Principles Of Accounting 12th Edition By Needles – Powers – Test Bank

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Chapter 5: Foundations of Financial Reporting and the Classified Balance Sheet

Student: ___________________________________________________________________________

  1. The objective of financial reporting established by the FASB is to provide information that is useful to potential customers.
    True    False

 

  1. To be useful for decision making, financial reporting must enable the user to assess cash flow prospects and assess management’s stewardship.
    True    False

 

  1. Financial statements are often audited by management to increase confidence in the statements’ reliability.
    True    False

 

  1. Investors and creditors use financial statements to evaluate a company’s ability to pay dividends and interest.
    True    False

 

  1. In practice, accounting information is quite simple and precise.
    True    False

 

  1. A different set of financial statements usually is prepared for each user.
    True    False

 

  1. The relevance of accounting information means that the information has a direct bearing on a decision.
    True    False

 

  1. An advantage of accounting information is that it provides exact and completely reliable measures.
    True    False

 

  1. Even when no errors have been made, accounting is never 100 percent accurate because of the extensive use of estimates.
    True    False

 

  1. Accounting information contains numerous estimates, classifications, summarizations, judgments, and allocations.
    True    False

 

  1. For accounting information to be useful, it must be both relevant and conservative.
    True    False

 

  1. The Sarbanes-Oxley Act requires a company to guarantee that its financial statements are 100 percent accurate.
    True    False

 

  1. Only the chief financial officer and the company’s CPAs must certify that, to their knowledge, the statements are accurate and complete.
    True    False

 

  1. The use of the lower-of-cost-or-market method for inventory is an application of the convention of conservatism.
    True    False

 

  1. The convention of consistency has led to an increase in the notes to financial statements.
    True    False

 

  1. The conservatism convention should not be used when the accountant is certain of a particular measure.
    True    False

 

  1. To understand accounting information, users must be familiar with the accounting conventions, or rules of thumb, used in preparing financial statements.
    True    False

 

  1. Full disclosure of all important facts aids in overcoming the limitations of accounting information.
    True    False

 

  1. Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period.
    True    False

 

  1. The convention of consistency pertains to the use of the same accounting principles by firms in the same industry.
    True    False

 

  1. A material item is one that is likely to affect a user’s decision.
    True    False

 

  1. In accounting, $1,000 is generally considered the dividing line between material and immaterial amounts.
    True    False

 

  1. Although a garbage can that costs $25 is a long-term asset, it can be expensed because the amount is immaterial and will not affect anyone’s decision making.
    True    False

 

  1. The cost-benefit convention holds that the benefits to be gained from providing accounting information should be greater than the costs of providing it.
    True    False

 

  1. Illegal acts of a small dollar amount can be ignored because they are immaterial.
    True    False

 

  1. The conventions of consistency and conservatism require that financial statements present all the information relevant to users’ understanding of the statements.
    True    False

 

  1. General-purpose external financial statements that are divided into subcategories are called classified financial statements.
    True    False

 

  1. Classified balance sheets list accounts in alphabetical order.
    True    False

 

  1. Natural resources, such as coal mines and oil wells, are classified as intangible assets.
    True    False

 

  1. It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year.
    True    False

 

  1. The investments category on the balance sheet normally includes investments that are intended to be held for a long period of time.
    True    False

 

  1. The main difference between intangible assets and property, plant, and equipment is physical substance.
    True    False

 

  1. The main differences among the balance sheets of the sole proprietorship, the partnership, and the corporation are found in the current assets and current liabilities sections.
    True    False

 

  1. The two parts of a corporation’s stockholders’ equity section are contributed capital and retained earnings.
    True    False

 

  1. The Retained Earnings portion of a corporation represents the initial contribution of capital to the business.
    True    False

 

  1. Contributed capital is shown on a corporate balance sheet as two amounts: the par value of the issued stock and retained earnings.
    True    False

 

  1. The term owner’s equity is preferred over the term net worth because most assets are carried at original cost rather than at current value.
    True    False

 

  1. Return on assets is a measure of liquidity.
    True    False

 

  1. Return on assets is a better measure of profitability than profit margin because it takes into account the assets invested in the business.
    True    False

 

  1. Profitability means having enough cash on hand to pay bills when they become due.
    True    False

 

  1. Asset turnover measures how efficiently assets are used to produce revenues.
    True    False

 

  1. A company with a current ratio of 1.0 is considered more liquid than a company with a current ratio of 2.0.
    True    False

 

  1. A debt to equity ratio of 1.0 means that half of the company’s assets are financed by creditors.
    True    False

 

  1. A company with a low debt to equity ratio is in a more vulnerable position during poor economic times than a company with a high debt to equity ratio.
    True    False

 

  1. Profit margin and gross margin are the same thing.
    True    False

 

  1. A company with a profit margin of 6 percent earns sixty cents profit for every dollar of net sales.
    True    False

 

  1. A debt to equity ratio of 0.5 means that one-third of a company’s total assets are financed by creditors.
    True    False

 

  1. A company’s management can improve overall profitability by decreasing the profit margin,
    the asset turnover, or both.
    True    False

 

  1. Return on assets is a combination of the profit margin and the asset turnover.
    True    False

 

  1. A company with a low asset turnover uses its assets more productively than one with a high asset turnover.
    True    False

 

  1. Working capital is the amount by which current liabilities exceed current assets and measures how efficiently liabilities are used to produce sales.
    True    False

 

  1. All of the following must certify that a public company’s financial statements are accurate, complete, and not misleading, except for the
    A. chief financial officer.
    B. director of human resources.
    C. chief executive officer.
    D. independent auditor.

 

  1. General-purpose external financial statements are not primarily intended for
    A. management.
    B. investors.
    C. suppliers of goods and services.
    D. lending institutions.

 

  1. Financial statements are audited by outside accountants
    A. because it is a requirement stated in the Internal Revenue Code.
    B. only when fraudulent financial reporting is suspected.
    C. who then report on whether or not the company is a good investment.
    D. to increase the users’ confidence in the statements’ reliability.

 

  1. Financial statements have faithful representation when the information has all of the following except
    A. Complete information.
    B. Information that is free from error.
    C. Neutral information.
    D. Material information.

 

  1. According to the FASB, the usefulness of accounting is judged by which of the following two qualitative characteristics of accounting information?
    A. Comparability and neutrality
    B. Understandability and comparability
    C. Verifiability and timeliness
    D. Relevance and faithful representation

 

  1. The qualitative characteristic of faithful representation includes
    A. materiality
    B. confirmative value.
    C. timeliness.
    D. neutral information.

 

  1. Accounting information should make a difference to the outcome of a decision, according to the qualitative characteristic of
    A. faithful representation.
    B. relevance.
    C. consistency.
    D. understandability.

 

  1. The user can depend on the accuracy of financial information when which of the following qualitative characteristics has been followed?
    A. Relevance
    B. Faithful representation
    C. Understandability
    D. Timeliness

 

  1. The Securities and Exchange Commission instituted rules requiring the chief executive officers and chief financial officers of all publicly traded companies to certify that, to their knowledge, the quarterly and annual statements that their companies file with the SEC are
    A. 100 percent accurate and contain no misstatements, errors, or mistakes.
    B. accurate and complete.
    C. subject to interpretation due to the many accounting rules and regulations.
    D. not to be used except by individuals working for the company.

 

  1. The lower-of-cost-or-market method of accounting for inventories follows the convention of
    A. full disclosure.
    B. materiality.
    C. conservatism.
    D. cost-benefit.

 

  1. The convention of consistency refers to consistent use of accounting principles
    A. among firms.
    B. within a given accounting period.
    C. within industries.
    D. among accounting periods.

 

  1. A practical decision to expense a $120 printer rather than record it as property, plant, and equipment and depreciate it probably is made on the basis of the convention of
    A. conservatism.
    B. consistency.
    C. materiality.
    D. full disclosure.

 

  1. The accounting convention that is most responsible for the increase in the number of notes to financial statements is
    A. materiality.
    B. full disclosure.
    C. consistency.
    D. conservatism.

 

  1. __________ is the quality that different knowledgeable and independent observers could reach concensus that a particular depiction is a faithful representation.
    A. Verifiability.
    B. Consistency.
    C. Comparability.
    D. Neutrality.

 

  1. Which of the following accounting conventions would an accountant most likely apply when facing major uncertainties?
    A. Understandability
    B. Conservatism
    C. Materiality
    D. Verifiability

 

  1. 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

 

  1. Which accounting convention could cause an overload of information for the financial statement user?
    A. Consistency
    B. Conservatism
    C. Full disclosure
    D. Materiality

 

  1. Which accounting convention requires a note to the financial statements explaining the company’s method of revenue recognition?
    A. Comparability and consistency
    B. Materiality
    C. Conservatism
    D. Full disclosure

 

  1. Which of the following is not an enhancing qualitative characteristic?
    A. Verifiability
    B. Timeliness
    C. Understandability
    D. Neutrality

 

  1. Faithful representation is comprised of all of the following except
    A. Verifiability
    B. Completeness
    C. Neutrality
    D. Free from error

 

  1. Relevance is comprised of all of the following except
    A. Neutrality
    B. Materiality
    C. Predictive value
    D. Confirmative value

 

  1. ___________ is related to both the nature of an item and its size.
    A. Neutrality
    B. Materiality
    C. Verifiability
    D. Timeliness

 

  1. Which of the following statements best describes predictive value?
    A. Helps capital providers make decisions about future actions.
    B. Provides all information necessary for a reliable decision.
    C. Enables users to identify similarities and differences.
    D. Enables users to comprehend the meaning of the information.

 

  1. A company should classify land held for a planned manufacturing facility as
    A. an intangible asset.
    B. an investment.
    C. a current asset.
    D. property, plant, and equipment.

 

  1. Which of the following should be classified as an intangible asset?
    A. Land held for future use
    B. Long-term notes receivable
    C. Special funds established to pay off a debt
    D. Copyright

 

  1. Which of the following would not appear in the owner’s equity section of a corporation?
    A. I. Muller, Capital
    B. Retained earnings
    C. Additional paid-in capital
    D. Common stock

 

  1. On a corporate balance sheet, earned capital is also known as
    A. common stock.
    B. paid-in capital.
    C. retained earnings.
    D. contributed capital.

 

  1. Use this information to answer the following question.
Sunshine Travel  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 40,000    
Short-term investments   20,000    
Notes receivable (due in ten months)   15,000    
Accounts receivable   10,000    
Merchandise inventory   35,000    
Land held for future use   40,000    
Land   45,000    
Building $50,000      
  Less accumulated depreciation    10,000 40,000  
Trademark     35,000    
Total assets     $280,000  
   
Liabilities  
Notes payable (due in six months)   $ 25,000    
Accounts payable   10,000    
Salaries payable   5,000    
Mortgage payable (due in seven years)     45,000    
Total liabilities     $85,000  
         
Owner’s Equity  
Jennifer More, Capital     195,000  
Total liabilities and owner’s equity     $280,000  
         
         
         
         

The total dollar amount of assets to be classified as current assets is
A. $105,000.
B. $145,000.
C. $95,000.
D. $120,000.

