Test Bank for Survey of Accounting 10th Edition by Carl Warren, Amanda Farmer, Jefferson P. Jones

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Test Bank For Survey of Accounting 10e Carl Warren, Amanda Farmer, Jefferson P. Jones Chapter 1-14 Answers are at the End of Each Chapter chapter 1

Indicate whether the statement is true or false.

1. A business stakeholder has an interest in the economic performance of a company. a. True b. False 2. The ownership of a proprietorship is divided into shares of stock owned by its stockholders. a. True b. False 3. Creditors have preference to assets behind stockholders if a business fails. a. True b. False 4. Manufacturing businesses change basic inputs into products that are sold to individual customers. a. True b. False 5. The stockholders' equity of a company should equal the sum of its total assets and total liabilities. a. True b. False 6. Assets are acquired through investing activities when resources are purchased. a. True b. False 7. A primary disadvantage of corporations is that the financial resources available to them are limited. a. True b. False 8. A limited liability company combines attributes of a partnership and a corporation. a. True b. False 9. John Deere is a leading manufacturer of agricultural machinery in the world, producing products that serve unique market needs. Therefore, John Deere is an example of a company that uses a premium-price approach to attract customers. a. True

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b. False 10. A corporation is a business that is legally separate and distinct from its owners. a. True b. False 11. Stockholders of a corporation are its internal stakeholders. a. True b. False 12. A partnership is owned by two or more individuals. a. True b. False 13. The balance sheet represents the accounting equation. a. True b. False 14. The popularity of the sole proprietorship is due to the ease and low cost of organizing. a. True b. False 15. Accounting is often called the "language of business" because business information is communicated to stakeholders. a. True b. False 16. The basic type of stock issued to owners is called common stock. a. True b. False 17. A liability is a legal obligation to repay the amount borrowed according to the terms of the borrowing agreement. a. True b. False 18. All merchandising businesses are organized as corporations. a. True b. False 19. The objective of most businesses is to maximize profits. a. True b. False 20. The branch of accounting related to the management's financial decisions is known as financial accounting.

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a. True b. False 21. Merchandising businesses produce products rather than provide services to customers. a. True b. False 22. Companies using a low-cost emphasis provide products and services that compete on features other than price. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

23. Under a _____, a business designs products that possess unique attributes or characteristics for which customers are willing to pay more. a. premium-price approach b. outreach approach c. low-cost approach d. customer approach 24. The performance evaluation of the managers of a company is dependent on the company's _____. a. common stock b. volatility c. economic performance d. nonrecurring activities 25. _____ is the increase in assets from selling products or providing services. a. Revenue b. Interest income c. Equity d. Cost of goods sold 26. A financial statement that summarizes the cash receipts and cash payments of a company for a specific period of time is _____. a. the cash analysis statement b. the bank reconciliation statement c. the statement of cash flows d. the statement of retained and nonretained cash earnings 27. Simmon's Inc., had the following account balances on June 30, 20Y9. What is Simmon's net income for the month of June?

Accounts Payable

$ 8,900

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Common Stock Cash Equipment Fees Earned Miscellaneous Expense Rent Expense Retained Earnings Wages Expense

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16,000 20,500 19,000 65,000 18,500 5,000 8,000 17,500

a. $24,000 b. $41,000 c. $39,500 d. 65,000 28. The "rules" of accounting are referred to as _____. a. income tax regulations b. SEC regulations c. internet rules d. Generally Accepted Accounting Principles 29. Which of the following is not an example of a capital market stakeholder? a. Banks b. Owners c. Suppliers d. Stockholders 30. Which of the following is true of return on assets? a. It is a measure of a company's profitability. b. It is used to evaluate a company's ability to pay off its short-term debts. c. It is used to determine the financial leverage of a company. d. It is a measure of the optimum capital structure.

31. Given the following list of accounts, calculate Total Assets.

Accounts Receivable Common Stock Cash Equipment Fees Earned Miscellaneous Expense Rent Expense Retained Earnings Salaries Expense Wages Expense

$ 12,000 25,000 25,500 16,900 45,400 18,800 3,250 8,850 15,500 15,000

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a. $52,100 b. $54,400 c. $33,850 d. $79,400 32. A note payable requires payment of the amount borrowed plus _____. a. interest b. tax c. overhead d. dividend 33. Which of the following is considered an asset until consumed? a. Accounts payable b. Prepaid expense c. Accounts receivable d. Stockholders' equity 34. Stork, Inc., had revenues of $395,000, expenses of $155,000, and dividends of $54,000 during the current year. Based on the given information, which of the following statements is true? a. Net income for the current year totaled $240,000. b. Net income for the current year totaled $186,000. c. Total retained earnings increased by $240,000 during the current year. d. Total retained earnings decreased by $186,000 during the current year.

35. A corporation is an entity that a. is organized according to state or federal statutes and in which ownership is divided into shares of stock. b. is known for its ease of formation. c. terminates its existence with the death of the owner. d. pays tax on the owner's tax returns.

36. Cash investments made by the stockholders of the business are reported on the statement of cash flows in the _____. a. financing activities section b. investing activities section c. operating activities section d. supplemental statement 37. According to which of the following concepts should the expenses incurred when generating revenue be reported in the same period as the related revenue? a. The cost concept b. The periodicity concept c. The matching concept d. The adequate disclosure concept

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38. Shares of ownership are evidenced by issuing _____. a. shares payable b. commercial paper c. shares of stock d. notes payable 39. Which of the following is an appropriate representation of the accounting equation? a. Assets + Liabilities = Stockholders' equity b. Assets = Liabilities + Stockholders' equity c. Assets = Liabilities + Common stock d. Assets = Liabilities + Retained earnings 40. Which of the following accounting concepts requires that the financial statements, including related notes, contain all relevant data a stakeholder would need to understand the financial condition and performance of the company? a. The adequate disclosure concept b. The cost concept c. The objectivity concept d. The matching concept 41. During the most recent year, Bean Corporation experienced an increase in total assets of $70,500 and an increase in total liabilities of $42,500. Assuming that common stock increased by $6,500 and no dividends were paid, calculate Bean's net income or net loss for the end of the year. a. Net income of $28,000 b. Net loss of $36,000 c. Net income of $21,500 d. Net loss of $49,000 42. Which of the following statements is true about a limited liability company? a. It is organized under state or federal statutes as a separate legal entity. b. Many professional practices such as lawyers, doctors, and accountants are organized as limited liability companies. c. Its financial resources are limited to the individual owner's resources. d. The frequency of this form is due to the ease and low cost of organizing.

43. The role of accounting in business is best defined as _____. a. an information system that provides reports to stakeholders about the economic activities and financial condition of a business b. a method of forecasting the future profitability of a company c. the policies, procedures, and strategies used in a business d. the process of transaction analysis 44. Use the following information to determine Total Stockholders' Equity.

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Total Assets Total Liabilities Total Stockholders' Equity Total Retained Earnings

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$ 95,000 22,000 x 8,000

a. $65,000 b. $40,000 c. $73,000 d. $117,000 45. Revenues received from providing services are referred to as _____. a. fees earned b. net income c. gross income d. retained earnings 46. Which of the items below is not a business organization form? a. Multi-venture b. Proprietorship c. Partnership d. Corporation 47. When a business borrows money, which of the following is incurred? a. An accumulated depletion b. A liability c. A loss d. An accrued expenditure 48. Cash collected from sales during the normal course of business would be an example of which type of business activity? a. Operating b. Investing c. Financing d. None of these 49. Reporting the financial condition of a business at a point in time and reporting the changes in the financial condition of a business over a period of time are the two major objectives of _____. a. fund accounting b. forensic accounting c. not-for-profit accounting d. financial accounting 50. Financing activities_____. a. involve obtaining funds to operate a business

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b. involve obtaining assets such as buildings and equipment c. help to earn revenues and profits d. help to make wise investments in other companies 51. _____ are an example of internal stakeholders. a. Managers b. Creditors c. Stockholders d. Suppliers 52. Rights to payments from customers are _____. a. liabilities b. prepaid expenses c. accounts receivable d. accounts payable 53. The purchase of machinery would be an example of which type of business activity? a. Financing b. Investing c. Operating d. All of these 54. Motel 6, a company that helps customers find budget motels across the nation, is an example of a business using which of the following? a. Low-cost approach b. Outreach approach c. Customer approach d. Premium-price approach 55. Debts owed by a business are referred to as _____. a. accounts receivable b. equities c. stockholders' equity d. liabilities 56. The portion of a corporation's net income that is paid out to the stockholders, instead of being retained in the business, is referred to as _____. a. gross income b. earnings before interest and taxes c. interest expense d. dividends 57. The portion of a corporation's net income reserved for future decisions in the business is called _____.

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a. interest earnings b. dividends c. tax expense d. retained earnings 58. Expressing financial data as if a business will continue operating for an indefinite period of time refers to which concept? a. Business entity concept b. Going concern concept c. Objectivity concept d. Adequate disclosure concept 59. If there are no beginning retained earnings, net income of $31,200, and ending retained earnings of $9,000, how much are dividends? a. $40,200 b. $9,000 c. $22,200 d. $4,500 60. Which of the following is true about the cost concept? a. It limits the economic data recorded in an accounting system to data related to the activities of that company. b. It initially records assets in the accounting records at their purchase price. c. It assumes that a company will continue in business indefinitely. d. It reports the revenues earned by a company for a period with the expenses incurred in generating the revenues.

61. 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. prior period statement b. statement of stockholders' equity c. income statement d. balance sheet 62. Which of the following businesses buys products from other businesses wholesale to sell them to customers at a retail price? a. A merchandising business b. A manufacturing business c. A service business d. An investment business 63. Profitability ratios such as _____ can be used to analyze and assess a company's financial performance. a. fixed assets turnover b. current ratios

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c. dividend payout ratios d. return on assets 64. In the case of a failing company, the right to the first claim of the company's assets belongs to _____. a. the state governments b. the creditors of the company c. the owners of the company d. the managers of the company 65. Which of the following is considered a business stakeholder? a. A bank b. An employee c. A federal government d. All of these 66. Which of the following is an intangible asset? a. Copyright b. Cash c. Land d. Equipment 67. A list of assets, liabilities, and owners' equity as of a specific date is a(n) _____. a. income statement b. balance sheet c. statement of cash flows d. statement of stockholders' equity 68. Which of the following is the correct order for preparing financial statements? a. Income statement, Statement of cash flows, Statement of stockholders' equity, Balance sheet b. Statement of stockholders' equity, Income statement, Statement of cash flows, Balance sheet c. Statement of cash flows, Statement of stockholders' equity, Balance sheet, Income statement d. Income statement, Statement of stockholders' equity, Balance sheet, Statement of cash flows 69. Which of the following is not a characteristic of a corporation? a. Corporations are organized as a separate legal taxable entity. b. Ownership is divided into shares of stock. c. Corporations experience an ease in obtaining large amounts of resources by issuing stock. d. A corporation can elect to be taxed as a partnership.

70. The debt created by a business when it borrows against credit from a vendor or supplier is called a(n) _____. a. account payable b. contingent liability c. intangible asset

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d. account receivable 71. What is the primary objective of most businesses? a. To maximize profits b. To pay dividends to stockholders c. To provide a benefit to society d. To manufacture a quality product 72. A low-cost approach strives to provide _____. a. no-frills, standardized products and services b. products and services that provide unique market needs c. products and services that provide prestige and image for customers d. products and services that compete on features other than price 73. Capital market stakeholders have an interest in a company because _____. a. they collect taxes from the company b. they depend upon the continued success of the company for keeping their jobs c. they purchase the company's products or services or sell their products or services to the company d. they provide major financing for the business 74. A return on assets of 5.15% means that a company is earning _____. a. a $5.15 return on every $100 of total assets. b. a $5.15 return on every $100 of assets minus liabilities. c. a $5.15 return on every $100 of current assets. d. a $5.15 return on every $100 invested in long-term assets.

75. Which of the following businesses use a premium-price approach? a. Value City Furniture selling furniture at affordable prices b. Tommy Hilfiger selling products that have a unique image c. Wal-Mart reselling standardized products d. Southwest Airlines providing standardized services 76. Costs incurred to earn revenue are referred to as _____. a. common stock b. expenses c. liabilities d. retained earnings 77. Rocky Creek Company had the following account balances in 20Y8 and 20Y9, respectively. Assuming dividends of $20,000 were paid in 20Y9, how much was net income?

20Y9

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20Y8

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Capital Stock Retained Earnings Total Stockholders' Equity a. $62,000 b. $252,000 c. $269,000 d. $89,000

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$ 41,000 x $ 310,000

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$ 40,000 200,000 $ 240,000

78. The economic performance of a business is of importance to the government because _____. a. of potential tax collections b. the government sells its products to the business c. of the amount owed by the government to the business d. all of these 79. The resources a business owns are called _____. a. assets b. liabilities c. earnings d. stockholders' equity 80. A summary of the cash receipts and cash payments for a specific period of time is a(n) _____. a. income statement b. balance sheet c. statement of cash flows d. statement of stockholders' equity 81. From the following information for BlackInks Corporation, compute the return on assets.

Net income Total assets at beginning of year Total assets at end of year a. 20.03% b. 18.60% c. 21.70% d. 19.10%

$32,550 $150,000 $175,000

82. The return on assets is calculated by _____. a. dividing interest expense by average total assets and average current assets b. dividing net income by average total assets c. dividing average total assets and interest expense by net income taxes d. dividing net income by average current assets 83. Which of the following types of organizational forms is popular for its ease of formation and low cost of organizing? a. Not-for-profit

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b. Corporation c. Partnership d. Proprietorship

84. How do businesses make money? What strategies can they use to gain a competitive advantage?

85. Define accounting and its role in business.

86. On May 31, 20X9, Dina's Cleaning Services had account balances as follows: Accounts payable $ 9,900 Accounts receivable 26,950 Cash 11,390 Fees earned 70,500 Insurance expense 1,550 Land 72,060 Miscellaneous expense 1,500 Prepaid insurance 2,000 Rent expense 9,000 Salary expense 35,200 Dividends 15,100 Supplies 950 Supplies expense 900 Utilities expense 4,800 Common stock 81,000 Retained earnings (beginning balance on May 1, 20Y9) 20,000 Present, in good form, (a) an income statement for May, (b) a statement of shareholders' equity for May, and (c) a balance sheet as of May 31.

87. Describe business stakeholders. State the classification of business stakeholders.

88. Classify the following as an asset, liability, revenue, or expense.

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Unearned revenue Office equipment Wages payable Salary expense Dividends payable Art fees earned Prepaid rent Accounts receivable Income tax expense Office supplies

89. Indicate whether each of the following activities would be reported on the statement of cash flows as an operating

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activity, an investing activity, a financing activity, or does not appear on the statement of cash flows. (a) Cash paid for building (b) Cash paid to suppliers (c) Cash paid for dividends (d) Cash received from customers (e) Cash received from the sale of common stock (f) Cash received from the sale of a building (g) Borrowed cash from a bank

90. Fill in the missing amounts on the following balance sheet.

Providence Company Balance Sheet December 31, 20Y9 Assets Cash Accounts Receivable Supplies Inventory Equipment Land Total Assets

$ 3,200 2,500 (a) 5,600 7,500 9,550 $32,550 Liabilities

Accounts Payable Notes Payable Total Liabilities Stockholders' Equity Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity

$

1,500 (b) $

(c)

$18,000 4,000 22,000 $

(d)

91. The following is the financial statement data for Sunshine Temporary Services on December 31, 20Y9. Prepare Sunshine's income statement.

Accounts Payable Accounts Receivable Cash Common Stock Dividends Insurance Expense Office Equipment Retained Earnings, January 1, 20Y9 Salaries Expense Notes Payable Service Revenue

$ 850 780 425 600 200 80 1,500 370 500 40 1,850

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Inventory Supplies Expense

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35 75 Sunshine Temporary Services Income Statement For the Year Ended December 31, 20Y9

92. Name the three different types of businesses that operate for profit and their respective characteristics.

93. Three different companies—A, B, and C—have the same balance sheet at the beginning and the end of a year. These are summarized as follows:

Beginning of the year End of the year

Total Assets $500,000 $1,200,000

Total Liabilities $250,000 $350,000

Given the data above and the additional information for each of the following companies, determine the net income (loss) for each company.

Company A Company B Company C

No additional investment was made by stockholders, and no dividends were paid.

Stockholders invested an additional $200,000, and no dividends were paid.

Stockholders invested $450,000, and dividends of $50,000 were paid.

94. Name and describe the four forms of businesses and their advantages and disadvantages (if any).

95. For each of the following companies, identify whether it is a service, merchandising, or manufacturing business.

A. Barnes & Noble Time Warner B. Cable

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C. D. E. F. G. H. I.

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Kohl's Ford Motor Co. Applebee's Sylvania Best Buy GAP H & R Block

96. What is the basic accounting equation, and which financial statement is prepared from this equation?

97. Match each statement with the appropriate accounting concept. (Some items may not be used. Others may be used more than once.) a. Accounting period concept b. Adequate disclosure concept c. Business entity concept d. Cost concept e. Going concern concept f.

Matching concept g. Objectivity concept h. Unit of measure concept (1) (2) (3) (4) (5) (6) (7) (8)

Owners' transactions are separate from business transactions.

Financial statements are prepared at the end of each year.

Land purchased for $50,000, 10 years ago, is reported on the Balance Sheet at $50,000.

December rent expense paid in January is reported with the December revenues.

All transactions are recorded and reported in dollars.

This provides a summary of significant accounting policies.

This assumes that IBM will continue as a corporation forever.

The length of time left on debt obligations is shown.

98. Match the following items with the appropriate financial statement. a.

Income statement b.

Balance sheet c.

Statement of stockholders' equity d.

Statement of cash flows (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

Cash Salary expense Unearned revenue Depreciation expense Common stock Cash flows from operating activities Accounts receivable Beginning balance of retained earnings Notes payable Accounts payable Changes in current assets and current liabilities Total expenses

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Answer Key 1. True 2. False 3. False 4. True 5. False 6. True 7. False 8. True 9. True 10. True 11. False 12. True 13. True 14. True 15. True 16. True 17. True 18. False 19. True 20. False 21. False

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22. False 23. a 24. c 25. a 26. c 27. a 28. d 29. c 30. a 31. b 32. a 33. b 34. a 35. a 36. a 37. c 38. c 39. b 40. a 41. c 42. b 43. a

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44. c 45. a 46. a 47. b 48. a 49. d 50. a 51. a 52. c 53. b 54. a 55. d 56. d 57. d 58. b 59. c 60. b 61. c 62. a 63. d 64. b 65. d

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66. a 67. b 68. d 69. d 70. a 71. a 72. a 73. d 74. a 75. b 76. b 77. d 78. a 79. a 80. c 81. a 82. b 83. d 84. Businesses have the objective of making money by generating more revenues than costs. Businesses can seek competitive advantage by using a premium-price approach or by using a low-cost approach. A premium-price approach tries to meet a unique market need based on quality, reliability, image, or design, allowing it to charge a higher price. A low-cost approach focuses on efficiency in product design and production to offer a lower price due to lower costs.

85. Accounting provides information for managers that can be used in operations of a business. Accounting provides information to external stakeholders to use in assessing the economic performance and condition of the business.

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86. (a) Dina's Cleaning Service Income Statement For the Month Ended May 31, 20Y9 Fees earned Operating expenses: Salary expense Rent expense Utilities expense Insurance expense Supplies expense Miscellaneous expense Total operating expenses Net income

$70,500 $35,200 9,000 4,800 1,550 900 1,500 52,950 $17,550

(b)

Balances, May 1 Net income Dividends Balances, May 31

Dina's Cleaning Service Statement of Stockholders' Equity For the Month Ended May 31, 20Y9 Common Retained Stock Earnings $81,000 $20,000 17,550 (15,100) $81,000 $22,450

Total $101,000 17,550 (15,100) $103,450

(c) Dina's Cleaning Service Balance Sheet May 31, 20Y9 Assets Cash Accounts receivable Prepaid insurance Supplies Land

Total assets

Liabilities $ 11,390 Accounts payable 26,950 2,000 Stockholders' Equity 950 Common stock 72,060 Retained earnings Total stockholders' equity Total liabilities and $113,350 stockholders' equity

$ 9,900

$ 81,000 22,450 $103,450 $113,350

87. Business stakeholders are persons or entities that have an interest in the economic performance of a company.

(1) Capital market stakeholder (2) Product or service market stakeholder (3) Government stakeholder (4) Internal stakeholder

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88.

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 89. (a) (b) (c) (d) (e) (f) (g)

Class:

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Liability Asset Liability Expense Liability Revenue Asset Asset Expense Asset

Investing activity Operating activity Financing activity Operating activity Financing activity Investing activity Financing activity

90. (a) $4,200 (b) $9,050 (c) $10,550 (d) $32,550 91.

Sunshine Temporary Services Income Statement For the Year Ended December 31, 20Y9 Revenues: Service Revenue Expenses: Salaries Expense Insurance Expense Supplies Expense Total Expenses Net income

$1,850 $500 80 75 (655) $1,195

92.

(1) Manufacturing: These businesses change basic inputs into products to sell to individual customers.

(2) Merchandising: These businesses sell products to individual customers but do not make the products. The products are purchased from other businesses and resold to customers.

(3) Service: These businesses do not make or sell products. They provide services for fees.

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93.

Company A Company B Company C

Date:

Net income $600,000 Net income $400,000 Net income $200,000

94.

(1) Proprietorship: These businesses are owned by one individual.

Advantages: There is ease and low cost of organizing proprietorships.

Disadvantages: the financial resources available to this type of business are limited to the owners' resources and to borrowing (2) Corporation: These businesses are organized under state or federal statutes as a separate legal entity. Ownership is divided into shares of stock.

Advantages: Corporations have the ability to obtain large amounts of resources by issuing stock.

Disadvantages: Dividend distributions from corporations are taxed twice.

(3) Partnership: These businesses are owned by two or more individuals.

Advantages: Partnerships provide for pooling of talent.

Disadvantages: A partnership may outgrow its ability to finance operations.

(4) Limited Liability Company: These businesses combine the attributes of a partnership and a corporation.

Advantages: Operates similar to a partnership; members' liability for the debts of the corporation are limited.

Disadvantages: Similar to a partnership; may outgrow its ability to finance operations.

95.

A. B. C. D. E. F. G. H. I.

Merchandising Service Merchandising Manufacturing Service Manufacturing Merchandising Merchandising Service

96. Assets = Liabilities + Stockholders' Equity; the balance sheet is prepared from this equation.

97.

(1) (2) (3) (4) (5) (6) (7) (8)

c a d f h b e b

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98.

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

Class:

Date:

Balance sheet Income statement Balance sheet Income statement Balance sheet Statement of cash flows Balance sheet Statement of stockholders' equity Balance sheet Balance sheet Statement of cash flows Income statement

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chapter 2

Indicate whether the statement is true or false.

1. Fees earned and received in cash will increase cash flows from operating activities as well as retained earnings. a. True b. False 2. By keeping a running total of the effects of transactions, the accounting equation provides a framework for summarizing the effects of a series of transactions. a. True b. False 3. When common stock is issued by a corporation for cash, both the income statement and the balance sheet are affected. a. True b. False 4. Retained earnings will be increased by the amount in the dividend account. a. True b. False 5. Miscellaneous expenses are expenses that have an undetermined amount to be paid. a. True b. False 6. The integrated financial statement approach has built-in controls to ensure that all transactions are correctly analyzed, recorded, and summarized. a. True b. False 7. Dividends are an example of an expense. a. True b. False 8. On a statement of cash flows, each cash transaction is recorded and classified as an operating, investing, or financing activity. a. True b. False 9. Inventory is less liquid than furniture, so it is listed after furniture on a balance sheet. a. True b. False 10. It is possible for a transaction to change the makeup of assets but not affect assets in total.

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chapter 2 a. True b. False 11. When comparing operating performance across companies within the same industry, companies prefer common-sized income statements prepared using net income rather than those prepared using operating income. This is because other income and expenses are influenced by a variety of factors that are independent of operations and that can vary significantly across companies. a. True b. False 12. The effect of every transaction is an increase or a decrease in one or more of the accounting equation elements. a. True b. False 13. The accounting equation can be expressed as: Assets − Liabilities = Revenues. a. True b. False 14. When a note payable is paid with cash, the stockholders' equity in the business increases. a. True b. False 15. The basic elements of a financial accounting system include a framework for preparing financial statements. a. True b. False 16. The payment of wage expense with cash would affect the operating activities in the statement of cash flows and the income statement but not the balance sheet. a. True b. False 17. The accounting equation is expressed as follows: Assets = Liabilities + Stockholders' Equity. a. True b. False 18. Any given transaction must affect at least two different parts of the accounting equation. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

19. If assets total $110,000 and stockholders' equity totals $75,000, then liabilities must total _____.

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chapter 2 a. $110,000 b. $185,000 c. $35,000 d. $75,000 20. JNC Co. buys equipment for $1,500,000 cash. This transaction _____. a. decreases JNC Co.'s liquidity and has no effect on its profitability metric b. has no effect on JNC Co.'s liquidity and profitability c. increases JNC Co.'s liquidity and profitability d. has no effect on JNC Co.'s liquidity and decreases its profitability 21. Flow Inc. received cash from fees earned. How does this transaction affect the statement of cash flows? a. Increase cash from operating activities b. Increase cash from investing activities c. Increase cash from financing activities d. No effect on the statement of cash flows 22. ABC Inc. borrows $50,000 from a bank to finance its operations. Which of the following statements regarding the effect of this transaction on the company's liquidity and profitability metrics is true? a. The transaction decreases the liquidity and increases the profitability of ABC Inc. b. The transaction increases the liquidity and decreases the profitability of ABC Inc. c. The transaction has no effect on the liquidity and profitability of ABC Inc. d. The transaction increases the liquidity and has no effect on the profitability of ABC Inc.

23. Expenses can be defined as _____. a. assets consumed b. services used in the process of generating revenues c. costs that have been incurred during the normal course of business d. All of these choices 24. A _____ is an economic event that under generally accepted accounting principles (GAAP) affects an element of the financial statements and must be recorded. a. framework b. control c. set of rules d. transaction 25. For EFG Co., the transaction "payment of interest expense" would _____. a. increase total assets b. decrease total assets Copyright Cengage Learning. Powered by Cognero.

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chapter 2 c. have no effect on total assets d. increase stockholders' equity 26. The stockholders' equity will increase as a result of the _____. a. issue of common stock b. repayment of long-term debt c. buyback of common stock d. issue of long-term debt 27.

Year 2 Year 1 Sales $195,000 $140,000 Cost of sales (150,000) (110,000) Gross profit $ 45,000 $ 30,000 Using the information in the table, calculate the percentage increase or decrease in cost of sales from Year 1 to Year 2. a. Increase of 1.7% b. Decrease of 3.4% c. Increase of 3.4% d. Decrease of 1.7% 28. East Company had beginning retained earnings of $40,000, issued additional common stock of $30,000, had net income of $25,000, and paid dividends of $10,000. What is the ending balance of retained earnings on the statement of stockholders’ equity? a. $55,000 b. $80,000 c. $105,000 d. $45,000 29. Green Ivy Inc. has the following transactions for the month of June: Issued common stock $ 50,000 Purchased land by paying cash 110,000 Paid expenses 30,000 Earned cash fees 95,000 As a cumulative result of these transactions, the liquidity of Green Ivy Inc. _____. a. increases by $5,000 b. increases by $65,000 c. decreases by $15,000 d. decreases by $35,000 30. Paying expenses affects which financial statement elements? a. Assets only b. Stockholders' equity only Copyright Cengage Learning. Powered by Cognero.

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chapter 2 c. Assets and stockholders' equity d. Assets and liabilities 31. ABC Company received $20,000 cash from issuing shares of stock in the corporation. This transaction would affect which two financial statement elements? a. Assets and stockholders' equity b. Assets and liabilities c. Liabilities and stockholders' equity d. None of these choices 32. A to Z Corporation issued a $40,000 note payable to borrow cash from the bank. On the statement of cash flows, the transaction would be classified as a(n) _____. a. operating activity b. investing activity c. financing activity d. noncash transaction 33. The following is a summary of the balance sheet of HRP Enterprises: Total Assets Total Liabilities Beginning of the year $290,000 $185,000 End of the year 525,000 310,000 Determine the net income (or loss) for the year, assuming $60,000 of common stock was issued and no dividends were paid during the year. a. $(105,000) b. $170,000 c. $50,000 d. $(215,000) 34. The increases in stockholders' equity attributable to business activities are called _____. a. assets b. liabilities c. revenues d. net expenses 35. Which of the following situations increases stockholders' equity? a. Supplies are purchased with cash. b. Services are provided for cash. c. Expenses are paid with cash. d. Dividends are paid to stockholders.

36. Dim Co. issues common stock of $15,000. Which of the following statements regarding the effect of this transaction on the company's liquidity and profitability metrics is true?

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chapter 2 a. The transaction increases the liquidity and decreases the profitability of the company. b. The transaction decreases the liquidity and increases the profitability of the company. c. The transaction increases the liquidity and has no effect on the profitability of the company. d. The transaction has no effect on the liquidity and increases the profitability of the company.

37. The income statement for March indicates net income of $80,000. The corporation also paid $20,000 in dividends during the same period. If the company is in operation for only one month and has no beginning balance in retained earnings, what is the ending balance in retained earnings? a. $100,000 b. $80,000 c. $20,000 d. $60,000 38. Laser Company paid a utility bill of $15,000 and rent of $25,000. As a result of these transactions, the stockholders' equity _____. a. decreases by $40,000 b. increases by $10,000 c. increases by $15,000 d. decreases by $25,000 39. Johnson, Inc. issued $35,000 in common stock in exchange for cash. What is the effect of this transaction? a. Total assets remain unchanged. b. Cash flows from financing activities increase. c. Net income increases. d. Retained Earnings increases.

40. Moon, Inc. had the following assets and liabilities as of November 30, 20X2: Assets $55,600 Liabilities 28,250 If assets increased by $4,250 and equity increased by $1,800 during December, what is the increase or decrease in liabilities of Moon Inc. as of December 31, 20X2? a. $(6,050) b. $6,050 c. $(2,450) d. $2,450 41. JNC Company provides services for cash. Which of the following financial statement elements would be affected as a result of this transaction? a. Assets and expenses b. Assets and liabilities c. Liabilities and stockholders' equity d. Assets and stockholders' equity Copyright Cengage Learning. Powered by Cognero.

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chapter 2

42. The financial statements include the _____. a. trial balance b. bank reconciliation statement c. balance sheet d. ledger account 43. A to Z Corporation paid a $10,000 cash dividend. On the statement of cash flows, the transaction would be classified as a(n) _____. a. operating activity b. investing activity c. financing activity d. noncash transaction 44. Red Inc. has the following transactions for the month of September: Fees earned in cash $580,000 Expenses paid 400,000 Dividends paid 45,000 As a result of these transactions, Red Inc.'s profitability metric _____. a. increases by $225,000 b. decreases by $135,000 c. increases by $180,000 d. decreases by $400,000 45. Johnson, Inc. purchased land for cash. What effect does this transaction have on its accounts? a. Increase in Cash and decrease in Land b. Decrease in Cash and decrease in Land c. Increase in Cash and increase in Land d. Decrease in Cash and increase in Land 46. Which of the following transactions changes the mix of assets only? a. Paid for supplies with cash b. Borrowed money from Second National Bank c. Received money for fees earned d. Received and paid a utility bill 47. A to Z Corporation purchased a building for $110,000 cash. On the statement of cash flows, the transaction would be classified as a(n) _____. a. operating activity b. investing activity Copyright Cengage Learning. Powered by Cognero.

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chapter 2 c. financing activity d. noncash transaction 48. Johnson, Inc. paid rent expense of $5,500 for the month of October. How are the accounts affected due to this transaction? a. Increase in Cash, $5,500, and increase in Retained Earnings, $5,500 b. Increase in Cash, $5,500, and decrease in Retained Earnings, $5,500 c. Decrease in Cash, $5,500, and decrease in Retained Earnings, $5,500 d. Decrease in Cash, $5,500, and increase in Retained Earnings, $5,500 49. ABC Inc. paid taxes of $25,000 and received interest of $50,000. As a result of these transactions, the stockholders' equity _____. a. increases by $75,000 b. decreases by $50,000 c. decreases by $75,000 d. increases by $25,000 50. The following is a summary of the balance sheet of BCR Inc.: Total Assets Total Liabilities Beginning of the year $260,000 $170,000 End of the year 490,000 410,000 Determine the net income (or loss) for the year, assuming no common stock was issued and no dividends were paid during the year. a. $(90,000) b. $(10,000) c. $(80,000) d. $(170,000) 51. The first month of operations showed the net cash from operating activities to be $2,225, the net cash from investing activities to be $(5,000), and the ending cash balance to be $1,400. The net cash from financing activities must be _____. a. $825 b. $2,775 c. $4,175 d. $7,775 52. Navy Inc. buys land for $500,000 cash in the month of March. In March, it also paid wages of $100,000. Which of the following statements is true with regards to these transactions? a. Navy Inc.'s profitability decreases by $500,000, and liquidity decreases by $100,000. b. Navy Inc.'s liquidity decreases by $600,000, and profitability remains unchanged. c. Navy Inc.'s liquidity and profitability decrease by $600,000. d. Navy Inc.'s liquidity decreases by $600,000, and profitability decreases by $100,000.

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chapter 2 53. If liabilities total $20,000 and stockholders' equity totals $70,000, then assets must total _____. a. $90,000 b. $70,000 c. $50,000 d. $20,000 54. For EFG Co., the transaction "cash sales to customers at a profit" would _____. a. increase total assets b. decrease total assets c. have no effect on total assets d. decrease stockholders' equity 55. Write Company had the following assets and liabilities at the end of the year: Assets $73,200 Liabilities 38,500 What is the year-end stockholders' equity of Write Company? a. $111,700 b. $38,500 c. $34,700 d. Cannot be determined with this information 56. A common-sized income statement is prepared by expressing income statement amounts as a percent of _____. a. sales b. purchases c. total assets d. profit 57. Rush Corporation borrowed $20,000 from the bank. Which of the following accurately shows the effects of the transaction? a. Increase Cash, $20,000, and decrease Notes Payable, $20,000 b. Increase Cash, $20,000, and increase Notes Payable, $20,000 c. Decrease Cash, $20,000, and decrease Notes Payable, $20,000 d. Decrease Cash, $20,000, and increase Notes Payable, $20,000 58. For EFG Co., the transaction "received cash from a customer for fees earned" would _____. a. increase total assets b. decrease total assets c. have no effect on total assets d. increase total liabilities 59. Stockholders' equity will be reduced by _____. a. a payment of dividends Copyright Cengage Learning. Powered by Cognero.

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chapter 2 b. an increase in revenues c. owners' investments d. an issuance of bonds 60. The statement of cash flows is integrated with the balance sheet because _____. a. the cash at the beginning of the period plus or minus the cash flows from operating, investing, and financing activities equals the end-of-period cash reported on the balance sheet b. the cash at the beginning of the period plus or minus the net income equals the end-of-period cash reported on the balance sheet c. the cash at the beginning of the period plus or minus assets and liabilities equals the end-of-period cash reported on the balance sheet d. the cash at the beginning of the period plus or minus the cash flows from operating activities equals the endof-period cash reported on the balance sheet 61. Lilly Pad Co. paid $30,000 of dividends to stockholders. As a result of this transaction, _____. a. the liquidity of Lilly Pad Co. increases b. the profitability of Lilly Pad Co. remains unchanged c. the profitability of Lilly Pad Co. decreases d. the liquidity of Lilly Pad Co. remains unchanged 62. Declaring and paying cash dividends affects which account(s)? a. Cash only b. Common Stock only c. Cash and Retained Earnings d. Cash and Common Stock 63. Yuan Corporation purchased office equipment for cash. What is the effect of this transaction? a. Cash will increase, and office equipment will increase. b. Total assets will increase, and shareholders' equity will decrease. c. Total assets will remain unchanged. d. Cash flows from financing activities will decrease.

64. Global Inc. has retained earnings of $50,000, common stock of $90,000, and liabilities of $55,000. The total assets of the company are worth _____. a. $140,000 b. $115,000 c. $195,000 d. $85,000 65. Anthony, Inc. buys land for $50,000 cash. The net effect on assets is _____. a. a $50,000 increase b. $0 Copyright Cengage Learning. Powered by Cognero.

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chapter 2 c. a $50,000 decrease d. a $25,000 increase 66. The statement of stockholders’ equity is prepared _____. a. before the income statement b. after the statement of cash flows c. before the balance sheet d. after the audit of the financial statements 67. A common-sized balance sheet is prepared by expressing each asset as a percent of _____. a. total current assets b. total assets c. total long-term assets d. total liabilities 68. Which of the following statements is true about liabilities? a. Liabilities include insurance premiums paid in advance. b. Liabilities arise when a company sells goods on account. c. Liabilities equal assets plus stockholders' equity. d. Liabilities are the debts owed by a company.

69. Which of the following groups of accounts includes only assets? a. Cash, Accounts Payable, Land b. Accounts Receivable, Revenue, Cash c. Prepaid Expenses, Land, Patents d. Unearned Revenues, Supplies, Cash 70. For EFG Co., the transaction "purchase of store equipment with cash" would _____. a. increase total assets b. decrease total assets c. have no effect on total assets d. decrease stockholders' equity 71. For EFG Co., the transaction "payment of dividends" would _____. a. increase total assets b. decrease total assets c. have no effect on total assets d. increase stockholders' equity 72. For EFG Co., the transaction "received and paid utility bill" would _____. a. increase total assets Copyright Cengage Learning. Powered by Cognero.

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chapter 2 b. decrease total assets c. have no effect on total assets d. decrease total liabilities 73. Johnson, Inc. receives $15,000 cash for fees earned. What is the effect of this transaction? a. Total assets remain unchanged. b. Cash flows from financing activities increase. c. Net income increases. d. Retained Earnings remains unchanged.

74. Jade Inc. paid rent of $45,000 for the current month. This transaction _____. a. decreases the profitability of the company b. has no effect on the profitability of the company c. increases the liquidity of the company d. has no effect on the liquidity of the company 75. If total assets increased by $550,000 during a period and total liabilities increased by $450,000 during the same period, determine the net income (or loss) for the period, assuming no common stock was issued and dividends of $35,000 were paid. a. $(35,000) b. $100,000 c. $65,000 d. $135,000 76. Jones Company has $30,000 in retained earnings, $45,000 in assets, and $9,000 in liabilities. How much is in common stock? a. $39,000 b. $6,000 c. $66,000 d. $15,000 77. Buying equipment for cash affects which account(s)? a. Cash only b. Retained Earnings only c. Equipment and Retained Earnings d. Cash and Equipment 78. Which of the following is a control that is built into the integrated financial statement approach? a. Assets + Liabilities = Stockholders' Equity. b. Cash from operating activities is equal to cash on the balance sheet. c. Net income on the income statement must equal the net effects of revenues and expenses on retained earnings.

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chapter 2 d. Total assets on the balance sheet should equal income from investing activities on the statement of cash flows.

79. An increase in stockholders' equity from revenues earned will also result in an increase in _____. a. liabilities b. assets c. expenses d. cash flows from financing activities 80. A common-sized balance sheet is prepared by expressing each liability item as a percent of _____. a. total sales b. total stockholders' equity c. total liabilities d. total liabilities plus stockholders' equity

81. How can a company earn a large net income and have a small balance in retained earnings?

82. The following are included on Ace Auto Parts, Inc.'s December 31, 20X2, balance sheet: Accounts receivable $ 45,000 Building 110,000 Cash 58,000 Land 125,000 Accounts payable 45,000 Notes payable 75,000 Stockholders' equity ?

The following are the amounts appearing for the same items on the December 31, 20X3, balance sheet: Accounts receivable $85,000 Building 110,000 Cash 135,000 Land 125,000 Accounts payable 55,000 Notes payable 65,000 Stockholders' equity ?

Analyze the changes in these balance sheet items and determine net income for 20X3, assuming that the only change to stockholders' equity is from net income.

83. On June 1, the cash account balance was $82,300. During June, cash receipts totaled $435,600, and the June 30 balance was $97,235. Determine the cash payments made during June.

84. Determine the cash receipts for February based on the following data: Cash payments during February Copyright Cengage Learning. Powered by Cognero.

$32,750 Page 37

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chapter 2 Cash account balance, February 1 Cash account balance, February 28

4,200 6,750

85. The accounting equation Assets = Liabilities + Stockholders' Equity is affected by transactions. Is it possible to have a transaction that only impacts one financial element of the equation? Can a transaction impact two elements of the equation? Give examples.

86. Linda's Laundry and Dry Cleaning, Inc. incorporated and started business on January 1, 20X2, and incurred the following select transactions: 1 Deposited $25,000 in a checking account in the name of Linda's Laundry and Dry Cleaning, Inc. for which common stock was issued.

