interest earned when bonds are purchased at a premium is the amount of the cash interest payments a. Plus the discount b. Minus the discount c. Plus the premium d. Minus the premium ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.5
46. When bonds that are held as a long-term investment are sold before their maturity dates, the difference between the sales price and the balance in the Investment account is a. Debited or credited to Capital Stock b. Recorded as a gain or loss on the sale c. Recorded directly to Retained Earnings d. Recorded as interest revenue or expense ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.5
47. The amortization of a bond discount a. Increases the amount of interest revenue earned on an investment in bonds b. Decreases the amount of interest revenue earned on an investment in bonds c. Decreases the balance of the Investment account d. Does not affect the balance in the Investment account ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.5
48. The journal entry to record the amortization of a premium resulting from an investment in bonds would cause a. An increase in Investment in Bonds b. An increase in Bond Interest Revenue c. A decrease in Bond Interest Revenue d. No change in Investment in Bonds ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.5
49. The entry to amortize an investment in bonds purchased at a discount includes a debit to a. Investment in Bonds b. Interest Expense c. Bond Interest Revenue d. Bond Discount ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.5
50. If a 12 percent, $16,000 face value bond sells for $14,000, the effective interest rate will be a. Less than 12 percent b. Greater than 12 percent c. Equal to 12 percent d. Unknown; more information is needed ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 12.5
51. On April 1, 2012, Fiedler purchased $10,000 of Hun Corporation Bonds at 96 plus accrued interest. The bonds pay interest of 10 percent semiannually on March 1 and September 1. To record this acquisition, Fiedler should debit Investments in Held-to-Maturity Securities Hun's Bonds for a. $9,600 b. $9,700 c. $10,000 d. $10,100 ANS: A Investment cost: $10,000 96% = $9,600 PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement 52. On April 1, 2012, Bering Inc. purchased $20,000 of Warner Corporation's 10-year, 8 percent bonds at par plus accrued interest. Interest is payable on June 30 and December 31. How much interest revenue should Bering report on its December 31, 2012, income statement as a result of this investment? a. $1,248 b. $1,200 c. $824 d. $800 ANS: B Interest revenue: $20,000 8% 9/12 = $1,200 PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement 53. Farve purchased ten $1,000, 10 percent bonds issued by Marino Corporation for 104 on July 1, 2012. The bonds will mature on July 1, 2022, and pay interest on June 30 and December 31. Farve uses the straight-line method to amortize premiums and discounts. How much interest revenue should Farve recognize from its investment for the year ending December 31, 2012? a. $480 b. $485 c. $500 d. $520 ANS: A Interest revenue: ($10,000 10% 6/12) ($400 10 2) = $480 PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement 54. Janis Corporation purchased $60,000 of Keller Corporation's 10 percent bonds at 96 plus accrued interest on March 1, 2012. The bonds mature on January 1, 2022, and interest is payable on June 30 and December 31. How much did Simpson pay in total on March 1, 2012? a. $60,000 b. $58,600 c. $57,600 d. $56,600 ANS: B Amount paid: ($60,000 96%) + ($60,000 10% 2/12) = $58,600 PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement
55. On January 1, 2012, Young Inc. purchased $50,000 of Montana Corporation 14 percent bonds for $53,000. Interest is payable semiannually. If Young desires a 12 percent rate of return, how much premium should be amortized on June 30, 2012, using the effective-interest method? a. $3,180 b. $1,855 c. $320 d. $210 ANS: C Premium to be amortized: ($50,000 14% 6/12) ($53,000 12% 6/12) = $320 PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement 56. Cleveland purchased $100,000 of Rob Company's 10-year, 9 percent bonds for $83,050 on July 1, 2012. Cleveland purchased the bonds to yield 12 percent interest. If Cleveland uses the effectiveinterest method to amortize discounts, how much interest revenue should Cleveland recognize for 2012 as a result of the investment? a. $7,474 b. $6,000 c. $5,767 d. $4,983 ANS: D Interest revenue: $83,050 12% 6/12 = $4,983 PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement 57. On January 1, 2012, Roswell purchased ten $1,000, 12 percent, 10-year bonds issued by E. T. Corporation at 101. The bonds pay interest on June 30 and December 31. When the bonds showed an unamortized balance of $10,070, Roswell sold them for $10,050. How much gain or loss should Roswell record on the sale? a. $100 gain b. $50 gain c. $30 loss d. $20 loss ANS: D Loss on sale: $10,070 $10,050 = $20 PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement
58. Lilburn Inc. purchased $56,000 of Metter Corporation's 12 percent, 10-year bonds on January 1, 2011, for $59,360 plus accrued interest. Interest on the bonds is payable on April 1 and October 1. On January 1, 2012, Lilburn sold the bonds for 103 plus accrued interest. As a result of the sale, Lilburn should debit Cash for a. $58,900 b. $56,000 c. $59,360 d. $57,680 ANS: C Cash amount: $56,000 103% + ($56,000 12% 3/12) = $59,360 PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement 59. Mel Company purchased $60,000 of Gibson Company's 20-year, 8 percent bonds at 98 on July 1, 2012. The bonds pay interest each January 1 and July 1, and they mature on July 1, 2029. Given this information, the entry to record the purchase of Gibson Company bonds would include a a. Debit to Held-to-Maturity Securities of $58,800 b. Debit to Held-to-Maturity Securities of $60,000 c. Credit to Cash of $60,000 d. Credit to Interest Revenue of $5,000 ANS: A Cost of security: $60,000 98% = $58,800 PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement 60. Mel Company purchased $60,000 of Gibson Company's 20-year, 8 percent bonds at 98 on November 1, 2012. The bonds pay interest each January 1 and July 1, and they mature on July 1, 2029. Given this information, the entry to record the purchase of Gibson Company bonds would include a a. Debit to Interest Receivable of $800 b. Debit to Held-to-Maturity Securities of $60,000 c. Credit to Cash of $60,400 d. Credit to Interest Revenue of $1,600 ANS: C Cash paid: ($60,000 98%) + ($60,000 8% 4/12) = $60,400 PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement 61. Mel Company purchased $60,000 of Gibson Company's 20-year, 8 percent bonds at 98 on July 1, 2012. The bonds pay interest each January 1 and July 1, and they mature on July 1, 2029. Given this information, the entry needed on December 31, 2012 (year-end), to account for the interest on Gibson Company's bonds would include a debit to a. Cash of $4,800 b. Cash of $2,400 c. Interest Receivable of $4,800 d. Interest Receivable of $2,400
ANS: D Interest receivable: $60,000 8% 6/12 = $2,400 PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement 62. On January 1, 2012, Newton Corporation purchased $200,000 of 10-year, 10 percent bonds for $227,184 to yield 8 percent annually. The bonds pay interest on January 1, and July 1 of each year. If Tomas uses the effective interest method of amortization, how much interest revenue will the company record for the first six months? (rounded) a. $10,912 b. $10,000 c. $9,087 d. $8,912 ANS: C Interest revenue: $227,184 8% 6/12 = $9,087 PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement 63. On January 1, 2011, the Nevada Company purchased $800,000 of Utah Company's 10 percent, 20-year bonds at 104 and classified the investment as held-to-maturity securities. The bonds pay interest on January 1 and July 1 of each year. Nevada uses straight-line amortization for all premiums and discounts. The entry for the receipt of the semiannual interest on July 1, 2011, is 40,000 a. Cash Investment in Held to Maturity Securities Bond Interest Revenue b. Cash Investment in Held-to Maturity Securities Bond Interest Revenue c. Cash Bond Interest Revenue d. Cash Bond Interest Revenue
ANS: B Premium: Premium amortization: Cash: Bond interest revenue:
800 40,800 40,000 800 39,200 40,000 40,000 40,800 40,800
($800,000 1.03) $800,000 = $32,000 $32,000 40 = $800 $800,000 10% 6/12 = $40,000 $40,000 $800 = $39,200
PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement
64. Cleveland purchased $200,000 of Clair Company's 10-year, 9 percent bonds for $166,100 on July 1, 2012. Cleveland purchased the bonds to yield 12 percent interest. If Cleveland uses the effectiveinterest method to amortize discounts, how much interest revenue should Cleveland recognize for 2012 as a result of the investment? a. $14,948 b. $12,000 c. $11,534 d. $9,966 ANS: D $166,100 12% 6/12 = $9,966 PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement 65. Simpson Corporation purchased $30,000 of Tekservice Corporation's 12 percent bonds for $27,345 plus accrued interest on March 1, 2012. The bonds mature on January 1, 2022, and interest is payable on June 30 and December 31. How much discount or premium should be amortized on June 30, 2012, under the straight-line method? a. $135.00 b. $132.75 c. $90.00 d. $88.50 ANS: C Total discount: Discount amortization:
$30,000 $27,345 = $2,655 $2,655 4/118 = $90
PTS: 1 DIF: Challenging OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement 66. On January 2, 2011, Oakwood, Inc., purchased $800,000 of 10 percent, 10-year bonds for $872,000. The bonds pay interest on January 1 and July 1 of each year. Oakwood uses straight-line amortization for all premiums or discounts. On July 1, 2014, Oakwood sold the bonds for $832,000. How much gain or loss should Oakwood record on the sale? a. $6,800 gain b. $6,800 loss c. $14,800 gain d. $14,800 loss ANS: D Premium amortization Jan. 2, 2011 July 1, 2014: Loss on sale:
$72,000 20 7 = $25,200 $832,000 ($872,000 $25,200) = ($14,800)
PTS: 1 DIF: Challenging OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement
67. When the equity method is used to account for long-term investments in stock, the receipt of dividends is recorded as a credit to a. The Investment account b. Dividend revenue c. Cash d. Interest revenue ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.6
68. When an investor uses the equity method to account for investments in common stock, the investment account will be increased when the investor recognizes a. A proportionate share of the net income of the investee b. A cash dividend received from the investee c. Periodic amortization of the goodwill related to the purchase d. Depreciation related to the excess of market value over book value of the investee's depreciable assets at the date of purchase by the investor ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.6
69. When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as a. An increase in the investment account b. A deduction from the investment account c. Dividend revenue d. A deduction from the investor's share of the investee's profits ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.6
70. Bart Corporation purchased 1,200 of the 3,000 outstanding shares of Starr Company common stock for $50 per share. Given this information, when Bart Corporation receives a cash dividend from Starr Company, which of the following accounts should be credited? a. Revenue from Investments b. Dividend Revenue c. Investment in Equity Method Securities d. None of these will be credited ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.6
71. On February 19, 2012, Jose Inc. acquired 18,000 shares of Luis Corporation stock at $45 per share. Jose has 50,000 shares outstanding. On December 31, 2012, Luis common stock had a closing market price of $26 per share. Assuming that the decline in market price is considered to be temporary, at December 31, Luis would a. Make an adjusting entry, including a debit to Unrealized Loss on Equity Method Securities of $342,000 b. Make an adjusting entry, including a credit to Market Adjustment on Equity Method Securities of $468,000 c. Make an adjusting entry, including a credit to Investment in Luis Stock of $342,000 d. Do nothing; an adjusting entry is not required ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 12.6
72. Sasser Inc. had the following activities related to long-term investments during 2012: July 6 Purchased 24,000 shares of Trudie Company for $30 per share. August 16 Received a $2.40-per-share cash dividend from Trudie Company. December 31 Trudie announced earnings for the year of $333,600. Trudie has 72,000 shares of stock outstanding. Given this information, how much revenue should Sasser report in 2012 for its investment in Trudie stock? a. $28,800 b. $111,200 c. $140,000 d. $168,800 ANS: B Revenue earned in 2012: $333,600 24,000/72,000 = $111,200 PTS: 1 DIF: Medium OBJ: 12.6 NAT: AACSB Analytic | AICPA FN Measurement 73. In 2012, Rune had the following activities in long-term investments: April 6 Purchased 2,000 shares of Arledge stock for $3.25 per share plus brokerage fees of $500. July 7 Received a cash dividend of $0.70 per share on Arledge stock. December 31 Arledge reported net income of $50,000. Arledge has 8,000 shares of common stock outstanding. What should be the balance in the Investment in Equity Method Securities-Arledge Stock account as of December 31, 2012? a. $17,600 b. $18,100 c. $19,500 d. $20,900 ANS: B Investment in Securities: (2,000 $3.25) + $500 (2,000 $0.70) + ($50,000 2,000/8,000) = $18,100 PTS: 1 DIF: Medium OBJ: 12.6 NAT: AACSB Analytic | AICPA FN Measurement
74. On January 2, 2011, U.S. Buyers, Inc. purchased 5,000 shares of the 20,000 shares outstanding of Latino Corporation stock for $15,000. The following information was reported by Latino during 2011: Net Income Dividends Market Price, 12/31/11
$45,000 $1.75 per share $2.50 per share
U.S. Buyers, Inc. sold all of its Latino Corporation stock on March 1, 2012, for $3.10 per share. The total amount U.S. Buyers, Inc. should report on the sale is a. $3,500 gain b. $3,000 loss c. $2,000 loss d. $1,950 loss ANS: C Investment in Latino Corporation: Loss on sale of Latino Corporation stock:
$15,000 + ($45,000 5,000/20,000) (5,000 1.75) = $17,500 (5,000 $3,10) $17,500 = ($2,000)
PTS: 1 DIF: Medium OBJ: 12.6 NAT: AACSB Analytic | AICPA FN Measurement 75. Financial statements in which financial data for two or more companies are combined as a single entity are called a. Conventional statements b. Consolidated statements c. Audited statements d. Constitutional statements ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.7
76. Johnson Company owns 90% of the outstanding stock of Smith Company. The equity of the remaining 10% of Smith Company stock is called the a. Parent b. Minority interest c. Majority interest d. Subsidiary ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.7
77. In general, consolidated financial statements should be prepared a. When a corporation owns more than 20% of the common stock of another company b. When a corporation owns more than 50% of the common stock of another company c. Only when a corporation owns 100% of the common stock of another company d. Whenever the market value of the stock investment is significantly lower than its cost ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 12.7
78. Stanger Company owns 85% of the outstanding stock of Willden Company. At the end of the year, Willden Company reported revenues of $2,500 and expenses of $1,800. How much will Stanger Company report on its own financial statements as income from Willden Company? a. $700 b. $825 c. $595 d. $0 ANS: C Income from Willden: ($2,500 $1,800) 85% = $595 PTS: 1 DIF: Medium OBJ: 12.7 NAT: AACSB Analytic | AICPA FN Measurement 79. Stanger Company owns 85% of the outstanding stock of Willden Company. At the end of the year, Willden Company reported revenues of $2,500 and expenses of $1,800. How much minority interest will be reported on Stanger Company's financial statements? a. $700 b. $105 c. $595 d. $0 ANS: B Minority Interest: ($2,500 $1,800) 15% = $105 PTS: 1 DIF: Medium OBJ: 12.7 NAT: AACSB Analytic | AICPA FN Measurement PROBLEM 1. Answer the following questions with respect to classifications of security: 1. 2.
List the four different classifications of securities. For each classification of security: a. What type(s) of securities are included in this classification? b. Where are temporary changes reported? c. Where are other than temporary changes reported?
ANS: (1) Classifications of securities Trading Available-for-sale Held-to-maturity Equity method
(2a)
(2b)
(2c) Reporting of other than temporary
Reporting of Types of securities temporary changes changes Debt and equity Income statement Income statement Debt and equity Stockholders' equity Income statement Debt Not recognized Income statement Equity Not recognized Income statement
PTS: 1 DIF: Medium OBJ: 12.2 NAT: AACSB Reflective Thinking | AICPA FN Measurement
2. Dixie Corporation recorded the following transactions for its long-term investments during 2012: April 30 Purchased 3,000 shares of Enigma Corporation stock at $22 per share plus brokerage fees of $3,000 and classified the shares as trading securities. Enigma Corporation has 50,000 shares outstanding. May 31 Received a cash dividend of $2.00 per share on Enigma Corporation stock. July 29 Sold 1,000 shares of Enigma Corporation stock for $25 per share. December 15 Sold 2,000 shares of Enigma Corporation stock for $20 per share. Give the journal entries necessary to account for the investment in Enigma Corporation during 2012. ANS: April 30 Investment in Trading Securities, Enigma Corp. Cash (3,000 $22) + $3,000 = $69,000
69,000
May 31 Cash Dividend Revenue ($2.00 3,000 shares = $6,000)
6,000
69,000
6,000
July 29 Cash 25,000 Realized Gain on Sale of Trading Securities 2,000 Investment in Trading Securities, Enigma Corp. 23,000 (Cash = $25.00 1,000 shares = $25,000; short-term Investment = $69,000 1,000/3,000 = $23,000; gain = $25,000 $23,000 = $2,000) December 15 Cash 40,000 Realized Loss on Sale of Trading Securities 6,000 Investment in Trading Securities, Enigma Corp. 46,000 (Cash = $20.00 2,000 shares = $40,000; short-term Investment = $69,000 2,000/3,000 = $46,000; loss = $40,000 $46,000 = $6,000) PTS: 1 DIF: Medium OBJ: 12.3 NAT: AACSB Analytic | AICPA FN Measurement 3. In June 2012, Barwick Company had excess cash that would not be needed until March 1, 2013. Management decided to invest the money in a short-term investment in trading securities. Barwick owned no investment securities before June 2012. The following transactions relate to these investments: June 20 Purchase 10,000 shares of Chula Corporation stock. The price paid (including brokerage fees) was $104,500. September 2 Received a cash dividend of $1.20 per share on Chula stock. October 5 Sold 4,000 shares of Chula stock at $10.00 per share. Paid a selling commission of $400. December 31 The market price of Chula stock was $11.00. Give the journal entries necessary to account for the investment in Chula Corporation during 2012.
ANS: June 20 Investment in Trading Securities, Chula Corp. Cash September 2 Cash Dividend Revenue ($1.20 10,000 shares = $12,000)
104,500 104,500 12,000 12,000
October 5 Cash 39,600 Realized Loss on Sale of Trading Securities 2,200 Investment in Trading Securities, Chula Corp. 41,800 (Cash = $10.00 4,000 shares $400 commission = $39,600; short-term Investment = $104,500 4,000/10,000 = $41,800; loss = $39,600 $41,800) December 31 Market Adjustment Trading Securities 3,300 Unrealized Gain on Trading Securities Income [$11.00 6,000 shares ($104,500 $41,800) = $3,300]
3,300
PTS: 1 DIF: Medium OBJ: 12.3 | 12.4 NAT: AACSB Analytic | AICPA FN Measurement 4. Barry Inc. carries the following marketable equity securities on its books at December 31, 2011 and 2012. All securities were purchased during 2011 and there were no beginning balances in any market adjustment accounts. Trading Securities:
D Company E Company F Company Total
Cost $ 50,000 26,000 70,000 $146,000
Market December 31, 2011 $ 26,000 40,000 60,000 $126,000
Market December 31, 2012 $ 40,000 40,000 50,000 $130,000
$420,000 100,000 $520,000
$360,000 120,000 $480,000
$300,000 140,000 $440,000
Available-for-Sale Securities: G Company H Company Total a. b.
Give the journal entries necessary to record the valuations for both trading and availablefor-sale securities at December 31, 2011 and 2012 What net effect would these valuations have on 2011 and 2012 income?
ANS: a.
2011 December 31 Unrealized Loss on Trading Securities Income Market Adjustment Trading Securities
20,000 20,000
Unrealized Decrease in Value of Available40,000 for-Sale Securities Equity Market Adjustment Available-for-Sale Securities 2012 December 31 Market Adjustment Trading Securities Unrealized Gain on Trading Securities Income
4,000
December 31 Unrealized Decrease in Value of Available40,000 for-Sale Securities Equity Market Adjustment-Available-for-Sale Securities b.
40,000
4,000
40,000
Effect of valuation entries on 2011 net income Recognized decline in value of trading securities
($20,000)
Effect of valuation entries on 2012 net income Recognized increase in value of trading securities
$4,000
PTS: 1 DIF: Medium OBJ: 12.4 NAT: AACSB Analytic | AICPA FN Measurement 5. Don Ono purchased Yoko bonds with a face value of $30,000 in the secondary market on March 1, 2012, at a price of $28,340 plus a brokerage fee of $280 and accrued interest. Interest at 10 percent is payable on January 1 and July 1 each year. The bonds were originally issued on January 1, 2011, and mature on January 1, 2014. Don plans to amortize the discount once a year at December 31 on a straight-line basis. a. b. c.
Prepare the journal entries to record the investment in the bonds on March 1, 2012, and the receipt of the first interest payment on July 1, 2012. Prepare the journal entry necessary on December 31, 2012, to properly report Don's income for 2012. Compute the amount of interest revenue that Don earned on these bonds in 2012.
ANS: a.
March 1 Investment in Held-to-Maturity Securities 28,620 Bond Interest Receivable 500 Cash 29,120 (Investment = $28,340 + $280; Bond interest receivable = $30,000 10% 2/12) July 1 Cash 1,500 Investment in Held-to Maturity Securities 251 Bond Interest Receivable 500 Interest Revenue 1,251 [Discount amortization = ($30,000 $28,620)/22 months = $62.73, $62.73 4 months; Cash = $30,000 10% 6/12; Interest revenue = $1,500 + $251 $500]
b.
c.
December 31 Bond Interest Receivable 1,500 Investment in Held-to-Maturity Securities 376 Interest Revenue [($30,000 $28,620)/22 months = $62.73; $62.73 6 months]
1,876
$1,251 + $1,876 = $3,127
PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement 6. Rentz Company held a bond investment with a face value of $230,400. The company decided to sell the bonds on April 15, 2012, at a quoted price of 104.5. On that date the carrying value of the bonds was $231,520. The sale is subject to a brokerage commission of $1,152. Prepare the journal entry on April 15, 2012, for the sale of the bond investment. (Ignore accrued interest.) ANS: Cash 239,616 Investment in Held-to-Maturity Securities Gain on Sale of Bonds [($230,400 1.045) 1,152 = $239,616; $239,616 $231,520 = $8,096] PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement
231,520 8,096
7. Lexington Corporation purchased fifty $1,000, 12%, 5-year bonds of Jedediah Company on January 1, 2012, as a long-term investment for $55,934. Interest payments are made semiannually on June 30 and December 31. a. b.
Using the straight-line method of amortization, prepare a schedule showing the amortization of the bond premium over the 5-year life of the bond. Using the effective-interest method of amortization, prepare a schedule showing the amortization of the bond premium over the 5-year life of the bond. Assume an effective rate of interest earned on the bonds is 9%, compounded semiannually.
ANS: a.
Straight-line method of amortization:
Time Period
January 1, 2012 June 30, 2012 December 31, 2012 June 30, 2013 December 31, 2013 June 30, 2014 December 31, 2014 June 30, 2015 December 31, 2015 June 30, 2016 December 31, 2016
Cash Received
Interest Actually Earned (rounded) (cash amortization)
Amount of Amortization ($5,934/10)
$ 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 $30,000
$ 2,407 2,407 2,407 2,407 2,407 2,407 2,407 2,407 2,407 2,407 $24,070
$ 593 593 593 593 593 593 593 593 593 593 $5,930
Cash Received ($50,000 12% 6/12)
Interest Actually Earned (rounded) (investment 4.5%)
Amount of Amortization (cash interest earned)
$ 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 $30,000
$ 2,517 2,495 2,473 2,449 2,424 2,398 2,371 2,343 2,313 2,282 $24,065
$ 483 505 528 551 576 602 629 657 687 718 $5,933
Investment Balance
$55,934 55,341 54,748 54,155 53,562 52,969 52,376 51,783 51,190 50,597 50,004*
*Number is slightly off due to rounding errors. b.
Effective-interest method of amortization:
Time Period
January 1, 2012 June 30, 2012 December 31, 2012 June 30, 2013 December 31, 2013 June 30, 2014 December 31, 2014 June 30, 2015 December 31, 2015 June 30, 2016 December 31, 2016
*Number is slightly off due to rounding errors PTS: 1 DIF: Medium OBJ: 12.5 NAT: AACSB Analytic | AICPA FN Measurement
Investment Balance
$55,934 55,451 54,946 54,418 53,867 53,291 52,689 52,060 51,403 50,716 49,998*
8. In 2012, Vidalia had the following activities in long-term investments: May 10 Purchased 50,000 shares of Woodbine stock for $15 per share plus brokerage fees of $5,000. August 24 Received a cash dividend of $2 per share on Woodbine stock. December 31 Woodbine reported net income of $478,000. Woodbine has 125,000 shares of common stock outstanding. Prepare the necessary journal entries for Vidalia's investment in Woodbine common stock. ANS: May 10 Investment in Equity Method Securities Cash (50,000 $15) + $5,000
755,000
August 24 Cash Investment in Equity Method Securities 50,000 $2
100,000
December 31 Investment in Equity Method Securities Revenue from Investments $478,000 50,000/125,000
755,000
100,000
191,200 191,200
PTS: 1 DIF: Medium OBJ: 12.6 NAT: AACSB Analytic | AICPA FN Measurement 9. On January 1, 2012, Shane Corporation acquired 30 percent (13,000 shares) of Matthews Services Inc. common stock for $1,300,000 as a long-term investment. Data from Matthews's 2012 financial statements include the following: Net income Less cash dividends paid Increase in retained earnings
$330,000 160,000 $170,000
The market value of Matthews Services Inc. common stock on December 31, 2012, was $98 per share. Shane does not have any other investments in securities. Prepare the necessary journal entries for Shane's investment in Matthews Services Inc. common stock assuming Shane uses the following methods to account for its investment in Matthews Services: a. b.
Classified as available-for-sale securities. The equity method.
ANS: a.
Investment in Available-for-sale SecuritiesMatthews Services Stock Cash Cash ($160,000 30%) Dividend Revenue Unrealized Increase/Decrease in Value of Availablefor-sale Securities Equity (13,000 shares $2) Market Adjustment Available-for-sale Securities
b.
Investment in Equity Method Securities Cash
1,300,000 1,300,000 48,000 48,000
26,000 26,000 1,300,000 1,300,000
Cash Investment in Equity Method Securities
48,000
Investment in Equity Method Securities ($330,000 30%) Revenue from Investment in Equity Method Securities
99,000
PTS: 1 DIF: Medium OBJ: 12.3 | 12.4 | 12.6 NAT: AACSB Analytic | AICPA FN Measurement
48,000
99,000
10. Johnson Company owns part of three different subsidiaries. The balance sheet and the income statement for Johnson Company and its three subsidiaries are shown below. Johnson Company currently accounts for the ownership of the three subsidiaries using the equity method. Percentage of Johnson's Ownership 90% 60% Johnson Subsidiary 1 Subsidiary 2 Assets Cash Accounts receivable Plant and equipment Investment in Sub 1 Investment in Sub 2 Investment in Sub 3 Total assets Liabilities Equity Total liabilities and stockholders' equity Sales Income from Sub 1 Income from Sub 2 Income from Sub 3 Total Expenses Net income a. b.
$
660 2,750 5,775 1,584 429 462 $ 11,660 4,950 6,710
$
220 660 2,200
$
40% Subsidiary 3
165 495 880
$ 330 275 1,650
$ 3,080 1,320 1,760
$ 1,540 825 715
$ 2,255 1,100 1,155
$ 11,660
$ 3,080
$ 1,540
$ 2,255
35,310 1,980 2,640 880 (23,100) $ 17,710
16,500
16,500
44,000
(14,300) $ 2,200
(12,100) $ 4,400
(41,800) $ 2,200
Prepare a consolidated balance sheet for Johnson Company and all of its majority-owned subsidiaries. Prepare a consolidated income statement for Johnson Company and all of its majorityowned subsidiaries.
ANS: a.
Johnson Company Consolidated Balance Sheet Assets Cash Accounts Receivable Plant and equipment Investment in Subsidiary 3 Total assets
$ 1,045 3,905 8,855 462 $ 14,267
Liabilities and Stockholders' Equity Liabilities Minority Interest [($1,760 10%) + ($715 40%)] Equity Total liabilities and stockholders' equity
$ 7,095 462 6,710 $ 14,267
b.
Johnson Company Consolidated Income Statement Sales Income from subsidiary 3 Expenses Minority interest income [($2,200 10%) + ($4,400 40%)] Net income
PTS: 1 DIF: Challenging OBJ: 12.7 NAT: AACSB Analytic | AICPA FN Measurement
$ 68,310 880 (49,500) (1,980) $ 17,710
Chapter 13—Statement of Cash Flows MULTIPLE CHOICE 1. The statement of cash flows replaces the a. Balance sheet b. Statement of financial position c. Income statement d. None of these ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.1
2. The statement of cash flows a. Is a required statement only for those companies using cash-basis accounting b. Provides a connecting link between two consecutive income statements c. Is intended primarily to provide necessary information for assessing the profitability of an entity d. Summarizes all cash inflows and outflows of an entity for a given period of time ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.1
3. Which of the following is NOT a purpose of the statement of cash flows? a. It provides information about an entity's cash receipts and payments over a period of time. b. It provides investors with information about the investing and financing activities of an entity. c. It highlights changes in managerial strategy regarding investments and finances. d. It measures the profitability of an entity. ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.1
4. Which of the following statements is NOT true? a. The statement of cash flows provides details as to how the cash account changed during a period. b. The statement of cash flows does not replace the income statement. c. The statement of cash flows includes transactions that are not already reflected in the balance sheet and income statement. d. The statement of cash flows sheds some light on a company's ability to generate income in the future. ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.1
5. In addition to the three primary financial statements, which of the following is also required under GAAP? a. Statement of financial position b. Statement of cash flows c. Statement of changes in working capital d. Statement of cash equivalents ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.1
6. Those transactions and events that enter into the determination of net income are reported under which section of the statement of cash flows? a. Significant noncash investing and financing activities b. Financing activities c. Investing activities d. Operating activities ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
7. Which of the following is the typical sequencing of activities on the statement of cash flows? a. Operating, investing, and financing b. Operating, financing, and investing c. Investing, operating, and financing d. Investing, financing, and operating ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
8. Which of the following would NOT be included in the operating activities section of the statement of cash flows? a. Interest received b. Interest paid c. Dividends received d. Dividends paid ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
9. Significant noncash financing and investing transactions are a. Listed in the body of a statement of cash flows b. Reported in a narrative or in a separate schedule c. Reported under the financing and investing activities sections d. Converted to cash equivalents ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
10. Which of the following would NOT be considered cash or cash equivalents for purposes of preparing a statement of cash flows? a. Money market funds b. Checking accounts c. Treasury bills d. Notes receivable ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
11. Which of the following would be reported as a cash flow from financing activities? a. Cash receipts from the sale of equipment b. Cash receipts from interest on notes receivable c. Cash receipts from dividends on long-term investments d. Cash receipts from the issuance of long-term debt ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
12. The exchange of debt for equipment would a. Be shown on a statement of cash flows as an operating activity b. Be shown on a statement of cash flows as an investing activity c. Be shown on a statement of cash flows as a financing activity d. Be shown as a supplementary disclosure ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
13. Which of the following would be classified as an investing activity on a statement of cash flows? a. Cash received from dividends b. Cash paid for interest c. Cash received from the sale of a land d. Cash used to repay principal amounts borrowed ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
14. Which of the following would be classified as an operating activity on a statement of cash flows? a. Cash received from selling equity securities b. Cash received as dividends on investments c. Cash dividends paid to stockholders d. Cash paid to purchase treasury stock ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
15. A statement of cash flows will help investors understand all the following EXCEPT a. How a new building was financed b. Why inventory increased c. How much long-term debt was retired d. Whether or not a company paid cash dividends ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
16. Which of the following would NOT be reported as an investing activity on a statement of cash flows? a. Collection of a long-term note receivable b. Amounts borrowed c. Extending loans to other entities d. Sale of a building ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
17. Which of the following would be reported as a financing activity on a statement of cash flows? a. Receipt of a dividend b. Purchase of treasury stock c. Proceeds from the sale of land d. Payment of interest ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
18. Which of the following would be reported as an operating activity on a statement of cash flows? a. Payment of taxes b. Payment of dividends c. Repayment of a loan d. Purchase of a building ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
19. The repayment of the principal on a loan used to finance the purchase of equipment should be classified as a(n) a. Operating activity b. Investing activity c. Financing activity d. Noncash transaction ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
20. Significant noncash financing transactions a. Are included parenthetically on a statement of cash flows b. Should not be disclosed at all since they are irrelevant to actual performance c. Should not be disclosed in the body of a statement of cash flows but should appear elsewhere d. Are deducted from net income to determine cash provided by operating activities on a statement of cash flows ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.2
21. Simpson purchased money market funds with cash during the current year. This transaction will result in a decrease in cash from a. Operating activities b. Financing activities c. Investing activities d. No change in cash will occur ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 13.2
22. Durning Company loaned $1,000,000 at 8 percent interest to Silva Company. The interest revenue would be classified as a(n) a. Operating activity b. Investing activity c. Financing activity d. Noncash transaction ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 13.2
23. Durning Company loaned $1,000,000 at 8 percent interest to Silva Company. Durning Company would classify the loan as a(n) a. Operating activity b. Investing activity c. Financing activity d. Noncash transaction ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 13.2
24. Durning Company loaned $1,000,000 at 8 percent interest to Silva Company. Silva Company would classify the loan as a(n) a. Operating activity b. Investing activity c. Financing activity d. Noncash transaction ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 13.2
25. A simple statement of cash flows can be prepared by using a. The cash t-account b. The beginning trial balance c. The ending trial balance d. The income statement ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.3
26. Yuka Company had a beginning cash balance of $1,875. In addition, Yuka Company reported the following items from its cash flow statement: Operating activities Investing activities Financing activities Given this information, Yuka Company's ending cash balance is a. $515 b. $2,390 c. $2,480 d. $3,590 ANS: B Ending cash balance: $1,875 + $6,450 $4,735 $1,200 = $2,390 PTS: 1 DIF: Medium OBJ: 13.3 NAT: AACSB Analytic | AICPA FN Measurement
$6,450 ($4,735) ($1,200)
27. The following financial information is available for the year 2012: Operating activities Investing activities Financing activities Ending cash balance
$ 309,800 ($118,000) ($190,000) $ 5,600
Given this information, what is the beginning cash balance? a. $1,800 b. $3,800 c. $72,600 d. $112,400 ANS: B Beginning cash balance:
x + $309,800 $118,000 $190,000 = $5,600 x = $3,800
PTS: 1 DIF: Medium OBJ: 13.3 NAT: AACSB Analytic | AICPA FN Measurement 28. Dahbi Corporation has the following financial information available: Operating activities Financing activities Beginning cash balance Ending cash balance
$14,250 $ 3,500 $ 1,450 $ 5,650
Given this information, what is the amount of cash provided by (used in) Dahbi's investing activities? a. $17,750 b. ($24,850) c. ($13,550) d. $13,550 ANS: C Investing activities:
$1,450 + $14,250 + x + $3,500 = $5,650 x = ($13,550)
PTS: 1 DIF: Medium OBJ: 13.3 NAT: AACSB Analytic | AICPA FN Measurement
29. Hee Jung Company had the following information available: Collections on accounts receivable Payments for equipment purchase Payments for wages and salaries Receipt of interest revenue Payments to principal amount on loan Payments for inventory
$53,200 $23,200 $18,000 $ 2,500 $12,800 $22,200
Using this information, compute Hee Jung's cash provided by (paid for) operating activities. a. $15,500 b. $14,500 c. $13,000 d. $12,000 ANS: A Operating activities: $53,200 $18,000 + $2,500 $22,200 = $15,500 PTS: 1 DIF: Medium OBJ: 13.3 NAT: AACSB Analytic | AICPA FN Measurement Exhibit 13-1 On December 31, 2012, Lodger Company's ledger had the following information in its cash account: Cash Beg. Bal. (2) (4) End. Bal.
18,475 (1) 135,000 (3) 7,250 (5) (6) 25,725
70,000 53,000 3,000 10,000
The transactions that are represented in Lodger's cash account are as follows:
Payments for inventory Collections on accounts receivables Payments for wages and salaries Proceeds from sale of equipment Payment of dividends to stockholders Payments for taxes
30. Refer to Exhibit 13-1. Using the information above, compute the amount of cash provided by (used in) operating activities. a. ($3,000) b. $7,250 c. ($2,000) d. $2,000 ANS: D Operating activities: $135,000 $70,000 $53,000 $10,000 = $2,000 PTS: 1 DIF: Medium OBJ: 13.3 NAT: AACSB Analytic | AICPA FN Measurement
31. Refer to Exhibit 13-1. Using the information above, compute the amount of cash provided by (used in) investing activities. a. ($3,000) b. $7,250 c. ($2,000) d. $2,000 ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 13.3
32. Refer to Exhibit 13-1. Using the information above, compute the amount of cash provided by (used in) financing activities. a. ($3,000) b. $7,250 c. ($2,000) d. $2,000 ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 13.3
Exhibit 13-2 Avondale Inc. had the following cash transactions during 2012: Sales receipts Inventory payments Interest payments Wage payments Dividend receipts Interest receipts Equipment purchased Stock of Canton Company purchased Stock issued Repaid a note (nonoperating)
$2,000,000 1,500,000 20,000 120,000 10,000 6,000 150,000 50,000 300,000 100,000
33. Refer to Exhibit 13-2. What was Avondale's net cash provided by (used in) operating activities? a. $2,016,000 b. $360,000 c. $516,000 d. $376,000 ANS: D Cash provided by operating activities: $2,000,000 $1,500,000 $20,000 $120,000 + $10,000 + $6,000 = $376,000 PTS: 1 DIF: Medium OBJ: 13.3 NAT: AACSB Analytic | AICPA FN Measurement
34. Refer to Exhibit 13-2. What was Avondale's net cash provided by (used in) financing activities? a. $200,000 b. $300,000 c. $100,000 d. $150,000 ANS: A Cash provided by financing activities: $300,000 $100,000 = $200,000 PTS: 1 DIF: Medium OBJ: 13.3 NAT: AACSB Analytic | AICPA FN Measurement 35. Refer to Exhibit 13-2. What was Avondale's net increase in cash for the year? a. $306,000 b. $266,000 c. $376,000 d. $576,000 ANS: C Net increase in cash: $2,000,000 $1,500,000 $20,000 $120,000 + $10,000 + $6,000 $150,000 $50,000 + $300,000 $100,000 = $376,000 PTS: 1 DIF: Medium OBJ: 13.3 NAT: AACSB Analytic | AICPA FN Measurement 36. Which of the following transactions is LEAST likely to be a separate item on a statement of cash flows prepared using the indirect method? a. The collection of accounts receivable b. The sale of equipment c. The issuance of stock d. The payment of dividends ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
37. The method that begins with net income or net loss and adjusts that number for items that did not affect cash is called the a. Direct method b. Operating method c. Indirect method d. Cash-equivalent method ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
38. Which of the following would be deducted from net income on a statement of cash flows prepared using the indirect method? a. A gain from the sale of equipment b. A decrease in accounts receivable c. An increase in accounts payable d. Dividends paid ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
39. Which of the following would be added to net income on a statement of cash flows prepared using the indirect method? a. A gain from the sale of equipment b. A decrease in accounts receivable c. A decrease in accounts payable d. Dividends received ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
40. The purchase of inventory on account would increase a. Cash from operating activities b. Cash from financing activities c. Working capital d. None of these are correct ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
41. The direct and indirect methods will usually show different amounts of cash flows from a. Operating activities b. Financing activities c. Investing activities d. None of these are correct ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
42. Which of the following would be subtracted from net income on a statement of cash flows prepared by the indirect method? a. An increase in accounts payable b. A decrease in accounts receivable c. A gain from the sale of equipment d. Depreciation expense ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
43. Which of the following would be subtracted from net income on a statement of cash flows prepared by the indirect method? a. An increase in accounts payable b. An decrease in dividends payable c. Depreciation expense d. A decrease in accounts receivable ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
44. Which of the following items would be reported on a statement of cash flows prepared by the indirect method but NOT by the direct method? a. Depreciation expense b. Cash received from the sale of a building c. Cash received from issuance of stock d. Cash paid for dividends ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
45. A loss from the sale of a building would be reported on an indirect method statement of cash flows as a. An addition to net income b. A deduction from net income c. A cash inflow from financing activities d. A cash outflow from investing activities ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
46. The indirect method of preparing a statement of cash flows a. Results in the same net cash flow from operating activities as the direct method b. Is the method most often used in practice c. Involves adjusting the net income figure for any noncash expenses d. Does all of these items ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
47. The approach to preparing a statement of cash flows that adjusts net income to cash flows from operations is the a. All financial resources method b. Direct method c. Indirect method d. Worksheet method ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
48. The method by which cash flows are presented on a statement of cash flows as operating cash receipts and payments is the a. All financial resources method b. Direct method c. Indirect method d. Working capital method ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
49. The direct method of presenting a statement of cash flows a. Classifies activities differently from the indirect method b. Involves reconciling accrual net income to net cash flows from operating activities c. Shows the major classes of operating cash receipts and payments d. Includes noncash financing transactions ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
50. A gain on the sale of machinery in the ordinary course of business should be presented in a statement of cash flows (indirect method) as a. A deduction from net income b. An addition to net income c. An inflow and outflow of cash d. An outflow of cash ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.4
51. If depreciation expense is $20,000 and the beginning and ending Accumulated Depreciation balances are $100,000 and $110,000, respectively, cash paid for depreciation is a. $0 b. $10,000 c. $20,000 d. $100,000 ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 13.4
52. Sales revenue for the period is $500,000 and the beginning and ending Accounts Receivable balances are $50,000 and $37,500, respectively. How much cash is collected from customers? a. $500,000 b. $512,500 c. $487,500 d. $587,500 ANS: B Cash collected from customers:
$50,000 + $500,000 x = $37,500 x = $512,500
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 53. If interest revenue for the period is $13,200 and the beginning and ending Interest Receivable balances are $1,650 and $6,600, respectively, cash received from interest is a. $19,800 b. $21,450 c. $18,150 d. $8,250 ANS: D Cash received from interest:
$1,650 + $13,200 x = $6,600 x = $8,250
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
54. If cost of goods sold is $100,000 and the beginning and ending Inventory balances are $20,000 and $16,000, respectively, net purchases are a. $96,000 b. $100,000 c. $104,000 d. $136,000 ANS: A Net purchases:
$20,000 + x $100,000 = $16,000 x = $96,000
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 55. If cost of goods sold is $80,000 and the beginning and ending Accounts Payable balances are $10,000 and $15,000, respectively, cash paid to suppliers is a. $75,000 b. $80,000 c. $85,000 d. Not determinable from the information given ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 13.4
56. If net purchases are $252,000 and the beginning and ending Accounts Payable balances are $32,000 and $12,000, respectively, cash paid to suppliers is a. $272,000 b. $232,000 c. $252,000 d. Not determinable from the information given ANS: A Cash paid to suppliers:
$32,000 + $252,000 x = $12,000 x = $272,000
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 57. If wages expense is $100,000 and the beginning and ending Wages Payable balances are $10,000 and $20,000, respectively, cash paid to employees is a. $90,000 b. $100,000 c. $110,000 d. Not determinable from the information given ANS: A Cash paid to employees:
$10,000 + $100,000 x = $20,000 x = $90,000
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
58. If insurance expense is $5,000 and the beginning and ending Prepaid Insurance balances are $1,000 and $1,500, respectively, cash paid for insurance is a. $4,500 b. $5,000 c. $5,500 d. Not determinable from the information given ANS: C Cash paid for insurance:
$1,000 + x $5,000 = $1,500 x = $5,500
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 59. Chen Company's financial statements show a net income of $184,000. The following items also appear on Chen's balance sheet: Depreciation expense Accounts receivable decrease Inventory increase Accounts payable increase
$40,000 12,000 28,000 8,000
What is Chen's net cash flow from operating activities? a. $216,000 b. $136,000 c. $232,000 d. $272,000 ANS: A Net cash flow from operating activities: $184,000 + $40,000 + $12,000 $28,000 + $8,000 = $216,000 PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 60. Chaffee Company's financial statements show a net loss of $180,000. The following items also appear on Chaffee's balance sheet: Depreciation expense Accounts receivable increase Inventory decrease Accounts payable decrease Accrued liabilities increase What is Chaffee's net cash flow from operating activities? a. $84,000 b. ($156,000) c. $348,000 d. ($180,000)
$ 84,000 120,000 48,000 24,000 36,000
ANS: B Net cash flow from operating activities: ($180,000) + $84,000 $120,000 + $48,000 $24,000 + $36,000 = ($156,000) PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 61. Worthy Company's financial statements show a net income of $540,000. The following items also appear on Worthy's balance sheet: Amortization expense Accounts receivable decrease Inventory decrease Interest payable increase
$144,000 135,000 63,000 90,000
What is Worthy's net cash flow from operating activities? a. $276,000 b. $666,000 c. $846,000 d. $972,000 ANS: D Net cash flow from operating activities: $540,000 + $144,000 + $135,000 + $63,000 + $90,000 = $972,000 PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 62. Booth Company's financial statements show a net income of $143,000. The following items also appear on Booth's balance sheet: Depreciation expense Accounts receivable decrease Prepaid rent increase Accounts payable decrease
$32,000 36,000 22,000 26,000
What is Booth's net cash flow from operating activities? a. $121,000 b. $163,000 c. $177,000 d. $157,000 ANS: B Net cash flow from operating activities: $143,000 + $32,000 + $36,000 $22,000 $26,000 = $163,000 PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
63. In its accrual-basis income statement for the year ended December 31, 2012, Nelson Company reported revenue of $1,750,000. Additional information is as follows: Accounts receivable December 31, 2011 Net income for 2012 Accounts receivable December 31, 2012
$505,000 70,000 375,000
Nelson should report cash collected from customers in its 2012 statement of cash flows (direct method) in the amount of a. $1,620,000 b. $1,550,000 c. $1,690,000 d. $1,880,000 ANS: D Cash collected from customers:
$505,000 + $1,750,000 x = $375,000 x = $1,880,000
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement Exhibit 13-3 The following information relates to Equipment and related accounts of De Soto Corporation: Equipment, beginning balance Equipment, ending balance Equipment sold during the year:
Cost Book value Fully depreciated equipment written off during the year Accumulated Depreciation, beginning balance Accumulated Depreciation, ending balance
$260,000 300,000 20,000 4,000 10,000 180,000 169,000
64. Refer to Exhibit 13-3. Assuming that all of De Soto's equipment purchases are for cash, how much cash was used to purchase equipment during the year? a. $42,000 b. $50,000 c. $70,000 d. $78,000 ANS: C Equipment purchased during the year:
$260,000 + x $20,000 $10,000 = $300,000 x = $70,000
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
65. Refer to Exhibit 13-3. Assuming De Soto uses the indirect method, the depreciation expense that would be added to net income in computing cash flows from operations would be a. $9,000 b. $15,000 c. $21,000 d. $23,000 ANS: B Depreciation expense:
$180,000 + x $16,000 $10,000 = $169,000 x = $15,000
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 66. Ojeda Corporation had the following cash flows during 2012. The company uses the direct method of preparing a statement of cash flows. Cash receipt from the issuance of stock Cash received from customers Dividends received on long-term investments Cash paid for wages Cash paid for insurance Cash paid for dividends Cash paid to purchase building Loan made to another company Given this information, net cash inflow (outflow) from operating activities is a. $8,500 b. $5,500 c. $3,500 d. $15,000 ANS: B Net cash inflow from operating activities: $9,000 + $4,000 $7,000 $500 = $5,500 PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
$20,000 9,000 4,000 7,000 500 3,000 30,000 10,000
Exhibit 13-4 Selected balance sheet and income statement data for Fowler Inc. are presented below. The company uses the direct method in preparing its statement of cash flows. Partial Balance Sheet Beginning of Year $10,000 20,000 1,500 1,500 12,000 13,000 10,000
Accounts Receivable Inventories Prepaid Insurance Prepaid Rent Accounts Payable Wages Payable Unearned Rent
End of Year $ 12,000 24,000 2,000 1,000 14,000 15,000 6,000
Partial Income Statement Rent Revenue Sales Revenue Cost of Goods Sold Insurance Expense Rent Expense Wages Expense
$ 20,000 100,000 60,000 10,000 6,000 30,000
67. Refer to Exhibit 13-4. Given the information above, cash collected from customers is a. $98,000 b. $100,000 c. $102,000 d. $122,000 ANS: A Cash collected from customers:
$10,000 + $100,000 x = $12,000 x = $98,000
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 68. Refer to Exhibit 13-4. Given the information above, cash collected for rent is a. $16,000 b. $20,000 c. $24,000 d. $24,500 ANS: A Cash collected for rent:
$10,000 + x $20,000 = $6,000 x = $16,000
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
69. Refer to Exhibit 13-4. Given the information above, cash paid for insurance is a. $9,500 b. $10,000 c. $10,500 d. Not determinable from the information given ANS: C Cash paid for insurance:
$1,500 + x $10,000 = $2,000 x = $10,500
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 70. Refer to Exhibit 13-4. Given the information above, cash paid for inventory is a. $58,000 b. $60,000 c. $62,000 d. $64,000 ANS: C Inventory bought this year: Cash paid for inventory:
$20,000 + x $60,000 = $24,000 x = $64,000 $12,000 + $64,000 x = $14,000 x = $62,000
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 71. Refer to Exhibit 13-4. Given the information above, cash paid for wages is a. $28,000 b. $30,000 c. $32,000 d. Not determinable from the information given ANS: A Cash paid for wages:
$13,000 + $30,000 x = $15,000 x = $28,000
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 72. Refer to Exhibit 13-4. Given the information above, cash paid for rent is a. $5,500 b. $6,000 c. $6,500 d. Not determinable from the information given ANS: A Cash paid for rent:
$1,500 + x $6,000 = $1,000 x = $5,500
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
73. In 2012, Kahoka Company paid $10,000 to satisfy its 2011 tax liability, $64,000 for its 2012 tax liability, and still owed taxes payable of $16,000 at year-end. How much should Kahoka report as a cash outflow for tax payments on the 2012 statement of cash flows? a. $74,000 b. $54,000 c. $80,000 d. $90,000 ANS: A Cash outflow for tax payments: $10,000 + $64,000 = $74,000 PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 74. The following data were taken from the 2012 financial statements of Magelby Corporation: Cost of Goods Sold Beginning Inventory Ending Inventory Beginning Accounts Payable Ending Accounts Payable
$315,000 36,000 54,000 22,500 18,000
How much cash did Sigma pay for inventory in 2012? a. $301,500 b. $292,500 c. $337,500 d. $328,500 ANS: C Inventory bought: Cash paid for inventory:
$36,000 + x $315,000 = $54,000 x = $333,000 $22,500 + $333,000 x = $18,000 x = $337,500
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 75. The following information appeared on the 2012 income statement of Kane Company: Depreciation expense Patent amortization expense Loss on sale of machinery Gain on sale of securities Net income
$ 25,000 10,000 6,000 3,000 120,000
Based on this information, what is Kane's net cash provided by operations? a. $164,000 b. $158,000 c. $120,000 d. $82,000 ANS: B Net cash provided by operations: $120,000 + $25,000 + $10,000 + $6,000 $3,000 = $158,000 PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
76. In 2011, Franco Manufacturing had sales of $975,000, beginning Accounts Receivable of $84,500, and ending Accounts Receivable of $110,500. Cash collected from customers for the year totaled a. $975,000 b. $1,001,000 c. $1,059,500 d. $949,000 ANS: D Cash collected from customers:
$84,500 + $975,000 x = $110,500 x = $949,000
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement Exhibit 13-5 Chen Corporation had the following cash flows during 2012. The company uses the direct method of preparing a statement of cash flows. Cash receipt from the issuance of stock Cash received from customers Dividends received on long-term investments Cash paid for wages Cash paid for insurance Cash paid for dividends Cash paid to purchase building Loan made to another company
$ 80,000 40,000 20,000 24,000 2,000 12,000 120,000 40,000
77. Refer to Exhibit 13-5. Given the information above, net cash inflow (outflow) from investing activities is a. ($40,000) b. ($120,000) c. ($160,000) d. ($172,000) ANS: C Cash outflow from investing activities: ($120,000) + ($40,000) = ($160,000) PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 78. Refer to Exhibit 13-5. Given the information above, net cash inflow (outflow) from financing activities is a. $80,000 b. $68,000 c. ($12,000) d. ($52,000) ANS: B Cash inflow from financing activities: $80,000 $12,000 = $68,000 PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
79. Refer to Exhibit 13-5. Given the information above, net cash inflow (outflow) from ALL activities is a. $22,000 b. $40,000 c. ($58,000) d. ($98,000) ANS: C Cash inflow from operating activities: Cash outflow from investing activities: Cash inflow from financing activities: Net cash outflow from all activities:
$40,000 + $20,000 $24,000 $2,000 = $34,000 ($120,000) + ($40,000) = ($160,000) $80,000 $12,000 = $68,000 $34,000 $160,000 + $68,000 = ($58,000)
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 80. Ozark Corporation's Retained Earnings balance increased by $100,000 during the year. Ozark also paid $30,000 in cash dividends that had been declared last year and declared dividends of $40,000 for the current year (but has not paid them at year-end). Ozark's net income for the current year must be a. $60,000 b. $140,000 c. $130,000 d. $100,000 ANS: B Net income: $40,000 + $100,000 = $140,000 PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 81. Didericksen Company's income statement for the year ended December 31, 2012, reported net income of $360,000. The financial statements also disclosed the following information: Amortization Depreciation Increase in accounts receivable Increase in inventory
$20,000 60,000 20,000 48,000
Decrease in accounts payable
76,000
Increase in salaries payable Dividends paid Purchase of equipment Increase in long-term note payable Increase in common stock outstanding
$ 28,000 120,000 150,000 300,000 35,000
Net cash provided by operating activities for 2012 should be reported as a. $84,000 b. $204,000 c. $234,000 d. $324,000 ANS: D Net cash provided by operating activities: $360,000 + $20,000 + $60,000 $20,000 $48,000 $76,000 + $28,000 = $324,000 PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
82. The following information is available from the financial statements of Sparta Corporation for the year ended December 31, 2012: Net income Depreciation expense Decrease in accounts receivable Increase in inventories
$792,000 204,000 208,000 180,000
Increase in accounts payable Payment of dividends Purchase of available-for-sale securities Decrease in income taxes payable
$ 48,000 108,000 44,000 32,000
What is Sparta Corporation's net cash flows from operating activities? a. $880,000 b. $932,000 c. $1,040,000 d. $1,084,000 ANS: C Net cash flows from operating activities: $792,000 + $204,000 + $208,000 $180,000 + $48,000 $32,000 = $1,040,000 PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement Exhibit 13-6 The following financial information is available for Ligutti Company:
Cash and cash equivalents Accounts receivable Buildings Accumulated depreciation Land
Accounts payable Long-term notes payable Common stock Retained earnings
83. Refer to Exhibit 13-6. Additional information for Ligutti Company:
Dividends paid totaled $10,000. Net income was $30,000. No buildings were sold during the year.
What was the net cash provided by (used in) operating activities? a. $33,000 b. $30,000 c. $26,000 d. $35,000
2012 $ 12,000 25,000 108,000 (20,000) 30,000 $155,000
2011 $15,000 22,000 45,000 (16,000) 20,000 $86,000
$ 26,000 50,000 50,000 29,000 $155,000
$22,000 20,000 30,000 14,000 $86,000
ANS: D Net change in Accounts Receivable: Depreciation expense: Net change in Accounts Payable: Net cash provided by operating activities:
$25,000 $22,000 = $3,000 ($20,000) ($16,000) = ($4,000) $26,000 $22,000 = $4,000 $30,000 $3,000 + $4,000 + $4,000 = $35,000
PTS: 1 DIF: Challenging OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 84. Refer to Exhibit 13-6. Additional information for Ligutti Company:
Dividends paid totaled $15,000. Net income was $30,000. No buildings were sold during the year.
What was the net cash provided by (used in) financing activities? a. $25,000 b. $35,000 c. $10,000 d. $45,000 ANS: B Cash received for long-term notes payable: $50,000 $20,000 = $30,000 Cash received for common stock: $50,000 $30,000 = $20,000 Cash paid for dividends: ($15,000) Net cash provided by financing activities: $30,000 + $20,000 $15,000 = $35,000 PTS: 1 DIF: Challenging OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement 85. Refer to Exhibit 13-6. Additional information for Ligutti Company:
Dividends paid totaled $10,000. Net income was $30,000. No buildings were sold during the year.
What was the net cash provided by (used in) investing activities? a. ($63,000) b. ($73,000) c. $63,000 d. $73,000 ANS: B Cash used in buying buildings: Cash used in buying land: Net cash used in investing activities:
$45,000 $108,000 = ($63,000) $20,000 $30,000 = ($10,000) ($63,000) + ($10,000) = ($73,000)
PTS: 1 DIF: Challenging OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
86. Analysis using cash flow information is restricted to a. Vertical analysis b. Horizontal analysis c. Relationships among the categories in the statement of cash flows d. All of these are correct ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.5
87. Which of the following cash flow patterns do rapidly growing start-up companies follow? a. Cash reserves are being used to finance operating shortfalls and pay long-term creditors and investors b. Cash is being borrowed to cover cash shortages from operations and to purchase fixed assets c. Cash generated by operations is used to buy fixed assets and pay down debt d. Operating cash flow shortages are covered from the sale of fixed assets, borrowing, or stockholder contributions ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.5
88. If a company is to succeed over the long-term, positive cash flows are necessary from a. Operating activities b. Investing activities c. Financing activities d. Both investing and financing activities ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.5
89. In 2012, Paula Company's statement of cash flows displayed the following pattern: Cash from operating activities: Cash from investing activities: Cash from financing activities:
Negative Negative Negative
Which one of the following statements BEST describes this cash flow pattern? a. Paula Company is using loans and operating cash flow in order to get the cash to purchase new buildings. b. Paula Company is selling buildings in order to repay long-term loans. c. Paula Company is using its operating cash flow in order to get the cash to purchase new buildings. d. Paula Company is decreasing the balance in its cash account. ANS: D PTS: 1 DIF: Medium NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 13.5
PROBLEM 1. Tabiona Company had the following transactions during the year. a. b. c. d. e. f. g. h. i.
Received $15,000 cash payment on accounts receivable. Sold land for $60,000. Paid $25,000 of its accounts payable Sold (issued) 1,000 shares of common stock, $10 par, for $40 per share. Recorded depreciation expense of $25,000. Borrowed $85,000 from Green Bank and signed a note to repay in 12 months, with 10% interest. Purchased equipment costing $40,000 by paying cash. Paid interest expense of $10,000. Received dividend revenue of $8,000.
For each of the above transactions, indicate: 1. 2.
Whether it is a cash inflow, cash outflow, or noncash item, Which category it would be reported under on a statement of cash flows: operating, investing, or financing (assume Tabiona uses the direct method or preparing its statement of cash flows).
ANS: 1 and 2. a. b. c. d. e. f. g. h. i.
Inflow/Outflow/Noncash Inflow Inflow Outflow Inflow Noncash Inflow Outflow Outflow Inflow
Operating, Investing, or Financing Operating Investing Operating Financing n/a Financing Investing Operating Operating
PTS: 1 DIF: Medium OBJ: 13.2 NAT: AACSB Analytic | AICPA FN Measurement 2. The Santini Company had the following selected transactions during the past year: a. b. c. d. e. f. g. 1. 2.
Sold (issued) 5,000 shares of common stock, $1 par, for $10 per share. Sold equipment for $5,000. The original cost was $20,000; the book value was $5,500. Paid $30,000 of its accounts payable. Borrowed $60,000 from First National Bank and signed a note to repay in 6 months, with 12% interest. Purchased equipment costing $80,000 by paying cash of $20,000 and signing a 12% note for the remainder. Purchased treasury stock for $20,000. Recorded depreciation expense of $8,000. Prepare journal entries for each of the transactions above. For each transaction, indicate the amount of cash inflow or cash outflow and how each of these cash flows would be classified on a statement of cash flows.
ANS: 1.
a.
b.
c.
d.
e.
f.
g.
2.
a. b. c. d. e.
f. g.
Cash Common Stock Paid-in-Capital in Excess of Par
50,000
Cash Accumulated Depreciation Loss on Sale of Equipment Equipment
5,000 14,500 500
Accounts Payable Cash
30,000
Cash Notes Payable
60,000
Equipment Cash Notes Payable
80,000
Treasury Stock Cash
20,000
Depreciation Expense Accumulated Depreciation
8,000
5,000 45,000
20,000
30,000
60,000
20,000 60,000 20,000
8,000
The $50,000 cash inflow would be classified as a financing activity. The $5,000 cash inflow is reported as an investing activity. Under the indirect method, the $500 loss would be added back to net income. The $30,000 cash outflow would be classified as an operating activity. The $60,000 cash inflow would be classified as a financing activity. The $20,000 cash outflow would be reported as an investing activity. $60,000 of the transaction is reported in a note or separate schedule as a significant noncash transaction. The $20,000 cash outflow is reported as a financing activity. There is no cash flow from this transaction. Under the indirect method, the $8,000 would be added back to net income.
PTS: 1 DIF: Medium OBJ: 13.3 NAT: AACSB Analytic | AICPA FN Measurement
3. On December 31, 2012, Catron Company's ledger had the following information in its cash account: Cash Beg. Bal. (b) (d) End. Bal.
35,000 (a) 270,000 (c) 14,500 (e) (f) 47,500
140,000 106,000 6,000 20,000
The transactions that are represented in Catron's cash account are as follows:
Payments for inventory Collections on accounts receivables Payments for wages and salaries Proceeds from sale of equipment Payment of dividends to stockholders Payments for taxes
Using this information, prepare Catron's cash flow statement using the direct method. ANS: Catron Company Statement of Cash Flows For the Year Ended December 31, 2012 Cash Flows from Operating Activities: Payments for inventory (a) Collections on accounts receivable (b) Payments for wages and salaries (c) Payments for taxes (f) Net cash flows provided by operating activities
($140,000) 270,000 (106,000) (20,000)
Cash Flows from Investing Activities: Cash receipts from sale of equipment (d) Net cash flows provided by investing activities
$ 14,500
Cash Flows from Financing Activities: Cash payments for dividends (e) Net cash flows used in financing activities Net increase in cash Beginning Cash balance Ending Cash balance PTS: 1 DIF: Medium OBJ: 13.3 NAT: AACSB Analytic | AICPA FN Measurement
$ 4,000
$14,500
(6,000) (6,000) $12,500 35,000 $47,500
4. At the end of the year, Wyatt Company had the following information related to transactions in its cash account: Payments for inventory Collections on accounts receivables Payments for interest Payments for wages and salaries Payments for purchase of land Proceeds from sale of equipment Payments for retirement of long-term debt Proceeds from sale of common stock Payments for taxes
$380,000 500,000 3,000 174,000 45,000 26,000 20,000 100,000 55,000
Additionally, Wyatt had a cash balance at the beginning and ending of the year of $75,000 and $24,000, respectively. Using this information, prepare Wyatt's cash flow statement using the direct method. ANS: Wyatt Company Statement of Cash Flows Cash Flows from Operating Activities: Payments for inventory Collections on accounts receivable Payments for interest Payments for wages and salaries Payments for taxes Net cash flows used in operating activities
($380,000) 500,000 (3,000) (174,000) (55,000)
Cash Flows from Investing Activities: Payments for purchase of land Proceeds from sale of equipment Net cash flows used in investing activities
(45,000) $ 26,000
Cash Flows from Financing Activities: Payments for retirement of long-term debt Proceeds from sale of common stock Net cash flows provided by financing activities Net decrease in cash Beginning Cash balance Ending Cash balance PTS: 1 DIF: Medium OBJ: 13.3 NAT: AACSB Analytic | AICPA FN Measurement
($112,000)
($ 19,000)
(20,000) 100,000 $ 80,000 ($ 51,000) 75,000 $ 24,000
5. From the following data for Vargas Company, determine the net cash flow provided (used) by operating activities. Net income Depreciation for the year Dividends declared during the year
Cash and cash equivalents Accounts receivable Inventory Prepaid expenses Accounts payable Accrued liabilities Dividends payable
$50,000 35,000 30,000 Beginning of Year $35,000 25,000 83,000 7,000 28,000 2,000 23,000
End of Year $42,000 27,000 80,000 8,000 22,000 7,000 25,000
ANS: Net income Add (deduct) adjustments to cash basis: Depreciation Increase in accounts receivable Decrease in inventory Increase in prepaid expenses Decrease in accounts payable Increase in accrued liabilities Net cash flow provided by operating activities Note:
$50,000 35,000 (2,000) 3,000 (1,000) (6,000) 5,000 $84,000
The amount of cash paid for dividends was $28,000 ($30,000 declared plus $23,000 payable at beginning of year less $25,000 payable at year-end). However, dividend payments are classified as a financing activity, not as an operating activity.
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
6. Vandalia Company reports the following selected information at year-end: Sales revenue Interest revenue Cost of goods sold Wages expense Depreciation expense Other (cash) operating expenses Proceeds from sale of equipment
Accounts receivable Interest receivable Inventory Accounts payable Wages payable
$1,500,000 12,000 720,000 560,000 86,000 190,000 74,000 Beginning of Year $110,000 8,400 442,000 66,000 52,000
End of Year $ 98,000 6,800 450,000 76,000 36,000
Using the direct method, compute the amount of net cash flow provided (used) by operating activities for Vandalia Company. ANS: Cash receipts from: Sales revenue + Beginning accounts receivable Ending accounts receivable Cash collected from customers Interest revenue + Beginning interest receivable Ending interest receivable Cash collected from interest Total cash receipts from operations Cash Payments to: Cost of goods sold Beginning inventory + Ending inventory
$1,500,000 110,000 (98,000) $1,512,000 $
12,000 8,400 (6,800) 13,600 $1,525,600
$ 720,000 (442,000) 450,000
Purchases + Beginning accounts payable Ending accounts payable Cash paid for inventory
$ 728,000 66,000 (76,000)
Wages expense + Beginning wages payable Ending wages payable Cash paid for wages
$ 560,000 52,000 (36,000)
(718,000)
(576,000)
Cash paid for other operating expenses
(190,000)
Total cash payments for operations
($1,484,000)
Net cash flow provided from operating activities.
$
Note:
41,600
The proceeds from sale of equipment is an investing activity. Depreciation is a noncash item and can be ignored when using the direct method.
PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
7. From the following information for Epperson Company, prepare a statement of cash flows for the year ended December 31, 2012, using the indirect method. Amortization of patent Depreciation expense Net income Payment of dividends Purchase of equipment Retirement of long-term debt Issuance of common stock Cash received in the sale of land (includes $5,000 gain) Decrease in accounts receivable Increase in inventory Increase in accounts payable Cash balance, January 1, 2012 Cash balance, December 31, 2012
$ 8,000 14,000 50,000 58,000 33,500 20,000 30,000 42,000 2,500 1,500 1,200 34,800 ?
ANS: Epperson Company Statement of Cash Flows For the Year Ended December 31, 2012 Cash Flows from Operating Activities: Net income Add (deduct) adjustments to cash basis: Amortization of patent Depreciation Gain on sale of land Decrease in accounts receivable Increase in inventory Increase in accounts payable Net cash flows provided by operating activities Cash Flows from Investing Activities: Cash receipts from sale of land Cash payments for purchase of equipment Net cash flows provided by investing activities Cash Flows from Financing Activities: Cash receipts from issuance of common stock Cash payments for dividends Cash payments to retire long-term debt Net cash flows used in financing activities Net increase in cash Beginning Cash balance Ending Cash balance PTS: 1 DIF: Medium OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
$ 50,000 8,000 14,000 (5,000) 2,500 (1,500) 1,200 $ 69,200 $ 42,000 (33,500) 8,500
$ 30,000 (58,000) (20,000) (48,000) $ 29,700 34,800 $ 64,500
8. Using the following information, prepare a statement of cash flows for the year ended December 31, 2012, using the indirect method. Ciomara Corporation Balance Sheet December 31, 2012 Assets Cash Accounts receivable Land Equipment Accumulated depreciation Total assets Liabilities and Stockholders' Equity Accounts payable Long-term debt Common stock Treasury Stock Retained earnings Total liabilities & stockholders' equity
2012 $ 11,000 120,000 75,000 70,000 (13,500) $262,500
2011 $ 46,500 115,500 60,000 90,000 (19,500) $292,500
$
$
6,000 20,000 197,000 (7,000) 46,500 $262,500
9,000 28,500 174,500 (2,000) 82,500 $292,500
Ciomara Corporation Income Statement For the year ended December 31, 2012 Sales Cost of goods sold Gross margin Depreciation expense Selling and administration expense Operating income Gain on sale of equipment Net Loss Other data:
Equipment with a cost of $20,000 was sold in 2012 Dividends were declared and paid in 2012 Stock was repurchased during 2012, but no treasury stock was sold.