 

  1. Use this information to answer the following question.
Sunshine Travel  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 40,000    
Short-term investments   20,000    
Notes receivable (due in ten months)   15,000    
Accounts receivable   10,000    
Merchandise inventory   35,000    
Land held for future use   40,000    
Land   45,000    
Building $50,000      
  Less accumulated depreciation    10,000 40,000  
Trademark     35,000    
Total assets     $280,000  
   
Liabilities  
Notes payable (due in six months)   $ 25,000    
Accounts payable   10,000    
Salaries payable   5,000    
Mortgage payable (due in seven years)     45,000    
Total liabilities     $85,000  
         
Owner’s Equity  
Jennifer More, Capital     195,000  
Total liabilities and owner’s equity     $280,000  
         
         
         
         

The total dollar amount of assets to be classified as investments is
A. $125,000.
B. $95,000.
C. $60,000.
D. $40,000.

 

  1. Use this information to answer the following question.
Sunshine Travel  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 40,000    
Short-term investments   20,000    
Notes receivable (due in ten months)   15,000    
Accounts receivable   10,000    
Merchandise inventory   35,000    
Land held for future use   40,000    
Land   45,000    
Building $50,000      
  Less accumulated depreciation    10,000 40,000  
Trademark     35,000    
Total assets     $280,000  
   
Liabilities  
Notes payable (due in six months)   $ 25,000    
Accounts payable   10,000    
Salaries payable   5,000    
Mortgage payable (due in seven years)     45,000    
Total liabilities     $85,000  
         
Owner’s Equity  
Jennifer More, Capital     195,000  
Total liabilities and owner’s equity     $280,000  
         
         
         
         

The total dollar amount of assets to be classified as property, plant, and equipment is
A. $135,000.
B. $125,000.
C. $95,000.
D. $85,000.

 

  1. An investment is classified as short term or long term based on
    A. whether the investment can be sold immediately.
    B. the length of time the investor expects to hold it.
    C. the purpose for which it is held.
    D. the dollar amount of the investment.

 

  1. Which of the following accounts is most likely to appear on the balance sheet as a current liability?
    A. Accumulated Depreciation
    B. Bonds Payable
    C. Mortgage Payable
    D. Wages Payable

 

  1. Which accounting term does not mean the same as the others?
    A. Retained earnings
    B. Net worth
    C. Capital
    D. Owner’s equity

 

  1. Which of the following should be classified as a current asset?
    A. Supplies
    B. Trademark
    C. Equipment
    D. Land held for future use

 

  1. Goodwill would appear in which balance sheet section?
    A. Investments
    B. Property, plant, and equipment
    C. Current assets
    D. Intangible assets

 

  1. Stephanie Cape purchased a franchise for dry cleaning services.  Stephanie is running the dry cleaning business as her primary occupation.  Where on the balance sheet is the franchise reported?
    A. Property, plant, and equipment
    B. Investments
    C. Current assets
    D. Intangible assets

 

  1. The normal operating cycle helps define which of the following balance sheet sections?
    A. Owner’s equity
    B. Current liabilities
    C. Intangible assets
    D. Property, plant, and equipment

 

  1. Liabilities have which of the following two major categories?
    A. Accounts payable and notes payable
    B. Contributed capital and retained earnings
    C. Current and long term
    D. Unearned revenues and other payables

 

  1. Use this information to answer the following question.
Coyle Company  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 70,000    
Short-term investments   56,000    
Accounts receivable   28,000    
Notes receivable (due in six months)   42,000    
Merchandise inventory   98,000    
Special fund for purchasing a building   112,000    
Land   140,000    
Building $150,000      
  Less accumulated depreciation    28,000 122,000  
Trademark     92,000    
Total assets     $760,000  
   
Liabilities  
Notes payable (due in one year)   $ 70,000    
Accounts payable   30,000    
Salaries payable   14,000    
Mortgage payable (due in seven years)     146,000    
Total liabilities     $260,000  
         
Owner’s Equity  
         
Eddie Coyle, Capital       500,000  
Total liabilities and owner’s equity     $760,000  
         

The total dollar amount of assets to be classified as current assets is
A. $252,000.
B. $238,000.
C. $294,000.
D. $406,000.

 

  1. Use this information to answer the following question.
Coyle Company  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 70,000    
Short-term investments   56,000    
Accounts receivable   28,000    
Notes receivable (due in six months)   42,000    
Merchandise inventory   98,000    
Special fund for purchasing a building   112,000    
Land   140,000    
Building $150,000      
  Less accumulated depreciation    28,000 122,000  
Trademark     92,000    
Total assets     $760,000  
   
Liabilities  
Notes payable (due in one year)   $ 70,000    
Accounts payable   30,000    
Salaries payable   14,000    
Mortgage payable (due in seven years)     146,000    
Total liabilities     $260,000  
         
Owner’s Equity  
Eddie Coyle, Capital       500,000  
Total liabilities and owner’s equity     $760,000  
         

The total dollar amount of assets to be classified as investments is
A. $168,000.
B. $0.
C. $112,000.
D. $56,000.

 

  1. Use this information to answer the following question.
Coyle Company  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 70,000    
Short-term investments   56,000    
Accounts receivable   28,000    
Notes receivable (due in six months)   42,000    
Merchandise inventory   98,000    
Special fund for purchasing a building   112,000    
Land   140,000    
Building $150,000      
  Less accumulated depreciation    28,000 122,000  
Trademark     92,000    
Total assets     $760,000  
   
Liabilities  
Notes payable (due in one year)   $ 70,000    
Accounts payable   30,000    
Salaries payable   14,000    
Mortgage payable (due in seven years)     146,000    
Total liabilities     $260,000  
         
Owner’s Equity  
Eddie Coyle, Capital       500,000  
Total liabilities and owner’s equity     $760,000  
         

The total dollar amount of assets to be classified as property, plant, and equipment is
A. $374,000.
B. $262,000.
C. $354,000.
D. $122,000.

 

  1. Intangible assets could include all except
    A. Trademark
    B. Land held for future use
    C. Patent
    D. Goodwill

 

  1. The debt to equity ratio equals
    A. owner’s equity divided by total liabilities.
    B. owner’s equity divided by long-term liabilities.
    C. total liabilities divided by owner’s equity.
    D. current liabilities divided by average owner’s equity.

 

  1. The profit margin equals
    A. net sales divided by net income.
    B. gross margin divided by net income.
    C. net income divided by gross margin.
    D. net income divided by revenues.

 

  1. The asset turnover ratio equals
    A. revenues divided by average total assets.
    B. average total assets divided by net income.
    C. average total assets divided by total liabilities.
    D. net income divided by average total assets.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 12,000   Current liabilities $ 8,000  
Investments 2,000   Long-term liabilities    2,000  
Property, plant, and equipment 16,000   Total liabilities $ 10,000  
Intangible assets    10,000        
    Owner’s Equity  
      Jonah Jones, Capital   30,000  
           
           
      Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
           

 

National Textile  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600
   
   
   

The total amount of working capital for National Textile is
A. $2,000.
B. $6,000.
C. $4,000.
D. $30,000.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 12,000   Current liabilities $ 8,000  
Investments 2,000   Long-term liabilities    2,000  
Property, plant, and equipment 16,000   Total liabilities $ 10,000  
Intangible assets    10,000        
    Owner’s Equity  
      Jonah Jones, Capital   30,000  
           
           
      Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
           

 

National Textile  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600
   
   
   

The current ratio for National Textile is
A. 1.20.
B. 1.75.
C. .67.
D. 1.50.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 12,000   Current liabilities $ 8,000  
Investments 2,000   Long-term liabilities    2,000  
Property, plant, and equipment 16,000   Total liabilities $ 10,000  
Intangible assets    10,000        
    Owner’s Equity  
      Jonah Jones, Capital   30,000  
           
           
      Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
           

 

National Textile  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600
   
   
   

The profit margin for National Textile is
A. 60 percent.
B. 25 percent.
C. 20 percent.
D. 12 percent.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 12,000   Current liabilities $ 8,000  
Investments 2,000   Long-term liabilities    2,000  
Property, plant, and equipment 16,000   Total liabilities $ 10,000  
Intangible assets    10,000        
    Owner’s Equity  
      Jonah Jones, Capital   30,000  
           
           
      Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
           

 

National Textile  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600
   
   
   

The return on assets for National Textile is
A. 30 percent.
B. 150 percent.
C. 33-1/3 percent.
D. 24 percent.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 12,000   Current liabilities $ 8,000  
Investments 2,000   Long-term liabilities    2,000  
Property, plant, and equipment 16,000   Total liabilities $ 10,000  
Intangible assets    10,000        
    Owner’s Equity  
      Jonah Jones, Capital   30,000  
           
           
      Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
           

 

National Textile  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600
   
   
   

The return on equity for National Textile is
A. 40 percent.
B. 67 percent.
C. 47 percent.
D. 32 percent.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 12,000   Current liabilities $ 8,000  
Investments 2,000   Long-term liabilities    2,000  
Property, plant, and equipment 16,000   Total liabilities $ 10,000  
Intangible assets    10,000        
    Owner’s Equity  
      Jonah Jones, Capital   30,000  
           
           
      Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
           

 

National Textile  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600
   
   
   

The debt to equity ratio for National Textile is
A. 67 percent.
B. 75 percent.
C. 25 percent.
D. 33-1/3 percent.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 12,000   Current liabilities $ 8,000  
Investments 2,000   Long-term liabilities    2,000  
Property, plant, and equipment 16,000   Total liabilities $ 10,000  
Intangible assets    10,000        
    Owner’s Equity  
      Jonah Jones, Capital   30,000  
           
           
      Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
           

 

National Textile  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600
   
   
   

The asset turnover for National Textile is
A. 1.00 times.
B. 1.33 times.
C. 0.83 times.
D. 1.20 times.

 

  1. Which of the following is not a measure of profitability?
    A. Current ratio
    B. Return on assets
    C. Return on equity
    D. Debt to equity ratio

 

  1. Which of the following is a measure of liquidity?
    A. Return on equity
    B. Return on assets
    C. Working capital
    D. Profit margin

 

  1. Current assets divided by current liabilities is known as the
    A. profit margin.
    B. current ratio.
    C. working capital.
    D. capital structure.