2 Borrowed $7,500 from National Bank.

3 Purchased equipment for cash from Washers Wholesale, $17,300.

4 Purchased supplies costing $4,200 from Suds 'n Stuff for cash.

5 Paid one month's rent for business space in Pine Plaza, $1,500.

6 Provided $14,300 of services to cash-paying customers during January.

7 Paid employees for January, $2,480.

8 Received and paid the utility bill, $450.

9 Received and paid the telephone bill, $200.

10 Paid dividends to the stockholders, $3,140.

Indicate the effect of each transaction on the accounting equation by listing the numbers identifying the transactions, (1) through (10) in a vertical column, and inserting at the right of each number the appropriate letter from the following list: a. Increase in an asset, decrease in another asset b. Increase in an asset, increase in a liability c. Increase in an asset, increase in stockholders' equity d. Decrease in an asset, decrease in a liability e. Decrease in an asset, decrease in stockholders' equity

87. Explain how the four financial statements are linked.

88. What are the basic elements of a financial accounting system?

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chapter 2 Answer Key 1. True 2. True 3. False 4. False 5. False 6. True 7. False 8. True 9. False 10. True 11. False 12. True 13. False 14. False 15. True 16. False 17. True 18. False 19. c 20. a

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chapter 2 21. a 22. d 23. d 24. d 25. b 26. a 27. d 28. a 29. a 30. c 31. a 32. c 33. c 34. c 35. b 36. c 37. d 38. a 39. b 40. d 41. d Copyright Cengage Learning. Powered by Cognero.

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chapter 2 42. c 43. c 44. c 45. d 46. a 47. b 48. c 49. d 50. b 51. c 52. d 53. a 54. a 55. c 56. a 57. b 58. a 59. a 60. a 61. b 62. c Copyright Cengage Learning. Powered by Cognero.

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chapter 2 63. c 64. c 65. b 66. c 67. b 68. d 69. c 70. c 71. b 72. b 73. c 74. a 75. d 76. b 77. d 78. c 79. b 80. d 81. The company may pay out most of its earnings in dividends.

82.

Assets = $ 45,000 Copyright Cengage Learning. Powered by Cognero.

Liabilities +

Stockholders' Equity

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chapter 2

Bal. 12/31/ 20X2

110,000 58,000 125,000 $338,000

Bal. 12/31/ 20Y8

Assets = $ 85,000 110,000 135,000 125,000 $455,000

Ending stockholders' equity Beginning stockholders' equity Change in net income

$ 45,000 75,000 $120,000

Liabilities +

$ 55,000 65,000 $120,000

$ 218,000

Stockholders' Equity

$335,000

$335,000 218,000 $117,000

83. $97,235 = $82,300 + $435,600 −?

Cash Payments = $420,665 84. $35,300 ($6,750 + $32,750 − $4,200) 85. Yes, to both questions. Examples include (1) purchasing equipment with cash [decreases Cash (an asset) and increases Equipment (an asset)]; (2) issuing common stock for cash [increases Cash (an asset) and increases Common Stock (stockholders’ equity)].

86.

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

c b a a e c e e e e

87. A financial accounting system is designed to produce four financial statements. The income statement, statement of stockholders' equity, and statement of cash flows are linked to an element of the balance sheet.

(1) The income statement shows the net effects of revenues and expenses, which affects the retained earnings on the balance sheet.

(2) The statement of stockholders' equity reflects the net income and dividends paid and shows how retained earnings in the balance sheet moves from the beginning balance to the ending balance.

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chapter 2 (3) The statement of cash flows explains how the cash balance in the balance sheet moves from the beginning balance to the ending balance by looking at the cash effects of operating, investing, and financing activities.

88. A financial accounting system is designed to produce financial statements. The basic elements of a financial accounting system include: (1) A set of rules for determining what, when, and the amount that should be recorded (2) A framework for preparing financial statements (3) One or more controls to determine whether errors may have arisen in the recording process

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chapter 3

Indicate whether the statement is true or false.

1. If land costing $85,000 was sold for $125,000, the amount reported in the investing activities section of the statement of cash flows would be $125,000. a. True b. False 2. Under the accrual basis of accounting, the accounting records are normally updated after the preparation of the financial statements. a. True b. False 3. The process that begins with the analysis of transactions and ends with preparing financial statements is called the accounting cycle. a. True b. False 4. The ―Fixed assets‖ section of a balance sheet may also be labeled as ―Property, plant, and equipment.‖ a. True b. False 5. The accrual basis recognizes liabilities at the time the business incurs the obligation to pay for the services or goods purchased. a. True b. False 6. Under accrual accounting, expenses are recorded when incurred regardless of when paid. a. True b. False 7. An adjusting entry would adjust an expense account so that the expense is reported when incurred. a. True b. False 8. Rights that are short term in nature are called intangible assets. a. True b. False 9. It is easy to objectively determine the physical decline in the ability of long-term assets such as equipment to provide service. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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chapter 3

10. The revenue recognition concept states that revenue should be recorded in the same period as the cash is received. a. True b. False 11. "Brand name" recognition is an example of goodwill. a. True b. False 12. Under the cash basis of accounting, no adjustments are necessary prior to the preparation of the financial statements. a. True b. False 13. To determine cash payments for operating expenses for the statement of cash flows using the direct method, depreciation expense is added to net income. a. True b. False 14. Quick assets include cash, accounts receivable, and inventory. a. True b. False 15. The quick ratio is a profitability metric used to assess a company’s ability to pay its long-term liabilities. a. True b. False 16. An adjusting entry would adjust revenue so that it is reported when earned and not when cash is received. a. True b. False 17. A company with a quick ratio of 1.4 indicates a stronger liquidity position than a company with a quick ratio of 1.2. a. True b. False 18. Current assets are assets that are expected to be converted to cash, sold, or used up within six months. a. True b. False 19. Physical assets of a long-term nature may be referred to as fixed assets. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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20. Accrual accounting does not require that the accounting records be updated prior to preparing financial statements. a. True b. False 21. Under the accrual basis of accounting, net cash flows from (used for) operating activities on the statement of cash flows is the same amount as net income. a. True b. False 22. Every company must use the cash basis of accounting. a. True b. False 23. Expenses on the income statement are assets used up or services consumed in the process of generating revenues. a. True b. False 24. Land is an example of a current asset. a. True b. False 25. Receiving cash in advance of performing a service creates a liability for the company. a. True b. False 26. Under the cash basis of accounting, expenses are recorded when paid. a. True b. False 27. Accrued expenses are expenses that have been incurred and paid. a. True b. False 28. Under the cash basis of accounting, a business records only transactions involving increases or decreases of its cash. a. True b. False 29. Liabilities that will not be due for more than one year are called long-term liabilities. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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30. The matching concept requires expenses to be recorded in the same period that the related revenue is recorded. a. True b. False 31. The accrual basis of accounting requires revenue to be recorded when the service is performed. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

32. Which of the following is the effect of a company recording depreciation? a. Its cash flow decreases. b. Its net income decreases. c. Its quick assets decrease. d. Its common stock increases.

33. Which of the following is the effect of the company’s payment of dividends to stockholders? a. The company's liquidity decreases, while profitability remains unchanged. b. The company's profitability and liquidity remain unchanged. c. The company's profitability and liquidity decrease. d. The company's profitability increases, while its liquidity decreases.

34. Which of the following will affect the liquidity metric of a company when an adjustment is made for it? a. Supplies used for manufacturing a product b. Salary owed but not paid c. Services provided but not billed to the customer d. Depreciation charged on fixed asset 35. Which of the following assets usually does not lose its ability to provide service and, as a result, does not need to be depreciated? a. A copyright b. Office equipment c. A patent d. Land 36. While calculating the carrying value of a building, its accumulated depreciation is _____. a. not taken into consideration b. subtracted from the building's cost c. added to the building's cost d. subtracted from the fair market value of the building Copyright Cengage Learning. Powered by Cognero.

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37. Unearned revenue is categorized as _____. a. a fixed asset b. stockholders' equity c. an intangible asset d. a liability 38. On the statement of cash flows, the operating activities section would include _____. a. receipts from the issuance of common stock b. receipts from the sale of investments c. payments for the acquisition of investments d. cash receipts from sales activities 39. When cash is paid to suppliers on account, which section of the statement of cash flows is affected? a. Operating activities section b. Investing activities section c. Financing activities section d. There is no effect on the statement of cash flows.

40. Which of the following is the effect of the issuance of additional common stock by a company on its liquidity and profitability metrics? a. Its profitability increases. b. Its profitability and liquidity increase. c. Its profitability and liquidity remain unaffected. d. Its liquidity increases.

41. Which of the following is an accrued expense? a. Rent owed but not yet paid b. Accumulated depreciation c. Inventory in process d. A prepaid advertising expense 42. Accrued revenue is shown on the balance sheet as _____. a. an asset b. common stock c. a liability d. retained earnings 43. When cash is received in payment of an account receivable, which section of the statement of cash flows is affected? a. Operating activities section b. Investing activities section Copyright Cengage Learning. Powered by Cognero.

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chapter 3 c. Financing activities section d. There is no effect on the statement of cash flows.

44. Which of the following transactions would be recorded in a cash basis system of accounting? a. Purchase of equipment by signing a note b. Purchase of supplies on credit c. Sale of goods against a note d. Sale of goods for cash 45. When an adjusting entry is made to record insurance expense and reduce the prepaid insurance account, which section of the statement of cash flows is affected? a. Operating activities section b. Investing activities section c. Financing activities section d. There is no effect on the statement of cash flows.

46. XYZ Co. received $3,000 in payments from clients for services billed in a previous month. Which accounts will be affected and by what amounts under the accrual basis of accounting? a. Cash will increase by $3,000, and Accounts Receivable will decrease by $3,000. b. Cash will increase by $3,000, and Fees Earned will increase by $3,000. c. Accounts Receivable will increase by $3,000, and Fees Earned will increase by $3,000. d. Accounts Receivable will increase by $3,000, and Cash will increase by $3,000.

47. JDA Co. has a five-day workweek (Monday through Friday). Employees earn $750 per day. How much cash will be paid on Friday? a. $750 b. $1,500 c. $3,750 d. $5,250 48. Eagle Eye, Inc. received an additional investment of $6,000 cash in exchange for shares of common stock. How does this transaction affect Eagle Eye's accounts? a. Increases Stock Expense and decreases Cash by $6,000 each b. Increases Common Stock and increases Cash by $6,000 each c. Increases Common Stock and increases Stock Revenue by $6,000 each d. Increases Common Stock and decreases Retained Earnings by $6,000 each 49. Interest receivable is an example of _____. a. accrued revenue b. retained earnings c. deferred revenue d. a prepaid expense Copyright Cengage Learning. Powered by Cognero.

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chapter 3

50. From the following data for Zen Industries, calculate the quick ratio.

Cash Accounts receivable Inventories Prepaid expenses Total current assets Less current liabilities Working capital

$ 66,500 120,000 210,000 25,000 $ 421,500 (270,000) $ 151,500

a. 1.8 b. 0.4 c. 0.7 d. 1.6 51. On April 1, Smart, Inc. paid $7,200 for an insurance premium on a three-year insurance policy. How does this transaction affect Smart's accounts? a. Increases Insurance Expense and decreases Cash by $7,200 each b. Increases Prepaid Insurance and decreases Cash by $7,200 each c. Increases Unearned Insurance and decreases Cash by $7,200 each d. Increases Prepaid Insurance and decreases Retained Earnings by $7,200 each 52. Which of the following is not reported as revenue on the income statement? a. Unearned revenue b. Fees revenue c. Commissions revenue d. Rent revenue 53. The reduction in the ability of a long-term asset such as equipment to provide service over time is called _____. a. deferral recognition b. depreciation c. consolidation d. accumulation 54. Cash and other assets that are expected to be converted to cash, sold, or used up within one year or less through the normal operations of the business are called _____. a. current assets b. intangible assets c. fixed assets d. notes receivable Copyright Cengage Learning. Powered by Cognero.

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chapter 3 55. Which of the following statements about an accrual is true? a. It is normally the result of cash being received or paid before the revenue is earned or the expense is incurred. b. It is initially recorded as an asset but becomes an expense over time. c. It is initially recorded as a liability but becomes revenue over time. d. It is normally the result of cash being received or paid after revenue has been earned or an expense has been incurred.

56. The unearned rent revenue account has a balance of $50,000. If $5,000 of the $50,000 is unearned at the end of the accounting period, the amount of the adjusting entry is _____. a. $45,000 b. $50,000 c. $54,000 d. $5,000 57. Scents Co. has a five-day workweek (Monday through Friday). Employees earn $550 per day. If the month ends on Thursday, and wages will not be paid until Friday, how much wage expense should be accrued on Thursday? a. $1,100 b. $550 c. $2,750 d. $2,200 58. Zebra Co. received $6,000 in payments from clients for services billed in a previous month. What effect does this transaction have on Zebra’s accounting equation elements under the accrual basis of accounting? a. Total assets increase by $6,000. b. Assets increase by $6,000 and revenues increase by $6,000. c. Total assets decrease by $6,000. d. The net effect on assets is zero.

59. Which of the following should be shown on a statement of cash flows in the financing activities section? a. Purchase of a long-term investment in the common stock of another company b. Cash received from issuing common stock. c. Proceeds from the sale of a building d. Issuance of a long-term note to acquire land 60. Which of the following is normally the result of cash being paid before the expense is incurred? a. A deferred expense b. An accrued expense c. A contra asset d. An intangible asset 61. Using accrual accounting, revenue is recorded and reported only _____. a. when cash is received without regard to when the services are rendered Copyright Cengage Learning. Powered by Cognero.

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chapter 3 b. when the services are rendered without regard to when cash is received c. when cash is received before the services are rendered d. when cash is received after the services are rendered 62. On May 1, Trinity, Inc. paid $3,600 for an insurance premium on a three-year insurance policy. At the end of December, Trinity's fiscal year-end, what should be the balance in the prepaid insurance account? a. $1,200 b. $2,400 c. $2,800 d. $3,600 63. The balance in the office supplies account on June 1 was $7,420, supplies purchased during June were $3,470, and the supplies on hand on June 30 were $2,350. The amount to be used for the appropriate adjusting entry is _____. a. $9,770 b. $6,300 c. $3,950 d. $8,540 64. ASE Company sold goods, receiving $45,000 in cash and $20,000 on credit. How much revenue should it record under the accrual basis of accounting? a. $25,000 b. $20,000 c. $45,000 d. $65,000 65. Which of the following statements about the quick ratio is true? a. It is computed as quick assets multiplied by current liabilities. b. The numerator includes cash, inventory, and short-term investments. c. If it is less than 1.0, it raises liquidity concerns for creditors. d. It is a suitable measure to derive the profitability of the company.

66. Using accrual accounting, expenses are recorded and reported only _____. 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 67. The liabilities that are due to be paid usually within a year or less are called _____. a. long-term liabilities b. deferred liabilities c. current liabilities Copyright Cengage Learning. Powered by Cognero.

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chapter 3 d. contingent liabilities 68. The updating of accrual accounting records before preparing financial statements is referred to as the _____. a. consolidation process b. full disclosure process c. adjustment process d. money measurement process 69. Red Co. provided services of $550,000 to clients on account. How does this transaction affect Red's accounts? a. Accounts Receivable and Cash increase by $550,000 each. b. Accounts Receivable and Revenues increase by $550,000 each. c. Accounts Receivable and Unearned Revenue increase by $550,000 each. d. Cash increases by $1,000,000, and Accounts Receivable decreases by $550,000.

70. The accrual basis of accounting recognizes _____. a. revenues when cash is received and expenses when cash is paid b. revenues when earned and expenses when cash is paid c. revenues when cash is received and expenses when incurred d. revenues when earned and expenses when incurred 71. A company's stockholders' equity is made up of _____. a. current assets and long-term assets b. common stock and long-term assets c. retained earnings and long-term assets d. common stock and retained earnings 72. _____ is the process that begins with analyzing transactions and ends with preparing financial statements. a. Liquidity reporting b. The accounting cycle c. Amortization of accounts d. Cost reporting 73. Seaside Co. paid $2,000 in dividends to stockholders. How does this transaction affect the accounts of Seaside? a. Cash will decrease by $2,000, and Retained Earnings will decrease by $2,000. b. Cash will decrease by $2,000, and Dividend Expense will increase by $2,000. c. Cash will decrease by $2,000, and Dividend Revenue will decrease by $2,000. d. Dividend Revenue will decrease by $2,000, and Dividend Expense will increase by $2,000.

74. QRT Co. received a $1,750 advance from Zynch Inc. as rent for the use of a building owned by QRT Co. How does this transaction affect QRT's accounts? a. Cash is increased, and Rent Revenue is increased.

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chapter 3 b. Cash is increased, and Rent Revenue is decreased. c. Cash is increased, and Unearned Rent Revenue is increased. d. Cash is increased, and Prepaid Rent is increased.

75. A deferred expense is initially recorded as a(n) _____. a. asset but becomes an expense over time b. expense but becomes an asset over time c. liability but becomes an expense over time d. expense but becomes a liability over time 76. _____ represent rights of a long-term nature, such as patent rights, copyrights, and goodwill. a. Accrued revenues b. Intangible assets c. Retained earnings d. Long-term liabilities 77. When an entry is made to adjust the supplies account and recognize supplies expense for the period, which section of the statement of cash flows is affected? a. Cash flows from operating activities b. Cash flows from investing activities c. Cash flows from financing activities d. There is no effect on the statement of cash flows.

78. Identify the item that should be treated as a deferred expense by a company. a. Prepaid advertising b. Unpaid wages c. Unearned rent d. Notes receivable 79. The following assets are included on the December 31, 20Y9, balance sheet of Sensible Goods, Inc.: Accounts Receivable (net of Allowance for Uncollectible Accounts) Accumulated Depreciation—Building Building Cash Land Merchandise Inventory Trademark

$ 60,000 31,000 150,000 70,000 150,000 80,000 126,500

The total dollar amount of assets classified as property, plant, and equipment on Sensible Goods, Inc.'s December 31, 20Y9 classified balance sheet is _____.

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chapter 3 a. $210,000 b. $269,000 c. $126,500 d. $605,500 80. Electrodo Co. purchased land for $55,000, with $20,000 paid in cash and $35,000 in notes payable. What effect does this transaction have on Electrodo’s accounting equation elements under the accrual basis of accounting? a. Net increase in assets and liabilities of $55,000 b. Net increase in assets of $35,000 and net increase in liabilities of $35,000 c. Net increase in assets of $55,000 and net decrease in liabilities of $35,000 d. Net increase in assets of $75,000 and net decrease in liabilities of $30,000 81. Which of the following statements is prepared with various sections, subsections, and captions? a. Statement of current assets b. Statement of stockholders' equity c. Pro forma contra asset statement d. Classified balance sheet 82. Unearned rent revenue, representing rent for the next six months' occupancy, would be reported on the landlord's balance sheet as _____. a. an asset b. a liability c. common stock d. a revenue 83. The quick ratio is computed as _____. a. quick assets divided by current liabilities b. quick assets divided by current assets c. current assets divided by stockholders' equity d. current liabilities divided by current assets 84. Which of the following is an example of an intangible asset? a. Goodwill b. Land c. Cash d. Inventory 85. Which of the following metrics is affected when a business receives prepayment of rent revenue? a. Profitability b. Leverage c. Liquidity Copyright Cengage Learning. Powered by Cognero.

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chapter 3 d. Contingency 86. On June 1, Unison, Inc. purchased $2,400 worth of supplies on account. Prior to the purchase, the balance in the supplies account was $250. On December 31, the fiscal year-end for Unison, it is determined that $300 of supplies still remain. What is the balance in the supplies account after adjustment? a. $300 b. $0 c. $400 d. $350 87. St. Nick Corporation's toy-making supplies account showed a beginning balance of $250 and supplies purchased of $900. There was $500 of supplies on hand at year-end. The year-end adjustment would include an increase in toy-making supplies expense of _____. a. $500 b. $650 c. $800 d. $1,100 88. Jumpstart Company's weekly payroll of $300 is paid on Fridays (five-day workweek). Assume that the last day of the month falls on Wednesday. Which of the following is the required month-end adjusting entry? a. Increase Salaries Expense, $300, and increase Salaries Payable, $300 b. Increase Salaries Expense, $60, and increase Cash, $60 c. Increase Salaries Payable, $240, and increase Cash, $240 d. Increase Salaries Expense, $180, and increase Salaries Payable, $180 89. Accumulated depreciation is a(n) _____. a. contra asset b. contingent asset c. revenue expenditure d. accrued expense 90. Accrued expenses are ordinarily reported on the balance sheet as _____. a. assets b. liabilities c. fixed assets d. prepaid expenses 91. In August, Eagle Inc. received cash in advance for rendering services to its clients. If only a few of those services were provided by December 31, the year-end adjustment would _____. a. increase unearned revenue and decrease revenue b. increase accounts payable and decrease revenue c. increase cash and decrease accounts receivable Copyright Cengage Learning. Powered by Cognero.

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chapter 3 d. decrease unearned revenue and increase revenue 92. On June 1, Unison, Inc. purchased $1,800 worth of supplies on account. Prior to the purchase, the balance in the supplies account was $0. On December 31, the fiscal year-end for Unison, it is determined that $950 of supplies still remain. What is the balance in the supplies account after adjustment? a. $0 b. $850 c. $950 d. $1,800 93. Deferred revenue is initially recorded as _____. a. revenue but becomes a liability over time b. an asset but becomes revenue over time c. a liability but becomes revenue over time d. revenue but becomes an asset over time 94. The expired amount of a prepaid expense is recorded as _____. a. accrued revenue b. a contra asset c. a liability d. an expense 95. Given the following data, which company’s quick ratio would cause the most concern to creditors?

Company Ashley Company Igor Company Paisley Company Tristan Company

Quick Ratio 2.0 0.5 0.9 1.1

a. Ashley Company b. Igor Company c. Paisley Company d. Tristan Company 96. Expenses not related to the primary operations of the business are sometimes reported as _____. a. administrative expense b. miscellaneous expense c. other expenses d. All of these choices 97. Which of the following accounts would require an adjustment when making an adjusting entry for a deferral?

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chapter 3 a. Interest Expense b. Unearned Rent c. Salary Expense d. Notes Receivable 98. Which of the following transactions will affect the profitability metric of a company? a. Rent revenue received in advance b. Prepaid insurance c. Purchase of supplies on account d. Fees received in cash for services provided 99. Flyer Co. billed a client for flying lessons given in January. The payment was received in February. Under the accrual basis of accounting, when should Flyer Co. record the revenue? a. January b. February c. Some in January and some in February d. Flyer Co. should not record any revenue

100. At the end of the fiscal year, the following adjusting entries were omitted: (a) No adjusting entry was made to transfer $2,000 of prepaid insurance from the asset account to the expense account. (b) No adjusting entry was made to record accrued fees of $700 for services provided to customers.

Assuming that financial statements are prepared before the errors are discovered, indicate the effect of each error, considered indivi inserting the dollar amount in the appropriate spaces. Insert 0 if the error does not affect the item.

Error (a) Error (b) Overstated Understated Overstated Understated (1) Assets at December 31 would be $ $ $ $ (2) Liabilities at December 31 would be $ $ $ $ (3) Net income for the year would be $ $ $ $ (4) Retained earnings at December 31 would be $ $ $ $

101. Identify the classification of the following items as a. accrued asset b. unearned revenue c. accrued liability d. prepaid expense Copyright Cengage Learning. Powered by Cognero.

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chapter 3 (1) (2) (3) (4) (5) (6)

Three months' interest on notes payable paid in advance Subscription fees for six months received in advance Services rendered but not yet billed at month-end Interest payable accrued on a note payable but not yet paid Salaries payable owed but not yet paid Two year's premium on building paid in advance

102. Why is a physical count of supplies necessary at the end of the accounting period?

103. Describe the differences between the cash and accrual bases of accounting.

104. Describe the end-of-period adjustment process. Why is it necessary?

105. When are sales recognized under the cash basis of accounting? When are expenses recognized?

106. Under the balance sheet classification of property, plant, and equipment, some accounts need adjustment, and others do not. Which do, and why? Which do not, and why?

107. Describe deferrals and accruals.

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chapter 3 Answer Key 1. True 2. False 3. True 4. True 5. True 6. True 7. True 8. False 9. False 10. False 11. True 12. True 13. False 14. False 15. False 16. True 17. True 18. False 19. True 20. False

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chapter 3 21. False 22. False 23. True 24. False 25. True 26. True 27. False 28. True 29. True 30. True 31. True 32. b 33. a 34. c 35. d 36. b 37. d 38. d 39. a 40. d 41. a Copyright Cengage Learning. Powered by Cognero.

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chapter 3 42. a 43. a 44. d 45. d 46. a 47. c 48. b 49. a 50. c 51. b 52. a 53. b 54. a 55. d 56. a 57. d 58. d 59. b 60. a 61. b 62. c Copyright Cengage Learning. Powered by Cognero.

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chapter 3 63. d 64. d 65. c 66. a 67. c 68. c 69. b 70. d 71. d 72. b 73. a 74. c 75. a 76. b 77. d 78. a 79. b 80. b 81. d 82. b 83. a Copyright Cengage Learning. Powered by Cognero.

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chapter 3 84. a 85. c 86. a 87. b 88. d 89. a 90. b 91. d 92. c 93. c 94. d 95. b 96. c 97. b 98. d 99. a 100.

Error (a) Overstated Understated (1) (2) (3) (4)

Assets at December 31 would be Liabilities at December 31 would be Net income for the year would be Retained earnings at December 31 would be

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Error (b) Overstated Understated

$2,000

$0

$0

$700

$0

$0

$0

$ 0

$2,000

$0

$0

$700

$2,000

$0

$0

$700 Page 65

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chapter 3

101.

(1) d (2) b (3) a (4) c (5) c (6) d

102. The beginning balance in supplies will be updated by purchases. To determine the supplies used, you must determine the supplies on hand for the period (beginning balance plus purchases) and then deduct the ending balance on hand to determine the supplies used (expense) for the period. Supplies used are normally not recorded in the account as they are used; the physical count is used to determine this.

If supplies have been used, then the amount before adjustment will be higher than the physical count. The account must be adjusted for the quantity used.

103. Under the cash basis of accounting, transactions are recorded when cash is affected. Revenue is recognized when cash is received, and expenses are recorded when cash is paid. Under accrual accounting, transactions are recorded as they occur, not just when cash is affected. Thus, revenue is recognized when it is earned. Expenses are recorded when they are incurred.

104. Using the accrual basis of accounting requires the accounting records to be updated before preparing the financial statements. This is necessary to properly match revenues and expenses. These adjustments are necessary because at any given point in time, some accounts will not be up to date.

105. Under the cash basis of accounting, the only time revenues or expenses are recognized is when there is a transaction affecting cash. When the cash is received for a sale, the revenue is recognized. When an expense is paid in cash, then it is recognized.

106. Plant and equipment both need an adjustment at the end of the period for depreciation and thus on the balance sheet for accumulated depreciation.

Land is not depreciated; therefore, no adjusting entry is necessary. Land continues to be accounted for on the books at its original purchase price.

107. Deferrals are created by recording a transaction in a way that delays or defers the recognition of an expense or revenue. An example of a deferral is prepaid insurance. The expense recognition is "deferred" until time has passed.

Accruals are created when a revenue/expense has been earned/incurred but has not been recorded. An example of an accrual is interest income earned but not yet recorded.

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chapter 4

Indicate whether the statement is true or false.

1. A sale of $700 on account subject to a sales tax of 6% would increase Accounts Receivable by $658. a. True b. False 2. Gross profit percent is calculated by dividing gross profit by sales. a. True b. False 3. The document issued by the seller that informs the buyer of the details of a customer allowance is called a debit memorandum. a. True b. False 4. Purchases of merchandise increase the inventory account under the perpetual inventory system. a. True b. False 5. Customer Refunds Payable is a contra-asset account. a. True b. False 6. A buyer who acquires merchandise under credit terms of n/eom has until the end of the next month to pay the invoice. a. True b. False 7. When someone purchases merchandise and incurs the cost of transportation, these costs of purchasing inventory are added to the cost of the inventory. a. True b. False 8. When merchandise that was sold is returned, the seller decreases Accounts Payable. a. True b. False 9. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales. a. True b. False 10. When the terms of sale are FOB shipping point, the buyer pays the transportation charges. a. True Copyright Cengage Learning. Powered by Cognero.

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chapter 4 b. False 11. It is usual for the credit period to begin with the date the merchandise is received by the buyer. a. True b. False 12. Revenue from sources other than the primary operating activity of a business is called other revenue. a. True b. False 13. Inventory shrinkage will decrease Retained Earnings. a. True b. False 14. On the income statement of a company that uses the periodic inventory system, the inventory at the beginning of the period is added to sales to yield the cost of goods sold during the period. a. True b. False 15. In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account. a. True b. False 16. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms are stated as FOB destination. a. True b. False 17. Freight Out or Delivery Expense is increased by the seller for the cost of delivering merchandise sold to a customer with terms FOB destination. a. True b. False 18. Operating expenses are subtracted from fees earned for a service business and from gross profit for a merchandising business. a. True b. False 19. Merchandise is sold for $3,000, terms FOB destination, n/30, with transportation costs of $200. If $500 of the merchandise is returned prior to payment and the invoice is paid within the credit period, the amount of the payment is $2,500. a. True Copyright Cengage Learning. Powered by Cognero.

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chapter 4 b. False 20. A criticism of a single-step income statement is that net income is not separately stated. a. True b. False 21. The effects of a customer refund are a reduction in Sales Revenue and a decrease in Cash or Accounts Receivable. a. True b. False 22. If merchandise is purchased for $3,200 with terms of FOB destination, n/30, and transportation costs of $200 are prepaid by the seller, the amount due upon payment of the invoice is $3,400. a. True b. False 23. In a transaction where purchased merchandise has been returned, the buyer will increase Customer Refunds Payable, and the seller will increase Accounts Payable. a. True b. False 24. If a product cost the company $90, and the desired markup is 20%, the selling price will be $110. a. True b. False 25. A physical inventory count at the end of the accounting period usually reveals more inventory on hand than the balance of the inventory account shows. a. True b. False 26. Cost of Goods Sold is used in accounting for transactions by sellers of merchandise. a. True b. False 27. The inventory account is found on the balance sheet. a. True b. False 28. A liability is recorded by the retailer when coupons are distributed by mail. a. True b. False 29. Interest expense is an example of an expense classified under "Other expense."

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chapter 4 a. True b. False 30. The customer refunds payable account is a contra account to Sales. a. True b. False 31. A buyer who acquires merchandise under credit terms of n/30 has 30 days after the invoice date to pay the invoice. a. True b. False 32. Under the perpetual inventory system, the cost of goods sold is recorded when sales are made. a. True b. False 33. A criticism of the single-step income statement is that gross profit and operating income are not separately stated. a. True b. False 34. If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/eom. a. True b. False 35. On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues. a. True b. False 36. A credit memorandum is issued by the seller to customers for return of damaged or defective merchandise. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

37. For sales to customers who use bank credit cards such as MasterCard and VISA, the effects on the accounts usually include a(n) _____. a. decrease in Bank Credit Card Sales, an increase in Credit Card Expense, and an increase in Sales b. increase in Cash and an increase in Sales c. increase in Accounts Receivable and an increase in Sales d. decrease in Sales, an increase in Credit Card Expense, and a decrease in Cash 38. If the buyer is to pay the delivery expense of delivering merchandise, delivery terms are stated as _____.

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chapter 4 a. FOB shipping point b. FOB destination c. FOB n/30 d. FOB buyer 39. Using a perpetual inventory system, the purchase of $25,000 of merchandise on account would include a(n) _____. a. increase in Inventory b. increase in Sales c. decrease in Inventory d. decrease in Sales 40. If merchandise that cost the company $17,000 is expected to be returned in the coming year, the required adjustment _____. a. increases Customer Refunds Payable and decreases Sales by $175,000 b. increases Estimated Returns Inventory and decreases Cost of Goods Sold by $17,000 c. decreases Sales and increases Cost of Goods Sold by $17,000 d. decreases Inventory and increases Cost of Goods Sold by $17,000 41. Sometimes coupons are issued with sales receipts, for which _____. a. no effect is recognized b. Estimated Coupons Payable is increased c. Sales is decreased d. Cash is decreased 42. Which of the following is an example of an administrative expense? a. Cost of goods sold b. Office supplies expense c. Loss from disposing of fixed assets d. Advertising expense 43. The amount of the total cash paid to the seller for merchandise purchased would normally include _____. a. only the list price b. only the sales tax c. the list price plus the sales tax d. the list price less the sales tax 44. Paying an invoice within the credit period _____. a. increases the profitability metric b. has no effect on the profitability metric c. decreases the liquidity metric d. increases the liquidity metric Copyright Cengage Learning. Powered by Cognero.

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chapter 4

45. What is one criticism of the single-step income statement? a. It is too complex. b. It has too many subsections. c. Gross profit and operating income are not separately stated. d. Income taxes are given too much weight.

46. Which of the following is the formula to calculate gross profit percent? a. (Sales – Operating Expenses) ÷ Gross Profit b. Sales × Gross Profit c. Sales ÷ Cost of Goods Sold d. (Sales – Cost of Goods Sold) ÷ Sales 47. Which of the following businesses would be categorized as a retail business? a. Coast to Coast Dental b. H&R Block c. Target d. Urgent Care Center 48. Which of the following statements about retail and/or service businesses is true? a. The operating cycle for a service business differs from the operating cycle for a retail business in that a service business must purchase merchandise for sale to customers. b. The revenue activities of a retail business involve the buying and selling of merchandise. c. The operating cycles of retail businesses and service businesses are exactly the same. d. The revenue activities of a retail business involve rendering services to customers.

49. Gold Co. sold merchandise to Silver Co. on account, $80,000, terms net 30. The cost of the merchandise sold is $56,000. Gold Co. issued a credit memorandum for $10,000 for merchandise returned that originally cost Gold Co. $8,500. Silver Co. paid the invoice within the credit period. The effects of the payment on the accounts and financial statements would include _____. a. a financing cash inflow of $24,000 b. an increase in Accounts Receivable of $80,000 c. an increase in Customer Refunds Payable of $10,000 d. None of these choices 50. The credit terms of a sale are normally indicated on a(n) _____. a. purchase order b. invoice c. bill of lading d. check 51. In case of returned merchandise, the inventory account is increased by the amount of the cost of goods returned, and Copyright Cengage Learning. Powered by Cognero.

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chapter 4 _____. a. the customer refunds payable account is increased by the same amount b. the estimated returns inventory account is decreased by the same amount c. the accounts receivable account is increased by the same amount d. retained earnings is decreased by the same amount 52. In a retail business, cost of goods sold is subtracted from sales to arrive at _____. a. net sales b. fees earned c. operating income d. gross profit 53. Which of the following occurs when a seller pays a customer a refund? a. The seller decreases the balance of the cash account and the customer refunds payable account. b. The seller decreases the balance of the sales account and the accounts receivable account. c. The seller increases the balance of the cash account and the customer refunds payable account. d. The seller increases the balance of the sales account and the accounts receivable account.

54. Data Inc. buys merchandise worth $275 on account, terms FOB shipping point, and pays the freight cost of $35. As a result of this transaction, Data's _____. a. working capital liquidity metric increases b. gross profit percent profitability metric remains unchanged c. working capital liquidity metric decreases d. gross profit percent profitability metric increases 55. Multiple-step income statements show _____. a. gross profit but not operating income b. neither gross profit nor operating income c. both gross profit and operating income d. operating income but not gross profit 56. When a retail business is making estimates for the expected customer refunds and allowances, it increases the customer refunds payable account and decreases the _____. a. sales account b. purchases account c. accounts receivable account d. operating expenses 57. For the perpetual inventory system, which of the following effects occurs upon the return from a customer of merchandise sold on account? a. Increases Customer Refunds and Allowances and decreases Accounts Receivable b. Decreases Cost of Goods Sold and increases Inventory Copyright Cengage Learning. Powered by Cognero.

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chapter 4 c. Increases Inventory and decreases Estimated Returns Inventory d. All of these choices 58. Zetia Inc. issues a credit memo of $900 to a customer. What is the effect of this transaction on the gross profit percent profitability metric and the working capital liquidity metric? a. Both gross profit and working capital increase. b. Gross profit increases while working capital decreases. c. Both gross profit and working capital remain unchanged. d. Gross profit decreases while working capital increases.

59. When purchases of merchandise are made for cash, under the perpetual inventory system, the transaction _____. a. increases Cash and decreases Inventory b. increases Inventory and decreases Cash c. increases Inventory and decreases Cash Discounts d. increases Inventory and decreases Purchases 60. The form of income statement that emphasizes total revenues and total expenses in determining net income is called the _____. a. operating income statement b. multiple-step income statement c. statement of cash flows d. single-step income statement 61. As a result of inventory shrinkage, _____. a. the working capital increases, whereas the gross profit percent decreases b. the working capital decreases, whereas the gross profit percent increases c. the working capital and the gross profit percent decreases d. the working capital and the gross profit percent increases 62. _____ is reported as a current asset on the balance sheet. a. Operating income b. Cost of goods sold c. Merchandise inventory d. Accounts payable 63. Office salaries, depreciation of office equipment, and office supplies are examples of what type of expense? a. Selling expense b. Miscellaneous expense c. Administrative expense d. Other expense

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chapter 4 64. In recording a cash sale and corresponding cost of goods sold using a perpetual inventory system, the effect on the balance sheet is, _____. a. increases Cost of Goods Sold and increases Cash b. increases Cash and Retained Earnings and decreases Inventory c. increases Inventory and decreases Cost of Goods Sold d. increases Accounts Receivable and decreases Inventory 65. Which of the following refers to the arrangements between buyers and sellers regarding the payments for merchandise? a. Credit terms b. Operating cycle c. Accounting cycle d. Markup terms 66. Which of the following is a selling expense? a. Advertising expense b. Cost of goods sold c. Rent expense d. Depreciation of land and building 67. The difference between sales and cost of goods sold for a retail business is _____. a. sales b. net sales c. gross sales d. gross profit 68. When merchandise that was sold on account is returned, which accounts are affected? a. Cash, Accounts Receivable, Cost of Goods Sold, and Customer Refunds Payable b. Customer Refunds Payable, Accounts Receivable, Inventory, and Estimated Returns Inventory c. Customer Refunds Payable, Accounts Receivable, Purchases, and Estimated Returns Inventory d. Customer Refunds Payable, Accounts Receivable, Purchases, and Merchandise Inventory 69. Which of the following is the effect of purchasing merchandise on account with credit terms of n/30? a. There is no effect on the liquidity (working capital) and profitability (gross profit percent) metrics. b. There is an increase in the liquidity (working capital) metric, while the profitability (gross profit percent) metric remains unchanged. c. There is an increase in the profitability (gross profit percent) metric, while the liquidity (working capital) metric remains unchanged. d. There is an increase in both the liquidity (working capital) and profitability (gross profit percent) metrics.

70. Merchandise subject to the credit terms n/30, FOB shipping point, is sold to a customer on account for $182,255. The seller issued a credit memorandum for $3,600 prior to payment. The effects of the credit memorandum on the accounts Copyright Cengage Learning. Powered by Cognero.

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chapter 4 and financial statements include _____. a. an increase in Customer Refunds Payable b. a decrease in Sales c. no effect on the income statement and gross profit d. an operating cash outflow on the statement of cash flows 71. Using a perpetual inventory system, the return of merchandise purchased on account includes a(n) _____. a. increase in Sales b. increase in Inventory c. decrease in Sales d. decrease in Inventory 72. Merchandise is ordered on December 13; the merchandise is shipped by the seller and the invoice is prepared, dated, and mailed by the seller on December 16; the merchandise is received by the buyer on December 18; and the transaction is recorded in the seller's accounts on December 16. If the credit terms are n/30, the credit period begins with what date? a. December 13 b. December 15 c. December 16 d. December 18 73. Multiple-step income statements show _____. a. gross profit but not net income b. neither gross profit nor net income c. gross profit but not cost of goods sold d. gross profit, cost of goods sold, operating income, and net income 74. When the coupon period has expired, any remaining balance in Estimated Coupons Payable is _____. a. added to Sales b. deducted from Cost of Goods Sold c. deducted from Accounts Receivable d. added to Inventory 75. Calculate the markup percent if sales are $90,000 and cost of goods sold is $55,550. a. 20.3% b. 62.0% c. 49.99% d. 58.2% 76. Orange Co. purchases merchandise on credit from Apple Co. in the amount of $8,000. The invoice is dated on May 15 with terms of net 45. By what date must the invoice be paid? a. June 25 b. June 29 Copyright Cengage Learning. Powered by Cognero.

