Principles of Accounting II Exam Solutions
Course Introduction
Principles of Accounting II builds upon the foundational concepts introduced in the first course, delving deeper into the accounting cycle, financial statement analysis, and the various methods of asset, liability, and equity valuation. This course emphasizes managerial accounting topics such as budgeting, cost behavior, performance evaluation, and internal controls. Students also explore the application of accounting principles in decision-making processes, ethical considerations, and how accounting information supports business planning and strategy. Upon completion, students gain a broader and more practical understanding of accounting practices in both corporate and non-profit organizations.
Recommended Textbook Principles of Accounting 11th Edition by
Belverd E. Needles
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Chapter 1: Uses of Accounting Information and the Financial Statements
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Sample Questions
Q1) The purpose of an audit is to
A) determine whether or not a company is a good investment.
B) comply with income tax regulations.
C) determine whether or not a company is a good credit risk.
D) ascertain that the financial statements follow GAAP.
Answer: D
Q2) For accounting purposes, a business and its owners are considered separate entities.
A)True
B)False
Answer: True
Q3) The measurement stage of accounting is accomplished by A) recording data.
B) reporting to decision makers.
C) processing data.
D) storing data.
Answer: A
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Page 3
Chapter 2: Analyzing Business Transactions
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Sample Questions
Q1) When a company has performed a service but has not yet received payment, what is the required journal entry to be recorded?
A) Accounts Receivable - Debit; Revenue from Services - Credit
B) Revenue from Services - Debit; Accounts Payable - Credit
C) No entry is required until the cash is received.
D) Revenue from Services - Debit; Accounts Receivable - Credit
Answer: A
Q2) For a T account, an account balance is the difference in total dollars between total debit footings and total credit footings.
A)True
B)False
Answer: True
Q3) When collection is made on Accounts Receivable,
A) owner's equity increases.
B) total assets decrease.
C) total assets remain the same.
D) total assets increase.
Answer: C
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4
Chapter 3: Measuring Business Income
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Sample Questions
Q1) The manipulation of revenues and expenses to achieve a specific outcome is called
A) earnings management.
B) the matching rule.
C) adjusting entries.
D) revenue recognition.
Answer: A
Q2) Financial statements may be prepared from an adjusted trial balance.
A)True
B)False
Answer: True
Q3) The accrual basis of accounting results in a more accurate measurement of net income for the period than does the cash basis of accounting.
A)True
B)False
Answer: True
Q4) As an asset's depreciation is recorded, its carrying value increases.
A)True
B)False
Answer: False
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Why will the Income Summary account never appear on any financial statement?
Q2) An important purpose of closing entries is to
A) help achieve the goals of the matching principle.
B) set permanent account balances to zero to begin the next period.
C) update the nominal accounts at year end.
D) transfer net income or net loss to the owner's Capital account.
Q3) The post-closing trial balance will have fewer accounts than the adjusted trial balance
A)True
B)False
Q4) Closing entries ultimately will affect
A) total liabilities.
B) the Cash account.
C) the owner's Capital account.
D) total assets.
Q5) Which of the following could not possibly be a closing entry?
A) Debit Income Summary and credit owner's Capital
B) Debit Income Summary and credit Withdrawals
C) Debit owner's Capital and credit Withdrawals
D) Debit owner's Capital and credit Income Summary
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Chapter 5: Financial Reporting and Analysis
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Q1) Although a stapler that costs $10 is a long-term asset, can be expensed because the amount is immaterial and will not affect anyone's decision making.
A)True
B)False
Q2) Expensing a building in the year of purchase represents an abuse of which of the following accounting conventions?
A) Full disclosure
B) Cost-benefit
C) Conservatism
D) Consistency
Q3) Which of the following is an actual account on the books?
A) Cost of goods sold
B) Gross margin
C) Net income
D) Income from operations
Q4) An advantage of accounting information is that it provides exact and completely reliable measures.
A)True
B)False
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Chapter 6: The Operating Cycle and Merchandising Operations
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Q1) For a company that takes an average of 50 days to sell inventory, takes an average of 110 days to collect for its sales, and has payment terms of 45 days on its purchases, what is the financing period? Show calculations.