$ 320,000 (279,000) $ 41,000 (9,000) (65,000) $ (33,000) 3,000 $ (30,000)
ANS: Ciomara Corporation Statement of Cash Flows For the Year Ended December 31, 2012 Cash Flows from Operating Activities: Net loss Add (deduct) adjustments to cash basis: Depreciation Gain on sale of equipment Increase in accounts receivable Decrease in accounts payable Net cash flows used by operating activities Cash Flows from Investing Activities: Cash receipt from sale of equipment Cash payment for purchase of land Net cash flows used by investing activities Cash Flows from Financing Activities: Cash receipts from sale of common stock Cash payment to repurchase stock (treasury stock) Cash payment to retire long-term debt Cash payment for dividends Net cash flows provided by financing activities Net decrease in cash Beginning cash balance Ending cash balance * Beginning accumulated depreciation Ending accumulated depreciation
$(30,000) $ 9,000* (3,000)** (4,500) (3,000)
(1,500) $(31,500)
$ 8,000** (15,000) (7,000)
$22,500 (5,000) (8,500) (6,000)*** 3,000 $(35,500) 46,500 $ 11,000
Depreciation expense Accumulated depreciation on sale
$ 19,500 13,500 6,000 9,000 $ 15,000
** Cost of equipment Accumulated depreciation Book value Proceeds from sale of equipment Gain on sale of equipment
$ 20,000 15,000 $ 5,000 8,000 $ 3,000
*** Beginning retained earnings Net loss Dividends Ending retained earnings
$ 82,500 (30,000) (6,000) $ 46,500
PTS: 1 DIF: Challenging OBJ: 13.4 NAT: AACSB Analytic | AICPA FN Measurement
Chapter 14—Analyzing Financial Statements MULTIPLE CHOICE 1. Which of the following statements best describes financial statement analysis? a. Financial statement analysis involves relationships and trends. b. Financial statement analysis evaluates future performance. c. Measurements for a specific company should be compared only with the past. d. All of these are correct. ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.1
2. Which of the following is one of the purposes of financial statement analysis? a. Diagnosis b. Prognosis c. Both diagnosis and prognosis d. Neither diagnosis nor prognosis ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.1
3. When analyzing financial statements, diagnosis is a. The prediction of how a business will perform in the future b. The identification of the trends in past numbers c. The prediction of how many employees will lose their jobs in the coming year d. The identification of where a business has problems ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.1
4. When analyzing financial statements, prognosis is a. The prediction of how a business will perform in the future b. The identification of the trends in past numbers c. The prediction of how many employees will lose their jobs in the coming year d. The identification of where a business has problems ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.1
5. Relationships between financial statement amounts are called a. Financial statement analyses b. Financial ratios c. Liquidity ratios d. DuPont ratios ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.1
6. External users of financial statements use financial statement analysis for a. Operating, investing, and financing decisions b. Investing decisions c. Operating and financing decisions d. Financing decisions ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.1
7. Management uses financial statement analysis for a. Operating, investing, and financing decisions b. Investing decisions c. Operating and financing decisions d. Financing decisions ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.1
8. Financial statement analysis is greatly enhanced when financial ratios are compared with a. Past values b. Future values c. Values for other firms in the same industry d. Both past values and values for other firms in the same industry ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.1
9. What ratio is used to measure a firm's liquidity? a. Debt ratio b. Asset turnover c. Current ratio d. Return on equity ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
10. The ability a company has to pay its debts in the short run is its a. Leverage b. Liquidity c. Efficiency d. Profitability ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
11. Which of the following ratios is used to measure a firm's leverage? a. Debt ratio b. Current ratio c. Asset turnover d. Return on equity ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
12. Which of the following ratios represents the proportion of borrowed funds used to acquire the company's assets? a. Return on assets b. Return on sales c. Debt ratio d. Current ratio ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
13. Which of the following ratios is used to measure the profit earned on each dollar of sales in a firm? a. Current ratio b. Asset turnover c. Return on sales d. Return on equity ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
14. Which of the following ratios is used to measure a firm's efficiency at using its assets? a. Current ratio b. Asset turnover c. Return on sales d. Return on equity ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
15. Which of the following ratios is used to measure the profit earned on each dollar invested in a firm? a. Current ratio b. Asset turnover c. Return on sales d. Return on equity ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
16. Which of the following ratios is the fundamental measure of overall company performance? a. Return on equity b. Current ratio c. Asset turnover d. Return on sales ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
17. Which of the following ratios represents an indication of investors' expectations concerning a firm's growth potential? a. Earnings per share b. Return on equity c. Price-earnings ratio d. Asset turnover ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
18. Which of the following ratios is a comparison of a financial statement number to a market value number? a. Price-earnings ratio b. Return on equity c. Return on sales d. Debt ratio ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
19. Which of the following is a measure of the liquid position of a corporation? a. Price earnings ratio b. Debt ratio c. Current ratio d. Asset turnover ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
20. Which of the following ratios is calculated using only balance sheet numbers? a. Price earnings ratio b. Return on sales c. Asset turnover d. Current ratio ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
21. Which of the following ratios is calculated using only income statement numbers? a. Debt ratio b. Return on sales c. Return on equity d. Current ratio ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
22. Which of the following ratios is calculated using numbers from both the income statement and the balance sheet? a. Current ratio b. Price-earnings ratio c. Return on equity d. Return on sales ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
23. Which of the following transactions could increase a firm's current ratio? a. Purchase of inventory for cash b. Payment of accounts payable c. Collection of accounts receivable d. Purchase of temporary investments for cash ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | AICPA FN Measurement
OBJ: 14.2
24. Partial information from Blain Company's balance sheet is as follows: Current assets: Cash Marketable securities Accounts receivable Inventories Prepaid expenses Total current assets Current liabilities: Notes payable Accounts payable Accrued expenses Income taxes payable Payments due within one year on long-term debt Total current liabilities
$ 1,200,000 3,750,000 28,800,000 33,150,000 600,000 $67,500,000 $
750,000 9,750,000 6,250,000 250,000 1,750,000 $18,750,000
What is Blain's current ratio? a. 0.26 b. 0.30 c. 1.80 d. 3.60 ANS: D Current ratio: $67,500,000 $18,750,000 = 3.6 PTS: 1 DIF: Medium OBJ: 14.2 NAT: AACSB Analytic | AICPA FN Measurement Exhibit 14-1 Selected information for Isaac Company is as follows: Common stock Additional paid-in capital Retained earnings Sales revenue for year Net income for year
$1,200,000 500,000 740,000 1,830,000 480,000
25. Refer to Exhibit 14-1. Isaac's return on equity, rounded to the nearest percentage point, is a. 20 percent. b. 21 percent. c. 28 percent. d. 40 percent. ANS: A Return on Equity: $480,000 ($1,200,000 + $500,000 + $740,000) = 20% PTS: 1 DIF: Medium OBJ: 14.2 NAT: AACSB Analytic | AICPA FN Measurement
26. Refer to Exhibit 14-1. Isaac's return on sales, rounded to the nearest percentage point, is a. 20 percent. b. 21 percent. c. 26 percent. d. 40 percent. ANS: C Return on Sales: $480,000 1,830,000 = 26% PTS: 1 DIF: Medium OBJ: 14.2 NAT: AACSB Analytic | AICPA FN Measurement 27. On December 31, 2010 and 2011, Taft Corporation had 100,000 shares of common stock issued and outstanding. Additional information is as follows: Stockholders' equity at 12/31/2011 Net income year ended 12/31/2011 Market price per share of common stock at 12/31/2011
$4,500,000 1,200,000 144
The price-earnings ratio on common stock at December 31, 2011, was a. 10 b. 12 c. 14 d. 16 ANS: B Price-earnings ratio: (100,000 $144) $1,200,000 = 12 PTS: 1 DIF: Medium OBJ: 14.2 NAT: AACSB Analytic | AICPA FN Measurement 28. The balance sheet at the end of the current year of operations indicates the following:
Total current assets Total investments Total property, plant, and equipment Total current liabilities Total long-term liabilities Common stock, $10 par Paid-in capital in excess of par-common stock Retained earnings
2012 $600,000 85,000 900,000 250,000 350,000 600,000 60,000 325,000
2011 $560,000 40,000 700,000 180,000 250,000 600,000 60,000 210,000
If net income is $115,000 for 2012, what is the return on equity for 2012 (round percent to one decimal point)? a. 10.6% b. 11.7% c. 12.4% d. 15.6%
ANS: B Return on equity: $115,000 ($600,000 + $60,000 + $325,000) = 11.7% PTS: 1 DIF: Medium OBJ: 14.2 NAT: AACSB Analytic | AICPA FN Measurement Exhibit 14-2 The balance sheet at the end of the first year of operations indicates the following: 2012 $600,000 85,000 900,000 250,000 350,000 600,000 60,000 325,000
Total current assets Total investments Total property, plant, and equipment Total current liabilities Total long-term liabilities Common stock, $10 par Paid-in capital in excess of par-common stock Retained earnings
29. Refer to Exhibit 14-2. What is the debt ratio for 2012 (rounded to one decimal places)? a. 37.9% b. 40.0% c. 22.1% d. 41.7% ANS: A Debt Ratio: ($250,000 + $350,000) ($600,000 + $85,000 + $900,000) = 37.9% PTS: 1 DIF: Medium OBJ: 14.2 NAT: AACSB Analytic | AICPA FN Measurement 30. Refer to Exhibit 14-2. If sales revenue for 2012 is $950,000, what is the asset turnover for 2012 (round to two decimal places)? a. 2.64 b. 1.58 c. 0.96 d. 0.60 ANS: D Asset turnover: $950,000 ($600,000 + $85,000 + $900,000) = 0.60 PTS: 1 DIF: Medium OBJ: 14.2 NAT: AACSB Analytic | AICPA FN Measurement 31. In a common-size income statement, each item on the statement is expressed as a percentage of a. Revenue b. Expenses c. Net income d. Gross profit ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.3
32. In a common-size balance sheet, each item on the balance sheet is typically expressed as a percentage of a. Assets b. Net income c. Equity d. Sales revenue ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.3
33. A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do? a. Evaluate financial statements of companies within a given industry of approximately the same value. b. Determine which companies in the same industry are at approximately the same stage of development. c. Ascertain the relative potential of companies of similar size in different industries. d. Compare the mix of revenue, and expenses, and determine efficient use of resources within a company over time or between companies within a given industry without respect to relative size. ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.3
34. When using common-size statements a. Data may be selected for the same business as of different dates, or for two or more businesses as of the same date b. Relationships should be stated in terms of ratios c. Dollar changes are reported over a period of at least three years d. All of these are correct ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.2
35. Which of the following below generally is the most useful in analyzing companies of different sizes? a. Comparative statements b. Common-sized financial statements c. Price-level accounting d. Audit report ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.3
Exhibit 14-3 Selected information for Alastair Company is as follows: Current assets Total assets Cost of goods sold Sales revenue Net income
2012 $450,000 725,000 700,000 915,000 145,000
36. Refer to Exhibit 14-3. What is the percentage that would be given to sales revenue on a common-size income statement (round to the nearest percent)? a. 20 percent. b. 49 percent c. 77 percent d. 100 percent ANS: D Sales revenue: $915,000 $915,000 = 100% PTS: 1 DIF: Medium OBJ: 14.3 NAT: AACSB Analytic | AICPA FN Measurement 37. Refer to Exhibit 14-3. What is the percentage that would be given to cost of goods sold on a commonsize income statement (round to the nearest percent)? a. 20 percent. b. 49 percent c. 77 percent d. 100 percent ANS: C Sales revenue: $700,000 $915,000 = 77% PTS: 1 DIF: Medium OBJ: 14.3 NAT: AACSB Analytic | AICPA FN Measurement 38. Refer to Exhibit 14-3. What is the percentage that would be given to current assets on a common-size balance sheet (round to the nearest percent)? a. 20 percent. b. 49 percent c. 77 percent d. 100 percent ANS: B Sales revenue: $450,000 $915,000 = 49% PTS: 1 DIF: Medium OBJ: 14.3 NAT: AACSB Analytic | AICPA FN Measurement 39. Which of the following is NOT included in the DuPont framework of the return on equity ratio? a. Return on sales b. Current ratio c. Asset turnover d. Asset-to-equity ratio ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.4
40. The return on equity ratio under the DuPont framework is computed as a. Net income/Revenue b. Revenue/Assets c. Assets/Equity d. Net income/Equity ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.4
41. Borrowing that allows a company to purchase more assets than its stockholders are able to pay for is a. Leverage b. Profitability c. Efficiency d. Liquidity ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.4
42. Which of the following ratios is used to measure a firm's profitability? a. Liabilities Equity b. Sales Assets c. Assets Equity d. Net income Sales ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.4
43. Which of the following ratios is used to measure a firm's leverage? a. Net income Equity b. Sales Assets c. Assets Equity d. Net income Sales ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.4
44. Which of the following ratios is used to measure a firm's efficiency? a. Net income Equity b. Sales Assets c. Assets Equity d. Net income Sales ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.4
45. Which of the following ratios is decomposed using the DuPont framework? a. Return on equity b. Asset turnover c. Assets-to-equity ratio d. Return on sales ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.4
46. Which of the following is NOT included in the DuPont framework? a. A measure of profitability b. A measure of efficiency c. A measure of market share d. A measure of leverage ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.4
Exhibit 14-4 The following data came from the financial statements of the Cheviot Company: Revenue Expenses Net income
$1,800,000 1,200,000 600,000
Assets Liabilities Equity
$1,200,000 200,000 1,000,000
47. Refer to Exhibit 14-4. Compute the return on equity. a. 40% b. 50% c. 30% d. 60% ANS: D Return on equity: $600,000 $1,000,000 = 60% PTS: 1 DIF: Medium OBJ: 14.4 NAT: AACSB Analytic | AICPA FN Measurement 48. Refer to Exhibit 14-4. Compute the return on sales. a. 25% b. 33% c. 40% d. 50% ANS: B Return on sales: $600,000 $1,800,000 = 33% PTS: 1 DIF: Medium OBJ: 14.4 NAT: AACSB Analytic | AICPA FN Measurement 49. Refer to Exhibit 14-4. Compute the asset turnover (round to two decimal places). a. 1.25 b. 1.40 c. 1.50 d. 1.60 ANS: C Asset turnover: $1,800,000 $1,200,000 = 1.50 PTS: 1 DIF: Medium OBJ: 14.4 NAT: AACSB Analytic | AICPA FN Measurement 50. Refer to Exhibit 14-4. Compute the asset-to-equity ratio (round to two decimal places). a. 1.20 b. 1.40 c. 1.25 d. 1.15 ANS: A Asset-to-equity ratio: $1,200,000 $1,000,000 = 1.20 PTS: 1 DIF: Medium OBJ: 14.4 NAT: AACSB Analytic | AACSB Measurement | AICPA FN Measurement
51. Which ratio represents how many times during the year a company is collecting its receivables? a. Average collection period for accounts receivable b. Accounts receivable turnover c. Inventory turnover d. Fixed asset turnover ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.5
52. Which ratio represents how many times a company replenishes its inventory during the year? a. Average collection period for accounts receivable b. Accounts receivable turnover c. Inventory turnover d. Fixed asset turnover ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.5
53. Which ratio represents how a company is managing its property, plant, and equipment? a. Average collection period for accounts receivable b. Accounts receivable turnover c. Inventory turnover d. Property, plant, and equipment turnover ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.5
54. Which of the following ratios is NOT an efficiency ratio? a. Fixed asset turnover b. Inventory turnover c. Debt-to-equity d. Days' sales in inventory ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.5
Exhibit 14-5 Selected financial statement numbers for Frederick Company are given below: Sales Cost of goods sold Average accounts receivable Average inventory Average property, plant, and equipment
$277,480 179,155 20,730 4,145 75,705
55. Refer to Exhibit 14-5. Using the information above, calculate Frederick's accounts receivable turnover (round to two decimal places). a. 13.39 times b. 66.94 times c. 3.67 times d. 8.64 times ANS: A Accounts receivable turnover: $277,480 $20,730 = 13.39 PTS: 1 DIF: Medium OBJ: 14.5 NAT: AACSB Reflective Thinking | AICPA FN Measurement 56. Refer to Exhibit 14-5. Using the information above, calculate Frederick's average collection period (round to two decimal places). a. 99.46 days b. 27.26 days c. 42.25 days d. 5.45 days ANS: B Accounts receivable turnover: Average collection period:
$277,480 $20,730 = 13.39 365 13.39 = 27.26 days
PTS: 1 DIF: Medium OBJ: 14.5 NAT: AACSB Reflective Thinking | AICPA FN Measurement 57. Refer to Exhibit 14-5. Using the information above, calculate Frederick's inventory turnover (round to two decimal places). a. 2.37 times b. 66.94 times c. 43.22 times d. 8.64 times ANS: C Inventory turnover: $179,155 $4,145 = 43.22 times PTS: 1 DIF: Medium OBJ: 14.5 NAT: AACSB Reflective Thinking | AICPA FN Measurement 58. Refer to Exhibit 14-5. Using the information above, calculate Frederick's number of days' sales in inventory (round to two decimal places). a. 154.01 days b. 8.45 days c. 42.25 days d. 27.26 days ANS: B Inventory turnover: Number of days' sales in inventory:
$179,155 $4,145 = 43.22 times 365 43.22 = 8.45 days
PTS: 1 DIF: Medium OBJ: 14.5 NAT: AACSB Reflective Thinking | AICPA FN Measurement
59. Refer to Exhibit 14-5. Using the information above, calculate Frederick's fixed asset turnover (round to two decimal places). a. 3.67 times b. 13.39 times c. 66.94 times d. 2.39 times ANS: C Fixed asset turnover: $277,480 $75,705 = 3.67 times PTS: 1 DIF: Medium OBJ: 14.5 NAT: AACSB Reflective Thinking | AICPA FN Measurement 60. The ratio that reflects the mix of sources of financing for a company is the a. Current ratio b. Debt-to-equity ratio c. Price-earnings ratio d. Times interest earned ratio ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.6
61. When analyzing a company's debt-to-equity ratio, if the ratio has a value that is greater then one, then the company has a. Less debt than equity b. More debt than equity c. Equal amounts of debt and equity d. None of these are correct ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.6
62. When analyzing a company's debt-to-equity ratio, if the ratio has a value that is equal to one, then the company has a. Less debt than equity b. More debt than equity c. Equal amounts of debt and equity d. None of these are correct ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.6
63. When analyzing a company's debt ratio, if the ratio has a value that is equal to one, then the company has a. No debt b. More debt than equity c. Equal amounts of debt and equity d. No stockholders' equity ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.6
64. When analyzing a company's assets-to-equity ratio, if the ratio has a value that is equal to one, then the company has a. No debt b. More debt than equity c. Equal amounts of debt and equity d. No stockholders' equity ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.6
65. The ratio that indicates if a borrowing company will be able to meet its required interest payments is the a. Current ratio b. Debt-to-equity ratio c. Price-earnings ratio d. Times interest earned ratio ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.6
Exhibit 14-6 The following data came from the financial statements of Petrini Company: Total assets Total liabilities Total stockholders' equity Operating profit Interest expense
$205,000 95,000 110,000 60,000 500
66. Refer to Exhibit 14-6. Given the information above, compute the debt-to-equity ratio (rounded to two decimal places) for Petrini Company. a. 0.86 b. 1.86 c. 1.16 d. 0.54 ANS: A Debt-to-equity: $95,000 $110,000 = 0.86 PTS: 1 DIF: Medium OBJ: 14.6 NAT: AACSB Analytic | AICPA FN Measurement 67. Refer to Exhibit 14-6. Given the information above, compute the debt ratio (rounded to two decimal places) for Petrini Company. a. 0.46 b. 2.15 c. 0.86 d. 1.86 ANS: A Debt ratio: $95,000 $205,000 = 0.46 PTS: 1 DIF: Medium OBJ: 14.6 NAT: AACSB Analytic | AICPA FN Measurement
68. Refer to Exhibit 14-6. Given the information above, compute the assets-to-equity ratio (rounded to two decimal places) for Petrini Company. a. 0.46 b. 0.54 c. 0.86 d. 1.86 ANS: D Assets-to-equity ratio: $205,000 $110,000 = 1.86 PTS: 1 DIF: Medium OBJ: 14.6 NAT: AACSB Analytic | AICPA FN Measurement 69. The following data came from the financial statements of Petrini Company: Total assets Total liabilities Total stockholders' equity Net income Tax expense Interest expense
$205,000 95,000 110,000 65,000 4,000 500
Compute the times interest earned ratio (rounded to two decimal places) for Petrini Company. a. 130 times b. 129 times c. 122 times d. 139 times ANS: D Times interest earned: ($65,000 + $4,000 + $500) 500 = 139 times PTS: 1 DIF: Medium OBJ: 14.6 NAT: AACSB Analytic | AICPA FN Measurement 70. Which of the following is NOT a situation when it would be important to analyze cash flow information because net income is NOT giving an accurate portrayal of the economic performance of the company? a. When a company is growing rapidly b. When a company is striving to present a stellar financial record c. When a company has a negative operating cash flow d. When a company has several large noncash expenses ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.7
71. Which cash flow ratio reflects the extent to which accrual accounting adjustments and assumptions have been included in net income? a. Cash flow-to-operating profit b. Cash flow-to-net income c. Cash flow frequency d. Cash flow adequacy ANS: B PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.7
72. Which cash flow ratio reflects a company's ability to finance its capital expansion through cash from operations? a. Cash flow-to-operating profit b. Cash flow-to-net income c. Cash flow frequency d. Cash flow adequacy ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.7
73. In general, most companies have significant noncash expenses that reduce net income and also cause the cash flow-to-net income ratio to be a. Greater than 1 b. Equal to 1 c. Less than 1 d. None of these are correct ANS: A PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.7
74. The cash flow adequacy ratio is computed as a. Cash from operations Cash from investing activities b. Cash from operations Cash from financing activities c. Cash from operations Cash paid for capital expenditures d. Cash from investing activities Cash from operations ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.7
Exhibit 14-7 The following data came from the financial statements of the Green Company: Cash from operations Cash from investing activities Cash from financing activities Cash paid for capital expenditures Net income 75. Refer to Exhibit 14-7. Compute the cash flow adequacy ratio. a. 2.57 b. 4.09 c. 16.36 d. 2.12 ANS: C Cash flow adequacy: $900,000 $55,000 = 16.36 PTS: 1 DIF: Medium OBJ: 14.7 NAT: AACSB Analytic | AICPA FN Measurement
$900,000 350,000 220,000 55,000 425,000
76. Refer to Exhibit 14-7. Compute the cash flow-to-net income ratio. a. 2.57 b. 4.09 c. 16.36 d. 2.12 ANS: D Cash flow-to-net income: $900,000 $425,000 = 2.12 PTS: 1 DIF: Medium OBJ: 14.7 NAT: AACSB Analytic | AICPA FN Measurement 77. The particular analytical measures chosen to analyze a company may be influenced by all BUT which one of the following? a. Industry type b. Capital structure c. Diversity of business operations d. Product quality or service effectiveness ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.8
78. Which one of these is NOT one of the benchmarking problems that arises when analyzing financial statements? a. Reported financial statement numbers may actually be a measurement of different things b. Companies that are being compared may be conglomerates c. Not all companies use the same accounting practices d. All of these are benchmarking problems ANS: D PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | AICPA FN Measurement
OBJ: 14.8
PROBLEM 1. The financial statements for Kobe Corporation revealed that sales revenue was $1,581,000 and that the following were the ending account balances: Cash Accounts receivable Land Buildings
$100,000 130,000 200,000 500,000
Accounts payable Mortgage payable Capital stock Retained earnings
Compute the following (round all numbers to one decimal place): a. b. c.
Debt ratio Current ratio Asset turnover ratio
$ 80,000 500,000 300,000 50,000
ANS: a. b. c.
($80,000 + $500,000) ($100,000 + $130,000 + $200,000 + $500,000) = 62.4% (rounded) ($100,000 + $130,000) $80,000 = 2.9 $1,581,000 ($100,000 + $130,000 + $200,000 + $500,000) = 1.7
PTS: 1 DIF: Medium OBJ: 14.2 NAT: AACSB Analytic | AICPA FN Measurement 2. Amherst, Inc.'s financial statements contained the following information: Sales Expenses Number of shares outstanding
$1,200,000 $1,140,000 20,000
Owners' equity Market price per share
Calculate the following: a. b. c.
Return on sales ratio Return on equity ratio Price-earnings ratio
ANS: a. b. c.
($1,200,000 $1,140,000) $1,200,000 = 5% ($1,200,000 $1,140,000) $300,000 = 20% ($90 20,000) ($1,200,000 $1,140,000) = 30
PTS: 1 DIF: Medium OBJ: 14.2 NAT: AACSB Analytic | AICPA FN Measurement
$300,000 $ 90
3. The income statement and balance sheet for Belpre Company for the year ended December 31, 2012, is presented below: Belpre Company Income Statement For the Year Ended December 31, 2012 Sales revenue Less: Cost of goods sold Gross profit Less: Operating expenses Salaries expense Advertising expense Net income
$900,000 500,000 $400,000 $150,000 35,000
185,000 $215,000
Belpre Company Balance Sheet December 31, 2012 Assets Current assets: Cash Accounts receivable Inventory Buildings Total assets
$ 165,000 75,000 50,000 750,000 $1,040,000
Liabilities Accounts payable
$
Owners' equity Capital stock Retained earnings Total owners' equity Total liabilities and owners' equity
$ 675,000 315,000 $ 990,000 $1,040,000
Using the above information, compute the following ratios (round to one decimal place). a. b. c. d. e.
Debt ratio Current ratio Return on sales Asset turnover Return on equity
ANS: a. b. c. d. e.
$50,000 $1,040,000 = 4.8% ($165,000 + $75,000 + $50,000) $50,000 = 5.8 $215,000 $900,000 = 23.9% $900,000 $1,040,000 = 86.5% $215,000 $990,000 = 21.7%
PTS: 1 DIF: Medium OBJ: 14.3 NAT: AACSB Analytic | AICPA FN Measurement
50,000
4. The income statement and balance sheet for the W. Gretsky Company for the year ended December 31, 2012, is presented below: W. Gretsky Company Income Statement For the Year Ended December 31, 2012 Sales revenue Less: Cost of goods sold Gross profit Less: Operating expenses Salaries expense Advertising expense Net income
$360,000 200,000 $160,000 $60,000 14,000
74,000 $ 86,000
W. Gretsky Company Balance Sheet December 31, 2012 Assets Current assets: Cash Accounts receivable Inventory Buildings Total assets
$ 66,000 30,000 20,000 300,000 $416,000
Liabilities Accounts payable
$ 20,000
Owners' equity Capital stock Retained earnings Total owners' equity Total liabilities and owners' equity
$270,000 126,000 $396,000 $416,000
a. b.
Prepare a common-size income statement. Prepare a common-size balance sheet.
ANS: a.
W. Gretsky Company Income Statement For the Year Ended December 31, 2012
$360,000 200,000 $160,000
% 100.0% 55.6% 44.4%
60,000 14,000 $ 86,000
16.7% 3.9% 23.9%
Assets Cash Accounts Receivable Inventory Buildings Total Assets
$ 66,000 30,000 20,000 300,000 $416,000
% 18.3% 8.3% 5.6% 83.3% 115.6%
Liabilities Accounts Payable
$ 20,000
5.6%
$270,000 126,000 $396,000
75.0% 35.0% 110.0%
$416,000
115.6%
Sales Less:
Cost of Goods Sold Gross Profit Less: Operating Expenses Salaries Expense Advertising Expense Net Income b.
W. Gretsky Company Balance Sheet December 31, 2012
Owners' Equity Capital Stock Retained Earnings Total Owners' Equity Total Liabilities and Owners' Equity PTS: 1 DIF: Medium OBJ: 14.3 NAT: AACSB Analytic | AICPA FN Measurement
5. The income statement and balance sheet for the W. Gretsky Company for the year ended December 31, 2012, is presented below: W. Gretsky Company Income Statement For the Year Ended December 31, 2012 Sales revenue Less: Cost of goods sold Gross profit Operating expenses: Advertising Salaries Net income
$360,000 200,000 $160,000 $14,000 60,000
74,000 $ 86,000
W. Gretsky Company Balance Sheet December 31, 2012 Assets Current assets: Cash Accounts receivable Inventory Total current assets Buildings Total assets
$ 66,000 30,000 20,000 116,000 300,000 $416,000
Liabilities Accounts payable
$ 20,000
Owners' equity Capital stock Retained earnings Total owners' equity Total liabilities and owners' equity
$270,000 126,000 $396,000 $416,000
Using the DuPont framework, compute (round to two decimal places): a. b. c. d.
The return on sales The asset turnover The asset-to-equity ratio The return on equity
ANS: a. b. c. d.
Return on sales = $86,000 $360,000 = 23.89% Asset turnover = $360,000 $416,000 = 0.87 times Asset-to-equity ratio = $416,000 $396,000 = 1.05 Return on equity = $86,000 $396,000 = 21.72%
PTS: 1 DIF: Medium OBJ: 14.4 NAT: AACSB Analytic | AICPA FN Measurement
6. The numbers below are for Jasper Company and Western Company: Cash Accounts receivable Inventory Property, plant, and equipment Total assets
Jasper $ 100 2,500 1,000 2,400 $ 6,000
Western $ 600 7,000 8,000 14,400 $30,000
Total liabilities Total equity
$ 3,600 2,400
$18,000 12,000
Sales Cost of goods sold Wage expense Other expenses Net income
$10,000 8,000 500 1,200 300
$60,000 48,000 4,500 5,000 2,500
Briefly explain exactly why Jasper's return on equity is lower than Western's. Hint: Start your analysis by using the DuPont Framework. ANS: Jasper Western
Return on Equity 12.5% 20.8%
Return on Sales 3.0% 4.2%
Asset Turnover 1.7 2.0
Assets-to-Equity 2.5 2.5
Jasper is less profitable at generating net income from each dollar of sales. Jasper is less efficient at using assets to generate sales. In terms of profitability, Jasper has substantially more Other Expenses as a percentage of sales than does Western (12.0% as compared to 8.3%). In terms of efficiency, the one asset that Jasper has more of relative to sales than does Western is Accounts Receivable (25.0% of sales compared to 11.7% of sales from Western). PTS: 1 DIF: Challenging OBJ: 14.4 NAT: AACSB Analytic | AICPA FN Measurement
7. The financial statements of Girard Company reflect the following data: Sales Cost of Goods Sold Beginning Accounts Receivable Ending Accounts Receivable
$1,600,000 400,000 672,000 644,000
Beginning Inventory Ending Inventory Beginning Property, Plant, and Equipment Ending Property, Plant, and Equipment
$128,000 134,000 310,400 312,000
Using the above information, compute the following ratios (round to two decimal places): a. b. c. d. e.
Accounts receivable turnover Average collection period for accounts receivable Inventory turnover Number of days' sales in inventory Fixed asset turnover
ANS: a. b. c. d. e.
Accounts receivable turnover: $1,600,000 [($672,000 + $644,000) 2] = 2.43 times Average collection period for accounts receivable: 365 2.43 = 150.21 days Inventory turnover: $400,000 [($128,000 + $134,000) 2] = 3.05 times Number of days' sales in inventory: 365 3.05 = 119.67 days Fixed asset turnover: $1,600,000 [($310,400 + $312,000) 2] = 5.14 times
PTS: 1 DIF: Medium OBJ: 14.5 NAT: AACSB Analytic | AICPA FN Measurement 8. List five efficiency ratios and write out the equation for each one. ANS: Accounts receivable turnover Average collection period Inventory turnover Number of days' sales in inventory Fixed asset turnover
Sales revenue average accounts receivable 365 accounts receivable turnover Cost of goods sold average inventory 365 inventory turnover Sales revenue average property, plant, and equipment
PTS: 1 DIF: Easy OBJ: 14.5 NAT: AACSB Reflective Thinking | AICPA FN Measurement
9. The following information is available for Escalante, Inc.: Accounts payable Mortgage payable Stockholders' equity Net income Annual interest expense Annual tax expense
$ 525,000 950,000 1,275,000 35,600 1,700 2,200
Using the above information, compute the following leverage ratios (round to two decimal places). a. b.
Debt-to-equity ratio Times interest earned ratio
ANS: a. b.
Debt-to-equity ratio: ($525,000 + 950,000) $1,275,000 = 1.16 Times interest earned ratio: ($35,600 + $1,700 + $2,200) $1,700 = 23.24 times
PTS: 1 DIF: Medium OBJ: 14.6 NAT: AACSB Analytic | AICPA FN Measurement 10. The following information is available for Lima, Inc.: 2012 7,800 195,000 78,000 187,200 $468,000
Cash Accounts receivable Inventory Property, plant, and equipment Total assets
$
Accounts payable Other current liabilities Long-term debt Stockholders' equity
$ 35,000 70,000 175,800 187,200
Sales Cost of goods sold Interest expense Other expenses Tax expense Net income
$780,000 604,000 39,000 74,000 15,000 48,000
Using the above information, compute the following ratios. a. b. c. d.
Debt ratio Debt-to-equity ratio Assets-to-equity ratio Times interest earned ratio
ANS: a. b. c. d.
($35,000 + $70,000 + $175,800) $468,000 = 60.0% ($35,000 + $70,000 + $175,800) $187,200 = 1.5 $468,000 $187,200 = 2.5 ($48,000 + $39,000 + $15,000) $15,000 = 6.8 times
PTS: 1 DIF: Medium OBJ: 14.6 NAT: AACSB Analytic | AICPA FN Measurement 11. Complete the following items. a. b.
List three leverage ratios and write out the equation for each one. List the name and write out the equation for the ratio that gives an indication of a company's ability to meet its required interest payments.
ANS: a.
b.
Debt ratio Debt-to-equity ratio Assets-to-equity ratio Times interest earned ratio
Total liabilities total assets Total liabilities total stockholders' equity Total assets total stockholders' equity Operating income interest expense
PTS: 1 DIF: Easy OBJ: 14.6 NAT: AACSB Reflective Thinking | AICPA FN Measurement 12. Cheshire Company's financial statements reflect the following information: Net income Cash from operations Cash from investing Cash from financing Cash paid for capital expenditures Using this information, calculate the following ratios (round to two decimal places): a. b.
Cash flow-to-net income Cash flow adequacy
ANS: a. b.
Cash flow-to-net income: $114,900 $97,450 = 1.18 Cash flow adequacy: $114,900 $32,700 = 3.51
PTS: 1 DIF: Medium OBJ: 14.7 NAT: AACSB Analytic | AICPA FN Measurement
$ 97,450 114,900 43,200 (5,700) 32,700
13. Write out the formula for each of the following ratios: a.
Debt ratio
b.
Current ratio
c.
Return on sales
d.
Asset turnover
e.
Return on equity
f.
Price-earnings ratio
g.
Assets-to-equity ratio
h.
Cash flow-to-net income
i.
Cash flow adequacy
ANS: a. b. c. d. e. f. g. h. i.
Debt ratio Current ratio Return on sales Asset turnover Return on equity Price-earnings ratio Assets-to-equity ratio Cash flow-to-net income Cash flow adequacy
Total liabilities Total assets Current assets Current liabilities Net income Sales Sales Total assets Net income Stockholders' equity Market value of shares Net income Total assets Total stockholders' equity Cash from operations Net income Cash from operations Cash paid for capital expenditures
PTS: 1 DIF: Easy OBJ: 14.2 | 14.4 | 14.7 NAT: AACSB Reflective Thinking | AICPA FN Measurement
Chapter 15—Management Accounting and Cost Concepts MULTIPLE CHOICE 1.
Good management accounting is motivated by: a. Government regulators b. Accounting rules c. Management's desire to improve d. All of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 15.1 NAT: AACSB Reflective Thinking | IMA Cost Management
2.
Management accounting is established by: a. Individual companies b. FASB c. SEC d. GAAP ANS: A PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Cost Management
3.
Which of the following principles are the LEAST uniform and are NOT mandatory? a. Financial reporting principles b. Management accounting principles c. Tax reporting principles d. All of these are equally uniform and mandatory ANS: B PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Cost Management
4.
The primary internal users of accounting information are: a. Investors b. Creditors c. Analysts d. Managers ANS: D PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Cost Management
5.
Providing information for planning, controlling, and evaluating is a function of: a. Management accounting b. Financial accounting c. Governmental accounting d. Tax accounting ANS: A PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Cost Management
6.
With regard to a particular company, which of the following groups generally has the widest variety of decisions to make? a. Managers b. Creditors c. Investors d. Regulators ANS: A PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
7.
Which of the following is a fundamental characteristic of management accounting as compared to financial accounting? a. Uses only financial data b. Satisfies a competitive need c. Uses generally accepted accounting principles d. Is governed by regulatory agencies ANS: B PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Cost Management
8.
Which of the following is NOT a fundamental characteristic of management accounting as compared to financial accounting? a. Evolves from the best practices of companies b. Results in only financial data c. Exists to serve the competitive needs of organizations d. Results in both financial and nonfinancial information ANS: B PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Cost Management
9.
Accounting information helps management to: a. Decide what prices to charge b. Decide how to market products c. Decide how to control operations d. Make all of these decisions ANS: D PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
10.
The first step in management planning is: a. Defining the problem b. Identifying reasonable alternative courses of action c. Evaluating the alternatives d. Choosing and implementing the best alternative ANS: A PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
11.
Which of the following is NOT a function of management? a. Planning b. Controlling c. Analyzing d. Regulating ANS: D PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Cost Management
12.
The process of making decisions about future operations is called: a. Controlling b. Planning c. Evaluating performance d. Implementing ANS: B PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
13.
Which is usually conducted by executive level management? a. Evaluating b. Strategic planning c. Operational budgeting d. Controlling ANS: B PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
14.
Production prioritizing is: a. The continual evaluation of the profitability of the various product lines and divisions. b. The systematic planning for long-term investments in operating assets. c. Broad, long-range planning. d. Planning decisions regarding current operations and those of the immediate future. ANS: A PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
15.
Capital budgeting is: a. The continual evaluation of the profitability of the various product lines and divisions. b. The systematic planning for long-term investments in operating assets. c. Broad, long-range planning. d. Planning decisions regarding current operations and those of the immediate future. ANS: B PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
16.
Strategic planning is: a. The continual evaluation of the profitability of the various product lines and divisions. b. The systematic planning for long-term investments in operating assets. c. Broad, long-range planning. d. Planning decisions regarding current operations and those of the immediate future. ANS: C PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
17.
Operational budgeting is: a. The continual evaluation of the profitability of the various product lines and divisions. b. The systematic planning for long-term investments in operating assets. c. Broad, long-range planning. d. Planning decisions regarding current operations and those of the immediate future. ANS: D PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
18.
Determining the best use of financial resources is an aspect of: a. Capital budgeting b. Strategic planning c. Production prioritizing d. Operational budgeting ANS: A PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
19.
Which of the following is a short-run planning decision? a. Defining the organization's mission b. Purchasing an industrial printing press c. Performing a strategic market analysis d. Preparing operational budgets ANS: D PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
20.
The aspect of management accounting that deals with such issues as what additional major resources (e.g., plant and equipment) are needed to meet a company's long-run goals is called: a. Capital budgeting b. Production prioritizing c. Operational budgeting d. Strategic planning ANS: A PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
21.
All of the following are involved in the management function of planning EXCEPT: a. Operational budgeting b. Capital budgeting c. Strategic planning d. Variance computation ANS: D PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
22.
Short-run planning involves which one of the following processes? a. Preparing capital budgets b. Tracking actual performance c. Preparing operational budgets d. Comparing actual results with established standards ANS: C PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
23.
Long-run planning involves which one of the following processes? a. Capital budgeting b. Production prioritizing c. Operational budgeting d. Variance comparison ANS: A PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
24.
The control of operations involves all the following procedures EXCEPT: a. Tracking actual performance b. Analyzing results c. Creating performance measures d. Establishing expectations ANS: B PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
25.
Which management function implements management plans and identifies how plans compare with actual performance? a. Controlling b. Evaluating c. Planning d. Tracking ANS: A PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
26.
The process of control involves: a. Preparing capital budgets b. Identifying problems c. Tracking actual results d. Preparing operational budgets ANS: C PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
27.
Which management function analyzes results, rewards performance and identifies problems? a. Controlling b. Evaluating c. Tracking d. Planning ANS: B PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
28.
Identifying problems and opportunities is a product of which process? a. Evaluating b. Long-term planning c. Short-term planning d. Controlling ANS: A PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
29.
Variances which result from a comparison of actual performance against expected results would be used in which management function? a. Planning b. Controlling c. Evaluating d. None of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
30.
Which of the following reveals how profitability is affected by changes in revenues, costs and activity levels? a. Operational budgeting b. Return on investment c. C-V-P analysis d. Production prioritizing ANS: C PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
31.
If a cost increases as the sales volume increases, the cost is a: a. Direct cost b. Sunk cost c. Variable cost d. Fixed cost ANS: C PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
32.
If total cost stays the same, even though the production level has risen, the cost is a(n): a. Indirect cost b. Fixed cost c. Variable cost d. Out-of-pocket cost ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
33.
Zodiac Company's total costs are the same at all levels of activity. The company's cost structure must have all: a. Fixed costs b. Variable costs c. Product costs d. Sunk costs ANS: A PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
34.
Which of the following is NOT a fixed cost? a. Property taxes b. Direct labor c. Executives' salaries d. Depreciation ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
35.
The cost of milk used to manufacture ice cream would most likely be classified as a(n): a. Variable cost b. Indirect cost c. Sunk cost d. Fixed cost ANS: A PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
36.
Advertising, insurance, and executives' salaries are all examples of: a. Variable costs b. Fixed costs c. Direct labor d. Direct material ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
37.
Which of the following would most likely be a variable cost? a. Direct materials b. Direct labor c. Sales commissions d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
38.
Which of the following would most likely be considered a variable cost? a. Property taxes b. Rent c. Bolts of cloth in a clothing factory d. Depreciation ANS: C PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
39.
Assume that Lily Company has total fixed costs of $48,000 for the period. Each unit sells for $40. The variable cost per unit is $24. How many units must be sold to break even? a. 1,200 b. 2,000 c. 3,000 d. 4,000 ANS: C Break even:
$40x $24x $48,000 = $0 x = 3,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 40.
15.3
Assume that Rose Company sold 15,000 units to break even this period. Each unit sells for $100. The variable cost per unit is $65. What were fixed costs for the period? a. $975,000 b. $525,000 c. $1,500,000 d. $300,000 ANS: B Break even:
($100 15,000) ($65 15,000) x = $0 x = $525,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
15.3
41.
Violet Company typically has $360,000 of fixed costs and $25 of variable costs per unit. Violet plans to sell 8,000 units this period. In order for Violet to break-even, what price should Violet charge per unit? a. $70 b. $25 c. $45 d. $20 ANS: A Break even:
8,000x ($25 8,000) $360,000 = $0 x = $70
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 42.
During the quarter, Iris Company sold 100,000 units at $5 per unit to break even. Iris had $150,000 in fixed costs. What was variable cost per unit for the quarter? a. $3.50 b. $1.50 c. $4.00 d. $3.00 ANS: A Break even:
($5 100,000) 100,000x $150,000 = $0 x = $3.50
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 43.
15.3
15.3
Which of the following has a direct materials inventory? a. Merchandising company b. Service company c. Manufacturing company d. None of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
44.
Which of the following has no inventories? a. Merchandising company b. Manufacturing company c. Service company d. None of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
45.
Which of the following is NOT true of period costs? a. They cannot be assigned to a product b. The most common are selling and administrative costs c. They are recognized as an expense d. They may appear on the balance sheet as inventory ANS: D PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
46.
Which is NOT a period cost of operating a retail store? a. Cost of merchandise sold b. Store manager's salary c. Store rent d. Corporate computer cost ANS: A PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
47.
The product costs of a software development company would NOT include: a. Computer lease b. Salary of the CEO c. Supplies used by programmers d. Computer programmers' salaries ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
48.
Which of the following would NOT usually be considered a product cost of a manufacturing company? a. Property taxes on factory building b. Direct materials c. Indirect labor d. Advertising ANS: D PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
49.
Manufacturing costs are also considered: a. Selling costs b. Fixed costs c. Product costs d. Period costs ANS: C PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
50.
Materials used in production are classified as "direct materials" if they are: a. Controllable by managers b. Traceable to specific products c. Fixed costs d. Not a significant part of production ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
51.
Which of the following would NOT be included in manufacturing overhead? a. Indirect materials b. Factory utilities c. Factory fire insurance d. Direct labor ANS: D PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
52.
Product costs in a manufacturing firm would NOT include: a. Direct materials b. Manufacturing overhead c. Administrative costs d. Indirect labor ANS: C PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
53.
Utility expense in a merchandising company would be considered a(n): a. Product cost b. Period cost c. Manufacturing cost d. Indirect cost ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
54.
Which of the following would NOT be considered a manufacturing cost? a. Tires for an automobile manufacturer b. Milk for an ice cream maker c. Sales commissions for an automobile manufacturer d. Property taxes on the factory for an ice cream maker ANS: C PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
55.
In a manufacturing company, indirect labor is usually classified as a(n): a. Period cost b. Product cost c. Opportunity cost d. Selling cost ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
56.
Direct labor is most often considered which of the following? a. Manufacturing overhead b. Fixed cost c. Indirect cost d. Product cost ANS: D PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
57.
Which of the following types of costs are most likely to be classified as period costs? a. Administrative costs b. Property taxes on factory c. Direct materials used in production d. Indirect materials ANS: A PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
58.
Glue used in the manufacture of chairs would most likely be classified as: a. Direct materials b. Manufacturing overhead c. Period cost d. Direct labor ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
59.
Miscellaneous materials used by sales managers should be accounted for as: a. Direct materials b. Indirect materials c. Manufacturing overhead d. Selling expense ANS: D PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
60.
A nonmanufacturing cost is usually classified as: a. A product cost b. Direct materials c. A period cost d. Manufacturing overhead ANS: C PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
61.
In constructing a custom cabinet, an indirect material would be: a. Wood b. Screws c. Brass handles d. Hinges ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
62.
The cost of milk for an ice cream manufacturer would be considered all of the following EXCEPT: a. Product cost b. Manufacturing cost c. Variable cost d. Indirect cost ANS: D PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
63.
Costs that are NOT classified as direct materials or direct labor but are essential to the production of goods and services are: a. Differential costs b. Manufacturing overhead costs c. Fixed costs d. Sunk costs ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
64.
Rhododendron Company offers yard maintenance services for residential clients. Costs for the year were direct labor, $80,000 and indirect labor, $5,000. Additional expenses for the year were supplies $6,000; depreciation of lawn maintenance equipment, $1,000; advertising expense, $500; receptionist payroll, $13,000 and fuel, $2,500. Which amount is Rhododendron's total service costs? a. $14,500 b. $80,000 c. $94,500 d. $11,000 ANS: C Manufacturing Overhead: Total Service Costs:
$5,000 + $6,000 + $1,000 + $2,500 = $14,500 $80,000 + $14,500 = $94,500
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 65.
15.3
The Zig-Zag Company manufactures zippers for many clothing manufacturers. Costs for the year were direct materials, $5,000; indirect materials, $1,600; direct labor, $12,000; and indirect labor, $4,000. Additional expenses for the year were factory utilities $3,500; depreciation of factory equipment, $1,300; advertising expense, $900; delivery expense on sales to customers, $1,700; and property taxes on factory buildings, $5,200. Which amount is the company's manufacturing overhead for the year? a. $10,000 b. $11,600 c. $15,600 d. $17,300 ANS: C Manufacturing Overhead: $1,600 + $4,000 + $3,500 + $1,300 + $5,200 = $15,600 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
66.
15.3
The Zig-Zag Company manufactures zippers for many clothing manufacturers. Costs for the year were direct materials, $5,000; indirect materials, $1,600; direct labor, $12,000; and indirect labor, $4,000. Additional expenses for the year were factory utilities $3,500; depreciation of factory equipment, $1,300; advertising expense, $900; delivery expense on sales to customers, $1,700; and property taxes on factory buildings, $5,200. Which amount is total manufacturing costs for the year? a. $22,000 b. $17,000 c. $15,600 d. $32,600 ANS: D Manufacturing Overhead: Total Manufacturing Costs:
$1,600 + $4,000 + $3,500 + $1,300 + $5,200 = $15,600 $5,000 + $12,000 + $15,600 = $32,600
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
15.3
67.
Cherry Company manufactures electronic yard tools. Costs for May were direct labor, $84,000; indirect labor, $51,000; direct materials, $69,000; indirect materials, $9,000; factory utilities, $6,900; and insurance on manufacturing equipment, $2,100. Cherry Company's manufacturing overhead for May is: a. $18,000 b. $69,000 c. $138,000 d. $222,000 ANS: B Manufacturing Overhead: $51,000 + $9,000 + $6,900 + $2,100 = $69,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
68.
Cherry Company manufactures electronic yard tools. Costs for May were direct labor, $84,000; indirect labor, $51,000; direct materials, $69,000; indirect materials, $9,000; factory utilities, $6,900; and insurance on manufacturing equipment, $2,100. Cherry Company's total manufacturing costs for May are: a. $135,000 b. $69,000 c. $138,000 d. $222,000 ANS: D Manufacturing Overhead: Total Manufacturing Costs:
$51,000 + $9,000 + $6,900 + $2,100 = $69,000 $84,000 + $69,000 + $69,000 = $222,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 69.
15.3
15.3
Mackie Co. manufactures hunting clothing. The standard variable costs to produce one batch of the Big Mac vests are as follows: direct material average cost is $6 per yard; average yards per batch is 20; direct labor average rate per hour is $12; average hours per batch is 4; variable overhead average rate per hour is $8; average hours per batch is 4. The standard monthly fixed costs are as follows: manufacturing overhead is $3,200; selling and administrative costs are $1,900. Mackie Co. produces 100 batches per month. (Ten vests are produced in each batch.) What is the manufacturing cost per vest? a. $5.10 b. $12.00 c. $23.20 d. $25.10 ANS: C Manufacturing cost per batch: Manufacturing cost per vest:
(20 $6) + (4 $12) + (4 $8) + ($3,200 100) = $232 $232 10 = $23.20
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
15.3
70.
Janet's Jewelry makes sterling silver jewelry. One of the most popular rings, the Love Knot, is produced in batches of 10. The standard variable costs to produce one batch are as follows: direct material average cost is $13 per ounce; average ounces per batch is 20; direct labor average rate per hour is $22; average hours per batch is 10; variable overhead average rate per hour is $10; average hours per batch is 10. The standard monthly fixed costs are as follows: fixed manufacturing overhead is $1,400; selling and administrative costs are $1,500. Janet's Jewelry produces 10 batches per month. What is the manufacturing cost per batch? a. $58 b. $72 c. $720 d. $870 ANS: C Manufacturing cost per batch: ($13 20) + ($22 10) + ($10 10) + ($1,400 10) = $720 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
71.
15.3
Costs that are directly traceable to a unit of business or segment being analyzed are called: a. Direct costs b. Sunk costs c. Variable costs d. Overhead costs ANS: A PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
72.
Another name for joint costs is: a. Direct costs b. Indirect costs c. Variable costs d. Fixed costs ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
73.
Costs incurred for the benefit of more than one segment of the business are called: a. Direct costs b. Opportunity costs c. Common costs d. Variable costs ANS: C PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
74.
Which of the following types of costs would be allocated among segments rather than directly attributable to a segment? a. Variable costs b. Indirect costs c. Fixed costs d. Sunk costs ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
75.
You are thinking about taking a trip to Asia. The cost of the airplane ticket you have yet to purchase is a(n): a. Sunk cost b. Direct cost c. Differential cost d. Opportunity cost ANS: C PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
76.
You want to go skiing for the day. However, you realize you are scheduled to work. If you call in sick and do not go to work, the wages you will not earn (assuming you are an hourly employee) are considered a(n): a. Differential cost b. Sunk cost c. Out-of-pocket cost d. Opportunity cost ANS: D PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
77.
You want to go skiing for the day. The cost of the lift ticket would be considered a(n): a. Sunk cost b. Out-of-pocket cost c. Opportunity cost d. Indirect cost ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
78.
The most important costs to consider when making a decision involving future action are: a. Sunk costs b. Opportunity costs c. Out-of-pocket costs d. Differential costs ANS: D PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
79.
Future costs that change as a result of a decision are: a. Direct costs b. Differential costs c. Out-of-pocket costs d. Common costs ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
80.
The only kind of costs that do NOT involve any outlay of cash are: a. Opportunity costs b. Sunk costs c. Indirect costs d. Differential costs ANS: A PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
81.
Which of the following costs would NOT be reported on a financial statement? a. Indirect costs b. Fixed costs c. Sunk costs d. Opportunity costs ANS: D PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
82.
Which of the following costs should NOT be considered when making a future decision? a. Sunk costs b. Opportunity costs c. Indirect costs d. Fixed costs ANS: A PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
83.
Costs that are specifically traceable to a unit of business are known as which of the following costs to that unit? a. Indirect b. Direct c. Opportunity d. Differential ANS: B PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
84.
Costs that do NOT change as the result of a future decision are known as: a. Out-of-pocket costs b. Variable costs c. Sunk costs d. Differential costs ANS: C PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
85.
Which of the following is NOT used in the evaluation of a business segment? a. Variable costs b. Opportunity costs c. Sunk costs d. Direct costs ANS: C PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
86.
Which of the following would most likely be an indirect cost? a. Cost of inventory b. Equipment rental c. Sales director's salary d. Sales commissions ANS: C PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
87.
When considering the purchase of a new truck, the depreciation expense on the old truck is considered a(n): a. Variable cost b. Opportunity cost c. Sunk cost d. Differential cost ANS: C PTS: 1 DIF: Easy NAT: AACSB Reflective Thinking | IMA Decision Analysis
88.
15.3
You currently work as a machinist in a factory. Your salary is $15 per hour. You are thinking about quitting your job and going back to college. It will take you two years to obtain your college degree. Tuition and other costs of the education will total $21,000. You spent $9,000 preparing to be a machinist. In considering whether to go back to school, the $9,000 of prior training is a(n): a. Differential cost b. Sunk cost c. Variable cost d. Opportunity cost ANS: B PTS: 1 DIF: Medium OBJ: NAT: AACSB Reflective Thinking | IMA Decision Analysis
90.
15.3
You currently work as a machinist in a factory. Your salary is $45,000 per year. You are thinking about quitting your job and going back to college. It will take you two years to obtain your college degree. Tuition and other costs of the education will total $60,000. The $60,000 cost of the education is a(n): a. Opportunity cost b. Differential cost c. Sunk cost d. Variable cost ANS: B PTS: 1 DIF: Medium OBJ: NAT: AACSB Reflective Thinking | IMA Decision Analysis
89.
OBJ:
15.3
You currently work as a school bus driver. Your salary is $28,000 per year. You are thinking about quitting your job and going back to college. It will take you two years to obtain your college degree. Tuition and other costs of the education will total $24,000. You also intend to keep your car by making the $250 per month payments out of your savings. How much is the opportunity cost of going to college? a. $28,000 b. $52,000 c. $56,000 d. $62,000 ANS: C $28,000 lost salary 2 years = $56,000 PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Decision Analysis
OBJ:
15.3
91.
Segment A had sales revenue of $900,000 and the following costs: direct materials, $252,000; direct labor, $36,000; variable manufacturing overhead, $72,000; and fixed manufacturing overhead, $315,000. If segment A is dropped, 25% of the fixed manufacturing overhead costs would be avoided. Calculate the segment profit. a. $225,000 b. $303,750 c. $461,250 d. $540,000 ANS: C Segment profit: $900,000 $252,000 $36,000 $72,000 ($315,000 25%) = $461,250 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
92.
Mega Manufacturing has defective inventory on hand, which cost $27,000 to manufacture. The company can sell the defective inventory as is for $18,000 or rework the units at a cost of $12,000 and sell the inventory for $26,000. The sunk cost and the opportunity cost of selling the inventory as is (rather than rework the units) are: Sunk Cost a. $0 b. $27,000 c. $27,000 d. $18,000
Opportunity Cost $18,000 $14,000 $18,000 $14,000
ANS: B Sunk Cost: Opportunity Cost:
$27,000 $26,000 $12,000 = $14,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 93.
15.3
The top accountant in most large organizations is usually called the: a. Controller b. Chief financial officer c. Chief executive officer d. Sales' manager ANS: A PTS: 1 DIF: Easy OBJ: NAT: AACSB Ethics | IMA Business Applications
94.
15.3
15.4
Which one of the following is NOT an ethical guideline that the Institute of Management Accountants (IMA) requires its members to follow? a. Not disclose confidential information b. Maintain objectivity when communicating information to decision makers c. Act with both actual and apparent integrity in all situations d. All of these are correct ANS: A PTS: 1 DIF: Easy OBJ: NAT: AACSB Ethics | IMA Business Applications
15.4
95.
What is the first step a business professional should take when confronted with a situation that may involve an ethical conflict? a. Resign from the organization. b. Discuss the problem with the immediate supervisor. c. Refrain from discussing the problem with anyone. d. Use an objective advisor to help clarify issues. ANS: B PTS: 1 DIF: Easy OBJ: NAT: AACSB Ethics | IMA Business Applications
15.4
PROBLEM 1.
In the spaces provided, write the letter of the definition for each of the following terms: A. B. C. D. E. F.
Costs that change in total in direct proportion to changes in activity level. Costs that remain constant in total, regardless of activity level. Outlining the activities that need to be performed for an organization to meet its objectives. Broad, long-range planning usually developed by top management. Systematic planning for long-term investments in operating assets. Management's continual evaluation of profitability of various product lines to identify problems and potential solutions. G. Managerial planning decisions regarding current operations that are characterized by regularity and frequency. H. Analyzing results, rewarding performance, and identifying problems. I. Implementing management plans and identifying how plans compare with actual performance. J. Techniques for determining how changes in revenues, costs, and level of activity affect the profitability of an organization. 1. Fixed costs 2. Capital budgeting 3. Controlling 4. Evaluating 5. Operational budgeting 6. C-V-P analysis 7. Planning 8. Production prioritizing 9. Variable costs 10. Strategic planning
ANS: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
B E I H G J C F A D
PTS: 1 DIF: Easy OBJ: 15.2 | 15.3 NAT: AACSB Reflective Thinking | IMA Cost Management | IMA Decision Analysis 2.
In the chart below, list the three main differences between managerial accounting and financial accounting. Managerial Accounting
Financial Accounting
Managerial Accounting Management accounting evolves from the best practices of companies working to be competitive.
Financial Accounting Financial accounting is legislated and governed by regulatory agencies and professional institutions.
Purpose:
Management accounting exists to serve the competitive needs of organizations working to uniquely serve specific customers in specific markets.
Financial accounting exists to serve the need for organizations to periodically report results to outside investors and lenders in a consistent and comparative manner.
Outcome:
Management accounting results in both financial and nonfinancial data that are proprietary.
Financial accounting results in only financial data that are public and reported to investors and creditors.
Source: Purpose: Outcome:
ANS:
Source:
PTS: 1 DIF: Medium OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Cost Management
3.
List and describe the three management functions. ANS: Planning:
Outlining the activities that need to be performed for an organization to achieve its objectives.
Controlling:
Implementing management plans and identifying how plans compare with actual performance
Evaluating:
Analyzing results, rewarding performance, and identifying problems.
PTS: 1 DIF: Medium OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis 4.
List and describe the two types of long-run planning and the two types of short-run planning. ANS: Long-run planning: 1. Strategic planning: Broad, long-range planning usually conducted by top management. 2. Capital budgeting: Systematic planning for long-term investments in operating assets. Short-run planning: 1. Production prioritizing: Management's continual evaluation of the profitability of the various product lines and divisions within an organization so that products and divisions that are performing below expectations can be analyzed to identify problems and potential solutions. 2. Operational budgeting: Managerial planning decisions regarding current operations and those of the immediate future that are characterized by regularity and frequency. PTS: 1 DIF: Medium OBJ: 15.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
5.
In the spaces provided, write the letter of the definition for each of the following terms: A. B.
A future cost that can be changed by a decision made now. Labor that is necessary in manufacturing a product or service but is not directly related to the actual production or service. C. Costs associated with products or services offered. D. Costs not directly related to a product, service, or asset that are charged as expenses as they are incurred. E. Materials that become part of the product and are traceable to it. F. Materials that are necessary in manufacturing a product or service, but are not directly included in the actual product. G. Wages paid to those who physically work on a product or service. H. All costs incurred in the manufacturing process other than direct labor and direct materials. I. Costs that are specifically traceable to a unit of business. J. Costs normally incurred for the benefit of several segments.
1. Direct costs 2. Direct labor 3. Direct materials 4. Indirect labor 5. Indirect costs 6. Indirect materials 7. Manufacturing overhead 8. Period costs 9. Product costs 10. Differential cost ANS: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
I G E B J F H D C A
PTS: 1 DIF: Easy OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis 6.
Complete the following phrases by inserting the appropriate cost term. a.
is a management technique developed by DuPont to measure operating performance and efficiency in using assets.
b.
costs often involve the outlay of cash.
c.
costs never involve an outlay of cash.
d.
costs, often referred to as manufacturing costs, are all costs necessary to create finished goods.
e.
costs are usually charged to the income statement in the period in which they are incurred.
f.
costs that usually include indirect materials and indirect labor.
g.
costs remain constant in total over a relevant range of activity.
h.
costs are specifically traceable to a unit or segment being analyzed.
i.
costs do not change as the result of a decision.
j.
costs are future costs that change as the result of a decision.
ANS: a.
ROI
b. c. d.
Out-of-pocket Opportunity Product
e.
Period
f. g. h.
Overhead or manufacturing overhead Fixed Direct
i. j.
Sunk Differential
is a management technique developed by DuPont to measure operating performance and efficiency in using assets. costs often involve the outlay of cash. costs never involve an outlay of cash. costs, often referred to as manufacturing costs, are all costs necessary to create finished goods. costs are usually charged to the income statement in the period in which they are incurred. costs that usually include indirect materials and indirect labor. costs remain constant in total over a relevant range of activity. costs are specifically traceable to a unit or segment being analyzed. costs do not change as the result of a decision. costs are future costs that change as the result of a decision.
PTS: 1 DIF: Medium OBJ: 15.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis 7.
Tulip Company is a tulip bulb distributor. Every year, Tulip Company plants an outdoor show garden where visitors can see all the varieties of tulips. The garden is open only during the month of April. The original cost to design and landscape the tulip garden is $300,000. Five employees work each day the garden is open. Each employee is paid hourly at a rate of $10 per hour and works for 8 hours each day. Tulip Company pays annual expenses of $1,000 for utilities on the garden property, $800 for property taxes, and $1,200 for insurance on the property. Tulip Company has found that it generally costs $50 per every 100 visitors to upkeep, repair, and maintain the gardens. a. b.
Tulip Garden hopes to have 5,000 visitors each day. How much should Tulip Garden charge as an entrance fee per visitor in order to break even? If Tulip Garden charges each visitor a $3 entrance fee, how many visitors would need to come during the month of April in order for Tulip to break-even?
ANS: a.
Fixed costs: $300,000 + (5 8 $10 30) + $1,000 + $800 + $1,200 = $315,000 Variable costs: $50 / 100 5,000 30 = $75,000 150,000x $75,000 $315,000 = $0 x = $2.60
b.
Fixed costs: $300,000 + (5 8 $10 30) + $1,000 + $800 + $1,200 = $315,000 $3x $.50x $315,000 = $0 x = 126,000 visitors
PTS: 1 DIF: Medium OBJ: 15.3 NAT: AACSB Analytic | IMA Decision Analysis
8.
Tulip Company is a tulip bulb distributor. Every year, Tulip Company plants an outdoor show garden where visitors can see all the varieties of tulips. The garden is open only during the month of April. The original cost to design and landscape the tulip garden is $300,000. Five employees work each day the garden is open. Each employee is paid hourly at a rate of $10 per hour and works for 8 hours each day. Tulip Company pays annual expenses of $1,000 for utilities on the garden property, $800 for property taxes, and $1,200 for insurance on the property. Tulip Company has found that it generally costs $50 per every 100 visitors to upkeep, repair, and maintain the gardens. a. b.
On April 1, 10,000 visitors came. Calculate the product cost of being open on April 1. Calculate the product cost of being open for all of April if there were 150,000 visitors during the month.
ANS: a. b.
[($300,000 + $1,000 + $800 + $1,200) / 30] + (5 8 $10) + (10,000 $.50) = $15,500 $300,000 + (5 8 $10 30) + $1,000 + $800 + $1,200 + (150,000 $.50) = $390,000
PTS: 1 DIF: Medium OBJ: 15.3 NAT: AACSB Analytic | IMA Decision Analysis 9.
After graduating from college, Mary found what seemed to be an ideal job. However, after a few months she began to notice that some unethical practices were occurring within the company. What three steps should Mary take to resolve these unethical issues? ANS: 1. 2. 3.
Mary should discuss the issues with her immediate supervisor. Mary should confidentially use an objective advisor to help clarify the issues. Finally, if the issue cannot be resolved, Mary should resign from the corporation and submit an informative memo to an appropriate member of the organization
PTS: 1 DIF: Medium OBJ: 15.4 NAT: AACSB Ethics | IMA Business Applications
Chapter 16—Cost Flows and Business Organizations MULTIPLE CHOICE 1.
Which of the following would NOT properly be classified as manufacturing overhead? a. Nails used to manufacture furniture b. Custodial wages for factory custodians c. Wood to manufacture cabinets d. Insurance on factory ANS: C PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
2.
Which of the following costs would NOT be classified as a product cost? a. Cost of raw materials b. Cost of labor for factory employees c. Salary of the Vice President of Manufacturing d. Salary of the Vice President of Finance ANS: D PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
3.
Which of the following is NOT a period cost? a. Sales salaries b. Delivery cost of finished goods c. Plant manager's salary d. Administrative utilities ANS: C PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
4.
Which of the following is usually NOT a manufacturing cost? a. Indirect labor b. Inexpensive items such as glue and nails c. Depreciation of machinery d. Depreciation on a delivery truck ANS: D PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
5.
Which of the following is one of the three types of product costs? a. Manufacturing overhead b. Period costs c. Selling and administrative costs d. Job order costs ANS: A PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
6.
Which of the following is NOT critical to accurately measure product costs? a. Allocate the appropriate amount of overhead costs to the correct product b. Trace all period costs to the correct product c. Trace all direct costs to the correct product d. Track the product through the production process ANS: B PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
7.
An estimate of the overhead that will be incurred for each unit is the: a. Direct materials cost b. Manufacturing overhead rate c. Work-in-process inventory d. Direct labor cost ANS: B PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
8.
The order of cost flow through the accounts in a manufacturing firm is: a. Raw Materials, Work-in-Process, Cost of Goods Sold, Finished Goods b. Raw Materials, Work-in-Process, Finished Goods, Cost of Goods Sold c. Raw Materials, Finished Goods, Work-in-Process, Cost of Goods Sold d. Work-in-Process, Raw Materials, Finished Goods, Cost of Goods Sold ANS: B PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
9.
Which of the following is NOT a part of job order costing? a. Specifically trace the direct costs to each product b. Identify the product that needs cost measurement c. Allocate selling costs to the product d. Allocate an appropriate amount of overhead to the product ANS: C PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
10.
After the completion of a product, the product costs are transferred to: a. Work-in-process b. Finished goods c. Period costs d. Manufacturing overhead ANS: B PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
11.
When a product is sold in a job order costing system, the costs associated with that product appear: a. In finished goods inventory b. On the income statement c. On the balance sheet d. None of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
12.
Raw Materials Inventory is debited: a. When raw materials are purchased b. When raw materials are used in production c. When raw materials are requisitioned by a production department d. None of these are correct ANS: A PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
13.
When relatively inexpensive materials are requisitioned by the production department, a. Raw Materials Inventory should be debited b. Manufacturing Overhead should be credited c. Work-in-Process Inventory should be debited d. Manufacturing Overhead should be debited ANS: D PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
14.
The actual costs of indirect materials are: a. Charged to products in the same manner as direct materials b. Debited to Manufacturing Overhead c. Insignificant, so they can be ignored in product costing d. Credited to Manufacturing Overhead ANS: B PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
15.
When materials are requisitioned from raw materials inventory, the journal entry includes: a. A debit to Work-in-Process Inventory or Manufacturing Overhead b. A debit to Work-in-Process Inventory only c. A debit to Raw Materials Inventory d. A debit to Manufacturing Overhead only ANS: A PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
16.