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chapter 4 c. June 30 d. July 1 77. Kracken Company sells merchandise on account to Ursula Company, terms FOB destination, n/30. Kracken pays cash for the shipping charges. Which of the following will be increased by Ursula Company for the shipping charges? a. Cash b. Delivery Expense c. Inventory d. None of these choices 78. The following is a single-step income statement for T Bonds Company: T Bonds Company Income Statement For the Year Ended December 31 Revenues: Sales Interest income Total revenues Expenses: Cost of goods sold Selling expenses General and administrative expenses Interest expense Income tax expense Total expenses Net income

$200,000 15,000 $215,000 $ 50,000 25,000 32,000 16,000 45,000 (168,000) $47,000

If the income statement were prepared in a multiple-step format, operating income would be _____. a. $48,000 b. $31,000 c. $93,000 d. $47,000 79. Subtracting operating expenses from gross profit results in _____. a. net sales b. total purchases c. operating income d. cost of goods sold 80. Which of the following statements about the perpetual inventory system is true? a. The amount of merchandise available for sale is continuously updated in the inventory records.

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chapter 4 b. Physical inventory is used to determine the cost of inventory on hand at the end of the period. c. The inventory does not show the amount of merchandise sold. d. The inventory account is updated for each purchase and sale, and related items in the subsidiary ledger are updated on a monthly basis.

81. If merchandise sold on account is returned to the seller, the seller may inform the customer of the details by issuing a _____. a. sales invoice b. purchase invoice c. credit memorandum d. debit memorandum 82. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are _____. a. n/30 b. FOB shipping point c. FOB destination d. consigned 83. Operating income is calculated by subtracting _____ from gross profit. a. operating expenses b. prepaid expenses c. accrued expenses d. nonoperating expenses 84. Merchandise purchased on account by a company has no effect on its working capital because _____. a. Inventory and Accounts Payable are increased by the same amount b. Inventory and Accounts Receivable are increased by the same amount c. Cash and Inventory are increased by the same amount d. Cash and Inventory are decreased by the same amount 85. Expenses that are incurred directly or entirely in connection with the sale of merchandise are classified as _____. a. selling expenses b. general expenses c. other expenses d. administrative expenses 86. If the seller is to pay the delivery expense of delivering merchandise, the delivery terms are stated as _____. a. FOB shipping point b. FOB destination c. FOB n/30 d. FOB seller Copyright Cengage Learning. Powered by Cognero.

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chapter 4

87. Merchandise sold and delivered by the end of the year is reported on the income statement as _____. a. cost of goods sold b. common stock c. inventory d. an operating expense 88. Which of the following best explains inventory shrinkage under the perpetual inventory system? a. It is the discount taken by the buyer for early payment of an invoice. b. It is the damaged merchandise returned by the buyer to the seller. c. It is the amount that is entered on a cash register and recorded in the accounts by increasing inventory. d. It is the difference between the physical count of inventory and the balance of the inventory account.

89. Which of the following is the effect of purchasing merchandise for cash on a company's liquidity (working capital) and profitability (gross profit percent) metrics? a. There is no effect on liquidity and profitability. b. There is an increase in liquidity, while profitability remains unchanged. c. There is an increase in profitability, while liquidity remains unchanged. d. There is an increase in both liquidity and profitability.

90. Since merchandise inventory is normally sold within a year, how is it reported on the balance sheet? a. As a revenue b. As cost of goods sold c. It does not appear on the balance sheet. d. As a current asset 91. Merchandise not sold at the end of the period is reported as _____. a. cost of goods sold on the income statement b. old stock on the balance sheet c. inventory on the balance sheet d. net purchases on the income statement 92. If Johnson, Inc., had sales of $750,000 of merchandise costing the company $675,000 to customers using MasterCard, subject to a 6.5% sales tax, the effects of the sales on the accounts and financial statements would include _____. a. an operating cash inflow of $798,750 b. an increase in Retained Earnings and gross profit of $75,000 c. an increase in Sales Tax Payable of $48,750 d. All of these choices 93. Merchandise is ordered on June 10; the merchandise is shipped by the seller and the invoice is prepared, dated, and mailed by the seller on June 12; the merchandise is received by the buyer on June 17; and the transaction is recorded in the buyer's accounts on June 18. The credit period begins with what date?

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chapter 4 a. June 10 b. June 12 c. June 17 d. June 18 94. Which term indicates that merchandise is free of transportation charges to the buyer? a. FOB destination b. Transportation out c. FOB shipping point d. Transportation in 95. The excess of sales over the cost of goods sold is called _____. a. accounts receivable b. operating income c. accounts payable d. gross profit 96. If title to merchandise purchases passes to the buyer when the goods are delivered to the buyer, the terms are _____. a. consigned b. n/30 c. FOB shipping point d. FOB destination 97. Kracken Company sells merchandise on account to Ursula Company, terms FOB destination, n/30. Which of the following will be increased by Kracken Company? a. Sales b. Inventory c. Accounts Receivable d. Both Sales and Accounts Receivable 98. A sales invoice included the following information: merchandise price, $5,000; terms n/30. Assuming that a credit for merchandise returned of $750 is granted prior to payment and that the invoice is paid within the credit period, the effects of the payment on the accounts and financial statements include _____. a. $750 increase in Customer Refunds Payable b. $5,000 decrease in Accounts Receivable c. $4,250 increase in Cash d. an operating cash outflow of $750 99. A sales invoice included the following information: merchandise price, $8,500; terms n/eom. Assuming that a credit for merchandise returned of $1,000 is granted prior to payment and that the invoice is paid within the credit period, the effects of the payment on the accounts and financial statements include _____. a. an $8,500 decrease in Accounts Receivable Copyright Cengage Learning. Powered by Cognero.

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chapter 4 b. a $7,500 increase in Cash c. a $7,500 increase in Sales d. an operating cash inflow of $8,500 100. A sales invoice included the following information: merchandise price, $5,400; transportation, $200; terms n/eom, FOB shipping point. Assuming that a credit for merchandise returned of $500 is granted prior to payment, that the transportation is prepaid by the seller, and that the invoice is paid within the credit period, what is the amount of cash received by the seller? a. $4,700 b. $4,900 c. $5,200 d. $5,100 101. Selling and administrative expenses are found on the multiple-step income statement _____. a. before gross profit b. after sales and before gross profit c. after net income and before expenses d. after gross profit 102. Expenses that cannot be traced directly to normal business operations are identified as _____. a. other revenue b. operating expenses c. cost of goods sold d. other expenses 103. Which of the following is not a subsection in a multiple-step income statement? a. Purchase discounts b. Gross profit c. Operating income d. Operating expenses 104. Which of these is calculated by dividing gross profit by cost of goods sold? a. Gross profit percent b. Markup percent c. Ratio of sales to assets d. Sales percent 105. Transactions between suppliers and retailers are called _____. a. B2B transactions b. B2C transactions c. C2C transactions Copyright Cengage Learning. Powered by Cognero.

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chapter 4 d. None of these choices 106. Seaside Co.'s beginning inventory for the year was $50,000, purchases during the year were $142,750, and ending inventory for the year was $160,000. What is Seaside's cost of goods sold for the year? a. $20,000 b. $32,750 c. $92,750 d. $160,000 107. During the previous year, Nightwork Co.'s sales were $145,000, cost of goods sold was $62,550, operating expenses were $75,600, and other revenues were $14,550. What was Nightwork's gross profit (loss)? a. $69,400 b. $6,850 c. $82,450 d. $(7,700) 108. The following is a single-step income statement for T Bonds Company: T Bonds Company Income Statement For the Year Ended December 31 Revenues: Sales Interest income Total revenues Expenses: Cost of goods sold Selling expenses General and administrative expenses Interest expense Income tax expense Total expenses Net income

$200,000 15,000 $215,000 $ 50,000 25,000 32,000 16,000 45,000 (168,000) $47,000

If the income statement were prepared in a multiple-step format, gross profit would be _____. a. $165,000 b. $150,000 c. $250,000 d. $47,000

109. The following data for the year ended July 31 were extracted from the accounting records of Skyline Co.: Copyright Cengage Learning. Powered by Cognero.

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chapter 4

Cost of goods sold Operating expenses Sales

$400,000 95,000 600,000

Determine the operating income for the year ended July 31.

110. Selected data from the ledger of Price Co. after adjustment at August 31, the end of the fiscal year, are listed as follows:

Accounts Receivable Accumulated Depreciation Administrative Expenses Common Stock Cost of Goods Sold Dividends Interest Revenue Notes Payable

$ 25,000 35,200 70,000 40,000 310,000 22,000 5,000 60,150

Office Equipment Prepaid Insurance Retained Earnings Salaries Payable Sales Selling Expenses Supplies

$ 70,500 2,250 55,000 3,000 650,000 68,000 2,750

Prepare a single-step income statement for the year ended August 31.

111. Based on the following data, determine the cost of goods sold for June.

Inventory, June 1 $ 99,260 Inventory, June 30 101,320 Sales 732,000 Purchases 432,980

112. Prepare a multiple-step income statement for Sienna Co. from the following data for the year ended December 31.

Sales, $960,000; cost of goods sold, $650,000; administrative expenses, $28,000; interest expense, $13,000; rent revenue, $18,000; selling expenses, $123,000.

113. The following data for the year ended December 31 were extracted from the accounting records of Zander Co.: Cost of goods sold Operating expenses Sales

$ 957,200 310,500 1,250,250

Determine the operating income (loss) for the year ended December 31.

114. Details of invoices for purchases of merchandise are as follows:

Merchandise a. $1,000

Transportation $25

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Terms FOB shipping point, n/30

Returns and Allowances $200 Page 83

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chapter 4 b. 5,000 c. 4,000 d. 5,000

30 50 70

FOB destination, n/30 FOB shipping point, n/30 FOB destination, n/30

400 150 —

Determine the amount to be paid in full settlement of each of the invoices, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the credit period. Also assume that the seller has prepaid the transportation expenses.

115. Silver Co. sold merchandise to Bronze Co. on account, $24,000, terms net/45. The cost of the merchandise sold was $18,500. Silver Co. issued a credit memorandum for $2,000 for merchandise returned that originally cost $1,700. Bronze Co. paid the invoice within the credit period. What is the amount of gross profit earned by Silver Co. on the transactions?

116. The following data for the year ended December 31 were extracted from the accounting records of Zander Co.: Cost of goods sold Operating expenses Sales

$ 957,200 317,500 1,250,250

What is the markup percent for Zander Co.? Round to the nearest whole percent.

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chapter 4 Answer Key 1. False 2. True 3. False 4. True 5. False 6. False 7. True 8. False 9. False 10. True 11. False 12. True 13. True 14. False 15. True 16. False 17. True 18. True 19. True 20. False

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chapter 4 21. False 22. False 23. False 24. False 25. False 26. True 27. True 28. False 29. True 30. False 31. True 32. True 33. True 34. True 35. True 36. True 37. b 38. a 39. a 40. b 41. b Copyright Cengage Learning. Powered by Cognero.

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chapter 4 42. b 43. c 44. b 45. c 46. d 47. c 48. b 49. d 50. b 51. b 52. d 53. a 54. b 55. c 56. a 57. c 58. c 59. b 60. d 61. c 62. c Copyright Cengage Learning. Powered by Cognero.

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chapter 4 63. c 64. b 65. a 66. a 67. d 68. b 69. a 70. c 71. d 72. c 73. d 74. a 75. b 76. b 77. d 78. c 79. c 80. a 81. c 82. b 83. a Copyright Cengage Learning. Powered by Cognero.

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chapter 4 84. a 85. a 86. b 87. a 88. d 89. a 90. d 91. c 92. d 93. b 94. a 95. d 96. d 97. d 98. c 99. b 100. d 101. d 102. d 103. a 104. b Copyright Cengage Learning. Powered by Cognero.

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chapter 4 105. a 106. b 107. c 108. b 109.

Sales Cost of goods sold Gross profit Operating expenses Operating income

$ 600,000 (400,000) $ 200,000 (95,000) $ 105,000

110.

Price Co. Income Statement For the Year Ended August 31 Revenues: Sales Interest revenue Total revenues Expenses: Cost of goods sold Selling expenses Administrative expenses Total expenses Net income

111. Cost of goods sold: Inventory, June 1 Purchases Merchandise available for sale Inventory, June 30 Cost of goods sold

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$ 650,000 5,000 $ 655,000 $310,000 68,000 70,000 (448,000) $ 207,000

$ 99,260 432,980 $532,240 (101,320) $430,920

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chapter 4 112.

Sienna Co. Income Statement For the Year Ended December 31 Sales Cost of goods sold Gross profit Operating expenses: Selling expenses Administrative expenses Total operating expenses Operating income Other revenue and expense: Rent revenue Interest expense Net income

$ 960,000 (650,000) $ 310,000 $123,000 28,000 (151,000) $ 159,000 $ 18,000 (13,000)

113.

Sales Cost of goods sold Gross profit Operating expenses Operating loss

114. (a) (b) (c) (d)

5,000 $ 164,000

$1,250,250 (957,200) $ 293,050 (310,500) $ (17,450)

$825 ($1,000 + $25 – $200) $4,600 ($5,000 – $400) $3,900 ($4,000 + $50 – $150) $5,000

115. $5,200 116.

Sales Cost of goods sold Gross profit

$1,250,250 (957,200) $ 293,050

Markup Percent = Gross Profit ÷ Cost of Goods Sold = $293,050 ÷ $957,200 = 31% Copyright Cengage Learning. Powered by Cognero.

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chapter 4

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chapter 5

Indicate whether the statement is true or false.

1. Separating the responsibilities for purchasing, receiving, and paying for equipment is an example of the control procedure: separating operations, custody of assets, and accounting. a. True b. False 2. A check for $546 was erroneously charged by the bank as $645. In order for the bank reconciliation to balance, $198 must be subtracted from the bank statement balance. a. True b. False 3. Bank debit and credit memorandums reported on the bank statement require entries in the depositor's accounts. a. True b. False 4. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the cash balance per bank. a. True b. False 5. For a strong internal control system over cash, it is important to have the duties related to cash receipts and cash payments divided among different employees. a. True b. False 6. Adding a review of operations by an internal audit staff weakens internal control. a. True b. False 7. Minimum cash balance maintained in the bank account is called line of credit. a. True b. False 8. Bank customers are considered owners of the bank, so the bank shows their accounts as an asset on the bank's records. a. True b. False 9. The internal control environment is enhanced by the hiring and retention of competent, honest employees. a. True b. False 10. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the cash balance per books.

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chapter 5 a. True b. False 11. Internal control is enhanced by combining the control of a transaction with the record-keeping function. a. True b. False 12. In preparing a bank reconciliation, the amount of a canceled check omitted from the depositor's records is deducted from the cash balance per books. a. True b. False 13. In preparing a bank reconciliation, the amount indicated by a debit memorandum for bank service charges is deducted from the cash balance per bank. a. True b. False 14. A remittance advice is a portion of the invoice accompanying the check issued to a creditor that states the specific invoice being paid. a. True b. False 15. Depositing all forms of cash (coins, currency, checks, money orders) in a bank and paying with checks is an internal control procedure over cash. a. True b. False 16. In preparing a bank reconciliation, the amount of outstanding checks is deducted from the cash balance per books. a. True b. False 17. A voucher system is an example of an internal control procedure over cash receipts. a. True b. False 18. A voucher is used to provide authorization to pay cash or transfer funds electronically. a. True b. False 19. The amount of the "adjusted balance" appearing on a bank reconciliation as of a given date is the amount that is shown on the balance sheet for that date after all adjusting entries have been entered. a. True Copyright Cengage Learning. Powered by Cognero.

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chapter 5 b. False 20. A bank reconciliation is an important part of the system of internal controls. a. True b. False 21. The bank informs the depositor of bank service charges by including a credit memorandum with a monthly bank statement. a. True b. False 22. In preparing a bank reconciliation, the amount indicated by a credit memorandum for a note receivable collected by the bank is added to the cash balance per books. a. True b. False 23. Money orders are considered cash. a. True b. False 24. The Sarbanes-Oxley Act requires companies to maintain strong and effective internal controls over recording transactions and preparing financial statements. a. True b. False 25. A debit memorandum from the bank indicates that the bank has deducted an amount from the depositor's account. a. True b. False 26. The depositor reconciles the bank's statement to the depositor's records. a. True b. False 27. Outstanding checks are checks that have been issued but have not been cleared by the bank. a. True b. False 28. A voucher system is an example of an internal control procedure over cash payments. a. True b. False 29. The bank reconciles its statement to the depositor's records.

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chapter 5 a. True b. False 30. The Sarbanes-Oxley Act requires companies and their independent accountants to report on the effectiveness of the company's internal controls. a. True b. False 31. Information and communication are essential elements of an organization's internal control. a. True b. False 32. The bank section begins with the cash balance according to the bank statement and ends with the adjusted balance. a. True b. False 33. A customer's check received in settlement of an account receivable is considered cash. a. True b. False 34. A voucher is a written authorization to make a cash payment. a. True b. False 35. There are only two internal control objectives: to ensure accurate financial reports and to ensure compliance with applicable laws. a. True b. False 36. A voucher is the notification accompanying the check issued to a creditor that indicates the specific invoice being paid. a. True b. False 37. A voucher is a special form where pertinent data about a liability and the particulars of its payment are recorded. a. True b. False 38. All organizations face risks, and the assessment of these risks is necessary so that the objectives of internal control can be achieved. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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chapter 5

39. A credit memorandum received with a bank statement means the company's bank account has been increased. a. True b. False 40. The Sarbanes-Oxley Act applies to all publicly held companies. a. True b. False 41. In preparing a bank reconciliation, the amount indicated by a debit memorandum for bank service charges is added to the cash balance per books. a. True b. False 42. Money market funds, commercial paper, and U.S. Treasury Bills are examples of cash equivalents. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

43. Separating the custody of assets from accounting for assets is a part of which element of internal control? a. Information and communication b. Monitoring c. Control environment d. Control procedures 44. Which of the following elements of internal control includes maintaining records of employees documenting their compensation and promotion? a. Risk assessment b. Control environment c. Monitoring d. Control procedures 45. Which element of internal control observes employees' behavior and the accounting system for indicators of control problems? a. Control environment b. Risk assessment c. Control procedures d. Monitoring 46. The following data is given for M&M Company: Copyright Cengage Learning. Powered by Cognero.

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chapter 5 Cash and Cash Equivalents $750,000 Monthly Cash Expenses $200,000 M&M Company’s ratio of cash to monthly cash expenses is ____. a. 4.0 months b. 5.0 months c. 3.8 months d. 2.7 months 47. A bank issues credit memos for ____. a. payments made by electronic funds transfer b. interest earned on the company's account c. service charges d. customer checks returned for not sufficient funds 48. NightHawk Co. records the receipts from cash sales of $35,200 as $25,300. What adjustment is required in the bank's accounts? a. No adjustment needed b. Increase Sales; decrease Cash c. Increase Cash; decrease Sales d. Increase Cash; decrease Accounts Receivable 49. Which of the following warning signs could mean receipts are being pocketed before being deposited? a. Missing documents or gaps in transaction numbers b. An unusual increase in customer refunds c. A sudden increase in cash payments d. A difference between daily bank and cash balances 50. The bank statement of Silver Co. shows a balance of $5,660 as of December 31. The following reconciling items were identified: (i) Deposit not recorded on bank statement, $50 (ii) Total outstanding checks, $100 (iii) Check of $75 returned because of not sufficient funds (NSF) What is the adjusted balance according to the bank statement? a. $5,710 b. $5,610 c. $5,460 d. $5,510 51. The ratio of cash to monthly cash expenses is computed as _____. a. monthly cash expenses divided by cash b. current assets divided by monthly cash expenses c. cash divided by cash equivalents Copyright Cengage Learning. Powered by Cognero.

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chapter 5 d. cash and cash equivalents divided by monthly cash expenses 52. The framework that has become widely accepted as the standard by which companies design, analyze, and evaluate internal controls is the ____. a. Internal Control–Integrated Framework by the Committee of Sponsoring Organizations b. Internal Control–Integrated Framework by the Congress of Special Offerings c. Internal Control Localized Structure by the Committee of Sponsoring Organizations d. Internal Control Localized Structure by the Congress of Special Offerings 53. The ratio of cash to monthly cash expenses can be used to _____. a. assess how long a company with positive cash flows from investing activities can continue to operate b. assess how long a company with negative cash flows from operations can continue to operate c. assess how long a company with negative cash flows from investing activities can continue to operate d. assess how long a company with positive cash flows from financing activities can continue to operate 54. The denominator in the ratio of cash to monthly cash expense is calculated as _____. a. total revenues divided by 12 b. net cash flows from investing activities divided by 12 c. earnings before taxes divided by 12 d. net cash flows used in operations divided by 12 55. Which of the following is true of EFT? a. It costs more than receiving cash payments through the mail. b. It can process certain cash transactions at less cost than by using the mail. c. It is easy to document purchase and sale transactions. d. It means Effective Funds Transfer.

56. Which of the following is an element of the control environment? a. Control procedures b. Managements' operating styles c. Information and communication activities d. Risk assessment plans 57. Internal controls are important because they ____. a. deter fraud and prevent misleading financial statements b. eliminate fraud c. ensure that the company maintains a compensating balance d. guarantee accurate financial statements 58. Which of the following would be deducted from the cash balance per books on a bank reconciliation? a. Service charges Copyright Cengage Learning. Powered by Cognero.

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chapter 5 b. Outstanding checks c. Deposits in transit d. Notes collected by the bank 59. When preparing a bank reconciliation statement, outstanding checks would ____. a. increase the cash balance according to the bank statement b. be deducted from the cash balance according to the bank statement c. increase the cash balance according to the company statement d. be deducted from the cash balance according to the company statement 60. What adjustment is required in the depositor's accounts to record outstanding checks? a. None b. Increase Cash; decrease Accounts Receivable c. Increase Cash; increase Accounts Payable d. Increase Accounts Receivable; decrease Cash 61. _____, which constitute one of the most important elements of internal control, include separating responsibilities for related operations. a. Control procedures b. Risk assessment activities c. Risk monitoring procedures d. Information and communication activities 62. Micdrop Inc. recorded the receipt from cash sales of $4,800 as $8,400. This error is adjusted on the bank reconciliation as a(n) ____. a. $4,800 addition to the cash balance per books b. $13,200 addition to the cash balance per bank c. $8,400 deduction from the cash balance per bank d. $3,600 deduction from the cash balance per books 63. A bank reconciliation should be prepared periodically because ____. a. the depositor's records and the bank's records are in agreement b. the bank has not recorded all of its transactions c. any differences between the depositor's records and the bank's records should be determined, and any errors made by either party should be discovered and corrected d. the bank must make sure that its records are correct 64. Anna erroneously records a check drawn for $285 as $825. This error is adjusted on the bank reconciliation as a(n) ____. a. $450 addition to the cash balance per books b. $285 addition to the cash balance per bank c. $825 deduction from the cash balance per bank Copyright Cengage Learning. Powered by Cognero.

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chapter 5 d. $1,110 deduction from the cash balance per books 65. Which of the following elements of internal control focuses on locating weaknesses and improving control effectiveness? a. Control environment b. Risk assessment c. Control procedures d. Monitoring 66. Zion Inc. has the following cash register data for December 31: Cash register total for cash sales $24,500 Cash receipts from cash sales $24,470 How should the difference be recorded? a. $30 cash overage as miscellaneous operating expense b. $30 cash overage as revenue c. $30 cash shortage as normal operating expense d. $30 cash shortage as other revenue 67. When there are major changes in strategy, senior management, business structure, or operations, evaluations of controls are usually performed by _____. a. internal auditors b. management c. supervisors d. directors 68. Accompanying the bank statement was a credit memorandum for a short-term note collected by the bank for the depositor. This item would be included on the bank reconciliation as a(n) ____. a. deduction from the cash balance per books b. addition to the cash balance per bank c. deduction from the cash balance per bank d. addition to the cash balance per books 69. Accompanying the bank statement was a debit memorandum for bank service charges. What adjustment is required in the depositor's accounts? a. Increase Miscellaneous Expense; decrease Cash b. Increase Cash; increase Other Income c. Increase Cash; increase Accounts Payable d. Decrease Accounts Payable; decrease Cash 70. When a firm uses internal auditors, it is adhering to which of the following internal control elements? a. Risk assessment b. Control procedures Copyright Cengage Learning. Powered by Cognero.

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chapter 5 c. Monitoring d. Information and communication 71. The amount of deposits in transit is included on the bank statement as a(n) ____. a. deduction from the cash balance per books b. deduction from the cash balance per bank c. addition to the cash balance per bank d. addition to the cash balance per books 72. A canceled check for $1,800 was erroneously recorded by the bank as $8,100. How is the error adjusted in a bank reconciliation? a. The amount is deducted from the cash balance in the bank section of the reconciliation. b. The amount is deducted from the cash balance in the company section of the reconciliation. c. The amount is added to the cash balance in the bank section of the reconciliation. d. The amount is added to the cash balance in the company section of the reconciliation.

73. A check drawn by a depositor for $750 in payment of a liability was recorded by the depositor as $570. The $180 difference would be included on the bank reconciliation as a(n) ____. a. addition to the cash balance per books b. addition to the cash balance per bank c. deduction from the cash balance per bank d. deduction from the cash balance per books 74. If a company's net cash flows from operating activities is $1,000,000 for a year and its end of the year cash and cash equivalents balance is $500,000, determine the company's ratio of cash to monthly cash expenses. a. 5:1 b. 9:1 c. 6:1 d. 2:1 75. A credit memorandum from the bank ____. a. decreases a bank customer's account b. is used to show a bank service charge c. shows that a company has deposited a customer's NSF check d. shows the bank has collected a note receivable for the customer 76. The highly liquid investments that a company may invest in when they temporarily have excess cash are called _____. a. cash equivalents b. bank overdrafts c. cash short and over d. vouchers Copyright Cengage Learning. Powered by Cognero.

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chapter 5 77. Internal control consists of policies and procedures that _____. a. involve cost-benefit considerations b. deal with the human element of controls, such as fatigue, carelessness, etc c. ensure public relations d. ensure the accuracy of business information 78. Which of the following elements of internal control deals with hiring, training, evaluation, compensation, and promotion of employees? a. Monitoring b. Control environment c. Risk assessment d. Control procedures 79. The Sarbanes-Oxley Act requires companies and their independent accountants to ____. a. report on the effectiveness of the company's internal controls b. report on any fraud and theft detected in the company c. report on the state of the economy and likelihood of fraud d. report on the financial activities of the company 80. On the bank’s accounting records, customers’ accounts are normally shown as a(n) ____. a. revenue b. liability c. asset d. expenses 81. Accompanying the bank statement was a debit memorandum for an NSF check received from a customer. This item would be included on the bank reconciliation as a(n) ____. a. deduction from the cash balance per books b. addition to the cash balance per bank c. deduction from the cash balance per bank d. addition to the cash balance per books 82. The purpose of the Sarbanes-Oxley Act is to ____. a. restore public confidence and trust in the financial statements of publicly held companies b. require all companies to prepare financial statements c. protect companies from demands of investors, stockholders, and creditors d. do all of these 83. When a company reports negative net cash flows from operations, _____. a. the ratio of equity to annual cash expenses helps in assessing the survival of the company b. the ratio of equity to monthly cash expenses helps in assessing the survival of the company Copyright Cengage Learning. Powered by Cognero.

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chapter 5 c. the ratio of cash to monthly cash expenses helps in assessing the survival of the company d. the ratio of accounts payable to annual financing expenses helps in assessing the survival of the company

84. Identify each of the following as related to (a) the control environment, (b) risk assessment, or (c) control procedures.

(1) Mandatory vacations (2) Personnel policies (3) Report of outside consultants on future market changes 85. (a) (b)

Where are cash equivalents disclosed in the financial statements?

List three examples of cash equivalents.

86. Why would a bank require a company to maintain a compensating balance?

87. Using the following information, prepare a bank reconciliation for Minnie Co. for October 31, 20Y9: (a) The bank statement balance is $4,063. (b) The cash account balance is $3,735. (c) Outstanding checks amounted to $640. (d) Deposits in transit are $250. (e) The bank service charge is $35. (f) A check for $74 for supplies was recorded on the depositor's books as $47.

88. From the following particulars of Eagle Eye Co., prepare the bank reconciliation statement as of June 30, 20Y9. (a) The bank statement balance is $4,000. (b) The cash account balance is $3,950. (c) Outstanding checks amounted to $960. (d) Deposits in transit are $900. (e) The bank service charge is $75. (f) Interest added to the checking account by the bank is $150. (g) A check drawn for $65 was incorrectly charged by the bank as $150.

89. For each of the following procedures, indicate whether it is an internal control strength or a weakness. Also, for each weakness, explain why it is a weakness and how it can be corrected. (a) Only the best accounting graduates are hired to eliminate the need for training. (b) The person responsible for order supplies also records the receipt of the supplies. (c) Company policy mandates that all employees take vacation time. (d) Internal auditors constantly monitor the internal control system. (e) The accountant deposits cash at least once each day.

90. List and define each of the five elements of internal control set forth by the Integrated Framework.

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chapter 5 91. Using the following information, list the items that will require adjustments to the accounts of Seaside Co. Also, indicate which accounts will increase or decrease due to the adjustment. (a) The bank statement balance is $3,598. (b) The cash account balance is $2,650. (c) Outstanding checks amounted to $700. (d) Deposits in transit are $635. (e) The bank service charge is $20. (f) Interest added to the checking account by the bank is $8. (g) A check drawn for $26 was incorrectly charged by the bank as $62.

92. The bank statement for White Shore Co. indicates a balance of $10,152.50 on September 30, 20Y9. The cash account for the company had a balance of $4,787.10. Prepare a bank reconciliation on the basis of the following reconciling items: (a) Cash sales of $351 had been erroneously recorded as $315. (b) Deposits in transit not recorded by bank, $600. (c) Bank debit memorandum for service charges, $40. (d) Bank credit memorandum for note collected by bank, $2,772, including $63 interest.

Bank debit memorandum for $223.40 NSF (not sufficient funds) check from Alice (e) Summer, a customer. (f) Checks outstanding, $3,420.80.

93. List the objectives of internal control and give an example of how each is implemented.

94. List the advantages of Electronic Funds Transfers.

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chapter 5 Answer Key 1. True 2. False 3. True 4. False 5. True 6. False 7. False 8. False 9. True 10. False 11. False 12. True 13. False 14. True 15. True 16. False 17. False 18. True 19. True 20. True

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chapter 5 21. False 22. True 23. True 24. True 25. True 26. True 27. True 28. True 29. False 30. True 31. True 32. True 33. True 34. True 35. False 36. False 37. True 38. True 39. True 40. True 41. False Copyright Cengage Learning. Powered by Cognero.

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chapter 5 42. True 43. d 44. b 45. d 46. c 47. b 48. a 49. d 50. b 51. d 52. a 53. b 54. d 55. b 56. b 57. a 58. a 59. b 60. a 61. a 62. d Copyright Cengage Learning. Powered by Cognero.

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chapter 5 63. c 64. a 65. d 66. c 67. a 68. d 69. a 70. c 71. c 72. c 73. d 74. d 75. d 76. a 77. d 78. b 79. a 80. b 81. a 82. a 83. c Copyright Cengage Learning. Powered by Cognero.

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chapter 5 84. (1) (c) control procedures (2) (a) the control environment (3) (b) risk assessment 85. (a) (b)

Cash account on the balance sheet.

Money market funds; notes of major corporations (commercial paper); U.S. Treasury Bills.

86. Usually it is part of a loan agreement or line of credit.

87.

Minnie Co. Bank Reconciliation October 31, 20Y9 Cash balance according to bank statement Add: Deposits in transit not recorded by bank

$4,063 250 $4,313 640 $3,673

Deduct: Outstanding checks Adjusted balance Cash balance according to Minnie Co. Deduct: Bank service charge Error in recording Adjusted balance

$3,735 $35 27

62 $3,673

88.

Eagle Eye Co. Bank Reconciliation June 30, 20Y9 Cash balance according to bank statement Add: Error in check amount Deposits in transit not recorded by bank Deduct: Outstanding checks Adjusted balance Cash balance according to Eagle Eye Co. Add: Interest credited by bank Copyright Cengage Learning. Powered by Cognero.

$4,000 $ 85 900 $960

$150

985 $4,985 960 $4,025 $3,950 150 Page 110

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chapter 5

Deduct: Bank service charge Adjusted balance

$ 75

$4,100 75 $4,025

89. (a) Weakness. All new hires need to be trained even though they may have graduated in the top of the class. The company should institute a training program for all employees. (b) Weakness. The employee who places this order should not be responsible for receiving supplies. The company must assign this task to someone else. (c) Strength. (d) Strength. (e) Weakness. The accountant should not be permitted to handle cash since this individual is responsible for recording cash. These functions must be kept separate.

90.

(1) Control Environment: The control environment is the overall attitude of management and employees about the importance of internal controls.

(2) Risk Assessment: Risk assessment is the identification of risks faced by an organization so that management can take necessary actions to control them.

(3) Control Procedures: The control procedures are the policies and procedures designed to provide reasonable assurance that the business goals are met and fraud is prevented.

(4) Monitoring: Monitoring locates deficiencies in the internal control system and improves control effectiveness.

(5) Information and Communication: Information and communication is an essential element of internal control. Information about the control environment, risk assessment, control procedures, and monitoring is used by management to guide operations and ensure compliance with reporting, legal, and regulatory requirements.

91. (e) Service charge $20; Cash will decrease by $20 and Retained Earnings will decrease by $20. (f) Interest income $8; Cash will increase by $8, and Retained Earnings will increase by $8.

92.

White Shore Co. Bank Reconciliation September 30, 20Y9 Copyright Cengage Learning. Powered by Cognero.

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chapter 5 Cash balance according to bank statement Add: Deposits in transit not recorded by bank Deduct: Outstanding checks Adjusted balance

$10,152.50 600.00 $10,752.50 $ 3,420.80 $7,331.70

Cash balance according to White Shore Co. Add: Note collected by bank, including $63 interest Error in recording cash sales of $351 as $315 Deduct: NSF check from Alice Summer Bank service charges Adjusted balance

$4,787.10 2,772.00 36.00 $7,595.10 $223.40 40.00

263.40 $7,331.70

93. The objectives of internal control are to provide reasonable assurance that (1) Assets are safeguarded and used for business purposes.

(2) Business information is accurate.

(3) Employees comply with laws and regulations.

Examples are the following: (1) Duties are separated.

(2) Duties are rotated.

(3) Reports are submitted to management.

There are many other examples that would be correct.

94. Advantages: (1) EFTs cost less than receiving cash payments through the mail.

(2) EFTs enhance internal controls over cash since the cash is received directly by the bank without any employees handling cash.

(3) EFTs reduce late payments from customers and speed up the processing of cash receipts.

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chapter 6

Indicate whether the statement is true or false.

1. "Market," as used in the phrase "lower-of-cost-or-market" for valuing inventory, refers to the price at which the inventory is being offered for sale by its owner. a. True b. False 2. Net realizable value is used for purposes of valuing out-of-date merchandise in inventory. a. True b. False 3. The difference between the total receivables and the balance in Allowance for Doubtful Accounts at the end of a period is referred to as the net realizable value of the receivables. a. True b. False 4. During inflationary periods, the use of the LIFO method of costing inventory will result in a lesser amount of net income than would result from the use of the average method of inventory costing. a. True b. False 5. Lower-of-cost-or-market is a method of inventory valuation. a. True b. False 6. Of the three widely used inventory costing methods (FIFO, LIFO, and average), the FIFO method of costing inventory is based on the assumption that costs are charged against revenues in the order in which they were incurred. a. True b. False 7. Allowance for Doubtful Accounts is a contra liability account. a. True b. False 8. During deflationary periods, the use of the LIFO method of costing inventory will result in a greater amount of net income than would result from the use of the FIFO method of inventory costing. a. True b. False 9. The party promising to pay a note at maturity is the payee. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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chapter 6

10. Both accounts receivable and notes receivable represent claims that are expected to be collected in cash. a. True b. False 11. When companies sell their receivables to other companies, the transaction is called factoring. a. True b. False 12. The due date of a 60-day note dated August 10 is October 9. a. True b. False 13. The due date of a 90-day note dated June 15 is September 13. (Assume 360 days in a year.) a. True b. False 14. During inflationary periods, the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO method of costing inventory. a. True b. False 15. Inventories of merchandising and manufacturing businesses are reported as current assets on the balance sheet. a. True b. False 16. The person who is to be paid when a note matures is called the payee. a. True b. False 17. The direct write-off method records bad debt expense only when an account is determined to be worthless. a. True b. False 18. The use of the lower-of-cost-or-market method of inventory valuation increases the gross profit for the period in which the inventory replacement price declined. a. True b. False 19. During inflationary periods, the value of inventory that appears on the balance sheet using the FIFO method will be more than its current replacement cost. a. True Copyright Cengage Learning. Powered by Cognero.

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chapter 6 b. False 20. Net income is reduced when a specific receivable is written off under the analysis of receivables method. a. True b. False 21. Average cost is a method of inventory valuation. a. True b. False 22. The balance of the allowance for doubtful accounts is added to accounts receivable on the balance sheet. a. True b. False 23. The maturity value of a 12%, 90-day note for $1,000 is $1,030. (Assume 360 days in a year.) a. True b. False 24. The estimate of uncollectible accounts receivable based on the analysis of receivables method violates the matching principle. a. True b. False 25. Credit purchases are taken into account when calculating the accounts receivable turnover ratio. a. True b. False 26. The FIFO method of costing inventory is based on the assumption that costs should be charged against revenues in the order in which they were incurred. a. True b. False 27. In valuing damaged merchandise for inventory purposes, net realizable value is the estimated selling price less any direct cost of disposal. a. True b. False 28. The sum of the face amount and the interest that must be paid at the due date of the note is called maturity value. a. True b. False 29. The interest at 6%, on a 90-day note for $5,000 is $300. (Assume 360 days in a year.)

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chapter 6 a. True b. False 30. Merchandise Inventory is presented on the balance sheet in the current assets section. a. True b. False 31. All receivables that are expected to be realized in cash within a year are presented in the current assets section of the balance sheet. a. True b. False 32. Uncollectible accounts may be estimated using one of two methods: the analysis of payables method or the percent of sales method. a. True b. False 33. Under the direct write-off method, an attempt is made to match Bad Debt Expense to sales revenues in the same accounting period. a. True b. False 34. Receivables not expected to be collected within one year are reported in the property, plant, and equipment section of the balance sheet. a. True b. False 35. Generally accepted accounting principles do not allow the use of the allowance method of accounting for uncollectible accounts. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

36. In reference to a promissory note, the person who is to receive payment is called the ____. a. maker b. payee c. seller d. payer 37. Allowance for Doubtful Accounts has an unadjusted balance of $1,100 at the end of the year, and an analysis of customers' accounts indicates doubtful accounts of $12,900. Which of the following records the proper adjustment for Copyright Cengage Learning. Powered by Cognero.

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chapter 6 doubtful accounts? a. Increase Uncollectible Accounts Expense, $14,000; increase Allowance for Doubtful Accounts, $14,000 b. Decrease Allowance for Doubtful Accounts, $14,000; decrease Uncollectible Accounts Expense, $14,000 c. Decrease Allowance for Doubtful Accounts, $11,800; decrease Uncollectible Accounts Expense, $11,800 d. Increase Uncollectible Accounts Expense, $11,800; increase Allowance for Doubtful Accounts, $11,800 38. JDA Inc. provided the following data for the year end: Cost of goods sold Inventory at the beginning of the year Inventory at the end of the year

$4,880,000 670,000 570,000

What is JDA Inc.'s days' sale in inventory? (Assume 360 days in a year.) a. 95 days b. 46 days c. 60 days d. 48 days 39. .If a company has an accounts receivable turnover ratio of 15, the company: a. is converting its accounts receivable to cash 15 times per year. b. is selling its inventory on 15 days credit terms. c. is converting its inventory to accounts receivable in 15 days of production. d. collects its receivables 15 times per year.

40. If merchandise inventory is being valued at cost and the price level is rising, the method of costing that will yield the highest net income is ____. a. average cost b. LIFO c. FIFO d. All methods will generate the same net income 41. Which of the following statements is a correct representation of the effect of the reinstatement of an accounts receivable account previously written off? a. Days' sales in receivables increase by the reinstatement of the account. b. Return on sales decreases by the reinstatement of the account. c. Days' sales in receivables are not affected by the reinstatement of the account. d. Return on sales is not affected by the reinstatement of the account.

42. Allowance for Doubtful Accounts has an unadjusted balance of $800 at the end of the year, and an analysis of accounts in the customers' ledger indicates doubtful accounts of $15,000. Which of the following records the proper adjustment for doubtful accounts?

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chapter 6 a. Increase Uncollectible Accounts Expense, $800; increase Allowance for Doubtful Accounts, $800 b. Increase Uncollectible Accounts Expense $15,000; increase Allowance for Doubtful Accounts, $15,000 c. Increase Uncollectible Accounts Expense, $14,200; increase Allowance for Doubtful Accounts, $14,200 d. Increase Uncollectible Accounts Expense, $15,800; increase Allowance for Doubtful Accounts, $15,800 43. Use the following data to calculate the cost of ending inventory using the LIFO method.