Q2) If it takes Gledhill Company 45 days to sell inventory, 23 days to collect from the sale, and creditors' payment terms are 30 days, the financing period is A) 98 days.
B) 23 days.
C) 45 days.
D) 38 days.
Q3) The operating cycle involves the purchase and sale of merchandise inventory as well as the subsequent collection of cash from credit sales.
A)True
B)False
Q4) The periodic inventory system relies on a physical count of merchandise for its balance sheet amount.
A)True
B)False
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Chapter 7: Internal Control
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Sample Questions
Q1) Why is the separation of duties an important control activity in a good system of internal control?
Q2) Which of the following is not an internal control activity for cash?
A) Surprise audits of cash on hand should be made occasionally.
B) The number of persons who have access to cash should be limited.
C) The functions of recordkeeping and keeping custody of cash should be combined.
D) All cash receipts should be recorded promptly.
Q3) At the end of each day, the cashier should be the one responsible for comparing the amount on the cash register tape with the day's cash additions to the cash register.
A)True
B)False
Q4) As the controller of a large company, you notice that the Cash Short or Over account is consistently debited for fairly large sums of cash when the petty cash fund is replenished. You probably will want to
A) increase the amount of the fund.
B) decrease the amount of the fund.
C) find a new custodian for the fund.
D) offer the custodian your congratulations.
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Page 9
Chapter 8: Inventories
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Q1) The determination of the balance sheet cost of merchandise inventory is important to the determination of net income.
A)True
B)False
Q2) Which inventory method generally results in the most realistic balance sheet valuation?
A) FIFO
B) Specific identification
C) LIFO
D) Average-cost
Q3) How does the perpetual inventory system differ from the periodic inventory system in the determination of cost of goods sold?
Q4) Which of the following inventory methods when used for income tax purposes must also be used for reporting purposes?
A) Specific identification
B) LIFO
C) FIFO
D) Average-cost
Q5) What is the chief objective of supply-chain management? How is it accomplished?
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Chapter 9: Cash and Receivables
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Sample Questions
Q1) The balance of Accounts Receivable, net of the allowance account, is $35,000 before the write-off of a $2,800 account. What is the Accounts Receivable balance, net of the allowance account, after the write-off?
A) $35,000
B) $32,200
C) $2,800
D) $37,800
Q2) Which of the following is not classified as a short-term financial asset?
A) Accounts Receivable
B) Notes Receivable
C) Inventory
D) Cash
Q3) A company that uses the allowance method writes off a specific account as uncollectible, but then the customer pays. The entries made upon receiving payment will
A) decrease Cash.
B) decrease Accounts Receivable.
C) increase Allowance for Uncollectible Accounts.
D) decrease Uncollectible Accounts Expense.
Q4) What is a compensating balance? By whom is it required?
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Chapter 10: Current Liabilities and Fair Value Accounting
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Sample Questions
Q1) In a deferred payment arrangement, interest is charged only if it is stated.
A)True
B)False
Q2) A company purchases an asset on a deferred payment plan, ultimately paying $10,000. On the payment date, the company would
A) credit Cash for less than $10,000.
B) debit Interest Expense for the imputed amount.
C) debit the asset account for $10,000.
D) debit Accounts Payable for $10,000.
Q3) A company sells merchandise on a deferred payment plan, ultimately receiving $5,000 on the account receivable. On the payment date, the company would
A) credit Accounts Receivable for less than $5,000.
B) debit Interest Income for the imputed amount.
C) credit Sales for less than $5,000.
D) debit the asset account for $5,000.
Q4) All liabilities involve an obligation of one sort or another.
A)True
B)False
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Page 12
Chapter 11: Long Term Assets
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Q1) On January 2, 2009, Vanowen Company purchased a machine for $80,000. The machine has an eight-year estimated useful life and an $8,000 estimated residual value. In addition, the company expects to use the machine 200,000 hours. Assuming that the machine was used 35,000 hours during 2010, complete the following chart. If a figure cannot be determined, indicate so by placing an X in the box. (Show your work.)