Work-in-Process Inventory is debited when: a. Direct materials are issued to production b. Direct laborers have earned wages for production output c. Manufacturing overhead is applied d. All of these occur ANS: D PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
17.
Under job order costing, the journal entry made to record indirect labor cost includes a: a. Debit to Wages Payable b. Debit to Work-in-Process Inventory c. Credit to Wages Payable d. Credit to Manufacturing Overhead ANS: C PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
18.
A plant manager's salary is debited to: a. Wages Expense b. Work-in-Process c. Manufacturing Overhead d. Wages Payable ANS: C PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
19.
Work-in-Process Inventory is debited when: a. Manufacturing overhead is applied b. Indirect materials are used in production c. Production is completed d. All of these occur ANS: A PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
20.
The journal entry to apply manufacturing overhead to products includes a debit to: a. Manufacturing Expense b. Manufacturing Overhead c. Work-in-Process Inventory d. Finished Goods Inventory ANS: C PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
21.
Which of the following costs is included in manufacturing overhead? a. Indirect materials b. Plant depreciation c. Rent on a manufacturing facility d. All of these are manufacturing overhead costs ANS: D PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
22.
A debit to Work-in-Process Inventory is sometimes accompanied by a credit to: a. Accumulated Depreciation b. Indirect Wages Expense c. Manufacturing Overhead d. None of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
23.
Predetermined overhead rates are used because: a. Total manufacturing overhead costs are not known until year-end b. Manufacturing overhead benefits many products and therefore cannot be directly assigned c. Both total manufacturing overhead costs are not known until year-end and manufacturing overhead benefits many products and therefore cannot be directly assigned d. Neither total manufacturing overhead costs are not known until year-end nor manufacturing overhead benefits many products and therefore cannot be directly assigned ANS: C PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
24.
Product costs assigned to jobs are: a. Applied costs for direct materials and direct labor, but actual costs for manufacturing overhead b. Actual costs for direct materials and direct labor, but applied costs for manufacturing overhead c. Actual costs for direct materials, direct labor, and manufacturing overhead d. Applied costs for direct materials, direct labor, and manufacturing overhead ANS: B PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
25.
When recording depreciation for manufacturing equipment, the entry should be: a. Debit to Depreciation Expense, Credit to Accumulated Depreciation b. Debit to Manufacturing Overhead, Credit to Depreciation Expense c. Debit to Accumulated Depreciation, Credit to Manufacturing Overhead d. Debit to Manufacturing Overhead, Credit to Accumulated Depreciation ANS: D PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
26.
Work-in-Process Inventory is credited when: a. Manufactured goods are sold b. Manufactured goods are completed c. Raw materials are used in production d. Closing entries are made ANS: B PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
27.
If a company uses job order costing, the amount transferred from Work-in-Process Inventory to Finished Goods Inventory is equal to the cost of goods: a. Sold during the period b. Completed during the period c. Completed and sold during the period d. Placed in production during the period ANS: B PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
28.
Finished Goods Inventory is debited when: a. Manufactured goods are completed b. Manufactured goods are sold c. Direct labor is used in production d. Manufacturing overhead is applied ANS: A PTS: 1 DIF: Easy OBJ: 16.1 NAT: AACSB Reflective Thinking | IMA Cost Management
29.
Which entry traces direct materials, direct labor and manufacturing overhead costs onto the income statement: a. Finished Goods xxx Work in Process xxx b. Raw Materials xxx Accounts Payable xxx c. Costs of Goods Sold xxx Finished Goods xxx d. Work in Process xxx Raw Materials xxx ANS: C PTS: 1 DIF: Easy OBJ: NAT: AACSB Reflective Thinking | IMA Cost Management
30.
16.1
What type of transaction is represented in the following entry? Work-in-process Inventory Raw Materials Inventory a. b. c. d.
25
Materials were purchased Direct materials were requisitioned for the production department Direct labor costs were incurred Indirect materials were requisitioned for the production department
ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Cost Management 31.
25
OBJ:
If direct labor time is charged to the wrong job number, that job will: a. Appear more profitable than it should b. Appear less profitable than it should c. Report the correct profitability d. None of these are correct ANS: B PTS: 1 DIF: Medium OBJ: NAT: AACSB Reflective Thinking | IMA Cost Management
32.
16.1
If ending Work-in-Process Inventory is understated, a. Finished Goods Inventory will be understated b. Cost of Goods Sold will be overstated c. Manufacturing Overhead will be overapplied d. Cost of Goods Sold will be understated ANS: B PTS: 1 DIF: Medium OBJ: NAT: AACSB Reflective Thinking | IMA Cost Management
33.
16.1
16.1
The Colonial Company produces porcelain collectibles. In August, the molding department had a beginning work-in-process inventory of $16,800. Costs added during August totaled $79,200 (direct materials $43,200; conversion costs $36,000). At the end of the month, the ending workin-process inventory value was $14,400. Assuming that Colonial Company uses job order costing, the cost of goods completed and transferred to the next department (glazing) in August was: a. $62,400 b. $64,800 c. $79,200 d. $81,600
ANS: D Cost of goods completed and transferred: $16,800 + $79,200 $14,400 = $81,600 PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Cost Management
OBJ:
16.1
Exhibit 16-1 Jack Corporation used a job order costing system to account for jobs in its construction division. During April, the following transactions occurred: 34.
Purchased $4,000 of lumber (raw materials) on account. Incurred direct labor costs of $8,000. Depreciation on construction equipment of $1,600 was recorded. A house that was completed in March at a cost of $160,000 was sold for $184,000.
Refer to Exhibit 16-1. Given the information above, the entry to record the purchase of the $4,000 of lumber would include a: a. Debit to Work-in-Process Inventory of $4,000 b. Credit to Cash of $4,000 c. Credit to Raw Materials Inventory of $4,000 d. Credit to Accounts Payable of $4,000 ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Cost Management
35.
OBJ:
16.1
Refer to Exhibit 16-1. Given the information above, the entry to record the depreciation on construction equipment would include a: a. Credit to Depreciation Expense of $1,600 b. Debit to Manufacturing Overhead of $1,600 c. Debit to Work-in-Process Inventory of $1,600 d. Credit to Manufacturing Overhead of $1,600 ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Cost Management
37.
16.1
Refer to Exhibit 16-1. Given the information above, the entry to record the direct labor costs of $8,000 includes a: a. Debit to Wages Expense of $8,000 b. Debit to Manufacturing Overhead of $8,000 c. Debit to Work-in-Process Inventory of $8,000 d. Credit to Work-in-Process Inventory of $8,000 ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Cost Management
36.
OBJ:
OBJ:
16.1
Refer to Exhibit 16-1. Given the information above, the entry to record the sale of the house would include a: a. Debit to Cost of Goods Sold b. Debit to Finished Goods Inventory c. Debit to Work-in-Process Inventory d. Credit to Cash ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Cost Management
OBJ:
16.1
38.
Manufacturing overhead is difficult to connect to products for all but which of the following reasons? a. Manufacturing overhead costs are not related to the flow of production b. The accounting system is not set up to separate manufacturing overhead from administrative costs c. Total costs are not known until the end of the period d. It is not easily connected to specific products ANS: B PTS: 1 DIF: Easy OBJ: 16.2 NAT: AACSB Reflective Thinking | IMA Cost Management
39.
The amount of manufacturing overhead predicted for the next period is known as: a. Overapplied manufacturing overhead b. Actual manufacturing overhead c. Estimated manufacturing overhead d. Underapplied manufacturing overhead ANS: C PTS: 1 DIF: Easy OBJ: 16.2 NAT: AACSB Reflective Thinking | IMA Cost Management
40.
The formula for the predetermined overhead rate is: a. Applied overhead actual overhead b. Estimated overhead estimated activity level c. Actual overhead estimated overhead d. Actual overhead actual activity level ANS: B PTS: 1 DIF: Easy OBJ: 16.2 NAT: AACSB Reflective Thinking | IMA Cost Management
41.
Which of the following statements is true? a. Actual overhead costs are entered as credits to Manufacturing Overhead b. Manufacturing Overhead is debited when overhead is applied c. When the credit balance in Manufacturing Overhead exceeds the debit balance in Manufacturing Overhead, manufacturing overhead has been underapplied d. When the debit balance in Manufacturing Overhead exceeds the credit balance in Manufacturing Overhead, manufacturing overhead has been underapplied ANS: D PTS: 1 DIF: Easy OBJ: 16.2 NAT: AACSB Reflective Thinking | IMA Cost Management
42.
The manufacturing overhead account is credited when: a. Manufacturing overhead is applied to a job or product b. Actual manufacturing overhead costs are recorded c. Manufacturing overhead is estimated d. A predicted overhead rate is calculated ANS: A PTS: 1 DIF: Easy OBJ: 16.2 NAT: AACSB Reflective Thinking | IMA Cost Management
43.
If overapplied manufacturing overhead is closed to Cost of Goods Sold, the journal entry would include a debit to: a. Cost of Goods Sold b. Manufacturing Overhead c. Finished Goods d. Work-in-Process Inventory ANS: B PTS: 1 DIF: Easy OBJ: 16.2 NAT: AACSB Reflective Thinking | IMA Cost Management
44.
The most accurate method of eliminating under- or overapplied manufacturing overhead is to: a. Close it to Cost of Goods Sold b. Close it to Cost of Goods Manufactured c. Allocate it to the different inventory accounts and Cost of Goods Sold d. Close it to Miscellaneous Expense ANS: C PTS: 1 DIF: Easy OBJ: 16.2 NAT: AACSB Reflective Thinking | IMA Cost Management
45.
Before any journal entries are made to deal with underapplied overhead, the total cost of jobs is: a. Not affected b. Overstated c. Understated d. None of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 16.2 NAT: AACSB Reflective Thinking | IMA Cost Management
46.
Rex Company's manufacturing overhead was overapplied by $10,000 in July. Estimated overhead was $755,000, and actual overhead was $752,000. The amount of overhead applied for May was: a. $742,000 b. $745,000 c. $762,000 d. $765,000 ANS: C Applied overhead: $752,000 + $10,000 = $762,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
47.
16.2
Smorgasbord Inc. estimated the following for 2012:
Indirect materials Indirect labor Rent Depreciation Insurance Machine hours Labor hours
Cutting Dept. $ 66,000 34,000 150,000 70,000 40,000 90,000 60,000
Finishing Dept. $ 80,000 40,000 115,000 60,000 25,000 80,000 60,000
The overhead rate for the cutting department is determined on the basis of machine hours. Using the data above, what is the predetermined overhead rate for the cutting department? a. $2.40 b. $4.00 c. $4.50 d. $6.00
ANS: B ($66,000 + $34,000 + $150,000 + $70,000 + $40,000) 90,000 machine hours = $4.00 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 48.
16.2
Smorgasbord Inc. estimated the following for 2012: Cutting Dept. $ 66,000 34,000 150,000 70,000 40,000 90,000 60,000
Indirect materials Indirect labor Rent Depreciation Insurance Machine hours Labor hours
Finishing Dept. $ 80,000 40,000 115,000 60,000 25,000 80,000 80,000
The overhead rate for the finishing department is determined on the basis of labor hours. Using the data above, what is the predetermined overhead rate for the finishing department? a. $2.00 b. $3.56 c. $4.00 d. $5.33 ANS: C ($80,000 + $40,000 + $115,000 + $60,000 + $25,000) 80,000 labor hours = $4.00 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 49.
16.2
California Company uses a predetermined overhead rate of $3.50 per machine hour based on an estimate of 50,000 machine hours for the year. The estimated manufacturing overhead cost for the period for The Club is: a. $15,000 b. $80,000 c. $120,000 d. $175,000 ANS: D 50,000 machine hours $3.50 = $175,000 estimated manufacturing overhead PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
50.
16.2
Work-in-Process Inventory for Wendall Productions has a balance of $2,600 at the end of the accounting period. The cost summaries for the uncompleted jobs showed direct materials of $1,200 and direct labor of $800. Wendall applies manufacturing overhead on the basis of direct labor cost. The company's predetermined overhead rate is: a. $0.50 per direct labor dollar b. $0.65 per direct labor dollar c. $0.75 per direct labor dollar d. $1.00 per direct labor dollar
ANS: C Manufacturing overhead: Predetermined overhead rate:
$2,600 $1,200 $800 = $600 $600 $800 = $0.75
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 51.
16.2
If manufacturing overhead is applied on the basis of machine hours and actual machine hours are more than anticipated, which of the following is true? a. Manufacturing overhead is probably overapplied b. Manufacturing overhead is probably underapplied c. Actual manufacturing overhead equals applied manufacturing overhead d. None of these are correct ANS: A PTS: 1 DIF: Medium OBJ: NAT: AACSB Reflective Thinking | IMA Cost Management
52.
If manufacturing overhead is applied on the basis of direct labor hours and if actual hours worked are less than anticipated, which of the following is true? a. Manufacturing overhead is probably overapplied b. Manufacturing overhead is probably underapplied c. Applied manufacturing overhead equals actual manufacturing overhead d. None of these are correct ANS: B PTS: 1 DIF: Medium OBJ: NAT: AACSB Reflective Thinking | IMA Cost Management
53.
16.2
16.2
Assuming that actual manufacturing overhead costs for Colorado Iron Company are $10,000 for cutting; $14,000 for shaping; and $6,000 for finishing; and applied manufacturing overhead is $11,400 for cutting; $11,000 for shaping; and $6,600 for finishing, what is the amount of over- or underapplied overhead? a. $1,000 overapplied b. $1,000 underapplied c. $400 overapplied d. $400 underapplied ANS: B Actual manufacturing overhead costs:
$10,000 + $14,000 + $6,000 = $30,000
Applied manufacturing overhead:
$11,400 + $11,000 + $6,600 = $29,000 $30,000 actual $29,000 applied = $1,000 underapplied
PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Cost Management
OBJ:
16.2
Exhibit 16-2 Dietrich Company has the following data for August: Direct materials cost Direct labor hours Direct labor cost Actual manufacturing overhead Machine hours worked
$35,000 6,000 $30,000 $25,000 3,000
54.
Refer to Exhibit 16-2. Given the information above, if manufacturing overhead is applied at the rate of 80% of direct labor cost, overhead for August is: a. $1,000 overapplied b. $1,000 underapplied c. $5,000 overapplied d. $5,000 underapplied ANS: B Applied manufacturing overhead:
$30,000 80% = $24,000 $25,000 actual $24,000 applied = $1,000 underapplied
PTS: 1 DIF: Medium OBJ: 16.2 NAT: AACSB Analytic | IMA Cost Management 55.
Refer to Exhibit 16-2. Given the information above, if manufacturing overhead is applied at the rate of $4.50 per direct labor hour, overhead for August is: a. $1,500 overapplied b. $2,000 overapplied c. $1,500 underapplied d. $2,000 underapplied ANS: B Applied manufacturing overhead:
6,000 $4.50 = $27,000 $25,000 actual $27,000 applied = $2,000 overapplied
PTS: 1 DIF: Medium OBJ: 16.2 NAT: AACSB Analytic | IMA Cost Management 56.
Refer to Exhibit 16-2. Given the information above, if manufacturing overhead is applied at the rate of $7 per machine hour, overhead for August is: a. $2,000 overapplied b. $2,000 underapplied c. $3,000 overapplied d. $4,000 underapplied ANS: D Applied manufacturing overhead:
3,000 $7 = $21,000 $25,000 actual $21,000 applied = $4,000 underapplied
PTS: 1 DIF: Medium OBJ: 16.2 NAT: AACSB Analytic | IMA Cost Management 57.
Refer to Exhibit 16-2. Given the information above, which manufacturing overhead rate results in the least amount of over- or underapplied overhead? a. 80% of direct labor costs b. $4.50 per direct labor hour c. $7 per machine hour d. 100% of direct labor costs
ANS: A Applied manufacturing overhead: Applied manufacturing overhead: Applied manufacturing overhead: Applied manufacturing overhead:
$30,000 80% = $24,000 $25,000 actual $24,000 applied = $1,000 underapplied 6,000 $4.50 = $27,000 $25,000 actual $27,000 applied = $2,000 overapplied 3,000 $7 = $21,000 $25,000 actual $21,000 applied = $4,000 underapplied $30,000 $25,000 $30,000 applied = $5,000 overapplied
PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Cost Management 58.
16.2
Costs incurred to manufacture goods during a period can be found in: a. A cost of goods sold account b. A cost of goods manufactured schedule c. Income statement d. Balance sheet ANS: B PTS: 1 DIF: Easy OBJ: 16.3 NAT: AACSB Reflective Thinking | IMA Cost Management
59.
Which of the following is NOT true about total manufacturing costs? a. Includes new manufacturing costs incurred during the period b. Represents the level of production during the period c. Includes raw materials, direct labor, and manufacturing overhead costs d. Reflects changes in finished goods inventory ANS: D PTS: 1 DIF: Easy OBJ: 16.3 NAT: AACSB Reflective Thinking | IMA Cost Management
60.
Which of the following is NOT true about cost of goods manufactured? a. Shows total cost of items completed during the period b. Includes some costs incurred in prior periods c. Includes only current period costs d. Includes most costs incurred during the period ANS: C PTS: 1 DIF: Easy OBJ: 16.3 NAT: AACSB Reflective Thinking | IMA Cost Management
61.
The formula for total manufacturing costs is: a. Raw materials used + Direct labor costs + Applied manufacturing overhead b. Raw materials purchased + Direct labor costs + Applied manufacturing overhead c. Raw materials used + Direct labor costs + Actual manufacturing overhead d. Raw materials purchased + Direct labor costs + Actual manufacturing overhead ANS: A PTS: 1 DIF: Easy OBJ: 16.3 NAT: AACSB Reflective Thinking | IMA Cost Management
62.
Which of the following inventory balances is NOT needed when preparing a cost of goods manufactured schedule? a. Work-in-process beginning inventory balance b. Work-in-process ending inventory balance c. Finished goods beginning inventory balance d. Raw materials ending inventory balance ANS: C PTS: 1 DIF: Easy OBJ: 16.3 NAT: AACSB Reflective Thinking | IMA Cost Management
63.
In the cost of goods sold calculation, overapplied manufacturing overhead is usually: a. Added to unadjusted cost of goods sold b. Subtracted from unadjusted cost of goods sold c. Not used to calculate cost of goods sold d. Shown separately on the income statement ANS: B PTS: 1 DIF: Easy OBJ: 16.3 NAT: AACSB Reflective Thinking | IMA Cost Management
64.
Which of the following would NOT be found on a cost of goods manufactured schedule? a. Raw materials purchased b. Ending work-in-process inventory c. Applied manufacturing overhead d. Finished goods inventory ANS: D PTS: 1 DIF: Easy OBJ: 16.3 NAT: AACSB Reflective Thinking | IMA Cost Management
65.
The schedule of cost of goods manufactured for the Cutler Company shows the following balances for the year ended July 31, 2012: Raw materials used in production Direct labor Applied manufacturing overhead Ending work-in-process inventory Cost of goods manufactured
$ 440,000 280,000 375,000 230,000 1,125,000
The beginning work-in-process inventory was: a. $30,000 b. $220,000 c. $260,000 d. $635,000 ANS: C Manufacturing costs: Beginning work-in-process:
$440,000 + $280,000 + $375,000 = $1,095,000 $1,095,000 + x $230,000 = $1,125,000 x = $260,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
16.3
66.
Famous Furniture Manufacturing Company reported the following information for 2012: Beginning work-in-process inventory Beginning raw materials inventory Ending work-in-process inventory Ending raw materials inventory Raw materials purchased Direct labor Applied manufacturing overhead
$182,000 66,500 157,500 84,000 136,500 130,200 84,000
Famous Furniture Manufacturing Company's cost of goods manufactured for the year is: a. $308,700 b. $333,200 c. $357,700 d. $392,700 ANS: C Raw materials used: Manufacturing costs: Cost of goods manufactured:
$66,500 + $136,500 $84,000 = $119,000 $119,000 + $130,200 + $84,000 = $333,200 $333,200 + $182,000 $157,500 = $357,700
PTS: 1 DIF: Medium OBJ: 16.3 NAT: AACSB Analytic | IMA Cost Management 67.
The following information is taken from the records of Minnesota Company for the year ended January 31, 2012: Raw materials Direct labor Applied manufacturing overhead Ending work-in-process inventory Cost of goods manufactured
$ 64,000 24,000 88,000 40,000 152,000
The amount of beginning work-in-process inventory is: a. $0 b. $16,000 c. $24,000 d. $64,000 ANS: B Manufacturing costs: Beginning work-in-process inventory:
$64,000 + $24,000 + $88,000 = $176,000 $176,000 + x $40,000 = $152,000 x = $16,000
PTS: 1 DIF: Medium OBJ: 16.3 NAT: AACSB Analytic | IMA Cost Management
68.
For 2012, Fli-Hi Woods' end-of-year information is as follows: Beginning raw materials inventory Beginning work-in-process inventory Direct labor Applied manufacturing overhead Raw materials purchased Ending raw materials inventory Ending work-in-process inventory
$ 9,120 13,440 25,680 18,000 36,000 9,960 16,800
Based on this information, the cost of goods manufactured for Fli-Hi Woods is: a. $75,480 b. $77,160 c. $78,840 d. $82,200 ANS: A Raw materials used: Manufacturing costs: Cost of goods manufactured:
$9,120 + $36,000 $9,960 = $35,160 $35,160 + $25,680 + $18,000 = $78,840 $78,840 + $13,440 $16,800 = $75,480
PTS: 1 DIF: Medium OBJ: 16.3 NAT: AACSB Analytic | IMA Cost Management 69.
Waterbed Factory has the following information for 2012: Beginning raw materials inventory Beginning finished goods inventory Ending finished goods inventory Beginning work-in-process inventory Ending work-in-process inventory Ending raw materials inventory Direct labor Raw materials purchased Applied manufacturing overhead Based on this information, the cost of goods manufactured is: a. $91,300 b. $92,200 c. $93,100 d. $95,200 ANS: B Raw materials used: $16,500 + $22,200 $12,000 = $26,700 Manufacturing costs: $26,700 + $37,900 + $29,400 = $94,000 Cost of goods manufactured: $94,000 + $17,100 $18,900 = $92,200 PTS: 1 DIF: Medium OBJ: 16.3 NAT: AACSB Analytic | IMA Cost Management
$16,500 30,600 26,700 17,100 18,900 12,000 37,900 22,200 29,400
70.
The manufacturing operations of Sentinel Company had the following inventory balances for 2012: January 1 $ 50,000 30,000 150,000
Raw materials Work-in-process Finished goods
December 31 $ 60,000 35,000 110,000
If Sentinel purchased $90,000 of raw materials during the year, the cost of raw materials used during 2012 would be: a. $80,000 b. $85,000 c. $110,000 d. $190,000 ANS: A Raw materials used:
$50,000 + $90,000 x = $60,000 x = $80,000
PTS: 1 DIF: Medium OBJ: 16.3 NAT: AACSB Analytic | IMA Cost Management 71.
Delaware Manufacturing had the following information for March 2012: Beginning raw materials inventory Beginning work-in-process inventory Beginning finished goods inventory General administrative expenses Raw materials used Indirect labor Indirect materials Depreciation-factory equipment Direct labor Applied manufacturing overhead Ending work-in-process inventory Ending finished goods inventory Based on this information, the cost of goods manufactured is: a. $309,120 b. $320,640 c. $326,400 d. $352,320 ANS: A Manufacturing costs: Cost of goods manufactured:
$129,600 + $97,920 + $87,360 = $314,880 $314,880 + $23,040 $28,800 = $309,120
PTS: 1 DIF: Medium OBJ: 16.3 NAT: AACSB Analytic | IMA Cost Management
$ 34,560 23,040 31,240 43,200 129,600 24,000 42,000 22,000 97,920 87,360 28,800 66,240
72.
Nester Company recorded the following data for 2012: January 1 $57,200 41,600 52,000
Raw materials Work-in-process Finished goods
December 31 $54,600 33,800 65,000
Additional data: Sales revenue Direct labor costs Applied manufacturing overhead Interest expense Advertising expense
$468,000 78,000 182,000 59,800 44,200
If raw materials costing $65,000 were purchased during the year, the total manufacturing costs for 2012 would be: a. $322,400 b. $325,000 c. $327,600 d. $332,800 ANS: C Raw materials used: Manufacturing costs:
$57,200 + $65,000 $54,600 = $67,600 $67,600 + $78,000 + $182,000 = $327,600
PTS: 1 DIF: Medium OBJ: 16.3 NAT: AACSB Analytic | IMA Cost Management 73.
For June 2012, Mitsumi Exports' beginning work-in-process inventory is $1,000, ending workin-process inventory is $3,000, and cost of goods manufactured is $34,000. What are the total manufacturing costs for June? a. $31,000 b. $32,000 c. $35,000 d. $36,000 ANS: D Manufacturing costs:
x + $1,000 $3,000 = $34,000 x = $36,000
PTS: 1 DIF: Medium OBJ: 16.3 NAT: AACSB Analytic | IMA Cost Management Exhibit 16-3 Garret Manufacturing Company's accounting records reflect the following inventories: Raw materials inventory Work-in-process inventory Finished goods inventory
Dec. 31, 2012 $78,000 90,000 57,000
Dec. 31, 2011 $66,000 48,000 45,000
During 2012, $75,000 of raw materials were purchased, direct labor costs amounted to $90,000, and manufacturing overhead incurred was $120,000.
74.
Refer to Exhibit 16-3. Garret Manufacturing Company's total manufacturing costs incurred in 2012 amounted to: a. $270,000 b. $273,000 c. $348,000 d. $381,000 ANS: B Raw materials used: Total manufacturing costs:
$66,000 + $75,000 $78,000 = $63,000 $63,000 + $90,000 + $120,000 = $273,000
PTS: 1 DIF: Medium OBJ: 16.3 NAT: AACSB Analytic | IMA Cost Management 75.
Refer to Exhibit 16-3. Garret Manufacturing Company's cost of goods sold for the year 2012 is: a. $201,000 b. $219,000 c. $231,000 d. $279,000 ANS: B Raw materials used: Total manufacturing costs: Cost of goods manufactured: Cost of goods sold:
$66,000 + $75,000 $78,000 = $63,000 $63,000 + $90,000 + $120,000 = $273,000 $273,000 + $48,000 $90,000 = $231,000 $231,000 + $45,000 $57,000 = $219,000
PTS: 1 DIF: Medium OBJ: 16.3 NAT: AACSB Analytic | IMA Cost Management 76.
Michigan Motors has a beginning finished goods inventory of $81,600, cost of raw material purchases of $106,800, cost of goods manufactured of $176,400, and an ending finished goods inventory of $92,400. The cost of goods sold for this company is: a. $96,000 b. $165,600 c. $208,800 d. $258,000 ANS: B Cost of goods sold: $81,600 + $176,400 $92,400 = $165,600 PTS: 1 DIF: Medium OBJ: 16.3 NAT: AACSB Analytic | IMA Cost Management
77.
The manufacturing operations of Beam Company had the following inventory balances for 2012:
Raw materials Work-in-process Finished goods
January 1 $ 40,000 24,000 120,000
December 31 $48,000 28,000 88,000
If Beam's cost of goods manufactured for 2012 was $152,000, what was Beam's cost of goods sold for the year? a. $120,000 b. $152,000 c. $172,000 d. $184,000 ANS: D Cost of goods sold: $152,000 + $120,000 88,000 = $184,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 78.
16.3
The management process in a service organization is much like that of a(n): a. Manufacturing company b. Merchandising company c. E-merchant d. None of these are correct ANS: A PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
79.
When comparing a service company to a manufacturing company, the service company is less likely to have: a. Direct labor b. Overhead costs c. Work-in-process services d. Raw materials ANS: D PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
80.
The most significant similarity between service companies and manufacturing companies is that both will likely have a significant amount of: a. Raw materials b. Direct labor c. Finished goods d. All of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
81.
The amount billed to a customer from a computer consulting firm may include: a. Labor costs of professionals b. Costs for diskettes and CDs c. Computers owned by the consulting company d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
82.
When supplies, direct labor, and overhead used to produce a service are billed, the costs of these items are debited to: a. Costs of Services b. Overhead c. Supplies d. Work-in-Process Services ANS: A PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
83.
In a service firm, overhead is generally assigned to services on an activity measure such as: a. Machine hours b. Billable hours c. Overhead hours d. Supplies used ANS: B PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
84.
As overhead costs are incurred in a service firm, the costs are debited to a(n): a. Expense account b. Work-in-process services account c. Overhead account d. Direct labor account ANS: C PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
85.
As overhead costs are allocated to services in a service firm, the entry would include a: a. Debit to the overhead account b. Credit to the overhead account c. Debit to the cost of services account d. Credit to the cost of services account ANS: B PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
86.
At year-end, a service company has a credit balance in the overhead account. This means that: a. Overhead has been overapplied to services b. Overhead has been underapplied to services c. Overhead has not been applied to services d. Estimated overhead was more than actual overhead ANS: A PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
87.
Any over- or underapplied overhead that exists at year-end would generally be closed to: a. Cost of Services b. Work-in-Process Services c. Overhead d. All of these are correct ANS: A PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
88.
Service costs are transferred from Work-in-Process Services to Cost of Services when the: a. Service is being conducted b. Service is completed c. Service is begun d. None of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
89.
Which of the following typically would NOT have Work in Process inventory: a. Manufacturing company b. Merchandising company c. Service company d. All of these would have Work in Process inventory ANS: B PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
90.
Most product distribution to consumers follows which of the following channels? a. Manufacturer to end user b. Manufacturer to retailer to end user c. Manufacturer to wholesaler to retailer to end user d. Manufacturer to wholesaler to end user ANS: C PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
91.
Raw Materials Inventory is only found in: a. Merchandising organizations b. Service organizations c. Wholesale organizations d. Manufacturing organizations ANS: D PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
92.
Ideally, inventory costs for a merchant should include: a. Transportation costs b. Insurance during transportation c. Storage costs d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
93.
When inventory is sold, a merchant records a debit to: a. Sales b. Merchandise Inventory c. Cost of Goods Sold d. Selling Expenses ANS: C PTS: 1 DIF: Easy OBJ: 16.4 NAT: AACSB Reflective Thinking | IMA Cost Management
94.
Turco Consulting is providing consulting services to a client. For this consulting assignment, Turco used $500 in supplies and 175 hours of consulting time. Turco charges clients $200 per hour and pays its consultants $115 per hour. Turco assigns overhead to jobs based on a rate of $50 per labor hour. The overhead assigned to this consulting service is: a. $8,750 b. $13,125 c. $20,125 d. $29,375 ANS: A Overhead assigned: 175 $50 = $8,750 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
95.
16.4
Turco Consulting is providing consulting services to a client. For this consulting assignment, Turco used $500 in supplies and 175 hours of consulting time. Turco charges clients $200 per hour and pays its consultants $115 per hour. Turco assigns overhead to jobs based on a rate of $50 per labor hour. The entry to record the cost of this service when billed would include a: a. Debit to Cost of Services for $29,375 b. Credit to Cost of Services for $29,375 c. Debit to Cost of Services for $35,000 d. Debit to Work-in-Process Services for $35,000 ANS: A Cost of services: (175 $50) + (175 $115) + $500 = $29,375 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
96.
16.4
A company that produces expensive customized machines would probably use which of the following methods of product costing? a. Job order costing b. Process costing c. Marginal costing d. Some combination of job order costing and process costing ANS: A PTS: 1 DIF: Easy OBJ: 16.5 NAT: AACSB Reflective Thinking | IMA Cost Management
97.
A company that produces bottles for a soft drink bottling company would probably use which of the following methods of product costing? a. Job order costing b. Process costing c. Marginal costing d. Some combination of job order costing and process costing ANS: B PTS: 1 DIF: Easy OBJ: 16.5 NAT: AACSB Reflective Thinking | IMA Cost Management
98.
Which of the following companies is most likely to use job order costing? a. A button manufacturer b. A brick manufacturer c. An auto repair shop d. A toy company ANS: C PTS: 1 DIF: Easy OBJ: 16.5 NAT: AACSB Reflective Thinking | IMA Cost Management
99.
Which of the following types of companies would be LEAST likely to use a process costing system? a. A tile installation company b. A tire manufacturing company c. A crayon manufacturing company d. A fast food restaurant ANS: A PTS: 1 DIF: Easy OBJ: 16.5 NAT: AACSB Reflective Thinking | IMA Cost Management
100.
Which of the following does NOT need to exist for process costing to be appropriate? a. Processes for all products are the same b. Overhead costs are insignificant c. Units produced are alike d. Large volumes are being produced ANS: B PTS: 1 DIF: Easy OBJ: 16.5 NAT: AACSB Reflective Thinking | IMA Cost Management
101.
Which of the following is NOT a necessary step when using a process costing system? a. Calculate the product cost per unit b. Combine fixed expenses with variable costs c. Determine the cost of ending work-in-process d. Determine equivalent units of production ANS: B PTS: 1 DIF: Easy OBJ: 16.5 NAT: AACSB Reflective Thinking | IMA Cost Management
102.
In a process costing system, units to be accounted for in a process are equal to the: a. Units in the beginning inventory plus the units started or transferred into the process b. Number of units transferred out of the process c. Ending inventory plus the units started or transferred into the process d. Number of units started or transferred into the process ANS: A PTS: 1 DIF: Easy OBJ: 16.5 NAT: AACSB Reflective Thinking | IMA Cost Management
103.
In process cost accounting: a. A materials requisition must identify the job on which the material will be used b. One work-in-process account is maintained for all the processes, similar to a job costing system c. A work-in-process account is maintained for each process d. A work-in-process account is maintained for each product ANS: C PTS: 1 DIF: Easy OBJ: 16.5 NAT: AACSB Reflective Thinking | IMA Cost Management
104.
In a process costing system, to determine the amount of work actually done in a period, you must be sure to include: a. Beginning work-in-process for the period b. Ending work-in-process for the period c. Units started and completed during the period d. All of these are used to determine work actually done ANS: D PTS: 1 DIF: Easy OBJ: 16.5 NAT: AACSB Reflective Thinking | IMA Cost Management
105.
Conversion costs consist of: a. Direct materials and direct labor b. Direct materials and overhead c. Direct labor and overhead d. Direct materials, direct labor, and overhead ANS: C PTS: 1 DIF: Easy OBJ: 16.5 NAT: AACSB Reflective Thinking | IMA Cost Management
106.
Information on a production cost report is used to transfer costs and units of output from one manufacturing center to another in a(n): a. Process costing system b. Job order costing system c. Activity-based costing system d. None of these are correct ANS: A PTS: 1 DIF: Easy OBJ: 16.5 NAT: AACSB Reflective Thinking | IMA Cost Management
107.
Berry Corporation began making scented body lotion in March of the current year. There is only one process in the manufacture of this product, and in March the costs of production were $24,600 for materials and $35,730 for processing. During the month, 12,300 pints of materials were placed in production. At the end of March, 1,250 pints of materials were still being processed and were 70% complete. Assume that all materials were added at the beginning of the production process. Given this information, the number of equivalent units for the conversion costs is: a. 875 b. 11,050 c. 11,925 d. 12,300 ANS: C Equivalent units for conversion costs: 11,050 + (1,250 70%) = 11,925 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
16.5
108.
Berry Corporation began making scented body lotion in March of the current year. There is only one process in the manufacture of this product, and in March the costs of production were $24,600 for materials and $35,730 for processing. During the month, 12,300 pints of materials were placed in production. At the end of March, 1,250 pints of materials were still being processed and were 70% complete. Assume that all materials were added at the beginning of the production process. Given this information, the number of equivalent units for materials is: a. 12,300 b. 11,910 c. 11,260 d. 11,000 ANS: A Equivalent units for materials: 11,050 + (1,250 100%) = 12,300 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
109.
16.5
Berry Corporation began making scented body lotion in March of the current year. There is only one process in the manufacture of this product, and in March the costs of production were $24,600 for materials and $35,730 for processing. During the month, 12,300 pints of materials were placed in production. At the end of March, 1,250 pints of materials were still being processed and were 70% complete. Assume that all materials were added at the beginning of the production process. Given this information, the total cost of goods transferred to Finished Goods Inventory was: a. $55,250 b. $59,550 c. $60,330 d. $61,500 ANS: A Equivalent units of production Materials: 11,050 + (1,250 100%) = 12,300 Conversion costs: 11,050 + (1,250 70%) = 11,925 Product costs per unit Materials: Conversion costs:
$24,600 12,300 = $2.00 $35,730 11,925 = $3.00
Costs transferred out Started and completed:
$5.00 11,050 = $55,250
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
16.5
110.
Department 1 of a two-department production process shows: Units 20,000 80,000 200,000
Beginning work-in-process Ending work-in-process Total units to be accounted for How many units were transferred to Department 2? a. 80,000 b. 120,000 c. 180,000 d. 200,000 ANS: B Units transferred out: 200,000 80,000 = 120,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 111.
16.5
During January, the Farnell Furniture Company produced 30,000 high-quality furniture sets: 7,500 from the January 1 work-in-process inventory and 22,500 from units started during the month. The January 30 work-in-process inventory consisted of 7,000 units 50% complete as to direct materials and 40% finished as to conversion costs. The January 1 inventory of work-inprocess was 50% finished as to direct materials and conversion costs. The number of conversion cost equivalent units processed in January was: a. 26,000 b. 29,050 c. 30,000 d. 32,800 ANS: B Conversion cost equivalent units: (7,500 50%) + 22,500 + (7,000 40%) = 29,050 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
112.
16.5
During January, the Farnell Furniture Company produced 30,000 high-quality furniture sets: 7,500 from the January 1 work-in-process inventory and 22,500 from units started during the month. The January 30 work-in-process inventory consisted of 7,000 units 50% complete as to direct materials and 40% finished as to conversion costs. The January 1 inventory of work-inprocess was 50% finished as to direct materials and conversion costs. The number of units started in production during January was: a. 22,000 b. 22,500 c. 29,500 d. 30,000 ANS: C Number of units started in production: 22,500 + 7,000 = 29,500 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
16.5
113.
The last department in a production process shows the following information at the end of the period: Beginning work-in-process Started Ending work-in-process How many units have been transferred to finished goods during the period? a. 400 b. 1,800 c. 2,000 d. 2,400
Units 600 1,800 400
ANS: C Units transferred to finished goods: 600 + 1,800 400 = 2,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 114.
16.5
In production, 100 units in a process that are 30% complete are referred to as: a. 30 equivalent units of production b. 70 equivalent units of production c. 100 equivalent units of production d. 130 equivalent units of production ANS: A Equivalent units of production: 100 30% = 30 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
115.
16.5
A department adds all raw materials at the very beginning of the process and incurs conversion costs evenly throughout the process. For the month of March, there were no units in the beginning work-in-process inventory; 5,000 units were started in March, and there were 1,500 units that were 60% complete in the ending work-in-process inventory at the end of March. What were the equivalent units of production for conversion costs for the month of March? a. 3,500 equivalent units b. 4,100 equivalent units c. 4,400 equivalent units d. 5,000 equivalent units ANS: C Conversion costs equivalent units: 3,500 + (1,500 60%) = 4,400 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
16.5
116.
Assume the following information for April: Beginning work-in-process inventory Started into production Ending work-in-process inventory
10,000 units, 40% finished 58,000 units 8,000 units, 30% finished
If material is added at the beginning of production and conversion is incurred uniformly, what is the number of equivalent units processed for conversion costs for April? a. 58,400 b. 60,000 c. 62,400 d. 68,000 ANS: A Conversion costs equivalent units: (10,000 60%) + 50,000 + (8,000 30%) = 58,400 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 117.
16.5
A department adds all raw materials at the beginning of the process and incurs conversion costs uniformly throughout the process. For the month of July, there was no beginning work-inprocess inventory; 18,000 units were completed and transferred out; and there were 10,000 units in the ending work-in-process inventory that were 40% complete. During July, $308,000 materials costs and $286,000 conversion costs were charged to the department. The product cost per unit of production for materials and conversion costs for the month of July was: Material a. $11.00 b. $11.00 c. $14.00 d. $14.00
Conversion $10.20 $13.00 $10.20 $16.00
ANS: B Raw materials equivalent units: Raw material costs: Conversion costs equivalent units: Conversion costs:
18,000 + (10,000 100%) = 28,000 $308,000 28,000 = $11 18,000 + (10,000 40%) = 22,000 $286,000 22,000 = $13
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
16.5
118.
Assume the following information for November: Direct materials Direct labor Factory overhead Units started and completed Units in ending work-in-process inventory (30% completed)
$30,100 $15,450 $ 7,100 3,000 800
Assuming uniform application of materials and conversion costs, and no beginning work-inprocess inventory, what is the unit cost of production for November? a. $13.85 b. $14.80 c. $16.25 d. $17.55 ANS: C Raw materials equivalent units: Raw material costs: Conversion costs equivalent units: Conversion costs: Unit cost:
119.
3,000 + (800 30%) = 3,240 $30,100 3,240 = $9.29 3,000 + (800 30%) = 3,240 $22,550 3,240 = $6.96 $9.29 + $6.96 = $16.25
PTS: 1 DIF: Medium OBJ: 16.5 NAT: AACSB Analytic | IMA Cost Management Hopple Company uses a FIFO process costing system. Costs in beginning inventory include $9,600 for materials and $8,000 for conversion costs. The following costs were incurred in January for the Dyeing Department: Direct materials Direct labor Factory overhead
$48,000 60,000 44,000
Material is added at the beginning of the process and conversion costs are incurred evenly throughout the process. If equivalent units are 3,200 for materials and 2,800 for conversion, what is the total product cost per unit for a unit completed during January? a. $18 b. $30 c. $37 d. $52 ANS: D Raw materials costs: Conversion costs: Total unit cost:
$48,000 3,200 = $15 ($60,000 + $44,000) 2,800 = $37 (rounded) $15 + $37 = $52
PTS: 1 DIF: Medium OBJ: 16.5 NAT: AACSB Analytic | IMA Cost Management
Exhibit 16-4 Timothy Company uses FIFO process costing. Material is added initially while conversion is added evenly throughout the process. The following information is available for the month just ended: Beginning work-in-process Started into process Ending work-in-process 120.
7,000 units, 40% complete 86,000 units 6,000 units, 50% complete
Refer to Exhibit 16-4. How many equivalent units of material will be used in calculating product cost per unit? a. 86,000 b. 87,200 c. 90,900 d. 93,000 ANS: A Equivalent units of material: 80,000 + (6,000 100%) = 86,000 PTS: 1 DIF: Medium OBJ: 16.5 NAT: AACSB Analytic | IMA Cost Management
121.
Refer to Exhibit 16-4. How many equivalent units of conversion will be used in calculating product cost per unit? a. 88,800 b. 87,200 c. 86,000 d. 85,800 ANS: B Equivalent units of conversion: (7,000 60%) + 80,000 + (6,000 50%) = 87,200 PTS: 1 DIF: Medium OBJ: 16.5 NAT: AACSB Analytic | IMA Cost Management Exhibit 16-5 Adam Company uses the FIFO method in its process costing system. The following information for the Assembly Department was obtained from the accounting records for September (all materials are added at the beginning of the process):
Work in process inventory, Sept. 1 Started during the month Work in process inventory, Sept. 30
Number of Units 60,000 270,000 40,000
Percent Completed 15%
Beginning work in process inventory Cost added during the month
Materials $15,000 $54,000
Labor and Overhead $ 18,000 $606,900
20%
122.
Refer to Exhibit 16-5. What was the amount of costs transferred out for September? a. $529,000 b. $562,000 c. $666,243 d. $669,100 ANS: D Equivalent units materials: Equivalent units conversion costs: Costs Transferred Out Beginning work-in-process: Started and completed: Total costs transferred out:
230,000 + 40,000 = 270,000 (60,000 85%) + 230,000 + (40,000 20%) = 289,000 ($15,000 + $18,000 + [($606,900 289,000) (60,000 85%)] = $140,100 [($54,000 270,000) + ($606,900 289,000)] 230,000 = $529,000 $140,100 + $529,000 = $669,100
PTS: 1 DIF: Challenging OBJ: 16.5 NAT: AACSB Analytic | IMA Cost Management 123.
Refer to Exhibit 16-5. What was the cost of ending work-in-process inventory? a. $26,000 b. $24,800 c. $18,400 d. $17,000 ANS: B Equivalent units materials: Equivalent units conversion costs: Costs for materials: Costs for conversion: Cost of ending work-inprocess inventory:
230,000 + 40,000 = 270,000 (60,000 85%) + 230,000 + (40,000 20%) = 289,000 40,000 ($54,000 270,000) = $8,000 (40,000 20%) ($606,900 289,000) = $16,800 $8,000 + $16,800 = $24,800
PTS: 1 DIF: Challenging OBJ: 16.5 NAT: AACSB Analytic | IMA Cost Management 124.
Refer to Exhibit 16-5. How much did the total costs per unit increase or decrease in September compared to August? a. $0.05 decrease in September costs per unit as compared to August b. $0.05 increase in September costs per unit as compared to August c. $0.02 decrease in September costs per unit as compared to August d. $0.02 increase in September costs per unit as compared to August
ANS: B Equivalent units materials: Equivalent units conversion costs:
(60,000 85%) + 230,000 + (40,000 20%) = 289,000
Product Costs per Unit Beginning work-in-process: Current period: Difference:
($15,000 60,000) + ($18,000 9,000) = $2.25 ($54,000 270,000) + ($606,900 289,000) = $2.30 $2.30 (Sept) $2.25 (Aug) = $0.05 increase
230,000 + 40,000 = 270,000
PTS: 1 DIF: Challenging OBJ: 16.5 NAT: AACSB Analytic | IMA Cost Management PROBLEM 1.
Post the following cost data to the appropriate T-accounts to trace the flow of costs from the time they are incurred until the product is completed and sold. (Assume that purchases and expenses are credited to Cash.) a. b. c. d. e. f. g. h. i. j.
Raw materials purchased Raw materials useddirect Raw materials usedindirect Wages payabledirect Wages payableindirect Selling and administrative expenses Other manufacturing overhead costs Manufacturing overhead applied Work-in-process completed Finished goods sold Raw Materials Inventory Beg. Bal. 5,000 Finished Goods Inventory Beg. Bal. 10,000
$30,000 25,000 3,500 30,000 6,000 16,000 12,500 20,000 60,000 67,500 Work-in-Process Inventory Beg. Bal. 15,000 Cash Beg. Bal. 80,000
Wages Payable
Cost of Goods Sold
Selling & Administrative Expense
Manufacturing Overhead
ANS: Raw Materials Inventory Beg. Bal. 5,000 (b) 25,000 (a) 30,000 (c) 3,500
Work-in-Process Inventory Beg. Bal. 15,000 (i) 60,000 (b) 25,000 (d) 30,000 (h) 20,000
Finished Goods Inventory Beg. Bal. 10,000 (j) 67,500 (i) 60,000
Cash Beg. Bal. 80,000 (a) 30,000 (f) 16,000 (g) 12,500
Wages Payable (d) 30,000 (e) 6,000
Selling & Administrative Expense (f) 16,000
Cost of Goods Sold (j) 67,500
Manufacturing Overhead (c) 3,500 (h) 20,000 (e) 6,000 (g) 12,500
PTS: 1 DIF: Medium OBJ: 16.1 NAT: AACSB Analytic | IMA Cost Management 2.
Prepare the journal entries for the following events. (Assume that purchases and expenses are credited to cash.) a. b. c. d. e. f. g. h. i. j.
Raw materials purchased Direct materials used Indirect materials used Wages payabledirect Wages payableindirect Selling and administrative expenses Other manufacturing overhead costs Manufacturing overhead applied Work-in-process completed Finished goods sold
$30,000 25,000 3,500 30,000 6,000 16,000 12,500 20,000 60,000 67,500
ANS: a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Raw materials inventory Cash
30,000
Work-in-process inventory Raw materials inventory
25,000
Manufacturing overhead Indirect materials inventory
3,500
Work-in-process inventory Wages payable
30,000
Manufacturing overhead Wages payable
6,000
Selling and administrative expense Cash
16,000
Manufacturing overhead Cash
12,500
Work-in-process inventory Manufacturing overhead
20,000
Finished Goods inventory Work-in-Process inventory
60,000
Cost of Goods Sold Finished Goods inventory
67,500
PTS: 1 DIF: Medium OBJ: 16.1 NAT: AACSB Analytic | IMA Cost Management
30,000
25,000
3,500
30,000
6,000
16,000
12,500
20,000
60,000
67,500
3.
Prepare the journal entries for the following events in a dress manufacturing organization. a. b. c. d. e. f. g.
Purchased 400 yards of fabric on account costing $4 per yard. Placed 50 yards of fabric into production 50 hours of labor at $10 per hour were used to produce the shirts. Overhead costs of $350 were incurred for the plant manager's salary. Overhead costs were allocated at the rate of $6 per direct labor hour. Work was completed on the shirts. All of the shirts were transferred out. All of the shirts were sold at a total price of $1,200.
ANS: a.
b.
c.
d.
e.
f.
g.
Raw materials inventory Accounts payable (400 $4)
1,600 1,600
Work-in-process inventory Raw materials inventory (50 $4)
200
Work-in-process inventory Wages payable (50 $10)
500
Manufacturing overhead Salaries payable
350
Work-in-process inventory Manufacturing overhead (50 $6)
300
200
500
350
300
Finished goods inventory Work-in-process inventory ($200 + $500 + $300)
1,000
Accounts receivable Sales revenue Cost of goods sold Finished goods inventory
1,200
1,000 1,200 1,000 1,000
PTS: 1 DIF: Medium OBJ: 16.1 NAT: AACSB Analytic | IMA Cost Management 4.
Clibon Manufacturing Company uses a job order costing system. All relevant information for the products completed in July is provided below: Beginning work-in-process Direct materials cost Direct labor cost Direct labor hours Units produced Actual manufacturing overhead Predetermined overhead rate Units sold
$ 3,000 $12,500 $ 9,000 750 500 $ 7,000 75% 400
of direct labor cost
a. b. c.
d.
How much manufacturing overhead will be applied for the month of July? By how much will the overhead be over- or underapplied? Prepare the journal entries to transfer costs for direct materials used, direct labor, and applied manufacturing overhead to the appropriate inventories as the products are worked on, completed, and sold. Assuming that over/underapplied overhead is closed directly to cost of goods sold, calculate cost of goods sold for July.
ANS: a. b.
c.
d.
$9,000 75% = $6,750 $7,000 actual manufacturing overhead 6,750 applied overhead 250 underapplied Work-in-Process Inventory Raw Materials Inventory Wages Payable Manufacturing Overhead ($9,000 75%)
28,250
Finished Goods Inventory Work-in-Process Inventory ($3,000 + $28,250)
31,250
Cost of Goods Sold Finished Goods Inventory [($31,250 / 500) 400]
25,000
12,500 9,000 6,750
31,250
25,000
Cost of goods sold recorded when units were sold Add: Underapplied overhead Cost of goods sold reported for July
$25,000 250 $25,250
PTS: 1 DIF: Medium OBJ: 16.1 | 16.2 NAT: AACSB Analytic | IMA Cost Management 5.
Wieland Company uses a job order costing system. Thus, management must establish a predetermined overhead rate for applying manufacturing overhead. During the past three months, the following data have been accumulated:
Direct labor hours Machine hours Direct materials costs Total budgeted manufacturing overhead
April 20,000 50,000 $200,000 $ 40,000
May 26,000 25,000 $125,000 $ 35,000
June 35,000 15,000 $175,000 $ 25,000
In good form, prepare a schedule of predetermined overhead rates for each of the three years assuming the rate is based on: a. b. c.
Direct labor hours (round to the nearest cent) Machine hours (round to the nearest cent) Direct materials costs
ANS: a.
Total budgeted manufacturing overhead Direct labor hours Predetermined overhead rate
April $40,000 20,000 $2.00/hr
May $35,000 26,000 $1.35/hr
June $25,000 35,000 $0.71/hr
b.
Total budgeted manufacturing overhead Machine hours Predetermined overhead rate
April $40,000 50,000 $ .80/hr
May $35,000 25,000 $1.40/hr
June $25,000 15,000 $1.67/hr
c.
Total budgeted manufacturing overhead Direct materials costs Predetermined overhead rate
April $ 40,000 200,000 20%
May $ 35,000 125,000 28%
June $ 25,000 175,000 14.3%
PTS: 1 DIF: Medium OBJ: 16.2 NAT: AACSB Analytic | IMA Cost Management 6.
Washington Company has two independent divisions and uses a job order costing system. Washington made the following estimates at the beginning of the year: Direct labor hours Machine hours Direct labor costs Total budgeted manufacturing overhead
Division 1 50,000 75,000 $600,000 $ 90,000
Division 2 35,000 50,000 $250,000 $ 70,000
Manufacturing overhead is applied on the basis of machine hours in Division 1 and on the basis of labor hours in Division 2. During the current month, one job was completed (no jobs were in process at the beginning or end of the month). The following information is available for the completed job: Direct materials used Direct labor costs Direct labor hours Machine hours
Division 1 $12,000 $10,000 4,500 7,000
Division 2 $5,000 $8,000 3,000 4,000
Using the information above, compute the following items: a. b. c. d.
The predetermined overhead rate for each division. The amount of manufacturing overhead to be applied to the job. The total cost of the job. The amount of over- or underapplied manufacturing overhead for the month, assuming that actual manufacturing overhead for Division 1 and Division 2 was $9,000 and $5,000, respectively.
ANS: a.
b.
Division 1: Total budgeted manufacturing overhead Machine hours Predetermined overhead rate
$90,000 75,000 $1.20/hr
Division 2: Total budgeted manufacturing overhead Direct labor hours Predetermined overhead rate
$70,000 35,000 $2.00/hr
Division 1: Actual machine hours Predetermined overhead rate Applied manufacturing overhead
7,000 $1.20 $8,400
Division 2: Actual direct labor hours Predetermined overhead rate Applied manufacturing overhead
3,000 $2.00 $6,000
c.
Direct materials Direct labor Manufacturing overhead Total cost of job
d.
Actual manufacturing overhead Applied manufacturing overhead Underapplied (overapplied) manufacturing overhead
Division 1 $12,000 10,000 8,400 $30,400
Division 2 $ 5,000 8,000 6,000 $19,000
Total $17,000 18,000 14,400 $49,400
Division 1 $ 9,000 8,400 $ 600 underapplied
Division 2 $ 5,000 6,000 $(1,000) overapplied
Total $14,000 14,400 $ (400) overapplied
PTS: 1 DIF: Challenging OBJ: 16.2 NAT: AACSB Analytic | IMA Cost Management 7.
Abe's Automobile Manufacturing Company reported the following information for 2012: Beginning work-in-process inventory Beginning raw materials inventory Ending work-in-process inventory Ending raw materials inventory Raw materials purchased Direct labor Applied manufacturing overhead Prepare a Cost of Goods Manufactured Schedule, in good form, for Abe's Automobile Manufacturing Company for 2012.
$910,000 332,000 787,000 420,000 683,000 651,000 450,000
ANS: Abe's Automobile Manufacturing Company Cost of Goods Manufactured Schedule For the Year Ended December 31, 2012 Raw materials: Beginning raw materials inventory Add: Raw materials purchased Total raw materials available Less: Ending raw materials inventory Raw materials used in production Direct labor Applied manufacturing overhead Total manufacturing costs Add: Beginning work-in-process inventory Less: Ending work-in-process inventory Cost of goods manufactured
$ 332,000 683,000 $1,015,000 (420,000) $ 595,000 651,000 450,000 $1,696,000 910,000 (787,000) $1,819,000
PTS: 1 DIF: Medium OBJ: 16.3 NAT: AACSB Analytic | IMA Cost Management 8.
Use the following information to prepare a cost of goods manufactured schedule for Bellevue Company for the year ended December 31, 2012: Ending raw materials inventory Ending work-in-process inventory Depreciation-factory Direct labor Indirect labor Indirect materials Insurance-factory Beginning work-in-process inventory Beginning raw materials inventory Payroll taxes-factory Raw materials purchased Predetermined overhead rate
$40,800 52,800 16,800 84,000 10,000 14,400 18,000 64,800 36,000 16,800 76,800 85%
of direct labor cost
ANS: Bellevue Company Cost of Goods Manufactured Schedule For the Year Ended December 31, 2012 Raw materials: Beginning raw materials inventory Add: Raw materials purchased Total raw materials available Less: Ending raw materials inventory Raw materials used in production Direct labor Applied manufacturing overhead ($84,000 85%) Total manufacturing costs Add: Beginning work-in-process inventory Less: Ending work-in-process inventory. Cost of goods manufactured
$ 36,000 76,800 $112,800 (40,800) $ 72,000 84,000 71,400 $227,400 64,800 (52,800) $239,400
PTS: 1 DIF: Medium OBJ: 16.3 NAT: AACSB Analytic | IMA Cost Management 9.
Prepare the journal entries for the following transactions in a transportation company: a. b. c. d. e. f. g. h.
Purchased supplies costing $2,000 for cash. Used supplies costing $700. Incurred and paid 3,000 hours of direct labor and 1,000 hours of indirect labor. The average hourly wage rate for both direct and indirect labor is $10. Received and paid an insurance bill of $750. Made monthly rent payment of $2,500. Applied overhead at $5 per direct labor hour. All work-in-process services was moved to cost of services and customers were billed at a rate of $22 per direct labor hour. Closed all over- or underapplied overhead to Cost of Services.
ANS: a. b.
c.
Supplies Cash
2,000 2,000
Work-in-process services Supplies
700
Work-in-process services Wages payable (3,000 $10)
30,000
Overhead Wages payable (1,000 $10)
10,000
700
30,000
10,000
d.
e.
f.
g.
h.
Overhead Cash
750
Overhead Cash
2,500
Work-in-process services Overhead (3,000 $5)
15,000
Accounts receivable Service revenue (3,000 $22)
66,000
Cost of services Work-in-process services ($700 + $30,000 + $15,000)
45,700
Overhead Cost of services (10,000 + 750 + 2,500) 15,000
1,750
750
2,500
15,000
66,000
45,700
1,750
PTS: 1 DIF: Medium OBJ: 16.4 NAT: AACSB Analytic | IMA Cost Management 10.
Seven Peaks Inc. produces German sausage. The company uses process costing. All raw materials are added at the beginning of the mixing process. The following information relates to July operations and the work-in-process inventory account for Seven Peaks' final processing department: Beginning work-in-process:
500 pounds; 70% complete; $350 in direct materials; $700 in conversion costs Ending work-in-process: 350 pounds; 50% complete Current month: 5,500 pounds of sausage were started and completed; $12,000 raw materials were requisitioned; $3,000 incurred in conversion costs a. Compute the equivalent units of production for both direct materials and conversion costs. b. Compute the total production cost per pound for the month. ANS: a.
Equivalent Units of Production Direct Materials Costs Physical Equivalent Percent Units Units Done Beginning work-inprocess Started and completed Ending work-in-process Equivalent units of production Transferred out
500 5,500 350
0% 100% 100%
0 5,500 350 5,850
6,000
Conversion Costs Equivalent Percent Units Done 30% 100% 50%
150 5,500 175 5,825
b.
Product Costs Per Unit Total Costs Current Period Direct materials costs Conversion costs Total
Equivalent Units
Cost Per Unit
5,850 5,825
$2.05 .52 $2.57
$12,000 3,000 $15,000
PTS: 1 DIF: Medium OBJ: 16.5 NAT: AACSB Analytic | IMA Cost Management 11.
Seven Peaks Inc. produces German sausage. The company uses process costing. All raw materials are added at the beginning of the mixing process. The following information relates to July operations and the work-in-process inventory account for Seven Peaks' final processing department: Beginning work-in-process:
500 pounds; 70% complete; $350 in direct materials; $700 in conversion costs
Ending work-in-process:
350 pounds; 50% complete
Current month:
5,500 pounds of sausage were started and completed; $12,000 raw materials were requisitioned; $3,000 incurred in conversion costs
a. b.
Compute the costs transferred out for the month. Compute the total costs in ending work-in-process inventory.
ANS: a.
Equivalent Units of Production Direct Materials Costs Physical Equivalent Percent Units Units Done Beginning work-inprocess Started and completed Ending work-in-process Equivalent units of production Transferred out
500 5,500 350
0% 100% 100%
0 5,500 350
30% 100% 50%
5,850
150 5,500 175 5,825
6,000 Product Costs Per Unit Total Costs
Current Period Direct materials costs Conversion costs Total
Conversion Costs Equivalent Percent Units Done
$12,000 3,000 $15,000
Equivalent Units
Cost Per Unit
5,850 5,825
$2.05 0.52 $2.57
a.
and b.
Costs Transferred Out Cost Per Equivalent Unit Units
Beginning work-in-process Initial direct materials costs Initial conversion costs Costs to complete materials Costs to complete conversion Total Started and completed Total costs transferred out b.
$ $2.05 0.52
0 150
$2.57
5,500
Costs of Ending Work-in-Process Cost Per Equivalent Unit Units Costs for materials $2.05 350 Conversion costs $0.52 175 Cost of ending work-in-process TOTAL DOLLARS OUT
350.00 700.00 0 78.00 $ 1,128.00 14,135.00 $15,263.00
$
717.50 91.00 $ 808.50 $16,071.50
PTS: 1 DIF: Challenging OBJ: 16.5 NAT: AACSB Analytic | IMA Cost Management 12.
UniCom Manufacturing Company uses FIFO process costing. At the beginning of August, there were 500 units in beginning work-in-process that were 40% complete. In Process 1 all direct materials are added at the beginning of the process. The costs for the 500 units include $1,500 for direct materials and $2,000 for direct labor and conversion costs. During August, an additional 2,000 units entered Process 1. Costs incurred during August include $6,200 for direct materials and $19,200 for conversion costs. There were 200 units only 70% complete by the end of the month. Prepare a production cost report for the month of August. ANS: UniCom Manufacturing Company Process 1 Production Cost Report For the Month of August Equivalent Units of Production
Beginning work-in-process Started and completed Ending work-in-process Equiv. units of production Transferred out
Physical Units 500 1,800 200 2,300
Direct Materials Costs Percent Equiv. Done Units 0% 0 100% 1,800 100% 200 2,000
Conversion Costs Percent Equiv. Done Units 60% 300 100% 1,800 70% 140 2,240
Product Costs Per Unit Total Costs Beginning work-in-process Direct materials costs Conversion costs Total Current period Direct materials costs Conversion costs Total TOTAL DOLLARS IN
Equivalent Units
Cost Per Unit
$ 1,500 2,000 $ 3,500
500 200
$ 3.00 10.00 $13.00
$ 6,200 19,200 $25,400 $28,900
2,000 2,240
$ 3.10 8.57 $11.67
Costs Transferred Out Cost Per Unit Beginning work-in-process Initial direct materials costs Initial conversion costs Costs to complete materials Costs to complete conversion Total Started and completed Total costs transferred out
$ 3.10 8.57
0 300
$11.67
1,800
Costs of Ending Work-in-Process Cost Per Unit Costs for materials $3.10 Conversion costs $8.57 Cost of ending work-in-process TOTAL DOLLARS OUT *Difference due to rounding PTS: 1 DIF: Challenging OBJ: 16.5 NAT: AACSB Analytic | IMA Cost Management
Equivalent Units
Equivalent Units 200 140
$ 1,500 2,000 0 2,571 $ 6,071 21,006 $ 27,077
$
620 1,200 $ 1,820 $28,897*
Chapter 17—Activity-Based Costing MULTIPLE CHOICE 1.
Assume that direct labor and direct materials are the major cost components of a product and that the small amount of overhead cost can easily be associated with products using a simple overhead allocation basis such as direct labor hours. Which one of the following statements is the most correct? a. Activity-based costing should probably be used in this situation. b. Activity-based costing is probably too expensive to justify using it in this situation. c. Job order costing is probably too expensive to justify using it in this situation. d. None of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 17.1 NAT: AACSB Reflective Thinking | IMA Cost Management
2.
Historically, a plant-wide manufacturing overhead rate would usually be assigned on the basis of: a. Either direct tracing of overhead or direct labor hours b. Either direct labor hours or number of products produced c. Either cost pools or cost drivers d. Either cost drivers or direct tracing of overhead ANS: B PTS: 1 DIF: Easy OBJ: 17.1 NAT: AACSB Reflective Thinking | IMA Cost Management
3.
The allocation of which of the following can cause the greatest errors when computing product costs? a. Direct labor b. Manufacturing overhead c. Direct materials d. All of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 17.1 NAT: AACSB Reflective Thinking | IMA Cost Management
4.
Traditional product costing systems (e.g. job order costing and process costing) usually assume that: a. Products consume overhead costs b. Activities consume overhead costs c. Overhead costs are insignificant d. All of these are correct ANS: A PTS: 1 DIF: Easy OBJ: 17.1 NAT: AACSB Reflective Thinking | IMA Cost Management
5.
Activity-based costing systems assume that: a. Products consume overhead costs b. Activities consume overhead costs c. Overhead costs are insignificant d. All of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 17.1 NAT: AACSB Reflective Thinking | IMA Cost Management
6.
Which method for allocating manufacturing overhead costs is usually more accurate? a. Job order costing b. Activity-based costing c. Process costing d. Unit-based costing ANS: B PTS: 1 DIF: Easy OBJ: 17.1 NAT: AACSB Reflective Thinking | IMA Cost Management
7.
Activity-based costing deals with the allocation of: a. Direct labor costs b. Manufacturing overhead costs c. Direct material costs d. Indirect materials costs ANS: B PTS: 1 DIF: Easy OBJ: 17.1 NAT: AACSB Reflective Thinking | IMA Cost Management
8.
Activity-based costing differs from traditional product costing in the allocation of: a. Direct labor costs b. Direct material costs c. Manufacturing overhead costs d. All of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 17.1 NAT: AACSB Reflective Thinking | IMA Cost Management
9.
Activity-based costing is most useful when there are variations in: a. Production volume b. Size of products c. Complexity of products d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 17.1 NAT: AACSB Reflective Thinking | IMA Cost Management
10.
Usually activity-based costing would be significantly more accurate than traditional product costing in a: a. One-product firm b. Multiple-product firm that has separate manufacturing facilities for each product c. Multiple-product firm where products are quite similar d. Multiple-product firm where products are quite different ANS: D PTS: 1 DIF: Easy OBJ: 17.1 NAT: AACSB Reflective Thinking | IMA Cost Management
11.
Which of the following types of costing systems identifies business activities that create overhead costs and then assigns overhead to products or divisions according to these activities? a. Unit-based costing b. Job order costing c. Activity-based costing d. Process costing ANS: C PTS: 1 DIF: Easy OBJ: 17.1 NAT: AACSB Reflective Thinking | IMA Cost Management
12.
Which of the following is the correct sequence of the five steps of implementing and using an activity-based costing system? a. Identify overhead cost activities, identify measurable cost drivers, assign overhead, analyze individual overhead costs in terms of those cost activities, and use the cost data to make decisions b. Use the cost data to make decisions, analyze individual overhead costs in terms of those cost activities, identify measurable cost drivers, assign overhead, and identify overhead cost activities c. Identify overhead cost activities, analyze individual overhead costs in terms of those cost activities, identify measurable cost drivers, assign overhead, and use the cost data to make decisions d. Identify measurable cost drivers, assign overhead, identify overhead cost activities, analyze individual overhead costs in terms of those cost activities, and use the cost data to make decisions ANS: C PTS: 1 DIF: Easy OBJ: 17.1 NAT: AACSB Reflective Thinking | IMA Cost Management
13.
Which of the following costs is usually NOT directly attributable to specific products? a. Direct materials b. Sales commissions c. Direct labor d. Property taxes ANS: D PTS: 1 DIF: Easy OBJ: 17.2 NAT: AACSB Reflective Thinking | IMA Cost Management
14.
Which of the following activities would most likely NOT be considered a batch activity: a. Hours required for set-up b. Accounting for materials c. Storage in warehouse d. Hours required for inspection ANS: C PTS: 1 DIF: Easy OBJ: 17.2 NAT: AACSB Reflective Thinking | IMA Cost Management
15.
Tracing overhead costs to activities involves dividing overhead costs into: a. Cost pools b. Cost drivers c. Pool rates d. Overhead rates ANS: A PTS: 1 DIF: Easy OBJ: 17.2 NAT: AACSB Reflective Thinking | IMA Cost Management
16.
For greater accuracy when using activity-based costing, management accountants should: a. Use the just-in-time inventory system b. Carefully estimate the total amount of overhead costs c. Compute a plant-wide rate of allocation based on volume d. Have a larger number of cost pools ANS: D PTS: 1 DIF: Easy OBJ: 17.2 NAT: AACSB Reflective Thinking | IMA Cost Management
17.