 

  1. Which of the following is not expressed in terms of a percentage?
    A. Return on equity
    B. Debt to equity ratio
    C. Current ratio
    D. Profit margin

 

  1. Which of the following is expressed in terms of a percentage?
    A. Return on equity
    B. Current ratio
    C. Asset turnover
    D. Working capital

 

  1. Which of the following does not include net income in its computation?
    A. Debt to equity ratio
    B. Return on assets
    C. Return on equity
    D. Profit margin

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 14,000   Current liabilities $  8,000  
Investments 6,000   Long-term liabilities       2,000  
Property, plant, and equipment 24,000   Total liabilities $  10,000  
Intangible assets    16,000        
    Owner’s Equity  
      Carlton Cane, Capital   50,000  
           
      Total liabilities and    
Total assets $60,000   owner’s equity $60,000  
           

Cane Construction  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600
   
   
   

The total amount of working capital for Cane Construction is
A. $4,000.
B. $14,000.
C. $6,000.
D. $2,000.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 14,000   Current liabilities $  8,000  
Investments 6,000   Long-term liabilities       2,000  
Property, plant, and equipment 24,000   Total liabilities $  10,000  
Intangible assets    16,000        
    Owner’s Equity  
      Carlton Cane, Capital   50,000  
           
      Total liabilities and    
Total assets $60,000   owner’s equity $60,000  
           

Cane Construction  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600
   
   
   

The current ratio for Cane Construction is
A. 1.75.
B. 0.57.
C. 1.4.
D. 2.0.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 14,000   Current liabilities $  8,000  
Investments 6,000   Long-term liabilities       2,000  
Property, plant, and equipment 24,000   Total liabilities $  10,000  
Intangible assets    16,000        
    Owner’s Equity  
      Carlton Cane, Capital   50,000  
           
      Total liabilities and    
Total assets $60,000   owner’s equity $60,000  
           

Cane Construction  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600
   
   
   

The profit margin for Cane Construction is
A. 30 percent.
B. 75 percent.
C. 60 percent.
D. 27 percent.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 14,000   Current liabilities $  8,000  
Investments 6,000   Long-term liabilities       2,000  
Property, plant, and equipment 24,000   Total liabilities $  10,000  
Intangible assets    16,000        
    Owner’s Equity  
      Carlton Cane, Capital   50,000  
           
      Total liabilities and    
Total assets $60,000   owner’s equity $60,000  
           

Cane Construction  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600
   
   
   

The return on assets for Cane Construction is
A. 80 percent.
B. 70 percent.
C. 36 percent.
D. 133 percent.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 14,000   Current liabilities $  8,000  
Investments 6,000   Long-term liabilities       2,000  
Property, plant, and equipment 24,000   Total liabilities $  10,000  
Intangible assets    16,000        
    Owner’s Equity  
      Carlton Cane, Capital   50,000  
           
      Total liabilities and    
Total assets $60,000   owner’s equity $60,000  
           

Cane Construction  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600
   
   
   

The return on equity for Cane Construction is
A. 62.5 percent.
B. 43.2 percent.
C. 84 percent.
D. 60 percent.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 14,000   Current liabilities $  8,000  
Investments 6,000   Long-term liabilities       2,000  
Property, plant, and equipment 24,000   Total liabilities $  10,000  
Intangible assets    16,000        
    Owner’s Equity  
      Carlton Cane, Capital   50,000  
           
      Total liabilities and    
Total assets $60,000   owner’s equity $60,000  
           

Cane Construction  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600
   
   
   

The debt to equity ratio for Cane Construction is
A. 16-2/3 percent.
B. 20 percent.
C. 80 percent.
D. 83-1/3 percent.

 

  1. Use this information to answer the following question.
J. & B. Auto Parts  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 60,000    
Short-term investments   40,000    
Notes receivable (due in ten months)   30,000    
Accounts receivable   20,000    
Merchandise inventory   70,000    
Long-term investments   80,000    
Land   90,000    
Building $100,000      
  Less accumulated depreciation    20,000 80,000  
Trademark     70,000    
Total assets     $540,000  
   
Liabilities  
Notes payable (due in six months)   $ 50,000    
Accounts payable   20,000    
Salaries payable   10,000    
Mortgage payable (due in seven years)     90,000    
Total liabilities     $170,000  
         
Owner’s Equity  
         
Cheryl Stein, Capital       370,000  
Total liabilities and owner’s equity     $540,000  
         

The debt to equity ratio is
A. 0.46.
B. 0.67.
C. 2.18.
D. 0.33.

 

  1. Use this information to answer the following question.
J. & B. Auto Parts  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 60,000    
Short-term investments   40,000    
Notes receivable (due in ten months)   30,000    
Accounts receivable   20,000    
Merchandise inventory   70,000    
Long-term investments   80,000    
Land   90,000    
Building $100,000      
  Less accumulated depreciation    20,000 80,000  
Trademark     70,000    
Total assets     $540,000  
   
Liabilities  
Notes payable (due in six months)   $ 50,000    
Accounts payable   60,000    
Salaries payable   10,000    
Mortgage payable (due in seven years)     50,000    
Total liabilities     $170,000  
         
Owner’s Equity  
         
Cheryl Stein, Capital       370,000  
Total liabilities and owner’s equity     $540,000  
         

The total amount of working capital is
A. $150,000.
B. $370,000.
C. $100,000.
D. $60,000.

 

  1. Use this information to answer the following question.
Coyle Company  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 70,000    
Short-term investments   56,000    
Accounts receivable   28,000    
Notes receivable (due in six months)   42,000    
Merchandise inventory   98,000    
Special fund for purchasing a building   112,000    
Land   140,000    
Building $150,000      
  Less accumulated depreciation    28,000 122,000  
Trademark     92,000    
Total assets     $760,000  
   
Liabilities  
Notes payable (due in one year)   $ 70,000    
Accounts payable   30,000    
Salaries payable   14,000    
Mortgage payable (due in seven years)     146,000    
Total liabilities     $260,000  
         
Owner’s Equity  
         
Eddie Coyle, Capital       500,000  
Total liabilities and owner’s equity     $760,000  
         

The debt to equity ratio is
A. 0.48.
B. 0.34.
C. 0.52.
D. 1.92.

 

  1. Use this information to answer the following question.
Coyle Company  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 70,000    
Short-term investments   56,000    
Accounts receivable   28,000    
Notes receivable (due in six months)   42,000    
Merchandise inventory   98,000    
Special fund for purchasing a building   112,000    
Land   140,000    
Building $150,000      
  Less accumulated depreciation    28,000 122,000  
Trademark     92,000    
Total assets     $760,000  
   
Liabilities  
Notes payable (due in one year)   $ 70,000    
Accounts payable   130,000    
Salaries payable   14,000    
Mortgage payable (due in seven years)     46,000    
Total liabilities     $260,000  
         
Owner’s Equity  
         
Eddie Coyle, Capital       500,000  
Total liabilities and owner’s equity     $760,000  
         

The total amount of working capital is
A. ($30,000.)
B. $80,000.
C. $24,000.
D. $400,000.

 

  1. Working capital measures
    A. the excess of current assets over current liabilities—what is on hand to fund business operations.
    B. the ability to earn a satisfactory income.
    C. the amount of debt in the company.
    D. the profitability of the business.

 

  1. The asset turnover ratio measures
    A. how quickly the company uses assets to pay debt.
    B. how efficiently assets are used to produce sales.
    C. the income produced by selling inventory.
    D. how efficiently equity is used to produce revenue.

 

  1. Each of the following statements is justified by a concept or convention of accounting. Write the letter in the blank next to each statement corresponding to the concept or convention involved.
a. Consistency d. Full disclosure
b. Materiality e. Cost-benefit
c. Conservatism  
   

_____ 1. This convention best enhances comparability of financial statements between years.
_____ 2. A merger agreed on just after the balance sheet date nevertheless is reported in the notes to the financial statements.
_____ 3. A company forgoes hiring another full-time accountant, which would add only slightly to the financial statements’ accuracy.
_____ 4. A company uses lower-of-cost-or-market to value inventory.
_____ 5. A large company rounds its financial statement figures to the nearest $10,000.

 

 

 

 

 

  1. Each of the following statements violates a concept or convention of accounting. Write the letter in the blank next to each statement corresponding to the concept or convention violated.

a. Consistency d. Full disclosure
b. Materiality e. Cost-benefit
c. Conservatism  
   

_____ 1. A note to the financial statements indicating a change in inventory methods is omitted.
_____ 2. When management is unsure of which estimates to use in a given situation, the estimate resulting in the largest net income is always used.
_____ 3. In 20×5, a company uses straight-line depreciation and in 20×6 the company uses declining-balance depreciation.
_____ 4. A small company expenses all expenditures under $10,000.
_____ 5. A small company purchases a $50,000 computer to save $3,000 per year in bookkeeping wages.

 

 

 

 

 

  1. Bill Pierce owns several ice cream shops all within 50 miles of his home. He has plans to expand the number of shops he owns. This planned expansion will require a large bank loan. Bill has always done his own accounting work and has prepared a set of financial statements for each of the past five years of operations to present to the bank. Because some periods were more profitable than others, Bill attempted to streamline his earnings by switching depreciation and inventory valuation methods frequently. This created the appearance that his company earnings were very consistent over the years. Discuss the merits of Bill’s financial statements with regard to his streamlining decisions.

 

 

 

 

 

  1. Why is it important for a company to maintain the same accounting methods and practices from period to period?

 

 

 

 

 

  1. The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent accounts. In the blank next to each account, write the letter indicating to which category it belongs.
a. Current assets e. Current liabilities
b. Investments f. Long-term liabilities
c. Plant and equipment g. Owner’s equity
d. Intangible assets h. Not on balance sheet
   

 

_____ 1. Accumulated Depreciation _____ 7. Trademark
_____ 2. Revenues Received in
Advance
_____ 8. Notes Payable (in five years)
_____ 3. Interest Expense _____ 9. Depreciation Expense
_____ 4. Wages Payable _____ 10. Prepaid Interest
_____ 5. Owner’s Capital _____ 11. Land Held for Future Use
_____ 6. Inventory  
   

 

 

 

 

 

 

  1. State the definition of a current asset.

 

 

 

 

 

  1. Match the following financial statement ratios with their definition.

    1. Working capital _____
    2. Current ratio _______
    3. Profit margin ______
    4. Return on assets______
    5. Debt to equity ratio________
    6. Return on equity_______
    7. Asset turnover_________

    a. A measure of profitability that shows the proportion of a company’s assets that is financed by creditors and the proportion financed by owners
    b. A measure of liquidity that shows the net current assets on hand to continue business operations
    c. A measure of profitability that relates the amount earned by a business to the owner’s investment in the business
    d. A measure of profitability that shows the percentage of each sales dollar that results in net income
    e. A measure of liquidity; current assets divided by current liabilities
    f. A measure of profitability that shows how efficiently a company uses its assets to produce income
    g. A measure of how efficiently assets are used to produce sales

 

 

 

 

 

  1. The profit margin and asset turnover ratios are important measures, but they have a limitation.  Describe these limitations and discuss the ratio that can be used to overcome these deficiencies.

 

 

 

 

 

  1. Describe how the current ratio is calculated.  If a company has a very low current ratio, what might this mean?  If a company has a very high current ratio, what might this mean?