\(\begin{array}{|l|l|l|}
\hline \text { Method } & \text { Depreciation Expense for 2010 } & \text { Carrying Value at 12/31/10 } \\
\hline \text { Straight-line } & & \\
\hline \text { Production } & & \\
\hline \text { Double-declining-balance } & &\\\hline \end{array}\)
Q2) Inventory is classified as a long-term asset.
A)True
B)False
Q3) When disposing of equipment, the Equipment account is credited for the existing carrying value.
A)True
B)False
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Page 13
Chapter 12: Contributed Capital
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Q1) When common stock with a par value is sold for a price that exceeds par value, the Common Stock account is credited only for the par value of the shares sold.
A)True
B)False
Q2) When stock is issued for noncash assets or services, how does one place a valuation (dollar amount) on the transaction?
Q3) Which of the following is the appropriate entry to record the declaration of cash dividends?
A) Dividends Payable - Debit
Cash - Credit
B) Additional Paid-in Capital - Debit
Dividends Payable - Credit
C) Dividends - Debit
Dividends Payable - Credit
D) Retained Earnings - Debit
Cash - Credit
Q4) Treasury shares are shares that are issued but not outstanding.
A)True
B)False
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Chapter 13: Long Term Liabilities
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Sample Questions
Q1) If a bond has a face interest rate of 6 percent, a face value of $20,000, and pays interest semiannually, each interest payment will amount to $1,200.
A)True
B)False
Q2) A bond discount is a component of interest cost because it represents the amount in excess of the issue price that a corporation must pay on the maturity date.
A)True
B)False
Q3) When the terms of a lease require that the lessee record an asset and a liability, the two accounts are recorded at the present value of the total lease payments required.
A)True
B)False
Q4) Leases of short-term assets are operating leases, and leases of long-term assets are capital leases.
A)True B)False
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Page 15
Chapter 14: The Corporate Income Statement and the Statement of Stockholders Equity
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Sample Questions
Q1) The preparation of a statement of stockholders' equity makes which other financial statement unnecessary?
A) Income statement
B) Statement of cash flows
C) Statement of retained earnings
D) Balance sheet
Q2) Which of the following would be involved in the computation of earnings per share for a company with a simple capital structure?
A) Stock options
B) Number of shares of nonconvertible preferred stock
C) Dividends declared on nonconvertible preferred stock
D) Dividends declared on common stock
Q3) Distinguish between cash and retained earnings.
Q4) Why would a financial analyst consider the amount of income from continuing operations to be more useful than the amount of net income?
Q5) Draw two distinctions between accounting for a stock split and accounting for a stock dividend.
Q6) Specifically, what gives rise to the Deferred Income Taxes account?
Q7) Why must certain income statement items be presented "net of taxes"?
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Chapter 15: The Statement of Cash Flows
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Q1) Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements-Increase in Accrued Liabilities-indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following:
A) Add to net income to arrive at net cash flows from operating activities
B) Subtract from net income to arrive at net cash flows from operating activities
C) Not used to adjust net income to calculate net cash flows from operating activities
Q2) Royer Corporation engaged in this transaction: Paid interest on note.
Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows.
A) Financing activities section
B) Schedule of noncash investing and financing transactions
C) Investing activities section
D) Operating activities section
Q3) Cash flows to assets is measured in "times."
A)True
B)False
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Chapter 16: Financial Performance Measurement
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Sample Questions
Q1) A common measure of profitability is the
A) asset turnover.
B) debt to equity ratio.
C) current ratio.
D) receivable turnover.
Q2) Dividends yield is a market strength ratio.
A)True
B)False
Q3) The quick ratio and the debt to equity ratio are measures of short-term debt-paying ability.
A)True
B)False
Q4) What is the best way to study the relationship of the components of financial statements?
A) Perform ratio analysis.
B) Perform trend analysis.
C) Perform horizontal analysis.
D) Prepare common-size statements.
Q5) What is vertical analysis, and why is it useful in performing financial performance measurement?
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Chapter 17: Partnerships
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Q1) When a newly admitted partner pays a bonus to the existing partners, the new partner's capital account is debited.