If activity-based costing is used, purchase orders would be classified as a: a. Unit-level activity b. Batch-level activity c. Product line activity d. Facility support activity ANS: B PTS: 1 DIF: Easy OBJ: 17.2 NAT: AACSB Reflective Thinking | IMA Cost Management
18.
If activity-based costing is used, assembly would be classified as a: a. Unit-level activity b. Batch-level activity c. Product line activity d. Facility support activity ANS: A PTS: 1 DIF: Easy OBJ: 17.2 NAT: AACSB Reflective Thinking | IMA Cost Management
19.
If activity-based costing is used, receiving docks would be classified as a: a. Unit-level activity b. Batch-level activity c. Product line activity d. Facility support activity ANS: C PTS: 1 DIF: Easy OBJ: 17.2 NAT: AACSB Reflective Thinking | IMA Cost Management
20.
If activity-based costing is used, property taxes would be classified as a: a. Unit-level activity b. Batch-level activity c. Product line activity d. Facility support activity ANS: D PTS: 1 DIF: Easy OBJ: 17.2 NAT: AACSB Reflective Thinking | IMA Cost Management
21.
Which of the following would most likely NOT be considered a source of a product line activity? a. Product manager b. In-house training for special services c. Depreciation on the product warehouse d. Maintenance of machinery ANS: B PTS: 1 DIF: Easy OBJ: 17.2 NAT: AACSB Reflective Thinking | IMA Cost Management
22.
When using activity-based costing, the cost associated with producing each batch is an example of a: a. Cost driver b. Cost pool c. Pool rate d. Unit cost ANS: B PTS: 1 DIF: Easy OBJ: 17.2 NAT: AACSB Reflective Thinking | IMA Cost Management
23.
Which of the following would most likely NOT be considered a facility support activity? a. Property taxes b. Factory equipment c. Depreciation on headquarters building d. Executive salaries ANS: B PTS: 1 DIF: Easy OBJ: 17.2 NAT: AACSB Reflective Thinking | IMA Cost Management Exhibit 17-1 Maggie's Motors manufactures boat motors. Maggie is shifting from a traditional costing system to an activity-based costing system. She has started by identifying four overhead cost activities. Listed below is the table that Maggie created identifying the cost activities and the percentage of time spent on each activity by various factory employees.
Maintenance person Production foreman Factory superintendent Accountant
Ordering parts 0% 15% 10% 50%
Repairing equipment 75% 15% 0% 0%
Inspecting motors 0% 40% 50% 0%
Engineering changes 25% 30% 40% 50%
Maggie also gathered the total overhead cost associated with each factory employee which is shown below: Maintenance person Production foreman Factory superintendent Accountant 24.
$ 75,000 90,000 105,000 85,000
Refer to Exhibit 17-1. Using the information above, compute the amount of the cost pool associated with ordering parts. a. $88,500 b. $69,750 c. $85,000 d. $66,500 ANS: D Cost pool for ordering parts: ($90,000 15%) + ($105,000 10%) + ($85,000 50%) = $66,500 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
25.
17.2
Refer to Exhibit 17-1. Using the information above, compute the amount of the cost pool associated with repairing equipment. a. $88,500 b. $69,750 c. $85,000 d. $66,500 ANS: B Cost pool for repairing equipment: ($75,000 75%) + ($90,000 15%) = $69,750 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
17.2
26.
Refer to Exhibit 17-1. Using the information above, compute the amount of the cost pool associated with engineering changes. a. $130,250 b. $105,000 c. $88,500 d. $66,500 ANS: A Cost pool for engineering changes: ($75,000 25%) + ($90,000 30%) + ($105,000 40%) + ($85,000 50%) = $130,250 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
27.
17.2
A more accurate allocation of manufacturing overhead and product costing can take place when costs are assigned on the basis of: a. Direct labor hours b. Machine setups c. Cost drivers d. Production volume ANS: C PTS: 1 DIF: Easy OBJ: 17.3 NAT: AACSB Reflective Thinking | IMA Cost Management
28.
An activity that affects a particular cost is a(n): a. Cost pool b. Cost driver c. Pool rate d. Overhead rate ANS: B PTS: 1 DIF: Easy OBJ: 17.3 NAT: AACSB Reflective Thinking | IMA Cost Management
29.
Which of the following is an example of a cost driver? a. Engineering b. Machine setups c. Maintenance d. Procurement ANS: B PTS: 1 DIF: Easy OBJ: 17.3 NAT: AACSB Reflective Thinking | IMA Cost Management
30.
Company A allocates one type of overhead cost on the basis of movement of materials. The number of movement of materials processed is an example of a(n): a. Cost driver b. Pool rate c. Overhead rate d. Cost pool ANS: A PTS: 1 DIF: Easy OBJ: 17.3 NAT: AACSB Reflective Thinking | IMA Cost Management
31.
The traditional overhead cost allocation system focuses the accumulation of overhead cost on: a. Cost pools b. Cost drivers c. Products d. Pool rate ANS: C PTS: 1 DIF: Easy OBJ: 17.3 NAT: AACSB Reflective Thinking | IMA Cost Management
32.
Number of purchase orders is an example of a(n): a. Cost driver b. Cost pool c. Allocation rate d. Pool rate ANS: A PTS: 1 DIF: Easy OBJ: 17.3 NAT: AACSB Reflective Thinking | IMA Cost Management
33.
With activity-based costing, overhead costs are assigned using: a. Product costs b. Cash flows c. Cost drivers d. Direct labor hours ANS: C PTS: 1 DIF: Easy OBJ: 17.3 NAT: AACSB Reflective Thinking | IMA Cost Management
34.
When assigning cost drivers to facility support activities, an appropriate cost driver would be: a. Production output b. Labor hours c. Floor space d. No cost driver should be assigned ANS: C PTS: 1 DIF: Easy OBJ: 17.3 NAT: AACSB Reflective Thinking | IMA Cost Management
35.
If a cost activity does NOT have any production-related cost driver that matches up with changes in the amount of overhead cost associated with the activity then: a. Any basis can be selected as a cost driver b. Direct labor hours should be used as the cost driver c. No cost driver should be selected; the costs should be treated as common costs d. Number of items produced should be the cost driver. ANS: C PTS: 1 DIF: Easy OBJ: NAT: AACSB Reflective Thinking | IMA Cost Management
36.
17.3
An appropriate cost driver for inspection costs is: a. Number of inspected products sold b. Quantity of items produced c. Direct labor hours d. Number of inspections completed ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Cost Management
OBJ:
17.3
37.
An appropriate cost driver for engineering changes is: a. Number of employees b. Number of set-ups performed c. Direct labor hours d. Quantity of items produced ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Cost Management
OBJ:
17.3
Exhibit 17-2 BigView Monitors manufactures three different sizes of computer monitors: 15-inch, 17-inch, and 20-inch. The company has recently implemented an activity-based costing system. BigView has identified five different production activities as well as the best cost driver for each activity. Each activity and driver is listed below, along with the budgeted amount that is associated with each activity for next year. Activity Parts handling Parts insertion Automated processing Testing Packaging Total indirect manufacturing cost
Budgeted Costs $ 90,000 990,000 336,000 68,000 68,000 $1,552,000
Cost Driver Number of parts Number of parts Machine hours Labor hours Orders shipped
The following information relates to each size of monitor and next year's anticipated manufacturing operations: 20-inch 2,000 200 30 4 2
Units to be produced Orders to be shipped Number of parts per unit Machine hours per unit Labor hours per unit 38.
17-inch 3,000 500 20 2 2
Refer to Exhibit 17-2. What is BigView's cost per cost driver for parts handling for next year (rounded)? a. $0.17 per part b. $0.53 per part c. $9.00 per part d. $15.00 per part ANS: B Total number of parts: Cost per part:
(2,000 30) + (3,000 20) + (5,000 10) = 170,000 $90,000 170,000 = $0.53 (rounded)
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
17.4
15-inch 5,000 800 10 1 2
39.
Refer to Exhibit 17-2. What is BigView's cost per cost driver for automated processing for next year (rounded)? a. $9.00 per machine hour b. $16.80 per machine hour c. $17.68 per machine hour d. $33.60 per machine hour ANS: C Total machine hours: Cost per machine hour:
(4 2,000) + (2 3,000) + 5,000 = 19,000 hrs. $336,000 19,000 = $17.68 (rounded)
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 40.
Refer to Exhibit 17-2. What is BigView's cost per cost driver for testing for next year (rounded)? a. $1.33 per labor hour b. $3.40 per labor hour c. $3.58 per labor hour d. $6.80 per labor hour ANS: B Total labor hours: Cost per labor hour:
(2,000 2) + (3,000 2) + (5,000 2) = 20,000 $68,000 20,000 = $3.40 (rounded)
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 41.
17.4
17.4
Refer to Exhibit 17-2. Under an activity-based product costing system, what is the per unit cost for manufacturing overhead of 15-inch monitors (rounded)? a. $95 b. $155 c. $177 d. $273
ANS: A Cost per cost driver: Total Cost Driver 20-inch 17-inch 15-inch Total costs Number of parts 60,000 60,000 50,000 170,000 $ 90,000 (parts handling) Number of parts 60,000 60,000 50,000 170,000 990,000 (parts insertion) Machine hours 8,000 6,000 5,000 19,000 336,000 Labor hours 4,000 6,000 10,000 20,000 68,000 Orders shipped 200 500 800 1,500 68,000 Total manufacturing overhead cost for 15-inch monitors: Cost per Number of Activity driver drivers Parts handling $ 0.53 50,000 Parts insertion 5.82 50,000 Automated processing 17.68 5,000 Testing 3.40 10,000 Packaging 45.33 800 Total
Cost per driver $ 0.53 5.82 17.68 3.40 45.33
Total $ 26,500 291,000 88,400 34,000 36,264 $476,164
Manufacturing cost per unit: $476,164 5,000 = $95 (rounded) PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Cost Management 42.
17.4
Refer to Exhibit 17-2. Under an activity-based product costing system, what is the per unit cost for manufacturing overhead of 17-inch monitors (rounded)? a. $95 b. $155 c. $177 d. $273 ANS: C Cost per cost driver: Cost Driver Number of parts (parts handling) Number of parts (parts insertion) Machine hours Labor hours Orders shipped
20-inch 60,000
17-inch 60,000
15-inch 50,000
Total 170,000
Total costs $ 90,000
Cost per driver $ 0.53
60,000
60,000
50,000
170,000
990,000
5.82
8,000 4,000 200
6,000 6,000 500
5,000 10,000 800
19,000 20,000 1,500
336,000 68,000 68,000
17.68 3.40 45.33
Total manufacturing overhead cost for 17-inch monitors: Cost per Activity driver Parts handling $ 0.53 Parts insertion 5.82 Automated processing 17.68 Testing 3.40 Packaging 45.33 Total
Number of drivers 60,000 60,000 6,000 6,000 500
Total $ 31,800 349,200 106,080 20,400 22,665 $530,145
Manufacturing cost per unit: $530,145 3,000 = $177 (rounded) PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Cost Management 43.
17.4
Refer to Exhibit 17-2. Under an activity-based product costing system, what is the per unit cost for manufacturing overhead of 20-inch monitors (rounded)? a. $95 b. $155 c. $177 d. $273 ANS: D Cost per cost driver: Cost Driver Number of parts (parts handling) Number of parts (parts insertion) Machine hours Labor hours Orders shipped
20-inch 60,000
17-inch 60,000
15-inch 50,000
Total 170,000
Total costs $ 90,000
Cost per driver $ 0.53
60,000
60,000
50,000
170,000
990,000
5.82
8,000 4,000 200
6,000 6,000 500
5,000 10,000 800
19,000 20,000 1,500
336,000 68,000 68,000
17.68 3.40 45.33
Total manufacturing overhead cost for 20-inch monitors: Cost per Activity driver Parts handling $ 0.53 Parts insertion 5.82 Automated processing 17.68 Testing 3.40 Packaging 45.33 Total Manufacturing cost per unit: $545,106 2,000 = $273 (rounded) PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Cost Management
17.4
Number of drivers 60,000 60,000 8,000 4,000 200
Total $ 31,800 349,200 141,440 13,600 9,066 $545,106
Exhibit 17-3 Bird's Eye View manufactures three different sizes of bird cages: small (for finches and canaries), medium (for cockatiels and small parrots), and large (for cockatoos and other large parrots). The company has recently implemented an activity-based costing system. Bird's Eye View has identified five different production activities as well as the best cost driver for each activity. Each activity and driver is listed below, along with the budgeted amount that is associated with each activity for next year.
Activity Materials handling Automated processing Plastic parts insertion Inspections Packaging Total indirect manufacturing cost
Cost Driver Labor hours Machine hours Number of parts Labor hours Orders shipped
Budgeted Costs $ 55,000 40,000 6,000 29,000 31,000 $161,000
The following information relates to each size of bird cage and next year's anticipated manufacturing operations: Large 350 180 8 4 2
Units to be produced Orders to be shipped Number of parts per unit Machine hours per unit Labor hours per unit 44.
Small 600 250 4 1 2
Refer to Exhibit 17-3. What is Bird's Eye View cost per cost driver for parts insertion for next year (rounded)? a. $0.25 per part b. $0.79 per part c. $7.56 per part d. $21.18 per part ANS: B Total number of parts: Cost per part:
(350 8) + (400 6) + (600 4) = 7,600 $6,000 7,600 = $0.79 (rounded)
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 45.
Medium 400 200 6 2 2
17.4
Refer to Exhibit 17-3. What is Bird's Eye View cost per cost driver for automated processing for next year (rounded)? a. $4.23 per part b. $10.36 per part c. $14.29 per part d. $29.63 per part ANS: C Total machine hours: (350 4) + (400 2) + (600 1) = 2,800 Cost per machine hour: $40,000 2,800 = $14.29 (rounded) PTS: 1 DIF: Medium OBJ: 17.4 NAT: AACSB Analytic | IMA Cost Management
46.
Refer to Exhibit 17-3. What is Bird's Eye View cost per cost driver for inspections for next year (rounded)? a. $1.18 per part b. $3.58 per part c. $10.74 per part d. $11.48 per part ANS: C Total labor hours: Cost per labor hour:
(350 2) + (400 2) + (600 2) = 2,700 $29,000 2,700 = $10.74 (rounded)
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 47.
17.4
Refer to Exhibit 17-3. Under an activity-based costing system, what is the per unit cost for manufacturing overhead of a small cage (rounded)? a. $100 b. $119 c. $120 d. $151 ANS: A Cost per cost driver: Cost Driver Labor hours (materials) Machine hours Number of parts Labor hours (inspections) Orders shipped
Large 700
Medium 800
Small 1,200
Total 2,700
Total costs $55,000
Cost per driver $20.37
1,400 2,800 700
800 2,400 800
600 2,400 1,200
2,800 7,600 2,700
40,000 6,000 29,000
14.29 0.79 10.74
180
200
250
630
31,000
49.21
Total manufacturing overhead cost of small cages: Activity Materials handling Automated processing Plastic parts insertion Inspections Packaging Total
Cost per driver $20.37 14.29 0.79 10.74 49.21
Manufacturing cost per unit: $60,105 600 = $100 (rounded) PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Cost Management
17.4
Number of drivers 1,200 600 2,400 1,200 250
Total $24,444 8,574 1,896 12,888 12,303 $60,105
48.
Refer to Exhibit 17-3. Under an activity-based costing system, what is the per unit cost for manufacturing overhead of a medium cage (rounded)? a. $100 b. $119 c. $120 d. $151 ANS: C Cost per cost driver: Total Cost Driver Large Medium Small Total costs Labor hours 700 800 1,200 2,700 $55,000 (materials) 1,400 800 600 2,800 40,000 Machine hours Number of parts 2,800 2,400 2,400 7,600 6,000 Labor hours 700 800 1,200 2,700 29,000 (inspections) 180 200 250 630 31,000 Orders shipped Total manufacturing overhead cost of medium cages: Cost per Number of Activity driver drivers Materials handling $20.37 800 Automated processing 14.29 800 Plastic parts insertion 0.79 2,400 Inspections 10.74 800 Packaging 49.21 200 Total
Cost per driver $20.37 14.29 0.79 10.74 49.21
Total $16,296 11,432 1,896 8,592 9,842 $48,058
Manufacturing cost per unit: $48,058 400 = $120 (rounded) PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Cost Management 49.
17.4
Refer to Exhibit 17-3. Under an activity-based costing system, what is the per unit cost for manufacturing overhead of a large cage (rounded)? a. $100 b. $119 c. $120 d. $151
ANS: D Cost per cost driver: Total Cost Driver Large Medium Small Total costs Labor hours 700 800 1,200 2,700 $55,000 (materials) Machine hours 1,400 800 600 2,800 40,000 Number of parts 2,800 2,400 2,400 7,600 6,000 Labor hours 700 800 1,200 2,700 29,000 (inspections) Orders shipped 180 200 250 630 31,000 Total manufacturing overhead cost of large cages: Cost per Number of Activity driver drivers Materials handling $20.37 700 Automated processing 14.29 1,400 Plastic parts insertion 0.79 2,800 Inspections 10.74 700 Packaging 49.21 180 Total
Cost per driver $20.37 14.29 0.79 10.74 49.21
Total $14,259 20,006 2,212 7,518 8,858 $52,853
Manufacturing cost per unit: $52,853 350 = $151 (rounded) PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Cost Management
17.4
Exhibit 17-4 The Dormir Company uses an activity-based costing system to account for its process of manufacturing camping tents. Each tent has $140 of direct materials, includes 15 parts, and requires 3 hours of machine time. Information on conversion costs, manufacturing activities, and cost drivers is listed below. Manufacturing Activity Material handling Sewing Assembling Testing 50.
Cost Driver Number of parts Machine hours Number of parts Number of finished units
Refer to Exhibit 17-4. The cost of material handling per tent is: a. $3.00 b. $15.00 c. $45.00 d. $120.00 ANS: C Cost of material handling: 15 parts $3 = $45 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
17.4
Cost Per Unit $ 3.00 20.00 1.00 8.00
51.
Refer to Exhibit 17-4. The cost of sewing per tent is: a. $20.00 b. $60.00 c. $160.00 d. $300.00 ANS: B Cost of sewing per tent: 3 hrs $20 = $60 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
52.
17.4
Refer to Exhibit 17-4. The cost of assembling per tent is: a. $3.00 b. $15.00 c. $20.00 d. $45.00 ANS: B Cost of assembling per tent: 15 $1.00 = $15 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
53.
17.4
Refer to Exhibit 17-4. The total manufacturing cost per tent is: a. $128 b. $140 c. $255 d. $268 ANS: D Total manufacturing cost: $140 + (15 $3) + (3 $20) + (15 $1) + 8 = $268 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
54.
The result of cross-subsidization is that: a. Some products look less profitable than they really are b. Some products look more profitable than they really are c. Both a and b d. Neither a nor b ANS: C PTS: 1 DIF: Easy OBJ: NAT: AACSB Analytic | IMA Cost Management
55.
17.4
17.5
Which of the following products usually consumes the highest amount of overhead costs per unit? a. High-volume standard products b. Low-volume standard products c. High-volume unique products d. Low-volume unique products ANS: D PTS: 1 DIF: Easy OBJ: 17.5 NAT: AACSB Reflective Thinking | IMA Cost Management
Exhibit 17-5 The following information is available for Dakota Company: Product 1 Product 2 Sales $1,400,000 $1,800,000 Direct materials (200,000) (400,000) Direct labor (600,000) (600,000) Manufacturing overhead* (500,000) (500,000) Gross margin $ 100,000 $ 300,000 *allocated based on direct labor hours Dakota Company has decided to allocate its manufacturing overhead cost using activity-based costing. Manufacturing overhead will be allocated based on batch-level and product line manufacturing as follows:
Batch-level manufacturing overhead Product line manufacturing overhead 56.
Total Manufacturing Overhead Costs $600,000 $400,000
Product 1 20 batches 10 lines
Product 2 60 batches 40 lines
Refer to Exhibit 17-5. What is Dakota Company's gross margin for Product 1 using activity based costing? a. $400,000 b. $370,000 c. $450,000 d. $520,000 ANS: B Batch-level cost per batch: Product line cost per product line: Manufacturing overhead for Product 1: Gross margin for Product 1:
$600,000 80 batches = $7,500 $400,000 50 lines = $8,000 ($7,500 20) + ($8,000 10) = $230,000 $1,400,000 $200,000 $600,000 $230,000 = $370,000
PTS: 1 DIF: Medium OBJ: 17.5 NAT: AACSB Reflective Thinking | IMA Cost Management 57.
Refer to Exhibit 17-5. What is Dakota Company's gross margin for Product 2 using activity based costing? a. $300,000 b. $350,000 c. $480,000 d. $30,000 ANS: D Batch-level cost per batch: Product line cost per product line: Manufacturing overhead for Product 2: Gross margin for Product 2:
$600,000 80 batches = $7,500 $400,000 50 lines = $8,000 ($7,500 60) + ($8,000 40) = $770,000 $1,800,000 $400,000 $600,000 $770,000 = $30,000
PTS: 1 DIF: Medium OBJ: 17.5 NAT: AACSB Reflective Thinking | IMA Cost Management
PROBLEM 1.
Define activity-based costing and list the five steps in implementing and using an activity-based costing system. ANS: Activity-based costing is a method of attributing overhead costs to products based on measurable factors that relate to activities that create overhead costs. Steps in implementing and using an activity-based costing system: 1. Identify overhead cost activities 2. Analyze individual overhead costs in terms of those cost activities 3. Identify measurable cost drivers 4. Assign overhead 5. Use the activity-based costing data to make decisions PTS: 1 DIF: Easy OBJ: 17.1 NAT: AACSB Reflective Thinking | IMA Cost Management
2.
BigPlay Company manufactures playground equipment. BigPlay is shifting from a traditional costing system to an activity-based costing system. The company started by identifying four overhead cost activities. Listed below is the table that the controller for BigPlay created identifying the cost activities and the percentage of time spent on each activity by various factory employees.
Maintenance people Production foreman Factory superintendent Accounting Department
Hiring and training workers 0% 60% 10% 60%
Ordering equipment 0% 15% 40% 0%
Assembling structures 70% 10% 20% 0%
Engineering changes 30% 15% 30% 40%
BigPlay's controller also gathered the total overhead cost associated with each factory employee which is shown below: Maintenance people Production foreman Factory superintendent Accounting Department
$ 90,000 110,000 125,000 90,000
From the information given, compute the amount of the cost pool associated with each of the four overhead cost activities. ANS: Cost pool for hiring and training workers: ($110,000 60%) + ($125,000 10%) + ($90,000 60%) = $132,500 b. Cost pool for ordering equipment: ($110,000 15%) + ($125,000 40%) = $66,500 c. Cost pool for assembling structures: ($90,000 70%) + ($110,000 10%) + ($125,000 20%) = $99,000 d. Cost pool for engineering changes: ($90,000 30%) + ($110,000 15%) + ($125,000 30%) + ($90,000 40%) = $117,000 PTS: 1 DIF: Medium OBJ: 17.2 NAT: AACSB Analytic | IMA Cost Management a.
3.
In the spaces provided, write the letter of the cost driver that best matches the overhead activity. A. B. C. D. E. F. G. H.
Number of product setups Number of inspections Number of parts used Number of machine hours used Receiving orders per product line Number of maintenance hours worked in each division Number of engineering changes Amount of machine floor space
1. Receiving costs 2. Inspection costs 3. Engineering design 4. Setup costs 5. Material handling 6. Maintenance costs 7. Building lease 8. Machine depreciation ANS: 1. 2. 3. 4. 5. 6. 7. 8.
E B G A C F H D
PTS: 1 DIF: Easy OBJ: 17.3 NAT: AACSB Reflective Thinking | IMA Cost Management 4.
Jantar Company makes three different styles of kitchen tables: round, oblong, and rectangle. The following information is provided about the company's costs: Round 500
Tables made Overhead Allocation Quality control Maintenance Machine depreciation
Overhead Cost $22,000 45,000 27,000
Cost Drivers Total number of setups Total maintenance hours worked in each area of production Number of cuts per unit
Oblong 600
Rectangle 300
Cost Drivers Number of setups Number of hours worked in each production area Number of cuts Round 7
Oblong 9
Rectangle 4
45 15
50 20
30 10
Determine the overhead cost per unit for each cost driver.
ANS: Cost per unit of cost driver (rounded): Cost Drivers Number of setups Maintenance hours worked Number of cuts
5.
Round Oblong 7 9 45 7,500
50 12,000
Rectangle 4
Total Drivers 20
Total Costs $22,000
Cost Per Unit $1,100.00
30 3,000
125 22,500
45,000 27,000
360.00 1.20
PTS: 1 DIF: Medium OBJ: 17.4 NAT: AACSB Analytic | IMA Cost Management Carolina manufactures two products. The following information is available concerning the manufacturing overhead costs: Overhead Costs Administration Building lease Equipment depreciation Engineering costs Maintenance
Cost $ 456,210 4,536,000 280,800 223,200 384,408 $5,880,618
Cost Drivers Production volume Machine floor space Machine hours Engineering hours Machine hours Product AB 13,400 60,000 30 80
Production volume Machine floor space Machine hours per unit Total engineering hours a. b. c.
Product YZ 17,600 140,000 70 400
Compute the overhead cost per unit for each cost driver. Compute the total overhead cost for both Product AB and Product YZ. Compute the unit overhead cost per unit for Product AB and Product YZ.
ANS: a.
Unit cost per cost driver (rounded):
Production volume Machine floor space Machine hours Engineering hours b.
AB 13,400 60,000 402,000 80
YZ 17,600 140,000 1,232,000 400
Total 31,000 200,000 1,634,000 480
Total Cost $ 456,210 4,536,000 665,208 223,200
Cost Per Driver $ 14.72 22.68 0.41 465.00
and c. Total overhead and unit overhead costs (rounded):
Production volume Machine floor space Machine hours Engineering hours Total overhead costs for Product AB Unit overhead costs per Product AB
AB 13,400 60,000 402,000 80
Cost Per Driver $ 14.72 22.68 0.41 465.00
Total $ 197,248 1,360,800 164,820 37,200 $1,760,068 $131.35
Production volume Machine floor space Machine hours Engineering hours Total overhead costs for Product YZ Unit overhead costs per Product YZ PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 6.
Cost Per Driver $ 14.72 22.68 0.41 465.00
YZ 17,600 140,000 1,232,000 400
Total $ 259,072 3,175,200 505,120 186,000 $4,125,392 $234.40
17.4
Custom Woods Inc. makes three different door styles for kitchen cabinets: standard, flat panel, and raised panel. The following information is provided about the company's costs: Standard 4,250 $19,125 $42,500
Doors made Direct materials Direct labor Overhead Cost $13,440 12,384 25,456
Overhead Allocation Quality control Maintenance Machine depreciation
Raised Panel 2,964 $20,007 $56,316
Cost Drivers Number of setups Number of hours worked in each production area Number of cuts
Cost Drivers Total number of setups Total maintenance hours worked in each area of production Number of cuts per unit a. b. c.
Flat Panel 3,052 $11,445 $42,728
Standard 2
Flat Panel 5
Raised Panel 8
36 6
48 22
60 26
Determine the overhead cost per unit for each cost driver. Determine the overhead cost for each door style. Determine the total cost per door.
ANS: a.
Cost per unit of cost driver (rounded): Cost Drivers Number of setups Maintenance hours worked Number of cuts
b.
Standard 2
Flat Panel 5
Raised Panel 8
Total Drivers 15
Total Costs $13,440
Cost Per Unit $896.00
36 25,500
48 67,144
60 77,064
144 169,708
12,384 25,456
86.00 0.15
Overhead cost per door style: Standard Number of setups Maintenance hrs worked Number of cuts Total overhead costs
Flat Panel
Raised Panel
2 $896
$1,792
5 $896
$ 4,480
8 $896
$ 7,168
36 $86 25,500 .15
3,096 3,825
48 $86 67,144 .15
4,128 10,072
60 $86 77,064 .15
5,160 11,560
$8,713
$18,680
$23,888
c.
Total cost per door (rounded):
Standard Direct materials $19,125 Direct labor 42,500 Overhead 8,713 Total costs $70,338 Total doors 4,250 Cost per door $ 16.55 PTS: 1 DIF: Medium OBJ: 17.4 NAT: AACSB Analytic | IMA Cost Management 7.
Flat Panel $11,445 42,728 18,680 $72,853 3,052 $ 23.87
Raised Panel $ 20,007 56,316 23,888 $100,211 2,964 $ 33.81
Westvaco Inc. has two divisions. Gross profit computations for these two divisions for the year 2012 are given below:
Sales Direct materials Direct labor Manufacturing overhead* Gross Profit
Foods Division $ 450,000 (150,000) (150,000) (200,000) $ (50,000)
Goods Division $ 550,000 (75,000) (150,000) (200,000) $ 125,000
*Manufacturing overhead is allocated to products based on the amount of direct labor dollars. Westvaco has determined that its total manufacturing overhead cost of $400,000 is a mixture of batch-level and product line costs. The following information has been assembled regarding overhead: Total Foods Goods Overhead Division Division Batch-level overhead $250,000 12 batches 38 batches Product line overhead $150,000 10 lines 30 lines a. Prepare gross profit calculations for Westvaco's two divisions assuming that manufacturing overhead is allocated based on the number of batches and number of product lines. b. Under the direct labor dollar method of overhead allocation, which division received costs from another division and what was the amount of that cost?
ANS: a. Manufacturing overhead costs Total units of activity Overhead application rate Overhead applied to Foods Division Overhead applied to Goods Division
Batch $250,000 50 batches $5,000/batch 12 $5,000 $60,000 38 $5,000 $190,000
Foods Division $ 450,000 (150,000) (150,000) (97,500) $ 52,500
Sales Direct materials Direct labor Manufacturing overhead Gross Profit b.
Product line $150,000 40 lines $3,750/line 10 $3,750 $37,500 30 $3,750 $112,500
Total $400,000
$ 97,500 $302,500 Goods Division $ 550,000 (75,000) (150,000) (302,500) $ 22,500
The Foods Division received costs of $102,500 ($125,000 22,500) from the Goods Division.
PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Cost Management
17.5
Chapter 18—Budgeting and Control MULTIPLE CHOICE 1.
The overall purpose of a budget is to: a. Develop a plan to meet a specified goal b. Determine disposable income c. Allow ongoing comparison between actual results and a specified plan d. To develop a plan to meet specified goals and allow ongoing comparison between actual results and a specified plan ANS: D PTS: 1 DIF: Easy OBJ: 18.1 NAT: AACSB Reflective Thinking | IMA Budget Preparation
2.
In a personal budget, the amount of income left after covering the withdrawals and fixed expenditures is referred to as: a. Necessary expenditures b. Disposable income c. Retirement savings d. Federal withholdings ANS: B PTS: 1 DIF: Easy OBJ: 18.1 NAT: AACSB Reflective Thinking | IMA Budget Preparation
3.
Which of the following is a characteristic of good personal budgeters? a. Disorganized b. Inflexible c. Undisciplined d. Goal oriented ANS: D PTS: 1 DIF: Easy OBJ: 18.1 NAT: AACSB Reflective Thinking | IMA Budget Preparation
4.
Top management's broad, long-range goals are found in: a. The strategic plan b. The capital budget c. The operating budget d. The sales budget ANS: A PTS: 1 DIF: Easy OBJ: 18.2 NAT: AACSB Reflective Thinking | IMA Budget Preparation
5.
The budget that details immediate goals for revenues, production, expenses, and cash for the next period is called: a. The strategic plan b. The capital budget c. The operating budget d. The sales budget ANS: C PTS: 1 DIF: Easy OBJ: 18.2 NAT: AACSB Reflective Thinking | IMA Budget Preparation
6.
Budgeting assists management in which of the following areas? a. Planning and setting objectives b. Motivation c. Performance measurement d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 18.2 NAT: AACSB Reflective Thinking | IMA Budget Preparation
7.
From a behavioral viewpoint, it is desirable that the operating budget: a. Be prepared only by top management b. Have considerable slack built into it c. Have the support of top management d. Be set at a level that is difficult to achieve, for maximum motivation ANS: C PTS: 1 DIF: Easy OBJ: 18.2 NAT: AACSB Reflective Thinking | IMA Budget Preparation
8.
A budget committee includes: a. Department managers and key employees for each department b. Divisional managers c. Vice presidents for sales, production, purchasing and finance and the controller d. President, vice president and director of each region ANS: C PTS: 1 DIF: Easy OBJ: 18.2 NAT: AACSB Reflective Thinking | IMA Budget Preparation
9.
Which of the following is NOT an advantage of bottom-up budgeting as compared to top-down budgeting? a. Segment managers know the strategic direction b. Segment managers have the best information about current operations c. Participation in the process can lead to positive motivation d. It is good training for managers ANS: A PTS: 1 DIF: Easy OBJ: 18.2 NAT: AACSB Reflective Thinking | IMA Budget Preparation
10.
To develop a budget that has the proper behavioral considerations, management must ensure all of the following EXCEPT: a. Participation by as many managers and employees as possible b. Constructive response to budget deviations c. Support of the budget process by top management d. Plenty of slack in the budget ANS: D PTS: 1 DIF: Easy OBJ: 18.2 NAT: AACSB Reflective Thinking | IMA Budget Preparation
11.
What is budgetary slack? a. Deviations from the budget b. A budget with easy targets c. Budget process not supported by top management d. A bottom-up approach to budgeting ANS: B PTS: 1 DIF: Easy OBJ: 18.2 NAT: AACSB Reflective Thinking | IMA Budget Preparation
12.
Which of the following budget development approaches can be used by management? a. Top-down approach b. Bottom-up approach c. A combination of top-down and bottom-up d. All of these can be used ANS: D PTS: 1 DIF: Easy OBJ: 18.2 NAT: AACSB Reflective Thinking | IMA Budget Preparation
13.
Which of the following statements is NOT true of the master budget? a. The master budget represents the overall operating and financing plans for a specific time period b. The capital budget is a critical part of the master budget c. The master budget culminates with pro-forma financial statements d. The master budget begins with a forecast of sales ANS: B PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
14.
Given the following budgets, which would be prepared first when completing the master budget? a. The direct materials budget b. The manufacturing overhead budget c. The pro-forma income statement d. The cash budget ANS: A PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
15.
The accuracy of the sales forecast is usually dependent upon all the following EXCEPT: a. Price changes b. Advertising and promotion levels c. Competition d. Number of employees ANS: D PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
16.
Which budget supplies information for all manufacturing cost budgets? a. Cash b. Production c. Master d. Direct materials purchases ANS: B PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
17.
Which of the following is NOT an uncontrollable external factor affecting sales? a. The state of technology b. Customer needs c. Government policies d. Product promotion ANS: D PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
18.
Which of the following is NOT an internal factor affecting sales? a. Product pricing b. Possible entry barriers c. Product placement d. Product promotion ANS: B PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
19.
Which of the following factors need NOT be considered in preparing the production budget? a. Beginning inventory b. Manufacturing overhead c. Desired ending inventory d. Projected sales volume ANS: B PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
20.
Which of the following is NOT included in the manufacturing overhead budget? a. Depreciation b. Utilities c. Labor for product assembly d. Labor for equipment maintenance ANS: C PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
21.
When determining the amount of cash payments for manufacturing overhead, which costs are removed from the budgeted manufacturing overhead? a. Depreciation b. Direct labor c. Direct materials d. Sales commissions ANS: A PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
22.
Which of the following accumulates all the costs for direct materials, direct labor and manufacturing overhead? a. Production budget b. Budgeted product cost sheet c. Sales budget d. Selling and administrative expense budget ANS: B PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
23.
The budgeted product cost sheet accumulates costs for all of the following EXCEPT: a. Direct materials b. Manufacturing overhead c. Direct labor d. Sales commissions ANS: D PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
24.
The formula underlying the budget for direct materials usage is: a. Desired ending inventory + Units needed for production Beginning inventory b. Desired ending inventory + Units needed for production + Beginning inventory c. Desired ending inventory Units needed for production + Beginning inventory d. Total units needed for production Cost of materials ANS: D PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
25.
The formula underlying the direct labor budget is: a. Number of units produced Direct labor hours per unit Cost per hour b. Number of units produced Direct labor hours per unit Cost per hour c. Number of units produced Direct labor hours per unit + Cost per hour d. Number of units produced + Direct labor hours per unit Cost per hour ANS: A PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
26.
Insufficient raw materials inventory may cause: a. High storage costs b. Costly work stoppages c. Excessive investment in inventory d. All of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
27.
Which of the following is LEAST likely to be affected if actual June production is less than budgeted June production? a. Purchases costs for June b. Direct labor costs for June c. Selling and administrative costs for June d. Manufacturing overhead costs for June ANS: C PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
28.
Which of the following would NOT be in the selling and administrative budget? a. Office supplies b. Sales commissions c. Depreciation on factory building d. Advertising expense ANS: C PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
29.
Which of the following costs are generally allocated evenly to each quarter? a. Estimated fixed costs b. Labor costs for part-time employees c. Estimated production costs d. Indirect materials costs ANS: A PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
30.
Operating budgets: a. Quantify management's objectives b. Assist in coordinating activities of the business segments c. Are benchmarks against which performance is measured d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
31.
The master budget includes all the following schedules EXCEPT the: a. Capital expenditures budget b. Production budget c. Selling and administrative expense budget d. Direct materials budget ANS: A PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
32.
In preparing the sales budget, management should consider: a. External variables such as customer tastes b. Internal variables such as advertising expenditures c. Both external variables and internal variables d. Neither external variables nor internal variables ANS: C PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
33.
A manufacturing overhead budget: a. Can be divided into quarters by dividing the yearly budget by four b. Is also used to calculate the manufacturing overhead rates c. Will vary with each quarter's production level d. Is used to calculate the manufacturing overhead rates and will vary with each quarter's production level ANS: D PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
34.
In preparing the master budget, which of the following is created first? a. Direct materials budget b. Production budget c. Sales budget d. Pro-forma statements ANS: C PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
35.
The master budgeting process is part of: a. Strategic planning b. Operations budgeting c. Capital budgeting d. Strategic planning, operations budgeting, and capital budgeting ANS: B PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
36.
Which of the following budgets is based on the expected sales volume and the desired ending inventory of finished goods and is adjusted for the expected beginning inventory of finished goods? a. Sales budget b. Production budget c. Direct materials budget d. Budgeted product cost sheet ANS: B PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
37.
The production budget is computed as: a. Beginning inventory + Sales budget Desired ending inventory b. Sales budget + Desired ending inventory Beginning inventory c. Sales budget Beginning inventory Desired ending inventory d. Beginning inventory + Desired ending inventory Sales budget ANS: B PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
38.
Which two factors from the master budget are used to calculate the predetermined overhead rate for manufacturing overhead? a. Annual production volume and annual direct labor hours b. Annual direct labor hours and annual variable manufacturing overhead c. Annual sales volume and annual total manufacturing overhead d. Annual direct labor hours and annual total manufacturing overhead ANS: D PTS: 1 DIF: Easy OBJ: 18.3 NAT: AACSB Reflective Thinking | IMA Budget Preparation
39.
Credit sales are $92,000 in June and $80,500 in July; 80% are collected in the month of sale and 20% collected in the following month. Total July collections are: a. $27,600 b. $64,400 c. $82,800 d. $80,500 ANS: C July collections: ($80,500 80%) + ($92,000 20%) = $82,800 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
40.
If Hardy Company plans to sell 350 monitors during the month of October, has 21 monitors on hand on October 1, and wants to maintain an inventory at month-end of 30 monitors, how many monitors must Hardy Company produce during October? a. 329 b. 341 c. 350 d. 359 ANS: D Production during October: 350 + 30 21 = 359 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
Exhibit 18-1 Elsie's Dairy produces various types of cheese. The following resources are used to make five pounds of cheddar cheese: 4 gallons of milk at $2.50 per gallon 4 cakes of yeast at $0.50 per cake 1/2 hour of labor at $10.00 per hour 1/2 hour of overhead at $6.00 per hour 41.
Refer to Exhibit 18-1. Based on the information above, what is the cost of making five pounds of cheese? a. $10.00 b. $12.00 c. $20.00 d. $25.00 ANS: C Cost of making five pounds of cheese: (4 $2.50) + (4 $0.50) + (1/2 $10.00) + (1/2 $6.00) = $20 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
42.
Refer to Exhibit 18-1. Based on the information above, what is the cost of producing one pound of cheese? a. $2.00 b. $2.40 c. $3.40 d. $4.00 ANS: D Cost of making five pounds of cheese: [(4 $2.50) + (4 $0.50) + (1/2 $10.00) + (1/2 $6.00)] 5 = $4 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation Exhibit 18-2 Makeby Corporation makes sharbees. The following data are available on December 1, 2011:
Raw materials needed to make 1 sharbee: 6 units of X 4 units of Y
Number of units available at beginning of December: Raw material X Raw material Y Finished sharbees
44 62 18
Expected sales during December:
144 sharbees
Desired levels of ending inventory: Raw material X Raw material Y Sharbees
60 56 20
Cost of raw materials: Raw material X Raw material Y
$6 per unit $8 per unit
43.
Refer to Exhibit 18-2. Given the information above, budgeted production for December is: a. 142 sharbees b. 144 sharbees c. 146 sharbees d. 164 sharbees ANS: C Budgeted production: 144 + 20 18 = 146 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
44.
Refer to Exhibit 18-2. Given the information above, cost of materials to be used in December is: a. $5,256 b. $9,928 c. $4,672 d. $8,064 ANS: B Budgeted production: Cost of materials used:
144 + 20 18 = 146 (146 6 $6) + (146 4 $8) = $9,928
PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation 45.
Refer to Exhibit 18-2. Given the information above, the direct materials purchases cost during December will be: a. $5,352 b. $4,624 c. $9,976 d. $8,153 ANS: C Budgeted production: Raw material X purchase costs: Raw material Y purchase costs: Direct materials purchases costs:
144 + 20 18 = 146 [(146 6) + 60 44] $6 = $5,352 [(146 4) + 56 62] $8 = $4,624 $5,352 + $4,624 = $9,976
PTS: 1 DIF: Challenging OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation 46.
Bondy Corporation makes widgets. The following are needed to make 1 widget: Wood Paint Direct labor Variable manufacturing overhead
20 board feet 3 gallons 4 hours 4 hours
The cost of wood is 30 cents per board foot, the cost of paint is $4 per gallon, and employees are paid $12 per hour. Also, variable manufacturing overhead is applied at the rate of $6 per direct labor hour. Given this information, the total direct materials cost of making 150 widgets is: a. $900 b. $1,800 c. $2,700 d. $7,200
ANS: C Direct materials cost of making one widget: Cost of making 150 widgets:
(20 $0.30) + (3 $4) = $18 $18 150 = $2,700
PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation 47.
NewGen Computers is preparing its budget for 2011. Sales for the year are budgeted at $1,000,000; 20% are cash sales and 80% are credit sales. The company expects to collect 60% of all credit sales in 2011. Budgeted expenses are $800,000. These expenditures include $25,000 for depreciation and $497,000 for variable manufacturing overhead. Given this information, total cash inflows from sales for 2011 would be: a. $800,000 b. $680,000 c. $480,000 d. $455,000 ANS: B Cash inflows from sales: ($1,000,000 20%) + ($1,000,000 80% 60%) = $680,000 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
48.
Larry's Custom Bird Cages has budgeted unit sales for the first quarter of the year as follows: January 430
February 390
March 450
April 420
Larry wishes to have 20% of the next month's sales in ending inventory. If the January 1 beginning inventory consisted of 74 units, budgeted purchases for February would be: a. 480 units b. 418 units c. 402 units d. 344 units ANS: C January ending inventory: February purchases:
390 20% = 78 390 + (450 20%) 78 = 402
PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation 49.
Johnson Electric plans to sell 125 boat motors during March. If it currently has 10 motors on hand and must maintain an inventory of 25, how many motors must the firm make during March? a. 140 b. 125 c. 150 d. 110 ANS: A Production during March: 125 + 25 10 = 140 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
50.
Dean's Dairy uses 4 gallons of milk to make 1 batch of cheese. Dean currently has 40 gallons of milk and desires to maintain an inventory of 20 gallons of milk. If 49 batches of cheese will be produced, how much milk must be purchased? a. 156 gallons b. 176 gallons c. 216 gallons d. 236 gallons ANS: B Milk to be purchased: (49 4) + 20 40 = 176 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
51.
Meadowland Clothing uses 3 yards of material for each garment produced. On May 1, Meadowland had 24 yards of material on hand. If Meadowland desires an ending inventory of 15 yards of material and plans to produce 65 garments during the month, how many yards of material should the company purchase during May? a. 186 b. 195 c. 204 d. 168 ANS: A Material purchases during May: (65 3) + 15 24 = 186 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation Exhibit 18-3 Thorne Chemicals makes cleaning solution. The following information is available on December 1, 2011:
Raw materials needed to make 1 gallon of cleaning solution: 4 units of X 3 units of Y
Amount on hand, December 1: Raw material X Raw material Y Cleaning solution
22 units 26 units 63 gallons
Expected sales of cleaning solution during December:
160 gallons
Desired levels of ending inventory: Raw material X Raw material Y Cleaning solution
30 units 24 units 45 gallons
Cost of raw materials: Raw material X Raw material Y
$2 per unit $5 per unit
52.
Refer to Exhibit 18-3. Given the information above, budgeted production for December is: a. 97 gallons b. 115 gallons c. 142 gallons d. 178 gallons ANS: C Budgeted production: 160 + 45 63 = 142 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
53.
Refer to Exhibit 18-3. Given the information above, the cost of materials used in production for the month of December will be: a. $3,246 b. $3,120 c. $3,266 d. $994 ANS: C Budgeted production: Cost of materials used:
160 + 45 63 = 142 (142 4 $2) + (142 3 $5) = $3,266
PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation 54.
Refer to Exhibit 18-3. Given the information above, how many units of raw material Y should be purchased during December? a. 424 b. 480 c. 532 d. 643 ANS: A Budgeted production: Raw material Y to be purchased:
160 + 45 63 = 142 (142 3) + 24 26 = 424
PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation 55.
If it takes 20 hours to make a boat motor and direct labor employees are paid $10 per hour, how much does it cost for labor to make 100 motors? a. $1,000 b. $2,000 c. $16,600 d. $20,000 ANS: D Cost of labor: 20 $10 100 = $20,000 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
Exhibit 18-4 Playtime Toys began operations on January 1, 2011. During January it produced 2,000 toys and sold 1,850 toys. The following are needed to make 1 toy: Wood Paint Direct labor
2 board feet at $3 per foot 1.5 quarts at $2 per quart 3 hours at $6 per hour
Manufacturing overhead is applied at a rate of $4 per direct labor hour. 56.
Refer to Exhibit 18-4. Given the information above, the cost of direct materials used in January would be: a. $18,000 b. $16,600 c. $12,000 d. $11,100 ANS: A Direct material cost per toy: Direct material cost in January:
(2 $3) + (1.5 $2) = $9 $9 2,000 = $18,000
PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation 57.
Refer to Exhibit 18-4. Given the information above, the direct labor cost per toy would be: a. $6 b. $10 c. $18 d. $30 ANS: C Direct labor cost per toy: 3 $6 = $18 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
58.
Refer to Exhibit 18-4. Given the information above, the manufacturing overhead cost per toy would be: a. $6 b. $9 c. $12 d. $30 ANS: C Manufacturing overhead cost per toy: 3 $4 = $12 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
59.
Refer to Exhibit 18-4. Given the information above, the cost of goods available for sale for January would be: a. $54,000 b. $62,000 c. $72,150 d. $78,000 ANS: D Total cost per toy: Cost of goods available for sale:
(2 $3) + (1.5 $2) + (3 $6) + (3 $4) = $39 $39 2,000 = $78,000
PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation 60.
Refer to Exhibit 18-4. Given the information above, ending inventory would be: a. $4,050 b. $4,650 c. $5,250 d. $5,850 ANS: D Total cost per toy: Ending inventory:
(2 $3) + (1.5 $2) + (3 $6) + (3 $4) = $39 ($39 2,000) ($39 1,850) = $5,850
PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation 61.
Cachet Inc. had a $93,000 balance in Accounts Receivable on July 1. In July, it expects to collect 55% of these receivables and 30% of the July credit sales, which are budgeted at $138,000. What is the budgeted accounts receivable at the end of July? a. $41,400 b. $51,150 c. $92,550 d. $138,450 ANS: D Budgeted accounts receivables: ($93,000 45%) + ($138,000 70%) = $138,450 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
62.
How much cash will be needed to pay the following general and administrative expenses? Advertising expense Executives' salaries expense Depreciation expense Amortization of patent Interest expense Total a. b. c. d.
$15,250 $20,500 $21,725 $16,475
$ 4,500 10,000 5,250 1,225 750 $21,725
ANS: A Cash needed: $21,725 $5,250 $1,225 = $15,250 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation 63.
The following resources are required to make 1 batch of ice cream: Milk Sugar Direct labor Manufacturing overhead
5 gallons at $2.50 per gallon 5 pounds at $0.30 per pound 45 minutes at $12.00 per hour 30 minutes at $6.00 per hour
Given this information, what is the cost of making 1 batch of ice cream? a. $14.00 b. $21.50 c. $23.00 d. $26.00 ANS: D Cost per batch of ice cream: (5 $2.50) + (5 $0.30) + (3/4 $12) + (1/2 $6) = $26 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation 64.
Theodore's Musical Toys makes xylophones. Each xylophone takes 3 labor hours to make at a rate of $10.00 per hour. What is the budgeted production of xylophones if the budgeted direct labor cost for July is $16,200? a. 540 b. 1,200 c. 1,620 d. 5,400 ANS: A Budgeted production: $16,200 (3 $10) = 540 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
65.
Which of the following budgets are the same for both a manufacturing firm and a merchandising firm? a. Sales budget and selling and administrative expense budget b. Sales budget and production budget c. Direct materials budget and manufacturing overhead budget d. Production budget and direct labor budget ANS: A PTS: 1 DIF: Easy OBJ: 18.4 NAT: AACSB Reflective Thinking | IMA Budget Preparation
66.
The purchases budget for a merchandising firm replaces four budgets for a manufacturing firm. These four budgets are: a. Production budget, sales budget, direct materials budget, and direct labor budget b. Production budget, direct materials budget, direct labor budget, and manufacturing overhead budget c. Production budget, direct materials budget, direct labor budget, and selling and administrative expense budget d. Production budget, manufacturing overhead budget, direct labor budget, and sales budget ANS: B PTS: 1 DIF: Easy OBJ: 18.4 NAT: AACSB Reflective Thinking | IMA Budget Preparation
67.
The format of the merchant's purchases budget is very similar to the format of the manufacturer's: a. Direct labor budget b. Sales budget c. Production budget d. Manufacturing overhead budget ANS: C PTS: 1 DIF: Easy OBJ: 18.4 NAT: AACSB Reflective Thinking | IMA Budget Preparation
68.
Another name for the sales budget in a service firm is the: a. Supplies budget b. Revenue budget c. Overhead budget d. Wages and salaries budget ANS: B PTS: 1 DIF: Easy OBJ: 18.4 NAT: AACSB Reflective Thinking | IMA Budget Preparation
69.
Which of the following budgets contains the sales volume (or production) for a service firm? a. Supplies budget b. Revenue budget c. Overhead budget d. Wages and salaries budget ANS: B PTS: 1 DIF: Easy OBJ: 18.4 NAT: AACSB Reflective Thinking | IMA Budget Preparation
70.
Which of the following budgets contains the supplies needed to operate for a service firm? a. Supplies budget b. Revenue budget c. Overhead budget d. Wages and salaries budget ANS: A PTS: 1 DIF: Easy OBJ: 18.4 NAT: AACSB Reflective Thinking | IMA Budget Preparation
71.
Which of the following budgets contains the labor costs involved directly in providing the service for a service firm? a. Supplies budget b. Revenue budget c. Overhead budget d. Wages and salaries budget ANS: D PTS: 1 DIF: Easy OBJ: 18.4 NAT: AACSB Reflective Thinking | IMA Budget Preparation
72.
Which of the following would NOT be in the overhead budget of a hotel? a. Depreciation b. Utilities c. TV and telephone d. Manager's salary ANS: D PTS: 1 DIF: Easy OBJ: 18.4 NAT: AACSB Reflective Thinking | IMA Budget Preparation
73.
Which of the following accumulates all the costs for supplies, wages and salaries, and overhead for a service firm? a. Budgeted service cost sheet b. Selling and administrative expense budget c. Budgeted product cost sheet d. Revenue budget ANS: A PTS: 1 DIF: Easy OBJ: 18.4 NAT: AACSB Reflective Thinking | IMA Budget Preparation
74.
If Mercedes Corporation plans to sell 1,000 computers during the month of July, has 80 computers on hand on July 1, and wants to maintain an inventory at month-end of 50 monitors, how many monitors must Heather Corporation purchase during July? a. 1,050 b. 1,000 c. 1,030 d. 970 ANS: D Purchases during July: 1,000 + 50 80 = 970 PTS: 1 DIF: Medium OBJ: 18.4 NAT: AACSB Analytic | IMA Budget Preparation
75.
Patricia's Piano Palace has budgeted piano sales for the fourth quarter of the year as follows: September 24
October 28
November 25
December 33
Larry wishes to have 20% of the next month's sales in ending inventory. If the September 1 beginning inventory consisted of 7 pianos, budgeted purchases for October would be: a. 29 pianos b. 28 pianos c. 27 pianos d. 26 pianos ANS: C September ending inventory: October purchases:
28 20% = 6 28 + (25 20%) 6 = 27
PTS: 1 DIF: Medium OBJ: 18.4 NAT: AACSB Analytic | IMA Budget Preparation 76.
Percy's Plants plans to sell 500 tomato plants during April. If it currently has 60 tomato plants on hand and must maintain an inventory of 90, how many tomato plants must the firm purchase during April? a. 530 b. 500 c. 470 d. 590 ANS: A Purchases during April: 500 + 90 60 = 530 PTS: 1 DIF: Medium OBJ: 18.4 NAT: AACSB Analytic | IMA Budget Preparation
77.
Highland Corporation is a high-speed Internet service provider that will open business January 1. Highland has enough band-width to potentially have 2,000 subscriptions each month at a cost of $50 per subscription. Highland expects that during January, the band-width will run at only 30% capacity. Highland plans to collect payment for each subscription at the beginning of each month. Given this information, how much revenue does Highland expect to earn during January? a. $100,000 b. $70,000 c. $30,000 d. $10,000 ANS: C Band-width used: Revenue:
2,000 30% = 600 600 $50 = $30,000
PTS: 1 DIF: Medium OBJ: 18.4 NAT: AACSB Analytic | IMA Budget Preparation Exhibit 18-5 Dr. Gatten began practicing dentistry on January 1, 2011. During January she served 250 patients who had their teeth examined and cleaned. The following information is known in relation to each patient visit: Cost of supplies used to clean teeth Cost of items in "clean teeth" bag, given to each patient Charges for dental hygienist Charges for dentist Overhead costs per patient 78.
$3 $4 $15 an hour, 1.5 hours per patient $40 an hour, 1 hour per patient $10
Refer to Exhibit 18-5. Given the information above, total supplies expense for January would be: a. $1,750 b. $750 c. $1,000 d. $2,500 ANS: A Supplies expense: ($3 250) + ($4 250) = $1,750 PTS: 1 DIF: Medium OBJ: 18.4 NAT: AACSB Analytic | IMA Budget Preparation
79.
Refer to Exhibit 18-5. Given the information above, total wages and salaries expense for January would be: a. $3,750 b. $5,625 c. $10,000 d. $15,625 ANS: D Wages and salaries expense: ($15 1.5 250) + ($40 1 250) = $15,625 PTS: 1 DIF: Medium OBJ: 18.4 NAT: AACSB Analytic | IMA Budget Preparation
80.
Refer to Exhibit 18-5. Given the information above, total service cost per patient served in January would be: a. $79.50 b. $69.50 c. $62.50 d. $57.00 ANS: A Total service cost: $3 + $4 + ($15 1.5) + ($40 1) + $10 = $79.50 PTS: 1 DIF: Medium OBJ: 18.4 NAT: AACSB Analytic | IMA Budget Preparation
81.
If actual variable costs per unit are equal to estimated variable costs per unit and a static budget is used, fewer units produced will show: a. Total actual variable costs = total estimated variable costs b. Total actual variable costs < total estimated variable costs c. Total actual variable costs > total estimated variable costs d. Not enough information is available ANS: B PTS: 1 DIF: Easy OBJ: 18.5 NAT: AACSB Reflective Thinking | IMA Budget Preparation
82.
Which of the following types of budgeting procedures is the most effective for measuring performance? a. Static budgeting b. Capital budgeting c. Flexible budgeting d. Strategic budgeting ANS: C PTS: 1 DIF: Easy OBJ: 18.5 NAT: AACSB Reflective Thinking | IMA Budget Preparation
83.
Flexible budgeting can be used with which of the following types of manufacturing costs? a. Direct labor b. Direct materials c. Manufacturing overhead d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 18.5 NAT: AACSB Reflective Thinking | IMA Budget Preparation
84.
A budget that is based on only one estimate of production or sales volume is a: a. Fixed budget b. Standard budget c. Static budget d. Flexible budget ANS: C PTS: 1 DIF: Easy OBJ: 18.5 NAT: AACSB Reflective Thinking | IMA Budget Preparation
85.
A static budget would be appropriate for: a. Fixed manufacturing overhead costs b. Variable manufacturing overhead costs c. Direct labor costs d. Direct material costs ANS: A PTS: 1 DIF: Easy OBJ: 18.5 NAT: AACSB Reflective Thinking | IMA Budget Preparation
86.
A budget that allows for comparisons of actual and budgeted amounts at varying activity levels is: a. A sales budget b. A flexible budget c. A master budget d. A static budget ANS: B PTS: 1 DIF: Easy OBJ: 18.5 NAT: AACSB Reflective Thinking | IMA Budget Preparation
87.
The flexible budget: a. Is not constrained to the relevant range b. Eliminates the need for a master budget c. Is prepared before the master budget d. Is a series of static budgets at different levels of activity ANS: D PTS: 1 DIF: Easy OBJ: 18.5 NAT: AACSB Reflective Thinking | IMA Budget Preparation
88.
Producing outside the relevant range can result in: a. Expected differences in per-unit variable and total fixed costs b. Higher direct materials costs c. Lower direct labor costs d. Higher manufacturing overhead costs ANS: A PTS: 1 DIF: Easy OBJ: 18.5 NAT: AACSB Reflective Thinking | IMA Budget Preparation
89.
A department has a budgeted monthly manufacturing overhead cost of $160,000 plus $16 per direct labor hour. If a flexible budget reflects $388,000 for total manufacturing overhead cost for the month, the actual direct labor hours would be: a. 12,250 b. 13,000 c. 14,250 d. 24,250 ANS: C Variable manufacturing overhead: Actual direct labor hours:
$388,000 $160,000 = $228,000 $228,000 $16 = 14,250
PTS: 1 DIF: Medium OBJ: 18.5 NAT: AACSB Analytic | IMA Budget Preparation
90.
If a company plans to sell 77,000 units of product but sells 132,000 units, the most appropriate comparison of the cost data associated with the sales can be done using a budget based on which of the following number of units? a. 33,000 b. 77,000 c. 132,000 d. 209,000 ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Budget Preparation
OBJ:
18.5
Exhibit 18-6 The July manufacturing overhead budget of Kyoto Corporation, shown below, was constructed assuming an activity level of 48,000 direct labor hours: Variable costs: Indirect labor Indirect materials Factory supplies
$48,000 24,000 19,200
$ 91,200
Fixed costs: Depreciation Supervision Property taxes
$38,400 69,600 36,000
144,000
Total overhead costs 91.
$235,200
Refer to Exhibit 18-6. If management prepared a flexible budget for July using 54,000 direct labor hours, what amount would this flexible budget show for indirect labor? a. $102,600 b. $54,000 c. $48,000 d. $27,000 ANS: B Indirect labor cost per direct labor hour: Flexible budget indirect labor cost:
$48,000 48,000 = $1 54,000 $1 = $54,000
PTS: 1 DIF: Medium OBJ: 18.5 NAT: AACSB Analytic | IMA Budget Preparation 92.
Refer to Exhibit 18-6. If management prepared a flexible budget for July using 40,000 direct labor hours, what amount would this flexible budget show for total variable costs? a. $76,000 b. $83,600 c. $87,200 d. $91,200 ANS: A Flexible budget total variable costs: 40,000 ($91,200 48,000) = $76,000 PTS: 1 DIF: Medium OBJ: 18.5 NAT: AACSB Analytic | IMA Budget Preparation
93.
Refer to Exhibit 18-6. If management prepared a flexible budget for July using 52,000 direct labor hours, what amount would this flexible budget show for total overhead costs? a. $235,200 b. $239,200 c. $242,800 d. $254,800 ANS: C Flexible budget total overhead costs: ($91,200 48,000 52,000) + $144,000 = $242,800 PTS: 1 DIF: Medium OBJ: 18.5 NAT: AACSB Analytic | IMA Budget Preparation Exhibit 18-7 Cedar Corporation uses a flexible budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead costs per direct labor hour are as follows: Indirect labor Indirect materials Maintenance Utilities
$12.00 6.00 2.00 1.00
Fixed overhead costs per month are: Supervision Insurance Factory rent Depreciation 94.
$8,000 1,600 1,300 1,900
Refer to Exhibit 18-7. If Cedar prepares a flexible budget for 4,000 direct labor hours, what amount will this budget show for variable manufacturing overhead costs? a. $8,400 b. $42,000 c. $84,000 d. $109,600 ANS: C Variable manufacturing costs: 4,000 ($12 + $6 + $2 + $1) = $84,000 PTS: 1 DIF: Medium OBJ: 18.5 NAT: AACSB Analytic | IMA Budget Preparation
95.
Refer to Exhibit 18-7. If Cedar prepares a flexible budget for 6,000 direct labor hours, what amount will this budget show for total manufacturing overhead costs? a. $12,800 b. $126,000 c. $134,000 d. $138,800 ANS: D Variable manufacturing costs: Total manufacturing overhead cost:
6,000 ($12 + $6 + $2 + $1) = $126,000 $126,000 + $8,000 + $1,600 + $1,300 + $1,900 = $138,800
PTS: 1 DIF: Medium OBJ: 18.5 NAT: AACSB Analytic | IMA Budget Preparation
96.
The section of a cash budget that identifies amounts that must be borrowed is called the: a. Cash receipts section b. Cash disbursements section c. Cash excess or deficiency section d. Financing section ANS: D PTS: 1 DIF: Easy OBJ: 18.6 NAT: AACSB Reflective Thinking | IMA Budget Preparation
97.
The cash payments section of a cash budget has information from which of the following: a. Direct materials budget b. Direct labor budget c. Selling and administrative expense budget d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 18.6 NAT: AACSB Reflective Thinking | IMA Budget Preparation
98.
Cash budgets should EXCLUDE costs incurred for: a. Materials b. Equipment c. Depreciation d. Both materials and equipment ANS: C PTS: 1 DIF: Easy OBJ: 18.6 NAT: AACSB Reflective Thinking | IMA Budget Preparation
99.
Which of the following budgets will most likely be prepared last? a. Production budget b. Selling and administrative expenses budget c. Sales budget d. Cash budget ANS: D PTS: 1 DIF: Easy OBJ: 18.6 NAT: AACSB Reflective Thinking | IMA Budget Preparation
100.
A line of credit with a bank enables a company to: a. Borrow money on demand for short periods of time at specific interest rates b. Borrow money for long periods of time with fluctuating interest rates c. Borrow money on demand for long periods of time d. Borrow money for long periods of time at specific interest rates ANS: A PTS: 1 DIF: Easy OBJ: 18.6 NAT: AACSB Reflective Thinking | IMA Budget Preparation Exhibit 18-8 Cheroke Company had an accounts receivable balance of $60,000 at December 31, 2011. Projected sales for the first three months of 2012 are: January February March
$120,000 130,000 100,000
All sales are credit sales. Cheroke Company usually collects 40% of its sales during the month of sale, 50% in the month following the sale, and 10% in the second month following the sale.
101.
Refer to Exhibit 18-8. Given the information above, cash collections during January should be: a. $108,000 b. $88,000 c. $120,000 d. The answer cannot be determined ANS: D PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Budget Preparation
102.
Refer to Exhibit 18-8. Given the information above, cash collections during February should be: a. $132,400 b. $122,400 c. $112,400 d. The answer cannot be determined ANS: D PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Budget Preparation
103.
18.6
18.6
Refer to Exhibit 18-8. Given the information above, cash collections during March should be: a. $117,000 b. $130,000 c. $113,000 d. The answer cannot be determined ANS: A Cash collections: ($120,000 10%) + ($130,000 50%) + ($100,000 40%) = $117,000 PTS: 1 DIF: Medium OBJ: 18.6 NAT: AACSB Analytic | IMA Budget Preparation Exhibit 18-9 Winthrop Merchandising is preparing its budget for 2011 (its first year of operation). Sales for the year are budgeted at $1,500,000; 20% are cash sales and 80% are credit sales. The company expects to collect 60% of all credit sales in 2011. Budgeted expenses are $1,200,000. These expenditures include $37,500 for depreciation and $745,500 for variable manufacturing overhead.
104.
Refer to Exhibit 18-9. Given the information above, total cash outflows for 2011 would be: a. $417,000 b. $454,500 c. $1,162,500 d. $1,200,000 ANS: C Cash outflow: $1,200,000 $37,500 = $1,162,500 PTS: 1 DIF: Medium OBJ: 18.6 NAT: AACSB Analytic | IMA Budget Preparation
105.
Refer to Exhibit 18-9. If the desired ending cash balance is $45,000, how much must Winthrop borrow during the year? a. $187,500 b. $142,500 c. $225,000 d. $180,000
ANS: A Cash available: Total cash needed: Total cash borrowed:
(1,500,000 20%) + (1,500,000 80% 60%) = $1,020,000 $1,200,000 $37,500 + $45,000 = $1,207,500 $1,020,000 $1,207,500 = ($187,500)
PTS: 1 DIF: Challenging OBJ: 18.6 NAT: AACSB Analytic | IMA Budget Preparation 106.
For 2011, Raster Graphics forecasts cash receipts of $405,000 and cash disbursements of $430,000. If the beginning cash balance is $35,000 and the desired ending balance is $21,000, how much must Raster borrow during the year? a. $0 b. $10,000 c. $11,000 d. $25,000 ANS: C Financing needed: $35,000 + $405,000 $430,000 $21,000 = (11,000) PTS: 1 DIF: Medium OBJ: 18.6 NAT: AACSB Analytic | IMA Budget Preparation
107.
LeMinton Company expects the following credit sales for the first five months of the year: January, $25,000; February, $40,000; March, $30,000; April, $36,000, May $40,000. Experience has shown that payment for the credit sales is received as follows: 60% in the month of sale, 25% in the first month after sale, 12% in the second month after sale, and the remainder is uncollectible. How much cash can LeMinton Company expect to collect in March as a result of credit sales? a. $18,000 b. $28,600 c. $30,000 d. $31,000 ANS: D Cash collected in March: ($25,000 12%) + ($40,000 25%) + ($30,000 60%) = $31,000 PTS: 1 DIF: Medium OBJ: 18.6 NAT: AACSB Analytic | IMA Budget Preparation
108.
Burke Corporation had accounts receivable of $44,400 on April 1 and $33,600 on April 30. How much cash was collected from accounts receivable during April if Burke's April sales on account totaled $134,400? a. $123,600 b. $134,400 c. $145,200 d. $100,800 ANS: C Cash collected from accounts receivable: $134,400 + $44,400 $33,600 = $145,200 PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
109.
Blake Company has $15,000 cash at the beginning of June and anticipates $50,000 in cash receipts and $34,500 in cash disbursements. Blake Company requires a minimum cash balance of $10,000 and maintains no more than $20,000 on hand. Any excess cash over the maximum is used to pay down debts. The firm has an agreement with its bank to borrow as needed or repay loans as funds become available. As of May 31, the company owes $15,000 to the bank. The balance of the loan on June 30 will be: a. $4,500 b. $9,500 c. $15,000 d. $19,500 ANS: A Ending cash available: Cash in excess of maximum allowed: Balance of loan:
$15,000 + $50,000 $34,500 = $30,500 $30,500 $20,000 = $10,500 $15,000 $10,500 = $4,500
PTS: 1 DIF: Challenging OBJ: 18.6 NAT: AACSB Analytic | IMA Budget Preparation 110.
Pro-forma financial statements typically include all of the following EXCEPT: a. Statement of cash flows b. Income statement c. Cash budget d. Balance sheet ANS: C PTS: 1 DIF: Easy OBJ: 18.7 NAT: AACSB Reflective Thinking | IMA Budget Preparation
111.