 

 

 

 

 

1. Quality that enables users to identify similarities and differences between two sets of financial data.      Qualitative characteristics.   ____
2. Related to both the nature of an item and its size.      Predictive value.   ____
3. Quality that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.      Materiality.   ____
4. Requires that once a company has adopted an accounting procedure, it must use it from one period to the next unless a note to the financial statements informs users of a change.      Neutrality.   ____
5. Free from bias intended to achieve a certain result or to bring about a particular behavior.      Comparability.   ____
6. Helps capital providers make decisions about future actions.      Verifiability.   ____
7. Relevance and faithful representation.      Consistency.   ____
8. When faced with choosing between two equally acceptable procedures or estimates, accountants should choose the one that is least likely to overstate assets and income.      Conservatism   ____

 

1. The percentage of each sales dollar that results in net income.      Current assets.   ____
2. Measures how efficiently assets are used to produce sales.      Investments..   ____
3. Current assets divided by current liabilities.      Net worth.   ____
4. Cash and other assets that a company can reasonably expect to convert to cash, sell, or consume within one year or its normal operating cycle, whichever is longer.      Earned capital.   ____
5. A less-preferred term for “owner’s equity.”      Current ratio.   ____
6. Another name for retained earnings.      Profit margin.   ____
7. Measures how much income did each dollar of assets generate.      Asset turnover.   ____
8. Include assets, usually long-term, that are not used in normal business operations and that management does not plan to convert to cash within the next year.      Return on assets.   ____

 

  1. Using the following data, prepare a classified balance sheet for Blanchard Company as of December 31, 20×5.
Cash $   200   Accumulated Depreciation– Building $  1,000
Investments in Short-Term Government Securities 400   Franchise 1,800
Accounts Receivable 800   Accounts Payable 1,600
Inventory 3,000   Revenues Received in Advance 400
Prepaid Rent 100   Notes Payable (in two years) 4,000
Investment in Land Held for future use 2,700   John Blanchard, Capital 12,000
Land 2,000      
Building 8,000      
         

 

 

 

 

 

 

  1. Using the following data, prepare a classified balance sheet as of December 31, 20×5, for Paula’s Picture Frame Company.
Accounts Payable $ 4,800   Accounts Receivable $  9,000  
Building Not Currently Used 57,000   Cash 15,600  
Accumulated Depreciation– Equipment 24,000   Unearned Revenue 2,400  
        Short-Term Investments 6,000
Paula West, Capital 127,800   Land 48,000  
Copyright 15,000   Equipment 45,000  
Notes Payable (due in 5 years) 39,000   Long-Term Investments 2,400  
           

 

 

 

 

 

 

  1. Use the following information to calculate the liquidity and profitability ratios listed below. Round to two decimal places.
Average owner’s equity $  13,875   Net income $  2,250
Average total assets 27,000   Net sales 23,437.50
Current assets 16,875   Total liabilities 13,125
Current liabilities 11,250      
         
  1. Current ratio
    b. Working capital
    c. Return on equity
    d. Profit margin
    e. Debt to equity ratio
    f. Return on assets
    g. Asset turnover

 

 

 

 

 

  1. Use the following information to calculate the liquidity and profitability ratios listed below. Round to two decimal places.
Average owner’s equity $14,000   Net income $ 2,100
Average total assets 21,000   Net sales 17,500
Current assets 15,000   Total liabilities 10,500
Current liabilities 10,000      
         
  1. Current ratio
    b. Working capital
    c. Return on equity
    d. Profit margin
    e. Debt to equity ratio
    f.  Return on assets
    g. Asset turnover

 

 

 

 

 

  1. Using the following amounts taken from the balance sheet and income statement of a business, compute the measures listed below. After each answer, write “L” if it is a measure of liquidity or “P” if it is a measure of profitability. Round to two decimal places.
Current assets $  12,000   Average owner’s equity $30,000
Average total assets 60,000   Net sales 39,000
Current liabilities 9,000   Net income 4,800
Long-term liabilities 21,000      
         
  1. Return on assets
    b. Working capital
    c. Return on equity
    d. Current ratio

 

 

 

 

 

  1. Using the following amounts taken from the balance sheet and income statement of a business, compute the measures listed below. After each answer, write “L” if it is a measure of liquidity or “P” if it is a measure of profitability. Round to two decimal places.
Current assets $  30,000   Average owner’s equity $60,000
Average total assets 120,000   Net sales 64,000
Current liabilities 20,000   Net income 3,000
Long-term liabilities 40,000      
         
  1. Current ratio
    b. Return on equity
    c. Return on assets
    d. Working capital

 

 

 

 

 

  1. A. From the simplified balance sheet and income statement of the business below, compute the following ratios. Assume that the June 30 amounts for total assets and owner’s equity also represent their average amounts for the period. Round percentages to the nearest whole percent.

    a. Working capital
    b. Current ratio
    c. Profit margin
    d. Return on assets
    e. Debt to equity ratio
    f.  Return on equity
    g. Asset turnover

Keene Industries  
Balance Sheet  
June 30, 20×5  
Assets Liabilities  
Current assets $ 8,000  Current liabilities   $  8,000  
Investments 4,000  Long-term liabilities       12,000  
Property, plant, and    Total liabilities   $20,000  
  equipment 24,000        
Intangible assets   4,000 Owner’s Equity  
     Kathy Keene, Capital     20,000  
     Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
             

 

Keene Industries  
Income Statement  
For the Year Ended June 30, 20×5  
Net sales $48,000  
Cost of goods sold   24,000  
Gross margin $24,000  
Operating expenses     19,200  
Net income $ 4,800  
     
     
     
  1. Discuss the liquidity and profitability of Keene Industries.

 

 

 

 

 

  1. A. From the simplified balance sheet and income statement of the business below, compute the following ratios. Assume that the April 30 amounts for total assets and owner’s equity also represent their average amounts for the period. Round percentages to the nearest whole percent.

    a. Working capital
    b. Current ratio
    c. Profit margin
    d. Return on assets
    e. Debt to equity ratio
    f.  Return on equity
    g. Asset turnover

TG Manufacturing  
Balance Sheet  
April 30, 20×5  
Assets Liabilities  
Current assets $ 4,000  Current liabilities   $  2,000  
Investments 6,000  Long-term liabilities       8,000  
Property, plant, and   Total liabilities   $10,000  
  equipment 16,000        
Intangible assets   4,000 Owner’s Equity  
           
           
     Ted Gruen, Capital   20,000  
     Total liabilities and    
Total assets $30,000   owner’s equity $30,000  
               

 

TG Manufacturing  
Income Statement  
For the Year Ended April 30, 20×5  
Net sales $40,000  
Cost of goods sold   22,000  
Gross margin $18,000  
Operating expenses   14,400  
Net income $  3,600  
     
     
     
  1. Discuss the liquidity and profitability of TG Manufacturing.

 

 

 

 

 

 

 

Chapter 5: Foundations of Financial Reporting and the Classified Balance Sheet Key

  1. The objective of financial reporting established by the FASB is to provide information that is useful to potential customers.
    FALSE

 

  1. To be useful for decision making, financial reporting must enable the user to assess cash flow prospects and assess management’s stewardship.
    TRUE

 

  1. Financial statements are often audited by management to increase confidence in the statements’ reliability.
    FALSE

 

  1. Investors and creditors use financial statements to evaluate a company’s ability to pay dividends and interest.
    TRUE

 

  1. In practice, accounting information is quite simple and precise.
    FALSE

 

  1. A different set of financial statements usually is prepared for each user.
    FALSE

 

  1. The relevance of accounting information means that the information has a direct bearing on a decision.
    TRUE

 

  1. An advantage of accounting information is that it provides exact and completely reliable measures.
    FALSE

 

  1. Even when no errors have been made, accounting is never 100 percent accurate because of the extensive use of estimates.
    TRUE

 

  1. Accounting information contains numerous estimates, classifications, summarizations, judgments, and allocations.
    TRUE

 

  1. For accounting information to be useful, it must be both relevant and conservative.
    FALSE

 

  1. The Sarbanes-Oxley Act requires a company to guarantee that its financial statements are 100 percent accurate.
    FALSE

 

  1. Only the chief financial officer and the company’s CPAs must certify that, to their knowledge, the statements are accurate and complete.
    FALSE

 

  1. The use of the lower-of-cost-or-market method for inventory is an application of the convention of conservatism.
    TRUE

 

  1. The convention of consistency has led to an increase in the notes to financial statements.
    FALSE

 

  1. The conservatism convention should not be used when the accountant is certain of a particular measure.
    TRUE

 

  1. To understand accounting information, users must be familiar with the accounting conventions, or rules of thumb, used in preparing financial statements.
    TRUE

 

  1. Full disclosure of all important facts aids in overcoming the limitations of accounting information.
    TRUE

 

  1. Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period.
    TRUE

 

  1. The convention of consistency pertains to the use of the same accounting principles by firms in the same industry.
    FALSE

 

  1. A material item is one that is likely to affect a user’s decision.
    TRUE

 

  1. In accounting, $1,000 is generally considered the dividing line between material and immaterial amounts.
    FALSE

 

  1. Although a garbage can that costs $25 is a long-term asset, it can be expensed because the amount is immaterial and will not affect anyone’s decision making.
    TRUE

 

  1. The cost-benefit convention holds that the benefits to be gained from providing accounting information should be greater than the costs of providing it.
    TRUE

 

  1. Illegal acts of a small dollar amount can be ignored because they are immaterial.
    FALSE

 

  1. The conventions of consistency and conservatism require that financial statements present all the information relevant to users’ understanding of the statements.
    TRUE

 

  1. General-purpose external financial statements that are divided into subcategories are called classified financial statements.
    TRUE

 

  1. Classified balance sheets list accounts in alphabetical order.
    FALSE

 

  1. Natural resources, such as coal mines and oil wells, are classified as intangible assets.
    FALSE

 

  1. It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year.
    TRUE

 

  1. The investments category on the balance sheet normally includes investments that are intended to be held for a long period of time.
    TRUE

 

  1. The main difference between intangible assets and property, plant, and equipment is physical substance.
    TRUE

 

  1. The main differences among the balance sheets of the sole proprietorship, the partnership, and the corporation are found in the current assets and current liabilities sections.
    FALSE

 

  1. The two parts of a corporation’s stockholders’ equity section are contributed capital and retained earnings.
    TRUE

 

  1. The Retained Earnings portion of a corporation represents the initial contribution of capital to the business.
    FALSE

 

  1. Contributed capital is shown on a corporate balance sheet as two amounts: the par value of the issued stock and retained earnings.
    FALSE

 

  1. The term owner’s equity is preferred over the term net worth because most assets are carried at original cost rather than at current value.
    TRUE

 

  1. Return on assets is a measure of liquidity.
    FALSE

 

  1. Return on assets is a better measure of profitability than profit margin because it takes into account the assets invested in the business.
    TRUE

 

  1. Profitability means having enough cash on hand to pay bills when they become due.
    FALSE

 

  1. Asset turnover measures how efficiently assets are used to produce revenues.
    TRUE

 

  1. A company with a current ratio of 1.0 is considered more liquid than a company with a current ratio of 2.0.
    FALSE

 

  1. A debt to equity ratio of 1.0 means that half of the company’s assets are financed by creditors.
    TRUE

 

  1. A company with a low debt to equity ratio is in a more vulnerable position during poor economic times than a company with a high debt to equity ratio.
    FALSE

 

  1. Profit margin and gross margin are the same thing.
    FALSE

 

  1. A company with a profit margin of 6 percent earns sixty cents profit for every dollar of net sales.
    FALSE

 

  1. A debt to equity ratio of 0.5 means that one-third of a company’s total assets are financed by creditors.
    TRUE

 

  1. A company’s management can improve overall profitability by decreasing the profit margin,
    the asset turnover, or both.
    FALSE

 

  1. Return on assets is a combination of the profit margin and the asset turnover.
    TRUE

 

  1. A company with a low asset turnover uses its assets more productively than one with a high asset turnover.
    FALSE

 

  1. Working capital is the amount by which current liabilities exceed current assets and measures how efficiently liabilities are used to produce sales.
    FALSE

 

  1. All of the following must certify that a public company’s financial statements are accurate, complete, and not misleading, except for the
    A.chief financial officer.
    B. director of human resources.
    C. chief executive officer.
    D. independent auditor.