A)True
B)False
Q2) Claim to the partners' personal assets by creditors if the partnership cannot pay its debts refers to
A) liquidation
B) mutual agency
C) unlimited liability
D) dissolution
Q3) A partnership has a limited life, because any change in the relationship of the partners dissolves the partnership.
A)True
B)False
Q4) Gains and losses on the sale of assets in a liquidation are divided equally among partners.
A)True
B)False
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Chapter 18: The Changing Business Environment-A
Managers Pers
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Q1) Activity-based costing (ABC) is used most often to improve the assignment of overhead costs to products.
A)True
B)False
Q2) If a management accountant confides to a relative that his or her company has a confidential plan to merge with another company in the near future, the accountant has A) not violated ethical standards.
B) violated ethical standards only if the relative owns stock in the company.
C) violated ethical standards because the accountant and relative could stand to gain personally from that information.
D) not violated ethical standards because the information was relayed to a family member.
Q3) A manager should write the purpose of a report before preparing it. A)True
B)False
Q4) The main goal of total quality management is to reduce product costs. A)True
B)False
Page 20
Q5) List three characteristics of a JIT operating environment.
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Chapter 19: Cost Concepts and Cost Allocation
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Q1) As actual overhead costs are incurred, the Overhead account is debited.
A)True
B)False
Q2) The Overhead account is used to accumulate actual overhead costs.
A)True
B)False
Q3) Job 29 consists of 300 units and has total manufacturing costs of direct materials, $4,500; direct labor, $7,500; and overhead, $3,600.
a. What is the unit product cost?
b. What are the prime costs per unit?
c. What are the conversion costs per unit?
Q4) If overhead has been overapplied during the period, the adjusting entry could include a credit to the Cost of Goods Sold account.
A)True
B)False
Q5) Direct materials are the only materials in a product.
A)True B)False
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Chapter 20: Costing Systems: Job Order Costing
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Q1) After a job is completed, the product unit cost can be determined from the job order cost card.
A)True
B)False
Q2) Costs assigned to the building of a house should appear on the income statement when
A) the house is completed.
B) the house is sold.
C) the purchase order to manufacture the house is received.
D) cash is collected for the sale of the house.
Q3) In a job order costing system, when overhead costs are applied, they increase the Work in Process Inventory account.
A)True
B)False
Q4) Which of the following products probably would be manufactured using a job order costing system?
A) Paper
B) Baseball
C) Computer monitors
D) Company business cards
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Chapter 21: Costing Systems Process Costing
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Q1) When computing the cost per equivalent unit, the FIFO process costing method considers
A) current costs only.
B) current costs plus ending work in process inventory costs.
C) current costs less ending work in process inventory costs.
D) current costs plus beginning work in process inventory costs.
Q2) In order to be classified as a process costing system, the product flow must represent a series of processes in which only one process has input into the next process.
A)True
B)False
Q3) Unit costs are determined by dividing the total costs of the period by the equivalent units.
A)True
B)False
Q4) Only one Work in Process Inventory account is used with the process costing system. A)True
B)False
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Chapter 22: Activity-Based Systems-Abm and Lean
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Q1) The actual amount of time that a product is being worked on is known as the A) moving time.
B) inspection time.
C) processing time.
D) queue time.
Q2) A work cell is an autonomous production line that can perform only one required operation efficiently at a time.
A)True
B)False
Q3) A change to just-in-time manufacturing expands mainly the role of the A) cost accountant.
B) machine operator.
C) purchasing manager.
D) quality control inspector.
Q4) When managing the production process in a just-in-time environment, the manager's focus is on throughput time.
A)True
B)False
Q5) When using a just-in-time system, what qualities should be used to evaluate a supplier?
24
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Chapter 23: Cost Behavior Analysis
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Q1) Contribution margin (CM) is the amount that remains after all fixed costs are subtracted from sales.
A)True
B)False
Q2) If direct materials costs are decreased, the breakeven point will decrease.
A)True
B)False
Q3) Cost-volume-profit analysis is not appropriate for service businesses.