Which of the following serve as a basis for key management decisions? a. Cash budgets b. Sales budgets c. Pro forma financial statements d. Budgeted cost of production sheets ANS: C PTS: 1 DIF: Easy OBJ: 18.7 NAT: AACSB Reflective Thinking | IMA Budget Preparation
112.
A pro-forma income statement usually includes all of the following EXCEPT: a. Budgeted selling and administrative expenses b. Budgeted sales revenue c. Budgeted operating expenses d. Budgeted capital expenditures ANS: D PTS: 1 DIF: Easy OBJ: 18.7 NAT: AACSB Reflective Thinking | IMA Budget Preparation Exhibit 18-10 Streamer Company sells float-tubes for recreational fly-fishing. A review of the company's historical operations shows that gross margin consistently averages 40% of sales. Company guidelines indicate that ending inventory at the end of any quarter should always be 25% of the next quarter's budgeted cost of goods sold. The expected sales for Streamer's next four quarters are shown below. First quarter Second quarter Third quarter Fourth quarter
$800,000 950,000 900,000 850,000
113.
Refer to Exhibit 18-10. If Streamer prepares a pro-forma income statement for the first quarter, what amount would be shown for purchases (assume the year end inventory balance is $120,000)? a. $800,000 b. $581,000 c. $502,500 d. $457,500 ANS: C Purchases for first quarter: ($800,000 60%) + ($950,000 60% 25%) $120,000 = $502,500 PTS: 1 DIF: Medium OBJ: 18.7 NAT: AACSB Analytic | IMA Budget Preparation
114.
Refer to Exhibit 18-10. If Streamer prepares a pro-forma income statement for the third quarter, what amount would be shown for inventory available for sale? a. $540,000 b. $667,500 c. $675,000 d. $749,000 ANS: B Inventory available for sale for third quarter: ($900,000 60%) + ($850,000 60% 25%) = $667,500 PTS: 1 DIF: Medium OBJ: 18.7 NAT: AACSB Analytic | IMA Budget Preparation
PROBLEM 1.
Michele has a salary of $56,000 per year. Michele estimates her living expenses are approximately as follows: Federal, state, and FICA taxes amount to Car payment Rent Insurance 401(k) Gas and maintenance on car Entertainment Utilities Food
35% of income $305/month $1,500/month $120/month 4% of gross pay $175/month $150/month $250/month $200/month
Prepare Michele's budget for the year. ANS: Salary Less withholding (35%) Net take-home pay Fixed expenses: Car payment Rent payment 401(k) (4%)
$ 56,000 (19,600) $ 36,400 $ 3,660 18,000 2,240
(23,900) $ 12,500
Other expenses: Insurance Gas and maintenance on car Entertainment Utilities Food
$ 1,440 2,100 1,800 3,000 2,400
(10,740) $ 1,760
PTS: 1 DIF: Medium OBJ: 18.1 NAT: AACSB Analytic | IMA Budget Preparation 2.
Describe the differences between authoritative budgeting and participative budgeting. Include advantages of each type of budgeting. ANS: Authoritative budgeting is a top-down approach whereby top management develops the budget and then delivers it to the rest of the organization. With authoritative budgeting, there is little or no involvement by other managers and employees. Advantages of authoritative budgeting include budgeting decisions are made by top management who know the strategic plan of the company, top management can be more objective, and top management can make more efficient decisions. Participative budgeting is a bottom-up approach that involves participation from managers of all levels of the organization. In participative budgeting, each division manager prepares a budget request. The budget requests are compiled and reviewed as they move up in the organization. Advantages of participative budgeting are more people participate in the budget's preparation, people are better motivated by a budget they helped prepare, and lower-level managers can have better information and may make better decisions because they are closer to customers and technology. PTS: 1 DIF: Medium OBJ: 18.2 NAT: AACSB Analytic | IMA Budget Preparation
3.
The Sho-lo Company makes measuring devices. The unit sales forecasts for measuring devices for the four quarters of 2011 and the first quarter of 2012 are as follows: Measuring Devices 30,000 35,000 33,000 40,000 32,000
1st Quarter, 2011 2nd Quarter, 2011 3rd Quarter, 2011 4th Quarter, 2011 1st Quarter, 2012
As of December 31, 2012, Sho-lo has 6,000 units in inventory. The company likes to maintain 20% of the next quarter's sales in inventory. Prepare a production budget for each of the four quarters of 2011 for measuring devices. ANS: Expected sales in units Add desired ending inventory Total needed Less beginning inventory Budgeted production
1st Quarter 30,000 7,000 37,000 6,000 31,000
2nd Quarter 35,000 6,600 41,600 7,000 34,600
PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
3rd Quarter 33,000 8,000 41,000 6,600 34,400
4th Quarter 40,000 6,400 46,400 8,000 38,400
4.
Maid-Sweet makes a frozen yogurt dessert. Each frozen yogurt dessert requires 12 ounces of yogurt. The production budget for the first four months of 2012 is as follows: Budgeted production
January 55,000
February 58,000
March 62,000
April 76,000
The company has determined that it must maintain materials inventory equal to 20% of the yogurt needed for the next month's production. Maid-Sweet can purchase yogurt for $0.10 per ounce. On December 31, 2011, there were 80,000 ounces of yogurt in stock. Prepare a budget showing direct materials usage and purchases for the first quarter of 2012 (January, February, and March). ANS: January 55,000 12 660,000 139,200 799,200 80,000 719,200 $0.10 $71,920
Expected production in units Yogurt required per unit Direct materials needed for production Add desired ending materials inventory Total needed Less beginning materials inventory Budgeted purchases in units Times unit cost Total direct materials cost
February 58,000 12 696,000 148,800 844,800 139,200 705,600 $0.10 $70,560
March 62,000 12 744,000 182,400 926,400 148,800 777,600 $0.10 $77,760
PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation 5.
Mark-A-Date Corporation makes pocket and wall calendars. The production budget for the next three months for each of the calendars is as follows: Pocket Calendars 30,000 24,000 36,000
June July August
Wall Calendars 30,000 28,000 32,000
From past experience, Mark-A-Date's management knows that it takes approximately 5 minutes to make a pocket calendar and 3 minutes to make a wall calendar. Mark-A-Date pays its employees $14 per hour. Prepare a direct labor budget for each of the three months in both hours and costs. ANS: June Production Calendars per hour Total direct labor hours Rate per hour Direct labor cost
Pocket Calendars 30,000 12 (60 4) 2,500 $14 $35,000
Wall Calendars 30,000 20 (60 3) 1,500 $14 $21,000
July Production Calendars per hour Total direct labor hours Rate per hour Direct labor cost
Pocket Calendars 24,000 12 (60 5) 2,000 $14 $28,000
Wall Calendars 28,000 20 (60 3) 1,400 $14 $19,600
August Production Calendars per hour Total direct labor hours Rate per hour Direct labor cost
Pocket Calendars 36,000 12 (60 5) 3,000 $14 $42,000
Wall Calendars 32,000 20 (60 3) 1,600 $14 $22,400
PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation 6.
General Telephone makes telephones and fax machines. During the past several years, management has kept accurate records of costs and resource requirements, determining that the following is needed to make telephones and fax machines:
Telephone Plastic Components Direct labor Manufacturing overhead
Production Requirements 3 pounds 4 pieces 1 hour 1 hour
Unit Cost $2.00 per pound $8.00 each $18.00 per hour $9.00 per hour
Fax Plastic Components Direct labor Manufacturing overhead
Production Requirements 12 pounds 8 pieces 3 hours 3 hours
Unit Cost $2.00 per pound $8.00 each $18.00 per hour $9.00 per hour
Compute the total unit costs of the telephones and the fax machines.
ANS: Telephone Plastic Components Direct labor Manufacturing overhead
Production Requirements 3 pounds $2.00 4 pieces $8.00 1 hour $18.00 1 hour $9.00
Fax Plastic Components Direct labor Manufacturing overhead
Production Requirements 12 pounds $2.00 8 pieces $8.00 3 hours $18.00 3 hours $9.00
Unit Cost $ 6.00 32.00 18.00 9.00 $ 65.00
Unit Cost $ 24.00 64.00 54.00 27.00 $169.00
PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation 7.
The following information is available for Eastham Company: Expected sales volume: July August September Selling price per unit Desired finished goods inventory, September 30 Beginning finished goods inventory, July 1
1,200 units 1,100 units 1,300 units $135 230 units 190 units
Prepare sales budgets and production budgets for July, August and September. The desired finished goods inventory every month is 20% of the next month's sales. ANS: Sales Budgets Expected sales (units) Selling price per units Total sales revenue
July 1,200 $135 $162,000
August 1,100 $135 $148,500
September 1,300 $135 $175,500
July 1,200 220 1,420 190 1,230
August 1,100 260 1,360 220 1,140
September 1,300 230 1,530 260 1,270
Production Budgets Expected sales (units) Add desired ending inventory Total needed Less beginning inventory Budgeted production PTS: 1 DIF: Medium OBJ: 18.3 NAT: AACSB Analytic | IMA Budget Preparation
8.
The following information is available for Alastair Company, a merchandising firm: Expected sales volume: October November December Selling price per unit Desired finished goods inventory, December 31 Beginning finished goods inventory, October 1
5,000 units 4,250 units 6,200 units $65 1,150 units 950 units
Prepare sales budgets and purchases budgets for October, November, and December. The desired finished goods inventory every month is 30% of the next month's sales. ANS: Sales Budgets October November December Expected sales (units) 5,000 4,250 6,200 Selling price per units $65 $65 $65 Total sales revenue $325,000 $276,250 $403,000 Purchases Budgets Expected sales (units) Add desired ending inventory Total needed Less beginning inventory Budgeted purchases
October 5,000 1,275 6,275 950 5,325
November 4,250 1,860 6,110 1,275 4,835
December 6,200 1,150 7,350 1,860 5,490
PTS: 1 DIF: Medium OBJ: 18.4 NAT: AACSB Analytic | IMA Budget Preparation 9.
Merrill & Merrill is planning for tax season (February, March, April). Merrill & Merrill earns all of its revenue through 1040 preparation and generally charges $1,000 per tax return. The following information has been gathered about Merrill & Merrill: Expected Tax Returns: February March April Wages and salaries (per tax return): Preparer fee Reviewer fee Overhead Costs (per month): Utilities Postage Misc. Costs Supplies (per tax return):
150 200 225
$ 600 $ 200 $1,000 $1,500 $9,000 $ 5
Prepare revenue budgets, supplies budgets, wages and salaries budgets, and overhead budgets for the months of February, March, and April (this year is not leap year).
ANS: Revenue Budgets Number of tax returns Tax return rate Revenue
February 150 $1,000 $150,000
March 200 $1,000 $200,000
April 225 $1,000 $225,000
February 150 $5 $750
March 200 $5 $1,000
April 225 $5 $1,125
February 150
March 200
April 225
90,000 30,000 120,000
120,000 40,000 160,000
135,000 45,000 180,000
February $ 1,000 1,500 9,000 $11,500
March $ 1,000 1,500 9,000 $11,500
April $ 1,000 1,500 9,000 $11,500
Supplies Budgets Total tax returns (Revenue Budget) Supplies needed per tax return: Total supplies cost Wages and Salaries Budgets Total tax returns (Revenue Budget) Wages and salaries per room: Preparer fee ($600 each) Reviewer fees ( $200 each) Total wages Overhead Budgets Utilities Postage Miscellaneous costs Total overhead costs PTS: 1 DIF: Medium OBJ: 18.4 NAT: AACSB Analytic | IMA Budget Preparation 10.
The Powder Peaks Resort is planning for the winter ski season (December, January, and February). Powder Peaks has 200 available rooms to rent and charges its customers $150 per room each night. The following information has also been gathered about Powder Peaks Resort: Expected Capacity: December January February Wages and salaries (per room): Cleaning fee Other wages Overhead Costs (per month): Utilities Cable Misc. Costs Supplies (per room): Linens and toiletries Food Other
80% 95% 90%
$ $
30 20
$7,000 $ 250 $5,500 $ $ $
12 40 15
Prepare revenue budgets, supplies budgets, wages and salaries budgets, and overhead budgets for the months of December, January, and February (this year is not leap year).
ANS: Revenue Budgets Number of rooms Number of days in month Potential rental volume Occupancy rate Rented rooms Room rate Revenue Supplies Budgets Total rented rooms (Revenue Budget) Supplies needed per room: Linens and toiletries ($12 each) Food ($40 each) Other ($15 each) Total supplies cost
December 200 31 6,200 80% 4,960 $150 $744,000
January 200 31 6,200 95% 5,890 $150 $883,500
February 200 28 5,600 90% 5,040 $150 $756,000
December 4,960
January 5,890
February 5,040
59,520 198,400 74,400 $332,320
70,680 235,600 88,350 $394,630
60,480 201,600 75,600 $337,680
December $ 4,960
January 5,890
February 5,040
148,800 99,200 248,000
176,700 117,800 294,500
151,200 100,800 252,000
December $ 7,000 250 5,500 $12,750
January $ 7,000 250 5,500 $12,750
February $ 7,000 250 5,500 $12,750
Wages and Salaries Budgets Total rented rooms (Revenue Budget) Wages and salaries per room: Cleaning fee ($30 each) Other wages ( $20 each) Total wages Overhead Budgets Utilities Cable Miscellaneous costs Total overhead costs
PTS: 1 DIF: Medium OBJ: 18.4 NAT: AACSB Analytic | IMA Budget Preparation 11.
The Mt. Airy Bed and Breakfast is planning for the summer tourist season and needs to prepare a flexible budget. The accountant has accumulated the following information: Fixed expenses: Maid salaries Mortgage payments Property taxes Other Variable expenses (per guest): Linens and toiletries Food Other Prepare a flexible budget showing expected total costs for 200, 300, and 400 guests.
$70,000 33,000 6,000 5,000 $10 60 15
ANS: 200 guests
300 guests
400 guests
$
2,000 12,000 3,000 $ 17,000
$
3,000 18,000 4,500 $ 25,500
$
Fixed expenses Maid salaries Mortgage payments Property taxes Other Total fixed expenses
$ 70,000 33,000 6,000 5,000 $114,000
$ 70,000 33,000 6,000 5,000 $114,000
$ 70,000 33,000 6,000 5,000 $114,000
Total expenses
$131,000
$139,500
$148,000
Variable expenses Linens and toiletries Food Other Total variable expenses
4,000 24,000 6,000 $ 34,000
PTS: 1 DIF: Medium OBJ: 18.5 NAT: AACSB Analytic | IMA Budget Preparation 12.
Kittitas Company provided the following budgeted information for the month: Fixed expenses: Utilities Rent Insurance Variable expenses: Operating expenses Supplies expense Other
$250,000 900,000 75,000 $980,000 80,000 440,000
Assuming the budgeted information provided is for an activity level of 10,000 units, prepare a flexible budget for 8,000, 10,000 and 12,000 units. ANS: 8,000 units
10,000 units
12,000 units
Variable expenses Operating expenses* Supplies* Other* Total variable expenses
$ 784,000 64,000 352,000 $1,200,000
$ 980,000 80,000 440,000 $1,500,000
$1,176,000 96,000 528,000 $1,800,000
Fixed expenses Utilities Rent Insurance Total fixed expenses
$ 250,000 900,000 75,000 $1,225,000
$ 250,000 900,000 75,000 $1,225,000
$ 250,000 900,000 75,000 $1,225,000
Total expenses
$2,425,000
$2,725,000
$3,025,000
* Unit Costs: Operating expenses: $980,000 / 10,000 = $98 Supplies: $80,000 / 10,000 = $8 Other: $440,000 / 10,000 = $44 PTS: 1 DIF: Medium OBJ: 18.5 NAT: AACSB Analytic | IMA Budget Preparation
13.
The Storm Meadows Resort is preparing a cash budget for March 2011. Management has collected the following information:
The cash balance on February 28, 2011 is $215,000. Actual services provided in January and February and projected services for March are:
Cash services Credit services
January $ 96,000 675,000
February $ 80,000 835,000
March $120,000 752,000
40% of credit services are collected in the month of service, and 60% are collected in the month following service. During March, $100,000 of cleaning supplies will be purchased. Accounts are usually paid for over two months: 80% in the month of purchase, 20% in the month following purchase. Accounts payable on February 28 is $34,000. Salaries and wages paid in March will be $650,000. Depreciation on equipment used for the resort for March will be $104,000. Other cash expenses for March will be $155,000. The resort must repay a short-term loan during March. The payment is $80,000, including interest.
Prepare a cash budget for March 2011. ANS: Cash receipts Beginning cash balance, March 1 Cash services Collections from credit services [($835,000 0.60) + ($752,000 0.40)] Total cash available
801,800 $1,136,800
Cash expenditures Purchase of supplies [$34,000 + ($100,000 0.80)] Salaries and wages Other cash expenses Repayment of loan Total expenditures
$ 114,000 650,000 155,000 80,000 $ 999,000
Ending cash balance, March 31
$ 137,800
PTS: 1 DIF: Medium OBJ: 18.6 NAT: AACSB Analytic | IMA Budget Preparation
$ 215,000 120,000
14.
Given the following projected information for Lacey Inc. for 2011, prepare a pro-forma balance sheet and income statement. Ending common stock Beginning retained earnings Ending accounts payable Ending equipment Ending accumulated depreciation Ending accounts receivable Ending cash Interest expense Salary expense Other expenses (including depreciation) Service revenue Income tax rate ANS:
$70,000 28,000 6,000 200,000 40,000 19,000 18,000 2,500 105,000 37,500 300,000 40%
Lacey Inc. Pro-Forma Income Statement For the Year Ended December 31, 2011 Revenues Service revenue Expenses Salary expense Other expenses Operating Income Interest expense Operating income Income tax expense Net income
$ 300,000 (105,000) (37,500) 157,500 (2,500) 155,000 (62,000)* $ 93,000
* $310,000 40% Lacey Inc. Pro-Forma Balance Sheet As of December 31, 2011 Assets Cash Accounts receivable Equipment Less: Accumulated depreciation Total assets Liabilities and Stockholder's Equity Accounts payable Common stock Retained earnings ($28,000 + $93,000) Total liabilities and stockholders' equity PTS: 1 DIF: Medium OBJ: 18.7 NAT: AACSB Analytic | IMA Budget Preparation
$ 18,000 19,000 $200,000 (40,000)
160,000 $197,000 $
6,000 70,000 121,000 $197,000
Chapter 19—Controlling Cost and Profit MULTIPLE CHOICE 1.
Which of the following is NOT a type of responsibility center? a. Profit center b. Investment center c. Revenue center d. Cost center ANS: C PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
2.
Responsibility accounting is the concept that: a. A firm is responsible for reporting to the public all activities that have a social impact, such as pollution control b. Each activity within a firm is controlled by a manager who is accountable for costs; costs and revenues; or costs, revenues, and investments, depending on the degree of responsibility assigned c. A firm should apply generally accepted accounting principles on a basis consistent with preceding years d. A firm should be objective in accounting and should use historical costs rather than current-value concepts ANS: B PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
3.
Which type of center is usually found at the lowest levels in a firm? a. An investment center b. A revenue center c. A cost center d. A profit center ANS: C PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
4.
Which of the following is NOT a benefit of decentralization? a. More timely decisions can be made b. Lower-level managers become more involved in strategic planning c. Managers can be evaluated more accurately d. Sub-unit managers have incentives to perform well ANS: B PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
5.
The report which highlights variances from budget is the: a. Production report b. Performance report c. Exception report d. Cost sheet ANS: C PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
6.
Centralization refers to the concept of having decision-making authority in the hands of: a. Segment managers b. Top management c. Individual employees d. Operational managers ANS: B PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
7.
Of the following, which is probably the greatest benefit of centralization? a. Employee satisfaction and motivation b. An improved perspective of lower-level managers on unique divisional problems c. Managerial flexibility d. Goal congruence among divisions ANS: D PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
8.
A disadvantage to decentralization is: a. Segment managers do not receive credit for performance b. There are fewer opportunities for advancement c. Management decisions may not be within the objectives of the firm d. Management evaluations are more difficult ANS: C PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
9.
Goal congruence can be achieved by: a. Centralizing decisions that benefit the entire company b. Decentralizing the organization c. Establishing a system of responsibility accounting d. Both centralizing decisions that benefit the entire company and establishing a system of responsibility accounting ANS: D PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
10.
In which of the following is a manager responsible for costs and revenues? a. Responsibility center b. Cost center c. Profit center d. Investment center ANS: C PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
11.
In which of the following is a manager responsible for costs, revenues, and assets? a. Revenue center b. Cost center c. Profit center d. Investment center ANS: D PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
12.
In which of the following is a manager responsible for only costs? a. Responsibility center b. Cost center c. Profit center d. Investment center ANS: B PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
13.
How can an organization prevent decisions made by a decentralized manager from being inconsistent with the firm's objectives? a. Have decisions that benefit the entire company be made at the corporate level b. Develop a system of responsibility accounting c. Have top management make all decisions d. Have decisions that benefit the entire company be made at the corporate level and develop a system of responsibility accounting ANS: D PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
14.
In a responsibility accounting system, which of the following is true? a. The manager should be involved in the development of the plan over which the manager has control b. A manager should be held accountable only for the costs, revenues or assets over which the manager has substantial control c. A manager should be given very little autonomy d. The manager should be involved in the development of the plan over which the manager has control and should be held accountable for the costs, revenues, or assets over which the manager has substantial control ANS: D PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
15.
Responsibility accounting is used in: a. Cost centers b. Profit centers c. Investment centers d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 19.1 NAT: AACSB Reflective Thinking | IMA Performance Measurement
16.
Standard costs are generally based on: a. Desired production costs for the period b. The actual production costs for the period c. The sales price expected for the period d. The estimated average production costs for the period ANS: D PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
17.
Which of the following may affect the behavior of costs? a. Production methods b. Technology c. Plant layout d. All of these may affect the behavior of costs ANS: D PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
18.
Management by exception uses which of the following? a. Variances to isolate problem areas b. Responsibility centers to make managers accountable c. Decentralization principles to assign management tasks d. None of these are correct ANS: A PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
19.
Standard costs are used to control all of the following costs EXCEPT: a. Relevant costs b. Direct labor costs c. Variable manufacturing overhead costs d. Direct materials costs ANS: A PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
20.
All of the following are criteria for investigating a variance EXCEPT: a. Frequency of occurrence b. Controllability c. Whether favorable or unfavorable d. Effect on profitability ANS: C PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
21.
Which of the following is NOT an advantage of standard costing? a. Standards are reported as specific figures but are treated by managers as ranges of acceptable performance b. The setting of standard costs requires a careful analysis of operations c. Standard costs provide a basis for measuring performance by assigning variances to the manager responsible d. A standard cost system is compatible with the principle of management by exception ANS: A PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
22.
Which of the following is NOT a disadvantage of standard costing? a. Standard costing must change as conditions change b. Standard costs are not useful for certain types of businesses c. The setting of standard costs requires an analysis of cost behavior and a determination of the components of manufacturing overhead costs d. It is easy to misinterpret the causes of a variance because so many factors are involved ANS: C PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
23.
The variance computed by multiplying the difference between the actual and standard quantity of materials by the standard price paid is the: a. Materials quantity variance b. Labor rate variance c. Manufacturing overhead spending variance d. Materials price variance ANS: A PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
24.
A materials quantity variance is unfavorable when: a. Standard quantity is less than actual quantity b. Actual price is greater than standard price c. Actual quantity is less than standard quantity d. Standard price is greater than actual price ANS: A PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
25.
The difference between the standard price and the actual price multiplied by the actual quantity of materials is the: a. Materials quantity variance b. Overhead efficiency variance c. Overhead spending variance d. Materials price variance ANS: D PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
26.
A favorable materials price variance would occur when the: a. Actual quantity is greater than the standard quantity b. Standard quantity is greater than the actual quantity c. Actual price is greater than the standard price d. Standard price is greater than the actual price ANS: D PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
27.
Which of the following is a true statement? a. When actual price is greater than expected price, a favorable variance results b. When expected price is greater than actual price, a favorable variance results c. When expected price is equal to actual price, a favorable variance results d. None of these are true statements ANS: B PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
28.
To prevent quantity variances from being influenced by price changes, which is used? a. Standard quantity b. Actual price c. Standard price d. None of these are used ANS: C PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
29.
Which variance compares actual inputs used at actual and standard prices? a. Price variance b. Quantity variance c. Usage variance d. None of these are correct ANS: A PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
30.
Which of the following would NOT cause a material quantity variance? a. Quality defects b. Poor choice of materials c. Inexperienced workers d. Delivery costs ANS: D PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
31.
The variance computed by multiplying the difference between the actual rate and the standard rate by the actual hours is: a. The labor rate variance b. The materials price variance c. The manufacturing overhead efficiency variance d. The labor efficiency variance ANS: A PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
32.
The difference between standard hours and actual hours multiplied by the standard rate is the: a. Materials quantity variance b. Overhead efficiency variance c. Labor efficiency variance d. Materials price variance ANS: C PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
33.
The labor rate variance is the difference between the: a. Actual labor hours and the standard labor hours multiplied by the standard labor rate b. Actual labor rate and the standard labor rate multiplied by standard hours c. Standard labor rate and the actual labor rate multiplied by the actual labor hours d. Standard labor rate and the actual labor rate multiplied by the difference in actual labor hours and standard labor costs ANS: C PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
34.
All favorable labor rate variances indicate that: a. The actual labor rate is less than the standard labor rate b. The actual labor rate is greater than the standard labor rate c. Actual hours were greater than standard hours d. Standard hours were greater than actual hours ANS: A PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
35.
The labor efficiency variance is the difference between the: a. Standard labor rate and the actual labor rate multiplied by the actual labor hours b. Standard labor rate and the actual labor rate multiplied by the standard hours c. Actual labor hours and the standard labor hours multiplied by the actual labor rate d. Actual labor hours and the standard labor hours multiplied by the standard rate ANS: D PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
36.
A favorable labor efficiency variance would occur when the: a. Actual labor hours are less than the standard labor hours b. Standard labor hours are less than the actual labor hours c. Standard labor rate is less than the actual labor rate d. Actual labor rate is greater than the standard labor rate ANS: A PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
37.
Which of the following compares actual inputs at standard prices with standard quantity of inputs at standard prices? a. Price variance b. Usage variance c. Rate variance d. None of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 19.2 NAT: AACSB Reflective Thinking | IMA Performance Measurement
38.
Sammamish Company utilizes a standard cost system. The standard quantity for production is 10 pounds of material, and the standard price is $3 per pound. The actual quantity was 9 pounds, and the actual price was $3.20 per pound. Given this information, Sammamish would have a(n): a. Favorable materials price variance and a favorable materials quantity variance b. Favorable materials price variance and an unfavorable materials quantity variance c. Unfavorable materials price variance and a favorable materials quantity variance d. Unfavorable materials price variance and an unfavorable materials quantity variance ANS: C PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Performance Measurement
19.2
Exhibit 19-1 The following information relates to Almira's operations for the month of August: Actual quantity of materials used Standard quantity of materials Actual price of materials Standard price of materials Actual direct labor hours Standard direct labor hours Actual direct labor rate Standard direct labor rate
22,000 pounds 20,000 pounds $ 8.00 $ 7.60 40,000 42,000 $15.00 $14.00
39.
Refer to Exhibit 19-1. Given the information above, the materials quantity variance is: a. $15,200 unfavorable b. $15,200 favorable c. $16,000 unfavorable d. $16,000 favorable ANS: A Materials quantity variance: (20,000 standard lbs. 22,000 actual lbs.) $7.60 = $15,200 U PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement
40.
Refer to Exhibit 19-1. Given the information above, the materials price variance is: a. $8,800 unfavorable b. $8,800 favorable c. $24,000 unfavorable d. $24,000 favorable ANS: A Materials price variance: ($7.60 $8.00) 22,000 actual lbs. = $8,800 U PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement
41.
Refer to Exhibit 19-1. Given the information above, the labor efficiency variance is: a. $42,000 unfavorable b. $42,000 favorable c. $28,000 unfavorable d. $28,000 favorable ANS: D Labor efficiency variance: (42,000 standard hours 40,000 actual hours) $14.00 = $28,000 F PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement
42.
Refer to Exhibit 19-1. Given the information above, the labor rate variance is: a. $40,000 unfavorable b. $40,000 favorable c. $42,000 unfavorable d. $42,000 favorable ANS: A Labor rate variance: ($14.00 $15.00) 40,000 actual hours = $40,000 U PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement Exhibit 19-2 The following information relates to Bergen Corporation: Standard cost per unit: Direct materials (6 pounds) Direct labor (3 hours) Actual resources used: Direct materials Direct labor Units of output
$18 24 12,500 pounds at $2.95 5,900 hours at $7.85 2,000
43.
Refer to Exhibit 19-2. Based on the information above, the quantity of direct materials that should have been used is: a. 7,800 pounds b. 8,000 pounds c. 12,000 pounds d. 12,500 pounds ANS: C Direct materials that should have been used: 2,000 units 6 lbs. = 12,000 lbs. PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement
44.
Refer to Exhibit 19-2. Based on the information above, the materials price variance for materials actually used is: a. $500 favorable b. $500 unfavorable c. $625 favorable d. $625 unfavorable ANS: C Materials price variance: ($3 $2.95) 12,500 actual lbs. = $625 F PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement
45.
Refer to Exhibit 19-2. Based on the information above, the journal entry to record the purchase of materials and the materials price variance would include a debit to: a. Materials price variance for $625 b. Cash for $36,875 c. Direct materials inventory for $37,500 d. Direct materials inventory for $36,875 ANS: C Standard materials purchased: 12,500 ($18 / 6) = $37,500 PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement
46.
Refer to Exhibit 19-2. Based on the information above, the materials quantity variance is: a. $500 favorable b. $500 unfavorable c. $1,500 favorable d. $1,500 unfavorable ANS: D Direct materials that should have been used: Materials quantity variance:
2,000 units 6 lbs. = 12,000 lbs. (12,000 lbs. 12,500 actual lbs.) $3 = $1,500 U
PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement
47.
Refer to Exhibit 19-2. Based on the information above, the journal entry to record the use of materials and the materials quantity variance would include a debit to: a. Materials quantity variance for $1,500 b. Work-in-process inventory for $37,500 c. Direct materials inventory for $37,500 d. Cash for $36,000 ANS: A Direct materials that should have been used: Materials quantity variance:
2,000 units 6 lbs. = 12,000 lbs. (12,000 lbs. 12,500 actual lbs.) $3 = $1,500 U
PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement 48.
Refer to Exhibit 19-2. Based on the information above, the number of direct labor hours that should have been used is: a. 5,900 hours b. 6,000 hours c. 6,100 hours d. 6,200 hours ANS: B Direct labor hours that should have been used: 2,000 units 3 hours = 6,000 hours PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement
49.
Refer to Exhibit 19-2. Based on the information above, the labor efficiency variance is: a. $1,000 unfavorable b. $1,000 favorable c. $800 unfavorable d. $800 favorable ANS: D Direct labor hours that should have been used: Labor efficiency variance:
2,000 units 3 hours = 6,000 hours (6,000 standard hours 5,900 actual hours) $8 = $800 F
PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement 50.
Refer to Exhibit 19-2. Based on the information above, the labor rate variance is: a. $885 unfavorable b. $885 favorable c. $585 unfavorable d. $585 favorable ANS: B Labor rate variance: ($8.00 $7.85) 5,900 actual hours = $885 F PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement
51.
Refer to Exhibit 19-2. Based on the information above, the journal entry to record the labor costs and variances for Bergen Corporation would include a debit to: a. Work-in-process inventory for $48,000 b. Labor rate variance for $885 c. Labor efficiency variance for $800 d. Wages payable for $46,315 ANS: A Work-in-process: 2,000 units $24 = $48,000 PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement
52.
Twin Pines Custom Trim established the standard labor rate as $8.60 and the standard hours as 4 hours per unit. During June, 100 units were manufactured, and 410 actual labor hours were incurred at a rate of $8.50 per hour. The labor efficiency variance is: a. $86 unfavorable b. $45 unfavorable c. $41 favorable d. $45 unfavorable ANS: A Labor efficiency variance: (400 standard hours 410 actual hours) $8.60 = $86 U PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement Exhibit 19-3 The following information relates to Lamb Company: Actual units completed Standard labor rate per hour Standard hours per unit Labor rate variance Labor efficiency variance
53.
Refer to Exhibit 19-3. Given the information above, the standard labor cost per unit is: a. $2,500 b. $3,600 c. $7,200 d. $14,400 ANS: A Standard labor cost per unit: 250 hours $10 = $2,500 PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement
54.
1,440 units $10 250 hours $33,730 U $27,000 F
Refer to Exhibit 19-3. Given the information above, the actual labor hours were: a. 356,040 hours b. 357,300 hours c. 362,700 hours d. 360,000 hours
ANS: B Standard labor cost per unit: Standard labor hours: Actual labor hours:
250 hours $10 = $2,500 250 hours 1,440 units = 360,000 hours (360,000 AH) $10 = $27,000 F AH = 357,300 actual hours
PTS: 1 DIF: Challenging OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement 55.
Refer to Exhibit 19-3. Given the information above, total actual labor costs are: a. $3,339,270 b. $3,540,843 c. $3,399,980 d. Not able to be determined ANS: B Standard labor cost per unit: Standard labor hours: Actual labor hours: Actual labor costs: Total labor costs:
250 $10 = $2,500 250 hours 1,440 units = 360,000 hours [360,000 standard hours AH) $10 = $27,000 F AH = 357,300 actual hours ($10 AR) 357,300 actual hours = $33,730 U AR = $9.91 357,300 actual hours $9.91 = $3,540,843
PTS: 1 DIF: Challenging OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement 56.
Segment managers are generally NOT concerned with: a. Controllable costs b. Variable direct costs c. Fixed direct costs d. Indirect costs ANS: D PTS: 1 DIF: Easy OBJ: 19.3 NAT: AACSB Reflective Thinking | IMA Performance Measurement
57.
A segment margin income statement is a measure of performance in which type of responsibility center? a. Cost center b. Profit center c. Mail center d. Investment center ANS: B PTS: 1 DIF: Easy OBJ: 19.3 NAT: AACSB Reflective Thinking | IMA Performance Measurement
58.
A responsibility center in which the manager is responsible for only revenues and costs is a(n): a. Revenue center b. Cost center c. Investment center d. Profit center ANS: D PTS: 1 DIF: Easy OBJ: 19.3 NAT: AACSB Reflective Thinking | IMA Performance Measurement
59.
A segment margin income statement typically includes all of the following EXCEPT: a. Controllable costs b. Direct variable costs c. Direct fixed costs d. Opportunity costs ANS: D PTS: 1 DIF: Easy OBJ: 19.3 NAT: AACSB Reflective Thinking | IMA Performance Measurement
60.
Profit center managers are most often evaluated on the basis of: a. A comparison of actual to standard costs b. Segment margin c. Return on investment d. Earnings per share ANS: B PTS: 1 DIF: Easy OBJ: 19.3 NAT: AACSB Reflective Thinking | IMA Performance Measurement
61.
Costs that a manager CANNOT control are called: a. Direct costs b. Indirect costs c. Uncontrollable costs d. Segment costs ANS: C PTS: 1 DIF: Easy OBJ: 19.3 NAT: AACSB Reflective Thinking | IMA Performance Measurement
62.
Costs that a manager can control are called: a. Indirect costs b. Product costs c. Controllable costs d. Managed costs ANS: C PTS: 1 DIF: Easy OBJ: 19.3 NAT: AACSB Reflective Thinking | IMA Performance Measurement
63.
Which of the following informs management whether actual sales prices were higher or lower than expected? a. Sales price variance b. Sales volume variance c. Market share variance d. Industry volume variance ANS: A PTS: 1 DIF: Easy OBJ: 19.3 NAT: AACSB Reflective Thinking | IMA Performance Measurement
64.
Which of the following informs management whether units sold were more or less than expected? a. Sales price variance b. Sales volume variance c. Market share variance d. Industry volume variance ANS: B PTS: 1 DIF: Easy OBJ: 19.3 NAT: AACSB Reflective Thinking | IMA Performance Measurement
Exhibit 19-4 The following information relates to St. Jean Industries:
65.
Expected unit sales Expected unit sales price Expected market sales
145 $45 1,800
Actual unit sales Actual unit sales price Actual market sales
150 $50 1,788
Refer to Exhibit 19-4. Based on the information above, the sales price variance is: a. $750 unfavorable b. $750 favorable c. $270 unfavorable d. $270 favorable ANS: B Sales price variance: ($50 $45) 150 units = $750 F PTS: 1 DIF: Medium OBJ: 19.3 NAT: AACSB Analytic | IMA Performance Measurement
66.
Refer to Exhibit 19-4. Based on the information above, the sales volume variance is: a. $750 unfavorable b. $750 favorable c. $225 unfavorable d. $225 favorable ANS: D Sales volume variance: (150 actual units 145 expected units) $45 = $225 F PTS: 1 DIF: Medium OBJ: 19.3 NAT: AACSB Analytic | IMA Performance Measurement
67.
Managers with the most costs to control are found: a. At the lowest level b. At the middle level c. At the highest level d. Not enough information available ANS: C PTS: 1 DIF: Easy OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement
68.
The income a segment is able to earn above a specified minimum return is called: a. Gross margin b. Profit margin c. Net income d. Residual income ANS: D PTS: 1 DIF: Easy OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement
69.
Return on investment is a direct function of all the following EXCEPT: a. Operating income b. Net sales c. Average total assets d. Average inventory ANS: D PTS: 1 DIF: Easy OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement
70.
When other factors remain constant, an increase in average total assets: a. Increases the return on investment b. Decreases the return on investment c. Does not change the return on investment d. Does not always have the same effect on total assets ANS: B PTS: 1 DIF: Easy OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement
71.
The type of center that is evaluated on the basis of residual income is a(n): a. Investment center b. Profit center c. Revenue center d. Cost center ANS: A PTS: 1 DIF: Easy OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement
72.
Which of the following will most likely increase the return on investment? a. Increasing costs b. Increasing sales c. Increasing the level of operating assets d. Decreasing sales ANS: B PTS: 1 DIF: Easy OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement
73.
Profit margin is equal to: a. Net income divided by total sales b. Total sales divided by total assets c. Total assets divided by total sales d. Net income divided by total assets ANS: A PTS: 1 DIF: Easy OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement
74.
Return on investment is equal to profit margin: a. Times asset turnover b. Divided by asset turnover c. Plus asset turnover d. Minus asset turnover ANS: A PTS: 1 DIF: Easy OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement
75.
Which type of responsibility center would usually be found at the highest level in an organization? a. Revenue center b. Investment center c. Profit center d. Cost center ANS: B PTS: 1 DIF: Easy OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement
76.
Which of the following will cause the ROI to decrease? a. Decreasing costs b. Decreasing sales c. Decreasing the level of operating assets d. All of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement
77.
Residual income is equal to: a. Net income earned above a specified minimum return on assets b. Net income divided by average total assets c. Average total assets divided by net sales d. Net sales divided by net income ANS: A PTS: 1 DIF: Easy OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement
78.
An independent subsidiary of a decentralized company would be considered a(n): a. Cost center b. Profit center c. Revenue center d. Investment center ANS: D PTS: 1 DIF: Easy OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement
79.
Which of the following can be evaluated using ROI? a. Investment center b. Profit center c. Cost center d. None of these are correct ANS: A PTS: 1 DIF: Easy OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement
80.
Which of the following would NOT improve ROI? a. Decrease costs b. Decrease assets c. Increase revenue d. Increase inventory ANS: D PTS: 1 DIF: Easy OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement
81.
Walnut Company has sales of $1,000,000 and total expenses of $900,000. If operating assets are $500,000, the return on investment is: a. 10% b. 20% c. 30% d. 40% ANS: B ($1,000,000 $900,000) / $500,000 = 20%
82.
PTS: 1 DIF: Medium OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement Walnut Company has sales of $1,000,000 and total expenses of $900,000. If operating assets are $500,000, and a minimum required return of 15%, the residual income is: a. $400,000 b. $100,000 c. $50,000 d. $25,000 ANS: D ($1,000,000 $900,000) (15% $500,000) = $25,000 PTS: 1 DIF: Medium OBJ: 19.4 NAT: AACSB Reflective Thinking | IMA Performance Measurement Exhibit 19-5 Ridgeline Corporation has the following operating data for the year: Revenue Expenses Average total assets Average total liabilities
83.
$1,125,000 $ 850,000 $ 750,000 $ 475,000
Refer to Exhibit 19-5. Given the above data for Ridgeline Company, what is the ROI assuming the minimum rate of return on assets is 10%? a. 15% b. 24.4% c. 36.7% d. 55.9% ANS: C ROI: [($1,125,000 $850,000) $1,125,000 $1,125,000 $750,000 = 36.7% PTS: 1 DIF: Medium OBJ: 19.4 NAT: AACSB Analytic | IMA Performance Measurement
84.
Refer to Exhibit 19-5. Given the above data for Ridgeline Company, what is the profit margin assuming the minimum rate of return on assets is 10%? a. 12.5% b. 25.6% c. 32% d. 57% ANS: B Profit margin: ($1,125,000 $837,000) $1,125,000 = 25.6% PTS: 1 DIF: Medium OBJ: 19.4 NAT: AACSB Analytic | IMA Performance Measurement
85.
Refer to Exhibit 19-5. Given the above data for Ridgeline Company, what is the asset turnover assuming the minimum rate of return on assets is 10%? a. 1.0 b. 1.5 c. 2.6 d. 3.2 ANS: B Asset turnover: $1,125,000 $750,000 = 1.5 PTS: 1 DIF: Medium OBJ: 19.4 NAT: AACSB Analytic | IMA Performance Measurement
86.
Refer to Exhibit 19-5. Given the above data for Ridgeline Company, what is the residual income assuming the minimum rate of return on assets is 10%? a. $75,000 b. $175,500 c. $213,000 d. $243,000 ANS: C ($1,125,000 $837,000) (10% $750,000) = $213,000 PTS: 1 DIF: Medium OBJ: 19.4 NAT: AACSB Analytic | IMA Performance Measurement Exhibit 19-6 Kentucky Corporation has the following operating data for 2011: Net income Revenue Total assets
87.
$ 255,000 1,700,000 1,360,000
Refer to Exhibit 19-6. Given the information above, Kentucky's return on investment is: a. 10.5% b. 15% c. 18.75% d. 20.25% ANS: C Return on investment: $255,000 $1,360,000 = 18.75% PTS: 1 DIF: Medium OBJ: 19.4 NAT: AACSB Analytic | IMA Performance Measurement
88.
Refer to Exhibit 19-6. Given the information above, if Kentucky's net income increased to $306,000, the return on investment would be: a. 15.0% b. 18.75% c. 22.5% d. 25.0% ANS: C Return on investment: $306,000 $1,360,000 = 22.5% PTS: 1 DIF: Medium OBJ: 19.4 NAT: AACSB Analytic | IMA Performance Measurement
89.
Frank Company, which has total assets of $300,000, has an opportunity to invest $80,000 in a new project that will generate a return of $16,000 per year. Given this information, what is the return on this investment? a. 15% b. 20% c. 25% d. 30% ANS: B Return on this investment: $16,000 $80,000 = 20% PTS: 1 DIF: Medium OBJ: 19.4 NAT: AACSB Analytic | IMA Performance Measurement
90.
Frank Company, which has total assets of $300,000, has an opportunity to invest $80,000 in a new project that will generate a return of $16,000 per year. Given this information, if Frank Company's acceptable return on investment is 22%, it will probably: a. Accept the project, but also look for another project b. Reject the project c. Increase its return on investment by accepting the project d. Not be able to make a decision based on the given information ANS: B Return on this investment: $16,000 $80,000 = 20% PTS: 1 DIF: Medium OBJ: 19.4 NAT: AACSB Analytic | IMA Performance Measurement
91.
Frank Company, which has total assets of $300,000, has an opportunity to invest $80,000 in a new project that will generate a return of $16,000 per year. Given this information, if Frank Company uses 15% as a minimum rate of return, how much residual income will result from this project? a. $16,000 per year b. $12,000 per year c. $4,000 per year d. $0 per year ANS: C Residual income: $16,000 (15% $80,000) = $4,000 PTS: 1 DIF: Medium OBJ: 19.4 NAT: AACSB Analytic | IMA Performance Measurement
92.
Frank Company, which has total assets of $300,000, has an opportunity to invest $80,000 in a new project that will generate a return of $16,000 per year. Given this information, if Frank Company was earning 25% before, then accepts this project, its new return on investment will be approximately: a. 20% b. 22% c. 24% d. 26%
ANS: C Profit margin before investment: Return on investment with investment:
Profit margin $300,000 = 25% Profit margin = $75,000 ($75,000 + $16,000) ($300,000 + $80,000) = 24%
PTS: 1 DIF: Challenging OBJ: 19.4 NAT: AACSB Analytic | IMA Performance Measurement 93.
The variance computed by comparing the standard costs at the budgeted activity level with the standard costs at the actual activity level is: a. The materials quantity variance b. The labor efficiency variance c. The manufacturing overhead efficiency variance d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 19.5 NAT: AACSB Reflective Thinking | IMA Performance Measurement
94.
The difference between the amount of money actually incurred for variable manufacturing overhead and the amount that should have been incurred for the actual activity level achieved, measured in terms of direct labor hours, is: a. The variable manufacturing overhead efficiency variance b. The variable manufacturing overhead spending variance c. The total variable manufacturing overhead variance d. None of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 19.5 NAT: AACSB Reflective Thinking | IMA Performance Measurement
95.
Comparing the standard variable manufacturing overhead costs based on standard hours with the standard variable manufacturing overhead based on actual hours provides: a. The variable manufacturing overhead efficiency variance b. The variable manufacturing overhead spending variance c. The total variable manufacturing overhead variance d. None of these are correct ANS: A PTS: 1 DIF: Easy OBJ: 19.5 NAT: AACSB Reflective Thinking | IMA Performance Measurement
96.
When direct labor is the best cost driver for variable manufacturing overhead, a favorable direct labor efficiency variance would result in: a. A favorable variable manufacturing overhead efficiency variance b. An unfavorable variable manufacturing overhead efficiency variance c. An unfavorable variable manufacturing overhead efficiency variance and an unfavorable total variable manufacturing overhead variance d. The answer cannot be determined ANS: A PTS: 1 DIF: Easy OBJ: 19.5 NAT: AACSB Reflective Thinking | IMA Performance Measurement
97.
A variance that provides an opportunity for control over individual overhead items by highlighting the differences between standard and actual costs is the: a. Variable manufacturing overhead efficiency variance b. Variable manufacturing overhead spending variance c. Fixed manufacturing overhead volume variance d. Direct labor efficiency variance ANS: B PTS: 1 DIF: Easy OBJ: 19.5 NAT: AACSB Reflective Thinking | IMA Performance Measurement Exhibit 19-7 The following figures represent 100% capacity for Starr Manufacturing: Units produced Direct labor hours expected Variable manufacturing overhead costs
20,000 12,000 $36,000
Starr Manufacturing normally produces at 100% capacity. During the month of October, the company started and completed 10,000 units of product, using variable manufacturing overhead costs of $20,000. The company used 6,400 direct labor hours in October instead of the 6,000 hours expected for the activity level achieved. 98.
Refer to Exhibit 19-7. Based on the information above, the overhead rate used to apply variable manufacturing overhead to Work-in-Process is: a. $0.80 per unit produced b. $1.20 per unit produced c. $1.20 per direct labor hour d. $3.00 per direct labor hour ANS: D Standard rate per hour: $36,000 12,000 hours = $3 PTS: 1 DIF: Medium OBJ: 19.5 NAT: AACSB Analytic | IMA Performance Measurement
99.
Refer to Exhibit 19-7. Based on the information above, the standard variable manufacturing overhead cost in terms of actual direct labor hours is: a. $18,000 b. $19,200 c. $27,000 d. $36,000 ANS: B Standard rate per hour: Standard variable manufacturing overhead:
$36,000 12,000 hours = $3 6,400 hours $3 = $19,200
PTS: 1 DIF: Medium OBJ: 19.5 NAT: AACSB Analytic | IMA Performance Measurement
100.
Refer to Exhibit 19-7. Based on the information above, the standard variable manufacturing overhead cost in terms of standard direct labor hours is: a. $18,000 b. $19,200 c. $27,000 d. $36,000 ANS: A Standard rate per hour: Standard variable manufacturing overhead cost:
$36,000 12,000 hours = $3 6,000 hours $3 = $18,000
PTS: 1 DIF: Medium OBJ: 19.5 NAT: AACSB Analytic | IMA Performance Measurement 101.
Refer to Exhibit 19-7. Based on the information above, the variable manufacturing overhead applied to Work-in-Process Inventory is: a. $18,000 b. $19,200 c. $27,000 d. $36,000 ANS: A Standard rate per hour: $36,000 12,000 hours = $3 Variable manufacturing overhead applied to WIP: 6,000 $3 = $18,000 PTS: 1 DIF: Medium OBJ: 19.5 NAT: AACSB Analytic | IMA Performance Measurement
102.
Refer to Exhibit 19-7. Based on the information above, the variable manufacturing overhead spending variance is: a. $2,000 favorable b. $2,000 unfavorable c. $800 favorable d. $800 unfavorable ANS: D Standard rate per hour: Variable overhead spending variance:
$36,000 12,000 hours = $3 $20,000 (6,400 hours $3) = $800 U
PTS: 1 DIF: Medium OBJ: 19.5 NAT: AACSB Analytic | IMA Performance Measurement 103.
Refer to Exhibit 19-7. Based on the information above, the manufacturing overhead efficiency variance is: a. $1,200 favorable b. $1,200 unfavorable c. $2,000 favorable d. $2,000 unfavorable ANS: B Standard rate per hour: Manufacturing overhead efficiency variance:
$36,000 12,000 hours = $3 (6,000 hours 6,400 hours) $3 = $1,200 U
PTS: 1 DIF: Medium OBJ: 19.5 NAT: AACSB Analytic | IMA Performance Measurement
Exhibit 19-8 The following information is available for Granger Company: Standard variable manufacturing overhead rate per direct labor hour Actual variable manufacturing overhead Standard direct labor hours for output produced Actual direct labor hours worked 104.
$7.00 $60,000 11,000 10,000
Refer to Exhibit 19-8. Given the information above, the variable manufacturing overhead spending variance is: a. $7,000 favorable b. $7,000 unfavorable c. $10,000 favorable d. $17,000 unfavorable ANS: C Variable manufacturing overhead spending variance: (10,000 hours $7) $60,000 = $10,000 F PTS: 1 DIF: Medium OBJ: 19.5 NAT: AACSB Analytic | IMA Performance Measurement
105.
Refer to Exhibit 19-8. Given the information above, the variable manufacturing overhead efficiency variance is: a. $7,000 favorable b. $7,000 unfavorable c. $10,000 unfavorable d. $17,000 unfavorable ANS: A Variable manufacturing overhead efficiency variance: (11,000 hours 10,000 hours) $7 = $7,000 F PTS: 1 DIF: Medium OBJ: 19.5 NAT: AACSB Analytic | IMA Performance Measurement
106.
The following information is available for the Ringo Corporation: Actual direct labor hours for March Standard direct labor hours for March Actual units produced in March Estimated variable manufacturing overhead for the year Estimated direct labor hours for the year Normal yearly capacity
6,000 7,000 3,000 $140,000 70,000 30,000
The amount of variable manufacturing overhead applied to Work-in-Process Inventory in March would be: a. $12,000 b. $14,000 c. $48,000 d. $56,000 ANS: B Variable manufacturing overhead rate: Variable manufacturing overhead applied in March
$140,000 70,000 hours = $2 per hour 7,000 hours $2 = $14,000
PTS: 1 DIF: Medium OBJ: 19.5 NAT: AACSB Analytic | IMA Performance Measurement
107.
Determine the appropriate variable manufacturing overhead rate using the following information: Annual expected manufacturing overhead costs Annual expected variable manufacturing overhead costs Annual units to be produced Annual standard direct labor hours expected a. b. c. d.
$910,000 $360,000 30,000 60,000
$6.00 per direct labor hour $12.00 per direct labor hour $15.16 per direct labor hour $30.33 per direct labor hour
ANS: A Variable manufacturing overhead rate: $360,000 60,000 hours = $6 PTS: 1 DIF: Medium OBJ: 19.5 NAT: AACSB Analytic | IMA Performance Measurement Exhibit 19-9 The following data is known for Lyman, Inc.: Budgeted variable manufacturing overhead Budgeted fixed manufacturing overhead Budgeted production Budgeted direct labor hours Budgeted direct labor hours per unit Actual variable manufacturing overhead Actual fixed manufacturing overhead Actual production Actual direct labor hours Standards: Variable manufacturing overhead: Fixed manufacturing overhead: 108.
$108,000 $324,000 36,000 units 54,000 units 1.5 hours $136,500 $296,000 40,000 units 65,000 1.5 direct labor hours $2 = $3 per unit 1.5 direct labor hours $6 = $9 per unit
Refer to Exhibit 19-9. Using the information above, compute the variable manufacturing overhead spending variance for Lyman, Inc. a. $10,000 favorable b. $10,000 unfavorable c. $6,500 favorable d. $6,500 unfavorable ANS: D Variable manufacturing overhead spending variance: (65,000 actual hours $2) $136,500 = $6,500 U PTS: 1 DIF: Challenging OBJ: 19.5 NAT: AACSB Analytic | IMA Performance Measurement
109.
Refer to Exhibit 19-9. Using the information above, compute the variable manufacturing overhead efficiency variance for Lyman, Inc. a. $10,000 favorable b. $10,000 unfavorable c. $30,000 favorable d. $30,000 unfavorable
ANS: B Hours allowed for actual production: Variable manufacturing overhead efficiency variance:
40,000 units 1.5 hours = 60,000 hours (60,000 allowed hours 65,000 actual hours) $2 = $10,000 U
PTS: 1 DIF: Challenging OBJ: 19.5 NAT: AACSB Analytic | IMA Performance Measurement 110.
Which of the following is a component of the fixed manufacturing overhead budget variance and the volume variance? a. Actual fixed manufacturing overhead costs b. Fixed manufacturing overhead budget c. Standard fixed manufacturing overhead rate d. All of these are components ANS: D PTS: 1 DIF: Easy OBJ: 19.6 NAT: AACSB Reflective Thinking | IMA Performance Measurement
111.
Which variance is NOT considered to be an input variance? a. Variable manufacturing overhead spending variance b. Variable manufacturing overhead efficiency variance c. Volume variance d. Fixed manufacturing overhead budget variance ANS: C PTS: 1 DIF: Easy OBJ: 19.6 NAT: AACSB Reflective Thinking | IMA Performance Measurement
112.
Which of the following would NOT be part of total over- or underapplied manufacturing overhead? a. Volume variance b. Variable manufacturing overhead efficiency variance c. Fixed manufacturing overhead budget variance d. Sales volume variance ANS: D PTS: 1 DIF: Easy OBJ: 19.6 NAT: AACSB Reflective Thinking | IMA Performance Measurement
113.
If the actual amount spent for fixed manufacturing overhead is greater than the budgeted amount, the result is: a. A favorable fixed overhead budget variance b. An unfavorable fixed overhead budget variance c. A favorable volume variance d. An unfavorable volume variance ANS: B PTS: 1 DIF: Easy OBJ: 19.6 NAT: AACSB Reflective Thinking | IMA Performance Measurement
114.
If the actual amount spent for fixed manufacturing overhead is less than the budgeted amount, the result is: a. A favorable fixed overhead budget variance b. An unfavorable fixed overhead budget variance c. A favorable volume variance d. An unfavorable volume variance ANS: A PTS: 1 DIF: Easy OBJ: 19.6 NAT: AACSB Reflective Thinking | IMA Performance Measurement
115.
If the budgeted amount for fixed manufacturing overhead is greater than the standard hours allowed for the actual output times the standard rate, the result is: a. A favorable fixed overhead budget variance b. An unfavorable fixed overhead budget variance c. A favorable volume variance d. An unfavorable volume variance ANS: D PTS: 1 DIF: Easy OBJ: 19.6 NAT: AACSB Reflective Thinking | IMA Performance Measurement
116.
If the budgeted amount for fixed manufacturing overhead is less than the standard hours allowed for the actual output times the standard rate, the result is: a. A favorable fixed overhead budget variance b. An unfavorable fixed overhead budget variance c. A favorable volume variance d. An unfavorable volume variance ANS: C PTS: 1 DIF: Easy OBJ: 19.6 NAT: AACSB Reflective Thinking | IMA Performance Measurement Exhibit 19-10 The following information is given for Roe Company: Actual fixed manufacturing overhead Budgeted fixed manufacturing overhead Actual production Budgeted production Standard direct labor hour per unit
$200,000 $190,000 600 500 4
Fixed manufacturing overhead is applied to production based on direct labor hours. 117.
Refer to Exhibit 19-10. Using the data above, compute the fixed manufacturing overhead budget variance. a. $7,000 favorable b. $7,000 unfavorable c. $10,000 favorable d. $10,000 unfavorable ANS: D Fixed overhead budget variance: $190,000 $200,000 = $10,000 U PTS: 1 DIF: Medium OBJ: 19.6 NAT: AACSB Analytic | IMA Performance Measurement
118.
Refer to Exhibit 19-10. Using the data above, compute the volume variance. a. $38,000 favorable b. $38,000 unfavorable c. $10,000 favorable d. $10,000 unfavorable
ANS: A Budgeted hours: Fixed manufacturing overhead application rate: Hours allowed for actual production: Volume variance: Alternative computation: Standard fixed manufacturing overhead rate: Volume variance:
500 units 4 hours = 2,000 hours $190,000 (2,000) = $95 600 units 4 hours = 2,400 hours (2,000 budgeted hours 2,400 allowed hours) $95 = $38,000 F $190,000 500 units = $380 (600 actual units 500 budgeted units) $380 = $38,000 F
PTS: 1 DIF: Medium OBJ: 19.6 NAT: AACSB Analytic | IMA Performance Measurement 119.
Medina Sports manufactures snowboards. Medina had budgeted 25 direct labor hours per unit and projected that 2,120 units would be produced. The budgeted fixed manufacturing overhead costs were $530,000. The actual overhead costs for the year were $544,000 and 2,150 units were produced. What is the fixed overhead budget variance? a. $14,000 favorable b. $14,000 unfavorable c. $7,500 favorable d. $7,500 unfavorable ANS: B Fixed overhead budget variance: $530,000 $544,000 = 14,000 U PTS: 1 DIF: Medium OBJ: 19.6 NAT: AACSB Analytic | IMA Performance Measurement
120.
Medina Sports manufactures snowboards. Medina had budgeted 12.5 direct labor hours per unit and projected that 2,120 units would be produced. The budgeted fixed manufacturing overhead costs were $530,000. The actual overhead costs for the year were $544,000 and 2,150 units were produced. What is the volume variance? a. $12,000 favorable b. $12,000 unfavorable c. $7,500 favorable d. $7,500 unfavorable
ANS: C Standard rate: Budgeted hours: Hours allowed for actual production: Volume variance: Alternative computation: Standard fixed manufacturing overhead rate: Volume variance:
$530,000 (2,120 units 12.5 hours) = $20 2,120 12.5 = 26,500 hours 2,150 12.5 = 26,875 hours (26,875 26,500) $20 = $7,500 F
$530,000 2,120 units = $250 (2,120 budgeted units 2,150 actual units) $250 = $7,500 F
PTS: 1 DIF: Medium OBJ: 19.6 NAT: AACSB Analytic | IMA Performance Measurement Exhibit 19-11 The following data is known for Carlin, Inc.: Budgeted variable manufacturing overhead Budgeted fixed manufacturing overhead Budgeted production Budgeted direct labor hours Budgeted direct labor hours per unit Actual variable manufacturing overhead Actual fixed manufacturing overhead Actual production Actual direct labor hours Standards: Variable manufacturing overhead: Fixed manufacturing overhead: 121.
$ 54,000 $162,000 18,000 units 27,000 units 1.5 hours $ 68,250 $148,000 20,000 units 32,500 1.5 direct labor hours $2 = $3 per unit 1.5 direct labor hours $6 = $9 per unit
Refer to Exhibit 19-11. Using the information above, compute the fixed manufacturing overhead budget variance for Carlin, Inc. a. $14,000 favorable b. $14,000 unfavorable c. $18,000 favorable d. $18,000 unfavorable ANS: A Fixed manufacturing overhead budget variance: $162,000 $148,000 = $14,000 F PTS: 1 DIF: Challenging OBJ: 19.6 NAT: AACSB Analytic | IMA Performance Measurement
122.
Refer to Exhibit 19-11. Using the information above, compute the volume variance for Carlin, Inc. a. $14,000 favorable b. $14,000 unfavorable c. $18,000 favorable d. $18,000 unfavorable
ANS: C Hours allowed for actual production: 20,000 units 1.5 hours = 30,000 hours Volume variance: (30,000 allowed hours 27,000 budgeted hours) $6 = $18,000 F Alternative computation: (20,000 actual units 18,000 budgeted units) $9 = $18,000 F PTS: 1 DIF: Challenging OBJ: 19.6 NAT: AACSB Analytic | IMA Performance Measurement PROBLEM 1.
Sequim Company is a decentralized company with two segments: Micro and Macro. Additionally, for each segment, Sequim's sales are split between the two states of Oregon and Washington. The following is information applicable to revenue for the year: Budget $400,000 250,000 200,000 175,000
Micro Oregon Micro Washington Macro Oregon Macro Washington a. b.
Actual $375,000 290,000 265,000 125,000
Prepare a responsibility accounting report for the head of the Micro division. Show whether each variance is favorable or unfavorable. Prepare a responsibility accounting report for the two operating segments, a detailed breakdown by geographic area is not required.
ANS: a. Oregon Washington b. Micro Macro
Budget $400,000 250,000 $650,000
Actual $375,000 290,000 $665,000
Variance $25,000 U $40,000 F $15,000 F
Budget $ 650,000 375,000 $1,025,000
Actual $ 665,000 390,000 $1,055,000
Variance $15,000 F $15,000 F $30,000 F
PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement 2.
Piedmont Company incurred the following actual costs for direct materials during July: Direct materials purchased: 40,000 pounds at $3.20 per pound Direct materials used: 37,000 pounds at $3.20 per pound
$128,000 118,400
During July, the company produced 2,000 units of its product. The standard costs for direct materials have been established as follows: Standard direct material cost per unit: Total standard direct materials cost for July:
20 pounds at $3 per pound 2,000 units 20 pounds $3 per pound
a. b.
Compute the materials price and quantity variances for Piedmont Company for the month of July. The price variance is determined when the materials are purchased. Prepare the journal entries to record the materials price variance when the materials are purchased and the materials quantity variance when the materials are used.
ANS: a.
Materials price variance: ($3.20 $3.00) 40,000 lbs. = $8,000 U Materials quantity variance: (37,000 lbs. used $40,000 standard pounds) $3 = $9,000 F
b.
Direct Materials Inventory 120,000 Materials Price Variance 8,000 Cash (or Accounts Payable) To record inventory at standard cost and recognize materials price variance. Work-in-Process Inventory 120,000 Materials Quantity Variance Direct Materials Inventory To transfer materials used to Work-in-Process Inventory at standard cost.
128,000
9,000 111,000
PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement 3.
The Clarke Manufacturing Company collected the following information for the month of July: Standard production Actual production Standard materials per unit Materials purchased and used in July Standard price for material Actual price for material a. b.
70,000 68,000 3 200,600 $0.60 $0.58
units units pounds pounds per pound per pound
Compute the materials price and quantity variances for July. Prepare journal entries for the purchase and use of materials.
ANS: a.
Materials price variance = ($0.58 – $0.60) 200,600 lbs. = $4,012 F Materials quantity variance = [200,600 lbs – (68,000 units 3)] $0.60 = $2,040 F
b.
Direct Materials Inventory Materials Price Variance Accounts Payable
120,360
Work-in-Process Inventory Materials Quantity Variance Direct Materials Inventory
122,400
PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement
4,012 116,348 2,040 120,360
4.
Kahlotus Company uses standard costs and a flexible budget for controlling its service activities. In March, the company serviced 11,000 units of its product using 30,000 actual direct labor hours. The actual hourly rate was $19.00. Three direct labor hours is the standard allowance for servicing one unit of product. The standard labor rate is $19.50 per hour. a. b.
Compute the rate and efficiency variances for direct labor. Prepare a journal entry to record the variances in the accounting records.
ANS: a.
Labor rate variance: ($19.50 – $19.00) 30,000 actual hours = $15,000 F Labor efficiency variance: [(11,000 3) standard hours – 30,000 actual hours] $19.50 = $58,500 F
b.
Work-in-Process Inventory 643,500 Labor Rate Variance Labor Efficiency Variance Salaries and Wages Payable To transfer labor cost to Work-in-Process Inventory at standard cost. PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement 5.
15,000 58,500 570,000
To produce one unit of PL734 requires 1.5 direct labor hours at a standard cost of $15.00 per hour. During the month of April, 41,000 units were produced using 63,450 direct labor hours of labor at a cost of $926,370. a. b.
Compute the labor rate and labor efficiency variances. Prepare a journal entry to record the use of direct labor.
ANS: a.
Labor rate variance = ($14.60 $15.00) 63,450 hours = $25,380 F Labor efficiency variance = (63,450 actual hours 61,500 budgeted hours) $15 = $29,250 U
b.
Work-in-Process Inventory Labor Efficiency Variance Labor Rate Variance Wages Payable
922,500 29,250 25,380 926,370
PTS: 1 DIF: Medium OBJ: 19.2 NAT: AACSB Analytic | IMA Performance Measurement 6.
The MEC Company has two divisions: the Computer division and the Printer division. Cost and revenue information for the two divisions for the year 2011 is as follows:
Revenue Fixed costs: Costs unique to each division Costs allocated by corporate headquarters Variable cost per unit Unit sales of each division's product
Computer Division $1,100,000
Printer Division $750,000
450,000 50,000 7 75,000
375,000 70,000 6 52,000
Prepare a segment margin statement showing each division's contribution and segment margins and the overall company profit. ANS: MEC Company Segment Margin Income Statement December 2011 Overall Company $1,850,000 837,000 $1,013,000 825,000 $ 188,000 120,000 $ 68,000
Sales revenue Variable costs Contribution margin Controllable fixed costs Segment margin Company indirect costs Net income
7.
Computer Division $1,100,000 525,000 $ 575,000 450,000 $ 125,000
Printer Division $750,000 312,000 $438,000 375,000 $ 63,000
PTS: 1 DIF: Medium OBJ: 19.3 NAT: AACSB Analytic | IMA Performance Measurement StoneWorks is a company that sells tile. It has three profit centers: ceramic, stone and granite. Financial information for the three centers for the year just ended follows:
Revenue Fixed costs: Costs unique to the profit center Costs allocated by the retail store Variable costs as a percentage of sales a. b.
Ceramic $100,000
Stone $125,000
Granite $150,000
30,000 6,000 40%
45,000 7,000 60%
64,000 8,000 64%
Calculate each profit center's contribution and segment margins and overall company profits. Which center, if any, should be discontinued?
ANS: a. Revenue Variable costs Contribution margin Fixed costs unique to the center Segment margin Allocated fixed costs Net income b.
Entire Company $375,000 211,000 $164,000 139,000 $ 25,000 21,000 $ 4,000
Ceramic $100,000 40,000 $ 60,000
Stone $125,000 75,000 $ 50,000
Granite $150,000 96,000 $ 54,000
30,000 $ 30,000
$
45,000 5,000
64,000 $(10,000)
On the basis of this information, Granite should be discontinued because it is not covering its own variable and fixed costs.
PTS: 1 DIF: Medium OBJ: 19.3 NAT: AACSB Analytic | IMA Performance Measurement
8.
The following information relates to Spangle Industries: Expected unit sales Expected unit sales price Expected market sales
435 $135 5,400
Actual unit sales Actual unit sales price Actual market sales
450 $150 5,364
Based on this information, calculate Spangle Industries sales price variance and sales volume variance. ANS: Sales price variance: Sales volume variance:
($150 $135) 450 units = $6,750 F (450 actual units 435 expected units) $135 = $2,025 F
PTS: 1 DIF: Medium OBJ: 19.3 NAT: AACSB Analytic | IMA Performance Measurement 9.