 

  1. General-purpose external financial statements are not primarily intended for
    A.management.
    B. investors.
    C. suppliers of goods and services.
    D. lending institutions.

 

  1. Financial statements are audited by outside accountants
    A.because it is a requirement stated in the Internal Revenue Code.
    B. only when fraudulent financial reporting is suspected.
    C. who then report on whether or not the company is a good investment.
    D. to increase the users’ confidence in the statements’ reliability.

 

  1. Financial statements have faithful representation when the information has all of the following except
    A. Complete information.
    B. Information that is free from error.
    C. Neutral information.
    D. Material information.

 

  1. According to the FASB, the usefulness of accounting is judged by which of the following two qualitative characteristics of accounting information?
    A.Comparability and neutrality
    B. Understandability and comparability
    C. Verifiability and timeliness
    D. Relevance and faithful representation

 

  1. The qualitative characteristic of faithful representation includes
    A.materiality
    B. confirmative value.
    C. timeliness.
    D. neutral information.

 

  1. Accounting information should make a difference to the outcome of a decision, according to the qualitative characteristic of
    A.faithful representation.
    B. relevance.
    C. consistency.
    D. understandability.

 

  1. The user can depend on the accuracy of financial information when which of the following qualitative characteristics has been followed?
    A.Relevance
    B. Faithful representation
    C. Understandability
    D. Timeliness

 

  1. The Securities and Exchange Commission instituted rules requiring the chief executive officers and chief financial officers of all publicly traded companies to certify that, to their knowledge, the quarterly and annual statements that their companies file with the SEC are
    A.100 percent accurate and contain no misstatements, errors, or mistakes.
    B. accurate and complete.
    C. subject to interpretation due to the many accounting rules and regulations.
    D. not to be used except by individuals working for the company.

 

  1. The lower-of-cost-or-market method of accounting for inventories follows the convention of
    A.full disclosure.
    B. materiality.
    C. conservatism.
    D. cost-benefit.

 

  1. The convention of consistency refers to consistent use of accounting principles
    A.among firms.
    B. within a given accounting period.
    C. within industries.
    D. among accounting periods.

 

  1. A practical decision to expense a $120 printer rather than record it as property, plant, and equipment and depreciate it probably is made on the basis of the convention of
    A.conservatism.
    B. consistency.
    C. materiality.
    D. full disclosure.

 

  1. The accounting convention that is most responsible for the increase in the number of notes to financial statements is
    A.materiality.
    B. full disclosure.
    C. consistency.
    D. conservatism.

 

  1. __________ is the quality that different knowledgeable and independent observers could reach concensus that a particular depiction is a faithful representation.
    A.Verifiability.
    B. Consistency.
    C. Comparability.
    D. Neutrality.

 

  1. Which of the following accounting conventions would an accountant most likely apply when facing major uncertainties?
    A.Understandability
    B. Conservatism
    C. Materiality
    D. Verifiability

 

  1. 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

 

  1. Which accounting convention could cause an overload of information for the financial statement user?
    A.Consistency
    B. Conservatism
    C. Full disclosure
    D. Materiality

 

  1. Which accounting convention requires a note to the financial statements explaining the company’s method of revenue recognition?
    A.Comparability and consistency
    B. Materiality
    C. Conservatism
    D. Full disclosure

 

  1. Which of the following is not an enhancing qualitative characteristic?
    A.Verifiability
    B. Timeliness
    C. Understandability
    D. Neutrality

 

  1. Faithful representation is comprised of all of the following except
    A. Verifiability
    B. Completeness
    C. Neutrality
    D. Free from error

 

  1. Relevance is comprised of all of the following except
    A. Neutrality
    B. Materiality
    C. Predictive value
    D. Confirmative value

 

  1. ___________ is related to both the nature of an item and its size.
    A.Neutrality
    B. Materiality
    C. Verifiability
    D. Timeliness

 

  1. Which of the following statements best describes predictive value?
    A.Helps capital providers make decisions about future actions.
    B. Provides all information necessary for a reliable decision.
    C. Enables users to identify similarities and differences.
    D. Enables users to comprehend the meaning of the information.

 

  1. A company should classify land held for a planned manufacturing facility as
    A.an intangible asset.
    B. an investment.
    C. a current asset.
    D. property, plant, and equipment.

 

  1. Which of the following should be classified as an intangible asset?
    A.Land held for future use
    B. Long-term notes receivable
    C. Special funds established to pay off a debt
    D. Copyright

 

  1. Which of the following would not appear in the owner’s equity section of a corporation?
    A.I. Muller, Capital
    B. Retained earnings
    C. Additional paid-in capital
    D. Common stock

 

  1. On a corporate balance sheet, earned capital is also known as
    A.common stock.
    B. paid-in capital.
    C. retained earnings.
    D. contributed capital.

 

  1. Use this information to answer the following question.
Sunshine Travel  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 40,000    
Short-term investments   20,000    
Notes receivable (due in ten months)   15,000    
Accounts receivable   10,000    
Merchandise inventory   35,000    
Land held for future use   40,000    
Land   45,000    
Building $50,000      
  Less accumulated depreciation    10,000 40,000  
Trademark     35,000    
Total assets     $280,000  
   
Liabilities  
Notes payable (due in six months)   $ 25,000    
Accounts payable   10,000    
Salaries payable   5,000    
Mortgage payable (due in seven years)     45,000    
Total liabilities     $85,000  
         
Owner’s Equity  
Jennifer More, Capital     195,000  
Total liabilities and owner’s equity     $280,000  
         
         
         
         

The total dollar amount of assets to be classified as current assets is
A. $105,000.
B. $145,000.
C. $95,000.
D. $120,000.

 

  1. Use this information to answer the following question.
Sunshine Travel  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 40,000    
Short-term investments   20,000    
Notes receivable (due in ten months)   15,000    
Accounts receivable   10,000    
Merchandise inventory   35,000    
Land held for future use   40,000    
Land   45,000    
Building $50,000      
  Less accumulated depreciation    10,000 40,000  
Trademark     35,000    
Total assets     $280,000  
   
Liabilities  
Notes payable (due in six months)   $ 25,000    
Accounts payable   10,000    
Salaries payable   5,000    
Mortgage payable (due in seven years)     45,000    
Total liabilities     $85,000  
         
Owner’s Equity  
Jennifer More, Capital     195,000  
Total liabilities and owner’s equity     $280,000  
         
         
         
         

The total dollar amount of assets to be classified as investments is
A. $125,000.
B. $95,000.
C. $60,000.
D. $40,000.

 

  1. Use this information to answer the following question.
Sunshine Travel  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 40,000    
Short-term investments   20,000    
Notes receivable (due in ten months)   15,000    
Accounts receivable   10,000    
Merchandise inventory   35,000    
Land held for future use   40,000    
Land   45,000    
Building $50,000      
  Less accumulated depreciation    10,000 40,000  
Trademark     35,000    
Total assets     $280,000  
   
Liabilities  
Notes payable (due in six months)   $ 25,000    
Accounts payable   10,000    
Salaries payable   5,000    
Mortgage payable (due in seven years)     45,000    
Total liabilities     $85,000  
         
Owner’s Equity  
Jennifer More, Capital     195,000  
Total liabilities and owner’s equity     $280,000  
         
         
         
         

The total dollar amount of assets to be classified as property, plant, and equipment is
A. $135,000.
B. $125,000.
C. $95,000.
D. $85,000.

 

  1. An investment is classified as short term or long term based on
    A.whether the investment can be sold immediately.
    B. the length of time the investor expects to hold it.
    C. the purpose for which it is held.
    D. the dollar amount of the investment.

 

  1. Which of the following accounts is most likely to appear on the balance sheet as a current liability?
    A.Accumulated Depreciation
    B. Bonds Payable
    C. Mortgage Payable
    D. Wages Payable

 

  1. Which accounting term does not mean the same as the others?
    A.Retained earnings
    B. Net worth
    C. Capital
    D. Owner’s equity

 

  1. Which of the following should be classified as a current asset?
    A.Supplies
    B. Trademark
    C. Equipment
    D. Land held for future use

 

  1. Goodwill would appear in which balance sheet section?
    A.Investments
    B. Property, plant, and equipment
    C. Current assets
    D. Intangible assets

 

  1. Stephanie Cape purchased a franchise for dry cleaning services.  Stephanie is running the dry cleaning business as her primary occupation.  Where on the balance sheet is the franchise reported?
    A.Property, plant, and equipment
    B. Investments
    C. Current assets
    D. Intangible assets

 

  1. The normal operating cycle helps define which of the following balance sheet sections?
    A.Owner’s equity
    B. Current liabilities
    C. Intangible assets
    D. Property, plant, and equipment

 

  1. Liabilities have which of the following two major categories?
    A.Accounts payable and notes payable
    B. Contributed capital and retained earnings
    C. Current and long term
    D. Unearned revenues and other payables

 

  1. Use this information to answer the following question.
Coyle Company  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 70,000    
Short-term investments   56,000    
Accounts receivable   28,000    
Notes receivable (due in six months)   42,000    
Merchandise inventory   98,000    
Special fund for purchasing a building   112,000    
Land   140,000    
Building $150,000      
  Less accumulated depreciation    28,000 122,000  
Trademark     92,000    
Total assets     $760,000  
   
Liabilities  
Notes payable (due in one year)   $ 70,000    
Accounts payable   30,000    
Salaries payable   14,000    
Mortgage payable (due in seven years)     146,000    
Total liabilities     $260,000  
         
Owner’s Equity  
         
Eddie Coyle, Capital       500,000  
Total liabilities and owner’s equity     $760,000  
         

The total dollar amount of assets to be classified as current assets is
A. $252,000.
B. $238,000.
C. $294,000.
D. $406,000.