A)True
B)False
Q4) When fixed costs are $41,500, the variable cost is $12 per unit, and the product sells for $22 per unit, the breakeven point is
A) 4,150 units.
B) 8,300 units.
C) 2,075 units.
D) 6,225 units.
Q5) Total variable and fixed costs will be the same regardless of how many units are produced.
A)True
B)False
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Chapter 24: The Budgeting Process
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Q1) Holman Company pays each of its three salespeople a base salary of $1,000 per month plus a commission of 10 percent of their sales. The base salary is paid each month as incurred; the 10 percent commission is paid the month following the month of sale. The total sales for the past four months are as follows: \[\begin{array} { l r }
\text { June } & 15,000 \\
\text { July } & 22,000 \\
\text { August } & 14,000 \\
\text { September } & 40,000 \\ \hline
\end{array}\] Total salary and commission cash payments for September total
A) $1,400.
B) $3,900.
C) $4,400.
D) $2,900.
Q2) As part of the budgeting process, managers evaluate operational, tactical, value chain, and capacity issues.
A)True
B)False
Q3) Describe three benefits budgeting provides to an organization's success.
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Chapter 25: Performance Management and Evaluation
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Q1) A responsibility accounting system ensures that
A) generally accepted accounting principles reporting requirements are met.
B) managers will not be held responsible for items they cannot change.
C) 99 percent of businesses utilizing such a system will be profitable.
D) easy correlations between revenues and costs can be drawn.
Q2) A manager can improve ROI by doing which of the following?
A) Decreasing assets
B) Increasing sales
C) Decreasing costs
D) All of these choices
Q3) Which of the following is a type of incentive compensation?
A) Health insurance
B) Profit-sharing plans
C) Pension plans
D) Flexible spending programs
Q4) Why are managers more likely to achieve their objectives in both the short term and the long term when they utilize a tool such as the balanced scorecard?
Q5) An organization chart assists in management control.
A)True
B)False
27
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Chapter 26: Standard Costing and Variance Analysis
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Q1) A purpose of standard costing is to A) control costs.
B) allocate costs more accurately.
C) replace subjective decision making.
D) compute the breakeven point.
Q2) Point Company uses the standard costing method. The company's main product is a fine-quality audio speaker that normally takes 0.25 hour to produce. Normal annual capacity is 3,000 direct labor hours, and budgeted fixed overhead costs for the year were $6,750. During the year, the company produced and sold 8,000 units. Actual fixed overhead costs were $4,800. Compute the fixed overhead budget variance.
A) $300 (F)
B) $300 (U)
C) $1,950 (F)
D) $1,950 (U)
Q3) The standard fixed overhead rate is usually based on the expected number of standard machine hours.
A)True
B)False
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Chapter 27: Short Run Decision Analysis
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Q1) The first step in the incremental analysis is to eliminate any irrelevant revenues and costs.
A)True
B)False
Q2) The difference in total costs between two alternatives is referred to as the A) incremental cost.
B) sunk cost.
C) opportunity cost.
D) direct cost.
Q3) During 2010, America, Inc., produced, among other products, 9,500 cameras, incurring the following unit costs: $5 in direct materials, $3 in direct labor, $2 in variable overhead, $4 in fixed overhead, $0.50 in variable selling and administrative expenses, and $1 in fixed selling and administrative expenses. An outsider had offered to produce the cameras for $12 each. Assuming that the factory space would have been idle otherwise, acceptance of the outside offer would have
A) lost the company $9,500.
B) saved the company $34,250.
C) saved the company $19,250.
D) lost the company $14,250.
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Chapter 28: Capital Investment Analysis
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Q1) The most commonly used methods in the evaluation of capital investment proposals are net present value method, payback period method and the accounting rate-of-return method.
A)True
B)False
Q2) The carrying value of the old asset in a machine replacement decision is irrelevant.
A)True
B)False
Q3) Capital facilities and projects are not expensive.
A)True
B)False
Q4) Availability of funds is not the criteria for deciding on the capital investment proposals.
A)True
B)False
Q5) The three techniques used to evaluate capital investment alternatives all use the project's expected net income.
A)True
B)False
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