Compute the missing data items, (a) through (f), in the following table: Revenue Net income Total assets Profit margin ratio Assets turnover ratio ROI
Division X $345,000 $ 69,000 (a) (b) (c) 10%
Division Y $287,500 $ 57,500 $143,750 (d) (e) (f)
ANS: a. b. c. d. e. f.
$69,000 / 10% = $690,000 $69,000 / $345,000 = 20% $345,000 / $690,000 = 0.5 $57,500 / $287,500 = 20% $287,500 / $143,750 = 2 $57,500 / $143,750 = 40% (or 20% 2)
PTS: 1 DIF: Medium OBJ: 19.4 NAT: AACSB Analytic | IMA Performance Measurement 10.
The following information has been gathered from the accounting department at a local grocery store: Net income Net sales revenue Total assets: 2011 2012 Cost of goods sold What is the return on investment and profit margin on sales for the local grocer?
$ 180,000 750,000 1,200,000 1,400,000 350,000
ANS: Return on investment: Profit margin on sales:
$180,000 / [($1,200,000 + $1,400,000) / 2] = 13.85% $180,000 / $750,000 = 24%
PTS: 1 DIF: Medium OBJ: 19.4 NAT: AACSB Analytic | IMA Performance Measurement 11.
Given the following information, if the minimum rate of return on average total assets is 15%, what is the residual income? Total assets Net income
$887,500 225,000
ANS: Net income Minimum ROA ($887,500 15%) Residual income
$225,000 (133,125) $ 91,875
PTS: 1 DIF: Medium OBJ: 19.4 NAT: AACSB Analytic | IMA Performance Measurement 12.
Matsuma Manufacturing Company uses standard direct labor hours to apply variable manufacturing overhead to Work-in-Process Inventory. The following data were taken from the records: June: Budgeted units Budgeted hours Actual variable manufacturing overhead Actual units produced Actual direct labor hours
20,000 5,000 $ 48,500 19,500 5,100
Annual variable manufacturing overhead data: Estimated variable costs Estimated direct labor hours Estimated units of production
$500,000 50,000 12,500
a. b. c.
Compute the annual variable manufacturing overhead rate to be used to apply variable manufacturing overhead to Work-in-Process Inventory. Compute the variable manufacturing overhead spending variance for June. Compute the variable manufacturing overhead efficiency variance for June.
ANS: a. b. c.
$500,000 ÷ 50,000 hours = $10 per direct labor hour $48,500 (5,100 hours $10) = $2,500 F (5,100 hours $10) – (5,000 hours $10) = $1,000 U
PTS: 1 DIF: Medium OBJ: 19.5 NAT: AACSB Analytic | IMA Performance Measurement
13.
Circle Corporation's president would like to have an analysis of variable and fixed manufacturing overhead costs budgeted and incurred for the month of August. Three machine hours per unit is the standard allowed for machine hours and 15,500 units were projected to be produced in August. Budgeted variable and fixed manufacturing overhead costs for the month were $93,000 and $186,000, respectively. During August, 49,000 machine hours were actually used to produce 17,500 units of product. Actual variable and fixed manufacturing overhead for the month were $112,000 and $194,000, respectively. a. b.
Compute the variable manufacturing overhead spending and efficiency variances for the month of August. Compute the fixed overhead budget variance and the volume variance for the month of August.
ANS: a.
Variable manufacturing overhead spending variance: Actual variable manufacturing overhead Predicted costs based on actual machine hours (49,000 $2*) Variable manufacturing overhead spending variance
$112,000 98,000 $ 14,000 U
Variable manufacturing overhead efficiency variance: Predicted costs based on actual machine hours (49,000 $2*) Applied costs based on standard hours allowed (52,500** $2*) Variable manufacturing overhead efficiency variance
105,000 $ 7,000 F
* Standard rate per hour: $93,000 (15,500 units 3 hours) = $2 per hour ** Standard hours allowed: 17,500 units 3 hours = 52,500 b. Fixed overhead budget variance: Actual fixed manufacturing overhead Budgeted fixed manufacturing overhead Fixed overhead budget variance
$194,000 186,000 $ 8,000 U
Volume variance: Budgeted fixed manufacturing overhead Applied costs based on standard hours allowed (52,500 $4*) Volume variance
$186,000 210,000 $ 24,000 F
$ 98,000
* Standard rate per hour: $186,000 (15,500 units 3 hours) = $4 per hour Alternative computation for volume variance: Expected production output (15,500 $12*) Actual production output (17,500 12*) Volume variance * Standard rate per unit: $186,000 15,500 units = $12 per unit PTS: 1 DIF: Challenging OBJ: 19.5 NAT: AACSB Analytic | IMA Performance Measurement
$186,000 210,000 $ 24,000 F
14.
The following information is given for Reardan Company: Actual fixed manufacturing overhead Budgeted fixed manufacturing overhead Actual production Budgeted production Standard direct labor hour per unit
$500,000 $475,000 1,500 1,250 10
Fixed manufacturing overhead is applied to production based on direct labor hours. a. b.
Compute the fixed manufacturing overhead budget variance. Compute the volume variance.
ANS: a.
Fixed overhead budget variance: $500,000 $475,000 = $25,000 U
b.
Budgeted hours: 1,250 units 10 hours = 12,500 hours Fixed manufacturing overhead application rate: $475,000 12,500 = $38 Hours allowed for actual production: 1,500 units 10 hours = 15,000 hours Volume variance: (15,000 allowed hours 12,500 budgeted hours) $38 = $95,000 F Alternative computation: Standard fixed manufacturing overhead rate: $475,000 1,250 units = $380 Volume variance: (1,500 actual units 1,250 budgeted units) $380 = $95,000 F
15.
PTS: 1 DIF: Challenging OBJ: 19.6 NAT: AACSB Analytic | IMA Performance Measurement Lake Stevens Manufacturing Company uses a standard cost system. After actual manufacturing costs have been recorded and manufacturing overhead has been applied, there is a credit balance of $5,000 in the manufacturing overhead account. Variances were as follows: $ 5,550 U $12,250 F $ 8,400 U $ 6,700 F
Variable overhead spending variance Variable overhead efficiency variance Fixed overhead budget variance Volume variance Prepare the journal entry to recognize the manufacturing variances. ANS: Manufacturing Overhead Variable Overhead Spending Variance Fixed Overhead Budget Variance Volume Variance Variable Overhead Efficiency Variance PTS: 1 DIF: Medium OBJ: 19.6 NAT: AACSB Analytic | IMA Performance Measurement
5,000 5,550 8,400 6,700 12,250
Chapter 20—Inventory Management and Variable and Absorption Costing MULTIPLE CHOICE 1.
The formula for a typical income statement is: a. Sales Cost of goods sold Selling & administrative expenses = Operating income b. Operating income = Gross margin (Selling & administrative expenses + Cost of goods sold) c. Sales Selling & administrative expenses Cost of goods sold = Gross margin d. Gross margin Cost of goods sold = Operating income ANS: A PTS: 1 DIF: Easy OBJ: 20.1 NAT: AACSB Reflective Thinking | IMA Cost Management
2.
What type of firm could have work-in-process inventory? a. Service b. Manufacturing c. Merchandising d. Both service and manufacturing ANS: D PTS: 1 DIF: Easy OBJ: 20.1 NAT: AACSB Reflective Thinking | IMA Cost Management
3.
What type of firm would have a large inventory of goods completed and ready to sell? a. Service b. Manufacturing c. Merchandising d. Both manufacturing and merchandising ANS: C PTS: 1 DIF: Easy OBJ: 20.1 NAT: AACSB Reflective Thinking | IMA Cost Management
4.
When comparing income statements, which type of company does not have a section for cost of goods or services sold? a. Manufacturing firm b. Service firm c. Merchandising firm d. All of these have a cost of goods or services sold section ANS: D PTS: 1 DIF: Easy OBJ: 20.1 NAT: AACSB Reflective Thinking | IMA Cost Management
5.
When comparing income statements, which type of company does not have a section for selling and general administrative expenses? a. Manufacturing firm b. Service firm c. Merchandising firm d. All of these have a section for selling and general administrative expenses ANS: D PTS: 1 DIF: Easy OBJ: 20.1 NAT: AACSB Reflective Thinking | IMA Cost Management
6.
When comparing balance sheets, which type of company has a significant materials inventory? a. Manufacturing firm b. Service firm c. Merchandising firm d. All of these have a significant materials inventory ANS: A PTS: 1 DIF: Easy OBJ: 20.1 NAT: AACSB Reflective Thinking | IMA Cost Management
7.
When comparing balance sheets, which type of company has an inventory of work-in-process services? a. Manufacturing firm b. Service firm c. Merchandising firm d. All of these have an inventory of work-in-process services ANS: B PTS: 1 DIF: Easy OBJ: 20.1 NAT: AACSB Reflective Thinking | IMA Cost Management
8.
When comparing balance sheets, which type of company could not have a supplies inventory? a. Manufacturing firm b. Service firm c. Merchandising firm d. All of these could have a supplies inventory ANS: D PTS: 1 DIF: Easy OBJ: 20.1 NAT: AACSB Reflective Thinking | IMA Cost Management
9.
The formula for inventory turnover is: a. Cost of goods sold average inventory b. Cost of goods manufactured average inventory c. Cost of goods sold cost of goods manufactured d. Average inventory cost per unit ANS: A PTS: 1 DIF: Easy OBJ: 20.2 NAT: AACSB Reflective Thinking | IMA Cost Management
10.
Which of the following is not true of inventory turnover? a. It measures how many times inventory has been replaced. b. It indicates how well inventory has been managed. c. A higher turnover number indicates a less efficient use of inventory. d. It is calculated by dividing cost of goods sold by average inventory value. ANS: C PTS: 1 DIF: Easy OBJ: 20.2 NAT: AACSB Reflective Thinking | IMA Cost Management
11.
Which of the following values would be the most desirable for inventory turnover? a. 9 b. 6 c. 3 d. Not enough information to tell ANS: A PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
20.2
Exhibit 20-1 The following information is for Saratoga Company: Raw materials used during the year Beginning raw materials inventory Ending raw materials inventory Applied manufacturing overhead Direct labor costs Beginning work-in-process inventory Ending work-in-process inventory Cost of goods sold Beginning finished goods inventory Ending finished goods inventory
$375,000 28,000 30,000 700,000 250,000 100,000 90,000 900,000 125,000 110,000
12.
Refer to Exhibit 20-1. Determine the raw materials inventory turnover (rounded). a. 7.6 b. 11.7 c. 12.9 d. 13.4 ANS: C Average raw materials inventory: ($28,000 + $30,000) 2 = $29,000 Raw materials inventory turnover: $375,000 $29,000 = 12.9 PTS: 1 DIF: Medium OBJ: 20.2 NAT: AACSB Analytic | IMA Cost Management
13.
Refer to Exhibit 20-1. Determine the number of days in ending raw materials inventory. Assume Saratoga uses a 365-day year. a. 27.3 b. 28.3 c. 31.2 d. 58.4 ANS: B Average raw materials inventory: Raw materials inventory turnover: Number of days in ending raw materials:
($28,000 + $30,000) 2 = $29,000 $375,000 $29,000 = 12.9 365 12.9 = 28.3
PTS: 1 DIF: Medium OBJ: 20.2 NAT: AACSB Analytic | IMA Cost Management 14.
Refer to Exhibit 20-1. Determine the inventory turnover for work-in-process inventory. a. 3.9 b. 7.4 c. 7.6 d. 14.1 ANS: D Average work-in-process inventory: ($100,000 + $90,000) 2 = $95,000 Cost of goods manufactured: $375,000 + $250,000 + $700,000 + $100,000 $90,000 = $1,335,000 Work-in-process inventory turnover: $1,335,000 $95,000 = 14.1 (rounded) PTS: 1 DIF: Medium OBJ: 20.2 NAT: AACSB Analytic | IMA Cost Management
15.
Refer to Exhibit 20-1. Determine the work-in-process days in inventory. Assume a 365-day year. a. 25.9 b. 38.5 c. 19.3 d. 93.6 ANS: A Average work-in-process inventory: Cost of goods manufactured: Work-in-process inventory turnover: Days of manufacturing represented by work-in-process inventory:
($100,000 + $90,000) 2 = $95,000 $375,000 + $250,000 + $700,000 + $100,000 $90,000 = $1,335,000 $1,335,000 $95,000 = 14.1 365 14.1 = 25.9
PTS: 1 DIF: Medium OBJ: 20.2 NAT: AACSB Analytic | IMA Cost Management 16.
Refer to Exhibit 20-1. Determine the inventory turnover for the finished goods inventory. a. 3.8 b. 7.2 c. 7.7 d. 8.2 ANS: C Average finished goods inventory: Finished goods inventory turnover:
($125,000 + $110,000) 2 = $117,500 $900,000 $117,500 = 7.7
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 17.
20.2
Refer to Exhibit 20-1. Determine the number of days in finished goods inventory. Assume a 365day year. a. 44.5 b. 47.4 c. 50.7 d. 96 ANS: B Average finished goods inventory: Finished goods inventory turnover: Number of days in finished goods inventory:
($125,000 + $110,000) 2 = $117,500 $900,000 $117,500 = 7.7 365 7.7 = 47.4
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
20.2
18.
Maintaining too little inventory causes all but which of the following problems? a. The opportunity lost to invest in alternative business investments b. Increased risk of lost sales c. Increased ordering costs d. Increased exposure to nondelivery ANS: A PTS: 1 DIF: Easy OBJ: 20.3 NAT: AACSB Reflective Thinking | IMA Cost Management
19.
When calculating ROI on inventory, inventory turnover is calculated by: a. Gross margin divided by Inventory b. Gross margin divided by Average inventory c. Sales revenue divided by Inventory d. Sales revenue divided by Average inventory ANS: D PTS: 1 DIF: Easy OBJ: 20.3 NAT: AACSB Reflective Thinking | IMA Cost Management
20.
Maintaining smaller inventories should lead to: a. Less purchasing costs b. More storage costs c. Less shrinkage costs d. All of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 20.3 NAT: AACSB Reflective Thinking | IMA Cost Management
21.
Carrying too much inventory can cause which of the following problems? a. Increase in ordering costs b. Increase in inventory shrinkage c. Decreased bulk order discounts d. Increased risk of price increases ANS: B PTS: 1 DIF: Easy OBJ: 20.3 NAT: AACSB Reflective Thinking | IMA Cost Management
22.
Inventory shrinkage is caused by: a. Spoilage b. Theft c. Breakage d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 20.3 NAT: AACSB Reflective Thinking | IMA Cost Management
23.
Use of the ROI formula can help a company: a. Determine true profit b. Maximize return on investments c. Measure revenue d. Establish asset turnover levels ANS: B PTS: 1 DIF: Easy OBJ: 20.3 NAT: AACSB Reflective Thinking | IMA Cost Management
24.
The return on inventory investment formula is: a. (Revenue Gross margin) (Gross margin Inventory) b. (Revenue Cost of goods sold) (Revenue Inventory) c. (Gross margin Revenue) (Revenue Inventory) d. None of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 20.3 NAT: AACSB Reflective Thinking | IMA Cost Management
25.
Which of the following is a disadvantage of low inventory levels? a. Decreased bulk discounts b. Higher order costs c. Risk of purchase price inflation d. All of these are disadvantages of low inventory levels ANS: D PTS: 1 DIF: Easy OBJ: 20.3 NAT: AACSB Reflective Thinking | IMA Cost Management
26.
ABC Co. has a gross margin of $42,750. LMN Co. has a gross margin of $49,100. XYZ Co. has a gross margin of $38,190. All three companies sell the same product. Which company did a better job of selling its product? a. ABC b. LMN c. XYZ d. There is not enough information available. ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Cost Management
OBJ:
20.3
Exhibit 20-2 Calumet Company sells slippers. The following information is available for Calumet's inventory for 2011: Units lost due to theft, breakage, etc. Monthly units sold at below market price Average monthly inventory level Overhead cost of managing a purchase order Original market sales price Actual sales price or items sold below market price Activity-based monthly cost of maintaining a unit of inventory Number of purchase events during the year 27.
Refer to Exhibit 20-2. Calculate Calumet's shrinkage loss for the year. a. $45,000 b. $30,000 c. $90,000 d. $150,000 ANS: A 3,000 $15 = $45,000 PTS: 1 DIF: Medium OBJ: 20.3 NAT: AACSB Analytic | IMA Cost Management
3,000 10,000 30,000 $150 $ 15 $ 10 $ 3 15
28.
Refer to Exhibit 20-2. Calculate Calumet's market loss for the year. a. $50,000 b. $600,000 c. $1,200,000 d. $360,000 ANS: B 10,000 12 ($15 $10) = $600,000 PTS: 1 DIF: Medium OBJ: 20.3 NAT: AACSB Analytic | IMA Cost Management
29.
Refer to Exhibit 20-2. Calculate Calumet's overhead cost for the year. a. $90,000 b. $600,000 c. $1,080,000 d. $1,800,000 ANS: C 30,000 12 $3 = $1,080,000 PTS: 1 DIF: Medium OBJ: 20.3 NAT: AACSB Analytic | IMA Cost Management
30.
Refer to Exhibit 20-2. Calculate Calumet's order costs for the year. a. $225 b. $2,250 c. $150 d. $45 ANS: B $150 15 = $2,250 PTS: 1 DIF: Medium OBJ: 20.3 NAT: AACSB Analytic | IMA Cost Management Exhibit 20-3 Florence Company sells lawn mowers. The following information is available for Florence's inventory for 2011: Units purchased at undiscounted prices before price increase Units purchased after price increase Original actual price Discounted purchase price New actual price
31.
Refer to Exhibit 20-3. Calculate Florence's lost discount for the year. a. $100,000 b. $22,500 c. $7,500 d. $12,500 ANS: D 500 ($225 $200) = $12,500 PTS: 1 DIF: Medium OBJ: 20.3 NAT: AACSB Analytic | IMA Cost Management
500 300 $225 $200 $270
32.
Refer to Exhibit 20-3. Calculate Florence's costs due to the price increase for the year. a. $13,500 b. $7,500 c. $22,500 d. $21,000 ANS: A 300 ($270 $225) = $13,500 PTS: 1 DIF: Medium OBJ: 20.3 NAT: AACSB Analytic | IMA Cost Management
33.
For the year ended 2011, Equine Supplies had cost of goods sold of $280,000 and gross margin of $400,000. Inventory levels were as follows: $40,000 at December 31, 2010 and $44,000 at December 31, 2011. ROI in inventory is: a. 58% b. 161% c. 667% d. 952% ANS: C Gross Margin: Inventory Turnover: ROI in Inventory:
$280,000 ($400,000 + $280,000) = 41.18% ($400,000 + $280,000) [($40,000 + $44,000) 2] = 16.2 .4118 16.2 = 667%
PTS: 1 DIF: Medium OBJ: 20.3 NAT: AACSB Analytic | IMA Cost Management 34.
During 2011, the Lianro Company had sales of $375,000 and cost of goods sold of $281,250. Merchandise inventory at the beginning of the year was $118,000 and at the end of the year, it was $124,000. The return on investment in inventory was: a. 4.8% b. 75.6% c. 77.5% d. 232% ANS: C Gross Margin: Inventory Turnover: ROI:
($375,000 $281,250) $375,000 = 25% $375,000 [($118,000 + $124,000) 2] = 310% 25% 310% = 77.5%
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 35.
20.3
Which of the following is an opportunity cost associated with financial holding costs? a. Too much inventory b. Too little inventory c. Both too much inventory and too little inventory d. Neither too much inventory nor too little inventory ANS: C PTS: 1 DIF: Easy OBJ: 20.4 NAT: AACSB Reflective Thinking | IMA Cost Management
36.
Economic profit is: a. Gross margin Financial holding costs b. Net operating profit Financial holding costs c. Gross margin Opportunity costs d. Net operating profit Gross margin ANS: B PTS: 1 DIF: Easy OBJ: 20.4 NAT: AACSB Reflective Thinking | IMA Cost Management
37.
Financial holding cost in a merchandising firm is calculated by which formula? a. Average inventory investment Annual rate b. Ending inventory investment Annual rate c. Average inventory investment Annual rate Number of periods d. Ending inventory investment Annual rate Number of periods ANS: C PTS: 1 DIF: Easy OBJ: 20.4 NAT: AACSB Reflective Thinking | IMA Cost Management
38.
39.
Merchandising companies can have holding costs associated with merchandise inventory. In service firms, the account that would have a comparable holding cost would be: a. Overhead b. Cost of Services c. Accounts Payable d. Work-in-Process Services ANS: D PTS: 1 DIF: Easy OBJ: 20.4 NAT: AACSB Reflective Thinking | IMA Cost Management Portage Company made the following inventory purchases during the year: January 1 March 31 July 15 October 1
$ 80,000 $150,000 $172,000 $ 90,000
If Portage Company's cost of capital is 14%, what is the amount of its holding costs for the year? a. $0 b. $8,610 c. $17,220 d. $21,000 ANS: B Average amount of inventory purchased: Average investment in inventory: Holding costs:
($80,000 + $150,000 + $172,000 + $90,000) 4 = $123,000 ($0 + $123,000) 2 = $61,500 $61,500 1 14% = $8,610
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
20.4
40.
The private investigation firm of Watson & Holmes is conducting an investigation for a wealthy movie star. The investigation is estimated to take 6 months to complete and will use $2,000 in supplies, $120,000 in labor, and $80,000 in overhead. Watson & Holmes' cost of capital is 12%. What are the financial holding costs on this project? a. $0 b. $3,030 c. $6,060 d. $12,120 ANS: C Average investment: Financial holding costs:
($0 + $2,000 + $120,000 + $80,000) 2 = $101,000 $101,000 6/12 12% = $6,060
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 41.
The private investigation firm of Watson & Holmes is conducting an investigation for a wealthy movie star. The investigation is estimated to take 6 months to complete and will use $2,000 in supplies, $120,000 in labor, and $80,000 in overhead. Watson & Holmes' cost of capital is 12%. At the end of the sixth month, Watson & Holmes finds that the investigation will take an additional 2 months to complete and another $80,000 in labor and overhead. What are the additional financial holding costs for the 2 extra months on this project? a. $4,840 b. $5,640 c. $8,880 d. $11,700 ANS: A Original work-in-process services: Additional holding costs:
$2,000 + $120,000 + $80,000 = $202,000 [($202,000 + $282,000) 2] 2/12 12% = $4,840
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management 42.
20.4
20.4
The CPA firm of Peck, Williams, and Shafner is conducting an audit of Monolith Enterprises. The audit is estimated to take 4 months to complete and will use $4,000 in supplies, $200,000 in labor, and $320,000 in overhead. Peck's annual rate is 18%. What are the financial holding costs on this project? a. $0 b. $15,720 c. $31,440 d. $47,160 ANS: B [($0 + $4,000 + $200,000 + $320,000) 2] 4/12 18% = $15,720 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
20.4
43.
The CPA firm of Peck, Williams, and Shafner is conducting an audit of Monolith Enterprises. The audit is estimated to take 4 months to complete and will use $4,000 in supplies, $200,000 in labor, and $320,000 in overhead. Peck's annual rate is 18%. At the end of the fourth month, Peck finds that the audit will take an additional 2 months to complete and another $200,000 in labor and overhead. What are the additional financial holding costs for the 2 extra months on this project? a. $0 b. $3,000 c. $18,720 d. $21,720 ANS: C [($524,000 + $724,000) 2] 2/12 18% = $18,720 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
44.
The consulting firm of Howe and Biggs is currently conducting a large consulting assignment for Spaeth Industries. Howe has calculated that the financial holding costs of this 3-month project are $6,000. If the project will use $600,000 in supplies, labor, and overhead, Howe's cost of capital must be: a. 4% b. 8% c. 12% d. None of these ANS: B $600,000 2 3/12 CC = $6,000 CC = $6,000 $75,000 CC = 8% PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Cost Management
45.
20.4
20.4
EOQ is used to: a. Minimize carrying costs of inventory b. Minimize ordering costs of inventory c. Balance carrying costs and ordering costs of inventory d. Maximize carrying costs of inventory ANS: C PTS: 1 DIF: Easy OBJ: 20.5 NAT: AACSB Reflective Thinking | IMA Corporate Finance
46.
EOQ is used to determine: a. The day of the month to place inventory orders b. The optimal order size of inventory c. The optimal purchase price of inventory d. All of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 20.5 NAT: AACSB Reflective Thinking | IMA Corporate Finance
47.
Which of the following equations determines the total annual carrying costs of inventory? a. Order quantity Unit carrying cost per year b. Order quantity 2 Unit carrying cost per year c. Total demand Order quantity Unit carrying cost per year d. Total demand 2 Unit carrying cost per year ANS: B PTS: 1 DIF: Easy OBJ: 20.5 NAT: AACSB Reflective Thinking | IMA Corporate Finance
48.
Which of the following equations determines the total annual ordering costs of inventory? a. Order quantity Cost to place an order b. Order quantity 2 Unit carrying costs per year c. Total demand Order quantity Cost to place an order d. Total demand 2 Cost to place an order ANS: C PTS: 1 DIF: Easy OBJ: 20.5 NAT: AACSB Reflective Thinking | IMA Corporate Finance Which of the following is not included in carrying costs? a. Holding costs b. Costs due to market loss c. Cost of capital d. Costs due to shrinkage
49.
ANS: C PTS: 1 DIF: Easy OBJ: 20.5 NAT: AACSB Reflective Thinking | IMA Corporate Finance 50.
Lead time is the: a. Number of days that it takes to place an order b. Number of days between placing an order and receiving the order c. Number of days between running out of inventory and receiving new inventory d. Number of days an order is in transit ANS: B PTS: 1 DIF: Easy OBJ: 20.5 NAT: AACSB Reflective Thinking | IMA Corporate Finance
51.
The formula for the reorder point without safety stock is: a. Maximum daily sales Average lead time b. Average daily sales Maximum daily sales Average lead time c. Maximum daily sales Average daily sales Average lead time d. Average daily sales Average lead time ANS: D PTS: 1 DIF: Easy OBJ: NAT: AACSB Reflective Thinking | IMA Corporate Finance
52.
20.5
A short formula to calculate the reorder point with safety stock is: a. Maximum daily sales Average lead time b. Average daily sales Maximum daily sales Average lead time c. Maximum daily sales Maximum lead time d. Average daily sales Average lead time ANS: C PTS: 1 DIF: Easy OBJ: NAT: AACSB Reflective Thinking | IMA Corporate Finance
20.5
53.
Hannafin Company decreased the size of inventory order quantities below the quantity determined by EOQ. What is the impact on total annual ordering costs? a. Increase b. No change c. Decrease d. Cannot be determined from the information given ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Corporate Finance
54.
OBJ:
20.5
Garner Industries increased the size of inventory order quantities above the quantity determined by EOQ. If annual quantity demanded remains the same, the number of orders made during the year will: a. Increase b. Not change c. Decrease d. Cannot be determined from the information given ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Corporate Finance
56.
20.5
Hannafin Company decreased the size of inventory order quantities below the quantity determined by EOQ. If annual quantity demanded remains the same, the number of orders made during the year will: a. Increase b. Not change c. Decrease d. Cannot be determined from the information given ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Corporate Finance
55.
OBJ:
OBJ:
20.5
Garner Industries increased the size of inventory order quantities above the quantity determined by EOQ. What is the impact on total annual carrying costs? a. Increase b. No change c. Decrease d. Cannot be determined from the information given ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Corporate Finance
OBJ:
20.5
Exhibit 20-4 The Hanover Catalog Company has the following information available concerning one of its inventory items: Cost of placing an order Unit carrying cost per year Annual quantity demanded Safety stock Average daily demand Lead time in days
$500.00 $ 4.00 100,000 750 380 6
57.
Refer to Exhibit 20-4. The EOQ for this inventory item is: a. 40 units b. 400 units c. 500 units d. 5,000 units ANS: D 2(100, 000)($500) $4
5, 000
PTS: 1 DIF: Medium OBJ: 20.5 NAT: AACSB Analytic | IMA Corporate Finance 58.
Refer to Exhibit 20-4. The reorder point with safety stock for this inventory item is: a. 2,280 units b. 2,220 units c. 3,030 units d. 5,000 units ANS: C (380 6) + 750 = 3,030 PTS: 1 DIF: Medium OBJ: 20.5 NAT: AACSB Analytic | IMA Corporate Finance
59.
Refer to Exhibit 20-4. If there is a delay in shipping the item, approximately how many days can be covered by the safety stock? a. 0.5 days b. 2 days c. 133 days d. 263 days ANS: B 750 380 = 2 days PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Corporate Finance
60.
20.5
Creasly Company has an economic order quantity of 300 units for item B of inventory. The annual demand for the product is 5,625 units, and the unit carrying cost is $4.00. What is the cost of placing an order? a. $32 b. $64 c. $75 d. $50 ANS: A 30 units =
2(5, 625)(x) 4
x = $32 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Corporate Finance
20.5
61.
Swanson Supplies has an economic order quantity of 100 units for item X of inventory. The annual demand for the product is 1,400 units and the cost to place an order is $25. What is the unit carrying cost? a. $3.50 b. $7.00 c. $14.00 d. $10.00 ANS: B 100 units =
2(1, 400)($25) x
x = $7 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Corporate Finance 62.
20.5
Which inventory costing method assigns fixed production costs to inventory so as to report the full cost of creating inventory? a. Variable costing b. Gross margin costing c. Full costing d. Absorption costing ANS: D PTS: 1 DIF: Easy OBJ: 20.6 NAT: AACSB Reflective Thinking | IMA Cost Management
63.
Which inventory costing method creates an incentive to build up excess inventory? a. Full costing b. Gross margin costing c. Contribution margin costing d. Absorption costing ANS: D PTS: 1 DIF: Easy OBJ: 20.6 NAT: AACSB Reflective Thinking | IMA Cost Management
64.
Which inventory costing method calculates contribution margin instead of gross margin? a. Full costing b. Gross margin costing c. Variable costing d. Absorption costing ANS: C PTS: 1 DIF: Easy OBJ: 20.6 NAT: AACSB Reflective Thinking | IMA Cost Management
65.
Which inventory costing method calculates operating income? a. Absorption costing b. Gross margin costing c. Variable costing d. Both absorption and variable costing ANS: D PTS: 1 DIF: Easy OBJ: 20.6 NAT: AACSB Reflective Thinking | IMA Cost Management
66.
Which inventory costing method expenses all selling and administrative expenses to the income statement in the period in which these costs occurred? a. Absorption costing b. Gross margin costing c. Variable costing d. Both absorption and variable costing ANS: D PTS: 1 DIF: Easy OBJ: 20.6 NAT: AACSB Reflective Thinking | IMA Cost Management
67.
What is the main difference between an absorption costing system and a variable costing system? a. The handling of variable production costs b. The handling of fixed production costs c. The handling of variable selling and administrative costs d. The handling of fixed selling and administrative costs ANS: B PTS: 1 DIF: Easy OBJ: 20.6 NAT: AACSB Reflective Thinking | IMA Cost Management
68.
69.
Which of the following is true regarding the variable inventory costing method? a. Current fixed production costs are retained in inventory at the end of the period b. Current fixed production costs are expensed to the income statement each period c. Cost of goods sold can be manipulated by the number of units produced d. It is the inventory costing method required by GAAP ANS: B PTS: 1 DIF: Easy OBJ: 20.6 NAT: AACSB Reflective Thinking | IMA Cost Management Which inventory costing method is required by GAAP? a. Absorption costing b. Variable costing c. Full costing d. Fixed costing ANS: A PTS: 1 DIF: Easy OBJ: 20.6 NAT: AACSB Reflective Thinking | IMA Cost Management
70.
Which inventory costing method allows net income to be manipulated by changing production levels? a. Full costing b. Gross margin costing c. Contribution margin costing d. Absorption costing ANS: D PTS: 1 DIF: Easy OBJ: 20.6 NAT: AACSB Reflective Thinking | IMA Cost Management
71.
Which of the following is the income statement formula for the absorption costing method? a. Sales Revenue Cost of Goods Sold = Gross Margin All Fixed Expenses = Operating Income b. Sales Revenue All Variable Costs = Contribution Margin All Fixed Expenses = Operating Income c. Sales Revenue Variable Manufacturing Costs = Contribution Margin Fixed Manufacturing Costs = Operating Income d. Sales Revenue Cost of Goods Sold = Gross Margin Selling and Administrative Expenses = Operating Income ANS: D PTS: 1 DIF: Easy OBJ: 20.6 NAT: AACSB Reflective Thinking | IMA Cost Management
72.
Which of the following is the income statement formula for the variable costing method? a. Sales Revenue Cost of Goods Sold = Gross Margin All Fixed Expenses = Operating Income b. Sales Revenue All Variable Costs = Contribution Margin All Fixed Expenses = Operating Income c. Sales Revenue Variable Manufacturing Costs = Contribution Margin Fixed Manufacturing Costs = Operating Income d. Sales Revenue Cost of Goods Sold = Gross Margin Selling and Administrative Expenses = Operating Income ANS: B PTS: 1 DIF: Easy OBJ: 20.6 NAT: AACSB Reflective Thinking | IMA Cost Management Exhibit 20-5 Barron Company manufactured 150,000 units during the year but only sold 130,000 of these units. At the beginning of the year, Barron had no beginning finished goods inventory. The following unit costs were incurred during the year:
73.
Variable manufacturing cost $3.00 Variable selling cost $0.50 Fixed manufacturing cost $4.00 Fixed selling cost ($300,000 total) $2.00 Refer to Exhibit 20-5. Using absorption costing, what is the value of Barron's finished goods inventory at the end of the year? a. $140,000 b. $60,000 c. $80,000 d. $120,000 ANS: A (20,000 $3) + (20,000 $4) = $140,000 PTS: 1 DIF: Medium OBJ: 20.6 NAT: AACSB Analytic | IMA Cost Management
74.
Refer to Exhibit 20-5. Using variable costing, what is the value of Barron's finished goods inventory at the end of the year? a. $140,000 b. $60,000 c. $80,000 d. $120,000 ANS: B (20,000 $3) = $60,000 PTS: 1 DIF: Medium OBJ: 20.6 NAT: AACSB Analytic | IMA Cost Management
75.
Refer to Exhibit 20-5. If Barron Company sold each unit for $13, what is Barron's net income for the year using absorption costing? a. $295,000 b. $335,000 c. $415,000 d. $780,000 ANS: C (130,000 $13) (130,000 $3) (130,000 $4) (130,000 $0.50) $300,000 = $415,000 PTS: 1 DIF: Medium OBJ: 20.6 NAT: AACSB Analytic | IMA Cost Management
76.
Refer to Exhibit 20-5. If Barron Company sold each unit for $13, what is Barron's net income for the year using variable costing? a. $295,000 b. $335,000 c. $415,000 d. $780,000 ANS: B (130,000 $13) (130,000 $3) (130,000 $0.50) (150,000 $4) $300,000 = $335,000 PTS: 1 DIF: Medium OBJ: 20.6 NAT: AACSB Analytic | IMA Cost Management Exhibit 20-6 Vilas Company manufactured 80,000 units during July but only sold 65,000 of these units at a price of $20 each. At the beginning of the month, Vilas had 5,000 units in finished goods inventory. The following unit costs are known for June and July: Variable manufacturing cost Variable selling cost Fixed manufacturing cost Fixed selling cost ($240,000 total) Vilas Company uses the first-in first-out (FIFO) method.
June $6 $1 $8 $3
July $6 $1 $6 $3
77.
Refer to Exhibit 20-6. What is net income for July using the absorption costing method? a. $205,000 b. $85,000 c. $215,000 d. $125,000 ANS: A (65,000 $20) (65,000 $6) (5,000 $8) (60,000 $6) (65,000 $1) $240,000 = $205,000 PTS: 1 DIF: Medium OBJ: 20.6 NAT: AACSB Analytic | IMA Cost Management
78.
Refer to Exhibit 20-6. What is net income for July using the variable costing method? a. $205,000 b. $85,000 c. $215,000 d. $125,000 ANS: D (65,000 $20) (65,000 $6) (65,000 $1) (80,000 $6) $240,000 = $125,000 PTS: 1 DIF: Medium OBJ: 20.6 NAT: AACSB Analytic | IMA Cost Management
79.
Last year, Racine Company's income under absorption costing was $15,000 lower than its income under variable costing. The company had total production costs of $24 per unit, of which $14 was variable costs. No selling expenses were incurred this year. Racine sold 25,000 units during the year. How many units were produced during the year? a. 25,000 b. 23,500 c. 24,000 d. 26,500 ANS: B Difference in operating income = Fixed manufacturing cost per unit (production units sales units) (15,000) = $10 (X 25,000) $235,000 = $10X X = 23,500 PTS: 1 DIF: Medium OBJ: 20.6 NAT: AACSB Analytic | IMA Cost Management
PROBLEM 1.
Complete the following table by listing the types of firms (manufacturing, service, or merchandising) that would use each balance sheet or income statement item. Raw materials inventory Work-in-process inventory Selling and administrative expenses Merchandise inventory Finished goods inventory Work-in-process services Purchases of materials Gross margin Supplies inventory Over/underapplied manufacturing/service overhead Direct labor Applied manufacturing/service overhead Cost of goods/services sold Selling and administrative expenses Operating income ANS: Raw materials inventory Manufacturing Work-in-process inventory Manufacturing Selling and administrative expenses Manufacturing, Service, Merchandising Merchandise inventory Merchandising Finished goods inventory Manufacturing Work-in-process services Service Purchases of materials Manufacturing Gross margin Manufacturing, Service, Merchandising Supplies inventory Manufacturing, Service, Merchandising Over/underapplied manufacturing/service overhead Manufacturing, Service, Merchandising Direct labor Manufacturing, Service Applied manufacturing/service overhead Manufacturing, Service Cost of goods/services sold Manufacturing, Service, Merchandising Selling and administrative expenses Manufacturing, Service, Merchandising Operating income Manufacturing, Service, Merchandising PTS: 1 DIF: Easy OBJ: 20.1 NAT: AACSB Reflective Thinking | IMA Cost Management
2.
Use the following information to prepare a cost of goods manufactured schedule for Beaverton Company for the year ended December 31, 2011: Ending raw materials inventory Ending work-in-process inventory Depreciation-factory Direct labor Indirect labor Indirect materials Insurance-factory Beginning work-in-process inventory Beginning raw materials inventory Payroll taxes-factory Property taxes-factory Raw materials purchased
$17,000 22,000 7,000 35,000 5,000 6,000 10,000 27,000 15,000 7,000 9,000 32,000
ANS: Beaverton Company Cost of Goods Manufactured Schedule For the Year Ended December 31, 2011 Raw materials: Beginning raw materials inventory Add: Raw materials purchased Total raw materials available Less: Ending raw materials inventory Raw materials used in production Direct labor Manufacturing overhead: Indirect labor Indirect materials Insurancefactory Depreciationfactory Property taxesfactory Payroll taxesfactory Total actual manufacturing overhead Total manufacturing costs Add: Beginning work-in-process inventory Less: Ending work-in-process inventory. Cost of goods manufactured PTS: 1 DIF: Medium OBJ: 20.1 NAT: AACSB Analytic | IMA Cost Management
$ 15,000 32,000 $ 47,000 (17,000) $ 30,000 35,000 $ 5,000 6,000 10,000 7,000 9,000 7,000 44,000 $109,000 27,000 (22,000) $114,000
3.
The following end of year information is given for Ashland Company: Raw materials used during the year Beginning raw materials inventory Ending raw materials inventory Applied manufacturing overhead Direct labor costs Beginning work-in-process inventory Ending work-in-process inventory Cost of goods sold Beginning finished goods inventory Ending finished goods inventory
$1,150,000 112,000 120,000 2,400,000 900,000 400,000 360,000 3,200,000 500,000 440,000
Calculate the following items (assume a 365-day year): a. b. c. d. e. f.
Raw materials inventory turnover. Number of days in raw materials inventory. Work-in-process inventory turnover. Number of days in work-in-process inventory. Finished goods inventory turnover. Number of days in finished goods inventory.
ANS: a.
Average raw materials inventory: ($112,000 + $120,000) 2 = $116,000 Raw materials inventory turnover: $1,150,000 $116,000 = 9.9138
b.
Number of days in ending raw materials: 365 9.9138 = 36.8
c.
Average work-in-process inventory: ($400,000 + $360,000) 2 = $380,000 Cost of goods manufactured: $1,150,000 + $900,000 + $2,400,000 + $400,000 $360,000 = $4,490,000 Work-in-process inventory turnover: $4,490,000 $380,000 = 11.8158
d.
Days of manufacturing represented by work-in-process inventory: 365 11.8158 = 30.9
e.
Average finished goods inventory: ($500,000 + $440,000) 2 = $470,000 Finished goods inventory turnover: $3,200,000 $470,000 = 6.8085
f.
Number of days in finished goods inventory: 365 6.8085 = 53.6
PTS: 1 DIF: Medium OBJ: 20.2 NAT: AACSB Analytic | IMA Cost Management 4.
Workman Industries had the following financial information for the years 2011 and 2012: Revenues Cost of goods sold Gross margin
2012 $460,000 270,000 $190,000
2011 $420,000 225,000 $195,000
Inventories
$110,000
$130,000
Calculate Workman's ROI in inventory for 2012.
ANS: ROI in inventory = $190,000/[($130,000 + $110,000)/2] = 158.3% PTS: 1 DIF: Medium OBJ: 20.3 NAT: AACSB Analytic | IMA Cost Management 5.
Fiesta and Sierra both operate catalog sales firms. The following information is available for 2011 and 2012: Fiesta
Sierra
Gross Margin: 2011 2012
$175,000 150,000
$350,000 380,000
Inventory: December 31, 2011 December 31, 2012
$ 70,000 60,000
$280,000 300,000
a. b.
Calculate each company's ROI in inventory for 2012. Which company manages inventory better? Explain your answer.
ANS: a. b.
Fiesta ROI in inventory = $150,000 / [($60,000 + $70,000) / 2] = 2.31 (Rounded) Sierra ROI in inventory = $380,000 / [($300,000 + $280,000) / 2] = 1.31 (Rounded) Fiesta manages inventory better. It generates $2.31 of gross margin for each dollar invested in inventory; Sierra generates only $1.31 of gross margin per dollar invested in inventory.
PTS: 1 DIF: Medium OBJ: 20.3 NAT: AACSB Analytic | IMA Cost Management 6.
During the first quarter of 2011, Dewey Company had an annual rate of 14%. The inventory balances during the quarter were: December 31, 2004 January 31, 2005 February 28, 2005 March 31, 2005 Calculate the financial holding costs for the first quarter of 2011. ANS: Financial holding cost (240,000 + 300,000)/2 0.14 3/12 = $9,450 PTS: 1 DIF: Medium OBJ: 20.4 NAT: AACSB Analytic | IMA Cost Management
$240,000 280,000 260,000 300,000
7.
Mosten's Retail Outlet collected the following information regarding two of its inventory items: Toasters 45,000 $ 12 $ 3 $300
Annual demand Cost per unit Annual carrying cost per unit Ordering cost a. b. c.
Blenders 10,000 $ 14 $ 4 $200
Calculate the economic order quantity (EOQ) for toasters and blenders. Calculate the total carrying costs for toasters. Calculate the total ordering costs for toasters.
ANS: a.
EOQ Toasters = EOQ Blenders =
b. c.
2(45, 000)($300) $3
= 3,000 units
2(10, 000)($200)
= 1,000 units $4 Carrying costs of toasters = (3,000 2) $3 = $4,500 Ordering costs of toasters = (45,000 3,000) $300 = $4,500
PTS: 1 DIF: Medium OBJ: 20.5 NAT: AACSB Analytic | IMA Corporate Finance 8.
Abernathy Imports determined that its most popular product has average daily sales of 200 units and maximum daily sales of 240 units. The lead time for this product is 5 days. Abernathy buys this product for $56 and sells it to customers for $99. a. b.
If Abernathy carries no safety stock, calculate the reorder point for this product. If Abernathy carries safety stock, calculate the reorder point for this product.
ANS: a. b.
200 units 5 days = 1,000 units reorder point (240 200) 5 days = 200 safety stock Reorder point = 1,000 units + 200 safety stock = 1,200 units
PTS: 1 DIF: Medium OBJ: 20.5 NAT: AACSB Analytic | IMA Corporate Finance 9.
Franklin Company manufactures picture frames. The following information is available for 2011: Sales volume (in units) Production volume (in units) Total fixed selling and administrative expenses Variable selling expenses per unit Total fixed production costs Variable production cost per unit Beginning inventory Sales price per unit
150,000 200,000 $200,000 $ 1.50 $650,000 $ 6.20 $ 0 $ 15
Create an income statement for Franklin Company using the absorption costing method.
ANS: Franklin Company Absorption Costing Income Statement Sales Revenue (150,000 $15) Variable Cost of Goods Sold (150,000 $6.20) Fixed Costs of Goods Sold ($650,000 200,000 150,000) Gross Margin Variable Selling Expenses (150,000 $1.50) Fixed Selling and Administrative Expenses Operating Income
$2,250,000 (930,000) (487,500) $ 832,500 (225,000) (200,000) $ 407,500
PTS: 1 DIF: Medium OBJ: 20.6 NAT: AACSB Analytic | IMA Cost Management 10.
Franklin Company manufactures picture frames. The following information is available for 2011: Sales volume (in units) Production volume (in units) Total fixed selling and administrative expenses Variable selling expenses per unit Total fixed production costs Variable production cost per unit Beginning inventory Sales price per unit
150,000 200,000 $200,000 $ 1.50 $650,000 $ 6.20 $ 0 $ 15
Create an income statement for Franklin Company using the variable costing method. ANS: Franklin Company Variable Costing Income Statement Sales Revenue (150,000 $15) Variable Cost of Goods Sold (150,000 $6.20) Variable Selling Expenses (150,000 $1.50) Contribution Margin Fixed Costs of Goods Sold Fixed Selling and Administrative Expenses Operating Income PTS: 1 DIF: Medium OBJ: 20.6 NAT: AACSB Analytic | IMA Cost Management
$2,250,000 (930,000) (225,000) $1,095,000 (650,000) (200,000) $ 245,000
Chapter 21—Cost Behavior and Decisions Using C-V-P Analysis MULTIPLE CHOICE 1.
Which of the following items is NOT a key factor involved in cost-volume-profit (C-V-P) analysis? a. Time value of money b. Fixed and variable costs c. Sales revenue d. The mix of products sold ANS: A PTS: 1 DIF: Easy OBJ: 21.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
2.
C-V-P analysis is useful to managers in: a. Planning b. Controlling decisions c. Evaluating decisions d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 21.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
3.
C-V-P analysis, while useful for several purposes, is primarily useful in: a. Planning b. Controlling decisions c. Evaluating decisions d. Financing decisions ANS: A PTS: 1 DIF: Easy OBJ: 21.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
4.
All the following are common cost behavior patterns EXCEPT: a. Fixed costs b. Variable costs c. Manufacturing costs d. Mixed costs ANS: C PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
5.
Which of the following types of costs always change in total in proportion to changes in the level of activity of a firm? a. Opportunity costs b. Relevant costs c. Fixed costs d. Variable costs ANS: D PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
6.
Which of the following is most likely to be a variable cost? a. Raw materials b. Insurance c. Supervisor's salary d. New computing technology ANS: A PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
7.
Within the relevant range, variable costs are considered to be: a. Curvilinear b. Linear c. Mixed d. Stepped ANS: B PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
8.
The relevant range refers to the activity range over which: a. Fixed and variable cost relationships remain the same b. Variable costs per unit decrease c. Fixed costs per unit remain the same d. Total variable costs do not change ANS: A PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
9.
Which of the following is NOT a cost behavior pattern? a. Variable costs b. Relevant costs c. Mixed costs d. Stepped costs ANS: B PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
10.
The type of cost that remains constant (in total) over the relevant range is a: a. Variable cost b. Fixed cost c. Mixed cost d. Semi-variable cost ANS: B PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
11.
Which of the following types of costs remain constant per unit within a certain relevant range? a. Opportunity costs b. Sunk costs c. Fixed costs d. Variable costs ANS: D PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
12.
The two components of a mixed cost are: a. Relevant costs and fixed costs b. Variable costs and opportunity costs c. Variable costs and relevant costs d. Variable costs and fixed costs ANS: D PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
13.
Relevant ranges must be considered for: a. Fixed costs b. Variable costs c. Both fixed and variable costs d. Neither fixed nor variable costs ANS: C PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
14.
Fixed costs per unit: a. Remain constant as activity levels increase b. Increase as activity levels increase c. Decrease as activity levels increase d. None of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
15.
An example of a stepped fixed cost is: a. Factory supervisors' salaries b. Depreciation c. Direct materials d. Commissions ANS: A PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
16.
Within the relevant range some fixed costs may actually be: a. Variable costs b. Direct costs c. Nonlinear costs d. Stepped costs ANS: D PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
17.
Within the relevant range, per-unit variable cost: a. Increases as activity level increases b. Decreases as activity level increases c. Remains constant as activity level increases d. Decreases as activity level decreases ANS: C PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
18.
Within the relevant range, the fixed cost per unit: a. Increases as activity level increases b. Remains constant as activity level increases c. Decreases as activity level increases d. Decreases as activity level decreases ANS: C PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
19.
Costs that contain both fixed and variable components are: a. Fixed costs b. Variable costs c. Mixed costs d. All of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
20.
Which of the following costs would LEAST likely be a fixed cost? a. Plant depreciation b. Rent c. Utilities expense d. Executives' salaries ANS: C PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
21.
Which of the following costs would LEAST likely be a variable cost? a. Indirect materials b. Direct labor c. Sales commissions d. Plant manager's salary ANS: D PTS: 1 DIF: Easy OBJ: 21.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
22.
Costs that would NOT be graphed as a straight line are: a. Variable costs b. Total costs c. Fixed costs d. Stepped costs ANS: D PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
23.
Zodiac Company's total costs are increasing in direct proportion to the increases in activity levels. The company's cost structure must have all: a. Fixed costs b. Variable costs c. Mixed costs d. Stepped costs ANS: B PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.2
24.
Mosely Company's per-unit cost is the same at all levels of activity. The company's cost structure must have all: a. Fixed costs b. Variable costs c. Mixed costs d. Stepped costs ANS: B PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
25.
Refer to the figure below. A charge for electricity that is based on a flat rate plus a variable cost after a certain number of kilowatt-hours are used follows which of the following cost behavior patterns?
a. b. c. d.
Graph A Graph B Graph C Graph D
ANS: C PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 26.
21.2
21.2
Refer to the figure below. Which would be the diagram of a mixed cost?
a. b. c. d.
Graph A Graph B Graph C Graph D
ANS: C PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.2
27.
Assume that Upward Company has total variable costs of $90,000 when 30,000 units are sold. If 40,000 units were sold, total variable costs would be: a. $100,000 b. $120,000 c. $130,000 d. $150,000 ANS: B Variable cost per unit: Total variable costs:
$90,000 30,000 units = $3 per unit 40,000 units $3 = $120,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 28.
21.2
Another name for the scattergraph method of analyzing mixed costs is the: a. Regression analysis method b. Visual-fit method c. High-low method d. Engineering method ANS: B PTS: 1 DIF: Easy OBJ: 21.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
29.
The scattergraph method is a useful tool for: a. Analyzing abrupt changes in cost behavior b. Separating mixed costs into their variable and fixed components c. Determining the break-even point d. Working outside the relevant range ANS: B PTS: 1 DIF: Easy OBJ: 21.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
30.
In the scattergraph method fixed costs are: a. Represented by the slope of the line b. The highest point in the graph c. The point where the line crosses the cost axis d. The point where the line crosses the activity axis ANS: C PTS: 1 DIF: Easy OBJ: 21.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
31.
The slope of the line in a scattergraph represents the: a. Variable cost per unit b. Fixed cost per unit c. Mixed cost per unit d. Opportunity cost per unit ANS: A PTS: 1 DIF: Easy OBJ: 21.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
32.
Which of the following is a common method of analyzing mixed costs? a. High-Low b. Scattergraph c. Both high-low and scattergraph d. Neither high-low nor scattergraph ANS: C PTS: 1 DIF: Easy OBJ: 21.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
33.
The scattergraph method is used to analyze: a. Variable costs b. Mixed costs c. Fixed costs d. Relevant costs ANS: B PTS: 1 DIF: Easy OBJ: 21.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
34.
When using the scattergraph method to analyze mixed costs, the regression line should be visually fit to: a. Go through the highest and the lowest points b. Maximize the average distance between all the data points and the regression line c. Go through the cost axis at 0 d. Minimize the average distance between all the data points and the regression line ANS: D PTS: 1 DIF: Easy OBJ: 21.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
35.
Which of the following is the formula used to calculate the slope of the regression line on a scattergraph? a. Change in activity change in cost b. Fixed costs change in activity c. Change in cost change in activity d. Fixed costs change in cost ANS: C PTS: 1 DIF: Easy OBJ: 21.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
36.
Which of the following is the formula for the high-low method of analyzing mixed costs? a. Fixed costs = total costs (activity level variable cost rate) b. Total costs = fixed costs (activity level variable cost rate) c. Variable costs = fixed costs + total costs d. Fixed costs = total costs variable cost rate ANS: A PTS: 1 DIF: Easy OBJ: 21.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
Exhibit 21-1 Wimmer Company makes swimming suits and wants to analyze its mixed costs. The diagram below shows a scattergraph representing Wimmer's mixed costs for the previous five months.
37.
Refer to Exhibit 21-1. Using the graph above, determine Wimmer's variable cost rate. a. $1.00 b. $1.25 c. $2.00 d. $2.50 ANS: A Variable cost rate: ($600 $400) (100 0) = $2.00 PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Decision Analysis
38.
OBJ: 21.3
Refer to Exhibit 21-1. Using the graph above, determine the amount of Wimmer's fixed costs. a. $400 b. $475 c. $600 d. $650 ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Decision Analysis
OBJ: 21.3
Exhibit 21-2 The following cost data are available for Malta Marketing: Month July August September October November December
Total Manufacturing Overhead Cost $64,000 57,000 48,000 77,000 90,000 82,000
Direct Labor Hours 8,400 6,800 4,000 12,000 18,000 15,000
39.
Refer to Exhibit 21-2. Given the data above and using the high-low method of analysis, total fixed costs are approximately: a. $16,000 b. $24,000 c. $20,000 d. $36,000 ANS: D Variable costs: Fixed costs:
($90,000 $48,000) (18,000 4,000) = $3 $90,000 (18,000 $3) = $36,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 40.
21.3
Refer to Exhibit 21-2. Given the data above and using the high-low method of analysis, total variable costs are approximately: a. $3 per direct labor hour b. $4 per direct labor hour c. $5 per direct labor hour d. $6 per direct labor hour ANS: A Variable costs: ($90,000 $48,000) (18,000 4,000) = $3 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
41.
If total costs are $27,000 and $36,000 for activity levels of 5,000 and 8,000, respectively, how much are fixed costs? a. $12,000 b. $8,000 c. $6,000 d. $0 ANS: A Variable costs: Fixed costs:
($36,000 $27,000) (8,000 5,000) = $3 $27,000 (5,000 $3) = $12,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 42.
21.3
21.3
What are the total costs for a company with per-unit variable costs of $12 and total fixed costs of $51,000 if it sells 8,000 units of product? a. $51,000 b. $147,000 c. $96,000 d. $125,000 ANS: B Total costs: $51,000 + (8,000 $12) = $147,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.3
43.
XYZ Company generally produces between 200 and 350 units of product. Its fixed costs, within this relevant range, are $50,000. Its variable costs at 250 units of production are $10 per unit. What are the fixed costs per unit at 250 and 300 units of production, respectively? (Round to the nearest dollar.) a. $10 and $200 b. $250 and $143 c. $200 and $167 d. Answer cannot be determined from data given ANS: C Fixed costs per unit at 250 units: Fixed costs per unit at 300 units:
$50,000 250 = $200 $50,000 300 = $167
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 44.
21.3
If fixed costs are $40,000 and total costs are $200,000 at an activity level of 8,000 units, variable costs are approximately: a. $5 per unit b. $20 per unit c. $25 per unit d. $40 per unit ANS: B Variable costs: ($200,000 $40,000) 8,000 = $20 per unit PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
45.
21.3
The contribution margin minus total fixed costs is equal to: a. Gross margin b. Net income c. Variable costs d. Earnings per share ANS: B PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
46.
The excess of sales over variable costs is equal to: a. Gross margin b. Contribution margin c. Profit margin d. Net margin ANS: B PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
47.
Contribution margin will provide a profit if: a. All variable costs are covered b. Sales revenues increase c. Fixed costs are covered d. The contribution margin ratio is high enough ANS: C PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
48.
The per-unit contribution margin is equal to: a. Selling price per unit Fixed costs per unit b. Selling price per unit Variable costs per unit c. Variable costs per unit Fixed costs per unit d. Selling price per unit Both fixed and variable costs per unit ANS: B PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
49.
Contribution margin is equal to: a. Revenues Fixed costs b. Revenues Variable costs c. Fixed costs + Variable costs d. Fixed costs Variable costs ANS: B PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
50.
When the variable cost ratio decreases, the: a. Contribution margin as a percentage of net sales increases b. Contribution margin as a percentage of net sales decreases c. Break-even point increases d. Fixed cost per unit increases ANS: A PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
51.
If the fixed costs relative to a specific product increase while the variable costs and sales price remain constant, the contribution margin will: a. Increase b. Decrease c. Remain unchanged d. The answer cannot be determined from the information given ANS: C PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
52.
If a company has a positive contribution margin, the maximum amount of loss that it can have is equal to its: a. Fixed costs b. Variable costs c. Fixed and variable costs d. None of these are correct ANS: A PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
53.
If sales revenue is equal for a manufacturing firm and a service firm, which of these two firms will probably need a higher contribution margin to break even? a. Manufacturing firm b. Service firm c. There would be no difference d. More information is necessary to answer the question ANS: B PTS: 1 DIF: Medium OBJ: 21.4 NAT: AACSB Analytic | IMA Decision Analysis
Exhibit 21-3 The following partial income statement is available for Lauria Company: Sales revenue (4,500 units at $75 each) Variable expenses: Production expenses Selling expenses Administrative expenses Total variable expenses
$337,500 $62,000 35,000 38,000 135,000 $202,500 90,000 $112,500
Net income 54.
Refer to Exhibit 21-3. Given the data above, the contribution margin per unit is: a. $20 b. $30 c. $45 d. $75 ANS: C Contribution margin per unit: ($337,500 $135,000) 4,500 units = $45 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
55.
Refer to Exhibit 21-3. Given the data above, at an activity level of 5,000 units, net income would increase by: a. $10,000 b. $15,000 c. $22,500 d. $37,500 ANS: C Contribution margin per unit: Increase in net income:
($337,500 $135,000) 4,500 units = $45 500 units $45 = $22,500
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 56.
21.4
21.4
Challis Company had sales of $450,000 and a profit of $54,000 during the period. Assume the fixed costs for the period were $184,500. The contribution margin ratio for the period was: a. 12% b. 47% c. 53% d. 88% ANS: C Contribution margin ratio: ($54,000 + $184,500) $450,000 = 53% PTS: 1 DIF: Medium OBJ: 21.4 NAT: AACSB Analytic | IMA Decision Analysis
57.
If total sales are $460,000, total variable costs are $138,000, and total fixed costs are $184,000, the contribution margin is: a. $460,000 b. $184,000 c. $276,000 d. $322,000 ANS: D Contribution margin: $460,000 $138,000 = $322,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
58.
21.4
If total sales are $460,000, total variable costs are $138,000, and total fixed costs are $184,000, the contribution margin ratio is: a. 70% b. 60% c. 40% d. 30% ANS: A Contribution margin ratio: ($460,000 $138,000) $460,000 = 70% PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
59.
21.4
Black Company had the following income statement: Sales revenue (700 units) Variable costs Contribution margin Fixed costs Net income
$70,000 38,500 $31,500 30,500 $ 1,000
Given this data, Black Company has a per-unit contribution margin of: a. $40 b. $45 c. $70 d. $100 ANS: B Contribution margin per unit: $31,500 700 = $45 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.4
60.
Heyburn Company had the following income statement: Sales revenue (1,000 units) Variable costs Contribution margin Fixed costs Net income
$900,000 440,000 $460,000 352,000 $108,000
Given this data, Heyburn Company's per-unit contribution margin is: a. $108 b. $352 c. $440 d. $460 ANS: D Contribution margin per-unit: $460,000 1,000 = $460 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.4
Exhibit 21-4 Cash2U Company had the following income statement: Sales revenue (1,000 units) Variable costs Contribution margin Fixed costs Net income 61.
$400,000 220,000 $180,000 126,000 $ 54,000
Refer to Exhibit 21-4. Given the data above, Cash2U Company's contribution margin percentage is: a. 40% b. 45% c. 50% d. 55% ANS: B Contribution margin percentage: $180,000 $400,000 = 45% PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
62.
21.4
Refer to Exhibit 21-4. Given the data above, Cash2U Company's break-even point in units is: a. 700 units b. 800 units c. 900 units d. 1,000 units ANS: A Break-even point: $126,000 ($180,000 1,000) = 700 units PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.4
63.
The limiting assumptions of C-V-P analysis include all of the following, EXCEPT: a. The behavior of revenues and cost are linear throughout the relevant range b. All costs can be organized as fixed or variable c. The operating leverage is constant throughout the relevant range d. The sales mix does not change ANS: C PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
64.
The behavior of a cost is usually defined in terms of how that cost varies with respect to: a. Time b. Profit c. Level of activity d. Sales price ANS: C PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
65.
Which of the following is NOT true of the break-even point? a. The volume of activity where total revenues equal total costs b. The volume of activity where contribution margin equals variable costs c. The volume of activity where there is no profit or loss d. The volume of activity where contribution margin equals fixed costs ANS: B PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
66.
Which of the following is true of a firm having a high level of fixed costs? a. It would have a better chance of making profits than would a company with a low level of fixed costs b. It would be more susceptible to profit fluctuations because of volume changes than would a firm with a low level of fixed costs c. It must also have high mixed costs d. None of these are true ANS: B PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
67.
A firm will break even when: a. Revenues = Variable costs Fixed costs b. Revenues = Variable costs + Fixed costs c. Revenues Variable costs = Fixed costs d. Both Revenues = Variable costs + Fixed costs and Revenues Variable costs = Fixed costs are correct ANS: D PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
68.
The equation for computing the break-even point is: a. Revenues (Fixed costs Variable costs) = Profit b. Variable costs = Revenues Fixed costs c. Revenues = Variable costs Fixed costs d. Revenues Variable costs Fixed costs = $0 ANS: D PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
69.
Total fixed costs (Sales price per unit Variable cost per unit) is the formula for: a. Break-even sales (in units) b. Per unit fixed costs c. Relevant range d. Per unit variable costs ANS: A PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
70.
Assume that StoneWorks has total fixed costs of $31,540 for the period. Each unit sells for $20. The variable cost per unit is $12.40. How many units must be sold to break even? a. 1,577 b. 2,544 c. 4,150 d. 4,200 ANS: C Units to break even:
$20x $12.40x $31,540 = 0 x = 4,150
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 71.
Star of the Sea School has annual fixed costs of $150,000 and variable costs of $550 per student. Star of the Sea expects 345 students for the upcoming year. If the school wishes to earn a profit of $10,000, what should tuition per student be? a. $957 b. $1,014 c. $1,233 d. $1,346 ANS: B Tuition cost:
345X ($550 345) $150,000 = $10,000 X = $1,014
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 72.
21.4
21.4
If variable costs are $46 per unit, revenues are $76 per unit, and fixed costs are $7,500, the breakeven point is: a. 1,000 units b. 500 units c. 250 units d. 100 units ANS: C Break-even point:
$76x $46x $7,500 = 0 x = 250 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.4
73.
To reach a target income of $20,000, a firm with fixed costs of $10,000 and a per-unit contribution margin of $5 must sell: a. 2,000 units b. 4,000 units c. 6,000 units d. 8,000 units ANS: C Number of units to reach target income: ($10,000 + $20,000) $5 = 6,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
74.
21.4
A company that has a per-unit contribution margin of $140 and fixed costs of $126,000 will break even when it sells: a. 600 units b. 800 units c. 900 units d. 1,200 units ANS: C Break-even in units: $126,000 $140 = 900 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
75.
Given the equation $500X = $300X + $200,000, variable costs are: a. $300 per unit b. $200 per unit c. $200,000 d. Represented by X ANS: A PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
76.
21.4
21.4
Given the equation $500X = $300X + $200,000, per-unit contribution margin is: a. $300 b. $200 c. $200,000 d. $500 ANS: B Per-unit contribution margin: $500 $300 = $200 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.4
77.
Given the equation $500X = $300X + $200,000, the break-even point in units is: a. 200,000 b. 30,000 c. 20,000 d. 2,000 ANS: D Break-even point: $200,000 ($500 $300) = 1,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
78.
A company with a cost-volume-profit structure of $50X = $30X + $20,000 will earn a 20% return on revenues when it sells: a. 1,000 units b. 2,000 units c. 1,500 units d. 3,000 units ANS: B Units to sell:
$50X $30X $20,000 = 0.2($50X) X = 2,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 79.
21.4
21.4
Everclean Company cleans draperies. It charges $75 to clean a full-size drape, and its variable and fixed costs are $45 per drape and $8,000 per year, respectively. Given this data, approximately how many drapes must the company clean to break even? a. 134 b. 267 c. 300 d. 320 ANS: B Break-even: $8,000 ($75 $45) = 267 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
80.
21.4
Everclean Company cleans draperies. It charges $75 to clean a full-size drape, and its variable and fixed costs are $40 per drape and $8,000 per year, respectively. Given this data, how many drapes must the company clean to make $50,000 profit? a. 967 b. 1,657 c. 2,000 d. 2,320 ANS: B Units needed to reach target income: ($8,000 + $50,000) ($75 $40) = 1,657 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.4
81.
Inner Corporation sells space heaters. The contribution margin is $5.40 per heater. If fixed costs are $540,000, what would be the total number of heaters sold at the break-even point? a. 100,000 b. 150,000 c. 200,000 d. 250,000 ANS: A Break-even point: $540,000 $5.40 = 100,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
82.
Duke Corporation sells fans for $20 per unit. In 2011, fixed costs are expected to be $450,000, and the variable cost ratio is 60%. How many fans must Duke sell to generate operating income of $60,000? a. 42,500 b. 56,250 c. 60,000 d. 63,750 ANS: D Units needed to reach target income:
$20X 0.60($20X) 450,000 = $60,000 X = 63,750
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 83.
21.4
Anderson Corporation sells picture calendars for $10 each. The fixed costs of production are $300,000, and the variable costs are 60% of the selling price. The company desires to make a profit of $120,000. How many calendars must it sell? a. 105,000 b. 70,000 c. 30,000 d. 75,000 ANS: A Units needed for target income:
$10X 0.6($10X) $300,000 = $120,000 X = 105,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 84.
21.4
21.4
Stone Company plans to sell 200,000 calculators. The fixed costs are $600,000, and the variable costs are 60% of the selling price. If the company wants to realize a profit of $120,000, the selling price of each calculator must be: a. $5.00 b. $7.50 c. $9.00 d. $10.00 ANS: C Selling price:
200,000X (0.6X 200,000) $600,000 = $120,000 X = $9.00 PTS: 1 DIF: Medium OBJ: 21.4 NAT: AACSB Analytic | IMA Decision Analysis
85.
Beta Corp. has a 45% contribution margin ratio on all units they sell. The company would like to make a profit of $20,000. Fixed costs are $70,000. What must Beta earn in sales revenue? a. $136,000 b. $163,636 c. $200,000 d. $225,000 ANS: C Target income point: ($70,000 + $20,000) 45% = $200,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
86.
Newport Corporation is planning to sell 50,000 lawn mowers for $100 each. The fixed costs are $2,000,000. If the company realizes a profit of $400,000, what would the variable costs be? a. $2,400,000 b. $2,600,000 c. $2,900,000 d. $3,100,000 ANS: B Variable costs:
(50,000 $100) X $2,000,000 = $400,000 X = $2,600,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 87.
21.4
21.4
Stites Corporation will make $100,000 if it sells 8,000 bathtubs for $200 per unit. If the contribution margin is 30%, what will the fixed costs be? a. $380,000 b. $580,000 c. $1,020,000 d. $480,000 ANS: A Fixed costs:
0.3($200 8,000) X = $100,000 X = $380,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.4
88.
Grate Company's product has a selling price of $15 and a per-unit variable cost of $8. Its fixed costs are $14,000. How many units must the company sell to earn a profit of $35,000? a. 2,334 b. 3,000 c. 6,125 d. 7,000 ANS: D Units to sell:
$15X $8X $14,000 = $35,000 X = 7,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 89.