November 1 November 10 November 20 November 30 a. $550 b. $750 c. $675 d. $600

Beginning Inventory Purchase Purchase Ending Inventory

15 units at $20 each 20 units at $25 each 25 units at $28 each 25 units

44. A 60-day, 10% note for $12,000 dated March 15 is received from a customer on account. The face value of the note is ____. a. $6,000 b. $12,000 c. $10,000 d. $12,200 45. During a period of rising prices, the method of inventory costing that will result in reporting the greatest cost of merchandise sold is ____. a. FIFO b. average cost c. LIFO d. All methods will generate the same cost of merchandise sold 46. A 90-day, 10% note for $12,000 dated May 1 is received from a customer on account. The maturity value of the note is ____. (Assume 360 days in a year.) a. $10,000 b. $10,800 c. $12,000 d. $12,300 47. Use the following data to calculate the cost of ending inventory under the FIFO method.

June June June June

1 10 20 30

Beginning Inventory Purchase Purchase Ending Inventory

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chapter 6 a. $825 b. $750 c. $950 d. $840 48. The accounts receivable turnover is computed by dividing ____. a. total assets by average accounts receivable b. net sales by average accounts receivable c. net income by average accounts receivable d. net purchases by average accounts receivable 49. Linus Company's inventory has the following values: Cost Estimated selling price Direct costs of disposal

$1,000 1,400 700

Under the lower-of-cost-or-market method, Linus Company's inventory will be valued at ____. a. $400 b. $900 c. $700 d. $1,000 50. After the accounts are adjusted and closed at the end of the fiscal year, Accounts Receivable has a balance of $600,000 and Allowance for Doubtful Accounts has a balance of $30,000. What is the net realizable value of the accounts receivable? a. $30,000 b. $475,000 c. $570,000 d. $600,000 51. Inventory costing methods place primary emphasis on assumptions about ____. a. flow of goods b. flow of costs c. flow of goods or costs depending on the method Copyright Cengage Learning. Powered by Cognero.

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chapter 6 d. flow of values 52. Allowance for Doubtful Accounts has an unadjusted balance of $500 at the end of the year, and an analysis of accounts in the customers' ledger indicates doubtful accounts of $15,000. What is the adjusted balance in the allowance for doubtful accounts? a. $15,000 b. $14,500 c. $14,000 d. $15,500 53. Use the following data to calculate cost of merchandise sold under the FIFO method.

May 1 May 10 May 20 May 31 a. $825 b. $750 c. $675 d. $800

Beginning Inventory Purchase Purchase Ending Inventory

15 units at $20 each 20 units at $25 each 25 units at $28 each 25 units

54. The amount of the promissory note plus the interest earned on the due date is called the ____. a. market value b. maturity value c. face value d. discounted value 55. In reference to a promissory note, the person who makes the promise to pay is called the ____. a. maker b. payee c. seller d. receiver 56. If merchandise inventory is being valued at cost and the price level is declining, which method of costing will yield the largest gross profit? a. Average cost b. LIFO c. FIFO d. All methods will generate the same gross profit.

57. If sales is $550,000, beginning inventory is $100,000, and ending inventory is $120,000, what is the accounts receivables turnover?

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chapter 6 a. 4.4 b. 5.0 c. 4.7 d. 4.0 58. When merchandise sold is assumed to be in the order in which the expenditures were made, the inventory costing method is called ____. a. first-in, last-out b. last-in, first-out c. first-in, first-out d. average cost 59. Use the following data to calculate the cost of ending inventory under the average cost method.

January 1 January 10 January 20 January 31 a. $992 b. $600 c. $875 d. $700

Beginning Inventory Purchase Purchase Ending Inventory

20 units at $10 each 25 units at $20 each 40 units at $25 each 30 units

60. Jack Inc. offers a credit term of n/30. This means that the company ____. a. receives money from the customers 30 days after the of sale of the goods b. offers a 30-day loan to the suppliers c. expects to collect receivables within 30 days of the invoice date d. pays its creditors within 30 days of the purchase of raw materials 61. At the end of the current year, Austin Inc. has an Accounts Receivable balance of $200,000 and Allowance for Doubtful Accounts has a credit balance of $60,000. What is the net realizable value of the receivables? a. $60,000 b. $260,000 c. $200,000 d. $140,000 62. Under which method of inventory costing is the cost flow assumed to be in the reverse order in which the expenditures were made? a. Average cost b. Last-in, first-out c. First-in, first-out d. Specific identification method Copyright Cengage Learning. Powered by Cognero.

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chapter 6

63. What type of account is Allowance for Doubtful Accounts? a. Contra asset account b. Asset account c. Liability account d. Expense account 64. The inventory costing method that considers the ending inventory to be composed of units of the merchandise acquired earliest is called ____. a. first-in, first-out b. highest-in, first-out c. lowest-in, first-out d. last-in, first-out 65. If the cost of an item of inventory is $70, the current replacement cost is $65, and the sales price is $85, the amount included in inventory according to the lower-of-cost-or-market method is ____. a. $65 b. $70 c. $85 d. $160 66. One of the weaknesses of the direct write-off method is that it ____. a. understates accounts receivable on the balance sheet b. violates the matching principle c. adjusts the allowance account at the end of the year d. is based on estimates 67. Sapphire Inc. had sales of $3,000,000, cost of merchandise sold of $2,200,000, and average inventory of $150,000.

What is Sapphire Inc.'s days' sales in inventory? (Round the answer to the nearest whole number.) a. 24 days b. 17 days c. 25 days d. 30 days 68. The following data is available for an item of J&M Inc. for the month of April: April 1 15 30

Inventory Purchase Purchase Sale

15 units at $10 each 30 units at $18 each 20 units at $15 each 25 units

Using the last-in, first-out method, what is J&M Inc.'s cost of ending inventory for April? a. $450 Copyright Cengage Learning. Powered by Cognero.

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chapter 6 b. $600 c. $540 d. $510 69. A transaction in which a company sells its receivables and immediately receives cash for operating and other needs is called _____. a. adjusting b. assigning c. factoring d. discounting 70. The following data is available for an item of North Inc. for the month of June: June

1 15 30

Inventory Purchase Purchase Sale

15 units at $10 each 30 units at $18 each 25 units at $15 each 40 units

Using the first-in, first-out method, what is North Inc.'s cost of ending inventory for June? a. $630 b. $510 c. $420 d. $465 71. Austin Inc. showed the following data for the year end: Sales Accounts receivable, beginning of the year Accounts receivable, end of the year

$9,800,000 600,000 400,000

Calculate Austin Inc.'s days' sales in receivables. (Round the answer to the nearest whole number.) a. 30 days b. 61 days c. 19 days d. 44 days 72. The due date of a 60-day note dated July 15 is ____. a. September 9 b. September 11 c. September 13 d. September 15

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chapter 6 73. Under which method of inventory costing is the ending inventory assumed to be composed of the most recent costs? a. Average cost b. Last-in, first-out c. First-in, last-out d. First-in, first-out 74. The analysis of receivables method is based on the assumption that ____. a. the uncollectible accounts can be estimated as a percentage of credit sales b. the bad debt expense is recorded by estimating uncollectible accounts at the end of the accounting period c. the bad debt expense is recorded only when an account is determined to be worthless d. the longer an account receivable is outstanding, the less likely that it will be collected 75. Florida Inc. reported operating income of $120,000 and sales of $1,200,000 for the current year end. Determine the company's return on sales. a. 10% b. 8% c. 15% d. 12% 76. Days' sales in receivables estimates the average number of days it takes to ____. a. collect cash sales b. convert inventory to sales c. collect accounts receivables d. convert raw material to inventory 77. If merchandise inventory is being valued at cost and the price level is rising, which method of costing will yield the highest value of ending inventory? a. Average cost b. LIFO c. FIFO d. All methods will generate the same gross profit.

78. In a period of rising prices, the effect of selecting the FIFO rather than the LIFO method of inventory valuation results in ____. a. a higher days' sales in inventory b. a lower return on sales c. a lower days' sales in inventory d. a higher days' sales in receivables 79. The inventory costing method that assigns the most recent costs to cost of goods sold is ____. a. FIFO b. LIFO Copyright Cengage Learning. Powered by Cognero.

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chapter 6 c. average cost d. specific identification 80. Days' sales in inventory estimates the average number of days it takes to ____. a. convert inventory to sales b. convert raw materials to finished inventory c. collect cash from inventory sold d. pay suppliers for inventory purchased 81. Taxes receivable is classified as ____. a. other receivables b. notes receivable c. accounts receivable d. trade receivables 82. Blue Bird Inc. reported the following transactions for the month of October: 1 5 13 20 31

Beginning inventory Purchase Purchase Purchase Ending inventory

15 units at $6 each 29 units at $9 each 25 units at $12 each 15 units at $14 each 35 units

Calculate the cost of ending inventory using the FIFO method. a. $420 b. $390 c. $450 d. $510 83. The two methods of accounting for uncollectible receivables are the ____. a. direct method and the indirect method b. allowance method and the direct write-off method c. cash method and the accrual method d. percent of sales method and the analysis of receivables method 84. A written promise to pay a sum of money on demand or at a definite time is called a ____. a. letter of credit b. deferred note c. credit memorandum d. promissory note 85. If sales is $1,000,000, cost of merchandise sold is $700,000, and average inventory is $200,000, what is the inventory Copyright Cengage Learning. Powered by Cognero.

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chapter 6 turnover? a. 1.1 b. 3.4 c. 1.3 d. 3.5 86. A note receivable due in five years is listed on the balance sheet under the caption, ____. a. investments b. current assets c. property, plant, and equipment d. stockholders' equity

87. Happy Co.'s recorded inventory information for the month of September is as follows: Beginning Inventory First Purchase Second Purchase Sales

22 units at $15 each 25 units at $18 each 21 units at $20 each 50 units

Determine the total cost of ending inventory according to (a) the FIFO method and (b) the LIFO method.

88. Calculate the following: (a) If the interest on a note is $1,600, the interest rate is 5%, and the time is 90 days, what is the principal? (Assume 360 days in a year) (b) If the principal of a note is $50,000, the interest is $1,000, and the time is 60 days, what is the interest rate? (Assume 360 days in a year) 89. Beginning inventory, purchases, and sales for Product T are as follows: Oct. 1 Oct. 17 Oct. 30

Beginning Inventory Purchase Sale

24 units 10 units 20 units

at $12 each at $14 each

Using the last-in, first-out method, determine (a) the cost of the merchandise sold for the October 30 sale and (b) the inventory on October 31.

90. Prepare the Current Assets section of a balance sheet using some or all of the following accounts: Cash Property, Plant, and Equipment Accounts Receivable Notes Receivable—90-day note Merchandise Inventory Copyright Cengage Learning. Powered by Cognero.

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chapter 6 Allowance for Doubtful Accounts Interest Receivable Prepaid Advertising Sales Returns and Allowances 91. Quartz Inc. recorded the following information pertaining to its inventory for the month of January: 1 18

Inventory Purchase Sales

80 units at $20 each 150 units at $25 each 100 units

The business uses the first-in, first-out inventory costing method. Determine the cost of the inventory on hand at the end of January.

92. Determine the due date and amount of interest due at maturity on the following notes (Assume 360 days in a year): Origination Date (a) March 1 (b) May 15

Face Amount $5,000 $9,000

Term of Note 60 days 120 days

Interest Rate 9% 8%

Maturity Date _______ _______

Interest Amount _______ _______

93. Classify the following as either Current Assets (CA), Investments (I), or both (CA and I). (a) Trade Receivables (b) Note Receivable due in 30 days (c) Interest Receivable on note due in 30 days (d) Note Receivable due in 2 years (e) Five-year Note Receivable due in a series of equal annual payments 94. Determine ending inventory cost by (a) the FIFO method, (b) the LIFO method, and (c) the average cost method.

June 5 Purchase 65 units at $6 each June 13 Purchase 55 units at $8 each June 29 Purchase 44 units at $10 each June 30 Ending Inventory 60 units 95. Determine the amount to be added to Allowance for Doubtful Accounts in each of the following cases: (a) Balance of $3,000 in the allowance account just prior to adjustment. Analysis of accounts receivable indicates doubtful accounts of $24,000. (b) Balance of $2,500 in the allowance account just prior to adjustment. Analysis of account receivable indicates doubtful accounts of $25,000.

96. Indicate the section of the balance sheet (current assets; property, plant, and equipment; investments; current liabilities; long-term liabilities; stockholders' equity) in which each of the following is reported: (a) Note receivable due in 3 years (b) Note receivable due in 90 days (c) Allowance for doubtful accounts 97. On the basis of the following data related to current assets for Emerald Co. at December 20Y9, prepare a partial Copyright Cengage Learning. Powered by Cognero.

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chapter 6 balance sheet in good form.

Cash and cash equivalents Notes receivable Accounts receivable Allowance for doubtful accounts Interest receivable Merchandise inventory at lower-of-cost-(first-in, first-out method) or-market

$120,000 50,000 280,000 20,000 750 110,000

98. Beginning inventory, purchases, and sales for Product Z are as follows: Nov. 1 Nov. 17 Nov. 30

Beginning Inventory Purchase Sale

24 units 10 units 20 units

at $12 each at $15 each

Using the first-in, first-out method, determine (a) the cost of the merchandise sold and (b) the inventory on November 30.

99. Other than accounts receivable and notes receivable, name other receivables that might be included on the balance sheet.

100. Using the lower-of-cost-or-market method of inventory valuation, what should the total inventory value be for the following items: Item A B C

Inventory Unit Cost Unit Market Total Cost Total Market Quantity Price Price Price Price 200 $5 $4.50 $1,000 $900 100 4 5.00 400 500 50 7 6.50 350 325

101. The following units are available for sale during the year: January 1 Beginning Inventory 10 units at $18 each May 3 Purchase 30 units at $20 each August 31 Purchase 28 units at $25 each October 29 Purchase 17 units at $30 each October 31 Ending Inventory 201 units Determine ending inventory cost by (a) the FIFO method, (b) the LIFO method, and (c) the average cost method.

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chapter 6 Answer Key 1. False 2. True 3. True 4. True 5. True 6. True 7. False 8. True 9. False 10. True 11. True 12. True 13. True 14. True 15. True 16. True 17. True 18. False 19. False 20. False

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chapter 6 21. True 22. False 23. True 24. False 25. False 26. True 27. True 28. True 29. False 30. True 31. True 32. False 33. False 34. False 35. False 36. b 37. d 38. b 39. a 40. c 41. a Copyright Cengage Learning. Powered by Cognero.

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chapter 6 42. c 43. a 44. b 45. c 46. d 47. c 48. b 49. c 50. c 51. b 52. a 53. d 54. b 55. a 56. b 57. b 58. c 59. b 60. c 61. d 62. b Copyright Cengage Learning. Powered by Cognero.

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chapter 6 63. a 64. d 65. a 66. b 67. c 68. b 69. c 70. d 71. c 72. c 73. d 74. d 75. a 76. c 77. c 78. a 79. b 80. a 81. a 82. c 83. b Copyright Cengage Learning. Powered by Cognero.

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chapter 6 84. d 85. d 86. a 87. (a) (b) 88. (a) (b)

$360 $270

$128,000 12%

89. (a) Cost of merchandise sold: 10 units at $12 = $120 10 units at $14 140 20 units $260

(b) Inventory, October 31 14 units at $12 = $168 90. Current Assets: Cash Notes Receivable—90-day note Accounts Receivable Less Allowance for Doubtful Accounts Interest Receivable Merchandise Inventory Prepaid Advertising 91.

January

31

Balance: 130 units at $25 = $3,250

92. (a) (b)

April 30; $75 = ($5,000 × .09) × (60/360) September 12; $240 = ($9,000 × .08) × (120/360)

93. (a) (b) (c) (d) (e)

CA CA CA I CA and I

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chapter 6 94. (a) FIFO: $568 (b) LIFO: $360 (c) Average cost: $464 (rounded) 95. (a) (b)

$21,000 $22,500

96. (a) (b) (c)

Investments Current assets Current assets

97.

Emerald Co. Partial Balance Sheet December 31, 20Y9 Assets Current assets: Cash and cash equivalents Notes receivable Accounts receivable Less allowance for doubtful accounts Interest receivable Merchandise inventory at lower-of-cost-(FIFO) ormarket Total current assets

$120,000 50,000 $280,000 20,000

260,000 750 110,000 $540,750

98. (a) Cost of merchandise sold: 20 units at $12 = $ 240 (b) Inventory, November 30: 10 units at $15 = $150 4 units at $12 = 48 14 units = $198 99. Interest receivable, receivables from officers or employees, taxes receivable.

100.

Item

Inventory Unit Cost Unit Market Total Cost Quantity Price Price Price

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Total Market Price

Lower-ofCost-orMarket Page 134

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chapter 6 A B C

200 100 50

$5 4 7

$4.50 5.00 6.50

$1,000 400 350

$900 500 325

$ 900 400 325 $1,625

101. (a) FIFO: $585 (b) LIFO: $380 (c) Average cost: $468 (rounded)

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chapter 7

Indicate whether the statement is true or false.

1. Companies usually compute depletion by using the double-declining-balance method. a. True b. False 2. If an asset is discarded, a loss is recognized equal to its salvage value. a. True b. False 3. A current asset account must be increased for revenue expenditures because they benefit only the current period. a. True b. False 4. The straight-line method of depreciation is appropriate if usage of the asset varies considerably from year to year. a. True b. False 5. If the proceeds from a sale of equipment are greater than the book value of the equipment as of the date of sale, a loss is recorded. a. True b. False 6. Property, plant, and equipment are reported at their book value on the balance sheet. a. True b. False 7. Under the straight-line method, the amount of depreciation expense for the first full year of use of an asset costing $95,000, with an estimated residual value of $5,000 and a useful life of five years, will be $18,000. a. True b. False 8. Goodwill refers to the excess of purchase price of a business over the fair value of its net assets. a. True b. False 9. Amortization refers to the systematic periodic transfer of the cost of an asset to an expense account. a. True b. False 10. The double-declining-balance method of depreciation is also referred to as an accelerated depreciation method. a. True Copyright Cengage Learning. Powered by Cognero.

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chapter 7 b. False 11. If a company sells an asset for an amount that is less than its book value, a gain must be recognized. a. True b. False 12. The total depreciation across the years of an asset's life is the same under the double-declining-balance method or the straight-line method. a. True b. False 13. The estimated amount that an asset can be sold for at the end of its useful life is called its book value. a. True b. False 14. The balance in the Accumulated Depreciation account is deducted from the cost of property, plant, and equipment on the balance sheet. a. True b. False 15. Long-lived assets that are intangible in nature, used in the operations of the business, and not held for sale in the ordinary course of business are called property, plant, and equipment. a. True b. False 16. Expenditures made to extend an asset's life are called revenue expenditures. a. True b. False 17. Intangible assets do not exist physically. a. True b. False 18. Physical depreciation occurs when changes in customer needs cause an asset to no longer provide services for which it was intended. a. True b. False 19. The difference between a fixed asset's initial cost and its current market value is called the asset's depreciable cost. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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chapter 7 20. Depletion is the process of transferring the cost of intangible assets to an expense account. a. True b. False 21. The acquisition costs of property, plant, and equipment should include all costs necessary to get the asset in place and ready for use. a. True b. False 22. Inventory turnover measures how efficiently a company is using its operating assets to generate sales. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

23. Which of the following is the effect on the transaction metrics of a company when it records depreciation? a. Its profitability decreases. b. Its profitability and liquidity remain unaffected. c. Its profitability increases. d. Its liquidity increases.

24. A fully depreciated asset must be _____. a. removed from the books b. kept on the books until sold or discarded c. disclosed only in the notes to the financial statements d. recognized on the income statement as a loss 25. Which of the following is true of asset turnover? a. It measures the efficiency with which a company uses its operating assets to generate sales. b. It measures the proportion of operating assets to total assets. c. It uses net purchases as a denominator in its calculation. d. It measures the profits generated by the fixed and current assets of the company.

26. The effect of recording a capital expenditure as a revenue expenditure is that _____. a. expenses are overstated, and owners' equity is understated b. net profit is understated, and owners' equity is overstated c. expenses are understated, and accumulated depreciation is overstated d. assets are overstated, and expenses are understated 27. _____ is an example of property, plant, and equipment. a. A machine Copyright Cengage Learning. Powered by Cognero.

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chapter 7 b. A prepaid expense c. Land held for investment d. An accrued revenue 28. A company acquired some land for $75,000 to construct a new office complex. Legal fees paid were $3,000, delinquent taxes assumed were $3,250, and $7,500 was paid to remove an old building. Materials salvaged from the demolition of the building were sold for $2500. Determine the cost of the land to be reported on the balance sheet. a. $85,050 b. $86,250 c. $86,150 d. $87,350 29. Which of the following is a characteristic of property, plant, and equipment? a. Property, plant, and equipment are offered for sale as part of normal operations. b. Property, plant, and equipment do not exist physically. c. Property, plant, and equipment are long-term or relatively permanent assets. d. Property, plant, and equipment that are no longer used in operations are still classified as property, plant, and equipment.

30. To calculate depreciation, which of the following must be known? a. The market value of the asset b. Mixed asset turnover c. The cost of the asset d. The amount of cash to replace the asset 31. Roadways Corporation operates throughout the United States. The following data (in millions) were adapted from recent financial statements of Roadways.

Sales Beginning of year property, plant, and equipment End-of-year property, plant, and equipment

Year 2 $53,250 22,530 25,830

Year 1 $47,250 18,620 22,360

From the above data, what would be the asset turnover for Year 2? (Round the answer to two decimal places.) a. 1.15 b. 1.62 c. 2.20 d. 2.22 32. A company sold office furniture costing $15,800 with accumulated depreciation of $13,000 for $1,500 cash. The entry to record the sale would include _____. a. an increase in accumulated depreciation of $15,800 Copyright Cengage Learning. Powered by Cognero.

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chapter 7 b. a loss of $1,300 c. a total decrease in office furniture of $2,800 d. a decrease in cash of $1,300 33. A company sold a delivery truck for $20,000 cash. The truck costs $45,800 and had accumulated depreciation of $32,000 as of the date of sale. The entry to record the sale would include _____. a. an increase in accumulated depreciation of $32,000 b. a total decrease in delivery truck of $13,800 c. a loss of $10,000 d. a gain of $6,200 34. Which of the following statements is true about intangible assets? a. They are usually presented in the balance sheet as property, plant, and equipment. b. They are short-lived assets. c. They are not held for resale. d. They have physical existence.

35. A gain is recorded on the sale of property, plant, and equipment when _____. a. the asset is sold for a price less than its book value b. the asset is sold for a price more than its book value c. accumulated depreciation on the asset is less than its selling price d. accumulated depreciation on the asset is more than its selling price 36. The cost of a patent should be amortized _____. a. over 10 years b. over its expected useful life c. over 20 years or its expected useful life, whichever is shorter d. only if an impairment occurs 37. A capital expenditure is reported on the _____. a. income statement under operating expenses b. balance sheet under property, plant, and equipment c. statement of retained earnings under contributed capital d. cash flow statement under cash flow from financing activities 38. If a revenue expenditure is treated as a capital expenditure, then _____. a. expenses are overstated, and owners' equity is understated b. expenses are overstated, and assets are overstated c. expenses are understated, and owners' equity is overstated d. net income is overstated and owners' equity is understated Copyright Cengage Learning. Powered by Cognero.

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chapter 7 39. A machine was purchased for $60,000. It has a useful life of five years and a residual value of $5,000. Determine the annual depreciation expense using the straight-line method. a. $5,000 b. $12,000 c. $11,000 d. $60,000 40. Which of the following is the effect of recording a depletion expense on the profitability and liquidity metrics of a company? a. It affects asset turnover, while free cash flow is unaffected. b. Its asset turnover decreases. c. It affects the statement of cash flows. d. Operating assets increase.

41. A drilling company purchased a mining site for $720,000 on July 1, 20Y9. The company expects to mine ore for the next 10 years and anticipates that a total of 80,000 tons will be recovered. During 20Y9, the company extracted 5,800 tons of ore. The depletion expense for the year 20Y9 is _____. a. $52,200 b. $45,000 c. $50,500 d. $32,625 42. Which of the following expenditures would be included in the cost of an asset? a. Uninsured theft b. Vandalism c. Sales taxes d. Mistakes in installation 43. A patent was purchased for $585,000 with a legal life of 20 years. Management estimates that the patent has a 12-year economic life. The entry to record amortization would include _____. a. an increase in amortization expense for $29,250 b. an increase in research and development expense for $585,000 c. a decrease in patent for $48,750 d. an increase in accumulated amortization for $585,000 44. If equipment with an original cost of $18,000 and accumulated depreciation of $2,000 is sold for $15,000, the company must _____. a. recognize a loss on the income statement under other expenses b. recognize a loss on the income statement under operating expenses c. recognize a gain on the income statement under other revenues d. recognize a gain on the income statement under revenues

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chapter 7 45. Computer equipment was acquired at the beginning of the year at a cost of $55,000, with an estimated residual value of $5,000 and an estimated useful life of five years. Determine the second year's depreciation expense using the straightline method. a. $9,200 b. $22,400 c. $10,000 d. $12,200 46. On September 1, a machine was purchased for $53,000, with a useful life of eight years and a residual value of $5,000. What is the depreciation expense in the year of purchase under the straight-line method, assuming a December 31 year-end? a. $1,917 b. $2,000 c. $2,958 d. $1,833 47. Which of the following is considered under the straight-line method but not under the double-declining-balance method? a. The asset's book value b. The asset's salvage value c. The asset's expected useful life d. The asset's initial cost 48. Recording depreciation _____. a. decreases liability and cash flow b. decreases net income but has no effect on cash flows c. decreases capital and operating expenses d. decreases retained earnings but has no effect on property, plant, and equipment 49. A machine was purchased for $35,500, having a useful life of 10 years and a residual value of $6,000. Compute the annual depreciation expense using the straight-line method. a. $3,550 b. $4,150 c. $5,800 d. $2,950 50. Which of the following is the effect on a company's liquidity and profitability metrics when it purchases a piece of equipment? a. Its free cash flow decreases. b. Its free cash flow increases. c. Its asset turnover increases. d. Its asset turnover remains unaffected.

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chapter 7

51. Which of the following intangible assets is amortized over its expected useful life? a. A trademark b. Goodwill c. A patent d. All of the above 52. Equipment was purchased for $18,000. It has a useful life of five years and a residual value of $5,000. Determine the depreciation expense for the first year using the double-declining-balance method. a. $5,400 b. $5,000 c. $7,200 d. $2,600 53. The cost incurred to extend an asset's useful life is recorded as _____. a. accrued expenditures b. maintenance expenditures c. routine expenditures d. capital expenditures 54. Which of the following transactions will have no effect on the liquidity metric of a company? a. Purchasing an asset b. Selling an asset for no loss and no gain c. Selling an asset for a loss d. Discarding a fully depreciated asset 55. The cost of removal of an old building to make the land ready for its intended use is charged to _____. a. land b. land improvements c. buildings d. operating expenses 56. Depreciable cost is computed as _____. a. cost less accumulated depreciation b. book value less residual value c. cost less residual value d. market value less residual value 57. When natural resources are used, the _____ expense account is increased for a portion of the cost of resources removed. a. depletion Copyright Cengage Learning. Powered by Cognero.

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chapter 7 b. deferral c. prepaid d. amortization 58. An asset turnover ratio of 1.87 for a company indicates that _____. a. the company is generating $1.87 of sales revenue for each dollar of long-term operating assets invested b. the company is generating $1.87 of net income for each dollar of retained earnings c. the company has $1.87 of long-term debt for each dollar of operating revenue earned d. the company has $1.87 of current assets for each dollar of property, plant, and equipment invested 59. Losses on discarding property, plant, and equipment are considered _____. a. opportunity costs b. nonoperating items c. capital expenditures d. accumulated depreciation 60. Asset turnover is calculated as _____. a. net income divided by average long-term operating assets b. sales divided by cost of the assets c. average long-term operating assets divided by sales d. sales divided by average long-term operating assets 61. Goodwill is _____. a. amortized in a manner similar to other intangibles b. written down only if an impairment in value occurs c. charged to expense immediately d. amortized over 40 years or its economic life, whichever is shorter 62. The book value of an asset is computed as the asset's _____. a. current market value less tax expense b. fair value less residual value c. discounted value plus accumulated depreciation d. cost less accumulated depreciation 63. Which of the following is a characteristic of the accumulated depreciation account? a. Accumulated depreciation represents cash reserved for asset replacement. b. The accumulated depreciation account is a contra liability account. c. Accumulated depreciation may be disclosed in the notes to the income statement. d. Accumulated depreciation is reported on the balance sheet as a deduction from the cost of the asset.

64. Property, plant, and equipment are presented on the balance sheet _____.

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chapter 7 a. at their current market value b. at their replacement cost c. at their cost less accumulated depreciation d. under intangible assets 65. Equipment was purchased for $40,000. It has a useful life of eight years and a residual value of $5,000. Compute the depreciation expense for the second year using the double-declining-balance method. a. $5,000 b. $6,000 c. $7,500 d. $10,000 66. Which of the following should be included in the acquisition cost of a piece of equipment? a. Uninsured theft b. Mistakes in installation c. Vandalism d. Installation costs 67. Research and development costs incurred for developing patents are recorded as _____. a. current operating expenses b. long-term operating assets c. accrued expenses d. working capital 68. The exclusive right to use a certain name or symbol is called a _____. a. franchise b. patent c. trademark d. copyright 69. A company purchased an oil well for $12 million. It is estimated that five million barrels can be extracted from the well. Determine depletion expense assuming four million barrels are extracted and sold during the year. a. $1,250,000 b. $8,000,000 c. $9,600,000 d. $12,500,000 70. Land improvements include _____. a. freight b. surveying fees c. sales tax Copyright Cengage Learning. Powered by Cognero.

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chapter 7 d. outdoor lighting 71. Which of the following is an example of a capital expenditure? a. Cleaning the carpet in the front-office room b. A regular tune-up for a company truck c. Replacing an engine in a company car d. Replacing all burned-out light bulbs in the factory 72. A fixed asset with a cost of $15,000 and accumulated depreciation of $13,500 is sold for $1,750. What is the amount of gain or loss on disposal of the fixed asset? a. $750 loss b. $250 loss c. $250 gain d. $750 gain 73. Which method of depreciation considers residual value in computing the normal periodic depreciation? a. Straight-line b. Tax c. Double-declining-balance d. Accelerated 74. Which of the following is not an intangible asset? a. Goodwill b. Trademark c. Copyright d. A long-term receivable 75. Which of the following is the effect of impaired goodwill on the liquidity and profitability metrics? a. Both profitability and liquidity will remain unaffected. b. Both profitability and liquidity will decrease. c. Profitability will increase, and liquidity will remain unaffected. d. Liquidity will decrease, and profitability will increase.

76. The accounting term depreciation measures _____. a. the decline in an asset's market value b. the amount of cash a company sets aside for asset replacement c. the amount of asset cost allocated to expense over periods benefited d. the anticipated loss if an asset is sold in the used-asset market 77. Gold Company purchased a patent from Silver Company for $245,000. At the time of purchase, the patent had a remaining useful life of 10 years. Determine the patent amortization expense for the first year.

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chapter 7 a. $23,400 b. $24,500 c. $20,000 d. $14,000

78. For each of the following items, indicate whether the transactions increased (+), decreased (–) or had no effect (0) by inserting the appropriate symbol.

Net Income

Owners' Assets Liabilities Equity

Cash Flows

Recorded depreciation expense Sold equipment for cash at a (b) loss Recorded loss on impaired (c) goodwill (d) Recorded depletion expense Recorded a capital (e) expenditure and issued a note payable (a)

79. Cook Co. incurred the following costs related to the office building used in operating its sports supply company: (a) Replaced a broken window. (b) Replaced the roof that had been on the building for 23 years. (c) Serviced all the air conditioners before summer started.

Replaced the air conditioners with refrigerated air conditioners in the customer service (d) areas. (e) Added a warehouse to the back of the building. (f) Repainted the interior walls. (g) Installed window shutters on all windows.

Classify each of the costs as a capital expenditure or a revenue expenditure.

80. A pressurized spray painter was purchased on June 1 of the fiscal year for $3,900. It has a useful life of four years and a residual value of $300. Determine depreciation expense for the first two years, assuming a fiscal year end of December 31 and using (a) the straight-line method and (b) the double-declining-balance method.

81. Identify the following as a Fixed Asset (FA), an Intangible Asset (IA), a Natural Resource (NR), or None of these (N). (a) Computer (b) Patent (c) Oil reserve (d) Goodwill (e) U.S. Treasury note (f) Land used for employee parking Copyright Cengage Learning. Powered by Cognero.

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chapter 7 (g)

Gold mine

82. Identify each of the following expenditures as chargeable to (a) Land, (b) Land Improvements, (c) Buildings, (d) Machinery and Equipment, or (e) Other accounts.

(1) Cost of paving parking area for employees and customers (2) Insurance during construction of building (3) Interest incurred on money borrowed for construction of building (4) Fee paid for installation of equipment (5) Special foundation for new equipment acquired (6) Transit insurance on new equipment (7) Freight charges on new equipment (8) Cost of repairing vandalism damage to equipment during installation (9) Sales tax on new equipment (10) Cost incurred in repairing damage resulting from installation of new equipment (11) Cost of landfill for building site (12) Cost of lubricating oil purchased for periodic oil changes for equipment (13) Parking lot lighting (14) Installing a fence around the parking lot (15) Repainting the trim on a building (16) Special assessment paid to city for extension of water main to the property (17) Cost of razing and removing the old building on property acquired for a building site (18) Delinquent real estate taxes assumed by purchaser on property acquired for a building site (19) Attorney's fee for title search (20) Architect's fee for building plans and supervision of construction 83. Determine the cost of the land, based on the following data.

Land purchase price Broker's commission Payment for the demolition and removal of existing building Cash received from the sale of materials salvaged from the demolished building

$80,000 7,500 2,500 500

84. A company purchased a photocopy machine for $16,000. It has a useful life of four years and a residual value of $1,000. Compute depreciation for the second year under each of the following methods: (a) straight-line and (b) doubledeclining-balance.

85. You have been hired by a high-growth startup company to assist in the determination of what depreciation method to employ for financial reporting. The company's property, plant, and equipment are equally divided among buildings and high-tech equipment (heavily used in the initial years). (a) Can the company select different methods of depreciation for financial reporting?

Explain. (b) Explain to company management which method of depreciation would be suitable for each type of property, plant, and equipment the company employs. Also, state why. (c) Which method of depreciation would the company choose for taxes? Explain why.

86. For each of the following items, indicate whether the transactions increased (+), decreased (–) or had no effect (0) by inserting the appropriate symbol.

Net Copyright Cengage Learning. Powered by Cognero.

Liabilities Owners'

Cash Page 148

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chapter 7 Income (a) (b) (c) (d) (e)

Assets

Equity

Flows

Sold equipment for cash at a gain Recorded amortization expense on patents Paid cash for minor repairs to an asset Recorded a revenue expenditure incurred on account Paid cash to remove old building from land being prepared for use

87. You are examining the financial statements of a company. You observe patent amortization expense of $1.5 million and a loss on impairment of goodwill for $25 million. (a) Describe how the accountants arrived at these amounts. (b) Interpret any information provided by these disclosures.

88. A company acquired a truck for $79,000 at the beginning of the fiscal year. It has a useful life of five years and a residual value of $9,000. The company uses the straight-line method of depreciation. After owning the truck for two years, the company sold it for $30,000. (a) Determine depreciation expense for each of the first two years. (b) Determine the gain or loss resulting from the sale.

89. A company made some expensive repairs to equipment and buildings during the past year. (a) What criteria is used in determining whether the repairs are capital expenditures or revenue expenditures? (b) What is the effect on the company's financial statements if they are incorrectly recorded as capital expenditures?

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chapter 7 Answer Key 1. False 2. False 3. False 4. False 5. False 6. True 7. True 8. True 9. False 10. True 11. False 12. True 13. False 14. True 15. False 16. False 17. True 18. False 19. False 20. False

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chapter 7 21. True 22. False 23. c 24. b 25. a 26. a 27. a 28. b 29. c 30. c 31. c 32. b 33. d 34. c 35. b 36. c 37. b 38. c 39. c 40. a 41. a Copyright Cengage Learning. Powered by Cognero.

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chapter 7 42. c 43. c 44. a 45. c 46. b 47. b 48. b 49. d 50. a 51. c 52. c 53. d 54. d 55. a 56. c 57. a 58. a 59. b 60. d 61. b 62. d Copyright Cengage Learning. Powered by Cognero.

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chapter 7 63. d 64. c 65. c 66. d 67. a 68. c 69. c 70. d 71. c 72. c 73. a 74. d 75. c 76. c 77. b 78.

Net Income (a) (b) (c) (d) (e)

Recorded depreciation expense Sold equipment for cash at a loss Recorded loss on impaired goodwill Recorded depletion expense Recorded a capital expenditure and issued a note payable

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Owners' Assets Liabilities Equity

Cash Flows

–

–

0

–

0

–

–

0

–

+

–

–

0

–

0

–

–

0

–

0

0

+

+

0

0 Page 153

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chapter 7

79. (a) (b) (c) (d) (e) (f) (g)

Revenue expenditure Capital expenditure Revenue expenditure Capital expenditure Capital expenditure Revenue expenditure Capital expenditure

80.

Straight-line method (a) Year 1: $525; [($3,900 – $300)/4 years] × 7/12 Year 2: $900; ($3,600/4 years) (b)

Double-declining-balance method Year 1: $1,137.50; ($3,900 × .5 × 7/12) Year 2: $1,381.25; ($3,900 – $1,137.50) × .5

81.

FA IA NR N

(a) (f) (b) (d) (c) (g) (e)

82. (a) (b) (c) (d) (e)

11, 16, 17, 18, 19 1, 13, 14 2, 3, 20 4, 5, 6, 7, 9 8, 10, 12, 15

83. $89,500; ($80,000 + $7,500 + $2,500 – $500) 84. a. $3,750 ($16,000 – $1,000)/4 b. $4,000 ($16,000 – $8,000) × .5 85. (a) Yes, generally accepted accounting principles do allow usage of different methods as long as costs are allocated on a rational and consistent basis. (b) Straight-line depreciation would be most suitable for buildings since usage and wear and tear are about the same each year. The double-declining-balance method would be most suitable for the high-tech equipment since it recognizes the greatest loss of services Copyright Cengage Learning. Powered by Cognero.

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chapter 7 through higher depreciation charges in the initial years. (c) The company would select the Modified Accelerated Cost Recovery System since the Internal Revenue Code uses this method to compute depreciation for tax purposes.

86.

(a) Sold equipment for cash at a gain Recorded amortization expense on (b) patents Paid cash for minor repairs to an (c) asset Recorded a revenue expenditure (d) incurred on account Paid cash to remove old building (e) from land being prepared for use

Net Income +

Owners' Assets Liabilities Equity + 0 +

Cash Flows +

–

–

0

–

0

–

–

0

–

–

–

0

+

–

0

0

0

0

0

–

87. (a) The patent amortization was arrived at by taking the cost and writing it off over the patent's legal life or useful life, whichever is shorter. The loss on impaired goodwill was determined by comparing goodwill's book value to fair value. In this case, the fair value of goodwill was lower; thus, goodwill had to be written down. (b) The amortization expense for patents simply allocates the asset's cost to periods benefited and does not measure any market value change. The loss on impaired goodwill does reflect a decline in the asset's market value and is not a cost allocation process such as amortization.

88. (a) (b)

$14,000 each year; [($79,000 – $9,000)/5] Loss of $21,000; [$30,000 – ($79,000 – $28,000)]

89. (a) Expenditures made to improve the asset or extend its useful life are characterized as capital expenditures. Costs that benefit only the current period are called revenue expenditures. (b) If a cost is incorrectly capitalized, it will be recorded as an increase to assets and not as an expense. Therefore, assets will be overstated, and expenses will be understated, causing net income to be overstated.

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chapter 8

Indicate whether the statement is true or false.

1. Bonds are sold at face value when the contract rate is equal to the market rate of interest. a. True b. False 2. The total earnings of an employee for a payroll period is referred to as net pay. a. True b. False 3. A corporation has 10,000 shares of $100 par value stock outstanding that has a current market value of $120. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately $30. a. True b. False 4. The reduction in the par or stated value of common stock, accompanied by the issuance of a proportionate number of additional shares, is called a stock split. a. True b. False 5. Cash dividends are not paid on shares of treasury stock. a. True b. False 6. Liabilities that are due and payable beyond one year or paid out of noncurrent assets are termed long-term liabilities. a. True b. False 7. Bonds payable due in the following year are reported on the balance sheet as long-term liabilities. a. True b. False 8. The main source of paid-in capital is issuing stock. a. True b. False 9. Treasury stock is reported as a reduction of stockholders’ equity. a. True b. False 10. Most employers are required to withhold a portion of the earnings of each employee for FICA tax. a. True Copyright Cengage Learning. Powered by Cognero.