 

  1. Use this information to answer the following question.
Coyle Company  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 70,000    
Short-term investments   56,000    
Accounts receivable   28,000    
Notes receivable (due in six months)   42,000    
Merchandise inventory   98,000    
Special fund for purchasing a building   112,000    
Land   140,000    
Building $150,000      
  Less accumulated depreciation    28,000 122,000  
Trademark     92,000    
Total assets     $760,000  
   
Liabilities  
Notes payable (due in one year)   $ 70,000    
Accounts payable   30,000    
Salaries payable   14,000    
Mortgage payable (due in seven years)     146,000    
Total liabilities     $260,000  
         
Owner’s Equity  
Eddie Coyle, Capital       500,000  
Total liabilities and owner’s equity     $760,000  
         

The total dollar amount of assets to be classified as investments is
A. $168,000.
B. $0.
C. $112,000.
D. $56,000.

 

  1. Use this information to answer the following question.
Coyle Company  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 70,000    
Short-term investments   56,000    
Accounts receivable   28,000    
Notes receivable (due in six months)   42,000    
Merchandise inventory   98,000    
Special fund for purchasing a building   112,000    
Land   140,000    
Building $150,000      
  Less accumulated depreciation    28,000 122,000  
Trademark     92,000    
Total assets     $760,000  
   
Liabilities  
Notes payable (due in one year)   $ 70,000    
Accounts payable   30,000    
Salaries payable   14,000    
Mortgage payable (due in seven years)     146,000    
Total liabilities     $260,000  
         
Owner’s Equity  
Eddie Coyle, Capital       500,000  
Total liabilities and owner’s equity     $760,000  
         

The total dollar amount of assets to be classified as property, plant, and equipment is
A. $374,000.
B. $262,000.
C. $354,000.
D. $122,000.

 

  1. Intangible assets could include all except
    A. Trademark
    B. Land held for future use
    C. Patent
    D. Goodwill

 

  1. The debt to equity ratio equals
    A.owner’s equity divided by total liabilities.
    B. owner’s equity divided by long-term liabilities.
    C. total liabilities divided by owner’s equity.
    D. current liabilities divided by average owner’s equity.

 

  1. The profit margin equals
    A.net sales divided by net income.
    B. gross margin divided by net income.
    C. net income divided by gross margin.
    D. net income divided by revenues.

 

  1. The asset turnover ratio equals
    A.revenues divided by average total assets.
    B. average total assets divided by net income.
    C. average total assets divided by total liabilities.
    D. net income divided by average total assets.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 12,000   Current liabilities $ 8,000  
Investments 2,000   Long-term liabilities    2,000  
Property, plant, and equipment 16,000   Total liabilities $ 10,000  
Intangible assets    10,000        
    Owner’s Equity  
      Jonah Jones, Capital   30,000  
           
           
      Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
           

 

National Textile  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600
   
   
   

The total amount of working capital for National Textile is
A. $2,000.
B. $6,000.
C. $4,000.
D. $30,000.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 12,000   Current liabilities $ 8,000  
Investments 2,000   Long-term liabilities    2,000  
Property, plant, and equipment 16,000   Total liabilities $ 10,000  
Intangible assets    10,000        
    Owner’s Equity  
      Jonah Jones, Capital   30,000  
           
           
      Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
           

 

National Textile  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600
   
   
   

The current ratio for National Textile is
A. 1.20.
B. 1.75.
C. .67.
D. 1.50.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 12,000   Current liabilities $ 8,000  
Investments 2,000   Long-term liabilities    2,000  
Property, plant, and equipment 16,000   Total liabilities $ 10,000  
Intangible assets    10,000        
    Owner’s Equity  
      Jonah Jones, Capital   30,000  
           
           
      Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
           

 

National Textile  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600
   
   
   

The profit margin for National Textile is
A. 60 percent.
B. 25 percent.
C. 20 percent.
D. 12 percent.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 12,000   Current liabilities $ 8,000  
Investments 2,000   Long-term liabilities    2,000  
Property, plant, and equipment 16,000   Total liabilities $ 10,000  
Intangible assets    10,000        
    Owner’s Equity  
      Jonah Jones, Capital   30,000  
           
           
      Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
           

 

National Textile  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600
   
   
   

The return on assets for National Textile is
A. 30 percent.
B. 150 percent.
C. 33-1/3 percent.
D. 24 percent.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 12,000   Current liabilities $ 8,000  
Investments 2,000   Long-term liabilities    2,000  
Property, plant, and equipment 16,000   Total liabilities $ 10,000  
Intangible assets    10,000        
    Owner’s Equity  
      Jonah Jones, Capital   30,000  
           
           
      Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
           

 

National Textile  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600
   
   
   

The return on equity for National Textile is
A. 40 percent.
B. 67 percent.
C. 47 percent.
D. 32 percent.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 12,000   Current liabilities $ 8,000  
Investments 2,000   Long-term liabilities    2,000  
Property, plant, and equipment 16,000   Total liabilities $ 10,000  
Intangible assets    10,000        
    Owner’s Equity  
      Jonah Jones, Capital   30,000  
           
           
      Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
           

 

National Textile  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600
   
   
   

The debt to equity ratio for National Textile is
A. 67 percent.
B. 75 percent.
C. 25 percent.
D. 33-1/3 percent.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 12,000   Current liabilities $ 8,000  
Investments 2,000   Long-term liabilities    2,000  
Property, plant, and equipment 16,000   Total liabilities $ 10,000  
Intangible assets    10,000        
    Owner’s Equity  
      Jonah Jones, Capital   30,000  
           
           
      Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
           

 

National Textile  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600
   
   
   

The asset turnover for National Textile is
A. 1.00 times.
B. 1.33 times.
C. 0.83 times.
D. 1.20 times.

 

  1. Which of the following is not a measure of profitability?
    A.Current ratio
    B. Return on assets
    C. Return on equity
    D. Debt to equity ratio

 

  1. Which of the following is a measure of liquidity?
    A.Return on equity
    B. Return on assets
    C. Working capital
    D. Profit margin

 

  1. Current assets divided by current liabilities is known as the
    A.profit margin.
    B. current ratio.
    C. working capital.
    D. capital structure.

 

  1. Which of the following is not expressed in terms of a percentage?
    A.Return on equity
    B. Debt to equity ratio
    C. Current ratio
    D. Profit margin

 

  1. Which of the following is expressed in terms of a percentage?
    A.Return on equity
    B. Current ratio
    C. Asset turnover
    D. Working capital

 

  1. Which of the following does not include net income in its computation?
    A.Debt to equity ratio
    B. Return on assets
    C. Return on equity
    D. Profit margin

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 14,000   Current liabilities $  8,000  
Investments 6,000   Long-term liabilities       2,000  
Property, plant, and equipment 24,000   Total liabilities $  10,000  
Intangible assets    16,000        
    Owner’s Equity  
      Carlton Cane, Capital   50,000  
           
      Total liabilities and    
Total assets $60,000   owner’s equity $60,000  
           

Cane Construction  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600
   
   
   

The total amount of working capital for Cane Construction is
A. $4,000.
B. $14,000.
C. $6,000.
D. $2,000.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 14,000   Current liabilities $  8,000  
Investments 6,000   Long-term liabilities       2,000  
Property, plant, and equipment 24,000   Total liabilities $  10,000  
Intangible assets    16,000        
    Owner’s Equity  
      Carlton Cane, Capital   50,000  
           
      Total liabilities and    
Total assets $60,000   owner’s equity $60,000  
           

Cane Construction  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600
   
   
   

The current ratio for Cane Construction is
A. 1.75.
B. 0.57.
C. 1.4.
D. 2.0.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 14,000   Current liabilities $  8,000  
Investments 6,000   Long-term liabilities       2,000  
Property, plant, and equipment 24,000   Total liabilities $  10,000  
Intangible assets    16,000        
    Owner’s Equity  
      Carlton Cane, Capital   50,000  
           
      Total liabilities and    
Total assets $60,000   owner’s equity $60,000  
           

Cane Construction  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600
   
   
   

The profit margin for Cane Construction is
A. 30 percent.
B. 75 percent.
C. 60 percent.
D. 27 percent.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 14,000   Current liabilities $  8,000  
Investments 6,000   Long-term liabilities       2,000  
Property, plant, and equipment 24,000   Total liabilities $  10,000  
Intangible assets    16,000        
    Owner’s Equity  
      Carlton Cane, Capital   50,000  
           
      Total liabilities and    
Total assets $60,000   owner’s equity $60,000  
           

Cane Construction  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600
   
   
   

The return on assets for Cane Construction is
A. 80 percent.
B. 70 percent.
C. 36 percent.
D. 133 percent.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 14,000   Current liabilities $  8,000  
Investments 6,000   Long-term liabilities       2,000  
Property, plant, and equipment 24,000   Total liabilities $  10,000  
Intangible assets    16,000        
    Owner’s Equity  
      Carlton Cane, Capital   50,000  
           
      Total liabilities and    
Total assets $60,000   owner’s equity $60,000  
           

Cane Construction  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600
   
   
   

The return on equity for Cane Construction is
A. 62.5 percent.
B. 43.2 percent.
C. 84 percent.
D. 60 percent.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction  
Balance Sheet  
December 31, 20×5  
Assets Liabilities  
Current assets $ 14,000   Current liabilities $  8,000  
Investments 6,000   Long-term liabilities       2,000  
Property, plant, and equipment 24,000   Total liabilities $  10,000  
Intangible assets    16,000        
    Owner’s Equity  
      Carlton Cane, Capital   50,000  
           
      Total liabilities and    
Total assets $60,000   owner’s equity $60,000  
           

Cane Construction  
Income Statement  
For the Year Ended December 31, 20×5  
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600
   
   
   

The debt to equity ratio for Cane Construction is
A. 16-2/3 percent.
B. 20 percent.
C. 80 percent.
D. 83-1/3 percent.

 

  1. Use this information to answer the following question.
J. & B. Auto Parts  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 60,000    
Short-term investments   40,000    
Notes receivable (due in ten months)   30,000    
Accounts receivable   20,000    
Merchandise inventory   70,000    
Long-term investments   80,000    
Land   90,000    
Building $100,000      
  Less accumulated depreciation    20,000 80,000  
Trademark     70,000    
Total assets     $540,000  
   
Liabilities  
Notes payable (due in six months)   $ 50,000    
Accounts payable   20,000    
Salaries payable   10,000    
Mortgage payable (due in seven years)     90,000    
Total liabilities     $170,000  
         
Owner’s Equity  
         
Cheryl Stein, Capital       370,000  
Total liabilities and owner’s equity     $540,000  
         

The debt to equity ratio is
A. 0.46.
B. 0.67.
C. 2.18.
D. 0.33.