21.4
A firm's per-unit contribution margin is $30, its fixed costs are $67,500, and its daily production output is 18 units. How many days will it take to break even after it is in operation? a. 100 days b. 125 days c. 139 days d. 155 days ANS: B Break-even in units: Days to break even:
$67,500 $30 = 2,250 2,250 18 = 125
PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.4
Exhibit 21-5 The following is a partial income statement for Duncan Corporation for 2011: Duncan Corporation Projected Income Statement For the Year Ended December 31, 2011 Sales revenue (750 units at $20) Manufacturing cost of goods sold: Direct materials used Direct labor Variable manufacturing overhead Fixed manufacturing overhead Gross margin Selling expenses: Variable costs Fixed costs Administrative expenses: Variable costs Fixed costs Total selling and administrative expenses Operating income
$15,000 $2,250 2,100 2,650 750
7,750 $ 7,250
$1,100 950 900 620 3,570 $ 3,680
90.
Refer to Exhibit 21-5. How many units of its product will Duncan Corporation have to sell to break even? a. 116 b. 194 c. 290 d. 300 ANS: C Variable costs per unit: Break-even point:
($2,250 + $2,100 + $2,650 + $1,100 + $900) 750 = $12 $20X $12X ($750 + $950 + $620) = 0 X = 290
PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Decision Analysis 91.
21.4
Refer to Exhibit 21-5. What will be Duncan Corporation's operating income if sales volume increases by 40 percent? a. $2,400 b. $6,080 c. $6,800 d. $7,280 ANS: B Operating income: 1.4($15,000) 1.4($2,250 + $2,100 + $2,650 + $1,100 + $900) ($750 + $950 + $620) = $6,080 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
92.
21.4
As activity level increases within the relevant range, per-unit fixed costs usually will: a. Increase b. Decrease c. Remain the same d. Vary randomly ANS: B PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
93.
As activity level increases within the relevant range, total variable costs usually will: a. Increase b. Decrease c. Remain the same d. Vary randomly ANS: A PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
94.
When all other factors remain constant, which of the following is true? a. An increase in fixed costs leads to a decrease in units needed to break even b. An increase in variable costs leads to an increase in units needed to break even c. An increase in sales price leads to an increase in units needed to break even d. A decrease in the variable cost rate leads to an increase in the units needed to break even ANS: B PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
95.
When other factors remain constant, a decrease in fixed costs: a. Increases the number of units needed to earn profits b. Decreases the number of units needed to earn profits c. Has no effect on the number of units needed to earn profits d. Increases the number of units needed to break even ANS: B PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
96.
When other factors remain constant, an increase in variable costs: a. Increases the number of units needed to earn profits b. Decreases the number of units needed to earn profits c. Has no effect on the number of units needed to earn profits d. Decreases the number of units needed to break even ANS: A PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
97.
When other factors remain constant, a decrease in sales price: a. Increases the number of units needed to earn profits b. Decreases the number of units needed to earn profits c. Has no effect on the number of units needed to earn profits d. Decreases the number of units needed to break even ANS: A PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
98.
If two firms have the same sales prices for their merchandise once fixed costs are covered, the firm with a higher variable cost rate will have: a. Greater increases in profits as sales increase b. Smaller increases in profits as sales increase c. The same increase in profits as sales increase d. None of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
99.
An increase in sales price would: a. Increase the contribution margin per unit b. Decrease the contribution margin per unit c. Increase the variable cost per unit d. Decrease the fixed cost per unit ANS: A PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
100.
If the fixed costs relative to a specific product increase while the variable costs and sales price remain constant, the break-even point will: a. Increase b. Decrease c. Remain unchanged d. The answer cannot be determined from the information given ANS: A PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
101.
Increasing the selling price and decreasing sales volume will increase profit if: a. Variable cost per unit remains constant b. Fixed cost per unit increases c. Total variable cost decreases d. Contribution margin increases ANS: D PTS: 1 DIF: Easy OBJ: NAT: AACSB Analytic | IMA Decision Analysis
102.
21.4
As fixed costs increase, the break-even point in units will: a. Increase b. Decrease c. Remain the same d. Unable to determine without variable cost information ANS: A PTS: 1 DIF: Easy OBJ: 21.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
103.
A company's break-even point would change if there were an increase in: a. Sales volume b. Total fixed costs due to a plant addition c. Total production volume d. Total variable costs due to higher production volume ANS: B PTS: 1 DIF: Easy OBJ: NAT: AACSB Analytic | IMA Decision Analysis
104.
At a break-even point of 600 units sold, the variable costs were $600 and the fixed costs were $300. What will the sale of each additional unit contribute to profit before income taxes? a. $0 b. $0.50 c. $1.00 d. $1.50 ANS: B Sales revenues: Contribution margin per unit:
600X $600 $300 = 0 X = $1.50 per unit $1.50 ($600 600) = $0.50
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 105.
21.4
21.4
Company X and Company Y each have a break-even point of 2,000 units. If Company X has higher fixed costs but lower variable costs, what will be the effect of an increase in sales volume, for both companies, to 2,200 units? a. The two companies will be equally profitable b. Company X will become less profitable than Company Y c. Company X will become more profitable than Company Y d. The effect cannot be determined without additional information ANS: C PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.4
106.
If a company's total fixed costs decreased by $6,000 and its contribution margin increased by $12,000, net income would: a. Decrease by $18,000 b. Decrease by $ 6,000 c. Increase by $ 6,000 d. Increase by $18,000 ANS: D $6,000 + $12,000 = $18,000 increase in net income PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
107.
21.4
Collins Co. earned a profit of $2,000 in January. The company has estimated that sales will increase by $13,500 in February. Assume that fixed costs for January were $3,000 (and are not expected to change) and the variable cost ratio is 40%. What is the expected profit for the next month? a. $8,100 b. $10,100 c. $13,500 d. Not enough information available ANS: B Expected profit: $13,500 0.4($13,500) + $2,000 = $10,100 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
108.
21.4
After the break-even point is reached, a firm that has a per-unit contribution margin of $20 will have a $500 increase in profits when sales increase by: a. 20 units b. 15 units c. 25 units d. 50 units ANS: C Sales increase: $500 $20 = 25 units PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
109.
21.4
Stanley Company manufactures and sells one product for $200 per unit. The variable costs per unit are $140, and monthly total fixed costs are $7,500. Last month Stanley sold 100 units and expects sales to remain the same for the current month. If fixed costs increase by $1,500, what is the break-even point for the current month? a. $12,800 b. $25,000 c. $30,000 d. $45,000 ANS: C Contribution margin percent: Break-even point:
($200 $140) $200 = 30% 0.30x ($7,500 + $1,500) = 0 x = $30,000 PTS: 1 DIF: Medium OBJ: 21.4 NAT: AACSB Analytic | IMA Decision Analysis
110.
Everclean Company cleans draperies. It charges $90 to clean a full-size drape, and its variable and fixed costs are $55 per drape and $10,000 per year, respectively. Given these data, if Everclean's variable costs were reduced to $50 per drape, how many drapes would the firm have to clean to break even? a. 250 b. 286 c. 200 d. 112 ANS: A Break-even units:
$90x $50x $10,000 = 0 x = 250
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 111.
21.4
Everclean Company cleans draperies. It charges $90 to clean a full-size drape, and its variable and fixed costs are $55 per drape and $10,000 per year, respectively. Given these data, if Everclean's fixed costs increased to $15,000, how many drapes must the firm clean to earn $60,000? a. 429 b. 1,364 c. 2,000 d. 2,143 ANS: D Units for target income:
$90x $55x $15,000 = $60,000 x = 2,143
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.4
Exhibit 21-6 The graph below illustrates various cost behavior patterns in XYZ Company.
112.
Refer to Exhibit 21-6. In the graph above, total fixed costs are represented by: a. Line A b. Line B c. Area C d. Area D ANS: D PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
113.
Refer to Exhibit 21-6. In the graph above, total costs are represented by: a. Line A b. Line B c. Area C d. Area D ANS: B PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
114.
Refer to Exhibit 21-6. In the graph above, the variable costs are represented by: a. Line A b. Line B c. Area C d. Area D ANS: C PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis Exhibit 21-7 Use the cost-volume-profit graph below to answer the following question(s).
115.
Refer to Exhibit 21-7. Point G on the cost-volume-profit graph represents the: a. Target profit sales level b. Loss area sales level c. Break-even sales level d. After-tax profit sales level ANS: C PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
116.
Refer to Exhibit 21-7. Revenues are represented on the C-V-P graph by: a. Line A b. Line B c. Line C d. Area D ANS: A PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
117.
Refer to Exhibit 21-7. Line C on the cost-volume-profit graph represents the: a. Revenues b. Total costs c. Variable costs d. Fixed costs ANS: D PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
118.
Refer to Exhibit 21-7. Area E on the cost-volume-profit graph represents the: a. Revenues b. Total costs c. Total variable costs d. Total fixed costs ANS: C PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
119.
Refer to Exhibit 21-7. Area F on the cost-volume-profit graph represents the: a. Revenues b. Total costs c. Total variable costs d. Total fixed costs ANS: D PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
120.
Refer to Exhibit 21-7. Area D on the cost-volume-profit graph represents the: a. Profit area b. Total costs c. Loss area d. Fixed costs ANS: A PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
121.
Refer to Exhibit 21-7. On the cost-volume-profit graph, the area between point G, the origin of the graph, and the point at which Line B crosses the sales axis represents the: a. Profit area b. Total costs c. Loss area d. Fixed costs ANS: C PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
Exhibit 21-8 Use the profit graph below to answer the following question(s).
122.
Refer to Exhibit 21-8. Area A on the profit graph represents the: a. Profit area b. Total costs c. Loss area d. Break-even point ANS: C PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
123.
Refer to Exhibit 21-8. Area B on the profit graph represents the: a. Profit area b. Total costs c. Loss area d. Break-even point ANS: A PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
124.
Refer to Exhibit 21-8. Point E on the profit graph represents the: a. Profit area b. Total costs c. Loss area d. Break-even point ANS: D PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
125.
A graph that only plots profits and losses, and omits costs and revenues, is called a: a. Scattergraph b. Cost-volume-profit graph c. Profit graph d. Revenue graph ANS: C PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
126.
Jones Company sells two products, Gumbo and Jumbo. Gumbo has a 45% contribution margin and Jumbo has a 55% contribution margin. Given these contribution margin percentages and assuming that other factors are equal, what should Jones Company do? a. It should emphasize Gumbo b. It should emphasize Jumbo c. It should emphasize both products, since they are equally profitable d. No recommendation can be made from the data given ANS: B PTS: 1 DIF: Easy OBJ: 21.6 NAT: AACSB Reflective Thinking | IMA Decision Analysis
127.
Block Company sells three products, each with a different per-unit contribution margin. To compute Block Company's break-even point in units, it is necessary to know: a. The sales mix b. The per-unit contribution margin of each product sold c. The company's total fixed costs d. All of these are needed to compute break-even point ANS: D PTS: 1 DIF: Easy OBJ: 21.6 NAT: AACSB Reflective Thinking | IMA Decision Analysis
128.
To maximize its profits, a company should pay the highest sales commissions on those products with the: a. Highest contribution margin b. Highest prices c. Lowest variable costs d. Lowest fixed costs ANS: A PTS: 1 DIF: Easy OBJ: 21.6 NAT: AACSB Reflective Thinking | IMA Decision Analysis
129.
One method that a multi-product firm can employ to promote a high-contribution margin product is: a. Increase advertising for the product b. Pay lower sales commissions for the product c. Base sales commissions on total sales d. None of these are correct ANS: A PTS: 1 DIF: Easy OBJ: 21.6 NAT: AACSB Reflective Thinking | IMA Decision Analysis
130.
Sales mix refers to: a. The differing volumes of sales from year to year b. The different contribution margins achieved on the different products during the year c. The relative proportions of different products that constitute total sales d. The mix of fixed and variable costs on the products sold during the year ANS: C PTS: 1 DIF: Easy OBJ: 21.6 NAT: AACSB Reflective Thinking | IMA Decision Analysis
131.
Total contribution margin will increase in a two-product firm if total units sold remain the same and: a. Fewer products with the highest contribution margin are sold b. More products with the highest contribution margin are sold c. More products with the lowest contribution margin are sold d. Fixed costs decrease ANS: B PTS: 1 DIF: Easy OBJ: 21.6 NAT: AACSB Reflective Thinking | IMA Decision Analysis
132.
McCammon Co. sells three products with the following sales and variable cost rates: Product A Product B Product C
$250,000 $200,000 $150,000
30% 40% 45%
What is McCammon's total contribution margin ratio at the current sales mix? a. 35% b. 38% c. 63% d. 65% ANS: C Sales revenue Less variable costs Contribution margin
Product A $250,000 100% 75,000 30%
Product B $200,000 100% 80,000 40%
Product C $150,000 100% 67,500 45%
Total $600,000 100% 222,500 37%
$175,000
$120,000
$ 82,500
$377,500
70%
60%
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 133.
55%
63%
21.6
Johnston Co. sells three products with the following sales and variable cost rates: Product 1 Product 2 Product 3
$12,000 $19,000 $ 8,000
61% 45% 70%
Assume that Johnston's total fixed costs are $9,000. Using the current sales mix, what is Johnston's break-even point? a. $15,000 b. $16,364 c. $20,000 d. $30,000 ANS: C Sales revenue Less variable costs Contribution margin
Product 1 $12,000 100% 7,320 61%
Product 2 $19,000 100% 8,550 45%
Product 3 $8,000 100% 5,600 70%
Total $39,000 100% 21,470 55%
$ 4,680
$10,450
$2,400
$17,530
39%
55%
Break-even point: $9,000 45% = $20,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.6
30%
45%
Exhibit 21-9 Stella Signs sells two different products. Following are the monthly revenues and costs: Sales Revenue $116,000 $189,000
Product A Product B
Variable Costs $ 40,600 $103,950
Refer to Exhibit 21-9. Determine the total contribution margin ratio at the current sales mix. 134. 134. a. 53% b. 45% c. 47% d. 55% ANS: A Sales revenue Less variable costs Contribution margin *rounded
Product A $116,000 100% 40,600 35% $ 75,400 65%
Product B $189,000 100% 103,950 55% $ 85,050 45%
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 135.
Total $305,000 144,550 $160,450
100% 47%* 53%*
21.6
Refer to Exhibit 21-9. Assume that Stella has fixed costs of $65,000. Using the current sales mix, what is Stella's break-even point? a. $118,182 b. $144,444 c. $138,298 d. $122,642 ANS: D Sales revenue Less variable costs Contribution margin *rounded
Product A $116,000 100% 40,600 35% $ 75,400 65%
Product B $189,000 100% 103,950 55% $ 85,050 45%
Total $305,000 144,550 $160,450
100% 47%* 53%*
Break-even point: $65,000 53% = $122,642 (rounded) PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 136.
21.6
Maintaining low fixed costs and high variable costs rather than high fixed costs and low variable costs: a. Is a more conservative cost structure b. Is a more risky cost structure c. Is an equally risky cost structure d. Results in a higher contribution margin ANS: A PTS: 1 DIF: Easy OBJ: 21.7 NAT: AACSB Reflective Thinking | IMA Decision Analysis
137.
Operating leverage deals primarily with the relationship between: a. Debt and equity b. Sales revenue and net income c. Fixed costs and variable costs d. Variable costs and contribution margin ANS: C PTS: 1 DIF: Easy OBJ: 21.7 NAT: AACSB Reflective Thinking | IMA Decision Analysis
138.
As compared to a company with a low operating leverage, a company with a high operating leverage will: a. Have smaller losses below the break-even point b. Have smaller profits above the break-even point c. Have larger losses below the break-even point d. Never be at the break-even point ANS: C PTS: 1 DIF: Easy OBJ: 21.7 NAT: AACSB Reflective Thinking | IMA Decision Analysis
139.
Which of the following types of firms would typically have the lowest level of operating leverage? a. Tile setter b. Automobile manufacturer c. E-commerce merchant d. Fast food restaurant chain ANS: B PTS: 1 DIF: Easy OBJ: 21.7 NAT: AACSB Reflective Thinking | IMA Decision Analysis
140.
Operating leverage is: a. The proportion of total units represented by each product b. A measure of risk c. A measure of operating performance d. None of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 21.7 NAT: AACSB Reflective Thinking | IMA Decision Analysis
PROBLEM 1.
The following information is given for Kooskia Company: Total Fixed Costs $20,000 $27,000 $34,000 $41,000
Units Produced 0500 5011,000 1,0011,500 1,5012,000
Variable Costs per Unit $40 $40 $50 $50
Compute the following items for Kooskia Company: a. b. c. d. e. d.
What is the fixed cost per unit when 400 units are produced? What is the total variable cost when 300 units are produced? What is the fixed cost per unit when 1,250 units are produced? What is the total variable cost when 1,000 units are produced? What is the total cost per unit when 1,600 units are produced? What is the total cost when 900 units are produced?
ANS: a. b. c. d. e. f.
$20,000 400 = $50 300 $40 = $12,000 $34,000 1,250 = $27.20 1,000 $40 = $40,000 ($41,000 1,600) + $50 = $75.63 $27,000 + (900 $40) = $63,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 2.
21.2
Using the following information for Palmer Company, analyze the cost behavior between the total costs and units produced for the six-month period. Use the high-low method to identify the variable cost rate and the fixed cost portion of total costs. Month January February March April May June
Total Costs $80,000 58,750 78,125 65,000 81,850 68,750
Units Produced 400 275 390 325 415 345
ANS: Total Costs $81,850 58,750 $23,100
High pointMay Low pointFebruary Difference
Units 415 275 140
Variable cost rate: $23,100/140 = $165 per unit Fixed costs at high point: X = $81,850 (415 $165) X = $13,375 Fixed costs at low point: X = $58,750 (275 $165) X = $13,375 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 3.
21.3
The following information has been compiled by the accounting department at Wallace Enterprises. The manager, Thomas Hicks, wants you to calculate the variable cost rate and total fixed costs from the information given. Mr. Hicks wants you to use the high-low method of analyzing these costs.
Month July August September October November December
Total Maintenance Costs $190,000 160,000 280,000 260,000 130,000 210,000
Direct Labor Hours 38,400 30,000 60,000 52,000 25,000 44,000
Total Maintenance Costs $280,000 130,000 $150,000
Direct Labor Hours 60,000 25,000 35,000
ANS:
High pointSeptember Low pointNovember Difference
Variable cost rate: $150,000/35,000 = $4.2857 per direct labor hour (rounded) Fixed costs at high point: X = $280,000 (60,000 $4.2857) X = $22,858 (rounded) Fixed costs at low point: X = $130,000 (25,000 $4.2857) X = $22,858 (rounded) PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.3
4.
Last month CMC Corporation had to sell 6,000 units to reach the break- even point. The selling price was $225 per unit and variable costs were $85.50 per unit. What were fixed costs for the month? ANS: Fixed costs ($225 $85.50) = 6,000 Fixed costs $139.50 = 6,000 Fixed costs = 6,000 $139.50 Fixed costs = $837,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
5.
21.4
During the past year, United Memories sold 150,000 units. Each of these units was sold at a price of $75. At the end of the year, the accounting department identified the costs per unit to be: $20 in materials, $15 for selling costs, and $8 for general expenses. Fixed costs for the year were $1,250,000. The president of United Memories wants to know what the contribution margin and net income were for the year. ANS: Sales (150,000 $75) Variable costs: Cost of goods sold (150,000 20) Selling costs (150,000 $15) General expenses (150,000 $8) Contribution margin Fixed costs Net loss PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
6.
$11,250,000 $3,000,000 2,250,000 1,200,000
6,450,000 $ 4,800,000 1,250,000 $ 3,550,000
21.4
The following data is available for North Publishers and South Publishers:
Sales ($135 per unit) Variable costs Fixed costs Net income
North Publishers $1,012,500 637,500 300,000 $ 75,000
South Publishers $1,012,500 750,000 187,500 $ 75,000
What will be the profit or loss for each company if the sales level drops to 5,500 units?
ANS: Per unit: North Publishers $135 85 $ 50
Sales Variable costs* Contribution margin
South Publishers $135 100 $ 35
* Units sold: $1,012,500 $135 = 7,500 units Variable costs per unit, North Publishers: $637,500 7,500 = $85 Variable costs per unit, South Publishers: $750,000 7,500 = $100 At sales level of 5,500 units: North Publishers $742,500 467,500 $275,000 300,000 $ (25,000)
Sales ($135 5,500) Variable costs* Contribution margin Fixed costs Net income (loss) * North Publishers: $85 5,500 South Publishers: $100 5,500 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 7.
South Publishers $742,500 550,000 $192,500 187,500 $ 5,000
21.4
Winslow Company sold 10,000 swing sets this past year at $280 each. The company incurred expenses of $560,000 for rent, administrative salaries, and insurance for the building. The cost per unit for Winslow was $168. The CEO, Ms. Dunlop, wants to know what the contribution margin was for the year as a percent of sales, how much profit would be earned with an additional $340,000 in sales, and what the profit would be on an additional 4,000 units in sales. ANS: Sales Variable costs Contribution margin Fixed costs Net income Profit on $340,000 additional sales: Profit on 4,000 additional units:
Total $2,800,000 1,680,000 $1,120,000 560,000 $ 560,000 ($340,000 0.40) = $136,000 (4,000 $112) = $448,000
PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.4
Per Unit $280 168 $112
Percentage 100% 60% 40%
8.
Rockin' H makes and sells saddles. The following information is from Rockin' H's 2012 records: Sales price per unit Variable cost per unit Total fixed costs Sales volume in units
$ 750 $ 300 $67,500 500
Rockin' H expects all the information above to be the same in 2013. For 2013, determine: a. b. c. d. e.
Rockin' H's unit contribution margin. Rockin' H's break-even point in units and sales dollars. The sales volume, in units and dollars, to achieve a target profit of $90,000. If Rockin' H can increase sales by 50 units above the 2012 sales, what would be the increase in net income (from the 2012 net income)? If Rockin' H can reduce variable costs by $25 and sales volume remains at the 2012 level, what would be the increase in net income (from the 2012 net income)?
ANS: a. b. c. d. e.
$750 $300 = $450 $67,500 / $450 = 150 units $67,500 / 60% = $112,500 ($67,500 + $90,000) / $450 = 350 units ($67,500 + $90,000) / 60% = $262,500 50 units $450 = $22,500 (500 units $475 per unit CM) (500 $450 per unit CM) = $12,500
PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.4
9.
Identify the indicated lines, areas, and point on the following graph.
ANS: Line A: Line B: Line C: Area D: Area E: Area F: Area G: Point H:
Revenue line Total cost line Fixed costs line Profits Variable costs Fixed costs Losses Break-even point
PTS: 1 DIF: Easy OBJ: 21.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis 10.
Given the following information, draw a profit graph for Viajem Company. Fixed costs: Variable costs per unit: Sales revenue per unit:
$50,000 $ 100 $ 150
ANS: Break-even point:
$150X $100X $50,000 = 0 X = 1,000 units
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 11.
21.5
Slaby Motors sells two different products. Following are the monthly revenues and costs: Sales Revenue $40,000 $70,000
Product A Product B
Variable Costs $12,000 $42,000
Determine the total contribution margin ratio at the current sales mix and the total contribution margin ratio if the sales mix changes to 50% for each product. (Assume that total sales revenue and variable cost rate stay the same.) ANS: Sales revenue Less variable costs Contribution margin
Product A $40,000 100% 12,000 30% $28,000 70%
Product B $70,000 100% 42,000 60% $28,000 40%
Total $110,000 54,000 $ 56,000
100% 49% 51%
Product A $55,000 100% 16,500 30% $38,500 70%
Product B $55,000 100% 33,000 60% $22,000 40%
Total $110,000 49,500 $ 60,500
100% 45% 55%
New product mix: Sales revenue Less variable costs Contribution margin
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.6
12.
Slaby Motors sells two different products. Following are the monthly revenues and costs: Sales Variable Revenue Costs Product A $40,000 $12,000 Product B $70,000 $42,000 If fixed costs are equal to $40,000, determine the break-even point at the current sales mix and the break-even point if the sales mix changes to 50% for each product. (Assume that total sales revenue and variable cost rate stay the same.) ANS: Sales revenue Less variable costs Contribution margin Break-even point:
Product A $40,000 100% 12,000 30% $28,000 70%
Product B $70,000 100% 42,000 60% $28,000 40%
Total $110,000 54,000 $ 56,000
100% 49% 51%
Total $110,000 49,500 $ 60,500
100% 45% 55%
$40,000 51% = 78,431 (rounded)
New product mix: Sales revenue Less variable costs Contribution margin Break-even point:
Product A $55,000 100% 16,500 30% $38,500 70%
Product B $55,000 100% 33,000 60% $22,000 40%
$40,000 55% = 72,727 (rounded)
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
21.6
Chapter 22—Relevant Information and Decisions MULTIPLE CHOICE 1.
Future costs that change as a result of a decision are: a. Sunk costs b. Variable costs c. Differential costs d. Opportunity costs ANS: C PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
2.
Costs that have already been incurred and CANNOT be avoided are: a. Sunk costs b. Variable costs c. Differential costs d. Opportunity costs ANS: A PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
3.
Costs that are never relevant to a decision because they are always the same are: a. Sunk costs b. Variable costs c. Differential costs d. Opportunity costs ANS: A PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
4.
Costs that can be eliminated in whole or in part by choosing one alternative over another are: a. Sunk costs b. Variable costs c. Differential costs d. Opportunity costs ANS: C PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
5.
Which of the following costs are always relevant for decision making? a. Sunk costs and differential costs b. Opportunity costs and sunk costs c. Differential costs and fixed costs d. Opportunity costs and differential costs ANS: D PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
6.
The maximum available contributions to profit that have been passed up by using resources for another purpose are: a. Sunk costs b. Variable costs c. Differential costs d. Opportunity costs ANS: D PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
7.
Which of the following costs is LEAST likely to be a differential cost? a. Overtime wages b. Depreciation c. Manager's salary d. Costs for additional equipment ANS: B PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
8.
In a decision regarding whether or not to buy a new truck, the book value of the old truck usually is considered to be: a. A relevant cost b. A differential cost c. A sunk cost d. None of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
9.
The total-cost approach to considering alternatives includes analyzing: a. Only the differential costs of the alternatives b. Only the common costs of the alternatives c. Both the common and the differential costs of the alternatives d. Neither the common nor the differential costs of the alternatives ANS: C PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
10.
Which of the following statements is true when making product and process decisions? a. Both quantitative and qualitative factors should be considered b. Only quantitative factors should be considered c. Only qualitative factors should be considered d. Neither quantitative nor qualitative factors should be considered ANS: A PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
11.
Which of the following is true when making product and process decisions? a. Opportunity costs should never be included in making a decision. b. All costs should be taken into account when making a decision. c. Only the differential costs should be used to make a decision. d. None of these are true. ANS: C PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
12.
For a cost to be a differential cost, it must be: a. A future cost b. A sunk cost c. Recorded in the accounting records d. A future cost that changes ANS: D PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
13.
The total-cost approach to pricing products is usually relevant to: a. Only the pricing of normal orders for products b. Only the pricing of special orders c. The pricing of both special orders and normal orders for products d. Neither the pricing of special orders nor the pricing of normal orders for products ANS: A PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
14.
Differential costs are relevant when making which of the following types of decisions? a. The pricing of special orders b. When to drop or add a product c. Determining whether or not to further process different products d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
15.
Costs that are significant in the decision-making process but are NOT recorded in the accounting records are: a. Opportunity costs b. Differential costs c. Sunk costs d. Overhead costs ANS: A PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
16.
A cost that is measured by the benefits forgone from an alternative use of resources is called a(n): a. Sunk cost b. Opportunity cost c. Differential cost d. Standard cost ANS: B PTS: 1 DIF: Easy OBJ: 22.1 NAT: AACSB Reflective Thinking | IMA Decision Analysis
17.
Evening theater tickets are probably more expensive than matinee tickets because: a. Variable costs of a matinee are lower than those of an evening performance b. Theaters are trying to use up excess capacity and so are considering only incremental costs in determining the price of a matinee c. Less electricity is probably used in the daytime d. None of these reasons are correct ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Decision Analysis
OBJ:
22.1
18.
For which decision would a store manager's salary be a differential cost? a. Adding a department b. Closing the store c. Increasing sales 10% d. Leasing a larger store ANS: B PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Decision Analysis
19.
OBJ:
22.1
A special order is an: a. Order that is priced at normal price in order to utilize excess capacity b. Order that is priced above the normal price in order to make a large profit c. Order that is priced below the normal price in order to utilize excess capacity d. Order that is part of normal business ANS: C PTS: 1 DIF: Easy OBJ: NAT: AACSB Reflective Thinking | IMA Decision Analysis
21.
22.1
For which decision(s) would shipping costs be a differential cost? a. Increasing the product's sales b. Deciding how many units to produce with limited resources c. Both increasing the product's sales and deciding how many units to produce with limited resources d. Neither increasing the product's sales nor deciding how many units to produce with limited resources ANS: A PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Decision Analysis
20.
OBJ:
22.2
Which type of data might cause a manager to erroneously reject an order? a. Total cost b. Effect on sales c. Future costs that would change d. Differential costs ANS: A PTS: 1 DIF: Easy OBJ: NAT: AACSB Reflective Thinking | IMA Decision Analysis
22.2
22.
In making a decision about whether or not to fill a special order, fixed costs that are incurred regardless of whether the order is accepted should: a. Be considered because they help to reduce net income b. Be considered because they cannot be avoided c. Not be considered because they will be incurred whether or not the order is accepted d. None of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 22.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
23.
When pricing special orders in a situation where there is unused capacity, management should charge a price that is greater than the: a. Additional costs of manufacturing the product b. Total costs of manufacturing the product c. Fixed costs of manufacturing the product d. The answer cannot be determined ANS: A PTS: 1 DIF: Easy OBJ: 22.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
24.
If a decision regarding special orders is based only on costs, management should: a. Accept any order where the payoff covers the variable costs b. Accept any order where the payoff covers the variable costs and the direct fixed costs c. Accept any order that will help utilize excess capacity, regardless of the payoff d. All of these statements are true ANS: B PTS: 1 DIF: Easy OBJ: 22.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
25.
When managers are deciding what price to charge for a special order, they should consider: a. Both additional costs and qualitative factors b. Only additional costs c. Only qualitative factors d. Neither qualitative factors nor additional costs ANS: A PTS: 1 DIF: Easy OBJ: 22.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
26.
When pricing special orders, management can often approximate additional costs by the: a. Sunk costs of making the product b. Total costs of making the product c. Fixed costs of making the product d. Variable costs of making the product ANS: D PTS: 1 DIF: Easy OBJ: 22.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
27.
Assuming a firm has excess capacity, which of the following is NOT a reason that the firm would decide to reduce the normal price of a product or service in order to obtain a special order? a. The demand for the firm's products has dropped sharply in the last three months b. The firm is being offered a contract from a foreign distributor based in a country where normal selling prices are lower c. Market demand is strong and the firm is able to produce more products and still sell them at normal price d. The firm is able to sell its excess product to be retailed under a generic brand name, the product will sell at lower than normal price ANS: C PTS: 1 DIF: Easy OBJ: 22.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
28.
A firm can increase profits if: a. The selling price exceeds the total variable costs b. The selling price exceeds the total variable and differential fixed costs c. The price floor exceeds the selling price d. Special sales have no adverse effect on normal sales ANS: B PTS: 1 DIF: Easy OBJ: 22.2 NAT: AACSB Reflective Thinking | IMA Decision Analysis
29.
Napa Company manufactures computers. The following cost information for the manufacture of one computer has been compiled: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Fixed manufacturing overhead
$ 96 180 124 80 80
If Napa receives a special order for 500 computers at a price of $550, what will be the effect on the company's profit if the order is accepted? (Assume that other variables do not change.) a. Increase of $15,000 b. Increase of $35,000 c. Increase of $75,000 d. Decrease of $5,000 ANS: B Total variable costs: Change in profit:
$96 + $180 + $124 + $80 = $480 ($550 $480) 500 = $35,000 increase
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 30.
22.2
West Star Company manufactures computers. The following cost information for the manufacture of one computer has been compiled: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Fixed manufacturing overhead
$55 95 60 30 40
West Star received an offer for a special order for 1,000 computers. In addition to normal costs, West Star would also incur a $10 shipping charge per computer. In negotiating a price, what is the minimum selling price West Star should accept? (Assume that other variables do not change and West Star has enough capacity to fulfill the order.) a. $285 b. $275 c. $235 d. $250 ANS: D Total variable costs: $55 + $95 + $60 + $30 + $10 = $250 PTS: 1 DIF: Medium OBJ: 22.2 NAT: AACSB Analytic | IMA Decision Analysis Exhibit 22-1 Lumens Corporation makes ornamental lamps. The costs per lamp are the following: Direct materials Direct labor Manufacturing overhead Total
$ 35 45 50 $130
The manufacturing overhead can be divided into 40% variable manufacturing overhead and 60% fixed manufacturing overhead. 31.
Refer to Exhibit 22-1. To earn a reasonable return and cover administrative and selling expenses, Lumens normally sells its lamps for $200 each. Given this information, Lumens's variable cost of making each lamp is: a. $90 b. $100 c. $120 d. $130 ANS: B Variable costs: $35 + $45 + ($50 40%) = $100 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
32.
Refer to Exhibit 22-1. A major department store has offered to buy 1,000 of the lamps from Lumens for $120 each. Given this information, if Lumens has sufficient idle capacity, by how much would Lumens increase its profits by selling the lamps to the store? a. $20,000 b. $10,000 c. $0 d. Lumens would lose profits for accepting this order ANS: A Variable costs: Increase in profits:
$35 + $45 + ($50 40%) = $100 1,000 ($120 $100) = $20,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 33.
22.2
22.2
Packer Corporation makes vases, the costs of which are: Direct materials Direct labor Manufacturing overhead Total
$ 70 90 120 $280
The manufacturing overhead can be divided into 60% variable manufacturing overhead and 40% fixed manufacturing overhead. A major department store has offered to buy 1,000 of the vases from Packer for $250 each. Given this information, if Packer has sufficient idle capacity and no adverse qualitative factors, should Packer accept the special order? a. No, Packer would lose $10,000 in profits b. Yes, Packer would earn $18,000 in profits c. Yes, Packer would earn $42,000 in profits d. No, Packer would lose $8,000 in profits
ANS: B Differential costs: $70 + $90 + ($120 60%) = $232 Total profits earned: 1,000 ($250 $232) = $18,000 PTS: 1 DIF: Challenging OBJ: 22.2 NAT: AACSB Analytic | IMA Decision Analysis 34.
The relevant costs of buying a component from a supplier are: a. Direct labor costs b. Opportunity costs c. Variable manufacturing costs d. Prices charged by the supplier ANS: D PTS: 1 DIF: Easy OBJ: 22.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
35.
In a make-or-buy decision, management would consider: a. Cost advantages b. Negative qualitative factors c. Alternative uses for idle facilities d. All of these should be considered ANS: D PTS: 1 DIF: Easy OBJ: 22.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
36.
When there is idle capacity, which costs are most likely to be IRRELEVANT? a. Incremental costs b. Fixed costs c. Variable costs d. Opportunity costs ANS: B PTS: 1 DIF: Easy OBJ: 22.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
37.
The opportunity cost of producing a component within a firm is: a. The return that could be earned from the best alternative use of the resources b. The return that could be earned from the worst alternative use of the resources c. The actual cost of making the component d. None of these are correct ANS: A PTS: 1 DIF: Easy OBJ: 22.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
38.
Make-or-buy decisions should be based on: a. Total costs b. Only variable costs c. Variable costs and indirect fixed costs d. Variable costs and direct fixed costs ANS: D PTS: 1 DIF: Easy OBJ: 22.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
39.
Which of the following qualitative factors should be considered in a make-or-buy decision? a. The effect on the regular supply source b. The company's ability to make a high-quality component c. Employment considerations d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 22.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
40.
Which of the following statements about opportunity costs is true? a. They are not recorded in the accounts and thus are not useful in the decision-making process b. They are not recorded in the accounts but are useful in the decision-making process c. They are recorded in the accounts but are not useful in the decision-making process d. They are recorded in the accounts and are useful in the decision-making process ANS: B PTS: 1 DIF: Easy OBJ: 22.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
41.
A cost important to the decision-making process but NOT recorded in conventional accounting records is called a(n): a. Sunk cost b. Standard cost c. Direct cost d. Opportunity cost ANS: D PTS: 1 DIF: Easy OBJ: 22.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis Exhibit 22-2 JD Smith Company is operating at less than full capacity. The production manager is considering using this excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows: Unit Cost $15 18 5 2 6 $46
Direct materials Direct labor Variable manufacturing overhead Direct fixed manufacturing overhead Indirect fixed manufacturing overhead Totals
Total Cost of 3,000 Units $ 45,000 54,000 15,000 6,000 18,000 $138,000
Up to now, the company has been buying 3,000 units of the part for a total of $115,000. 42.
Refer to Exhibit 22-2. In deciding whether or not to make the part, JD Smith Company should use a differential unit cost figure of: a. $33 b. $38 c. $40 d. $46 ANS: C Differential unit cost: $15 + $18 + $5 + $2 = $40 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
22.3
43.
Refer to Exhibit 22-2. If JD Smith uses a differential-cost analysis in deciding whether to make the part or buy the part, the total differential cost of making the part would be: a. $99,000 b. $114,000 c. $120,000 d. $138,000 ANS: C Total differential cost: $45,000 + $54,000 + $15,000 + $6,000 = $120,000 PTS: 1 DIF: Medium OBJ: 22.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
44.
Refer to Exhibit 22-2. If JD Smith decided to make this product, its profit would: a. Decrease $5,000 b. Decrease $23,000 c. Increase $5,000 d. Increase $23,000 ANS: A Total differential cost: Change in profit:
$45,000 + $54,000 + $15,000 + $6,000 = $120,000 $115,000 $120,000 = $5,000 Decrease
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
22.3
Exhibit 22-3 Shasta Company is operating at less than full capacity. The production manager is considering using this excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows: Unit Cost $16 30 12 6 12 $76
Direct materials Direct labor Variable manufacturing overhead Direct fixed manufacturing overhead Indirect fixed manufacturing overhead Totals
Total Cost of 2,000 Units $ 32,000 60,000 24,000 12,000 24,000 $152,000
Up to now, the company has been buying 2,000 units of the part for a total of $124,000. 45.
Refer to Exhibit 22-3. In deciding whether or not to make the part, Shasta Company should use a differential unit cost figure of: a. $46 b. $58 c. $64 d. $76 ANS: C Differential unit cost: $16 + $30 + $12 + $6 = $64 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
22.3
46.
Refer to Exhibit 22-3. If Shasta Company uses a differential-cost analysis in deciding whether to make the part, the total differential cost of making the part would be: a. $88,000 b. $116,000 c. $128,000 d. $152,000 ANS: C Total differential cost: $32,000 + $60,000 + $24,000 + $12,000 = $128,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
47.
22.3
Refer to Exhibit 22-3. If Shasta Company decided to make this product, its profit would: a. Decrease $28,000 b. Decrease $4,000 c. Increase $4,000 d. Increase $10,000 ANS: B Total differential cost: Change in profit:
$32,000 + $60,000 + $24,000 + $12,000 = $128,000 $128,000 $124,000 = $4,000 Decrease
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
22.3
Exhibit 22-4 Lauria Electronics has excess capacity that could be used to make 2,000 antennas for the cell phones that the company produces. The following cost figures are available: Per Unit $2.00 3.00 2.50 1.20 2.40
Direct materials Direct labor Utilities Direct fixed costs Indirect fixed costs Lauria can buy the antennas from an outside supplier for $10.50. 48.
Refer to Exhibit 22-4. Given the data above, Lauria would: a. Save $1,400 by making the antennas b. Save $3,600 by making the antennas c. Lose $1,000 by making the antennas d. Lose $3,600 by making the antennas ANS: B Differential costs to make: Cost to buy: Difference in cost:
$4,000 + $6,000 + $5,000 + $2,400 = $17,400 $10.50 2,000 = $21,000 $3,600
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
22.3
Total $4,000 6,000 5,000 2,400 4,800
49.
Refer to Exhibit 22-4. Given the data above, if Lauria has idle facilities with no alternative use, it should: a. Buy the antennas from the outside supplier b. Make the antennas c. Lauria would be equally well off either buying or making the antennas d. The answer cannot be determined ANS: B Differential costs: $2 + $3 + $2.50 + $1.20 = $8.70 PTS: 1 DIF: Medium OBJ: 22.3 NAT: AACSB Reflective Thinking | IMA Decision Analysis
50.
Decisions to drop a product line must take into consideration: a. All differential costs b. Qualitative factors c. Joint costs d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 22.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
51.
Which of the following should be considered in a decision to enter a market? a. Effects on profits b. Effects on quality c. Effects on delivery time d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 22.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
52.
When a segment of a business consistently shows net losses, it should: a. Definitely be dropped b. Be dropped only if its contribution to overall company profits is negative c. Be dropped only if contribution margin exceeds fixed costs d. Never be dropped ANS: B PTS: 1 DIF: Easy OBJ: 22.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
53.
When considering whether or not to drop a market segment of a business, past costs that CANNOT be recovered regardless of whether the segment is dropped are: a. Opportunity costs b. Variable costs c. Sunk costs d. Relevant costs ANS: C PTS: 1 DIF: Easy OBJ: 22.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
54.
Which of the following criteria should be used when making a decision about whether or not to drop a market segment? a. Total contribution margin of the segment b. Contribution margin available to cover indirect fixed costs c. Net income of the segment d. Segment margin available to cover indirect fixed costs ANS: D PTS: 1 DIF: Easy OBJ: 22.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
55.
Costs that are NOT the responsibility of any specific segment, product, or department are: a. Common costs b. Differential costs c. Sunk costs d. Fixed costs ANS: A PTS: 1 DIF: Easy OBJ: 22.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
56.
A company should generally add a product line if: a. Its segment margin is negative and its contribution to overall company profits is negative b. Its segment margin is negative and its contribution to overall company profits is positive c. Its segment margin is positive d. None of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 22.4 NAT: AACSB Reflective Thinking | IMA Decision Analysis
57.
Newell Company presently has three product lines: paper, stamps, and printer ink. The company is considering discontinuing the stamp line. The stamp line has the following current data: Sales revenue Variable costs Direct fixed costs Indirect fixed costs (allocated from company headquarters) Net loss Given this information, if Newell discontinues the stamp line, net income would: a. Increase by $3,000 b. Decrease by $6,000 c. Decrease by $9,000 d. Decrease by $12,000 ANS: B Segment margin: $48,000 $30,000 $12,000 = $6,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
22.4
$ 48,000 (30,000) (12,000) (9,000) $ (3,000)
58.
Newell Company presently has three product lines: paper, stamps, and printer ink. The company is considering adding a new line of pens. Market research shows the following expected revenues and costs if the pen line were added: Sales revenue (expected annual sale of 16,250 units) Variable costs Direct fixed costs Indirect fixed costs (allocated from company headquarters) Net income
$ 65,000 (30,000) (12,000) (9,000) $ 14,000
If pens are added as a product line, it is expected that the other lines will have a decrease in contribution margin of $7,000. Given this information, if Newell adds the pen line, net income would increase by: a. $16,000 b. $14,000 c. $7,000 d. $0 ANS: A Increase in net income: $65,000 $30,000 $12,000 $7,000 = $16,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 59.
22.4
Northwest Company presently has two products: compasses and maps. The company is considering discontinuing the compass line. The following financial information is available for these two products: Compass $275,000 (190,000) (60,000) (40,000) $ (15,000)
Sales revenue Variable costs Direct fixed costs Common fixed costs Net income (loss)
Given this information, if Northwest discontinues the compass line, net income would: a. Increase by $15,000 b. Decrease by $40,000 c. Decrease by $25,000 d. Decrease by $30,000 ANS: C Segment margin: $275,000 $190,000 $60,000 = $25,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
22.4
Map $228,000 (133,000) (40,000) (30,000) $ 25,000
60.
Overland Company is planning on discontinuing one of its markets in Japan. The Japanese market has a contribution margin of $33,000. Fixed costs for the Japanese market are $55,000, 70% of which are unavoidable. What will be the effect on Overland's net income if the Japanese market is eliminated? a. Increase by $33,000 b. Decrease by $33,000 c. Increase by $16,500 d. Decrease by $16,500 ANS: D Segment margin: $33,000 ($55,000 30%) = $16,500 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
61.
Merced Corporation is considering adding a new product line. Market research indicates that sales revenue for the new line would be $80,000 for 35,000 units. Variable costs would be $1.70 per unit; direct fixed costs, $0.40 per unit; and indirect fixed costs, $0.50 per unit. If Merced added the new line, its income would: a. Increase by $20,500 b. Increase by $6,500 c. Decrease by $5,000 d. Decrease by $11,000 ANS: B Total relevant costs: Segment margin for new line:
35,000 ($1.70 + $0.40) = $73,500 $80,000 $73,500 = $6,500
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 62.
22.4
22.4
Joint product costs are: a. Costs incurred before the split-off point b. Irrelevant to decisions concerning further processing c. Incurred whether further processing is done or not d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 22.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
63.
Under what circumstance will it be profitable to continue processing after the split-off point? a. When incremental revenues exceed incremental processing costs after the split-off point b. There are no additional sunk costs c. Opportunity costs outweigh the differential costs d. None of these are correct ANS: A PTS: 1 DIF: Easy OBJ: 22.5 NAT: AACSB Reflective Thinking | IMA Decision Analysis
64.
Granger Company makes portable DVD players. In its inventory, Granger found 200 DVD players that had become obsolete. Each DVD player has a cost of $100. Granger can upgrade these DVD players for $15 each after which they can be sold at a cost of $40 each. Granger has also received an offer to sell the DVD players, as is, for a total of $4,000. What is the total amount of sunk cost? a. $3,000 b. $4,500 c. $8,000 d. $20,000 ANS: D Sunk cost: $100 200 units = $20,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
65.
22.5
Granger Company makes portable DVD players. In its inventory, Granger found 200 DVD players that had become obsolete. Each DVD player has a cost of $100. Granger can upgrade these DVD players for $15 each after which they can be sold at a cost of $40 each. Granger has also received an offer to sell the DVD players, as is, for a total of $4,000. Compared to just selling the 200 DVD players for a total of $4,000 as they are, what is the net increase (decrease) in operating income if Granger upgrades the DVD players and then sells them? a. $1,000 decrease b. $1,000 increase c. $5,000 decrease d. $5,000 increase ANS: B Net increase: ($40 200 units) ($15 200 units) $4,000 = $1,000 increase PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
66.
22.5
CharCore mixes together wood chips and pine oil. After joint manufacturing costs of $2,000 have been incurred, the mixture separates into two products, granulated charcoal and methyl alcohol. At the split-off point, granulated charcoal can be sold for $5,000 and the alcohol can be sold for $9,000. The charcoal can be further processed at a cost of $6,000 to make air filters which could be sold for $15,000. The alcohol can be further processed at a cost of $7,000 to make a cleaning solvent which could be sold for $14,000. What is the net increase (decrease) in operating income from air filters? a. $(2,000) b. $2,000 c. $3,000 d. $4,000 ANS: D Additional revenue from further processing: Net increase:
$15,000 $5,000 = $10,000 $10,000 $6,000 = $4,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
22.5
67.
CharCore mixes together wood chips and pine oil. After joint manufacturing costs of $2,000 have been incurred, the mixture separates into two products, granulated charcoal and methyl alcohol. At the splitoff point, granulated charcoal can be sold for $5,000 and the alcohol can be sold for $9,000. The charcoal can be further processed at a cost of $6,000 to make air filters which could be sold for $15,000. The alcohol can be further processed at a cost of $7,000 to make a cleaning solvent which could be sold for $14,000. What is the net increase (decrease) in operating income from cleaning solvents? a. $(2,000) b. $2,000 c. $3,000 d. $4,000 ANS: A Additional revenue from further processing: Net decrease:
68.
$14,000 $9,000 = $5,000 $5,000 $7,000 = $(2,000)
PTS: 1 DIF: Medium OBJ: 22.5 NAT: AACSB Analytic | IMA Decision Analysis CharCore mixes together wood chips and pine oil. After joint manufacturing costs of $2,000 have been incurred, the mixture separates into two products, granulated charcoal and methyl alcohol. At the split-off point, granulated charcoal can be sold for $5,000 and the alcohol can be sold for $9,000. The charcoal can be further processed at a cost of $6,000 to make air filters which could be sold for $15,000. The alcohol can be further processed at a cost of $7,000 to make a cleaning solvent which could be sold for $14,000. Which product should be processed further? a. Granulated charcoal only b. Methyl alcohol only c. Both granulated charcoal and methyl alcohol d. Neither granulated charcoal nor methyl alcohol ANS: A Granulated charcoal: Additional revenue from further processing: Net increase:
$15,000 $5,000 = $10,000 $10,000 $6,000 = $4,000
Methyl alcohol: Additional revenue from further processing: Net decrease:
$14,000 $9,000 = $5,000 $5,000 $7,000 = $(2,000)
PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Decision Analysis 69.
22.5
In relation to the critical resource factor, a company will maximize net income by selling products that: a. Have the lowest variable costs b. Have the highest selling price c. Contribute the most toward fixed costs d. Have the lowest differential costs ANS: C PTS: 1 DIF: Easy OBJ: 22.6 NAT: AACSB Reflective Thinking | IMA Decision Analysis
70.
When managers are deciding how much of each product to sell to maximize net income, they should: a. Focus on the product that contributes the most toward covering indirect fixed costs in relation to the critical resource factor b. Focus on the product that has the highest contribution margin, regardless of its relation to the critical resource factor c. Focus on the product that has the highest selling price d. Focus on the product that has the lowest variable costs ANS: A PTS: 1 DIF: Easy OBJ: 22.6 NAT: AACSB Reflective Thinking | IMA Decision Analysis
71.
72.
To maximize net income in a situation involving scarce resources, a company should: a. Manufacture products that generate overall contribution margin b. Manufacture products that generate the greatest overall contribution margin per unit of scarce resource c. Manufacture products that sell for the highest price d. Manufacture products that have the lowest variable costs ANS: B PTS: 1 DIF: Easy OBJ: 22.6 NAT: AACSB Reflective Thinking | IMA Decision Analysis The resource that limits operating capacity by its availability is the: a. Outsourcing factor b. Common cost factor c. Special resource factor d. Critical resource factor ANS: D PTS: 1 DIF: Easy OBJ: NAT: AACSB Reflective Thinking | IMA Decision Analysis
73.
22.6
Hopson Company is located in a large city that has good access to both raw materials and a dependable labor supply. Real estate in the city is extremely expensive, and Hopson's warehouse is always full because the company operates at 100% capacity. Hopson's critical resource probably is: a. Labor hours b. Availability of raw materials c. Floor space d. Machine hours ANS: C PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Decision Analysis
OBJ:
22.6
Exhibit 22-5 Imperial Company manufactures two types of fruit drinks, Tropical and Hawaiian. The company can sell as many bottles of each product as it can produce, but production is limited by the availability of direct labor hours. The revenues, costs, and labor hours for the two products are as follows: Selling price per 100 bottles Variable costs per 100 bottles Labor hours per 100 bottles
Tropical $1,200 $ 720 10
Hawaiian $1,800 $1,200 20
74.
Refer to Exhibit 22-5. What is the contribution margin per 100 bottles of Hawaiian? a. $480 b. $600 c. $720 d. $1,200 ANS: B Contribution margin for Hawaiian: $1,800 $1,200 = $600 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
75.
Refer to Exhibit 22-5. With 1,000 direct labor hours available for production, if Imperial Company uses the entire amount to produce Tropical, the contribution margin in total dollars would be: a. $24,000 b. $30,000 c. $48,000 d. $60,000 ANS: C Contribution margin per direct labor hour: Total contribution margin:
76.
22.6
($1,200 $720) 10 = $48 1,000 $48 = $48,000
PTS: 1 DIF: Medium OBJ: 22.6 NAT: AACSB Analytic | IMA Decision Analysis Refer to Exhibit 22-5. How much larger or smaller would Imperial's earnings be if the company produced Hawaiian instead of Tropical with the 1,000 available direct labor hours? a. $12,000 larger b. $12,000 smaller c. $18,000 larger d. $18,000 smaller ANS: D Tropical: Contribution margin per direct labor hour: Total contribution margin:
($1,200 $720) 10 = $48 1,000 $48 = $48,000
Hawaiian: Contribution margin per direct labor hour: Total contribution margin:
($1,800 $1,200) 20 = $30 1,000 $30 = $30,000
Change in earnings:
$48,000 $30,000 = $18,000 smaller
PTS: 1 DIF: Medium OBJ: 22.6 NAT: AACSB Reflective Thinking | IMA Decision Analysis
77.
Tarver Corporation makes stools and tables. The company can sell as many stools and tables as it can produce, but its machine-hour capacity is limited. Revenue and cost data for each unit are given as follows: Stool $7.50 6.00 $1.50
Selling price Variable costs Contribution margin
It takes two machine hours to make a table and one machine hour per stool. Given this information, Tarver should: a. Produce tables rather than stools b. Produce stools rather than tables c. Be equally well off either producing all tables or all stools d. The answer cannot be determined from the information given ANS: B Stool's contribution margin per machine hour: Table's contribution margin per machine hour:
$1.50 1 = $1.50 $2.50 2 = $1.25
PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Decision Analysis
22.6
78.
The price charged for a product should normally be high enough to cover: a. Total costs and still provide a reasonable return to owners b. Fixed costs and still provide a reasonable return to owners c. Variable costs and still provide a reasonable return to owners d. Differential costs and still provide a reasonable return to owners ANS: A PTS: 1 DIF: Easy OBJ: 22.7 NAT: AACSB Reflective Thinking | IMA Decision Analysis
79.
When making normal pricing decisions, management should consider: a. Differential costs and markup amount b. Variable costs and direct fixed costs only c. Total costs and markup amount d. Variable costs only ANS: C PTS: 1 DIF: Easy OBJ: 22.7 NAT: AACSB Reflective Thinking | IMA Decision Analysis
80.
When using the functional cost approach to set selling prices, the markup must cover: a. Variable costs plus a reasonable return on investment b. Fixed costs plus a reasonable return on investment c. Period costs plus a reasonable return on investment d. None of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 22.7 NAT: AACSB Reflective Thinking | IMA Decision Analysis
Table $18.00 15.50 $ 2.50
81.
When using the contribution approach to set selling prices, the markup must cover: a. Variable costs plus a reasonable return on investment b. Fixed costs plus a reasonable return on investment c. Period costs plus a reasonable return on investment d. None of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 22.7 NAT: AACSB Reflective Thinking | IMA Decision Analysis Exhibit 22-6 Newell Company presently has three product lines: paper, stamps, and printer ink. The company is considering adding a new line of pens. Market research shows the following expected revenues and costs if the pen line were added: Sales revenue (expected annual sale of 15,000 units) Variable costs Direct fixed costs Common fixed costs Net income
82.
83.
$ 65,000 (30,000) (12,000) (9,000) $ 14,000
Refer to Exhibit 22-6. What is the lowest selling price that Newell should consider that would still make it economically desirable to add this product line? a. $4.33 b. $3.40 c. $2.80 d. $0.93 ANS: C Lowest selling price: ($30,000 + $12,000) 15,000 = $2.80 PTS: 1 DIF: Medium OBJ: 22.7 NAT: AACSB Analytic | IMA Decision Analysis Refer to Exhibit 22-6. If Newell generally sets a markup of 20%, what is the lowest selling price that should be considered for the new pen line? a. $1.12 b. $3.36 c. $4.08 d. $5.20 ANS: C Total costs: Lowest selling price:
($30,000 + $12,000 + $9,000) 15,000 = $3.40 $3.40 120% = $4.08
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
22.7
Exhibit 22-7 West Star Company is planning to market a new computer and must decide on a proper selling price. The following cost information for the manufacture of one computer has been compiled: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Fixed manufacturing overhead 84.
Refer to Exhibit 22-7. If the selling price is set at $400 and only variable costs are considered in the pricing decision, what is the markup percentage based on selling price? a. 25% b. 30% c. 40% d. 50% ANS: C Total variable costs: Markup percentage:
$48 + $90 + $62 + $40 = $240 ($400 $240) $400 = 40%
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 85.
$48 90 62 40 40
22.7
Refer to Exhibit 22-7. If the selling price is set at $400 and both variable and fixed costs are treated as product costs, what is the markup percentage based on selling price? a. 25% b. 30% c. 40% d. 50% ANS: B Total product costs: Markup percentage:
$48 + $90 + $62 + $40 + $40 = $280 ($400 $280) $400 = 30%
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
22.7
PROBLEM 1.
You are the controller of Rugged Shoe Company. The company has excess snow boots in its inventory because of a mild winter season. A large retail store chain has offered to buy 10,000 pairs of these boots at a special price. The president of your company asks you to analyze the cost data for producing the boots and estimate a minimum selling price below which the order from the retail chain should not be accepted. Cost information for a pair of boots is as follows: Direct materials Direct labor Manufacturing overhead: Variable Fixed Selling and administrative expenses: Variable Fixed a. b.
$15 8 5 2 3 5
What is the minimum selling price the company should accept based only on the financial data presented above, ignoring qualitative factors? How much increased profit would the company achieve if 10,000 pairs are sold to the retail chain at $31 per pair?
ANS: a.
b.
Since the boots are already produced and in inventory, the only differential cost is variable selling and administrative costs, $3. Therefore, the minimum selling price is $3, ignoring qualitative factors. The increased profit would be $280,000 [($31 $3) 10,000 pairs].
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 2.
22.2
Assume that the monthly capacity of a sporting goods business is 25,000 soccer balls. Current sales and production are averaging 20,000 soccer balls per month, and the soccer balls sell for $40 each. The business receives an offer from an exporter for 5,000 footballs at $36 each. Pricing policies in the domestic market will not be affected, and production can be spread over three months. Variable costs per unit consist of $11.00 for direct materials, $9.00 for direct labor, and $5.00 for variable manufacturing overhead. Fixed costs are $15.00 per unit. What is the differential income or loss from accepting the special order? ANS: Sales price Variable and differential fixed costs Direct materials Direct labor Variable manufacturing overhead Total variable and differential fixed costs Remaining margin to cover fixed costs and provide a profit Number of units in order Expected contribution to fixed costs and profit PTS: 1 DIF: Medium OBJ: 22.2 NAT: AACSB Analytic | IMA Decision Analysis
$ 36.00 $11.00 9.00 5.00 25.00 $ 11.00 5,000 $55,000
3.
Silverado Company needs 3,000 special cinches for a saddle that it designs and manufactures. If the company buys the cinches from another company, it will have idle capacity in its plant that cannot otherwise be used. The company factory space is sufficient to make the cinch if that is the logical choice. Indirect fixed manufacturing overhead is 20% and will be incurred whether the buckles are purchased or manufactured by the company. The relevant costs of making and buying the cinches are as follows: Cost to make the cinches: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead (direct and indirect)
$ 8 13 5 5 $33
Cost to buy from a cinch company a. b.
$31
Identify the differential costs of making the cinches. Should the cinches be purchased or manufactured? Explain your answer.
ANS: a.
b.
The differential costs of making cinches are materials, $8; labor, $13; variable manufacturing overhead, $5; and fixed manufacturing overhead, $4 [(100% 20%) $5], for a total differential cost of $30. The company should produce the cinches in house and save $1 per cinch as compared with the cost to buy of $31.
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 4.
22.3
Tulare Company is operating at less than full capacity. The production manager is considering using this excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows: Unit Cost $ 24 45 18 9 18 $114
Direct materials Direct labor Variable manufacturing overhead Direct fixed manufacturing overhead Indirect fixed manufacturing overhead Totals Until now, Tulare has been buying 4,000 units of the part for a total of $408,000. a. What is the unit differential cost of making the part? b. What is the total differential cost of making the part? c. Should Tulare make the part or continue to buy? ANS: a. b. c.
$24 + $45 + $18 + $9 = $96 $96 4,000 = $384,000 $408,000 $384,000 = $24,000 Tulare would save $24,000 by making the part. Therefore, in the absence of any qualitative factors suggesting otherwise, Tulare should make the part.
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
22.3
5.
Plumas Company presently has two products: tapes and CDs. The company is considering discontinuing the tape line. The following financial information is available for these two products: Tapes $ 825,000 (570,000) (180,000) (120,000) $ (45,000)
Sales revenue Variable costs Direct fixed costs Common fixed costs Net income (loss)
CDs $ 684,000 (399,000) (120,000) (90,000) $ 75,000
Should Plumas Company discontinue the tape line? Explain your answer. ANS: Tape segment margin: $825,000 $570,000 $180,000 = $75,000 No, Plumas should not drop the tape line. The tape line contributes $75,000 segment margin to cover common costs. If the tape line is dropped, net income would actually decrease. PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Decision Analysis 6.
22.4
Bellevue, Inc. reported the following financial information for the year just ended: Sales revenue Cost of goods sold Gross margin Operating expenses Net income (loss)
Division A $ 27,500 15,000 $ 12,500 15,000 $ (2,500)
Division B $90,000 65,000 $25,000 27,000 $ (2,000)
Division C $115,000 75,000 $ 40,000 24,000 $ 16,000
Total $232,500 155,000 $ 77,500 66,000 $ 11,500
Given this information, Bellevue is considering closing Division A and Division B. Before making a final decision, Bellevue's controller decided to separate the total costs into variable costs, direct fixed costs and common fixed costs. The following chart shows the controller's list of separated costs: Division A Division B Division C Cost of good sold: Variable costs 60% 75% 80% Direct fixed costs 40% 25% 20% Operating expenses 20% 40% 35% Direct fixed costs Common fixed costs 80% 60% 65% a. Prepare a modified report, showing Bellevue's costs separated into variable, direct fixed, and common fixed. b. Should Division A and Division B be dropped? Explain your answer.
ANS: a. Sales revenue Variable expenses Contribution margin Direct fixed costs Segment margin Common fixed costs Net income b.
Division A $27,500 9,000 $18,500 9,000 $ 9,500
Division B $90,000 48,750 $41,250 27,050 $14,200
Total $232,500 117,750 $114,750 59,450 $ 55,300 43,800 $ 11,500
Neither Division A nor Division B should be dropped from Bellevue, Inc. Division A contributes $9,500 segment margin to cover common costs and Segment B contributes $14,200 segment margin to cover common costs. If either one of these segments were dropped, Bellevue's net income would actually decrease.
PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Decision Analysis 7.
Division C $115,000 60,000 $ 55,000 23,400 $ 31,600
22.4
Puyallup Corporation makes two products in a joint manufacturing process. At the point of separation, costs of $56,000 have been incurred. Each product can be sold at the separation point or processed further. The following information is available for these products: Product MJ1 Product MJ2 Sales value at separation point $137,600 $ 94,600 Costs of further processing 68,370 74,820 Sales value after further processing $204,250 $175,440 a. What is the net increase (decrease) in operating income from processing Product MJ1 further? b. What is the net increase (decrease) in operating income from processing Product MJ2 further? c. Which product should be processed further. Explain your answer. ANS: a.
and b. Sales revenue after further processing Sales revenue at point of separation Additional revenue from further processing Additional processing costs Additional profit from further processing
c.
Only Product MJ2 should be processed further. By processing it further, Puyallup Corporation will earn an additional $6,020 to net income. Product MJ1 should be sold at the point of separation.
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 8.
Product MJ1 $204,250 137,600 $ 66,650 68,370 $ (1,720)
Product MJ2 $175,440 94,600 $ 80,840 74,820 $ 6,020
22.5
Calaveras makes two products in a joint manufacturing process. At the point of separation, costs of $8,000 have been incurred. Each product can be sold at the point of separation or processed further. At the split-off point, Product 1 can be sold for $20,000 and Product 2 can be sold for $36,000. Product 1 can be further processed at a cost of $24,000 to make Product 1a which could be sold for $60,000. Product 2 can be further processed at a cost of $28,000 to make Product 2b which could be sold for $56,000. a. b. c.
What is the net increase (decrease) in operating income from processing Product 1 further? What is the net increase (decrease) in operating income from processing Product 2 further? Which product should be processed further. Explain your answer.
ANS: a.
and b. Sales revenue after further processing Sales revenue at point of separation Additional revenue from further processing Additional processing costs Additional profit from further processing
c.
Only Product 1 should be processed further. By processing it further, Calaveras will earn an additional $16,000 to net income. Product 2 should be sold at the point of separation.
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 9.
Product 1 $60,000 20,000 $40,000 24,000 $16,000
Product 2 $56,000 36,000 $20,000 28,000 $ (8,000)
22.5
Humboldt Company manufactures two types of products: tables and chairs. The company can sell as many units of each product as it can produce, but production is limited by the availability of direct labor hours. The revenues, costs, and labor hours for the two products are as follows: Tables $800 $650 15
Selling price per unit Variable costs per unit Labor hours per unit
Chairs $200 $150 10
Humboldt Company has 2,000 direct labor hours available for production. a. b. c.
If Humboldt Company uses the entire amount to produce tables, what is the contribution margin in total dollars? If Humboldt Company uses the entire amount to produce chairs, what is the contribution margin in total dollars? How much larger or smaller would Humboldt's earnings be if the company produced tables instead of chairs with the 2,000 available direct labor hours?
ANS: a.
Tables: Contribution margin per direct labor hour: ($800 $650) 15 = $10 Total contribution margin: 2,000 $10 = $20,000
b.
Chairs: Contribution margin per direct labor hour: ($200 $150) 10 = $5 Total contribution margin: 2,000 $5 = $10,000
c.
Change in earnings: $20,000 $10,000 = $10,000 larger
PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Decision Analysis
22.6
10.
The Crystal Clear Company makes three sizes of computer monitors: 15-inch, 17-inch, and 19inch. Due to a labor strike, only 3,040 labor hours will be available next week. The direct labor wage rate is $10 per hour. The revenue and cost information for all three sizes are listed below: 15-inch $275
17-inch $375
19-inch $550
Direct materials Direct labor Variable manufacturing overhead
70 60 30
90 80 40
150 120 60
Units ordered for next week
300
125
100
Selling price
Given the units ordered for next week, how many of each monitor should Crystal produce to maximize profits? ANS: Contribution margin per constrained resource: 15-inch $275 (70) (60) (30) $115
Selling price Direct materials Direct labor Variable manufacturing overhead Contribution margin per monitor 15-inch; 17-inch; 19-inch;
19-inch $550 (150) (120) (60) $220
$115 CM 6 labor hours = $19.17 $165 CM 8 labor hours = $20.63 $220 CM 12 labor hours = $18.33
Therefore, produce: 125 17-inch $165 CM 300 15-inch $115 CM 20 19-inch $220 CM Total contribution margin
= = = =
$20,625 (125 8) 1,000 labor hours 34,500 (300 6) 1,800 labor hours 4,400 (20 12) 240 labor hours $59,525 3,040 labor hours
PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Decision Analysis 11.
17-inch $375 (90) (80) (40) $165
22.6
Amador Company is pricing a new line of recliners. Production costs for each recliner are as follows: Cost per unit Direct materials $ 150 Direct labor $ 160 Variable manufacturing overhead $ 120 Variable selling and administrative expenses $ 80 Total fixed manufacturing overhead $8,400 Total selling and administrative expenses $3,600 Average number of recliners sold per year 120 a. Assuming that Amador Company prices its products using a 40% markup on total variable costs, estimate the normal selling price for Amador's recliner. b. Assuming that Amador Company prices its products using a 30% markup on total manufacturing costs, estimate the normal selling price for Amador's recliner.
ANS: a. Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Total variable costs Markup (variable cost 40%) Estimated normal selling price
Cost per Unit $150 160 120 80 $510 204 $714
b.
Cost per Unit $150 160 120 70 $500 150 $650
Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($8,400 120 units) Total manufacturing costs Markup (manufacturing cost 30%) Estimated normal selling price PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis 12.
22.5
Inyo Company is planning to market a new product and must decide on a proper selling price. The following cost information for the manufacture of one unit has been compiled: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Fixed manufacturing overhead a. b. c.
$168 315 217 140 140
Assuming that Inyo Company prices its products using a 25% markup on total costs, estimate the normal selling price for Inyo's new product. If the selling price is set at $1,400 and only variable costs are considered in the pricing decision, what is the markup percentage based on selling price? If the selling price is set at $1,400 and both variable and fixed costs are treated as product costs, what is the markup percentage based on selling price?
ANS: a.
Cost per Unit $ 168 315 217 140 140 $ 980 245 $1,225
Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Fixed manufacturing overhead Total costs Markup (total cost 25%) Estimated normal selling price b.