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chapter 8 b. False 11. One of the conditions for paying a cash dividend is formal action by the board of directors. a. True b. False 12. If the market rate of interest is 7% and a corporation's bonds bear interest at 8%, the bonds will sell at a premium. a. True b. False 13. The two main sources of stockholders' equity are investments contributed by stockholders and net income retained in the business. a. True b. False 14. The declaration of a cash dividend decreases a corporation's stockholders' equity and increases its liabilities. a. True b. False 15. The amount of capital paid in by the stockholders of the corporation is called legal capital. a. True b. False 16. If the market rate of interest is 6% and a corporation's bonds bear interest at 7%, the bonds will sell at a discount. a. True b. False 17. Medicare taxes are paid only by employees. a. True b. False 18. If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium. a. True b. False 19. A corporation has 12,000 shares of $100 par value stock outstanding. If the corporation issues a 3-for-1 stock split, the number of shares outstanding after the split will be 36,000. a. True b. False 20. During the first year of operations, employees earned vacation pay of $50,000. The vacations will be taken during the second year. The vacation pay expense should be recorded in the first year of operations.

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chapter 8 a. True b. False 21. Federal unemployment compensation tax becomes an employer's liability at the time the employees are paid. a. True b. False 22. During the first year of operations, a company granted warranties on its products. The estimated cost of the product warranty liability at the end of the year is $13,250. The product warranty expense of $13,250 should be recorded in the year the related product sale is made. a. True b. False 23. One of the conditions for paying a cash dividend is sufficient retained earnings. a. True b. False 24. Most employers are required to withhold federal unemployment taxes from employee earnings. a. True b. False 25. When the market rate of interest is more than the contract rate of a bond, the bond will sell at a discount. a. True b. False 26. A corporation has 12,000 shares of $100 par value stock outstanding. If the corporation issues a 43-for-1 stock split, the number of shares outstanding after the split will be 36,000. a. True b. False 27. The par value of common stock is rarely equal to its market value on the date the stock is issued. a. True b. False 28. FICA tax is a payroll tax that is paid only by employers. a. True b. False 29. The issuance of common stock affects both paid-in capital and retained earnings. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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chapter 8 30. If 50,000 shares are authorized, 30,000 shares are issued, and 3,000 shares are reacquired, the number of outstanding shares is 33,000. a. True b. False 31. The total earnings of an employee for a payroll period is referred to as gross pay. a. True b. False 32. If 50,000 shares are authorized, 35,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 33,000. a. True b. False 33. For accounting purposes, stated value is treated the same way as par value. a. True b. False 34. If paid-in capital in excess of par preferred stock is $90,000, preferred stock is $400,000, paid-in capital in excess of par common stock is $60,000, common stock is $1,000,000, and retained earnings is $250,000, the total stockholders' equity is $1,800,000. a. True b. False 35. If prior to the last weekly payroll period of the calendar year, the cumulative earnings for an employee are $75,200, earnings subject to Social Security tax are $106,800, and the tax rate is 7.5%, the employer's Social Security tax on the $800 gross earnings paid on the last day of the year is $60. a. True b. False 36. For proper matching of revenues and expenses, the estimated cost of fringe benefits must be recognized as an expense of the period during which the employee earns the benefits. a. True b. False 37. Paid-in capital and retained earnings are the two major categories of stockholders' equity for a corporation. a. True b. False 38. In order to record a contingent liability, the liability must be probable and reasonably estimated. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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chapter 8 39. Federal unemployment compensation tax is a tax that is paid only by employers. a. True b. False 40. The prices of bonds are quoted on bond exchanges as a percentage of the bonds' face value. a. True b. False 41. A corporation has 10,000 shares outstanding of $25 par value stock and a current market value of $100 per share. If the corporation issues a 5-for-1 stock split, the market value of the stock will fall to approximately $20. a. True b. False 42. FICA tax becomes a liability to the federal government at the time the employees are paid. a. True b. False 43. When a corporation issues bonds, it executes a contract with the bondholders known as a bond indenture. a. True b. False 44. Obligations that depend on future events and are based on past transactions are contingent liabilities. a. True b. False 45. If the market rate of interest is 9% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium. a. True b. False 46. The primary purpose of a stock split is to reduce the number of shares outstanding in order to encourage more investors to enter the market for the company's shares. a. True b. False 47. If 50,000 shares are authorized, 25,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 23,000. a. True b. False 48. If 20,000 shares are authorized, 16,000 shares are issued, and 1,000 shares are reacquired, the number of outstanding shares is 17,000. a. True Copyright Cengage Learning. Powered by Cognero.

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chapter 8 b. False 49. Medicare taxes are withheld from an employee's pay only until the employee has earned a specific amount each year. a. True b. False 50. If 20,000 shares are authorized, 15,000 shares are issued, and 1,000 shares are held as treasury stock, a cash dividend of $1 per share would amount to $14,000. a. True b. False 51. When a corporation issues bonds, it executes a contract with the bondholders known as a bond debenture. a. True b. False 52. FICA tax is a payroll tax that is paid by both the employee and the employer. a. True b. False 53. Obligations that depend on past events and that are based on future transactions are contingent liabilities. a. True b. False 54. The declaration of a cash dividend decreases a corporation's stockholders' equity and decreases its assets. a. True b. False 55. The debt ratio measures the percent of the company's assets financed by debt. a. True b. False 56. Preferred stockholders with a preference to dividends must receive their current-year dividends before the common stockholders can receive any dividends. a. True b. False 57. A bond is simply a form of an interest-bearing note. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

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chapter 8 58. Current liabilities are _____. a. due but not receivable for more than one year b. due but not payable for more than one year c. due and receivable within one year d. due and payable within one year 59. Where is interest expense listed on the income statement? a. Other expense section b. Cost of merchandise sold c. Operating expenses d. Interest expense is listed on the balance sheet, not the income statement.

60. The price at which stock is sold depends on a variety of factors, such as _____. a. the financial condition and dividend record of the corporation b. the corporation's ability to measure potential liability c. the likelihood of an uncertain event happening d. the corporation's efficiency in using current assets to pay interest on debt 61. A company sold 300 shares of common stock with a par value of $5 at a price of $13 per share. What is the effect on the accounts of this transaction? a. Increase cash $3,900; increase retained earnings $3,900 b. Increase cash $1,500; increase common stock $1,500 c. Increase cash $3,900; increase common stock $1,500; increase paid-in capital $2,400 d. Increase cash $3,900; increase common stock $2,400; increase paid-in capital $1,500 62. Which of the following is necessary for a corporation to pay cash dividends? a. Market value in excess of par value per share b. Order by the court of law c. Sufficient retained earnings d. Prior declaration of stock dividends 63. As interest is recorded on an interest-bearing note, the Interest Expense account is _____. a. decreased; the Interest Payable account is increased b. increased; the Interest Payable account is increased c. increased; the Notes Payable account is decreased d. increased; the Notes Payable account is increased 64. An employee receives an hourly rate of $25, with time and a half for all hours worked in excess of 40 during a week.

Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $350; cumulative earnings for year prior to current week, $99,700; Social Security tax rate, 6.0% on maximum of $106,800; and Medicare tax rate, 1.5% on all earnings. What is the net pay for the employee? a. $852.50 Copyright Cengage Learning. Powered by Cognero.

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chapter 8 b. $872.77 c. $950.19 d. $1,300.00 65. A corporation has 60,000 shares of $90 par value stock outstanding, with a current market value of $150. If the corporation issues a 3-for-1 stock split, the market value of the stock will fall to approximately _____. a. $30 b. $36 c. $45 d. $50 66. The excess of issue price over par of common stock is termed as _____. a. a discount b. more income c. a deficit d. a premium 67. Which of the following is an effect of payment of cash dividends on a company's financial statements? a. A decrease in cash and stockholders' equity b. A decrease in cash and liability c. An increase in stockholders' equity and liability d. A decrease in cash and an increase in liability 68. When the market rate of interest on bonds is equal to the contract rate, the bonds will sell at _____. a. a premium b. their face value c. a discount d. a discount or a premium 69. Joe Co. paid a note payable of $6,000 with interest. As a result of this transaction, the company's _____. a. earnings per share increase b. earnings per share decrease c. net assets do not change d. net assets increase 70. If bonds are issued at a premium, the contract interest rate is _____. a. higher than the market rate of interest b. lower than the market rate of interest c. too low to attract investors d. adjusted to a higher rate of interest Copyright Cengage Learning. Powered by Cognero.

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chapter 8 71. The following data (in millions) is given for Crimson Inc. for the current year.

Total assets Total liabilities Total stockholders' equity

$820,000 $410,000 $310,000

Compute the debt ratio. (Round to the nearest whole number.) a. 20% b. 50% c. 55% d. 60% 72. A company sold 200 shares of common stock with a par value of $5 at a price of $12 per share. Which section of the statement of cash flows will contain this transaction? a. Operating activities b. Investing activities c. Financing activities d. Sale of stock will not appear on the statement of cash flows.

73. The cost of a product warranty should be included as an expense in the _____. a. period the cash is collected for a product sold on account b. future period when the cost of repairing the product is paid c. period of the sale of the product d. future period when the product is repaired or replaced 74. Which of the following will be classified as a current liability? a. Two-year notes payable b. Bonds payable c. Mortgage loan d. Unearned rent 75. On July 1, George Co. issued $3,000,000 of 10-year, 8% bonds at par. Interest on the bonds is payable semiannually on December 31 and June 30. As a result of this transaction, net assets of the company _____. a. decrease by $240,000 b. increase by $3,000,000 c. are not affected d. decrease by $120,000 76. On which of the following dates does a company incur liability for a dividend? a. The date of record b. The date of payment c. The date of liquidation Copyright Cengage Learning. Powered by Cognero.

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chapter 8 d. The date of declaration 77. ABC Co. has a gross payroll of $18,000. The FICA tax rate is 7.65% of the gross payroll, and the federal and state withholding are $1,600 and $963 respectively. On recording the payroll tax liability, net assets of the company _____. a. increase by $13,940 b. decrease by $14,060 c. increase by $21,940 d. decrease by $5,485 78. Treasury stock is reported in the _____ section of the balance sheet. a. stockholders' equity b. investment c. contingent liabilities d. current liabilities 79. Which of the following accounts is reported in the long-term liabilities section of the balance sheet? a. Bonds payable b. Common stock c. Dividends payable d. Cash 80. When the contract rate of interest on bonds is less than the market rate of interest, the bonds sell at _____. a. a premium b. their face value c. their maturity value d. a discount 81. On December 21 of the current year, Maroon Inc. reacquired 60,000 shares of its common stock at $4 per share. As a result of this transaction, net assets of the company _____. a. increase by $240,000 b. remain unchanged c. decrease by $240,000 d. increase by $50,000 82. An employee receives an hourly rate of $30, with time and a half for all hours worked in excess of 40 during a week.

Payroll data for the current week are as follows: hours worked, 52; federal income tax withheld, $300; cumulative earnings for year prior to current week, $90,700; Social Security tax rate, 6.0% on maximum of $106,800; and Medicare tax rate, 1.5% on all earnings. What is the net pay for the employee? a. $1,147.95 b. $1,059.75 c. $1,309.50 d. $1,740.00 Copyright Cengage Learning. Powered by Cognero.

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chapter 8

83. Liabilities due beyond one year are classified as _____. a. current liabilities b. long-term liabilities c. contingent liabilities d. fixed liabilities 84. _____ liabilities may arise from past transactions if certain events occur in the future. a. Current b. Noncurrent c. Long-term d. Contingent 85. Jack Co. issued 675,000 shares at $0.25 per share of common stock. If 75,000 shares were subsequently reacquired, _____ shares are considered outstanding. a. 750,000 b. 600,000 c. 675,000 d. 75,000 86. On April 15, Gold Co. issued a $70,000, 6%, 90-day note payable to Silver Co. How much will Gold Co. have to pay at maturity? (Assume 360 days in a year.) a. $70,500 b. $71,050 c. $75,350 d. $80,000 87. A company issues 5,000 shares of $15 par common stock. As a result, the earnings per share of the company _____. a. increase b. remain unchanged c. decrease d. equal $15 88. When a company has a high debt ratio, it is an indication of a _____. a. high solvency risk b. weak operating efficiency c. high profit margin d. low asset turnover 89. If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount _____.

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chapter 8 a. less than face value b. equal to the face value c. greater than face value d. that cannot be determined 90. Prior to the last weekly payroll period of the calendar year, the cumulative earnings of employees A and B are $106,150 and $91,000, respectively. Their earnings for the last completed payroll period of the year are $850 each. Social Security tax rate is 6% on a maximum of $106,800. All earnings are subject to Medicare tax of 1.5%. Assuming that the payroll will be paid on December 29, what will be the employer's total FICA tax for this payroll period on the two salary amounts of $850 each? a. $127.50 b. $115.50 c. $76.50 d. $63.75 91. Which of the following is a reason for a corporation to buy back its own stock? a. To increase liquidity b. To increase solvency c. To increase the shares outstanding d. To reissue as bonuses to employees 92. An employee receives an hourly rate of $25, with time and a half for all hours worked in excess of 40 during a week.

Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $350; cumulative earnings for year prior to current week, $99,700; Social Security tax rate, 6.0% on maximum of $106,800; and Medicare tax rate, 1.5% on all earnings. What is the gross pay for the employee? a. $852.50 b. $950.00 c. $1,300.00 d. $1,325.00 93. The debt ratio of Jade Co. and Emerald Inc. are 30% and 51%, respectively. This information indicates that _____. a. Jade Co. has a higher asset turnover than Emerald Inc. b. Jade Co.'s operations are financed primarily with debt c. Emerald Inc. has lower financial leverage than Jade Co. d. Emerald Inc.'s operations are financed primarily with debt 94. The par value per share of common stock represents _____. a. the minimum selling price of the stock established by the articles of incorporation b. the minimum amount the stockholder will receive when the corporation is liquidated c. the monetary amount assigned to each share of stock in the articles of incorporation d. the amount of dividends per share to be received each year

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chapter 8 95. If $500,000 of 8% bonds are issued at 103, the amount of cash received from the sale is _____. a. $540,000 b. $510,000 c. $515,000 d. $530,000 96. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 60,000 shares were originally issued and 5,000 were subsequently reacquired. What is the number of shares outstanding? a. 5,000 b. 100,000 c. 60,000 d. 55,000 97. Rico Inc. issues a 90-day, 4%, $3,000 note on account. This transaction _____. a. increases net assets and earnings per share of the company b. decreases net assets and increases earnings per share of the company c. has no effect on net assets and earnings per share of the company d. decreases net assets and earnings per share of the company 98. The FICA tax withheld from employees contributes to _____. a. federal and state unemployment compensation b. Social Security and federal unemployment compensation c. Social Security and Medicare d. Medicare only 99. Sapphire Inc. has 40,000 shares at $10 par common stock outstanding. If the company decides to buy 10% of its shares for $15 per share, the total stockholders' equity will _____. a. increase by $240,000 b. increase by $120,000 c. decrease by $150,000 d. decrease by $60,000 100. On July 1, Mark Co. issued $3,000,000 of 10-year, 8% bonds at par. Interest on the bonds is payable semiannually on December 31 and June 30. On payment of interest, net assets of the company _____. a. decrease by $150,000 b. increase by $240,000 c. decrease by $120,000 d. remain unaffected 101. Most employers are levied a tax on payrolls for _____. a. sales tax b. medical insurance premiums Copyright Cengage Learning. Powered by Cognero.

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chapter 8 c. federal unemployment compensation tax d. union dues 102. When the contract rate of interest on bonds is higher than the market rate of interest, the bonds sell at _____. a. a premium b. their face value c. their maturity value d. a discount 103. Which of the following transactions decreases the profitability of a company? a. Issuing a note payable b. Purchasing treasury stock c. Declaring a cash dividend d. Recording payroll tax expense 104. Glow Co. reacquired 60,000 shares of its common stock at $25 per share. The balance of the treasury stock account is reported on the balance sheet as a(n) _____. a. increase in long-term liabilities b. reduction of stockholders' equity c. reduction of fixed assets d. increase in current liabilities 105. Contingent liabilities that are probable but cannot be reasonably estimated are disclosed in the _____. a. notes to the financial statements b. current liabilities section of the balance sheet c. retained earnings section of the statement of stockholders' equity d. long-term liabilities section of the balance sheet 106. The periodic interest to be paid on bonds is identified in the bond indenture and is expressed as a percentage of the face amount of the bond. This percentage or rate of interest is called the _____. a. accrued rate b. contract rate c. internal rate d. effective rate 107. Which of the following factors affects the accounting for contingent liabilities? a. Financial and economic conditions b. The coupon rate and market rate of interest c. Investors' expectations d. The likelihood of occurring and measurement

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chapter 8 108. If $4,000,000 of 12% bonds are issued at 102 1/4, the amount of cash received from the sale is _____. a. $4,040,000 b. $4,090,000 c. $4,130,000 d. $4,000,000 109. Orange Inc. had 200,000 shares of $120 par value common stock outstanding at the beginning of the year. During the year, the company issued a 4-for-1 stock split. What is the number of shares outstanding after the split? a. 200,000 shares b. 400,000 shares c. 600,000 shares d. 800,000 shares 110. The primary purpose of a stock split is to _____. a. increase paid-in capital b. reduce the market price of the stock per share c. increase the market price of the stock per share d. increase retained earnings 111. The _____ is determined by transactions between buyers and sellers of similar bonds. a. stated interest rate b. market interest rate c. internal interest rate d. straight-line rate 112. Vivo Corporation's earnings per share of common stock were $1.75, with a market price of $34.50; calculate the price-earnings ratio. a. 19.7 b. 22.3 c. 44.0 d. 33.5 113. If $900,000 of 10% bonds are issued at 98, the amount of cash received from the sale is _____. a. $800,000 b. $882,000 c. $975,000 d. $1,000,000 114. The major subdivisions of the stockholders' equity section of the balance sheet are _____. a. paid-in capital and retained earnings b. common stock and preferred stock Copyright Cengage Learning. Powered by Cognero.

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chapter 8 c. issued capital and authorized capital d. expenses and incomes

115. On April 1, 10,000 shares of $20 par common stock were issued at $24. Illustrate the effects on the accounts and the financial statements.

116. Needles Inc., which had 40,000 shares of common stock outstanding, declared a 4-for-1 stock split. (a) What will be the number of shares outstanding after the split?

If the common stock had a market price of $120 per share before the stock split, what (b) would be an approximate market price per share after the split?

117. The following accounts and their balances appear in the ledger on December 31 of the current year: Common Stock, $20 par Paid-In Capital in Excess of Par Retained Earnings Treasury Stock

$400,000 45,000 260,000 20,000

Prepare the stockholders' equity section of the balance sheet as of December 31. Twenty-five thousand shares of common stock are authorized, and 1,000 shares have been reacquired.

118. The following information is for employee James John for the week ended October 15.

Total hours worked: 48 Rate: $16 per hour, with double time for all hours in excess of 40 Federal income tax withheld: $200 United Fund deduction: $50 Cumulative earnings prior to current week: $6,400 Tax rates: Social Security: 6% on maximum earnings of $106,800 Medicare: 1.5% on all earnings; on both employer and employee State unemployment: 4.2% on maximum earnings of $7,000; on employer Federal unemployment: 0.8% on maximum earnings of $7,000; on employer

(a) Determine (1) total earnings, (2) total deductions, and (3) cash paid. (b) Determine each of the employer's payroll taxes related to the earnings of William Heedy for the week ended October 15.

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chapter 8 Answer Key 1. True 2. False 3. True 4. True 5. True 6. True 7. True 8. True 9. True 10. True 11. True 12. True 13. True 14. True 15. False 16. False 17. False 18. False 19. True 20. True

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chapter 8 21. True 22. True 23. True 24. False 25. True 26. False 27. True 28. False 29. False 30. False 31. True 32. True 33. True 34. True 35. True 36. True 37. True 38. True 39. True 40. True 41. True Copyright Cengage Learning. Powered by Cognero.

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chapter 8 42. True 43. True 44. True 45. False 46. False 47. True 48. False 49. False 50. True 51. False 52. True 53. False 54. False 55. True 56. True 57. True 58. d 59. a 60. a 61. c 62. c Copyright Cengage Learning. Powered by Cognero.

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chapter 8 63. b 64. a 65. d 66. d 67. b 68. b 69. b 70. a 71. b 72. c 73. c 74. d 75. c 76. d 77. b 78. a 79. a 80. d 81. c 82. c 83. b Copyright Cengage Learning. Powered by Cognero.

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chapter 8 84. d 85. b 86. b 87. c 88. a 89. c 90. b 91. d 92. c 93. d 94. c 95. c 96. d 97. c 98. c 99. d 100. c 101. c 102. a 103. d 104. b Copyright Cengage Learning. Powered by Cognero.

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chapter 8 105. a 106. b 107. d 108. b 109. d 110. b 111. b 112. a 113. b 114. a 115.

Financial Statement Effect

Balance Sheet Accounts Assets: Cash Stockholders' Equity: Common Stock Paid-In Capital in Excess of Par—Common Stock

+240,000 Net increase in assets Net increase in +200,000 stockholders' equity

$240,000

+ 40,000 Financing activities

240,000

240,000

116. (a) 160,000 shares (40,000 × 4) (b) $30 per share ($120 ÷ 4) 117.

Stockholders' Equity Section of the Balance Sheet Paid-In Capital: Common Stock, $20 par (25,000 shares authorized, 20,000 shares issued) $400,000 Add: Paid-in Capital in Excess of Par Copyright Cengage Learning. Powered by Cognero.

45,000 Page 177

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chapter 8 Total Paid-in Capital Retained Earnings Total Deduct: Treasury Stock (1,000 shares at cost) Total Stockholders' Equity

118. (a) (1)40 hours at $16 8 hours at $32 (2)Deductions: Income tax United Fund deduction Social Security tax, 6% of $896 Medicare tax, 1.5% of $896 (3)Cash paid (b) Social Security and Medicare taxes, 7.5% of $896 State unemployment tax, 4.2% × $600 Federal unemployment tax, 0.8% × $600 Total

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$445,000 260,000 $705,000 20,000 $685,000

$640.00 256.00 $200.00 50.00 53.76 13.44

$896.00

317.20 $578.80

$67.20 25.20 4.80 $97.20

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chapter 9

Indicate whether the statement is true or false.

1. A job order cost system provides a separate record of the costs for each particular quantity of product that is manufactured. a. True b. False 2. For an automotive repair shop, the wages of mechanics would be classified as direct labor cost. a. True b. False 3. Service companies can effectively use activity-based costing to compute product (service) costs. a. True b. False 4. Direct materials costs are included in the conversion costs of a product. a. True b. False 5. The current year's advertising costs are normally considered product costs. a. True b. False 6. If factory overhead applied is less than the actual costs, the overhead is said to be underapplied. a. True b. False 7. In a job order cost system, materials and supply costs for service businesses are normally included as part of overhead costs because they are normally insignificant. a. True b. False 8. Reporting under managerial accounting is not restricted by specific rules such as generally accepted accounting principles (GAAP). a. True b. False 9. Direct labor cost is an example of a product cost. a. True b. False 10. Product cost includes factory overhead.

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chapter 9 a. True b. False 11. The costs of materials and labor that do not enter directly into the finished product are classified as cost of goods sold. a. True b. False 12. Using the job order cost system, service businesses are able to bill clients on a weekly or monthly basis, even when the job has not been completed. a. True b. False 13. For a construction contractor, the wages of carpenters would be classified as direct labor cost. a. True b. False 14. Activity-based costing is a method of accumulating and allocating costs by department. a. True b. False 15. Period costs are costs that are included in the production of goods. a. True b. False 16. If the cost of employee wages is not a significant portion of the total product cost, the wages are classified as factory overhead cost. a. True b. False 17. A manufacturing business reports three types of inventories on its balance sheet: direct materials, products in the process of being manufactured, and finished products. a. True b. False 18. Conversion cost is the combination of direct labor cost and factory overhead cost. a. True b. False 19. The underapplied factory overhead amount may be transferred to cost of goods sold at the end of the fiscal year. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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chapter 9 20. The summary of the time tickets at the end of each month is the basis for recording the direct and indirect labor costs incurred in production. a. True b. False 21. In a job order cost accounting system, perpetual inventory records are maintained in controlling accounts and subsidiary ledgers for materials, work-in-process, and finished goods. a. True b. False 22. Manufacturers implement the philosophy of just-in-time processing to produce products with high quality, low cost, and instant availability. a. True b. False 23. Depreciation expense on factory equipment is part of factory overhead cost. a. True b. False 24. The direct labor and overhead costs of providing services to clients are accumulated in a Work-in-Process account. a. True b. False 25. Indirect labor is included in factory overhead. a. True b. False 26. In response to materials requisition, materials are transferred from the storeroom to the factory. a. True b. False 27. Sales commission is an example of factory overhead cost. a. True b. False 28. The cost of a manufactured product generally consists of direct materials cost, direct labor cost, and factory overhead cost. a. True b. False 29. A company may use a job order cost system for some of its products and a process cost system for other products. a. True Copyright Cengage Learning. Powered by Cognero.

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chapter 9 b. False 30. Factory overhead is applied to production using a predetermined overhead rate. a. True b. False 31. A job order cost system accumulates costs for each of the departments or processes within the factory. a. True b. False 32. A manufacturing business converts materials into finished products through the use of machinery and labor. a. True b. False 33. After the goods are completed, their costs are transferred from Work-in-Process to Finished Goods. a. True b. False 34. As product costs are incurred in the manufacturing process, they are accounted for as assets and reported on the balance sheet as inventory. a. True b. False 35. Job order cost systems can be used to compare unit costs of similar jobs to determine if costs are staying within expected ranges. a. True b. False 36. Materials inventory consists of the costs of direct and indirect materials that have not yet entered the manufacturing process. a. True b. False 37. If the cost of materials is not a significant portion of the total product cost, the materials may be classified as a part of factory overhead cost. a. True b. False 38. Managerial accounting reports information primarily for stakeholders that are external to the company. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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chapter 9 39. Non-manufacturing costs are generally classified into two categories: selling and administrative. a. True b. False 40. Inventories of finished products are reported as current assets on a manufacturer's balance sheet. a. True b. False 41. If the actual overhead incurred is less than the applied factory overhead, it is called overapplied factory overhead. a. True b. False 42. The cost of materials entering directly into the manufacturing process is classified as factory overhead cost. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

43. The cost of wages paid to employees directly involved in the manufacturing process of converting materials into finished product is classified as _____. a. factory overhead cost b. direct labor cost c. wages expense d. direct materials cost 44. Which of the following would be a period cost for a textbook printing company? a. Wages of a press operator b. Utility costs of the factory c. Advertising expenses d. Paper costs 45. In a job order cost accounting system, the effect of the flow of direct materials into production will be an _____. a. increase in Work-in-Process and a decrease in Materials Inventory b. increase in Materials Inventory and a decrease in Work-in-Process c. increase in Factory Overhead and a decrease in Materials Inventory d. increase in Work-in-Process and a decrease in Supplies 46. Depreciation on factory equipment is an example of a_____. a. period cost b. product cost c. selling cost Copyright Cengage Learning. Powered by Cognero.

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chapter 9 d. prime cost 47. Downy Inc., a manufacturing company, forecasts that total overhead for the current year will be $18,000,000, and total machine hours will be 250,000 hours. However, the actual overhead is $6,050,000, and the actual machine hours are 145,000 hours. If the company uses a predetermined overhead rate based on machine hours for applying overhead, what is the predetermined overhead rate? a. $25 per machine hour b. $72 per machine hour c. $52 per machine hour d. $42 per machine hour 48. A(n) _____ provides product costs for each quantity of a product that is manufactured. a. process costing b. job order costing c. activity-based costing d. DuPont costing 49. Which of the following best explains a job order cost system? a. It provides product costs for each manufacturing department or process. b. It is often used by companies that manufacture custom products for customers or batches of similar products. c. It is often used by companies that manufacture units of a product that are indistinguishable from each other. d. It is used by companies that manufacture units of a product using a continuous production process.

50. Which of the following is most likely a period cost? a. Depreciation on factory lunchroom furniture b. Salary of telephone receptionist in the sales office c. Salary of a security guard for the factory parking lot d. Computer chips used by a computer manufacturer 51. Which of the following is considered a part of factory overhead cost? a. Sales commissions b. Depreciation of factory buildings c. Depreciation of office equipment d. Direct materials used 52. During the year, Illuminate Corporation applied factory overhead costs of $320,000 to production. At the end of the year, total overapplied factory overhead is $12,000. What was the amount of actual factory overhead cost incurred during the year? a. $300,000 b. $308,000 c. $310,000 d. $317,000 Copyright Cengage Learning. Powered by Cognero.

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chapter 9

53. An activity-based costing system allocates factory overhead rates to products or services using _____. a. a single plantwide overhead rate b. the cost of activities based on an activity rate times the number of activity-based usage quantities c. an allocation of budgeted revenues produced by a product or service d. an end-of-year allocation of costs to products or services 54. A summary of the materials requisitions completed during a period serves as the basis for transferring the cost of the materials from the Materials account to _____. a. Work-in-Process and Cost of Goods Sold b. Work-in-Process and Factory Overhead c. Finished Goods and Cost of Goods Sold d. Work-in-Process and Finished Goods 55. The amount of time spent by each employee and the labor costs incurred for each individual job or for factory overhead may be recorded using _____. a. employees' earnings records b. an in-and-out board c. time recordings d. receiving order 56. Which of the following techniques is used by just-in-time manufacturing? a. It provides specialized training so that employees only do one task and work individually to improve efficiencies in the department. b. It organizes the plant in such a way as to reduce product movement from station to station. c. It encourages management to make all operating decisions regarding the manufacturing process rather than the line employees in order to streamline the process. d. It emphasizes push manufacturing.

57. Which of the following is an example of direct labor cost for an airplane manufacturer? a. Cost of wages of janitors b. Cost of wages of assembly workers c. Salary of plant supervisor d. Salary of the chairman 58. Which of the following is true of just-in-time processing? a. In just-in-time processing, supervisors enter materials into manufacturing so as to keep all the manufacturing departments (processes) operating. b. In just-in-time processing, a worker typically performs only one function. c. It assigns service activities to centralized service departments. d. It is a management approach that focuses on reducing time and cost and eliminating poor quality.

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chapter 9 59. In a job order cost accounting system used by a service business, which of the following items would normally not be included as part of overhead? a. Materials b. Direct labor c. Rent d. Supplies 60. Which of the following businesses is most likely to use a job order costing system? a. A paper mill b. A swimming pool installer c. A company that manufactures chlorine for swimming pools d. An oil refinery 61. The sale of a finished good on account would _____. a. decrease cost of goods sold and increase finished goods b. increase cost of goods sold, decrease finished goods, increase accounts receivable, and increase sales c. increase sales expense, decrease finished goods, decrease cash, and decrease accounts receivable d. increase work-in-process, decrease finished goods, increase accounts receivable, and increase sales 62. Which of the following items would be classified as a part of prime cost? a. Direct labor cost b. Factory overhead cost c. Selling cost d. Administrative cost 63. Which of the following is an example of direct materials cost for an automobile manufacturer? a. Cost of oil lubricants for factory machinery b. Cost of wages of assembly worker c. Varnish for coating d. Cost of interior upholstery 64. Which of the following are the two main types of cost accounting systems for manufacturing operations? a. Process cost and general accounting systems b. Job order cost and process cost systems c. Job order cost and general accounting systems d. Process cost and replacement cost systems 65. The direct labor and overhead costs of providing services to clients are accumulated in _____. a. finished services expense b. work-in-process c. administrative salaries expense Copyright Cengage Learning. Powered by Cognero.

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chapter 9 d. overhead 66. The recording of the jobs completed would increase _____. a. Factory Overhead b. Finished Goods c. Work-in-Process d. Cost of Goods Sold 67. The document authorizing the issuance of materials from the storeroom for use in manufacturing is called _____. a. materials requisition b. purchase requisition c. receiving report d. purchase order 68. Compute factory overhead cost from the following costs: Depreciation on factory buildings Depreciation on office equipment Direct materials used Indirect labor a. $87,360 b. $40,510 c. $54,080 d. $80,130

$ 46,850 33,280 95,740 7,230

69. Which of the following is an example of a factory overhead cost? a. Repair and maintenance cost on the administrative building b. Factory heating and lighting cost c. Insurance premiums on salespersons' automobiles d. President's salary 70. Finished goods inventory includes _____. a. telephone charges b. advertising expenses c. factory overhead d. director's fees 71. Direct materials, work-in-process, and finished goods inventory are most likely to be reported on the balance sheet of a(n) _____. a. financial consultant b. apparel boutique c. automobile company Copyright Cengage Learning. Powered by Cognero.

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chapter 9 d. insurance company 72. The following information is available for the first month of operations for Blue Bird, Inc.: Sales Gross profit Indirect labor Indirect materials Other factory overhead Materials purchased Total manufacturing costs Materials inventory, end of period

$800,000 350,000 35,000 15,000 10,000 350,000 680,000 25,000

Based on the information provided for Blue Bird, Inc., calculate the cost of goods sold. a. $410,000 b. $450,000 c. $520,000 d. $650,000 73. The finished goods account is a controlling account for the subsidiary _____. a. sales ledger b. materials ledger c. work-in-process ledger d. finished goods ledger 74. In which of the following cost accounting systems are perpetual inventory records maintained for materials, work-inprocess, and finished goods inventories? a. Process costing b. Batch costing c. Activity-based costing d. Job order costing 75. Robinson Inc. has estimated total factory overhead costs of $175,000 and 25,000 direct labor hours for the current fiscal year. If job number 115 incurred 1,300 direct labor hours, the Work-in-Process account will be increased and factory overhead will be decreased by _____. a. $25,000 b. $9,842 c. $9,100 d. $1,300 76. Which of the following is most likely to be a product cost? a. Salary of the vice president of sales b. Advertising for a particular product Copyright Cengage Learning. Powered by Cognero.

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chapter 9 c. Drill bits for a drill press used in the plant assembly area d. Salary of the company receptionist 77. The recording of the jobs completed would decrease _____. a. Factory Overhead b. Finished Goods c. Work-in-Process d. Cost of Goods Sold 78. Which of the following is the subsidiary ledger for work-in-process? a. The finished goods ledger b. Job cost sheets c. Materials requisitions d. The materials ledger 79. When a job is completed and the client is billed, the costs are transferred to an account called the _____. a. Work-in-Process account b. Cost of Services account c. Expenses account d. Applied Overhead account 80. One of the ways in which just-in-time processing is accomplished in manufacturing and non-manufacturing processes is by _____. a. moving a product from process to process as each function is completed b. combining processing functions into work centers and cross-training workers to perform more than one function c. having production supervisors attempt to enter enough materials into manufacturing to keep all manufacturing departments operating d. having workers typically perform one function on a continuous basis 81. The recording of the jobs shipped and customers billed would increase _____. a. Accounts Payable b. Cash c. Finished Goods d. Cost of Goods Sold 82. Predetermined factory overhead rate is calculated as _____. a. estimated total factory overhead costs + estimated activity base b. estimated total factory overhead costs – estimated activity base c. estimated total factory overhead costs × estimated activity base d. estimated total factory overhead costs ÷ estimated activity base Copyright Cengage Learning. Powered by Cognero.

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chapter 9 83. Which of the following is a period cost? a. Power in a building b. Depreciation on factory equipment c. Sales commissions d. Wages of an assembly worker 84. For which of the following businesses would the job order costing system be most appropriate? a. Custom cabinet manufacturer b. Automobile manufacturer c. Lumber mill d. Meat processor 85. Which of the following is true of a direct materials cost? a. A direct materials cost is included in factory overhead. b. It is sometimes called factory burden. c. It is not a significant portion of the total product cost. d. It is the cost of any material that is an integral part of the finished product.

86. Constance Inc. forecasts that total overhead for the current year will be $12,000,000 and total machine hours will be 300,000 hours. However, the actual overhead is $3,250,000, and the actual machine hours are 98,500 hours. If the company uses a predetermined overhead rate based on machine hours for applying overhead, the overhead will be _____. a. underapplied by $690,000 b. overapplied by $690,000 c. overapplied by $8,750,000 d. underapplied by $8,750,000 87. For an automobile company, the total overhead applied was $48,000,000 at the end of the year. Actual overhead was $52,850,000. Closing over/underapplied overhead into cost of goods sold would cause net income to _____. a. increase by $4,850,000 b. decrease by $4,850,000 c. stay the same d. decrease by $400,000 88. Which of the following statements is true of a traditional production process? a. It focuses on reducing time and cost and eliminating poor quality. b. It emphasizes on continually improving the manufacturing process and product quality. c. In a traditional production process, supervisors enter materials into manufacturing so as to keep all the manufacturing departments (processes) operating. d. In a traditional production process, service activities may be assigned to individual work centers, rather than to centralized service departments.

89. A _____ is prepared when materials that have been ordered are received and inspected.

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chapter 9 a. supplier's invoice b. materials ledger c. receiving report d. materials requisition 90. Which of the following manufacturing costs is an indirect cost of producing a product? a. Oil lubricants used for factory machinery b. Commissions for sales personnel c. Hourly wages of an assembly worker d. Memory chips for a microcomputer manufacturer 91. Costs are often classified by their relationship to a segment of operations, called a _____. a. prime cost b. controlling account c. cost object d. cost sheet 92. Which of the following costs appear on a balance sheet? a. Selling expenses b. Product costs c. Period costs d. Opportunity costs 93. Which of the following information is provided by job cost sheets? a. Cost of depreciation on office computers b. Managerial salary c. Cost of utilities d. Cost impact of materials changes 94. At the end of the fiscal year, if the balance in Factory Overhead is small, it would normally be _____. a. transferred to Work-in-Process b. transferred to Cost of Goods Sold c. transferred to Finished Goods d. allocated between Work-in-Process and Finished Goods 95. Dividing estimated total factory overhead costs by estimated activity base will give the _____. a. underapplied factory overhead rate b. predetermined factory overhead rate c. overapplied factory overhead rate d. actual factory overhead rate Copyright Cengage Learning. Powered by Cognero.

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chapter 9 96. Recording direct labor costs in a job order costing system _____. a. increases Factory Overhead and decreases Work-in-Process b. increases Finished Goods and increases Wages Payable c. increases Work-in-Process and increases Wages Payable d. increases Factory Overhead and increases Wages Payable 97. Which of the following businesses is most likely to use a process cost accounting system? a. Custom cabinet manufacturer b. Dress designer c. Lumber mill d. Printing firm 98. Which of the following is true of job order cost systems? a. Examples of companies that use job order cost systems would be oil refineries, paper producers, chemical processors, and food processors. b. Job order cost systems are not widely used. c. Job order cost systems are often used by companies that manufacture custom products for customers or batches of similar products. d. Job order cost systems provide product costs for each manufacturing department or process.

99. Spring Hill, Inc., has estimated total factory overhead costs of $500,000 and 25,000 direct labor hours for the current fiscal year. If direct labor hours for the year total 17,500, and actual factory overhead totals $360,000, what is the amount of overapplied or underapplied overhead for the year? a. $10,000 overapplied b. $10,000 underapplied c. $50,000 underapplied d. $50,000 overapplied 100. An increase in the Work-in-Process account occurs when _____. a. materials are received into the storeroom b. factory overhead costs are incurred c. direct labor is recorded from the time sheets d. materials are ordered 101. The recording of the factory labor costs incurred for general factory use would include a debit to _____. a. Factory Overhead b. Wages Payable c. Wages Expense d. Cost of Goods Sold 102. Which of the following statements is a difference between financial accounting and managerial accounting? a. Under financial accounting, reports are prepared using GAAP, whereas under managerial accounting, Copyright Cengage Learning. Powered by Cognero.

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chapter 9 information that is useful to management for its decision making is not recorded using GAAP. b. Financial accounting focuses on providing information for internal use, whereas managerial accounting focuses on providing information for external use. c. Under financial accounting, reports are prepared as and when management needs them, whereas under managerial accounting, reports are prepared on a monthly basis. d. Financial accounting has a subjective approach, whereas managerial accounting has an objective approach.

103. For a manufacturing business, work-in-process inventories consist of inventories that have _____. a. not yet entered the manufacturing process b. entered the manufacturing process but not been completed c. entered and completed the manufacturing process but have not been sold d. entered and completed the manufacturing process and have been sold 104. Upon completion of a job, direct materials totaled $4,800; direct labor, $2,600; and factory overhead, $3,600. Units produced totaled 2,750. What is the cost per unit? a. $2 b. $4 c. $3 d. $5 105. Heedy Sparacia Winery accumulates the costs incurred in the labeling process in an activity cost pool. Costs for the labeling process are estimated to be $340,000, and the winery expects to generate 680,000 labels for the coming year.