 

  1. Use this information to answer the following question.
J. & B. Auto Parts  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 60,000    
Short-term investments   40,000    
Notes receivable (due in ten months)   30,000    
Accounts receivable   20,000    
Merchandise inventory   70,000    
Long-term investments   80,000    
Land   90,000    
Building $100,000      
  Less accumulated depreciation    20,000 80,000  
Trademark     70,000    
Total assets     $540,000  
   
Liabilities  
Notes payable (due in six months)   $ 50,000    
Accounts payable   60,000    
Salaries payable   10,000    
Mortgage payable (due in seven years)     50,000    
Total liabilities     $170,000  
         
Owner’s Equity  
         
Cheryl Stein, Capital       370,000  
Total liabilities and owner’s equity     $540,000  
         

The total amount of working capital is
A. $150,000.
B. $370,000.
C. $100,000.
D. $60,000.

 

  1. Use this information to answer the following question.
Coyle Company  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 70,000    
Short-term investments   56,000    
Accounts receivable   28,000    
Notes receivable (due in six months)   42,000    
Merchandise inventory   98,000    
Special fund for purchasing a building   112,000    
Land   140,000    
Building $150,000      
  Less accumulated depreciation    28,000 122,000  
Trademark     92,000    
Total assets     $760,000  
   
Liabilities  
Notes payable (due in one year)   $ 70,000    
Accounts payable   30,000    
Salaries payable   14,000    
Mortgage payable (due in seven years)     146,000    
Total liabilities     $260,000  
         
Owner’s Equity  
         
Eddie Coyle, Capital       500,000  
Total liabilities and owner’s equity     $760,000  
         

The debt to equity ratio is
A. 0.48.
B. 0.34.
C. 0.52.
D. 1.92.

 

  1. Use this information to answer the following question.
Coyle Company  
Balance Sheet  
December 31, 20×5  
Assets  
Cash   $ 70,000    
Short-term investments   56,000    
Accounts receivable   28,000    
Notes receivable (due in six months)   42,000    
Merchandise inventory   98,000    
Special fund for purchasing a building   112,000    
Land   140,000    
Building $150,000      
  Less accumulated depreciation    28,000 122,000  
Trademark     92,000    
Total assets     $760,000  
   
Liabilities  
Notes payable (due in one year)   $ 70,000    
Accounts payable   130,000    
Salaries payable   14,000    
Mortgage payable (due in seven years)     46,000    
Total liabilities     $260,000  
         
Owner’s Equity  
         
Eddie Coyle, Capital       500,000  
Total liabilities and owner’s equity     $760,000  
         

The total amount of working capital is
A. ($30,000.)
B. $80,000.
C. $24,000.
D. $400,000.

 

  1. Working capital measures
    A.the excess of current assets over current liabilities—what is on hand to fund business operations.
    B. the ability to earn a satisfactory income.
    C. the amount of debt in the company.
    D. the profitability of the business.

 

  1. The asset turnover ratio measures
    A.how quickly the company uses assets to pay debt.
    B. how efficiently assets are used to produce sales.
    C. the income produced by selling inventory.
    D. how efficiently equity is used to produce revenue.

 

  1. Each of the following statements is justified by a concept or convention of accounting. Write the letter in the blank next to each statement corresponding to the concept or convention involved.
a. Consistency d. Full disclosure
b. Materiality e. Cost-benefit
c. Conservatism  
   

_____ 1. This convention best enhances comparability of financial statements between years.
_____ 2. A merger agreed on just after the balance sheet date nevertheless is reported in the notes to the financial statements.
_____ 3. A company forgoes hiring another full-time accountant, which would add only slightly to the financial statements’ accuracy.
_____ 4. A company uses lower-of-cost-or-market to value inventory.
_____ 5. A large company rounds its financial statement figures to the nearest $10,000.

 

1. a   4. c
2. d   5. b
3. e    
     

 

  1. Each of the following statements violates a concept or convention of accounting. Write the letter in the blank next to each statement corresponding to the concept or convention violated.

a. Consistency d. Full disclosure
b. Materiality e. Cost-benefit
c. Conservatism  
   

_____ 1. A note to the financial statements indicating a change in inventory methods is omitted.
_____ 2. When management is unsure of which estimates to use in a given situation, the estimate resulting in the largest net income is always used.
_____ 3. In 20×5, a company uses straight-line depreciation and in 20×6 the company uses declining-balance depreciation.
_____ 4. A small company expenses all expenditures under $10,000.
_____ 5. A small company purchases a $50,000 computer to save $3,000 per year in bookkeeping wages.

 

1. d   4. b
2. c   5. e
3. a    
     

 

  1. Bill Pierce owns several ice cream shops all within 50 miles of his home. He has plans to expand the number of shops he owns. This planned expansion will require a large bank loan. Bill has always done his own accounting work and has prepared a set of financial statements for each of the past five years of operations to present to the bank. Because some periods were more profitable than others, Bill attempted to streamline his earnings by switching depreciation and inventory valuation methods frequently. This created the appearance that his company earnings were very consistent over the years. Discuss the merits of Bill’s financial statements with regard to his streamlining decisions.

Bill’s attempt to streamline his earnings by frequently changing depreciation and inventory methods is a violation of the accounting conventions of comparability and consistency. Once the selection of accounting methods for such areas as depreciation and inventory are made, the company should continue to apply these methods from one period to the next. To vacillate between different methods greatly diminishes the usefulness of the financial statements in providing meaningful information. The true picture of somewhat erratic earnings is hidden by his efforts to present his operations in a more favorable light in order to receive a loan from the bank.

 

  1. Why is it important for a company to maintain the same accounting methods and practices from period to period?

An important aspect of financial analysis is comparing financial information about a company from one period to another. The only way to make a valid comparison is if the same set of rules (standards) have been used each period.

 

  1. The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent accounts. In the blank next to each account, write the letter indicating to which category it belongs.
a. Current assets e. Current liabilities
b. Investments f. Long-term liabilities
c. Plant and equipment g. Owner’s equity
d. Intangible assets h. Not on balance sheet
   

 

_____ 1. Accumulated Depreciation _____ 7. Trademark
_____ 2. Revenues Received in
Advance
_____ 8. Notes Payable (in five years)
_____ 3. Interest Expense _____ 9. Depreciation Expense
_____ 4. Wages Payable _____ 10. Prepaid Interest
_____ 5. Owner’s Capital _____ 11. Land Held for Future Use
_____ 6. Inventory  
   

 

 

1. c   7. d
2. e   8.  f
3. h   9. h
4. e   10. a
5. g   11. b
6. a    
     

 

  1. State the definition of a current asset.

A current asset is cash or another asset that is expected to be converted into cash or consumed within one year or the normal operating cycle, whichever is longer.

 

  1. Match the following financial statement ratios with their definition.

    1. Working capital _____
    2. Current ratio _______
    3. Profit margin ______
    4. Return on assets______
    5. Debt to equity ratio________
    6. Return on equity_______
    7. Asset turnover_________

    a. A measure of profitability that shows the proportion of a company’s assets that is financed by creditors and the proportion financed by owners
    b. A measure of liquidity that shows the net current assets on hand to continue business operations
    c. A measure of profitability that relates the amount earned by a business to the owner’s investment in the business
    d. A measure of profitability that shows the percentage of each sales dollar that results in net income
    e. A measure of liquidity; current assets divided by current liabilities
    f. A measure of profitability that shows how efficiently a company uses its assets to produce income
    g. A measure of how efficiently assets are used to produce sales

  2. b
    2. e
    3. d
    4. f
    5. a
    6. c
    7. g

 

  1. The profit margin and asset turnover ratios are important measures, but they have a limitation.  Describe these limitations and discuss the ratio that can be used to overcome these deficiencies.

The profit margin ratio does not consider the assets necessary to produce income, and the asset turnover ratio does not take into account the amount of income produced. The return on assetsratio overcomes these deficiencies by relating net income to average total assets.

 

  1. Describe how the current ratio is calculated.  If a company has a very low current ratio, what might this mean?  If a company has a very high current ratio, what might this mean?

The current ratio is the ratio of current assets to current liabilities (current assets/current liabilities).  A very low current ratio can be unfavorable, indicating that a company will not be able to pay its debts on time. A very high current ratio may indicate that a company is not using its assets to the best advantage. In other words, it could probably use its excess funds more effectively to increase its overall profit.

 

1. Quality that enables users to identify similarities and differences between two sets of financial data.      Qualitative characteristics.   7
2. Related to both the nature of an item and its size.      Predictive value.   6
3. Quality that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.      Materiality.   2
4. Requires that once a company has adopted an accounting procedure, it must use it from one period to the next unless a note to the financial statements informs users of a change.      Neutrality.   5
5. Free from bias intended to achieve a certain result or to bring about a particular behavior.      Comparability.   1
6. Helps capital providers make decisions about future actions.      Verifiability.   3
7. Relevance and faithful representation.      Consistency.   4
8. When faced with choosing between two equally acceptable procedures or estimates, accountants should choose the one that is least likely to overstate assets and income.      Conservatism   8

 

1. The percentage of each sales dollar that results in net income.      Current assets.   4
2. Measures how efficiently assets are used to produce sales.      Investments..   8
3. Current assets divided by current liabilities.      Net worth.   5
4. Cash and other assets that a company can reasonably expect to convert to cash, sell, or consume within one year or its normal operating cycle, whichever is longer.      Earned capital.   6
5. A less-preferred term for “owner’s equity.”      Current ratio.   3
6. Another name for retained earnings.      Profit margin.   1
7. Measures how much income did each dollar of assets generate.      Asset turnover.   2
8. Include assets, usually long-term, that are not used in normal business operations and that management does not plan to convert to cash within the next year.      Return on assets.   7

 

  1. Using the following data, prepare a classified balance sheet for Blanchard Company as of December 31, 20×5.
Cash $   200   Accumulated Depreciation– Building $  1,000
Investments in Short-Term Government Securities 400   Franchise 1,800
Accounts Receivable 800   Accounts Payable 1,600
Inventory 3,000   Revenues Received in Advance 400
Prepaid Rent 100   Notes Payable (in two years) 4,000
Investment in Land Held for future use 2,700   John Blanchard, Capital 12,000
Land 2,000      
Building 8,000      
         

 

 

Blanchard Company  
Balance Sheet  
December 31, 20×5  
Assets  
Current assets        
  Cash   $     200    
  Investments in short-term government securities   400    
  Accounts receivable   800    
  Inventory   3,000    
  Prepaid rent         100    
  Total current assets     $ 4,500  
Investments        
  Land held for future use     2,700  
Property, plant, and equipment        
  Land   $ 2,000    
  Building $8,000      
  Less accumulated depreciation    1,000    7,000    
  Total property, plant, and equipment     9,000  
Intangible assets        
  Franchise         1,800  
Total assets     $18,000  
   