Total variable costs: $168 + $315 + $217 + $140 = $840 Markup percentage: ($1,400 $840) $1,400 = 40%
c.
Total product costs: $168 + $315 + $217 + $140 + $140 = $980 Markup percentage: ($1,400 $980) $1,400 = 30%
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Decision Analysis
22.5
Chapter 23—Capital Investment Decisions MULTIPLE CHOICE 1.
All of the following define capital EXCEPT: a. Material wealth b. Money used for investment c. Resources used for future benefit d. Depreciable assets ANS: D PTS: 1 DIF: Easy OBJ: 23.1 NAT: AACSB Reflective Thinking | IMA Investment Decisions
2.
All of the following are characteristics of the capital investment decisions that are critical to longrun profitability EXCEPT: a. They affect earnings over a long period b. They are much less liquid than other assets c. They involve fixed assets d. They require large outlays of capital ANS: C PTS: 1 DIF: Easy OBJ: 23.1 NAT: AACSB Reflective Thinking | IMA Investment Decisions
3.
Determining whether capital investment projects meet minimum standards of financial acceptability is called: a. The ranking function b. The screening function c. The selecting function d. The acceptance function ANS: B PTS: 1 DIF: Easy OBJ: 23.1 NAT: AACSB Reflective Thinking | IMA Investment Decisions
4.
Determining whether or not a given investment is best among all acceptable alternatives is called: a. The ranking function b. The screening function c. The selection function d. The acceptance function ANS: A PTS: 1 DIF: Easy OBJ: 23.1 NAT: AACSB Reflective Thinking | IMA Investment Decisions
5.
The present value of $1 to be received 2 years in the future is: a. Greater than $1 b. Less than $1 c. Equal to $1 d. None of these are correct ANS: B PTS: 1 DIF: Easy OBJ: 23.1 NAT: AACSB Reflective Thinking | IMA Investment Decisions
6.
Which of the following investments has the greatest present value? a. An investment that provides $100,000 in 1 year b. An investment that provides $50,000 at the end of each year for 2 years c. An investment that provides $33,333 at the end of each year for 3 years d. An investment that provides $25,000 at the end of each year for 4 years ANS: A PTS: 1 DIF: Easy OBJ: 23.1 NAT: AACSB Reflective Thinking | IMA Investment Decisions
7.
Cash outlays for capital assets include all the following EXCEPT: a. The original purchase price b. The annual operating costs c. The salvage value d. All of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 23.1 NAT: AACSB Reflective Thinking | IMA Investment Decisions
8.
Which of the following expenses are often ignored when making capital budgeting decisions? a. Maintenance expense b. Utilities expense c. Depreciation expense d. Rent expense ANS: C PTS: 1 DIF: Easy OBJ: 23.1 NAT: AACSB Reflective Thinking | IMA Investment Decisions
9.
When making a capital budgeting decision, which of the following is usually NOT discounted? a. The original purchase price paid in cash b. The annual operating expenses c. The annual operating revenues d. The salvage value of the purchased asset ANS: A PTS: 1 DIF: Easy OBJ: 23.1 NAT: AACSB Reflective Thinking | IMA Investment Decisions
10.
Which of the following is true when making capital budgeting decisions? a. Both quantitative and qualitative factors should be considered b. Only quantitative factors should be considered c. Only qualitative factors should be considered d. Neither quantitative nor qualitative factors should be considered ANS: A PTS: 1 DIF: Easy OBJ: 23.1 NAT: AACSB Reflective Thinking | IMA Investment Decisions
11.
Which of the following capital budgeting methods ignores the time value of money? a. Internal rate of return method b. Net present value method c. Payback method d. All of these consider the time value of money ANS: C PTS: 1 DIF: Easy OBJ: 23.2 NAT: AACSB Reflective Thinking | IMA Investment Decisions
12.
The formula for computing the payback period is: a. Investment cost divided by annual revenues from investment b. Investment cost divided by annual net cash inflows c. Net cash inflows divided by investment cost d. Annual revenues from investment divided by investment cost ANS: B PTS: 1 DIF: Easy OBJ: 23.2 NAT: AACSB Reflective Thinking | IMA Investment Decisions
13.
Another name for the accounting rate of return is the: a. Internal rate of return b. Discounted present value c. Payback period d. Unadjusted rate of return ANS: D PTS: 1 DIF: Easy OBJ: 23.2 NAT: AACSB Reflective Thinking | IMA Investment Decisions
14.
The formula for computing unadjusted rate of return is: a. Increase in future average annual revenues divided by initial investment cost b. Increase in future average annual net income divided by initial investment cost c. Initial investment cost divided by increase in future annual revenues d. Initial investment cost divided by increase in future annual net income ANS: B PTS: 1 DIF: Easy OBJ: 23.2 NAT: AACSB Reflective Thinking | IMA Investment Decisions
15.
The formula, Investment Cost divided by Annual Net Cash Inflows, is used to determine an interval of time in which method? a. Net present value method b. Payback method c. Internal rate of return method d. Unadjusted rate of return method ANS: B PTS: 1 DIF: Easy OBJ: 23.2 NAT: AACSB Reflective Thinking | IMA Investment Decisions
16.
Which of these factors is necessary to compute the payback period for an investment? a. Useful life b. Net present value c. Annual net cash inflow d. Minimum desired rate of return ANS: C PTS: 1 DIF: Easy OBJ: 23.2 NAT: AACSB Reflective Thinking | IMA Investment Decisions
17.
Which of the following is LEAST preferable for measuring profitability of an investment? a. Internal rate of return method b. Payback method c. Net present value method d. Unadjusted rate of return method ANS: B PTS: 1 DIF: Easy OBJ: 23.2 NAT: AACSB Reflective Thinking | IMA Investment Decisions
18.
Which method measures the amount of time it will take for net cash flows of an investment to equal the cash outlay? a. Unadjusted rate of return method b. Internal rate of return method c. Payback method d. Net present value method ANS: C PTS: 1 DIF: Easy OBJ: 23.2 NAT: AACSB Reflective Thinking | IMA Investment Decisions
19.
Which of the following does NOT consider the time value of money? a. Internal rate of return method b. Unadjusted rate of return method c. Net present value method d. None of these consider the time value of money ANS: B PTS: 1 DIF: Easy OBJ: 23.2 NAT: AACSB Reflective Thinking | IMA Investment Decisions
20.
Which of the following is a strength of the payback method? a. It is difficult to compute b. It considers the investment's overall profitability c. It takes into account the time value of money d. It determines whether an investment fits into a specific period for the use of funds ANS: D PTS: 1 DIF: Easy OBJ: 23.2 NAT: AACSB Reflective Thinking | IMA Investment Decisions
21.
Which of the following is a characteristic of the unadjusted rate of return? a. It takes into account annual cash flows b. It provides a measure of GAAP-based profitability c. It takes into account the time value of money d. It determines whether an investment fits into a specific period for the use of funds ANS: B PTS: 1 DIF: Easy OBJ: 23.2 NAT: AACSB Reflective Thinking | IMA Investment Decisions
22.
In order for a project to be acceptable, the rate of return must be larger than the: a. Hurdle rate b. Accounting rate c. Capital rate d. Unadjusted rate ANS: A PTS: 1 DIF: Easy OBJ: 23.2 NAT: AACSB Reflective Thinking | IMA Investment Decisions
23.
Curritt Company purchased equipment for $360,000 that is expected to generate cash inflows from operations of $108,000 in each of the next 5 years. The machine will be depreciated on a straight-line basis with no salvage value. What is the payback period for the investment by Curritt Company? a. 2.0 years b. 3.3 years c. 4.0 years d. 4.7 years
ANS: B Payback period: $360,000 $108,000 = 3.3 years PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 24.
Curritt Company purchased equipment for $360,000 that is expected to increase revenues $115,200 in each of the next 5 years. The machine will be depreciated on a straight-line basis with no salvage value. What is the unadjusted rate of return on the initial investment by Curritt Company? a. 10% b. 12% c. 15% d. 20% ANS: B Annual depreciation expense: Annual net income: Unadjusted rate of return:
$360,000 5 = $72,000 $115,200 $72,000 = $43,200 $43,200 $360,000 = 12%
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 25.
23.2
23.2
SkiTime Photos plans to spend $74,400 for a new machine, which is expected to generate cash inflows of $18,600 per year over its useful life of 10 years. The new machine will be depreciated on a straight-line basis over 10 years with no salvage value. What is the payback period? a. 4 years b. 5 years c. 8 years d. 10 years ANS: A Payback period: $74,400 $18,600 = 4 years PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
26.
23.2
Boone Corporation expects to buy a machine for $126,000, which will be depreciated over an 8year period on a straight-line basis with no salvage value. The machine is expected to generate a net cash flow of $42,000 per year. What is the payback period? a. 3.0 years b. 3.5 years c. 5.0 years d. 6.4 years ANS: A Payback period: $126,000 $42,000 = 3 years PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
23.2
27.
Merriam Corporation is considering the purchase of a new machine that costs $18,000, has an expected useful life of 10 years, and has no salvage value. Merriam estimates that the machine will save the company $3,000 per year over the 10-year life. The company's hurdle rate is 12%. Given the data provided, the payback period for the machine is: a. 4 years b. 5 years c. 6 years d. 9 years ANS: C Payback period: $18,000 $3,000 = 6 years PTS: 1 DIF: Medium OBJ: 23.2 NAT: AACSB Reflective Thinking | IMA Investment Decisions
28.
Merriam Corporation is considering the purchase of a new machine that costs $18,000, has an expected useful life of 10 years, and has no salvage value. Merriam estimates that the machine will give the company a net income of $3,000 per year over the 10-year life. The company's hurdle rate is 12%. Given the data provided, the unadjusted rate of return for the machine is: a. 6.7% b. 16.7% c. 12% d. 10% ANS: B Unadjusted rate of return: $3,000 $18,000 = 16.7% PTS: 1 DIF: Medium OBJ: 23.2 NAT: AACSB Reflective Thinking | IMA Investment Decisions
29.
A $240,000 asset that is being depreciated at a rate of 10% per year and will increase a company's annual net income by $40,000 a year provides an approximate unadjusted rate of return of: a. 6.7% b. 16.7% c. 26.7% d. 29.7% ANS: B Unadjusted rate of return: $40,000 $240,000 = 16.7% PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
30.
23.2
If an investment has a payback period of 13 years and provides annual cash inflows of $14,500, its cost is: a. $4,460 b. $102,000 c. $120,000 d. $188,500 ANS: D Cost of investment:
X $14,500 = 13 X = $188,500 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
23.2
31.
Tootie Clothing Store is considering opening a new store. The expected purchase price is $270,000, expected annual revenues are $150,000, and expected annual costs are $90,000, including $22,500 of depreciation. The store has a payback period of approximately: a. 1.8 years b. 3.0 years c. 3.3 years d. 4.5 years ANS: C Annual net cash flows: Payback period:
$150,000 $90,000 + $22,500 = $82,500 $270,000 $82,500 = 3.3 years
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 32.
23.2
Tootie Clothing Store is considering opening a new store. The expected purchase price is $270,000, expected annual revenues are $150,000, and expected annual costs are $90,000, including $22,500 of depreciation. The store has an unadjusted rate of return of approximately: a. 55.6% b. 33.3% c. 30.6% d. 22.2% ANS: D Unadjusted rate of return: ($150,000 $90,000) $270,000 = 22.2% PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
33.
23.2
What is the average cost of a firm's debt and its equity? a. Internal rate of return b. Hurdle rate c. Net present value d. Cost of capital ANS: D PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
34.
Which of the following is true? a. Present value concepts are used to determine accounting income b. The higher the hurdle rate, the larger the present value of the amount being discounted c. The further in the future a cash flow is, the smaller its present value will be d. None of these are true ANS: C PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
35.
When would a project be rejected under the net present value method? a. If its net present value is less than zero b. If its net present value is equal to zero c. If its net present value is greater than zero d. All of these are true ANS: A PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
36.
The "true" discount rate of a capital investment is calculated by using the: a. Internal rate of return method b. Unadjusted rate of return method c. The accounting rate of return method d. The net present value method ANS: A PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
37.
Interpolation is usually associated with which of the following capital budgeting methods? a. The unadjusted rate of return method b. The internal rate of return method c. The accounting rate of return method d. The net present value method ANS: B PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
38.
Which of the following would be considered a discounted cash flow method? a. The payback period method b. The unadjusted rate of return method c. The net present value method d. The capital budgeting method ANS: C PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
39.
Which two capital budgeting techniques take the time value of money into consideration? a. Net present value method and unadjusted rate of return method b. Payback method and internal rate of return method c. Net present value method and internal rate of return method d. Unadjusted rate of return method and payback method ANS: C PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
40.
Which method is best to help managers make capital investment decisions that will be LEAST costly to the organization? a. Non-discounted cash flow method b. Payback method c. Net present value method d. Unadjusted rate of return method ANS: C PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
41.
Which of the following would have the greatest impact on the net present value of an investment? a. The initial cost of the investment is understated by $7,000 b. The net annual cash inflows are understated by $1,400 for 5 years c. The salvage value is understated by $7,000 d. All of these should have the same impact ANS: A PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
42.
The internal rate of return capital budgeting method uses the same formula as which of the following? a. The payback method b. The unadjusted rate of return method c. The accounting rate of return method d. The net present value method ANS: A PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
43.
A company's hurdle rate is the: a. Unadjusted rate of return on a capital investment b. True rate of return on a capital investment c. Internal rate of return on a capital investment d. Minimum rate of return that an investment must provide in order to be acceptable ANS: D PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
44.
The net present value of a proposed investment represents the: a. Present value of the cash inflows less the present value of the cash outflows b. Cash flows less the original investment c. Cash flows less the present value of the cash flows d. Present value of the cash flows plus the present value of the original investment ANS: A PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
45.
When using the internal rate of return method, a project will be rejected if: a. The internal rate of return is greater than the hurdle rate b. The internal rate of return is equal to the hurdle rate c. The internal rate of return is less than the hurdle rate d. None of these are correct ANS: C PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
46.
The internal rate of return and the net present value methods for making capital budgeting decisions are superior to the payback method because they: a. Require less input b. Are easier to implement c. Consider the time value of money d. Reflect depreciation and income taxes ANS: C PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
47.
The internal rate of return method provides a rate of return that approximates: a. The accounting rate of return b. The unadjusted rate of return c. Both the accounting rate of return and the unadjusted rate of return d. Neither the accounting rate of return nor the unadjusted rate of return ANS: D PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
48.
Which of the following capital budgeting methods considers the time value of money? a. Internal rate of return method b. Net present value method c. Unadjusted rate of return d. Both the internal rate of return method and the net present value method ANS: D PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
49.
If the net present value of an investment is positive, this represents the: a. Net contribution margin of the investment b. Net profit of the investment c. Net tax benefit of the investment d. Net value gain of the investment above the hurdle rate ANS: D PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
50.
Which of the following situations is one in which a least-cost decision would be used? a. Deciding whether to replace existing machinery or keep the old b. Deciding whether to buy a new delivery truck c. Deciding which of three pieces of safety equipment should be purchased in order to comply with state regulations d. Deciding whether to invest in a new warehouse or an updated computer system ANS: C PTS: 1 DIF: Easy OBJ: 23.3 NAT: AACSB Reflective Thinking | IMA Investment Decisions
51.
Clarke Company purchased equipment for $100,000 that is expected to generate cash inflows from operations of $30,000 in each of the next 5 years. The machine will be depreciated on a straightline basis with no salvage value. Assume the following present value factors: Period 1 2 3 4 5
Present Value of $1 at 12% 0.8929 0.7972 0.7118 0.6355 0.5574
Present Value of an Annuity of $1 at 12% 0.8929 1.6901 2.4018 3.0373 3.6048
What would be the net present value of the investment by Clarke Company? a. $8,144 b. $8,881 c. $12,100 d. $16,288 ANS: A Cost of equipment Cash inflows ($30,000 3.6048) Net present value PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
$ (100,000) 108,144 $ 8,144 23.3
52.
Crawford Company expects to invest $144,000 in an asset with a 10-year life. The annual cash inflows from using the asset are estimated to be $24,000. The company's expected rate of return for this type of asset is 10%. The following present value information is available: At 10% 0.3855 6.1446
Present value of $1 for 10 periods Present value of an annuity of $1 for 10 periods
At 12% 0.3220 5.6502
The company's actual rate of return on this asset is: a. 10% b. 12% c. Less than 10%, but more than 0% d. More than 10%, but less than 12% ANS: D Present value factor: $144,000 $24,000 = 6 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 53.
23.3
An asset is purchased for $40,000. It is expected to provide an additional $10,000 of annual net cash inflows. The asset has a 10-year life and an expected salvage value of $3,300. The hurdle rate is 10%. The present value of an annuity factor of 10% for 10 years is 6.1446. The present value of $1 discounted for 10 years at 10% is 0.3855. Given the data provided, the net present value of the investment is approximately: a. $62,718 b. $22,718 c. $21,446 d. $0 ANS: B Cost of asset Cash inflows ($10,000 6.1446) Salvage value ($3,300 0.3855) Net present value PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
54.
$(40,000) 61,446 1,272 $ 22,718 23.3
Linex Corporation is considering the purchase of a new machine that costs $18,000, has an expected useful life of 10 years, and has no salvage value. Linex estimates that the machine will save the company $3,000 per year over the 10-year life. The company's hurdle rate is 12%. The present value annuity factors of 10, 12, and 14% for 10 years are 6.145, 5.650, and 5.216, respectively. The present value of $1 discounted for 10 years at 12% is 0.322. Given the data provided, the internal rate of return on the machine is: a. Less than 10% b. Between 10% and 12% c. Between 12% and 14% d. Greater than 14% ANS: B Present value factor: $18,000 $3,000 = 6 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
23.3
55.
Linex Corporation is considering the purchase of a new machine that costs $18,000, has an expected useful life of 10 years, and has no salvage value. Linex estimates that the machine will save the company $3,000 per year over the 10-year life. The company's hurdle rate is 12%. The present value annuity factors of 10, 12, and 14% for 10 years are 6.145, 5.650, and 5.216, respectively, and the present value of $1 discounted for 10 years at 12% is 0.322. Given the data provided, the net present value of the machine is: a. $435 b. $(1,050) c. $(2,358) d. $(8,340) ANS: B Cost of machine Cash savings ($3,000 5.650) Net present value PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
56.
23.3
Linex Corporation is considering the purchase of a new machine that costs $18,000 and has an expected useful life of 10 years. Linex estimates that the machine will save the company $3,000 per year over the 10-year life. The company's hurdle rate is 12%. The present value annuity factors of 10, 12, and 14% for 10 years are 6.145, 5.650, and 5.216, respectively. The present value of $1 discounted for 10 years at 12% is 0.322. Given the data provided, if the machine had a salvage value of $4,000, the net present value of the machine would be: a. $238 b. $957 c. $1,723 d. $2,950 ANS: A Cost of equipment Cash savings ($3,000 5.650) Salvage value ($4,000 0.322) Net present value PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
57.
$(18,000) $ 16,950 $ (1,050)
$(18,000) 16,950 1,288 $ 238 23.3
Gallatin Co. is considering the purchase of a new machine that costs $300,000. It is anticipated that it will provide net annual cash inflows of $80,000. The machine has an expected life of 5 years with no salvage value. Gallatin's hurdle rate is 7%. The present value annuity factors for 5 years are 4.1002 at 7%, 3.9927 at 8%, 3.8897 at 9%, 3.7908 at 10%, and 3.6048 at 12%. The internal rate of return for the purchase is: a. Between 10% and 12% b. Between 9% and 10% c. Between 8% and 9% d. Between 7% and 8% ANS: A Present value factor: $300,000 $80,000 = 3.75 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
23.3
58.
Hildale Hotels has been told that it must install a fire sprinkler system. System A would cost $400,000 immediately, but it would not add to annual operating costs. System B costs only $250,000, but it would add $25,000 a year to operating costs. Both systems have a useful life of 10 years. The hotel's hurdle rate is 12%. Given the data provided, with a present value of an annuity for 10 years at 12% of 5.650 and a present value of $1 for 10 years at 12% of 0.322, the company should: a. Select System A b. Select System B c. Be indifferent about the two alternatives d. Try to obtain additional data; as is, the answer cannot be determined ANS: B System A Annual cash outflows Initial cost Net present value
($400,000) ($400,000)
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 59.
System B $25,000 5.650
($141,250) ( 250,000) ($391,250)
23.3
An asset is purchased for $100,000. It is expected to provide an additional $15,600 of annual net cash inflows. The asset has a 10-year life and no expected salvage value. The hurdle rate is 10%. Assume the following present value factors:
Percent 8% 9% 10% 12%
Present Value of $1 for 10 years 0.4632 0.4224 0.3855 0.3220
Present Value of an Annuity of $1 for 10 years 6.7101 6.4177 6.1446 5.6502
Given the data provided, the internal rate of return would be approximately: a. 12% b. 10% c. 9% d. 8% ANS: C Present value factor: $100,000 $15,600 = 6.41 PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Investment Decisions 60.
23.3
An asset is purchased for $100,000. It is expected to provide an additional $14,800 of annual net cash inflows. The asset has a 10-year life and an expected salvage value of $6,000. The hurdle rate is 9%. Assume the following present value factors:
Percent 8% 9% 10% 12%
Present Value of $1 for 10 years 0.4632 0.4224 0.3855 0.3220
Present Value of an Annuity of $1 for 10 years 6.7101 6.4177 6.1446 5.6502
Given the data provided, the net present value would be approximately: a. $4,868 b. $51 c. $(4,434) d. $(5,018) ANS: B Net present value using a 9% interest rate: Cost of asset Cash inflows ($14,800 6.4177) Salvage value ($12,000 0.4224) Net present value
$(100,000) 94,982 5,069 $ 51
PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Investment Decisions 61.
23.3
Stanley Company invested in an asset with a useful life of 4 years and no salvage value. The company's expected rate of return is 12%. The cash inflows and present value factors for 4 years are as follows: Period 1 2 3 4
Cash inflows $ 9,000 $ 9,900 $10,800 $11,700
Present Value of an Annuity of $1 at 12% 0.8929 0.7972 0.7118 0.6355
If the asset generates a positive net present value of $3,000, what was the amount of the original investment? a. $8,036 b. $28,050 c. $31,050 d. $34,050 ANS: B Net present value Cash inflow, period 1 ($9,000 0.8929) Cash inflow, period 2 ($9,900 0.7972) Cash inflow, period 3 ($10,800 0.7118) Cash inflow, period 4 ($11,700 0.6355) Net present value PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Investment Decisions
$ (3,000) 8,036 7,892 7,687 7,435 $28,050 23.3
62.
Windham Company is considering a project with annual cash inflows of $3,000 a year, an estimated life of 12 years, no salvage value, and a net present value of $(7,088). If the present value of an annuity factor used to calculate the net present value was 6.222, the initial investment is: a. $17,500 b. $18,666 c. $25,754 d. $30,000 ANS: C Present value of cash inflows: Initial investment:
$3,000 6.222 = $18,666 x + $18,666 = $(7,088) x = $25,754
PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Investment Decisions 63.
23.3
Which of the following is NOT typically a qualitative factor that management must consider in strategic and capital investment decisions? a. Environmental concerns b. Cost efficiency c. Government regulations d. Owner preferences ANS: B PTS: 1 DIF: Easy OBJ: 23.4 NAT: AACSB Reflective Thinking | IMA Investment Decisions
64.
65.
A company may decide to invest in a project even if the investment returns less than the cost of capital. The qualitative reasons for doing so include all BUT which of the following? a. To improve product quality b. To deliver products to customers faster c. To increase managers' bonuses d. To reduce the number of defective products produced ANS: C PTS: 1 DIF: Easy OBJ: 23.4 NAT: AACSB Reflective Thinking | IMA Investment Decisions Sensitivity analysis can be used to evaluate the uncertainty of: a. Expected cash flows b. Expected useful life c. Expected salvage value d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 23.5 NAT: AACSB Reflective Thinking | IMA Investment Decisions
66.
The technique used to consider a range of possibilities in capital budgeting decisions is called: a. Discounted cash flow b. Net present value c. Sensitivity analysis d. Ranking ANS: C PTS: 1 DIF: Easy OBJ: 23.5 NAT: AACSB Reflective Thinking | IMA Investment Decisions
67.
An asset is purchased for $50,000. It is expected to provide an additional $12,000 of annual net cash inflows. The asset has a 10-year life and an expected salvage value of $4,000. The hurdle rate is 10%. The present value of an annuity factor of 10% for 10 years is 6.1446, and the present value of $1 discounted for 10 years at 10% is 0.3855. Given the data provided, the minimum amount of annual cash inflows that would provide the 10% return is approximately: a. $7,500 b. $7,900 c. $8,150 d. $8,500 ANS: B Cost of asset Salvage value ($4,000 0.3855) Net cost of asset
$50,000 1,542 $48,458
Cash flow return in order to provide 10%: $48,458 6.1446 = $7,886 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 68.
23.5
An asset is purchased for $120,000. It is expected to provide an additional $28,000 of annual net cash inflows. The asset has a 10-year life and an expected salvage value of $12,000. The hurdle rate is 10%. The present value of an annuity factor of 10% for 10 years is 6.1446, and the present value of $1 discounted for 10 years at 10% is 0.3855. The present value of annuity factors at 10% for 3, 4, 5, 6, 7, 8, and 9 years are 2.4869, 3.1699, 3.7908, 4.3553, 4.8684, 5.3349, and 5.7590, respectively. The minimum useful life that would provide a 10% return is between: a. 3 and 4 years b. 5 and 6 years c. 7 and 8 years d. 9 and 10 years ANS: B Cost of asset Salvage value ($12,000 0.3855) Net cost of asset
$120,000 4,626 $115,374
Present value factor: $115,374 $28,000 = 4.1205 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 69.
23.5
Boggs Corporation is considering the purchase of a machine with an initial cost of $26,000, a useful life of 10 years, and a salvage value of $2,000. The company desires a 12% rate of return. Given the data provided, at a present value of an annuity for 10 years at 12% of 5.650 and a present value of $1 for 10 years at 12% of 0.322, the machine should be purchased only if annual net cash inflows are: a. Greater than $4,487 b. Greater than $2,400 c. Greater than $2,600 d. Greater than $2,000
ANS: A Cost of machine Salvage value ($2,000 0.322) Net cost of asset
$26,000 644 $25,356
Minimum cash flow return in order to provide 12%: $25,356 5.65 = $4,487 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 70.
23.5
A profitability index is a method of: a. Ranking alternative projects using net present values b. Ranking alternative projects using internal rate of return c. Screening alternative projects using internal rate of return d. Screening alternative projects using net present value ANS: A PTS: 1 DIF: Easy OBJ: 23.6 NAT: AACSB Reflective Thinking | IMA Investment Decisions
71.
The use of a profitability index is required when ranking projects for capital rationing under which method? a. Internal rate of return method b. Payback method c. Net present value method d. Unadjusted rate of return method ANS: C PTS: 1 DIF: Easy OBJ: 23.6 NAT: AACSB Reflective Thinking | IMA Investment Decisions
72.
When a company has an opportunity to invest in several projects but has limited resources, it should select those projects with the highest: a. Net present value b. Net annual cash inflows c. Profitability index d. Annual cash inflows ANS: C PTS: 1 DIF: Easy OBJ: 23.6 NAT: AACSB Reflective Thinking | IMA Investment Decisions
73.
Which of the following are correct capital budgeting decision rules when using the profitability index (PI)? a. PI < 1, invest; PIa > PIb, pick a, etc. b. PI = 1, invest; PIa > PIb, pick a, etc. c. PI < 1, don't invest; PIb > PIa, pick a, etc. d. PI > 1, invest; PIa > PIb, pick a, etc. ANS: D PTS: 1 DIF: Easy OBJ: 23.6 NAT: AACSB Reflective Thinking | IMA Investment Decisions
74.
The process of determining which investment is best among acceptable alternatives is: a. The ranking function b. The screening function c. The selecting function d. The rationing function ANS: A PTS: 1 DIF: Easy OBJ: 23.6 NAT: AACSB Reflective Thinking | IMA Investment Decisions
75.
Which method is preferred for capital rationing? a. Internal rate of return method b. Payback method c. Net present value method d. Both internal rate of return method and net present value method ANS: D PTS: 1 DIF: Easy OBJ: 23.6 NAT: AACSB Reflective Thinking | IMA Investment Decisions
76.
Allin Company is considering two projects. Project W has an investment cost of $15,000 and a present value of net cash inflows of $21,000. Project T has an investment cost of $20,000 and a present value of net cash inflows of $29,000. Due to limited resources, Allin can invest in only one project. What should Allin do? a. Invest in Project W b. Invest in Project T c. Invest in either Project W or Project T because both have positive net present values d. The answer cannot be determined ANS: B Profitability index for Project W: Profitability index for Project T:
$21,000 $15,000 = 1.4 $29,000 $20,000 = 1.45
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 77.
23.6
Collins Company is considering the purchase of a new machine. The initial investment in the machine was $39,000 and the present value of net cash inflows is $45,500. The profitability index is: a. 7.00 b. 6.00 c. 1.17 d. 0.86 ANS: C Profitability index: $45,500 $39,000 = 1.17 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
78.
23.6
Pulaski Corporation is considering a capital investment that has a profitability index of 1.2. If the initial investment is $1,200,000, the net present value must be: a. $240,000 b. $1,000,000 c. $1,440,000 d. $1,680,000 ANS: A Present value of net cash inflows: Net present value:
x $1,200,000 = 1.2 x = $1,440,000 $1,440,000 $1,200,000 = $240,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
23.6
79.
Blakeley Company is considering the following six capital investment projects: Project A B C D E F
Expected Rate of Return 14% 10% 17% 18% 11% 12%
Blakeley has a minimum required rate of return of 12%. Given this information, what ranking should Blakeley use on the capital investment projects? a. C, A, F, D, b. A, B, C, D, c. D, C, B, E, d. D, C, A, F ANS: D PTS: 1 DIF: Medium NAT: AACSB Analytic | IMA Investment Decisions 80.
OBJ:
23.6
Which of the following items would NOT have an impact on income taxes related to a capital budgeting decision? a. Extra revenue generated by a new machine b. Deductions for the cost of the new machine c. Depreciation on a new machine d. All of these impact income taxes ANS: D PTS: 1 DIF: Easy OBJ: 23.7 NAT: AACSB Reflective Thinking | IMA Investment Decisions
81.
In general, which of the following is true of the impact of income taxes on the internal rate of return? a. Income taxes increase the internal rate of return b. A lower tax rate causes a greater reduction in the internal rate of return c. A higher tax rate causes a greater reduction in the internal rate of return d. Income taxes do not affect the internal rate of return ANS: C PTS: 1 DIF: Easy OBJ: 23.7 NAT: AACSB Reflective Thinking | IMA Investment Decisions
82.
A machine with a book value of $8,000 can be sold for $9,500. The corporation that owns the machine has taxable income of $50,000 and a tax rate of 40%. What would be the tax on the sale of the machine? a. $600 b. $3,200 c. $3,800 d. $20,000 ANS: A Gain on sale: Tax on gain:
$9,500 $8,000 = $1,500 $1,500 40% = $600
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
23.7
83.
A corporation with taxable income of $100,000 and a tax rate of 40% is selling a machine. The original cost of the machine is $8,000, and the machine has been depreciated $4,000. If the machine is sold for $6,000, the amount of after-tax cash generated by this sale would be: a. $(1,600) b. $4,400 c. $5,200 d. $6,000 ANS: C Gain on sale: Tax on gain: After-tax cash:
$6,000 ($8,000 $4,000) = $2,000 $2,000 40% = $800 $6,000 $800 = $5,200
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 84.
A company with an average income tax rate of 35% sold a piece of equipment with a book value of $80,000 for $70,000 cash. What is the after-tax cash flow of this transaction? a. $73,500 b. $3,500 c. $10,000 d. $12,000 ANS: A Loss on equipment: Tax shield = After-tax cash flow:
$80,000 $70,000 = $10,000 $10,000 35% = $3,500 $70,000 + $3,500 = $73,500
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 85.
23.7
23.7
If the tax rate is 40% and a company has $400,000 of pre-tax income, a depreciation deduction of $25,000 would result in a tax savings of: a. $8,500 b. $10,000 c. $15,000 d. $16,500 ANS: B Tax savings: $25,000 40% = $10,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
86.
23.7
If the tax rate is 40% and a company has $200,000 of pre-tax income, a depreciation deduction of $40,000 would result in a tax savings of: a. $13,600 b. $16,000 c. $24,000 d. $26,400
ANS: B Tax savings: $40,000 40% = $16,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 87.
23.7
If the tax rate is 40% and a company has $400,000 of pre-tax income, the company would have an after-tax income of: a. $100,000 b. $160,000 c. $240,000 d. $400,000 ANS: C After-tax income: $400,000 (1 0.40) = $240,000 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
88.
A company has a tax rate of 40% and a pre-tax net income of $200,000. Other than depreciation expense of $40,000, all other revenues and expenses used to calculate this income are on a cash basis. What is the company's after-tax cash flow? a. $200,000 b. $160,000 c. $120,000 d. $80,000 ANS: B After-tax net income: After tax cash flow:
$200,000 (1 .40) = $120,000 $120,000 + $40,000 = $160,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 89.
23.7
23.7
Frosty-O-Cereal Company is considering the purchase of a new piece of production machinery to replace old machinery. This replacement will reduce labor and maintenance costs. Data related to the purchase follows: Salvage value of old machine Book value of old machine Initial investment in new machine Useful life of new machine Annual cash savings of new machine Salvage value of new machine Frosty-O-Cereal's cost of capital
$ 10,000 $ 10,000 $200,000 10 years $ 35,000 $ 0 8%
Assume that all cash flows occur at the end of the year and will last for a period of ten years. Frosty-O-Cereal's average income tax rate is 40%. Also assume that for tax purposes the new machine will be depreciated on a straight-line basis for 10 years. What is the net present value of this purchase (rounded to the nearest 10 dollars)? a. ($89,347) b. ($15,537) c. $4,593 d. $44,853
ANS: C Initial investment ($200,000 $10,000) Annual cash inflow ($21,000*) Depreciation tax savings ($8,000**) Net present value
now 110 110
1.0 6.7101 6.7101
$(190,000) 140,912 53,681 $ 4,593
* After-tax earnings: $35,000 (1 0.4) = $21,000 ** Depreciation tax savings: ($200,000 10) 0.4 = $8,000 PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Investment Decisions
23.7
PROBLEM 1.
List and describe the three aspects of capital investment decisions that are critical to long-run profitability. ANS: 1.
2.
3.
Large Initial Outlay: Large outlays of cash are required to invest in assets such as land, buildings, and equipment. A firm that makes poor decisions regarding these large assets could struggle to survive. Potential Long-term Impact on Earnings: By definition, long-term investments extend over several years. Therefore, bad investment decisions could adversely effect earnings over a long period of time. Difficult to Reverse Course: Capital assets are much-less liquid than other assets and, therefore, it is more difficult to dispose of capital assets.
PTS: 1 DIF: Medium OBJ: 23.1 NAT: AACSB Reflective Thinking | IMA Investment Decisions 2.
You are considering the purchase of a car to use for pizza delivery. The owner of the car will let you pay for it in 4 monthly payments of $600. You expect to earn $300 per week with gas and related expenses of $60 per week. How long will it take for the car to pay for itself? ANS: Investment cost: Weekly net cash inflows: Payback period:
4 $600 = $2,400 $300 $60 = $240 $2,400 $240 = 10 weeks
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 3.
23.2
The owner of the pizza parlor you are working for has asked for your help. He is trying to decide whether to buy an ice cream machine. The cost of the machine is $45,000. The revenue generated by the machine is expected to be $19,600 and the costs will be $14,200. The owner has no more information available. Ignoring taxes, calculate the unadjusted rate of return to help him make his decision.
ANS: Increase in future average net income: Initial investment cost: Unadjusted rate of return:
$19,600 $14,200 = $5,400 $45,000 $5,400 $45,000 = 12%
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 4.
23.2
Green Acre Farms wants to buy a machine that costs $750,000 and will increase net income an average of $200,000 per year. What is the rate of return without considering the time value of money? ANS: Increase in future average net income: Initial investment cost: Unadjusted rate of return:
$200,000 $750,000 $200,000 $750,000 = 26.67%
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 5.
23.2
Carroll Corporation is considering the purchase of a new machine that costs $144,000, has an expected useful life of 10 years, and has no salvage value. Merriam estimates that the machine will give the company a net income of $24,000 per year over the 10-year life. The company's hurdle rate is 12%. a. b. c.
What is the payback period for the new machine? What is the unadjusted rate of return on the new machine? Should the Carroll Corporation purchase the new machine?
ANS: a.
Investment cost: $144,000 Net cash inflows: $24,000 + $14,400 (depreciation) = $38,400 Payback period: $144,000 $38,400 = 3.75 years
b.
Increase in future average net income: $24,000 Initial investment cost: $144,000 Unadjusted rate of return: $24,000 $144,000 = 16.67%
c.
According to the payback method and the unadjusted rate of return, Carroll Corporation should purchase the new machine. The payback period is less than the useful life of the machine and the unadjusted rate of return is greater than the hurdle rate.
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
23.2
6.
Parkways Inc. is considering the purchase of a new machine. The machine will cost $60,000 to purchase and will generate $15,000 of revenues per year for the next 8 years. The machine will cost $1,000 per year to maintain and have a salvage value of $5,000 at the end of the 8 years. From a quantitative standpoint, should Parkways purchase the machine if its cost of capital is 15%? ANS:
Inflows: Revenues Salvage value Total inflows Outflows: Initial cost Future maintenance Total outflows Net present value of cash flows
PV Flow (rounded)
Period
Cash Flow
PV Factor
18 8
$15,000 5,000
4.4873 0.3269
$67,310 1,635 $68,945
Today 18
$60,000 1,000
1.000 4.4873
$60,000 4,487 $64,487 $ 4,458
Yes, Parkways should purchase the machine since the net present value of cash flows is positive. PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 7.
23.3
Marketing Group Ltd. wants to know the net present value of a machine that will cost $60,000 today and will generate the following cash flows: Year 1 Year 2 Year 3 Year 4 Year 5
$45,000 $30,000 $20,000 $15,000 $ 3,000
The machine has a salvage value of $5,000 at the end of year 5. The cost of capital is 12%. ANS:
Initial outflow Annual savings
Salvage value Net present value
Period Today 1 2 3 4 5 5
Cash Flow $(60,000) 45,000 30,000 20,000 15,000 3,000 5,000
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
23.3
PV Factor (12%) 1.0000 0.8929 0.7972 0.7118 0.6355 0.5674 0.5674
PV Flow $(60,000) 40,181 23,916 14,236 9,533 1,702 2,837 $ 32,405
8.
Kankakee Company wants to buy a machine that will cost $770,124 and provide an annual cash income of $120,000 for 10 years. What is the company's internal rate of return? Assume the following present value factors: Percent 8% 9% 10% 12%
Present Value of $1 for 10 years 0.4632 0.4224 0.3855 0.3220
Present Value of an Annuity of $1 for 10 years 6.7101 6.4177 6.1446 5.6502
ANS: Present value factor: $770,124 $120,000 = 6.4177 For 10 years, 6.4177 = 9% internal rate of return PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 9.
23.3
Rocky's Packaging Company is considering the purchase of a new piece of production machinery that will reduce labor and maintenance costs. Data related to the new machine follows: Initial investment Useful life Salvage value of old machine Annual cash savings Salvage value of new machine Cost of capital
$200,000 10 years $ 10,000 $ 35,000 $ 18,000 12%
Assume all cash flows occur at the end of the year and ignore income taxes. a. b. c.
Calculate the net present value of the investment. Determine the effect on net present value if the cost of capital is 16% and the new machine's salvage value is $22,000. Return to the original data, and determine the effect on net present value if annual cash flows are reduced by 10% and the useful life is 12 years.
ANS: a.
Initial investment ($200,000 $10,000) Annual cash inflow ($35,000) Salvage value of new machine ($18,000) Net present value
now 110 10
1.0 5.6502 0.3220
$(190,000) 197,757 5,796 $ 13,553
b.
Initial investment ($200,000 $10,000) Annual cash inflow ($35,000) Salvage value of new machine ($22,000) Net present value
now 110 10
1.0 4.8332 0.2267
$(190,000) 169,162 4,987 $ (15,851)
Initial investment ($200,000 $10,000) Annual cash inflow ($31,500) Salvage value of new machine ($18,000) Net present value PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
now 112 12
1.0 6.1944 0.2567
$(190,000) 195,124 4,621 $ 9,745
c.
23.3
10.
List 10 qualitative factors that could be taken into account when making capital budgeting decisions. ANS: Impact on the timeliness of product or service delivery Impact on the quality of the product or service Legal exposure Government regulations Environmental impact Pollution control Worker safety Company image Community welfare Preferences of owners and management *Note: answers may differ from those listed PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions
11.
23.4
Macoupin Company purchased an asset for $275,000. It is expected to provide an additional $66,000 of annual net cash inflows. The asset has a 10-year life and an expected salvage value of $22,000. The hurdle rate is 12%. The present value of an annuity factor of 12% for 10 years is 5.65, and the present value of $1 discounted for 10 years at 12% is 0.322. Given the data provided, calculate the minimum amount of annual cash inflows that would provide the 12% return. ANS: Cost of asset Salvage value ($22,000 0.322) Net cost of asset
$275,000 7,084 $267,916
Cash flow return in order to provide 12% return: $267,916 5.65 = $47,419 PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 12.
23.5
Cottages 4U is considering several long-term investment projects. Management wants to accept the two best projects, given the following data: Project identifier Investment cost Present value of cash inflows a. b. c.
A 50,000 $46,500
B 32,000 $30,000
C 48,000 $60,000
D 40,000 $48,000
Calculate the net present value and the profitability index for each project. Which projects are acceptable based on the profitability index? What is the ranking of the acceptable projects?
E 80,000 $88,000
ANS: a.
Project identifier Present value of cash inflows Investment cost Net present value Profitability index
A
B
C
D
E
$46,500 50,000 $ (3,500) 0.9300
$30,000 32,000 $ (2,000) 0.9375
$60,000 48,000 $12,000 1.2500
$48,000 40,000 $ 8,000 1.2000
$88,000 80,000 $ 8,000 1.100
b.
Projects C, D, and E are acceptable (PI > 1).
c.
Ranking is C, D, E.
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 13.
23.6
Schuyler Company is considering the following six capital investment projects:
Project R S T U V W
Expected Rate of Return 16% 8% 14% 10% 12% 13%
Schuyler has a minimum required rate of return of 11%. a. b.
Which projects are acceptable based on the internal rate of return? What is the ranking of the acceptable projects?
ANS: a. b.
Projects R, T, V, and W are acceptable (internal rate of return is greater than hurdle rate). Ranking is R, T, W, V.
PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Investment Decisions 14.
23.6
Speedy Movers is considering the purchase of a new moving truck that will reduce fuel and maintenance costs as well as increase revenues. Data related to the new truck follows: Initial investment Useful life Annual cash savings Salvage value at end of useful life Cost of capital Income tax rate
$98,000 7 years $26,000 $12,000 14% 30%
Assume all cash flows occur at the end of the year and the company will depreciate the truck using straight-line depreciation. Calculate the net present value of the truck. Should the company purchase the new truck? Explain your answer.
ANS: Initial investment ($98,000) Annual cash inflow ($18,200*) Depreciation tax savings ($4,200**) Salvage value of new machine ($8,400***) Net present value
now 17 17 7
1.0 4.2883 4.2883 0.3996
$(98,000) 78,047 18,011 3,357 $ 1,415
* After-tax earnings: $26,000 (1 .3) = $18,200 ** Depreciation tax savings: ($98,000 7) .3 = $4,200 *** After-tax salvage value: $12,000 (1 .3) = $8,400 Based solely on the quantitative analysis, Speedy Motors should purchase the new moving truck because the net present value is positive. PTS: 1 DIF: Challenging OBJ: NAT: AACSB Analytic | IMA Investment Decisions
23.7
Chapter 24—New Measures of Performance MULTIPLE CHOICE 1.
Which of the following is NOT one of the components of economic value added? a. Net operating profit after taxes b. Average total assets c. Weighted average cost of capital d. Invested capital ANS: B PTS: 1 DIF: Easy OBJ: 24.1 NAT: AACSB Reflective Thinking | IMA Strategic Planning
2.
Which of the following is NOT one of the components of residual income? a. Operating profit b. Average total assets c. Weighted average cost of capital d. Minimum required rate of return ANS: C PTS: 1 DIF: Easy OBJ: 24.1 NAT: AACSB Reflective Thinking | IMA Strategic Planning
3.
A performance measurement system that emphasizes the income earned over and above the income required to cover the cost of capital is: a. Operating profit b. Economic value added c. Return on investment d. Return on income ANS: B PTS: 1 DIF: Easy OBJ: 24.1 NAT: AACSB Reflective Thinking | IMA Strategic Planning
4.
The weighted average cost of capital is: a. The average return expected by both equity owners and debt holders b. The average return expected by equity owners c. The average return expected by debt holders d. The net operating profit after taxes ANS: A PTS: 1 DIF: Easy OBJ: 24.1 NAT: AACSB Reflective Thinking | IMA Strategic Planning
5.
The formula for economic value added is: a. Net operating profit after tax (Minimum required rate of return Invested capital) b. Net operating profit after tax (Weighted average cost of capital Average total assets) c. Net operating profit before tax (Minimum required rate of return Average total assets) d. Net operating profit after tax (Weighted average cost of capital Invested capital) ANS: D PTS: 1 DIF: Easy OBJ: 24.1 NAT: AACSB Reflective Thinking | IMA Strategic Planning
6.
A company's interest-bearing debt and stockholders' equity is equal to its: a. Average total assets b. Invested capital c. Return on investment d. Weighted average cost of capital ANS: B PTS: 1 DIF: Easy OBJ: 24.1 NAT: AACSB Reflective Thinking | IMA Strategic Planning
7.
A company's invested capital is equal to its: a. Short-term and long-term assets b. Operating assets c. Total assets less non-interest-bearing (short term) liabilities d. Long-term assets ANS: C PTS: 1 DIF: Easy OBJ: 24.1 NAT: AACSB Reflective Thinking | IMA Strategic Planning Exhibit 24-1 Shriber Company had the following balance sheet at the end of 2012: Shriber Company Balance Sheet for December 31, 2012 Cash Inventory Accounts receivable Total current assets Equipment Buildings Land Total assets
8.
$ 2,280 10,450 6,080 $ 18,810 148,200 446,500 285,000 $898,510
Accounts payable Wages payable Total current liabilities Long-term liabilities Total liabilities Common stock Retained earnings Total liabilities and equity
$
3,990 7,030 $ 11,020 357,200 $368,220 418,000 112,290 $898,510
Refer to Exhibit 24-1. Using the information above, determine Shriber's invested capital assets. a. $530,290 b. $898,510 c. $887,490 d. $879,700 ANS: C Invested capital assets: Alternate calculation:
$898,510 $11,020 = $887,490 $357,200 + $418,000 + $112,290 = $887,490
PTS: 1 DIF: Medium OBJ: 24.1 NAT: AACSB Analytic | IMA Strategic Planning 9.
Refer to Exhibit 24-1. Shriber Company had $223,400 in operating income before taxes this year, a tax rate of 25% and a weighted average cost of capital of 16%. Using this information, determine Shriber's economic value added for 2012. a. $25,552 b. $167,550 c. $141,998 d. $11,020 ANS: A Net operating profit after tax: Invested capital: Economic value added:
$223,400 (1 0.25) = $167,550 $898,510 $11,020 = $887,490 $167,550 (16% $887,490) = $25,552 (rounded)
PTS: 1 DIF: Medium OBJ: 24.1 NAT: AACSB Analytic | IMA Strategic Planning
10.
Yavapai Industries has decided to start calculating economic value added. Yavapai's accountant gathered the following information: Operating income Total assets Current liabilities Stockholders' equity Tax rate Weighted average cost of capital
$ 426,250 $1,891,000 $ 27,900 $ 720,500 30% 14%
Using this information, calculate Yavapai's economic value added. a. $41,773 b. $27,900 c. $298,375 d. $37,541 ANS: D Net operating profit after tax: Invested capital: Economic value added:
$426,250 (1 0.30) = $298,375 $1,891,000 $27,900 = $1,863,100 $298,375 (14% $1,863,100) = $37,541
PTS: 1 DIF: Medium OBJ: 24.1 NAT: AACSB Analytic | IMA Strategic Planning 11.
Adoption of a just-in-time inventory system: a. Avoids a buildup of parts and inventory b. Provides an accurate allocation of costs c. Replaces direct allocation as the most accurate method of assigning overhead cost d. Is based on a demand push theory ANS: A PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
12.
The just-in-time inventory system focus is: a. A low cost supplier b. State of the art, high technology equipment c. Multiskilled workers d. Waste elimination ANS: D PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
13.
Suppliers for a company using a just-in-time inventory system: a. Must be low cost b. Must be dependable c. Must deliver quality products d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
14.
Organizations using just-in-time: a. Must obtain material only when needed for production b. Must manufacture quality into the products c. Must keep inventories at a minimum d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
15.
Just-in-time provides savings by: a. Lowering inventory levels b. Freeing resources for other uses c. Reducing returns from customers d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
16.
When using the just-in-time inventory system, production schedules are based on: a. Raw material inventory levels b. The customers' demand c. Machine and labor capacity d. Predetermined levels of production ANS: B PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
17.
The emphasis of JIT is to: a. Improve non-value-added activities b. Reduce value-added activities c. Manage the flow of goods with a push process d. Remove all waste from a production or service process ANS: D PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
18.
The just-in-time inventory system increases: a. Inventory levels b. Centralized support c. The number of costs to allocate d. None of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
19.
Which of the following is the revolutionary management accounting tool that tends to reduce waste associated with inventories? a. ABC b. JIT c. Economic value added d. TQM ANS: B PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
20.
Which of the following requires that quality be manufactured rather than inspected into products? a. ABC b. JIT c. Restructured environment d. TMP ANS: B PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
21.
Which of the following statements is NOT true under the JIT philosophy? a. Inventory is completed only when ordered by customers b. Raw materials are received when needed for production c. Safety stock is maintained to deal with defective products d. Manufacturing activities must be pulled by need for output ANS: C PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
22.
A signaling device that pulls parts forward through the production system is known as a(n): a. Kanban b. Safety stock c. Leading measure d. Outcome measure ANS: A PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
23.
Costs incurred to inspect products after manufacturing are: a. Prevention costs b. Appraisal costs c. Internal failure costs d. External failure costs ANS: B PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
24.
Costs incurred due to reduced product yield are: a. Prevention costs b. Appraisal costs c. Internal failure costs d. External failure costs ANS: C PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
25.
Costs incurred to handle customer complaints are: a. Prevention costs b. Appraisal costs c. Internal failure costs d. External failure costs ANS: D PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
26.
Costs incurred to train production employees are: a. Prevention costs b. Appraisal costs c. Internal failure costs d. External failure costs ANS: A PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
27.
Costs incurred for routine maintenance of production equipment are: a. Prevention costs b. Appraisal costs c. Internal failure costs d. External failure costs ANS: A PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
28.
The amount of warranty claims due to product defects would be classified as a(n): a. Prevention costs b. Appraisal costs c. Internal failure costs d. External failure costs ANS: D PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
29.
Costs incurred for downtime of production equipment are: a. Prevention costs b. Appraisal costs c. Internal failure costs d. External failure costs ANS: C PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
30.
Costs incurred to educate suppliers are: a. Prevention costs b. Appraisal costs c. Internal failure costs d. External failure costs ANS: A PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
31.
Costs incurred to repair products under warranty are: a. Prevention costs b. Appraisal costs c. Internal failure costs d. External failure costs ANS: D PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
32.
An example of a prevention cost would be: a. Product recalls b. Adjusting test equipment c. Scrap d. Process or product design ANS: D PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
33.
An example of an appraisal cost would be: a. Product recalls b. Adjusting test equipment c. Scrap d. Process or product design ANS: B PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
34.
An example of an external failure cost would be: a. Product recalls b. Adjusting test equipment c. Scrap d. Process or product design ANS: A PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
35.
An example of an internal failure cost would be: a. Product recalls b. Adjusting test equipment c. Scrap d. Process or product design ANS: C PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
36.
The process of measuring, monitoring, and minimizing prevention, appraisal, internal failure, and external failure costs is: a. Activity-based costing b. Cost of quality c. Just-in-time d. Prevention costing ANS: B PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
37.
Which of the following costs are generally the highest? a. Prevention costs b. Appraisal costs c. Internal failure costs d. External failure costs ANS: D PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
38.
Which of the following are NOT included in the COQ model? a. Opportunity costs b. External failure costs c. Appraisal costs d. Prevention costs ANS: A PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
39.
Which of the following is a management philosophy on increasing profitability by improving the quality of products and processes? a. Balanced scorecard management b. Costs of quality measurement c. Process management d. Total quality management ANS: D PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
40.
Which of the following are some of the defining characteristics of total quality management? a. Emphasis of quality and continuous improvement and continuously planning, controlling, and evaluating improvement using specific measures b. Emphasis of profitability before quality and continuous improvement and continuously planning, controlling, and evaluating improvement using specific measures c. Emphasis of quality and continuous improvement and continuously reducing costs d. Emphasis of reducing costs and continuously planning, controlling, and evaluating improvement using specific measures ANS: A PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
41.
A technical tool that provides users with the ability to study, control, and improve processes of all types is a: a. Balanced scorecard b. Statistical process control c. Cost of quality analysis d. Just-in-time inventory ANS: B PTS: 1 DIF: Easy OBJ: 24.2 NAT: AACSB Reflective Thinking | IMA Strategic Planning
42.
The criticism of traditional management accounting measures is that they focus too much on: a. Intangible corporate capabilities b. Information assets c. Periodic financial measures d. Research and development ANS: C PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
43.
A balanced scorecard approach to performance measurement would allow the inclusion of all BUT which of the following measures? a. Measures of customer satisfaction b. Measures of financial performance c. Measures of worker satisfaction d. All of these could be measures in a balanced scorecard ANS: D PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
44.
Performance measures that allow a company to monitor factors such as whether it is gaining market share and customer profitability are called: a. Internal process measures b. Employee productivity measures c. Outcome performance measures d. Leading performance measures ANS: C PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
45.
In general, performance measures that allow a company to monitor the cost, quality, and time of producing goods or services are called: a. Outcome performance measures b. Leading performance measures c. Customer retention measures d. Financial performance measures ANS: B PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
46.
What can be used to measure performance with respect to customer satisfaction? a. Number of new customers b. Number of product returns c. Customer retention rates d. Warranty repairs ANS: C PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
47.
An example of an outcome performance measure is: a. Percentage of on-time deliveries b. Retaining current customers c. Purchase cost to the customer d. Production cycle time ANS: B PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
48.
An example of a leading performance measure is: a. Production cycle time b. Number of new customers c. Company's percent of total number of customers in the market d. Customer retention rates ANS: A PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
49.
Which of the following is NOT an outcome performance measure? a. Customer retention rates b. Customer acquisition rates c. Costs to recruit customers d. Returns by customers ANS: D PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
50.
Which of the following is NOT a leading performance measure? a. Time to complete contract b. Delivery cost to customer c. Acquisition rates d. Average response time for a service call ANS: C PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
51.
An example of an outcome performance measure is: a. Number of defecting customers b. Percentage of on-time deliveries c. Number of production interruptions d. Delivery cost to the customer ANS: A PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
52.
An example of a leading performance measure is: a. Number of new customers b. Customer retention rates c. Average response time for a service call d. Company's percent of total number of customers in the market ANS: C PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
53.
Which of the following is NOT part of the Balanced Scorecard Framework? a. "How do we appear to shareholders?" b. "How will we sustain change and progress?" c. "What business processes must we excel at?" d. "What is our current market share?" ANS: D PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
54.
The first key to strong financial performance is: a. Cost control b. Customer satisfaction c. Proper allocation of manufacturing overhead d. Strategic planning ANS: B PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
55.
Customer satisfaction is the result of the right combination of: a. Cost, quality and time b. Cost, quality, and product performance c. Discounts, quality and customer support d. Quality, time and product warranty ANS: A PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
56.
Traditional financial measures are now being supplemented in which area(s)? a. Learning and growth b. Customer service c. Internal process improvement d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
57.
Performance measures that monitor a company's effectiveness in identifying new products or services and then creating and bringing those products to market are: a. Outcome performance measures b. Innovation process measures c. Research and development measures d. Financial performance measures ANS: B PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
58.
A performance measure that monitors a company's commitment to warranty its product would be called a(n): a. Service-after-sale process measure b. Innovation process measure c. Financial performance measure d. Operations process measure ANS: A PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
59.
Defective products per million produced is an example of a(n): a. Innovation process measure b. Financial performance measure c. Service-after-sale process measure d. Operations process measure ANS: D PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
60.
Design cycle time is an example of a(n): a. Innovation process measure b. Financial performance measure c. Service-after-sale process measure d. Operations process measure ANS: A PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
61.
An example of an operations process measure is: a. Customer requests handled on first call b. Modifications required per design c. Six sigma quality d. Costs per customer service incident ANS: C PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
62.
An example of an innovation process measure is: a. Customer requests handled on first call b. Modifications required per design c. Six sigma quality d. Costs per customer service incident ANS: B PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
63.
An example of a service-after-sale process measure is: a. Customer requests handled on first call b. Modifications required per design c. Six sigma quality d. Costs per customer service incident ANS: A PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
64.
Performance measures that allow a company to monitor the capabilities of the employee, the information system, and the organizational structure would best be called: a. Innovative process measures b. Service-after-sale process measures c. Learning and growth measures d. Financial performance measures ANS: C PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
65.
An example of an outcome measure of learning and growth is: a. Output per employee b. Average life cycle of personal computers owned by the company c. Percentage of employees participating in education activities d. Average time to disseminate information to employees ANS: A PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
66.
An example of a leading measure of learning and growth is: a. Output per employee b. Average employee years with the company c. Percentage of employees participating in education activities d. Number of women managers ANS: C PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
67.
Which of the following is NOT true of the balanced scorecard approach to performance measurement? a. It includes financial and nonfinancial measures b. The measures developed must match the company's strategy and vision c. It should include measures of financial, customer, internal process, and learning and growth activities d. The planning horizon focus is very short term ANS: D PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
68.
Which of the following is NOT true of the balanced scorecard approach to performance measurement? a. It can be effective in manufacturing, merchandising, and service firms b. The measures developed must match the company's strategy and vision c. The measures should be linked such that improvement on one measure should lead to improvement in related measures d. A standard balanced scorecard can be developed to suit many organizations ANS: D PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
69.
A process that measures all costs involved in creating, producing, and using a product is known as: a. Outcome performance measures b. Balanced scorecard c. Leading performance measures d. Life cycle costing ANS: D PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
70.
What are the two types of customer performance measures? a. Innovation process and operations process b. Leading performance and outcome performance c. Service-after-sale process and six sigma quality d. Leading indicators and lagging indicators ANS: B PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
71.
Which of the following processes is NOT effective in supporting customer satisfaction? a. Learning and growth measures b. Innovation process measures c. Service-after-sale process measures d. Operations process measures ANS: A PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
72.
An operation process that has six sigma quality: a. Has very high quality b. Has the lowest possible cost c. Is very competitive d. Is completed on schedule nearly every time ANS: A PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
73.
Which of the following is NOT a factor with respect to learning and growth? a. Alignment of goals b. Effective communication c. Identifying and creating new products d. Integration of efforts across departments ANS: C PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
74.
Which of the following is a measure of learning and growth in an organization? a. Employee satisfaction b. Productivity c. Employee retention d. All of these are correct ANS: D PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
75.
Which of the following is a measure of performance that, if accomplished, should lead to a desired result? a. Lagging indicators b. Leading indicators c. Outcome indicators d. Market share indicators ANS: B PTS: 1 DIF: Easy OBJ: 24.3 NAT: AACSB Reflective Thinking | IMA Strategic Planning
76.
Which of the following is NOT true regarding changes in accounting information that external users desire? a. Users generally need more nonfinancial information b. Users generally desire more objective and verifiable information c. Users generally desire less detailed information d. Users generally desire information more frequently than at year-end ANS: C PTS: 1 DIF: Easy OBJ: 24.4 NAT: AACSB Reflective Thinking | IMA Strategic Planning
PROBLEM 1.
List and describe the three major differences between residual income and economic value added. ANS: 1.
2.
3.
Residual income uses operating profit whereas, economic value added uses net operating profit after taxes. Essentially, economic value added includes the effect of taxes when calculating profit. Residual income uses a minimum required rate of return (or hurdle rate) and economic value added uses the weighted average cost of capital (WACC). The hurdle rate is set by the managers and may be based on the cost of acquiring assets. However, the WACC is the organization's specific cost of capital which is essentially the average return expected by both equity owners and debt holders. Residual income uses average total assets to determine the minimum income required.
Economic value added uses invested capital to determine the minimum income required. In other words, economic value added excludes non-interest bearing operating liabilities from the equation. PTS: 1 DIF: Medium OBJ: NAT: AACSB Analytic | IMA Strategic Planning 2.
24.1
Mohave Company has decided to start calculating economic value added. Mohave's accountant gathered the following information: Operating income Total assets Current liabilities Stockholders' equity Tax rate Weighted average cost of capital
$1,705,000 $7,564,000 $ 111,600 $2,882,000 35% 12%
Using this information, calculate Yavapai's economic value added. ANS: Economic value added Net operating profit after tax $1,705,000 (1 0.35) Invested capital $7,564,000 $111,600 Economic value added $1,108,250 (12% $7,452,400)
$1,108,250 $7,452,400 $ 213,962
PTS: 1 DIF: Medium OBJ: 24.1 NAT: AACSB Analytic | IMA Strategic Planning 3.
At the end of 2012, Bernal Corporation reported the following information: Total current assets Total assets Total current liabilities Total liabilities Common stock Retained earnings Operating income before taxes Tax rate Minimum required rate of return Weighted average cost of capital Using this information, calculate the following: a. b.
Bernal's residual income for 2012 Bernal's economic value added for 2012
2012 $ 29,950 $964,250 $ 11,600 $436,600 $374,920 $152,730 $275,300 40% 12% 14.5%
2011 $ 30,170 $969,570 $ 13,800 $417,300 $418,000 $134,270 $259,400 40% 12% 14%
ANS: a.
b.
2012 Residual Income: Operating profit Average total assets (964,250 + $969,570) 2 Residual income: $275,300 (12% $966,910)
$275,300 $966,910 $159,271
2012 Economic value added Net operating profit after tax $275,300 (1 0.40) Invested capital $964,250 $11,600 Economic value added $165,180 (14.5% $952,650)
$165,180 $952,650 $ 27,046
Alternative calculation based on average invested capital 2012 Economic value added Net operating profit after tax $275,300 (1 0.40) Invested capital [($964,250 + $969,570) 2] $11,600 Economic value added $165,180 (14.5% $955,310)
$165,180 $955,310 $ 26,660
PTS: 1 DIF: Challenging OBJ: 24.1 NAT: AACSB Analytic | IMA Strategic Planning 4.
Below is a list of activities performed by Gila and Greenlee, a CPA firm. Indicate whether each activity is a value-added activity or a non-value added activity. a.
Preparing tax returns for clients
b.
Assisting clients with their accounting systems
c.
Reformatting layout of financial statements
d.
Updating clients' fixed asset records
e.
Redesigning its website
f.
Paying the accounts payable
g.
Helping clients to develop tax-saving strategies
h.
Maintaining computer systems
i.
Preparing financial statements for clients
j.
Preparing internal financial statements
ANS: a. b. c. d. e. f. g. h. i. j.
Preparing tax returns for clients Assisting clients with their accounting systems Reformatting layout of financial statements Updating clients' fixed asset records Redesigning its website Paying the accounts payable Helping clients to develop tax-saving strategies Maintaining computer systems Preparing financial statements for clients Preparing internal financial statements
Value-added Value-added Non-value added Value-added Non-value added Non-value added Value-added Non-value added Value-added Non-value added
PTS: 1 DIF: Medium OBJ: 24.2 NAT: AACSB Analytic | IMA Strategic Planning 5.
Cochise Company manufacturers top of the line camping tents. The customers of Cochise Company expect, and usually receive, high-quality tents. The following chart is an accumulated list of all of the costs that Cochise acquired during the past year that relate to quality. Cost of product recalls $ 70,000 Wages paid to tent engineers 170,000 Cost to satisfy warranty issues 50,000 Quality training costs for production line workers 120,000 Wages paid to tent inspectors 90,000 Cost of interest on short-term loan 24,000 Wages paid to rework tents that failed parts of inspection 102,000 Cost of high-quality, water-proof, raw materials 48,000 Cost of scrapped tents that completely failed inspection 90,000 Cost of salary for CEO 200,000 Estimated lost sales due to unhappy customers 240,000 Cost for testing strength of seams 92,000 Compute the total cost for each of the following categories: prevention costs, appraisal costs, internal failure costs, and external failure costs. ANS: Prevention costs: Wages paid to tent engineers Quality training costs for production line workers Cost of high-quality, water-proof, raw materials Appraisal costs: Wages paid to tent inspectors Cost for testing strength of seams Internal failure costs: Wages paid to rework tents that failed parts of inspection Cost of scrapped tents that completely failed inspection External failure costs: Cost of product recalls Cost to satisfy warranty issues Estimated lost sales due to unhappy customers PTS: 1 DIF: Medium OBJ: 24.2 NAT: AACSB Analytic | IMA Strategic Planning
$170,000 120,000 48,000 $338,000 $ 90,000 92,000 $182,000 $102,000 90,000 $192,000 $ 70,000 50,000 240,000 $360,000
6.
Listed below are scorecard measures for a merchandising company: a. b. c. d. e. f. g. h. i.
Errors in customer service Employee turnover rate Percentage of on-time deliveries Costs to retain customers Lead time from order to delivery Return on investment Percentage of employees participating in education activities Unit product cost Number of new customers
Classify each scorecard measure according to perspective (financial, customer, internal process, or learning and growth), focus (cost, quality, or time), and relationship within the perspective (leading or outcome). ANS:
a. b. c. d. e. f. g. h. i.
Measure Errors in customer service Employee turnover rate Percentage of on-time deliveries Costs to retain customers Cycle time from order to delivery Return on investment Percentage of employees participating in education activities Unit product cost Number of new customers
Perspective Internal process Learning and growth Customer Customer Internal process Financial Learning and growth
Focus Quality Quality Time Cost Time Cost Quality
Relationship Outcome Outcome Leading Outcome Leading Outcome Leading
Financial Customer
Cost Quality
Leading Outcome
PTS: 1 DIF: Medium OBJ: 24.3 NAT: AACSB Analytic | IMA Strategic Planning 7.
Gremi Company provides landscaping services to private home owners. Recently Gremi has decided to develop a balanced scorecard. Gremi has developed the following goals and objectives: a.
b.
c.
Goal: To provide excellent customer service Finish the customer's landscapes within specified estimate Meet the customer's landscape needs Exceed the customer's quality expectations Goal: To be the industry leader in innovative landscapes Introduce water conserving landscapes into market faster than competitors Present the customer with new and innovative possibilities Research and design new landscaping concepts Goal: To promote well-being and growth of employees Provide benefits to employees (such as health insurance, retirement plans, etc.) Provide employees opportunities to take classes and learn more about landscaping
For each of these objectives, provide one measure of performance that Gremi could use.
ANS: Goal a.
b.
c.
To provide excellent customer service
To be the industry leader in innovative landscapes
To promote well-being and growth of employees
Objective
Possible Measure
Finish the customer's landscapes within specified estimate
Percent of on-time fulfilled contracts, decrease in completion time
Meet customers' needs and wants for landscapes
Number of customer complaints
Exceed the customer's quality expectations
Percent of landscape rejects by customers, score on customer satisfaction survey, number of customers providing references
Introduce water conserving landscapes into market faster than competitors
Number of customer orders for water conserving landscapes, market share for water conserving landscapes
Present the customer with new and innovative possibilities
Number of proposals made to customers for innovative landscape upgrades, number of customer orders for innovative landscape upgrades
Research and design new landscaping concepts
R&D time spent on landscaping concepts, Number of new landscaping ideas created
Provide benefits to employees (such as health insurance, retirement plans, etc.)
Number of employees with benefits, employee turnover
Provide employees opportunities to take classes and learn more about landscaping
Number of employees currently enrolled in classes, Percentage of employees completing at least one landscaping course
PTS: 1 DIF: Challenging OBJ: 24.3 NAT: AACSB Analytic | IMA Strategic Planning