Production for its top-selling wine is estimated at 170,000 bottles. How much overhead from the labeling process will be allocated to this particular variety of wine? a. $40,000 b. $80,000 c. $85,000 d. $170,000 106. If the cost of direct materials is not a significant portion of the total product cost, it may be classified as _____. a. direct labor costs b. selling and administrative costs c. miscellaneous costs d. factory overhead costs 107. Excellence Inc., has estimated total factory overhead costs of $800,000 and 25,000 direct labor hours for the current fiscal year. If the direct labor hours for Job T41 are 2,200, calculate the total factory overhead applied to this job. a. $25,000 b. $40,000 c. $70,400 d. $72,000

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chapter 9 108. Which of the following statements is true of managerial accounting? a. Reporting under managerial accounting is constrained by rules such as generally accepted accounting principles. b. Managerial accounting is required to be reported annually but also may be reported monthly or quarterly. c. Managerial accounting provides information to the external stakeholders of the company. d. Managerial accounting is primarily concerned with generating information for use by managers.

109. Which of the following would be classified as direct materials for an auto manufacturer? a. Factory light bulbs b. Material used for door panels c. Drill bits d. Steel 110. Which of the following is a product cost? a. Administrative cost b. Direct labor cost c. Selling cost d. Opportunity cost

111. JMP Printing Company uses a job order cost system. (a) Indicate the source of the data for increasing Work-in-Process for each of the following: (1)Direct materials requisitioned (2)Direct labor used (b) Indicate the source of the data for decreasing Work-in-Process for jobs completed. (c) Present a list of the three controlling accounts used in the general ledger to record the inventories and, in each case, indicate the related subsidiary ledger.

112. M&M, Inc., a toy manufacturing company, uses a job order cost system. The time records from November jobs are summarized as follows: Job 100 Job 101 Job 102 Job 103 Factory supervision

$3,600 1,900 1,100 2,700 $1,800

Factory overhead is applied to jobs on the basis of a predetermined overhead rate of $20 per direct labor hour. The direct labor rate is $25 per hour. a. Determine the total factory labor costs transferred to Work-in-Process and Factory Overhead for November.

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chapter 9

b. Determine the amount of Factory Overhead applied to production for November.

113. Use the correct number to designate each item in the following list: 1) direct materials 2) selling and administrative expenses 3) factory overhead 4) direct labor a) b) c) d) e) f) g) h) i)

rent expense on factory building sales supplies used factory supplies used indirect materials used wages of assembly line personnel depreciation on office equipment rent on office facilities insurance expired on factory equipment cost of primary material used to assemble product

114. Indicate whether each of the following costs of a cabinet manufacturer would be classified as direct materials cost, direct labor cost, factory overhead cost, or period cost. a. Plant manager's salary b. Office administrative assistant's salary c. Depreciation on factory equipment d. Rent on office building e. Varieties of wood f. Varnish for coating cabinets g. Utilities cost on the factory h. Cabinet assembly worker's salary i. Advertising costs j. Screws and glue used in assembly process

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chapter 9 Answer Key 1. True 2. True 3. True 4. False 5. False 6. True 7. True 8. True 9. True 10. True 11. False 12. True 13. True 14. False 15. False 16. True 17. True 18. True 19. True 20. True

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chapter 9 21. True 22. True 23. True 24. True 25. True 26. True 27. False 28. True 29. True 30. True 31. False 32. True 33. True 34. True 35. True 36. True 37. True 38. False 39. True 40. True 41. True Copyright Cengage Learning. Powered by Cognero.

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chapter 9 42. False 43. b 44. c 45. a 46. b 47. b 48. b 49. b 50. b 51. b 52. b 53. b 54. b 55. c 56. b 57. b 58. d 59. b 60. b 61. b 62. a Copyright Cengage Learning. Powered by Cognero.

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chapter 9 63. d 64. b 65. b 66. b 67. a 68. c 69. b 70. c 71. c 72. b 73. d 74. d 75. c 76. c 77. c 78. b 79. b 80. b 81. d 82. d 83. c Copyright Cengage Learning. Powered by Cognero.

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chapter 9 84. a 85. d 86. b 87. b 88. c 89. c 90. a 91. c 92. b 93. d 94. b 95. b 96. c 97. c 98. c 99. b 100. c 101. a 102. a 103. b 104. b Copyright Cengage Learning. Powered by Cognero.

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chapter 9 105. c 106. d 107. c 108. d 109. d 110. b 111. (a) (1) Summary of materials requisitions (2) Summary of time tickets (b) Summary of job cost sheets for jobs completed (c) Controlling Account Subsidiary Ledger Materials Materials ledger Work-in-Process Cost ledger Finished Goods Finished goods ledger (or stock ledger)

112. a. Costs transferred to Work-in-Process = $9,300 ($3,600 + $1,900 + $1,100 + $2,700) Costs transferred to Factory Overhead = $1,800 b. Factory Overhead applied = $7,440 [($3,600 + $1,900 + $1,100 + $2,700) / $25] × $20 113. a) 3 b) 2 c) 3 d) 3 e) 4 f) 2 g) 2 h) 3 i) 1 114. a. Factory overhead cost b. Period cost c. Factory overhead cost d. Period cost e. Direct materials cost Copyright Cengage Learning. Powered by Cognero.

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chapter 9 f. Factory overhead cost g. Factory overhead cost h. Direct labor cost i. Period cost j. Factory overhead cost

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chapter 10

Indicate whether the statement is true or false.

1. Cost-volume-profit analysis can be presented in both graph and equation form. a. True b. False 2. A change in fixed costs as a result of an increase in a yearly insurance premium will decrease the break-even point. a. True b. False 3. Direct materials and direct labor costs are examples of variable costs of production. a. True b. False 4. Variable costs are costs that vary on a per unit basis as the level of manufacturing activity changes. a. True b. False 5. If direct materials cost per unit decreases, the amount of sales necessary to earn a desired amount of profit will decrease. a. True b. False 6. The graph of the variable costs when plotted against the activity level appears as a line parallel to the horizontal axis. a. True b. False 7. Total fixed costs remain constant as the level of activity changes within the relevant range. a. True b. False 8. If fixed costs are $300,000 and variable costs are 70% of break-even sales, profit is zero when sales revenue is $1,000,000. a. True b. False 9. The contribution margin ratio is the same as the variable cost ratio. a. True b. False 10. The fixed cost per unit varies with changes in the level of activity. a. True Copyright Cengage Learning. Powered by Cognero.

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chapter 10 b. False 11. Fixed costs are costs that vary in total dollar amount as the level of activity changes. a. True b. False 12. Variable costs are costs that remain constant in total with changes in the activity level. a. True b. False 13. The variable cost per unit remains constant with changes in the level of activity. a. True b. False 14. If the unit selling price is $40, the volume of sales is $3,500,000, sales at the break-even point amount to $3,000,000, and the maximum possible sales are $3,900,000, the margin of safety will be 12,500 units. a. True b. False 15. Break-even analysis is a type of cost-volume-profit analysis. a. True b. False 16. The ratio that indicates the percentage of each sales dollar available to cover fixed costs and to provide operating income is termed as contribution margin ratio. a. True b. False 17. If sales total $2,000,000, fixed costs total $600,000, and variable costs are 60% of sales, the contribution margin ratio is 40%. a. True b. False 18. Activities that cause costs to change are called activity bases. a. True b. False 19. A rental cost of $40,000 plus $0.50 per machine hour of use is an example of a mixed cost. a. True b. False 20. If employees accept a wage contract that decreases the unit contribution margin, the break-even point will decrease.

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chapter 10 a. True b. False 21. Variable costs are costs that vary in total in direct proportion to changes in the activity level. a. True b. False 22. Rental charges of $60,000 per year plus $2 for each machine hour over 15,000 hours is an example of a fixed cost. a. True b. False 23. Variable cost per unit remains the same regardless of activity level. a. True b. False 24. For the purpose of analysis, mixed costs can generally be separated into their variable and fixed components. a. True b. False 25. If fixed costs are $800,000 and the unit contribution margin is $50, profit is zero when 15,000 units are sold. a. True b. False 26. Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the profitvolume graph. a. True b. False 27. If the unit selling price is $50, the volume of sales is $425,000, sales at the break-even point amount to $350,000, and the maximum possible sales are $500,000, the margin of safety will be 2,000 units. a. True b. False 28. If the volume of sales is $4,800,000 and sales at the break-even point amount to $3,840,000, the margin of safety will be 25%. a. True b. False 29. Even if a business sells six products, it is possible to estimate the break-even point. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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chapter 10 30. Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the costvolume-profit graph. a. True b. False 31. If direct materials cost per unit increases, the break-even point will increase. a. True b. False 32. A change in fixed costs as a result of an increase in the property tax rates will increase the break-even point. a. True b. False 33. Direct materials cost is an example of a fixed cost of production. a. True b. False 34. If fixed costs are $425,000 and the unit contribution margin is $50, the sales necessary to earn an operating income of $25,000 is 14,000 units. a. True b. False 35. The point in operations at which revenues and expenses are exactly equal is called the break-even point. a. True b. False 36. The unit contribution margin is the dollars available from each unit of sales to cover fixed costs and provide operating income. a. True b. False 37. If the volume of sales is $3,000,000 and sales at the break-even point amount to $2,400,000, the margin of safety will be 20%. a. True b. False 38. A production supervisor's salary that does not vary with the number of units produced is an example of a fixed cost. a. True b. False 39. Monthly rent on a factory building is an example of a fixed cost. a. True Copyright Cengage Learning. Powered by Cognero.

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chapter 10 b. False 40. If a business sells two products, it is not possible to estimate the break-even point. a. True b. False 41. If a business sells four products, it is not possible to estimate the break-even point. a. True b. False 42. Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio. a. True b. False 43. If direct materials cost per unit decreases, the break-even point will increase. a. True b. False 44. If sales total $5,000,000, fixed costs total $400,000, and variable costs are $2,750,000, the contribution margin ratio is 45%. a. True b. False 45. Cost behavior refers to the manner in which a cost changes as a related activity changes. a. True b. False 46. A mixed cost has characteristics of both a variable cost and a fixed cost. a. True b. False 47. The break-even point (in units) is calculated by dividing total estimated fixed costs by net sales of a period. a. True b. False 48. If fixed costs are $220,000 and the unit contribution margin is $25, the sales necessary to earn an operating income of $30,000 is 10,000 units. a. True b. False 49. The relevant range is useful for analyzing cost behavior for management decision-making purposes.

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chapter 10 a. True b. False 50. If sales total $1,000,000, fixed costs total $200,000, and variable costs are 55% of sales, the contribution margin ratio is 55%. a. True b. False 51. The range of activity over which changes in cost are of interest to management is called the relevant range. a. True b. False 52. If the volume of sales is $5,500,000 and sales at the break-even point amount to $4,510,000, the margin of safety will be 20%. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

53. Based on the following information, calculate fixed costs per month using the high-low method.

April May June July

Cost $55,000 75,000 60,000 62,000

Machine Hours 22,000 32,000 28,000 22,000

a. $12,000 b. $11,000 c. $10,000 d. $9,000 54. Currently, fixed costs are $540,000, the unit selling price is $95, and the unit variable cost is $60. What would be the break-even sales (in units) if the unit selling price is increased by $10? a. 5,294 units b. 9,000 units c. 12,857 units d. 12,000 units 55. If fixed costs are $750,000 and variable costs are 60% of sales, what is the break-even point (in dollars)? a. $1,875,000 b. $1,250,000 Copyright Cengage Learning. Powered by Cognero.

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chapter 10 c. $1,666,667 d. $1,350,000 56. The systematic examination of the relationships between selling prices, volume of sales and production, costs, expenses, and profits is called _____. a. contribution margin analysis b. cost-volume-profit analysis c. budgetary analysis d. gross profit analysis 57. Cost behavior refers to the manner in which _____. a. a cost changes as the related activity changes b. a cost is allocated to products c. a cost is used in setting selling prices d. a cost is estimated 58. Which of the following is an example of a mixed cost? a. Depreciation on factory machinery b. Direct material cost c. Maintenance expense d. Property tax 59. The electricity expense in a production plant is an example of a _____. a. variable cost b. margin cost c. fixed cost d. distribution cost 60. Currently, fixed costs are $810,000, the unit selling price is $60, and the unit variable cost is $48. What would be the break-even sales (in units) if the variable cost is increased by $2? a. 16,200 units b. 57,875 units c. 81,000 units d. 67,500 units 61. Calculate the contribution margin ratio of a company with sales of $190,000 and operating income of $40,000.

Variable costs of the company are 54% of sales. a. 24% b. 36% c. 41% d. 46% Copyright Cengage Learning. Powered by Cognero.

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chapter 10 62. Knowing how costs react to changes in the level of activity is useful to management for all the following reasons except for _____. a. predicting customer demand b. predicting profits as sales and production volumes change c. estimating costs d. changing an existing product production 63. When a business sells more than one product at varying selling prices, the business's break-even point can be determined as long as the number of products does not exceed _____. a. two b. three c. fifteen d. there is no limit 64. Cost-volume-profit analysis cannot be used if which of the following occurs? a. Costs cannot be properly classified into fixed and variable costs. b. Total fixed costs change. c. Per unit variable costs change. d. Per unit sales price changes.

65. Assume that Seaside Co. sold 12,000 units of Product A and 18,000 units of Product B in the last year. The unit contribution margins for Products A and B are $10 and $20 respectively. Seaside has fixed costs of $400,000. The breakeven point in units is _____. a. 26,250 units b. 25,000 units c. 18,500 units d. 16,750 units 66. Which of the following statements is true if the number of units produced decreases? a. The total variable cost remains constant. b. The total variable cost decreases. c. The variable cost per unit decreases. d. The variable cost per unit increases.

67. A-1 Co. has the following operating data for its manufacturing operations: Unit selling price Unit variable cost Total fixed costs

$250 $100 $840,000

The company has decided to increase the wages of hourly workers, which will increase the unit variable cost by 10%.

Increases in the salaries of factory supervisors and property taxes for the factory will increase fixed costs by 4%. If sales prices are held constant, the break-even point for A-1 Co. will _____.

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chapter 10 a. increase by 400 units b. increase by 640 units c. decrease by 640 units d. increase by 800 units 68. The _____ indicates the percentage of each sales dollar available to cover fixed costs and to provide operating income. a. fixed cost ratio b. volume ratio c. operating ratio d. contribution margin ratio 69. The point where the sales line and the total costs line intersect on the cost-volume-profit graph represents _____. a. the maximum possible operating loss b. the maximum possible operating income c. the total fixed costs d. the break-even point 70. _____ per unit increases or decreases in inverse proportion to its activity level. a. Variable cost b. Opportunity cost c. Contribution cost d. Fixed cost 71. Kennedy Co. sells two products, Arks and Bins. Last year, Kennedy sold 32,000 units of Arks and 18,000 units of Bins. Related data are as follows: Unit Unit Unit Selling Variable Contribution Product Price Cost Margin Arks $ 80 $20 $60 Bins 120 40 80 What was Kennedy's sales mix last year? a. 40% Arks, 60% Bins b. 43% Arks, 57% Bins c. 54% Arks, 46% Bins d. 64% Arks, 36% Bins 72. Costs that remain constant on a per unit level as the level of activity changes are called _____. a. fixed costs b. mixed costs c. opportunity costs Copyright Cengage Learning. Powered by Cognero.

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chapter 10 d. variable costs 73. Calculate the break-even sales when a business has sales of $825,000 and a margin of safety of 20%. a. $585,000 b. $650,560 c. $660,000 d. $710,000 74. The relative distribution of sales among the various products sold by a business is called _____. a. business's basket of goods b. contribution margin mix c. sales mix d. product portfolio 75. The difference between current sales revenue and sales at the break-even point is called the _____. a. contribution margin b. margin of safety c. price factor d. operating leverage 76. Compute break-even sales (in units) when fixed costs are $487,200, unit selling price is $66, and unit variable cost is $42. a. 17,500 units b. 10,500 units c. 11,500 units d. 20,300 units 77. Which of the following is true of a variable cost? a. Total variable cost remains constant with changes in the number of goods sold. b. Unit variable cost decreases with an increase in production. c. Unit variable cost remains constant with changes in production. d. Total variable cost decreases with an increase in the number of goods sold.

78. Which of the following statements is true regarding fixed and variable costs? a. Both costs are constant when considered on a per unit basis. b. Both costs are constant when considered on a total basis. c. Fixed costs are fixed in total, and variable costs are fixed per unit. d. Variable costs are fixed in total, and fixed costs vary in total.

79. _____ is the excess of sales over variable costs. a. Fixed cost Copyright Cengage Learning. Powered by Cognero.

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chapter 10 b. Contribution margin c. Operating income d. Incremental cost 80. Which of the following is an example of a cost that varies in proportion to changes in the activity base? a. Depreciation on machinery b. Packaging cost c. Factory rent d. Insurance cost 81. Currently, fixed costs are $600,000 and the unit contribution margin is $40. What would be the break-even point in units if fixed costs are reduced by $80,000? a. 13,000 units b. 14,500 units c. 20,000 units d. 12,500 units 82. Alpha Inc. is expecting a reduction of $25,000 in fixed costs of $700,000. What will be the change in break-even sales (in units) if the selling price per unit is $45 and the unit variable cost is $30? a. 10,000 units b. 5,000 units c. 1,667 units d. 2,500 units 83. Which of the following activity bases would be the most appropriate for gasoline costs of a delivery service such as UPS? a. Number of trucks employed b. Number of miles driven c. Number of trucks in service d. Number of packages delivered 84. The following information is given for the maintenance department of Garden State Co. Calculate the variable costs per unit using the high-low method.

June July August September a. $0.08 b. $0.25 c. $0.17 d. $0.11

Cost $3,200 2,000 2,200 5,000

Production in units 18,000 12,000 14,000 24,000

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chapter 10

85. A company operated at 82% of its capacity for the past year. Fixed costs during this time were $131,000, variable costs were 60% of sales, and sales were $790,000. Calculate the company's operating profit. a. $97,000 b. $185,000 c. $56,000 d. $164,000 86. Calculate break-even sales (in units) when fixed costs are $225,000, unit selling price is $100, and unit variable cost is $40. a. 4,200 units b. 3,200 units c. 3,750 units d. 3,800 units 87. What is the margin of safety (in sales) when a business has sales of $475,000, sales of $205,000 at break-even point, and a unit selling price of $50? a. $680,000 b. $270,000 c. $260,000 d. $510,000 88. A business has a capacity of $4,000,000 of sales, actual sales of $1,500,000, break-even sales of $900,000, fixed costs of $540,000, and variable costs that are 40% of sales. What is the margin of safety expressed as a percentage of sales? a. 40% b. 42% c. 33% d. 35% 89. _____ analysis is used while selecting the mix of products to sell. a. Cost-volume-profit b. Activity-based c. Discounted d. Receivables 90. Calculate the number of units that must be sold in order to realize an operating income of $140,000 when fixed costs are $450,000 and unit contribution margin is $20. a. 28,950 units b. 29,500 units c. 30,350 units d. 31,550 units Copyright Cengage Learning. Powered by Cognero.

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chapter 10 91. Kennedy Co. sells two products, Arks and Bins. Last year, Kennedy sold 32,000 units of Arks and 18,000 units of Bins. Related data are as follows: Unit Unit Unit Selling Variable Contribution Product Price Cost Margin Arks $ 80 $20 $60 Bins 120 40 80 What was Kennedy's overall unit contribution margin? a. $67.20 b. $70.00 c. $72.00 d. $100.00 92. Currently, fixed costs are $561,000, and the unit contribution margin is $10. What would be the break-even point in units if variable cost decreased by $0.50 per unit? a. 59,053 units b. 56,100 units c. 53,429 units d. 60,000 units 93. Compute the number of units that must be sold in order to have zero profit when fixed costs are $810,000 and unit contribution margin is $90. a. 8,100 units b. 9,000 units c. 6,500 units d. 6,810 units 94. With the aid of computer software, managers can vary assumptions regarding selling prices, costs, and volume and can immediately see the effects of each change on the break-even point and profit. Such an analysis is called _____. a. "what if" or sensitivity analysis b. vary the data analysis c. computer-aided analysis d. data gathering 95. BlueJay Co. manufactures office furniture. During the most productive month of the year, 3,800 desks were manufactured at a total cost of $170,000. In its slowest month, the company made 1,400 desks at a cost of $74,000. Using the high-low method of cost estimation, total fixed costs per month are _____. a. $12,000 b. $18,000 c. $11,600 d. $72,000 Copyright Cengage Learning. Powered by Cognero.

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96. Wiles Inc.'s unit selling price is $40, the unit variable costs are $30, fixed costs are $135,000, and current sales are 10,000 units. How much would operating income change if sales increase by 5,000 units? a. $50,000 increase b. $65,000 decrease c. $100,000 increase d. $50,000 decrease 97. Compute the break-even point (in dollars) if fixed costs are $520,000 and variable costs are 60% of sales. a. $1,800,000 b. $900,000 c. $1,300,000 d. $1,650,000 98. Using the high-low method, calculate variable utilities costs per machine hour.

Cost Machine Hours January $ 8,100 13,900 February 14,500 20,500 March 7,500 10,500 April 9,200 18,900 a. $0.63 b. $0.70 c. $0.50 d. $0.25 99. The graph of a variable cost per unit when plotted against its related activity base appears as a _____. a. circle b. rectangle c. straight line d. curved line 100. For the purpose of analysis, mixed costs are generally _____. a. classified as fixed costs b. classified as variable costs c. classified as period costs d. separated into their variable and fixed cost components 101. Which of the following is true about changes in fixed cost? a. An increase in production will result in an increase in per unit fixed cost. b. A decrease in fixed cost will result in an increase in variable cost. c. An increase in production will result in a decrease in per unit fixed cost.

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chapter 10 d. A decrease in production will result in an increase in total fixed cost.

102. Stockpile Corporation sells product H for $150 per unit, the variable cost per unit is $105, and the fixed costs are $675,000. What is the sales (in dollars) required to realize operating income of $50,000? a. $2,533,333 b. $2,416,667 c. $2,400,000 d. $1,680,000 103. Which of the following graphs illustrates the nature of a mixed cost?

a. Graph 2 b. Graph 3 c. Graph 4 d. Graph 1 104. Kennedy Co. sells two products, Arks and Bins. Last year, Kennedy sold 32,000 units of Arks and 18,000 units of Bins. Related data are as follows: Unit Unit Unit Selling Variable Contribution Product Price Cost Margin Arks $ 80 $20 $60 Bins 120 40 80 What was Kennedy's overall unit variable cost?

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chapter 10 a. $32.00 b. $30.00 c. $28.80 d. $27.20 105. Which of the following conditions would cause the break-even point to increase? a. Increase in total fixed costs b. Increase in unit selling price c. Decrease in unit variable cost d. Decrease in total fixed costs 106. Kennedy Co. sells two products, Arks and Bins. Last year, Kennedy sold 32,000 units of Arks and 18,000 units of Bins. Related data are as follows: Unit Unit Unit Selling Variable Contribution Product Price Cost Margin Arks $ 80 $20 $60 Bins 120 40 80 Assuming that last year's fixed costs totaled $611,520, what was Kennedy's break-even point in units? a. 9,100 units b. 13,000 units c. 13,227 units d. 13,542 units 107. If variable costs per unit decreased because of a decrease in utility rates, the break-even point would _____. a. decrease b. increase c. remain the same d. increase or decrease 108. Romney Co. has budgeted that factory supervisors' salaries will increase by 10%. If selling prices and all other cost relationships are held constant, next year's break-even point would _____. a. decrease by 10% b. increase by 10% c. remain constant d. increase at a rate greater than 10% 109. Sales amount to $774,000, variable costs are 61% of sales, and fixed costs are $120,000. What is the contribution margin ratio? a. 37% Copyright Cengage Learning. Powered by Cognero.

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chapter 10 b. 44% c. 39% d. 41% 110. If variable costs per unit increased because of an increase in hourly wage rates, the break-even point would _____. a. decrease b. increase c. remain the same d. increase or decrease 111. Under variable costing, only _____ manufacturing costs are included in the product cost. a. variable b. fixed c. capitalized d. notional 112. Which of the following graphs illustrates the behavior of a total fixed cost within the specified relevant range?

a. Graph 2 b. Graph 3 c. Graph 4 d. Graph 1 113. Which of the following costs is an example of a fixed cost? a. Direct labor cost b. Insurance cost Copyright Cengage Learning. Powered by Cognero.

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chapter 10 c. Commission paid d. Capital stock 114. Which of the following activity bases would be the most appropriate for food costs of a hospital? a. Number of cooks scheduled to work b. Number of x-rays taken c. Number of patients who are admitted in the hospital d. Number of scheduled surgeries 115. Variable costs as a percentage of sales for Proton Inc. are 65%, sales are $500,000, and fixed costs are $125,000.

How much would operating income change if sales decrease by $10,000? a. $3,500 increase b. $3,500 decrease c. $3,250 decrease d. $3,250 increase 116. JMP Co. manufactures pens. During the most productive month of the year, 3,850 pens were manufactured at a total cost of $82,550. During its slowest month, the company made 1,450 pens at a cost of $44,150. Calculate the total fixed cost using the high-low method of cost estimation. a. $20,950 b. $25,650 c. $26,150 d. $28,300 117. The point where the profit line intersects the left vertical axis on the profit-volume graph represents _____. a. the maximum possible operating loss b. the maximum possible operating income c. the total fixed costs d. the break-even point 118. The point where the profit line intersects the horizontal axis on the profit-volume graph represents _____. a. the maximum possible operating loss b. the maximum possible operating income c. the total fixed costs d. the break-even point 119. Which of the following graphs illustrates the behavior of a total variable cost?

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a. Graph 2 b. Graph 3 c. Graph 4 d. Graph 1 120. Kennedy Co. sells two products, Arks and Bins. Last year, Kennedy sold 32,000 units of Arks and 18,000 units of Bins. Related data are as follows: Unit Unit Unit Selling Variable Contribution Product Price Cost Margin Arks $ 80 $20 $60 Bins 120 40 80 What was Kennedy's overall unit selling price? a. $97.60 b. $104.00 c. $102.40 d. $94.40 121. Which of the following conditions would cause the break-even point to increase? a. Decrease in total fixed costs b. Increase in unit selling price c. Decrease in unit variable cost d. Increase in unit variable cost Copyright Cengage Learning. Powered by Cognero.

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chapter 10 122. Which of the following conditions would cause the break-even point to decrease? a. Increase in total fixed costs b. Decrease in unit selling price c. Decrease in unit variable cost d. Increase in unit variable cost

123. For the past year, Lion Guard Company had fixed costs of $90,000, unit variable costs of $34, and a unit selling price of $40. For the coming year, no changes are expected in revenues and costs except that property taxes are expected to increase by $15,000. Determine the break-even sales (in units) for (a) the past year and (b) the coming year.

124. The following is a list of various costs of producing sweatshirts. Classify each cost as either a variable, fixed, or mixed cost for units produced and sold. (a) Electricity costs of $0.025 per kilowatt-hour (b) Warehouse rent of $6,000 per month plus $0.50 per square foot of storage used (c) Thread (d) Zip used in sweatshirts (e) Janitorial costs of $2,000 per month (f) Advertising costs of $10,000 per month (g) Plant manager salary (h) Color dyes for producing different colors of sweatshirts (i) Salary of the production supervisor (j) Straight-line depreciation on sewing machines (k) Patterns for different designs. Patterns typically last many years before being replaced Maintenance costs for the company's sewing machine. The cost is $2,000 per year plus (l) $0.001 for each machine hour of use (m) Property taxes on factory, building, and equipment (n) Cotton and polyester cloth (o) Hourly wages of sewing machine operators 125. For the past year, Incline Company had fixed costs of $6,552,000, a unit variable cost of $444, and a unit selling price of $600. For the coming year, no changes are expected in revenues and costs except that a new wage contract will increase variable costs by $6 per unit. Determine the break-even sales (in units) for (a) the past year and (b) the coming year.

126. Finese Company had fixed costs of $272,300, variable costs of $645,000, and actual sales of $1,200,000. If the company has a break-even point at $750,000 in sales revenue, determine (a) the margin of safety expressed in dollars, (b) the margin of safety expressed as a percentage of sales, (c) the contribution margin ratio, and (d) the operating income.

127. The following cost graphs illustrate various types of cost behaviors.

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For each of the following costs, identify the cost graph that best describes its cost behavior as the number of units produced and sold increases. (a) Per unit cost of direct labor (b) Rent on warehouse of $10,000 per month (c) Insurance costs of $2,500 per month (d) Sales commissions of $5,000 plus $0.05 for each item sold Total salaries of quality control supervisors. One supervisor must be added for each (e) additional work shift (f) Total employer pension costs of $0.30 per direct labor hour (g) Per unit straight-line depreciation costs (h) Per unit cost of direct materials (i) Total direct materials cost (j) Electricity costs of $5,000 per month plus $0.0004 per kilowatt-hour (k) Per unit cost of plant superintendent's salary (l) Straight-line depreciation on factory equipment (m) Repairs and maintenance costs of $3,000 for each 2,000 hours of factory machine usage (n) Total direct labor cost

128. The following are two independent scenarios. (a) (b)

Modern Co. has budgeted sales of $450,000, fixed costs are $240,000, and variable costs are $337,500. What is its contribution margin ratio?

Coachman Company has sales of $800,000, variable costs are 30% of sales, and fixed costs are $350,000. What is its operating profit?

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chapter 10 129. Currently, Unison Company's unit selling price is $25, variable costs are $17, and total fixed costs are $72,000. A proposal is being evaluated to increase the selling price to $27. (a) Compute the current break-even sales (in units).

Compute the anticipated break-even sales (in units), assuming that the unit selling price is (b) increased and all costs remain constant.

130. A company has a margin of safety of 20%, a contribution margin ratio of 30%, and sales of $1,500,000. (a) What is the break-even point? (b) What is the operating income?

If neither the relationship between variable costs and sales nor the amount of fixed costs (c) is expected to change in the next year, how much additional operating income can be earned by increasing sales by $120,000?

131. For the coming year, Bellon Company estimates fixed costs of $60,000, a unit variable cost of $25, and a unit selling price of $50. Determine (a) the break-even point in units of sales, (b) the unit sales required to realize an operating income of $100,000, and (c) the probable operating income if sales total $400,000.

132. For the current year ending May 31, Phillip Company expects fixed costs of $178,500 and a unit variable cost of $41.50. For the coming year, a new wage contract will increase the unit variable cost to $45. The selling price of $50 per unit is expected to remain the same. (a) Compute the break-even sales (in units) for the current year.

Compute the anticipated break-even sales (in units) for the coming year, assuming the (b) new wage contract is signed.

133. For the current year ending June 30, Preston Company expects fixed costs of $75,000, a unit variable cost of $45, and a unit selling price of $95. (a) Compute the anticipated break-even sales (in units). (b) Compute the sales (in units) required to realize an operating profit of $8,000.

134. Skyline Company sells Products E and F and has made the following estimates for the coming year: Product E F

Unit Selling Price $30 70

Unit Variable Cost $24 56

Sales Mix 60% 40

Fixed costs are estimated at $230,000. Determine (a) the estimated sales in units of the overall product necessary to reach the break-even point for the coming year, (b) the estimated number of units of each product necessary to be sold to reach the break-even point for the coming year, and (c) the estimated sales in units of the overall product necessary to realize an operating income of $110,400 for the coming year.

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chapter 10 Answer Key 1. True 2. False 3. True 4. False 5. True 6. False 7. True 8. True 9. False 10. True 11. False 12. False 13. True 14. True 15. True 16. True 17. True 18. True 19. True 20. False

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chapter 10 21. True 22. False 23. True 24. True 25. False 26. True 27. False 28. False 29. True 30. False 31. True 32. True 33. False 34. False 35. True 36. True 37. True 38. True 39. True 40. False 41. False Copyright Cengage Learning. Powered by Cognero.

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chapter 10 42. True 43. False 44. True 45. True 46. True 47. False 48. True 49. True 50. False 51. True 52. False 53. b 54. d 55. a 56. b 57. a 58. c 59. a 60. c 61. d 62. a Copyright Cengage Learning. Powered by Cognero.

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chapter 10 63. d 64. a 65. b 66. b 67. b 68. d 69. d 70. d 71. d 72. d 73. c 74. c 75. b 76. d 77. c 78. c 79. b 80. b 81. a 82. c 83. b Copyright Cengage Learning. Powered by Cognero.

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chapter 10 84. b 85. b 86. c 87. b 88. a 89. a 90. b 91. a 92. c 93. b 94. a 95. b 96. a 97. c 98. b 99. c 100. d 101. c 102. b 103. a 104. d Copyright Cengage Learning. Powered by Cognero.

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chapter 10 105. a 106. a 107. a 108. b 109. c 110. b 111. a 112. d 113. b 114. c 115. b 116. a 117. a 118. d 119. b 120. d 121. d 122. c 123. (a) Break-even sales (units) = $90,000 ÷ ($40 – $34) = 15,000 units (b) Break-even sales (units) = $105,000 ÷ ($40 – $34) = 17,500 units 124. (a) (b)

variable mixed

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chapter 10 (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o)

variable variable fixed fixed fixed variable fixed fixed fixed mixed fixed variable variable

125. (a) Break-even sales (units) = $6,552,000 ÷ ($600 – $444) = 42,000 units (b) Break-even sales (units) = $6,552,000 ÷ ($600 – $450) = 43,680 units 126. (a) Margin of safety (dollars) = $1,200,000 − $750,000 = $450,000 (b) Margin of safety (%) = $450,000 ÷ $1,200,000 = 37.5% (c) Contribution margin ratio = ($1,200,000 - $645,000) ÷ $1,200,000 = 46.25% (d) Operating income = $1,200,000 − $645,000 − $272,300 = $282,700

127.

Graph (a) 3 (b) 3 (c) 3 (d) 2 (e) 5 (f) 1 (g) 4 (h) 3 (i) 1 (j) 2 (k) 4 (l) 3 (m) 5 (n) 1 128. (a) Contribution margin ratio = ($450,000 − $337,500) ÷ $450,000 = 25% (b) Variable costs = 30% × $800,000 = $240,000 Copyright Cengage Learning. Powered by Cognero.

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chapter 10 Operating profit = Sales – Variable costs – Fixed costs = $800,000 − $240,000 − $350,000 = $210,000

129. (a) Break-even sales (units) = $72,000 ÷ ($25– $17) = 9,000 units (b) Break-even sales (units) = $72,000 ÷ ($27 – $17) = 7,200 units 130.

Margin of safety = $1,500,000 × 20% = $300,000 (a) (b)

Break-even point = $1,500,000 − $300,000 = $1,200,000 Operating income = $300,000 (margin of safety) × 30% (contribution margin ratio) = $90,000

Alternate computation: Sales Less Variable costs ($1,500,000 × 70%**) Less fixed costs* Operating income *Break-even point (a) Less variable costs ($1,200,000 × 70%**) Fixed costs

$1,500,000 $1,050,000 360,000

1,410,000 $90,000

$1,200,000 840,000 $360,000

**100% − 30% (contribution margin ratio) = 70% (variable costs)

(c)

$120,000 × 30% = $36,000

131. (a) Break-even sales (units) = $60,000 ÷ ($50 – $25) = 2,400 units (b) Sales (units) = ($60,000 + $100,000) ÷ ($50 – $25) = 6,400 units (c) Operating income = (50% $400,000) – $60,000 = $140,000 132. (a) Break-even sales (units) = $178,500 ÷ ($50 – $41.50) = 21,000 units (b) Break-even sales (units) = $178,500 ÷ ($50 – $45) = 35,700 units 133.

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chapter 10 (a) (b)

Break-even sales (units) = $75,000÷ ($95 – $45) = 1,500 units Sales (units) = ($75,000 + $8,000) ÷ ($95 – $45) = 1,660 units

134. (a) Unit selling price of overall product = ($30 × 60%) + ($70 × 40%) = $46.00 Unit variable cost of overall product = ($24 × 60%) + ($56 × 40%) = $36.80 Unit contribution margin = $46 − $36.80 = $9.20 Break-even sales (units) = $230,000 ÷ $9.20 = 25,000 units (b) E: 15,000 units (25,000 units × 60%) F: 10,000 units (25,000 units × 40%) (c) Sales = ($230,000 + $110,400) ÷ $9.20 = 37,000 units

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chapter 11

Indicate whether the statement is true or false.

1. The budgeted volume of production is based on the sum of (1) the expected sales volume and (2) the desired ending inventory, less (3) the estimated beginning inventory. a. True b. False 2. Goal conflict can be avoided if budget goals are carefully designed for consistency across all areas of the organization. a. True b. False 3. If Division Inc. expects to sell 300,000 units in 20Y9, desires ending inventory of 26,000 units, and has 28,000 units on hand as of the beginning of the year, the budgeted volume of production for 20Y9 is 298,000 units. a. True b. False 4. The budget procedure that requires all levels of management to start from zero in estimating sales, production, and other operating data is called zero-based budgeting. a. True b. False 5. The capital expenditure budget summarizes future plans for acquisition of fixed assets. a. True b. False 6. A budget procedure that provides for the maintenance at all times of a 12-month projection into the future is called continuous budgeting. a. True b. False 7. Budgeted direct materials purchases are based on the sum of (1) the materials needed for production and (2) the desired ending materials inventory, less (3) the estimated beginning materials inventory. a. True b. False 8. Flexible budgeting builds the effect of changes in level of activity into the budget system. a. True b. False 9. Employees view budgeting more positively when goals are established for them by senior management. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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10. Once a static budget has been determined, it is changed regularly as the underlying activity changes. a. True b. False 11. Process yield measures the efficiency of a process. a. True b. False 12. If Division Inc. expects to sell 200,000 units in 20Y9, desires ending inventory of 26,000 units, and has 22,000 units on hand as of the beginning of the year, the budgeted volume of production for 20Y9 is 202,000 units. a. True b. False 13. Budgeted direct materials purchases are normally computed as the sum of (1) the materials for production and (2) the desired beginning inventory. a. True b. False 14. Budgets are normally used by both profit-making businesses and nonprofit organizations. a. True b. False 15. Supervisor salaries, maintenance, and indirect factory wages would normally appear in the factory overhead cost budget. a. True b. False 16. Budgetary slack can be avoided if lower- and mid-level managers are requested to support all of their spending requirements with specific operational plans. a. True b. False 17. The budgeted volume of production is normally computed as the sum of (1) the expected sales volume and (2) the desired ending inventory. a. True b. False 18. The production budget is the starting point for preparation of the direct labor cost budget. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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chapter 11 19. The cash budget summarizes future plans for acquisition of fixed assets. a. True b. False 20. The master budget of a small manufacturer would normally include all component budgets that impact the financial statements. a. True b. False 21. Supervisor salaries and indirect factory wages would normally appear in the direct labor cost budget. a. True b. False 22. Supervisor salaries, maintenance, and indirect factory wages would normally appear in the selling and administrative expenses budget. a. True b. False 23. In preparing flexible budgets, the first step is to identify the fixed and variable components of the various costs and expenses being budgeted. a. True b. False 24. The master budget of a small manufacturer would normally include all necessary component budgets except the capital expenditures budget. a. True b. False 25. A formal written statement of management's plans for the future, expressed in financial terms, is called a budget. a. True b. False 26. The first budget to be prepared is usually the sales budget. a. True b. False 27. The sales budget is the starting point for preparation of the direct labor cost budget. a. True b. False 28. The cash budget presents the expected inflow and outflow of cash for a specified period of time. a. True Copyright Cengage Learning. Powered by Cognero.

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chapter 11 b. False 29. The first budget to be prepared is usually the production budget. a. True b. False 30. When budget goals are too tight, the budget becomes less effective for planning and controlling operations. a. True b. False 31. Many service businesses use process yield for assessing performance and the efficient use of assets. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

32. For March, sales revenue is $400,000; sales commissions are 5% of sales; the sales manager's salary is $45,000; advertising expenses are $15,000; shipping expenses total 1% of sales; and miscellaneous selling expenses are $1,200 plus 1/2 of 1% of sales. Total selling expenses for the month of March are _____. a. $55,000 b. $71,000 c. $87,200 d. $73,600 33. Based on the following information, calculate the overall process yield.

Process M: Units passing inspection Units entering process Process N: Units passing inspection Units entering process a. 80.93% b. 60.82% c. 66.00% d. 56.76%

7,755 units 11,750 units

5,762 units 6,700 units

34. Below is budgeted production and sales information for Octagon Cans, Inc. for the month of April:

Estimated beginning inventory Desired ending inventory Region I, anticipated sales Copyright Cengage Learning. Powered by Cognero.

Aluminum 12,000 units 15,000 units 390,000 units

Tin 6,000 units 4,000 units 80,000 units Page 237

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chapter 11 Region II, anticipated sales

130,000 units

30,000 units

The unit selling price for aluminum cans is $0.15 and for tin cans is $0.20.

Budgeted production for aluminum cans during the month is _____. a. 383,000 units b. 508,000 units c. 517,000 units d. 523,000 units 35. The _____ budget shows the expected results of a responsibility center for several activity levels. a. flexible b. standard c. break-even d. static 36. Which of the following is true of a capital expenditures budget? a. It summarizes plans for acquiring fixed assets. b. It indicates all the estimated cash receipts and cash payments for a period of time. c. It records all short-term expenses for a period. d. It lists all the transactions related to capital stock.

37. MicroMatic Company's static budget for 14,000 units of production includes $56,000 for direct materials, $28,000 for direct labor, utilities of $7,000, and supervisor salaries of $18,000. A flexible budget for 16,000 units of production would show _____. a. the same cost structure in total b. direct materials of $56,000, direct labor of $42,000, utilities of $7,000, and supervisor salaries of $21,000 c. total variable costs of $126,800 d. direct materials of $64,000, direct labor of $32,000, utilities of $8,000, and supervisor salaries of $18,000 38. SunRay Co.'s static budget at 10,000 units of production includes $30,000 for direct material and $5,000 for electric power. Total fixed costs are $31,000. At 12,000 units of production, a flexible budget would show _____. a. variable costs of $40,000 and $35,000 of fixed costs b. variable costs of $44,000 and $23,000 of fixed costs c. variable costs of $42,000 and $31,000 of fixed costs d. variable costs of $41,000 and $30,000 of fixed costs 39. A _____ shows the expected results of a responsibility center for only one activity level. a. break-even budget b. standard costing system c. static budget d. budgetary slack Copyright Cengage Learning. Powered by Cognero.

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chapter 11 40. Kohlman Company began its operations on March 31 of the current year. Projected manufacturing costs for the first three months of business are $156,800, $195,200, and $217,600, respectively, for April, May, and June. Depreciation, insurance, and property taxes represent $28,800 of the estimated monthly manufacturing costs. Insurance was paid on March 31, and property taxes will be paid in November. Three-fourths of the remainder of the manufacturing costs are expected to be paid in the month in which they are incurred with the balance to be paid in the following month.

The cash payments for manufacturing in the month of June are _____. a. $294,000 b. $235,200 c. $183,200 d. $381,500 41. Which of the following formulas is used to compute utilization rate? a. Units entering process ÷ Units passing inspection b. Service units used ÷ Available service units c. Standard quantity ÷ Actual quantity d. (Actual price – Standard price) × Actual quantity 42. The following is budgeted production and sales information for Octagon Cans, Inc. for the month of April:

Estimated beginning inventory Desired ending inventory Region I, anticipated sales Region II, anticipated sales

Aluminum 12,000 units 15,000 units 390,000 units 130,000 units

Tin 6,000 units 4,000 units 80,000 units 30,000 units

The unit selling price for aluminum cans is $0.15 and for tin cans is $0.20.

Budgeted sales for the month are _____. a. $97,750 b. $100,000 c. $98,500 d. $99,750 43. Bright Corporation began its operations on October 1 of the current year. Budgeted sales for the first three months of business are $300,000, $420,000, and $500,000, respectively, for October, November, and December. The company expects to sell 20% of its merchandise for cash. Of sales on account, 70% are expected to be collected in the month of the sale, 25% in the month following the sale, and the remainder in the following month.

The cash collections from accounts receivable in December are _____. a. $381,500 b. $280,000 c. $376,000 d. $305,200 44. Bright Corporation began its operations on October 1 of the current year. Budgeted sales for the first three months of business are $300,000, $420,000, and $500,000, respectively, for October, November, and December. The company Copyright Cengage Learning. Powered by Cognero.

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chapter 11 expects to sell 20% of its merchandise for cash. Of sales on account, 70% are expected to be collected in the month of the sale, 25% in the month following the sale, and the remainder in the following month.

The cash collections from accounts receivable in November are _____. a. $270,000 b. $295,200 c. $272,500 d. $218,000 45. In a production budget, if the number of units expected to be sold during the year is 8,000, the number of units desired in ending inventory is 470 units, and the number of units in beginning inventory is 510 units, the total production for the year is _____. a. 7,160 units b. 6,660 units c. 7,810 units d. 7,960 units 46. In computing _____, output is measured as the percentage of units from a process that pass inspection. a. standard units b. process yield c. process variance d. utilization rate 47. Coral Corporation sells a single product. Budgeted sales for the year are anticipated to be 650,000 units, estimated beginning inventory is 99,000 units, and desired ending inventory is 85,000 units. The quantities of direct materials expected to be used for each unit of finished product are as follows: Material A Material B Material C

0.50 lb. per unit 1.00 lb. per unit 1.20 lb. per unit

@ $0.60 per pound @ $1.70 per pound @ $1.00 per pound

The amount of direct material A purchased during the year is _____. a. $216,000 b. $186,600 c. $190,800 d. $245,400 48. Production and sales estimates for August are as follows: Estimated inventory (units), August 1 Desired inventory (unit), August 31 Expected sales volume (units): Area W Area X Area Y Unit sales price Copyright Cengage Learning. Powered by Cognero.

17,500 19,300 4,200 7,500 10,300 $15 Page 240

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The number of units expected to be manufactured in August is _____. a. 22,000 b. 18,400 c. 23,800 d. 20,200 49. The process of developing budget estimates by requiring all levels of management to estimate sales, production, and other operating data as though operations were being initiated for the first time is referred to as _____. a. flexible budgeting b. continuous budgeting c. zero-based budgeting d. master budgeting 50. Which of the following formulas is used to calculate process yield? a. Actual rate per hour × Actual time of a process b. Service units used ÷ Available service units of a process c. Units entering process ÷ Units passing inspection d. Units passing inspection ÷ Units entering process 51. Which of the following budgets summarizes plans for acquiring fixed assets? a. A selling and administrative expenses budget. b. A factory overhead budget c. A cash budget d. A capital expenditures budget 52. If the expected sales volume for the current period is 25,000 units, the desired ending inventory is 800 units, and the beginning inventory is 500 units, the number of units set forth in the production budget, representing total production for the current period, is _____. a. 25,250 units b. 25,300 units c. 21,500 units d. 22,300 units 53. Based on the following production and sales estimates for June, determine the number of units expected to be manufactured in June.

Estimated inventory (units), June 1 Desired inventory (units), June 30 Expected sales volume (units): South region West region North region Copyright Cengage Learning. Powered by Cognero.

20,000 15,000 40,000 50,000 60,000 Page 241

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chapter 11 Unit sales price a. 90,000 units b. 95,000 units c. 145,000 units d. 150,000 units

$10

54. The following is budgeted production and sales information for Octagon Cans, Inc., for the month of April:

Estimated beginning inventory Desired ending inventory Region I, anticipated sales Region II, anticipated sales

Aluminum 12,000 units 15,000 units 390,000 units 130,000 units

Tin 6,000 units 4,000 units 80,000 units 30,000 units

The unit selling price for aluminum cans is $0.15 and for tin cans is $0.20.

Budgeted production for tin cans during the month is _____. a. 83,000 units b. 108,000 units c. 112,000 units d. 120,000 units 55. Production and sales estimates for June are as follows: Estimated inventory (units), June 1 Desired inventory (units), June 30 Expected sales volume (units): Area X Area Y Area Z Unit sales price

19,500 19,000 3,000 4,000 5,500 $20

The number of units expected to be manufactured in June is _____. a. 10,000 b. 12,000 c. 13,000 d. 12,500 56. Production estimates for August are as follows: Estimated inventory (units), August 1 Desired inventory (units), August 31 Expected sales volume (units), August

12,000 9,000 75,000

For each unit produced, the direct materials requirements are as follows: Direct material A ($5 per lb.)

3 lbs.

Direct material B ($15 per lb.)

1/2 lb.

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The total direct materials purchases of materials A and B required for August production is _____. a. $1,260,000 for A; $630,000 for B b. $1,080,000 for A; $540,000 for B c. $1,125,000 for A; $562,500 for B d. $1,170,000 for A; $585,000 for B 57. Bright Corporation began its operations on October 1 of the current year. Budgeted sales for the first three months of business are $300,000, $420,000, and $500,000, respectively, for October, November, and December. The company expects to sell 20% of its merchandise for cash. Of sales on account, 70% are expected to be collected in the month of the sale, 25% in the month following the sale, and the remainder in the following month.

The cash collections from accounts receivable in October are _____. a. $175,000 b. $140,000 c. $190,000 d. $168,000 58. Managers plan _____ in a budget in order to provide a cushion for unexpected events or to improve the appearance of operations. a. budgetary slack b. favorable variance c. budgetary margin d. opportunity gap 59. Based on the following information, calculate process yield.

Units passing inspection Units entering process a. 85% b. 15% c. 90% d. 117%

13,500 units 15,000 units

60. Production estimates for July are as follows: Estimated inventory (units), July 1 Desired inventory (units), July 31 Expected sales volume (units), July

725 1,200 7,500

For each unit produced 4 hours of direct labor is required. The labor rate per hour is $15. The number of direct labor hours required for July production is _____. a. 25,200 b. 27,100 c. 31,900 Copyright Cengage Learning. Powered by Cognero.

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chapter 11 d. 34,800 61. The _____ estimates the number of units to be manufactured to meet budgeted sales and desired inventory levels. a. capital expenditures budget b. production budget c. sales budget d. cash budget 62. A variant of fiscal-year budgeting whereby a 12-month projection into the future is maintained at all times is termed _____. a. flexible budgeting b. master budgeting c. zero-based budgeting d. continuous budgeting 63. Kohlman Company began its operations on March 31 of the current year. Projected manufacturing costs for the first three months of business are $156,800, $195,200, and $217,600, respectively, for April, May, and June. Depreciation, insurance, and property taxes represent $28,800 of the estimated monthly manufacturing costs. Insurance was paid on March 31, and property taxes will be paid in November. Three-fourths of the remainder of the manufacturing costs are expected to be paid in the month in which they are incurred with the balance to be paid in the following month.

The cash payments for manufacturing in the month of April are _____. a. $128,000 b. $117,600 c. $156,800 d. $96,000 64. Production estimates for August are as follows: Estimated inventory (units), August 1 Desired inventory (units), August 31 Expected sales volume (units), August

3,000 2,000 40,000

For each unit produced, the direct materials requirements are as follows: Direct material A ($2 per lb.)

5 lbs.

Direct material B ($11 per lb.)

1 lb.

The number of pounds of materials A and B required for August production is: a. 195,000 lbs. of A; 39,000 lbs. of B. b. 200,000 lbs. of A; 40,000 lbs. of B. c. 205,000 lbs. of A; 41,000 lbs. of B. d. 210,000 lbs. of A; 42,000 lbs. of B. 65. Two major budgets comprising the budgeted balance sheet are _____. a. the cash budget and the capital expenditures budget Copyright Cengage Learning. Powered by Cognero.

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chapter 11 b. the sales budget and the production budget c. the cost of goods sold budget and the selling and administrative expenses budget d. the static budget and the flexible budget 66. Production and sales estimates for June are as follows: Estimated inventory (units), June 1 Desired inventory (units), June 30 Expected sales volume (units): Area X Area Y Area Z Unit sales price

8,000 9,000 3,000 4,000 5,500 $24

The budgeted total sales for June is _____. a. $300,000 b. $337,500 c. $312,500 d. $287,500 67. Coral Corporation sells a single product. Budgeted sales for the year are anticipated to be 650,000 units, estimated beginning inventory is 99,000 units, and desired ending inventory is 85,000 units. The quantities of direct materials expected to be used for each unit of finished product are as follows: Material A Material B Material C

0.50 lb. per unit 1.00 lb. per unit 1.20 lb. per unit

@ $0.60 per pound @ $1.70 per pound @ $1.00 per pound

The amount of direct material B purchased during the year is _____. a. $954,000 b. $763,000 c. $1,081,200 d. $1,057,400 68. The _____ estimates the expected receipts and payments of cash for a period of time. a. capital expenditures budget b. cash sales budget c. cash budget d. production budget 69. The _____ is an integrated set of operating, investing, and financing budgets for a period of time. a. standard budget b. budget performance report c. zero-based budget Copyright Cengage Learning. Powered by Cognero.

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chapter 11 d. master budget 70. Kohlman Company began its operations on March 31 of the current year. Projected manufacturing costs for the first three months of business are $156,800, $195,200, and $217,600, respectively, for April, May, and June. Depreciation, insurance, and property taxes represent $28,800 of the estimated monthly manufacturing costs. Insurance was paid on March 31, and property taxes will be paid in November. Three-fourths of the remainder of the manufacturing costs are expected to be paid in the month in which they are incurred with the balance to be paid in the following month.

The cash payments for manufacturing in the month of May are _____. a. $185,600 b. $156,800 c. $124,800 d. $146,400 71. Which of the following processes is involved in budgeting? a. Assessing the utilization rate of assets b. Identifying the industry standards of stock returns c. Periodically comparing actual results with the goals d. Dismissing all managers who fail to achieve operational goals specified in the budget 72. Cape Corporation sells a single product. Budgeted sales for the year are anticipated to be 650,000 units, estimated beginning inventory is 99,000 units, and desired ending inventory is 85,000 units. The quantities of direct materials expected to be used for each unit of finished product are as follows.

Material A Material B Material C

0.50 lb. per unit 1.00 lb. per unit 1.20 lb. per unit

@ $0.60 per pound @ $1.70 per pound @ $1.00 per pound

The amount of direct material C purchased during the year is _____. a. $763,200 b. $769,000 c. $756,400 d. $650,000 73. The first budget customarily prepared as part of an entity's master budget is the _____. a. production budget b. cash budget c. sales budget d. direct materials purchases 74. A hotel has 60 suites in total, and the number of booked suites for the month of May is 30. Calculate the occupancy rate of suites of the hotel. a. 40% b. 50% Copyright Cengage Learning. Powered by Cognero.

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chapter 11 c. 60% d. 45% 75. As of January 1 of the current year, the Butner Company had accounts receivable of $50,000. Sales for January, February, and March were as follows: $120,000, $140,000, and $150,000. Twenty percent of each month's sales are for cash. Of the remaining 80% (the credit sales), 60% are collected in the month of sale, with the remaining 40% collected in the following month. What is the total cash collected (from both accounts receivable and cash sales) in the month of February? a. $132,000 b. $105,600 c. $133,600 d. $95,200 76. A budget that provides the starting point for the preparation of a direct labor cost budget is the _____. a. selling and administrative expenses budget b. capital expenditures budget c. production budget d. factory overhead budget

77. Based on the following production and sales data of Preston Co. for July of the current year, prepare (a) a sales budget and (b) a production budget.

Estimated inventory, July 1 Desired inventory, July 31 Expected sales volume: Area I Area II Unit sales price

Product X 26,000 units 32,000 units

Product Y 18,000 units 15,000 units

320,000 units 190,000 units $4

260,000 units 130,000 units $12

78. Prepare a monthly flexible selling expense budget for Zodiac Company for sales volumes of $270,000, $350,000, and $480,000, based on the following data: Sales commissions Sales manager's salary Advertising expense Shipping expense Miscellaneous selling expense

7% of sales $62,000 per month $70,000 per month 2% of sales $2,500 per month plus 1/2% of sales

79. Canvas Inc.'s production budget for Product T for the year ended December 31 is as follows: Product T Copyright Cengage Learning. Powered by Cognero.

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chapter 11 Sales Plus desired ending inventory Total Less estimated beginning inventory, Jan. 1 Total production

640,000 units 85,000 725,000 90,000 635,000

In Canvas's production operations, Materials A, B, and C are required to make Product T. The quantities of direct materials expected to be used for each unit of product are as follows: Product T Material A 0.50 pound per unit Material B 1.00 pound per unit Material C 1.20 pounds per unit The prices of direct materials are as follows: Material A $0.60 per pound Material B $1.70 per pound Material C $1.50 per pound Prepare a direct materials purchases budget for Product T. 80. The following information is given for a company: Process A 8,500 units 10,000 units

Units passing inspection Units entering process

Process B 3,750 units 5,000 units

Calculate the (a) process yield for Process A, (b) process yield for Process B, and (c) overall process yield.

81. Trapp Co. was organized on August 1 of the current year. Projected sales for the next three months are as follows: August September October

$100,000 185,000 225,000

The company expects to sell 40% of its merchandise for cash. Of the sales on account, one-third are expected to be collected in the month of the sale and the remainder in the following month.

Prepare a schedule indicating cash collections of accounts receivable for August, September, and October 20Y8.

82. The treasurer of Unisyms Company has accumulated the following budget information for the first two months of the coming year:

Sales Manufacturing costs Copyright Cengage Learning. Powered by Cognero.

March $450,000 290,000

April $520,000 350,000 Page 248

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chapter 11 Selling and administrative expenses Capital additions

41,400 250,000

46,400 —-

The company expects to sell about 35% of its merchandise for cash. Of sales on account, 80% are expected to be collected in full in the month of the sale and the remainder in the month following the sale. One-fourth of the manufacturing costs are expected to be paid in the month in which they are incurred and the other three-fourths in the following month.

Depreciation, insurance, and property taxes represent $6,400 of the probable monthly selling and administrative expenses.

Insurance is paid in February 20Y8, and a $40,000 installment on income taxes is expected to be paid in April 20Y8. Of the remainder of the selling and administrative expenses, one-half are expected to be paid in the month in which they are incurred, with the balance paid in the following month. Capital additions of $250,000 are expected to be paid in March 20Y8.

Current assets as of March 1 are composed of cash of $45,000 and accounts receivable of $51,000. Current liabilities as of March 1 are composed of accounts payable of $121,500 ($102,000 for materials purchases and $19,500 for operating expenses). Management desires to maintain a minimum cash balance of $20,000.

Prepare a monthly cash budget for March and April 20Y8.

83. AlumiGuard Company manufactures two models of televisions, AR26 and AR28. Based on the following production data for June of the current year, prepare a production budget for June 20Y9.

Estimated inventory (units), June 1 Desired inventory (units), June 30 Expected sales volume (units): Eastern zone Midwest zone Western zone

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AR26 2,500 3,700

AR28 3,700 3,700

8,200 13,000 7,300

11,500 17,500 9,100

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chapter 11 Answer Key 1. True 2. True 3. True 4. True 5. True 6. True 7. True 8. True 9. False 10. False 11. True 12. False 13. False 14. True 15. True 16. True 17. False 18. True 19. False 20. True

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chapter 11 21. False 22. False 23. False 24. False 25. True 26. True 27. False 28. True 29. False 30. True 31. False 32. c 33. d 34. d 35. a 36. a 37. d 38. c 39. c 40. c 41. b Copyright Cengage Learning. Powered by Cognero.

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chapter 11 42. b 43. c 44. b 45. d 46. b 47. c 48. c 49. c 50. d 51. d 52. b 53. c 54. b 55. b 56. b 57. d 58. a 59. c 60. c 61. b 62. d Copyright Cengage Learning. Powered by Cognero.

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chapter 11 63. d 64. a 65. a 66. a 67. c 68. c 69. d 70. b 71. c 72. a 73. c 74. b 75. c 76. c 77. (a)

Product and Area Product X: Area I Area II Total

Preston Co. Sales Budget For Month Ending July 31, 20Y9 Unit Unit Sales Selling Volume Price

Product Y: Area I Area II Total Copyright Cengage Learning. Powered by Cognero.

Total Sales

320,000 190,000 510,000

$4 4

$1,280,000 760,000 $2,040,000

260,000 130,000 390,000

$12 12

$3,120,000 1,560,000 $4,680,000 Page 253

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chapter 11 Total revenue from sales (b)

$6,720,000

Preston Co. Production Budget For Month Ending July 31, 20Y9 Product X Expected units to be sold 510,000 units Plus desired ending inventory, July 31, 20Y9 32,000 Total 542,000 units Less estimated beginning inventory, July 1, 20Y9 26,000 Total production 516,000 units

Product Y 390,000 units 15,000 405,000 units 18,000 387,000 units

78.

Zodiac Company Monthly Selling Expense Budget $270,000 $350,000

$480,000

$ 18,900 5,400 1,350 $ 25,650

$ 24,500 7,000 1,750 $ 33,250

$ 33,600 9,600 2,400 $ 45,600

$ 62,000 70,000 2,500 $134,500 $160,150

$ 62,000 70,000 2,500 $134,500 $167,750

$ 62,000 70,000 2,500 $134,500 $180,100

Sales volume Variable expense: Sales commissions Shipping expense Misc. selling expense Total variable expense Fixed expense: Sales manager's salary Advertising expense Misc. selling expense Total fixed expense Total selling expense

79.

Direct Materials Purchases Budget A B C Units required for production of Product T(Note A) 317,500 lbs 635,000 lbs 762,000 lbs Unit price × $.60 × $1.70 × $1.50 Total direct materials purchases $190,500 $1,079,500 $1,143,000 Note A: Material A 635,000 × 0.50 lb. per unit = 317,500 lbs.

Material B 635,000 × 1.00 lb. per unit = 635,000 lbs.

Material C 635,000 × 1.20 lbs. per unit = 762,000 lbs.

Total

$2,413,000

80. Process yield: Copyright Cengage Learning. Powered by Cognero.

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chapter 11 Process A = Units passing inspection ÷ Units entering process = 8,500 units ÷ 10,000 units = 85% Process B = Units passing inspection ÷ Units entering process = 3,750 units ÷ 5,000 units = 75% Overall process yield = 85% × 75% = 63.75%

81.

Trapp Co. Schedule of Collections of Accounts Receivable For Three Months Ending October 31, 20Y8 August September August sales on account (60% × $100,000): Collected in August (1/3 × $60,000) $20,000 Collected in September (2/3 × $60,000) $40,000 September sales on account (60% × $185,000): Collected in September (1/3 × $111,000) Collected in October (2/3 × $111,000)

37,000 $ 74,000

October sales on account (60% × $225,000): Collected in October (1/3 × $135,000) Totals

October

______ $20,000

______ $77,000

45,000 _______ $119,000

82.

Unisyms Company Cash Budget For the Two Months Ending April 30, 20Y8 March Estimated cash receipts from: Cash sales* $157,500 Collections of accounts receivable** 285,000 Total cash receipts $442,500 Estimated cash payments for: Manufacturing costs*** $174,500 Selling and administrative expenses**** 37,000 Capital additions 250,000 Income taxes —Total cash payments $461,500 Cash increase (decrease) $(19,000) Cash balance at beginning of month 45,000 Cash balance at end of month $ 26,000 Copyright Cengage Learning. Powered by Cognero.

April $182,000 328,900 $510,900 $305,000 37,500 —40,000 $382,500 $128,400 26,000 $154,400 Page 255

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chapter 11 Minimum cash balance 20,000 Excess (deficiency) $6,000 *$450,000 × 0.35 = $157,500; $520,000 × 0.35 = $182,000 **($450,000 × 0.65 × 0.80) + $51,000 = $285,000 ($520,000 × 0.65 × 0.80) + ($450,000 × 0.65 × 0.20) = $328,900 ***($290,000 × 0.25) + $102,000 = $174,500 ($290,000 × 0.75) + ($350,000 × 0.25) = $305,000 ****($41,400 − $6,400) = $35,000 × 0.5 = $17,500 $17,500 + $19,500 = $37,000 ($46,400 − $6,400) = $40,000 × 0.5 = $20,000 $20,000 + $17,500 = $37,500

20,000 $134,400

83.

AlumiGuard Company Production Budget For the Month Ending June 30, 20Y9 AR26 Estimated units to be sold 28,500 units Plus desired ending inventory, June 30, 20Y9 3,700 Total 32,200 units Less estimated beginning inventory, June 1, 20Y9 2,500 Total production 29,700 units

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AR28 38,100 units 3,700 41,800 units 3,700 38,100 units

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chapter 12

Indicate whether the statement is true or false.

1. If the total unit cost of manufacturing Product Y is currently $40 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $48. a. True b. False 2. In deciding whether to accept business at a special price when the company is operating at full capacity, the special price should be set high enough to cover all fixed and variable costs and expenses. a. True b. False 3. When deciding to make or buy a part needed for the manufacturing process, management needs to consider whether the plant has excess production capacity available to make the part or if current production will need to be interrupted to manufacture the part. a. True b. False 4. In deciding whether to accept business at a special price when the company is operating below full capacity, the special price should be set high enough to cover both the fixed and variable costs. a. True b. False 5. A cost that will not be affected by later decisions is termed an opportunity cost. a. True b. False 6. A cost that will not be affected by later decisions is termed as sunk cost. a. True b. False 7. The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on production processes. a. True b. False 8. In using the total cost concept of applying the cost-plus method to product pricing, only profit is covered in the markup. a. True b. False 9. When choosing whether or not to replace equipment, the analysis normally focuses on the costs of continuing to use the old equipment versus replacing the equipment.

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chapter 12 a. True b. False 10. In addition to the differential costs in an equipment replacement decision, the difference between the remaining useful life of the old equipment and the estimated life of the new equipment is an important consideration. a. True b. False 11. Differential revenue is the amount of income that would result from the best available alternative for the proposed use of cash. a. True b. False 12. Opportunity cost is the amount of increase or decrease in revenue that would result from the best available alternative to the proposed use of cash or its equivalent. a. True b. False 13. The total cost concept includes all manufacturing costs minus selling and administrative expenses in the total cost amount to which the markup is added to determine the product price. a. True b. False 14. Eliminating a product or segment will usually eliminate all of the product's or segment's variable costs. a. True b. False 15. Manufacturers must conform to the Robinson-Patman Act, which prohibits price discrimination within the United States unless differences in prices can be justified by different costs. a. True b. False 16. A practical approach that is frequently used by managers when setting normal selling price is the cost-plus method. a. True b. False 17. The revenue that is forgone from an alternative use of an asset, such as cash, is called an opportunity cost. a. True b. False 18. When eliminating a product or segment of a business, the fixed costs pertaining to the product or segment will always be eliminated.

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chapter 12 a. True b. False 19. When choosing whether or not to replace a fixed asset, management will consider the price at which the asset can be sold. a. True b. False 20. When a product or segment of a business is determined to be generating a loss, the total income from operations for the company will always increase if management eliminates the product or segment. a. True b. False 21. Differential analysis can aid management in making decisions on a variety of alternatives, including whether to discontinue an unprofitable segment and whether to replace fixed assets. a. True b. False 22. Differential revenue is the amount of increase or decrease in revenue expected from a particular course of action as compared to an alternative. a. True b. False 23. If the total unit cost of manufacturing Product Y is currently $40 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $8. a. True b. False 24. In using the product cost concept of applying the cost-plus method to product pricing, selling expenses, administrative expenses, and profit are covered in the markup. a. True b. False 25. The product with the highest contribution margin per scarce resource is the most profitable. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

26. White Lights Co. uses the total cost concept of applying the cost-plus approach to product pricing. The costs of producing and selling 7,700 units are as follows: Fixed factory overhead cost Copyright Cengage Learning. Powered by Cognero.

$60,000 Page 259

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chapter 12 Fixed selling and administrative costs Variable direct materials cost per unit Variable direct labor cost per unit Variable factory overhead cost per unit Variable selling and administrative cost per unit

120,000 80 150 50 30

If the amount of desired profit is $325,000, calculate the total cost markup percentage per unit. (Round answer to two decimal places) a. 9.30% b. 11.10% c. 15.70% d. 12.66% 27. Defense contractors would be more likely to use which of the following cost concepts in pricing their product? a. Variable cost b. Product cost c. Total cost d. Fixed cost 28. Prosper Co. is considering replacing a machine that originally cost $500,000 and has $250,000 accumulated depreciation to date. A new machine will cost $450,000. What is the sunk cost in this situation? a. $250,000 b. $507,500 c. $350,000 d. $500,000 29. A business received an offer from an exporter for 10,000 units of product at $14 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic unit sales price Unit manufacturing costs: Variable Fixed

$21 12 5

What is the amount of the profit or loss from acceptance of the offer? a. $75,000 loss b. $20,000 profit c. $15,000 profit d. $40,000 profit 30. A practical approach that is frequently used by managers when setting normal selling price is the _____. a. cost-plus method b. economic theory method c. price graph method Copyright Cengage Learning. Powered by Cognero.

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chapter 12 d. market price method 31. White Lights Co. uses the total cost concept of product pricing. The following is cost information for the production and sale of 50,000 units of its sole product. Blue Lights desires a profit equal to a 15.6% rate of return on invested assets of $1,000,000.

Fixed factory overhead cost Fixed selling and administrative costs Variable direct materials cost per unit Variable direct labor cost per unit Variable factory overhead cost per unit Variable selling and administrative cost per unit

$90,000 55,000 6.00 9.65 3.50 1.20

Based on the information provided, the dollar amount of desired profit from the production and sale of the company's product is _____. a. $126,000 b. $156,000 c. $237,700 d. $96,000 32. What cost concept used in applying the cost-plus method to product pricing includes total manufacturing costs and total selling and administrative expenses in the "cost" amount to which the markup is added? a. Variable cost concept b. Total cost concept c. Product cost concept d. Opportunity cost concept 33. What is a production constraint? a. The point in the manufacturing process where the demand for the company's products exceeds its ability to produce the products b. A manufacturing strategy used to reduce production cost by eliminating waste of inventory c. A manufacturing strategy that focuses on increasing the influence of constraints on production processes d. The point in the manufacturing process where total variable costs and total fixed costs equal total revenues 34. A business is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $15 per unit. The unit cost for the business to make the part is $18, including fixed costs, and $12, not including fixed costs. If 25,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it? a. $90,000 increase b. $ 75,000 increase c. $90,000 decrease d. $ 75,000 decrease 35. White Lights Co. uses the total cost concept of applying the cost-plus method to product pricing. The costs of Copyright Cengage Learning. Powered by Cognero.

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chapter 12 producing and selling 6,000 units are as follows: Fixed factory overhead cost Fixed selling and administrative costs Variable direct materials cost per unit Variable direct labor cost per unit Variable factory overhead cost per unit Variable selling and administrative cost per unit

$ 60,000 120,000 80 150 50 30

If the total cost markup percentage per unit is 5.0%, determine the selling price per unit of the company's product. a. $346 b. $357 c. $365 d. $677 36. The _____ is estimated as the difference between the expected selling price and the desired profit. a. target cost b. product cost c. sunk cost d. opportunity cost 37. _____ is a method of setting prices that combines market-based pricing with a cost-reduction emphasis. a. Product costing b. Target costing c. Markup costing d. Activity-based costing 38. The condensed income statement for a business for the past year is as follows: Product Sales Less variable costs Contribution margin Less fixed costs Income (loss) from operations

Red $ 750,000 400,000 $ 350,000 240,000 $ 110,000

Blue $ 550,000 380,000 $ 170,000 100,000 $ 70,000

Management is considering the discontinuance of the manufacture and sale of Blue at the beginning of the current year.

The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Red. What is the amount of change in net income for the current year that will result from the discontinuance of Blue? a. $40,000 decrease b. $180,000 decrease c. $70,000 decrease d. $170,000 decrease Copyright Cengage Learning. Powered by Cognero.

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chapter 12 39. Wyandott Co. produces two products. Both products pass through a firing process that is operating at full capacity and is a production bottleneck. Product A requires 2 hours of processing and has a contribution margin per unit of $60.

Product B requires 1 hour of processing and has a contribution margin per unit of $40. Which of the following provides the most accurate assessment of the situation assuming unlimited demand for each product? a. Production of Product B rather than Product A will generate the maximum profitability for Wyandott. b. Production of Product A rather than Product B will generate the maximum profitability for Wyandott. c. Raising the selling price of Product B by $20 will cause management to be indifferent between producing Product A or Product B. d. Raising the selling price of Product A by $10 will cause management to be indifferent between producing Product A or Product B. 40. Fun Stuff Inc., a toy manufacturer, provided the following information: Domestic unit sales price Unit manufacturing costs: Variable Fixed

$50 10 8

The company has received an offer from an exporter for 12,000 units of toys at $60 per unit. The additional business is not expected to affect the normal production or domestic sales prices of Fun Stuff Inc. The company's differential revenue from the acceptance of the offer is _____. a. $450,000 b. $720,000 c. $540,000 d. $225,000 41. The condensed income statement for a business for the past year is presented as follows: Product Sales Less variable costs Contribution margin Less fixed costs Income (loss) from operations

J $200,000 120,000 $ 80,000 25,000

K $180,000 160,000 $ 20,000 30,000

L $320,000 200,000 $120,000 40,000

Total $700,000 480,000 $220,00 95,000

$ 55,000

$10,000

$ 80,000

$125,000

Management is considering the discontinuance of the manufacture and sale of Product K at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Products J and L. What is the amount of change in net income for the current year that will result from the discontinuance of Product K? a. $10,000 increase b. $20,000 increase Copyright Cengage Learning. Powered by Cognero.

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chapter 12 c. $10,000 decrease d. $20,000 decrease 42. Soap Company manufactures Soap X and Soap Y and can sell all it can make of either. Hours available to produce the products are the constrained resources. Based on the following data, which statement is true?

X Y Sales Price $20 $25 Variable Cost 14 15 Hours needed to process 3 5 a. X is more profitable than Y. b. Y is more profitable than X. c. Neither X nor Y have a positive contribution margin. d. X and Y are equally profitable.

43. Soap Company manufactures Soap X and Soap Y and can sell all it can make of either. Hours available to produce the products are the constrained resources. Based on the following data, if Soap could reduce the processing time for X by 10%, which of the following statements is true?

X Y Sales Price $20 $25 Variable Cost 14 15 Hours needed to process 3 5 a. It would take 162 minutes to process one unit of X. b. There would be no difference in the contribution margin per hour as compared to before the processing time reduction. c. The contribution margin per hour for X would be $2. d. Soap Y would still be the most profitable.

44. Fun Stuff Inc., a toy manufacturer, provided the following information: Domestic unit sales price Unit manufacturing costs: Variable Fixed

$50 10 8

The company has received an offer from an exporter for 12,000 units of toys at $60 per unit. The additional business is not expected to affect the normal production or domestic sales prices of Fun Stuff Inc. The company's differential cost from the acceptance of the offer is _____. a. $72,000 b. $378,000 c. $120,000 d. $90,000 45. The condensed income statement for a business for the past year is as follows: Copyright Cengage Learning. Powered by Cognero.

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chapter 12

Sales Less variable costs Contribution margin Less fixed costs Income (loss) from operations

Product X $800,000 720,000 $ 80,000 125,000 $(45,000)

Y $550,000 430,000 $120,000 45,000 $ 75,000

Management is considering the discontinuance of the manufacture and sale of Product X at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Product Y. What is the amount of change in net income for the current year that will result from the discontinuance of Product X? a. $80,000 increase b. $45,000 increase c. $45,000 decrease d. $80,000 decrease 46. In using the total cost concept of applying the cost-plus method to product pricing, what is included in the cost amount to which the markup is added? a. Total selling and administrative expenses plus desired profit b. Total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit c. Total costs of manufacturing a product plus selling and administrative expenses d. Total variable manufacturing costs, total variable selling and administrative expenses, and desired profit 47. Differential analysis focuses on _____. a. setting the selling price according to the demand for the product b. reducing the influence of constraints on production processes c. setting the selling price according to the price offered by competitors d. the effect of alternative courses of action on revenues and costs 48. Jenkins Inc. is considering disposing of a machine with a book value of $50,000 and an estimated remaining life of five years. The old machine can be sold for $15,000. A new machine with a purchase price of $150,000 is being considered as a replacement. It will have a useful life of five years and no residual value. It is estimated that variable manufacturing costs will be reduced from $75,000 to $50,000 if the new machine is purchased. The net differential increase or decrease in cost for the entire five years for the new equipment is _____. a. $10,000 decrease b. $25,000 decrease c. $10,000 increase d. $25,000 increase 49. The amount of increase or decrease in revenue that is expected from a particular course of action as compared with an alternative is termed _____. a. manufacturing margin b. differential margin c. deferred revenue Copyright Cengage Learning. Powered by Cognero.

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chapter 12 d. differential revenue 50. Fun Stuff Inc., a toy manufacturer, provided the following information: Domestic unit sales price Unit manufacturing costs: Variable Fixed

$50 10 8

The company has received an offer from an exporter for 12,000 units of toys at $60 per unit. The additional business is not expected to affect the normal production or domestic sales prices of Fun Stuff Inc. What is the amount of differential profit or loss from acceptance of the offer? a. $450,000 profit b. $720,000 loss c. $315,000 loss d. $600,000 profit 51. The amount of increase or decrease in cost that is expected from a particular course of action as compared to an alternative is termed _____. a. period cost b. product cost c. differential cost d. discretionary cost 52. Ruby Company is considering replacing an old machine that originally cost $105,000. A new machine will cost $900,000, and the old machine can be sold for $30,000. What is the sunk cost in this situation? a. $25,000 b. $95,000 c. $105,000 d. $120,000 53. The markup determined by management should be sufficient to earn _____. a. manufacturing cost plus the selling and administrative expenses b. the desired profit plus cover any costs and expenses that are not included in the cost amount c. only costs and expenses that are not included in the cost amount d. only the desired profit 54. Target costing is arrived at by _____. a. taking the selling price and subtracting desired profit b. taking the selling price and adding desired profit c. taking the selling price and subtracting the budget standard cost d. taking the budget standard cost and reducing it by 10% Copyright Cengage Learning. Powered by Cognero.

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55. Milton Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $25 per unit. The unit cost for Milton Co. to make the part is $30, which includes $2 of fixed costs. If 20,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it? a. $60,000 decrease b. $40,000 decrease c. $40,000 increase d. $60,000 increase 56. In which of the following pricing methods is the markup added to manufacturing costs and selling and expenses to determine the selling price? a. Total cost concept b. Product cost concept c. Variable cost concept d. Fixed cost concept 57. The revenue that is forgone from an alternative use of an asset is called a(n) _____. a. opportunity cost b. differential revenue c. sunk cost d. differential income 58. In attempting to improve profitability when faced with a bottleneck related to hours that is involved in the production of two or more products, which of the following is most important for management to consider? a. Contribution margin per unit for each product b. Time required for each different product passing through the bottleneck c. Selling price or sales revenue generated by each product produced through the bottleneck d. Contribution margin per bottleneck hour for each product 59. A cost that has been incurred in the past and is irrelevant is termed a(n) _____. a. variable cost b. opportunity cost c. differential cost d. sunk cost 60. In using the total cost concept of applying the cost-plus method to product pricing, what is included in the markup? a. Total selling and administrative expenses plus desired profit b. Total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit c. Total costs plus desired profit d. Desired profit Copyright Cengage Learning. Powered by Cognero.

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chapter 12 61. The condensed income statement for a business for the past year is presented as follows:

Sales Less variable costs Contribution margin Less fixed costs Income (loss) from operations

J $300,000 180,000 $120,000 50,000 $ 70,000

Product K $220,000 190,000 $ 30,000 50,000 $(20,000)

L $340,000 220,000 $120,000 40,000 $ 80,000

Total $860,000 590,000 $270,000 140,000 $130,000

Management is considering the discontinuance of the manufacture and sale of Product K at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Products J and L. What is the amount of change in net income for the current year that will result from the discontinuance of Product K? a. $30,000 decrease b. $30,000 increase c. $20,000 decrease d. $20,000 increase 62. What pricing approach is most likely to be used if there are several providers in the same market and there is sufficient demand for the product? a. Demand-based concept b. Total cost concept c. Cost-plus concept d. Competition-based concept

63. M&M Manufacturing Company has a normal plant capacity of 75,000 units per month. Because of an extra-large quantity of inventory on hand, it expects to produce only 60,000 units in June. Monthly fixed costs and expenses are $150,000 ($2 per unit at normal plant capacity), and variable costs and expenses are $13 per unit. The present selling price is $25 per unit. The company has an opportunity to sell 5,000 additional units at $14.30 per unit to an exporter who plans to market the product under its own brand name in a foreign market. The additional business is therefore not expected to affect the regular selling price or quantity of sales of M&M Manufacturing Company.

Prepare a differential analysis report, dated June 19 of 20Y9, on the proposal to sell at the special price.

64. Brickman's Pharmacy sells a variety of products. The business is divided into four segments or departments for reporting purposes. The departments and their operating results are as follows:

Sales Revenue Variable Costs Contribution Margin Fixed Costs Net Income (Loss)

Pharmaceuticals $ 600,000 425,000 $ 175,000 80,000 $ 95,000

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Cosmetics $ 300,000 200,000 $ 100,000 60,000 $ 40,000

Grocery $ 200,000 170,000 $ 30,000 40,000 $ (10,000)

Household $ 400,000 250,000 $ 150,000 80,000 $ 70,000 Page 268

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chapter 12

The fixed costs consist of insurance, property taxes, interest, and other costs that will not be eliminated if a department is discontinued.

Brickman's management is considering eliminating the grocery department. Assuming sales in the other departments will not be affected by dropping the grocery department, what will be the effect on the company's total operating income?

65. Product J is one of the many products manufactured and sold by Milton Company. An income statement by product line for the past year indicated a net loss for Product J of $7,250. This net loss resulted from sales of $265,000, cost of goods sold of $186,500, and operating expenses of $85,750. It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 40% of the operating expense is fixed. If Product J is retained, the revenue, costs, and expenses are not expected to change significantly from those of the current year. However, because of the net loss, management is considering the elimination of the unprofitable endeavor. Because of the large number of products manufactured, the total fixed costs and expenses are not expected to decline significantly if Product J is discontinued.

Prepare a differential analysis report, dated February 28 of 20Y9, on the proposal to discontinue Product J. 66. Glover Inc. manufactures Product B, incurring variable costs of $15.00 per unit and fixed costs of $70,000. Glover desires a profit equal to a 12% rate of return on assets. Assets of $785,000 are devoted to producing Product B, and 100,000 units are expected to be produced and sold. (a) Compute the markup percentage using the total cost concept. (b) Compute the selling price of Product B. 67. Jarvis Company uses the total cost concept of applying the cost-plus method to product pricing. The costs and expenses of producing and selling 35,000 units of Product E are as follows: Variable costs: Direct materials Direct labor Factory overhead Selling and administrative expenses Total

$ 3.00 1.25 0.75 3.00 $ 8.00

Fixed costs: Factory overhead Selling and administrative expenses

$50,000 20,000

Jarvis desires a profit equal to a 14% rate of return on invested assets of $400,000. (a) Determine the amount of desired profit from the production and sale of Product E. Determine the total costs and the cost amount per unit for the production and sale of 35,000 (b) units of Product E. (c) Determine the markup percentage for Product E. (d) Determine the selling price of Product E.

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chapter 12 Answer Key 1. False 2. True 3. True 4. False 5. False 6. True 7. True 8. True 9. True 10. True 11. False 12. False 13. False 14. True 15. True 16. True 17. True 18. False 19. True 20. False

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chapter 12 21. True 22. True 23. True 24. True 25. True 26. d 27. c 28. a 29. b 30. a 31. b 32. b 33. a 34. d 35. b 36. a 37. b 38. d 39. a 40. b 41. d Copyright Cengage Learning. Powered by Cognero.

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chapter 12 42. d 43. a 44. c 45. d 46. c 47. d 48. a 49. d 50. d 51. c 52. c 53. b 54. a 55. d 56. a 57. a 58. d 59. d 60. d 61. a 62. d Copyright Cengage Learning. Powered by Cognero.

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chapter 12 63.

M&M Manufacturing Company Proposal to Sell to Exporter June 19, 20Y9 Differential revenue from accepting offer: Revenue from sale of 5,000 additional units at $14.30 Differential cost of accepting offer: Variable costs and expenses of 5,000 additional units at $13

$71,500 65,000

Differential income from accepting offer

$ 6,500

64. Brickman's overall net operating income will decrease by $30,000. The sales revenue and variable costs from the grocery department will be eliminated; thus, the contribution margin of $30,000 will be lost. The $40,000 in fixed expenses will remain but will be allocated to other departments. So operating income will decrease by the lost contribution margin.

65.

Milton Company Proposal to Discontinue Product J February 28, 20Y9 Differential revenue from annual sales of product: Revenue from sales Differential cost of annual sales of product: Variable cost of goods sold ($186.50 × 70%) $130,550 Variable operating expenses ($85,750 × 60%) 51,450 Annual differential income from sales of Product J

$265,000

182,000 $ 83,000

66.

(a)

Markup Percentage = 6% (b)

67. (a) (b)

Cost amount per unit ($15.00 variable costs = $0.70 fixed costs) Markup ($15.70 × 6%) Selling price of Product B

$15.70 .94 $16.64

$56,000 ($400,000 × 14%) Total costs: Variable ($8.00 × 35,000 units)

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$280,000 Page 273

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chapter 12 Fixed ($50,000 + $20,000) Total

70,000 $350,000

Cost amount per unit: $350,000/35,000 units

$ 10.00

(c) Markup Percentage = Desired Profit ÷ Total Costs: $56,000 ÷ $350,000 = 16% (d)

Cost amount per unit Markup ($10.00 × 16%) Selling price

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$10.00 1.60 $11.60

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chapter 13

Indicate whether the statement is true or false.

1. The major advantage of residual income as a performance measure is that it considers not only a minimum acceptable rate of return but also the operating income earned by each division. a. True b. False 2. If Division Q's operating income was $60,000 and invested assets amounted to $400,000, the return on investment calculated would be 15%. a. True b. False 3. In the return on investment analysis, the investment turnover component focuses on efficiency of use of assets and indicates the number of sales dollars generated for each dollar of invested assets. a. True b. False 4. The profit margin, a component of the return on investment, focuses on profitability by indicating the rate of profit earned on each sales dollar. a. True b. False 5. The major advantage of using the return on investment over operating income as a divisional performance measure is that divisional investment is directly considered, and, thus, comparability of divisions is facilitated. a. True b. False 6. A centralized business organization is one in which all major planning and operating decisions are made by top management. a. True b. False 7. If the profit margin for a division is 8% and the investment turnover is 1.20, the return on investment computed would be 6.7%. a. True b. False 8. Responsibility accounting reports for profit centers are normally in the form of balance sheets. a. True b. False 9. The primary disadvantage of decentralized operations is that decisions made by one manager may affect other managers in such a way that the profitability of the entire company may suffer.

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chapter 13 a. True b. False 10. Depreciation expense on store equipment for a department store is a direct expense. a. True b. False 11. The process of measuring and reporting operating data by areas of responsibility is termed responsibility accounting. a. True b. False 12. The manager of the furniture department of a leading retailer does not have control of salaries of the department personnel. a. True b. False 13. The minimum amount of desired divisional operating income is set by top management by establishing a maximum rate of return that is expected from the invested assets. a. True b. False 14. A responsibility center in which the department manager has responsibility for and authority over costs in the department is termed a cost center. a. True b. False 15. The excess of divisional operating income over a minimum amount of desired operating income is termed residual income. a. True b. False 16. If divisional operating income is $75,000, invested assets are $537,500, and the minimum rate of return on the invested assets is 7%, the residual income calculated would be $37,375. a. True b. False 17. If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover would be 5.0. a. True b. False 18. Controllable expenses are those that can be influenced by the decisions of the profit center management.

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chapter 13 a. True b. False 19. The primary accounting tool for controlling and reporting for cost centers is a budget performance report. a. True b. False 20. If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin calculated would be 20%. a. True b. False 21. The service department will determine its service department charge rate and charge the company's divisions or departments based on the usage of the service by each department. a. True b. False 22. The underlying principle of allocating operating expenses to departments is to assign each department an amount of expense proportional to the revenues of that department. a. True b. False 23. If divisional operating income is $100,000, invested assets are $850,000, and the minimum rate of return on invested assets is 7%, the residual income would be $40,500. a. True b. False 24. If operating income for a division is $120,000, sales are $1,050,000, and invested assets are $750,000, the investment turnover would be 5.3. a. True b. False 25. Investment turnover (as used in determining the return on investment) focuses on the rate of profit earned on each sales dollar. a. True b. False 26. The amount of details presented in a budget performance report for a cost center depends upon the level of management to which the report is directed. a. True b. False

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chapter 13 27. A responsibility center in which the authority and responsibility for costs and revenues is vested on the department manager is termed an investment center. a. True b. False 28. Service department charges are similar to the expenses that would be incurred if the profit center purchased the services from outside the company. a. True b. False 29. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are termed indirect expenses. a. True b. False 30. The balanced scorecard attempts to evaluate the underlying financial drivers of nonfinancial performance. a. True b. False 31. The financial performance of responsibility centers is evaluated in the balanced scorecard under the financial section of the scorecard. a. True b. False 32. If operating income for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin calculated would be 24%. a. True b. False 33. The manager of a profit center does not make decisions concerning the invested assets in the center. a. True b. False 34. The ratio of operating income to sales is termed the profit margin, a component of the return on investment. a. True b. False 35. The return on investment can be computed by dividing investment turnover by the profit margin. a. True b. False 36. Budget performance reports prepared for the vice president of production would generally contain less detail than the Copyright Cengage Learning. Powered by Cognero.

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chapter 13 reports prepared for the various plant managers. a. True b. False 37. Operating expenses incurred for the entire business as a unit that are not subject to the control of individual department managers are called indirect expenses. a. True b. False 38. By using the return on investment as a divisional performance measure, divisional managers will always be motivated to invest in proposals that will increase the overall rate of return for the company. a. True b. False 39. The profit center income statement should include only those revenues and expenses that can be controlled by the manager. a. True b. False 40. Property tax expense for a department store's equipment is an example of a direct expense. a. True b. False 41. A decentralized business organization is one in which all major planning and operating decisions are made by top management. a. True b. False 42. If the profit margin for a division is 11% and the investment turnover is 1.5, the return on investment computed would be 16.5%. a. True b. False 43. The profit center income statement should include only controllable revenues and expenses. a. True b. False 44. The three common types of responsibility centers are referred to as asset centers, liabilities centers, and equity centers. a. True b. False 45. Sales commissions expense for a department store is an example of a direct expense.

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chapter 13 a. True b. False 46. If operating income for a division is $6,000, and invested assets are $25,000, and sales are $30,000, the investment turnover would be 1.2. a. True b. False 47. Personnel administration expense for a department in a store is an indirect expense. a. True b. False 48. The balanced scorecard evaluates managers on financial and nonfinancial measures of performance. a. True b. False 49. The ratio of sales to invested assets is termed investment turnover. a. True b. False 50. The ratio of sales to invested assets is termed the investment turnover, a component of the return on investment. a. True b. False 51. The minimum amount of desired divisional operating income is set by top management by establishing a minimum rate of return considered acceptable for invested assets. a. True b. False 52. Separation of businesses into more manageable operating units is termed centralization. a. True b. False 53. The major shortcoming of using operating income as an investment center performance measure is that it ignores the amount of assets invested in each center. a. True b. False 54. If operating income for a division is $30,000, sales are $281,250, and invested assets are $187,500, the investment turnover would be 1.5. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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chapter 13

Indicate the answer choice that best completes the statement or answers the question.

55. Iron Inc. had $1,150,000 in invested assets, sales of $1,200,000, operating income amounting to $185,000, and a minimum acceptable rate of return of 15% on its invested assets. Iron's profit margin is _____. a. 26.0% b. 18.8% c. 15.4% d. 14.2% 56. Two divisions of Crowson Company (Divisions X and Y) have the same profit margins. Division X's investment turnover is larger than that of Division Y (1.2 to 1.0). Which of the following statements is true? a. Division Y will have a higher return on investment, as it is using its assets more efficiently in generating sales. b. Division X will have a higher return on investment, as it is generating more operating income. c. Division X will have a higher return on investment, as it is using its assets more efficiently in generating sales. d. Division Y will have a higher return on investment, as it is generating more operating income.

57. The profit margin is calculated as the ratio of operating income to _____. a. invested assets b. investment turnover c. sales d. residual income 58. Zion Inc. had $750,000 invested in assets, sales of $1,225,000, operating income amounting to $150,000, and a minimum acceptable rate of return of 10% on its invested assets. The return on investment for Zion is _____ . a. 20.0% b. 21.5% c. 16.2% d. 14.5% 59. Which of the following would not be considered as internal centralized service department? a. Payroll accounting department b. Manufacturing department c. Information systems department d. Purchasing department 60. Small Inc. had $285,000 invested in assets, sales of $305,500, operating income of $70,500, and a minimum acceptable rate of return of 65% on its invested assets. The return on investment for Small Inc. is _____ . a. 22% b. 20% c. 25% d. 6.4% Copyright Cengage Learning. Powered by Cognero.

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61. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are termed _____. a. miscellaneous administrative expenses b. indirect expenses c. direct expenses d. variable expenses 62. Which of the following statements is used to measure the performance of a profit center's manager? a. A divisional statement of cash flows b. A divisional bank reconciliation statement c. A divisional balance sheet d. A divisional income statement 63. Division B's profit margin is 15%, and the investment turnover is 1.5. What is Division B's return on investment? a. 15.7% b. 28.8% c. 22.5% d. 10.6% 64. Stark Inc. has a rate of return on investment of 18% and a profit margin of 10%. What is its investment turnover? a. 1.8 b. 2.3 c. 1.9 d. 3.5 65. The following financial information was summarized from the accounting records of World Corporation for the current year ended December 31:

Cost of goods sold Direct operating expenses Net sales Interest expense General overhead Income tax

Eastern Western Corporate Division Division Total $310,000 $145,000 250,000 105,000 600,000 440,000 $12,000 101,000 26,700

The operating income for World Corporation is _____. a. $40,000 b. $230,000 c. $190,000 d. $139,700 Copyright Cengage Learning. Powered by Cognero.

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66. Assume that divisional operating income amounts to $325,000 and top management has established 10% as the minimum rate of return on divisional assets totaling $1,250,000. The residual income for the division is _____. a. $200,000 b. $292,500 c. $125,000 d. $0 67. Responsibility accounting reports for profit centers will include _____. a. only costs b. only revenues c. both expenses and fixed assets d. revenues, expenses, and net income or loss from operations 68. Lee Inc. had $700,000 in invested assets, sales of $1,000,000, operating income amounting to $75,000, and a minimum acceptable rate of return of 12% on its invested assets. Lee's investment turnover is _____. a. 1.4 b. 1.3 c. 1.1 d. 1.5 69. Which component of the balanced scorecard evaluates the economic performance of the responsibility centers? a. Internal process b. Financial c. Innovation and learning d. Customer 70. The manager of a cost center has the responsibility for making decisions affecting _____. a. the center's revenues and investments b. the center's revenues only c. the center's costs only d. the center's costs and revenues 71. When managers of separate divisions or units are delegated the responsibility for managing their operations, the operational responsibility is said to be _____. a. amalgamated b. accumulated c. negotiated d. decentralized 72. A profit center calculates the payment of a service department _____.

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chapter 13 a. using the difference between its controllable expenses and controllable revenues b. using the difference between its direct operating expenses and controllable expenses c. based on the usage of the service by the profit center and total service department expense d. based on the usage of the service by the profit center and a service department charge rate 73. Division A has generated sales revenue of $24,700,000 and achieved operating income of $285,000 using $1,500,000 of invested assets. If the management desires a minimum rate of return of 12% on the invested assets, Division A's residual income would be _____. a. $85,000 b. $105,0000 c. $100,000 d. $81,500 74. How do the responsibilities of a manager in an investment center compare to the responsibilities of managers in a cost or profit center? a. Investment center managers have more authority and responsibility than managers of a cost or profit center. b. Investment center managers have more authority and responsibility than managers of a cost center but less than managers of a profit center. c. Investment center managers have about the same authority and responsibility as managers of a cost or profit center. d. Investment center managers have more authority and responsibility than managers of a profit center but less than managers of a cost center.

75. Which of the following expenses incurred by the sporting goods department of a department store is a direct expense? a. Depreciation expense of office equipment b. Insurance on inventory of sporting goods c. Uncollectible accounts expense d. Office salaries 76. Responsibility accounting for a profit center focuses on reporting _____. a. the controllable revenues only b. controllable revenues, controllable expenses, and controllable profits c. controllable revenues, controllable expenses, controllable profits, and investment in assets controlled by the manager of the center d. controllable expenses, and controllable profits, but not controllable revenues 77. Which of the following is true of the balanced scorecard? a. It ignores the financial performance of the company. b. It has the ability to reveal the underlying nonfinancial drivers of financial performance. c. It aims to improve the nonfinancial performance of the business. d. It focuses primarily on the short term performance of the business.

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chapter 13 78. Identify the formula used to calculate profit margin. a. Profit margin = Sales ÷ Operating income b. Profit margin = Operating income ÷ Invested assets c. Profit margin = Invested assets ÷ Operating income d. Profit margin = Operating income ÷ Sales 79. The balanced scorecard measures _____. a. only financial information b. only nonfinancial information c. both financial and nonfinancial information d. both external and internal information 80. Division X's profit margin is 17%, and its investment turnover is 4.2. What is the return on investment for Division X? a. 4.0% b. 71.4% c. 26.8% d. 38.2% 81. Whitewater Inc. had $400,000 in invested assets, sales of $750,000, operating income amounting to $110,000, and a minimum acceptable rate of return of 12% on its invested assets. The residual income for Whitewater is _____. a. $42,500 b. $62,000 c. $60,000 d. $37,500 82. In an investment center, the manager has the responsibility for and the authority to make decisions that affect _____. a. the assets invested in the center but not costs and revenues b. costs and assets invested in the center but not revenues c. both costs and revenues for the department or division d. not only costs and revenues but also assets invested in the center 83. In an investment center, the manager has responsibility and authority for making decisions that affect _____ . a. only costs b. both costs and revenues c. only assets d. costs, revenues, and assets 84. What additional information is needed to find the return on investment if operating income is known? a. Invested assets b. Residual income c. Direct expenses Copyright Cengage Learning. Powered by Cognero.

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chapter 13 d. Indirect expenses 85. The costs of services charged to a profit center based on the usage of the service are called _____. a. operating expenses b. noncontrollable charges c. service department charges d. activity charges 86. The investment turnover is calculated as the ratio of sales to _____. a. operating income b. invested assets c. marketable investments d. profit margin 87. For higher levels of management, responsibility accounting reports _____. a. are more detailed than for lower levels of management b. are more summarized than for lower levels of management c. contain almost the same level of detail as reports for lower levels of management d. are rarely provided or reviewed 88. The excess of actual operating income over a minimum acceptable operating income is called _____. a. net profit b. gross profit c. non-operating income d. residual income 89. Identify a disadvantage of decentralization of operations. a. Managers do not have the scope to become experts in their area of operation. b. Managerial creativity and customer relations are hampered. c. Managers closest to the operations are not allowed to make decisions. d. Decisions made by one manager may negatively affect the profits of the company.

90. The best measure of managerial efficiency in the use of investments in assets is _____. a. return on stockholders' equity b. return on investment c. operating income d. inventory turnover 91. Identify the formula for the return on investment. a. Invested assets ÷ Operating income b. Sales ÷ Invested assets Copyright Cengage Learning. Powered by Cognero.

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chapter 13 c. Operating income ÷ Sales d. Operating income ÷ Invested assets 92. Which of the following expenses incurred by a department store is an indirect expense? a. Insurance on merchandise inventory b. Sales salaries c. Depreciation on store equipment d. Salary of vice president of finance 93. Which one of the following is not a measure that management can use in evaluating and controlling investment center performance? a. Return on investment b. Cost-plus method c. Residual income d. Operating income 94. The following financial information was summarized from the accounting records of World Corporation for the current year ended December 31:

Cost of goods sold Direct operating expenses Net sales Interest expense General overhead Income tax

Eastern Division $310,000 250,000 600,000

Western Division $145,000 105,000 440,000

Corporate Total

$12,000 101,000 26,700

The gross profit for the Western Division is _____. a. $150,000 b. $295,000 c. $235,000 d. $120,000 95. The manager of a profit center has the responsibility for making decisions that affect the center's _____. a. costs, revenues and investment in fixed assets b. investment in fixed assets but not costs c. costs and revenues but not investment in fixed assets d. revenues and investment in fixed assets but not costs 96. The performance of a profit center manager is evaluated by comparing the profit center's operating income _____ . a. and the other profit centers' operating income b. and the profit center's budgeted operating income Copyright Cengage Learning. Powered by Cognero.

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chapter 13 c. and the organization's budgeted net income d. and the organization's non-operating income 97. In large businesses, decentralization is often advantageous because _____. a. it allows top management to make all decisions, thus ensuring that overall operational goals are met b. it prevents decisions from one unit to negatively affect the profitability of the entire company c. it allows departmental managers to focus on acquiring expertise in their areas of responsibility d. it prevents duplication of assets and expense 98. A common balanced scorecard measures performance in all of the following areas except _____. a. education b. internal process c. financial d. innovation and learning 99. Able Inc. has a return on investment of 18% and an investment turnover of 1.2. What is the division's profit margin? a. 9.4% b. 14.2% c. 15.0% d. 16.4% 100. Identify the type of organization in which all major planning and operating decisions are made by top management. a. Decentralized b. Centralized c. Consolidated d. Segmented 101. Division M for Motivate Company has a return on investment of 22% and an investment turnover of 1.5. What is the profit margin? a. 20% b. 13% c. 15% d. 30% 102. Division Y has generated sales revenue of $250,000 and achieved operating income of $20,500 using $20,000 of invested assets. If management desires a minimum rate of return of 12%, the profit margin would be _____ . a. 14.4% b. 8.2% c. 10.2% d. 7.1% Copyright Cengage Learning. Powered by Cognero.

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chapter 13

103. A responsibility center in which the department manager has responsibility for and authority over costs and revenues is called a(n) _____. a. profit center b. investment center c. volume center d. cost center 104. Which of the following expressions calculates the investment turnover used in determining the rate of return on investment? a. Invested assets ÷ Sales b. Operating income ÷ Invested assets c. Operating income ÷ Sales d. Sales ÷ Invested assets 105. The following financial information was summarized from the accounting records of World Corporation for the current year ended December 31: Eastern Division $310,000 250,000 600,000

Cost of goods sold Direct operating expenses Net sales Interest expense General overhead Income tax

Western Division $145,000 105,000 440,000

Corporate Total

$12,000 101,000 26,700

The operating income for the Western Division is _____. a. $150,000 b. $120,000 c. $190,000 d. $154,400

106. A portion of the divisional income statement for the year just ended is presented in the following condensed form.

Net sales Cost of goods sold Gross profit Operating expenses Loss from operations

Department M $93,800 72,400 $21,400 28,900 $(7,500)

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chapter 13 The operating expenses of Department M include $16,000 for direct expenses.

It is estimated that the discontinuance of Department M would not have affected the sales of the other departments nor have reduced the indirect expenses of the business. Assuming the accuracy of these estimates, determine the effect (increase or decrease and the amount) on the operating income of the business if Department M had been discontinued.

107. The sales, operating income, and invested assets for each division of Gibson Company are as follows:

Division A Division B Division C (a) (b)

Operating Income $470,000 430,000 560,000

Sales $3,000,000 3,600,000 6,000,000

Invested Assets $2,500,000 2,400,000 3,000,000

Using the expanded expression, determine the profit margin, investment turnover, and return on investment for each division. Round to one decimal place.

Which division is (are) the most profitable per dollar invested?

108. JMP Co. has two divisions, North and South. Invested assets and condensed income statement data for each division for the past year ended December 31, 20Y9 are as follows:

Revenues Operating expenses Service department charges Invested assets (a) (b)

North Division $1,200,000 950,000 145,000 800,000

South Division $820,000 660,000 74,000 500,000

Prepare condensed income statements for the past year for each division.

Using the expanded expression, determine the profit margin, investment turnover, and rate of return on investment for each division. Round to one decimal place.

109. The budget for Department 1of Plant T for the month ending July 31, 20Y9 is as follows: Materials Factory wages Supervisory salaries Depreciation of plant and equipment Power and light Insurance and property taxes Maintenance

$205,000 260,000 65,800 35,000 22,500 15,500 9,700

During July, the costs incurred in Department 1 of Plant T were materials, $203,000; factory wages, $280,000; supervisory salaries, $61,600; depreciation of plant and equipment, $35,000; power and light, $21,360; insurance and property taxes, $14,400; maintenance, $9,456.

Prepare a budget performance report for the supervisor of Department 1 of Plant T for the (a) month of July.

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chapter 13 (b)

Are there any significant variances (greater than 5%) of the budgeted amounts that should be examined by the supervisor?

110. The sales, operating income, and invested assets for each division of Missouri Company are as follows:

Division A Division B Division C

Sales $4,000,000 3,500,000 2,250,000

Operating Income $510,000 600,000 900,000

Invested Assets $3,500,000 4,000,000 7,000,000

Management has established a minimum rate of return for invested assets of 12%. (a) (b)

Determine the residual income for each division.

Based on residual income, which division is the most profitable?

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chapter 13 Answer Key 1. True 2. True 3. True 4. True 5. True 6. True 7. False 8. False 9. True 10. True 11. True 12. False 13. False 14. True 15. True 16. True 17. False 18. True 19. True 20. True

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chapter 13 21. True 22. False 23. True 24. False 25. False 26. True 27. False 28. True 29. False 30. False 31. True 32. False 33. True 34. True 35. False 36. True 37. True 38. False 39. True 40. True 41. False Copyright Cengage Learning. Powered by Cognero.

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chapter 13 42. True 43. True 44. False 45. True 46. True 47. True 48. True 49. True 50. True 51. True 52. False 53. True 54. True 55. c 56. c 57. c 58. a 59. b 60. c 61. c 62. d Copyright Cengage Learning. Powered by Cognero.

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chapter 13 63. c 64. a 65. b 66. a 67. d 68. a 69. b 70. c 71. d 72. d 73. b 74. a 75. b 76. b 77. b 78. d 79. c 80. b 81. b 82. d 83. d Copyright Cengage Learning. Powered by Cognero.

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chapter 13 84. a 85. c 86. b 87. b 88. d 89. d 90. b 91. d 92. d 93. b 94. b 95. c 96. b 97. c 98. a 99. c 100. b 101. c 102. b 103. a 104. d Copyright Cengage Learning. Powered by Cognero.

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chapter 13 105. c 106. $5,400 decrease, which is the operating income from Department F. ($93,800 net sales – $72,400 cost of goods sold – $16,000 direct expenses) 107. (a) Return on Investment: ROI = Profit Margin × Investment Turnover ROI =

Operating Income × Sales

Division A: ROI =

$470,000 × $3,000,000

Sales Invested Assets $3,000,000 $2,500,000

ROI = 15.7% × 1.2 = 18.8% Division B: ROI =

$430,000 × $3,600,000

$3,600,000 $2,400,000

ROI = 11.9% × 1.5 = 17.9% Division C: ROI =

$560,000 × $6,000,000

$6,000,000 $3,000,000

ROI = 9.3% × 2.0 = 18.7% (b)

Divisions A and C are almost equally profitable.

108. (a) JMP DT Co. Divisional Income Statements For the Year Ended December 31, 20Y9

Revenues Operating expenses Operating income before service department charges Service department charges Operating income

North Division $1,200,000 950,000 $ 250,000 145,000 $ 105,000

South Division $820,000 660,000 $160,000 74,000 $ 86,000

(b) Return on Investment (ROI) = Profit Margin × Investment Turnover ROI =

Operating Income ×

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chapter 13 Sales North Division:

Invested Assets

$105,000 × $1,200,000

$1,200,000 $800,000

ROI = 8.75% × 1.5 = 13.1% South Division:

$86,000 × $820,000

$820,000 $500,000

ROI = 10.51% × 1.64 = 17.2%

109. (a) BUDGET PERFORMANCE REPORT Supervisor, Department 1of Plant T For Month Ended July 31, 20Y9 Budget Materials Factory wages Supervisory salaries Depreciation of plant and equipment Power and light Insurance and property taxes Maintenance

(b)

Actual Over Budget

$205,000 $203,000 260,000 280,000 65,800 61,600 35,000

35,000

22,500 21,360 15,500 14,400 9,700 9,456 $613,500 $624,816

Under Budget $ 2,000

$20,000 4,200 0

0

$20,000

1,140 1,100 244 $ 8,684

The factory wages and supervisory salaries expenses should be examined by the supervisor.

110.

(a)

Division A: Residual income = $510,000 – (12% of $3,500,000) = $510,000 – $420,000 = $90,000 Division B: Residual income = $600,000 – (12% of $4,000,000) = $600,000 – $480,000 = $120,000 Division C: Residual income = $900,000 – (12% of $7,000,000)

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chapter 13

(b)

= $900,000 – $840,000 = $60,000 Division B

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chapter 14

Indicate whether the statement is true or false.

1. The anticipated purchase of an asset for $400,000, with a useful life of five years, no residual value, and depreciation assumed to be on straight-line basis, is expected to yield total net income of $200,000 for five years. The expected average rate of return is 20%. a. True b. False 2. The anticipated purchase of an asset for $300,000, with a useful life of five years, no residual value, and depreciation assumed to be on straight-line basis, is expected to yield total net income of $150,000 for five years. The expected average rate of return on investment computed is 20%. a. True b. False 3. Qualitative considerations in capital investment decisions include manufacturing flexibility, employee morale, and strategic opportunities. a. True b. False 4. The process by which management allocates available investment funds among competing capital investment proposals is termed capital rationing. a. True b. False 5. Leasing assets may be a favorable alternative to purchasing assets if the asset has a high risk of becoming obsolete. a. True b. False 6. Average total assets divided by average stockholders' equity is the formula for financial leverage. a. True b. False 7. For years 1 through 5, a proposed expenditure of $250,000 for an asset with a five-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 2.5 years. a. True b. False 8. If a proposed expenditure of $400,000 for an asset with a four-year life has an annual expected net cash flow and net income of $160,000 and $60,000, respectively, the cash payback period is 2.5 years. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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chapter 14 9. Care must be taken while making capital investment decisions because they involve a long-term commitment of funds and affect operations for several years. a. True b. False 10. The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the cash payback period. a. True b. False 11. In capital rationing, alternative proposals are initially screened by establishing minimum standards using the cash payback and the average rate of return methods. a. True b. False 12. The average rate of return method of capital investment analysis considers the present value of future cash flows. a. True b. False 13. If a proposed expenditure of $60,000 for an asset with a four-year life has an annual expected net cash flow of $12,000, the cash payback period is 5 years. a. True b. False 14. The excess of cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow. a. True b. False 15. The anticipated purchase of an asset for $300,000, with a useful life of five years, a $30,000 residual value, and depreciation assumed to be on straight-line basis, is expected to yield total net income of $200,000 for five years. The expected average rate of return is 50%. a. True b. False 16. For years 1 through 5, a proposed expenditure of $400,000 for an asset with a five-year life has expected net income of $50,000, $40,000, $20,000, $20,000, and $20,000, respectively, and net cash flows of $130,000, $120,000, $100,000, $100,000, and $100,000, respectively. The cash payback period is 3.5 years. a. True b. False 17. The process by which management allocates available investment funds among competing capital investment proposals is termed cash payback period method.

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chapter 14 a. True b. False 18. Methods that ignore present value in capital investment analysis include the cash payback method. a. True b. False 19. Average rate of return equals estimated average annual income divided by average investment. a. True b. False 20. A qualitative characteristic that influences capital investment analysis is manufacturing productivity. a. True b. False 21. When evaluating a proposal by use of the cash payback method, if net cash flows exceed the capital investment within the time deemed acceptable by management, the proposal should be accepted. a. True b. False 22. Return on stockholders' equity is calculated as the ratio of average stockholders' equity to operating income. a. True b. False 23. The anticipated purchase of an asset for $400,000 with a useful life of five years, no residual value, and depreciation assumed to be on straight-line basis, is expected to yield total income of $150,000. The expected average rate of return is 15%. a. True b. False 24. The excess of cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow. a. True b. False 25. The process by which management plans, evaluates, and controls long-term investment decisions involving property, plant, and equipment is called capital investment analysis. a. True b. False 26. The process by which management plans, evaluates, and controls long-term investment decisions involving property, plant, and equipment is called cost-volume-profit analysis.

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chapter 14 a. True b. False 27. A capital expenditures budget summarizes the decisions made for the acquisition of property, plant, and equipment. a. True b. False 28. The anticipated purchase of an asset for $400,000, with a useful life of five years, a $40,000 residual value, and depreciation assumed to be on straight-line basis, is expected to yield total net income of $200,000 for five years. The expected average rate of return on investment is 18.2%. a. True b. False 29. Average rate of return equals average investment divided by estimated average annual income. a. True b. False 30. The average rate of return and cash payback methods of evaluating capital investment proposals consider the time value of money. a. True b. False 31. A company should purchase an asset when the minimum rate of return exceeds its average rate of return. a. True b. False 32. If the average rate of return on an asset exceeds the minimum rate of return for investments, the asset should be purchased. a. True b. False 33. One of the qualitative characteristics that influence capital investment analysis is product quality. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

34. The process by which management plans, evaluates, and controls long-term investment decisions involving property, plant, and equipment is called _____. a. absorption cost analysis b. variable cost analysis c. capital investment analysis Copyright Cengage Learning. Powered by Cognero.

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chapter 14 d. cost-volume-profit analysis 35. Which of the following is a factor that complicates capital investment analysis? a. Equal proposal lives b. Certainty of estimates of revenues, expenses, and cash flows c. Sunk cost d. Leasing alternative 36. All of the following qualitative considerations may impact upon capital investments analysis except _____. a. manufacturing productivity b. manufacturing sunk cost c. manufacturing flexibility d. manufacturing control 37. Which of the following concepts is being considered when a company making a capital investment decision converts all the dollar cash inflows and outflows over the life of a project to their present value? a. The accounting period concept b. The time value of money concept c. The realization concept d. The matching concept 38. Zeppelin Inc. is evaluating the purchase of a machine that costs $260,000. The annual cash revenues from the machine would be $50,000, and the annual cash expenses of the machine would be $10,000. What is the estimated cash payback period for the machine? a. 8.5 years b. 6.5 years c. 3.8 years d. 5.2 years 39. Which of the following is the expansion of the DuPont formula for return on stockholders' equity? a. Profit margin × Asset turnover × Financial leverage b. Profit margin × Sales turnover × Financial leverage c. Profit margin × Asset turnover × Operating leverage d. Operating income × Asset turnover × Financial leverage 40. Delta Inc. is considering the purchase of a machine costing $500,000, having a useful life of five years. Depreciation would be recognized using the straight-line method, and the machine would have no residual value at the end of its useful life. The estimated total net income from the machine is $600,000. The average investment for the machine is _____. a. $600,000 b. $150,000 c. $225,000 d. $250,000 Copyright Cengage Learning. Powered by Cognero.

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chapter 14

41. In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum standards. Which of the following evaluation methods are normally used? a. Cash payback method and average rate of return method b. Average rate of return method and net present value method c. Net present value method and cash payback method d. Internal rate of return method and net present value method 42. The management of Royal Inc. is considering the purchase of a new machine costing $500,000. In addition to this information, use the following data in determining the acceptability in this situation: Year 1 2 3 4 5

Income from Operations $100,000 80,000 50,000 10,000 10,000

Net Cash Flow $200,000 170,000 130,000 80,000 80,000

The cash payback period for this investment is _____. a. 5 years b. 3 years c. 2 years d. 4 years 43. Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects? a. Interest deduction b. Depreciation deduction c. Minimum tax provision d. Charitable contributions 44. The two methods that consider the time value of money concept to analyze capital investment proposals are _____. a. the net present value method and the internal rate of return method b. the net present value method and the average rate of return method c. the internal rate of return method and the average rate of return method d. the cash payback method and the net present value method 45. The management of London Corporation is considering the purchase of a new machine costing $750,000. In addition to this information, use the following data in determining the acceptability in this situation: Year 1 2

Income from Operations $37,500 37,500

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Net Cash Flow $187,500 187,500 Page 305

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chapter 14 3 4 5

37,500 37,500 37,500

187,500 187,500 187,500

The average rate of return for this investment is _____. a. 5% b. 10% c. 25% d. 15% 46. Which of the following is the formula to calculate the return on stockholders' equity? a. Operating income ÷ Average stockholders' equity b. Gross income ÷ Average stockholders' equity c. Average stockholders' equity ÷ Operating income d. Average stockholders' equity ÷ Gross income 47. Purchase of a new machine to replace an old machine is an example of _____. a. break-even analysis b. cost-volume-profit analysis c. capital investment analysis d. just-in-time inventory analysis 48. A company's profit margin is 16.5%, its asset turnover is 0.72, and its financial leverage is 3.25. Determine the company's return on shareholders' equity. a. 38.6% b. 36.3% c. 51.7% d. 28.4% 49. The process by which management allocates available investment funds among competing investment proposals is called _____. a. investment capital management b. capital budgeting c. cost-volume-profit analysis d. capital rationing 50. A disadvantage of the average rate of return method of capital investment analysis is that _____. a. it is very complex to compute b. it does not include the entire amount of income earned over the life of a project c. it does not emphasize accounting income, which is often used by investors and creditors in evaluating management performance d. it does not directly consider the timing of the expected cash flows Copyright Cengage Learning. Powered by Cognero.

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chapter 14

51. The expected average rate of return for a proposed investment of $800,000 for an asset, with a useful life of five years, no residual value, depreciation assumed to be on straight-line basis, and an expected total net income of $360,000 for the five years, is _____. a. 20% b. 25% c. 18% d. 16% 52. Ruby Inc.'s sales is $520,000, its operating income is $73,000, average total assets are $480,000, and average shareholders' equity is $200,000. Determine the company's return on shareholders' equity. a. 22.6% b. 36.5% c. 42.0% d. 55.2% 53. The payback period is determined using which of the following formulas? a. Amount to be invested ÷ Annual average net income b. Annual net cash flow ÷ Amount to be invested c. Annual average net income ÷ Amount to be invested d. Amount to be invested ÷ Annual net cash flows 54. Periods experiencing increases in price levels are known as periods of _____. a. inflation b. recession c. depression d. deflation 55. Omega Company is evaluating the purchase of a machine costing $400,000. The expected useful life of the machine is five years, at the end of which it would have no residual value, and the depreciation is assumed to be on a straight-line basis. The estimated total income from the machine is $500,000. The expected average rate of return for this machine is _____. a. 26.4% b. 42.6% c. 50.0% d. 57.1% 56. The management of Benjamin Inc. is considering the purchase of a new machine costing $750,000. In addition to this information, use the following data in determining the acceptability in this situation: Year 1 2

Income from Operations $37,500 37,500

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chapter 14 3 4 5

37,500 37,500 37,500

187,500 187,500 187,500

The cash payback period for this investment is _____. a. 3 years b. 5 years c. 20 years d. 4 years 57. Which of the following is a qualitative consideration that influences capital investments analysis? a. Time value of money b. Internal rate of return c. Changes in price level d. Manufacturing flexibility 58. One issue to consider when investing in assets in foreign countries is _____. a. that local currency may weaken to the dollar, causing adverse effects on the investment's return b. that the dollar may weaken to the local currency, causing adverse effects on the investment's return c. that local currency may be difficult to exchange into dollars, causing problems in receiving a return on the investment d. that dollars may be difficult to exchange into local currency, causing problems in receiving any return on investment 59. The management of Royal Inc. is considering the purchase of a new machine costing $500,000. In addition to this information, use the following data in determining the acceptability in this situation: Year 1 2 3 4 5

Income from Operations $100,000 80,000 50,000 10,000 10,000

Net Cash Flow $200,000 170,000 130,000 80,000 80,000

The average rate of return for this investment is _____. a. 18% b. 16% c. 5% d. 20% 60. An anticipated purchase of equipment for $1,270,000, with a useful life of eight years and no residual value, is expected to yield the following annual net incomes and net cash flows:

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chapter 14 Year 1 2 3 4 5 6 7 8

Net Income $210,000 180,000 145,000 125,000 60,000 60,000 60,000 60,000

Net Cash Flow $400,000 320,000 280,000 270,000 220,000 220,000 220,000 220,000

What is the cash payback period? a. 5 years b. 4 years c. 6 years d. 3 years

61. Proposals M and N each cost $500,000, have six-year lives, and have expected total cash flows of $750,000. Proposal M is expected to provide equal annual net cash flows of $100,000, while the net cash flows for Proposal N are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

$250,000 200,000 100,000 90,000 60,000 50,000 $750,000

Determine the cash payback period for each proposal.

62. A five-year project is estimated to cost $600,000 and have no residual value. If the straight-line depreciation method is used and estimated total income is $230,000, determine the average rate of return, giving effect to depreciation on the investment.

63. Price Co. is considering a 10-year project that is estimated to cost $900,000 and has no residual value. Price seeks to earn an average rate of return of 12% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Price Co. 64. Proposal S and Proposal T both require an initial investment of $1,050,000, have a six-year life, and have expected total cash inflows of $1,680,000. Proposal S is expected to provide an annual net cash inflow of $300,000, while the annual net cash inflows for Proposal T are as follows: Year 1 $350,000 Year 2 $315,000 Year 3 $280,000 Year 4 $280,000 Year 5 $245,000 Copyright Cengage Learning. Powered by Cognero.

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chapter 14 Year 6

$210,000

Determine the cash payback period for each proposal.

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chapter 14 Answer Key 1. True 2. True 3. True 4. True 5. True 6. True 7. False 8. True 9. True 10. True 11. True 12. False 13. True 14. False 15. False 16. True 17. False 18. True 19. True 20. True

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chapter 14 21. True 22. False 23. True 24. True 25. True 26. False 27. True 28. True 29. False 30. False 31. False 32. True 33. True 34. c 35. d 36. b 37. b 38. b 39. a 40. d 41. a Copyright Cengage Learning. Powered by Cognero.

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chapter 14 42. b 43. b 44. a 45. b 46. a 47. c 48. a 49. d 50. d 51. c 52. b 53. d 54. a 55. c 56. d 57. d 58. a 59. d 60. b 61. Proposal M: $500,000 ÷ $100,000 = 5 years Proposal N: 2 years ($250,000 + $200,000) + 0.5 year ($50,000 ÷ $100,000) = 2.50 years

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chapter 14 62. Estimated Average Annual Income = $230,000 ÷ 5 = $46,000 Average Investment = $600,000 ÷ 2 = $300,000 Estimated Average Annual Income Average Investment

=

$46,000 $300,000

=

15.3%

63.

Estimated Average Annual Income Average Investment X ($900,000 + $0) ÷ 2 X $450,000 X

= Average Rate of Return = 0.12 =0.12 = $54,000

64. Proposal S: $1,050,000 ÷ $300,000 = 3.50 years Proposal T: 3 years ($350,000 + $315,000 + $280,000) + 0.38 year ($105,000 ÷ $280,000) = 3.38 years

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