Liabilities  
Current liabilities        
  Accounts payable $1,600      
  Revenues received in advance     400      
  Total current liabilities   $ 2,000    
Long-term liabilities        
  Notes payable (in two years)      4,000    
Total liabilities     $ 6,000  
         
Owner’s Equity  
   
         
John Blanchard, Capital         12,000  
Total liabilities and owner’s equity     $18,000  
             

 

  1. Using the following data, prepare a classified balance sheet as of December 31, 20×5, for Paula’s Picture Frame Company.
Accounts Payable $ 4,800   Accounts Receivable $  9,000  
Building Not Currently Used 57,000   Cash 15,600  
Accumulated Depreciation– Equipment 24,000   Unearned Revenue 2,400  
        Short-Term Investments 6,000
Paula West, Capital 127,800   Land 48,000  
Copyright 15,000   Equipment 45,000  
Notes Payable (due in 5 years) 39,000   Long-Term Investments 2,400  
           

 

 

Paula’s Picture Frame Company  
Balance Sheet  
December 31, 20×5  
Assets  
Current assets        
  Cash   $ 15,600    
  Short-term investments   6,000    
  Accounts receivable      9,000    
  Total current assets     $ 30,600  
Investments        
  Building not currently used   $57,000    
  Long-term investments          2,400    
  Total investments     59,400  
Property, plant, and equipment        
  Land   $48,000    
  Equipment $45,000      
  Less accumulated depreciation     24,000    21,000    
  Total property, plant, and equipment     69,000  
Intangible assets        
  Copyrights         15,000  
Total assets     $174,000  
   
Liabilities  
Current liabilities        
  Accounts payable $4,800      
  Unearned revenue     2,400      
  Total current liabilities   $ 7,200    
Long-term liabilities        
  Notes payable (due in 5 years)     39,000    
Total liabilities     $46,200  
         
Owner’s Equity  
Paula West, Capital       127,800  
Total liabilities and owner’s equity     $174,000  
             

 

  1. Use the following information to calculate the liquidity and profitability ratios listed below. Round to two decimal places.
Average owner’s equity $  13,875   Net income $  2,250
Average total assets 27,000   Net sales 23,437.50
Current assets 16,875   Total liabilities 13,125
Current liabilities 11,250      
         
  1. Current ratio
    b. Working capital
    c. Return on equity
    d. Profit margin
    e. Debt to equity ratio
    f. Return on assets
    g. Asset turnover
  2. 1.5 ($16,875 ¸ $11,250)
    b. $5,625 ($16,875 – $11,250)
    c. 0.16 (16%) ($2,250 ¸ $13,875)
    d. 0.096 (9.6%) ($2,250 ¸ $23,437.50)
    e. 0.95 (95%) ($13,125 ¸ $13,875)
    f.  0.08 (8%) ($2,250 ¸ $27,000)
    g. 0.87 times ($23,437.50 ¸ $27,000)

 

  1. Use the following information to calculate the liquidity and profitability ratios listed below. Round to two decimal places.
Average owner’s equity $14,000   Net income $ 2,100
Average total assets 21,000   Net sales 17,500
Current assets 15,000   Total liabilities 10,500
Current liabilities 10,000      
         
  1. Current ratio
    b. Working capital
    c. Return on equity
    d. Profit margin
    e. Debt to equity ratio
    f.  Return on assets
    g. Asset turnover
  2. 1.5 ($15,000 ¸ $10,000)
    b. $5,000 ($15,000 – $10,000)
    c. 0.15 (15%) ($2,100 ¸ $14,000)
    d. 0.12 (12%) ($2,100 ¸ $17,500)
    e. 0.75 (75%) ($10,500 ¸ $14,000)
    f.  0.10 (10%) ($2,100 ¸ $21,000)
    g. 0.83 times ($17,500 ¸ $21,000)

 

  1. Using the following amounts taken from the balance sheet and income statement of a business, compute the measures listed below. After each answer, write “L” if it is a measure of liquidity or “P” if it is a measure of profitability. Round to two decimal places.
Current assets $  12,000   Average owner’s equity $30,000
Average total assets 60,000   Net sales 39,000
Current liabilities 9,000   Net income 4,800
Long-term liabilities 21,000      
         
  1. Return on assets
    b. Working capital
    c. Return on equity
    d. Current ratio
  2. 8% P ($4,800 ¸ $60,000)
    b. $3,000 L ($12,000 – $9,000)
    c. 16% P ($4,800 ¸ $30,000)
    d. 1.33 L ($12,000 ¸ $9,000)

 

  1. Using the following amounts taken from the balance sheet and income statement of a business, compute the measures listed below. After each answer, write “L” if it is a measure of liquidity or “P” if it is a measure of profitability. Round to two decimal places.
Current assets $  30,000   Average owner’s equity $60,000
Average total assets 120,000   Net sales 64,000
Current liabilities 20,000   Net income 3,000
Long-term liabilities 40,000      
         
  1. Current ratio
    b. Return on equity
    c. Return on assets
    d. Working capital
  2. 1.5 L ($30,000 ¸ $20,000)
    b. 5% P ($3,000 ¸ $60,000)
    c. 3% P ($3,000 ¸ $120,000)
    d. $10,000 L ($30,000 – $20,000)

 

  1. A. From the simplified balance sheet and income statement of the business below, compute the following ratios. Assume that the June 30 amounts for total assets and owner’s equity also represent their average amounts for the period. Round percentages to the nearest whole percent.

    a. Working capital
    b. Current ratio
    c. Profit margin
    d. Return on assets
    e. Debt to equity ratio
    f.  Return on equity
    g. Asset turnover

Keene Industries  
Balance Sheet  
June 30, 20×5  
Assets Liabilities  
Current assets $ 8,000  Current liabilities   $  8,000  
Investments 4,000  Long-term liabilities       12,000  
Property, plant, and    Total liabilities   $20,000  
  equipment 24,000        
Intangible assets   4,000 Owner’s Equity  
     Kathy Keene, Capital     20,000  
     Total liabilities and    
Total assets $40,000   owner’s equity $40,000  
             

 

Keene Industries  
Income Statement  
For the Year Ended June 30, 20×5  
Net sales $48,000  
Cost of goods sold   24,000  
Gross margin $24,000  
Operating expenses     19,200  
Net income $ 4,800  
     
     
     
  1. Discuss the liquidity and profitability of Keene Industries.

 

A. a. $0 ($8,000 – $8,000)
b. 1.0 ($8,000 ¸ $8,000)
c. 0.10 (10%) ($4,800 ¸ $48,000)
d. 0.12 (12%) ($4,800 ¸ $40,000)
e. 1.0 (100%) ($20,000 ¸ $20,000)
f.  0.24 (24%) ($4,800 ¸ $20,000)
g. 1.2 times ($48,000 ¸ $40,000)

B. Keene’s liquidity is not adequate as the current liabilities equal the current assets.  A ratio above 1 indicates healthy liquidity.  Return on equity (24%) is good when compared to return on assets (12%). However, to assess liquidity and profitability adequately, we need several years of data for Keene Industries and several years of industry data.

 

 

  1. A. From the simplified balance sheet and income statement of the business below, compute the following ratios. Assume that the April 30 amounts for total assets and owner’s equity also represent their average amounts for the period. Round percentages to the nearest whole percent.

    a. Working capital
    b. Current ratio
    c. Profit margin
    d. Return on assets
    e. Debt to equity ratio
    f.  Return on equity
    g. Asset turnover

TG Manufacturing  
Balance Sheet  
April 30, 20×5  
Assets Liabilities  
Current assets $ 4,000  Current liabilities   $  2,000  
Investments 6,000  Long-term liabilities       8,000  
Property, plant, and   Total liabilities   $10,000  
  equipment 16,000        
Intangible assets   4,000 Owner’s Equity  
           
           
     Ted Gruen, Capital   20,000  
     Total liabilities and    
Total assets $30,000   owner’s equity $30,000  
               

 

TG Manufacturing  
Income Statement  
For the Year Ended April 30, 20×5  
Net sales $40,000  
Cost of goods sold   22,000  
Gross margin $18,000  
Operating expenses   14,400  
Net income $  3,600  
     
     
     
  1. Discuss the liquidity and profitability of TG Manufacturing.
  2. a. $2,000 ($4,000 – $2,000)
    b. 2.0 ($4,000 ¸ $2,000)
    c. 0.09 (9%) ($3,600 ¸ $40,000)
    d. 0.12 (12%) ($3,600 ¸ $30,000)
    e. 0.50 (50%) ($10,000 ¸ $20,000)
    f.  0.18 (18%) ($3,600 ¸ $20,000)
    g. 1.33 times ($40,000 ¸ $30,000)

    B. TG’s liquidity is strong as the current assets are double the current liabilities. Return on equity (18%) is good when compared to return on assets (12%). However, to assess liquidity and profitability adequately, we need several years of data for TG Manufacturing and several years of industry data.

 

 

 

 

Chapter 17: Managerial Accounting and Cost Concepts

Student: ___________________________________________________________________________

  1. Management accounting is a subordinate activity to financial accounting.
    True    False

 

  1. Management accounting is a profession that involves partnering in management decision making.
    True    False

 

  1. Financial accounting information is confidential and private.
    True    False

 

  1. Management accounting provides reports that are future oriented.
    True    False

 

  1. Accounting rules applicable to management accounting are the same as those used for financial accounting.
    True    False

 

  1. Management accounting exists primarily for the benefit of people inside a company.
    True    False

 

  1. Financial accounting relies on the criterion of usefulness rather than formal guidelines in reporting information.
    True    False

 

  1. Management accounting information demands more objectivity than financial accounting information.
    True    False

 

  1. Managerial accounting reports should be prepared when they are needed, without regard to calendar dates or regularity of issue.
    True    False

 

  1. The overall guideline or limit for management accounting information is that the report or analysis must be meaningful and must answer the questions or issues under review.
    True    False

 

  1. The reporting format of financial accounting information is based on generally accepted accounting principles.
    True    False

 

  1. Reporting format of managerial accounting is flexible and driven by user’s needs.
    True    False

 

  1. Management accounting data must be expressed in historical dollars.
    True    False

 

  1. Management accounting information is objective and verifiable for decision making.
    True    False

 

  1. Primary users of managerial accounting include governmental agencies.
    True    False

 

  1. Financial accounting reports are prepared on a periodic basis.
    True    False

 

  1. Managerial accounting primarily provides information on past performance.
    True    False

 

  1. Management accounting information is determined objectively and is verifiable, whereas financial accounting is more subjective.
    True    False

 

  1. Managerial accounting’s main emphasis is on full and accurate accounting for and disclosure of a company’s operating results.
    True    False

 

  1. Similar to financial accounting reports, management accounting reports are standardized in format.
    True    False

 

  1. Neither the amount of detail nor the format of a management accounting report is affected by those to whom the report is sent.
    True    False

 

  1. Management accounting formats are identical for all companies.
    True    False

 

  1. Period costs are also called noninventoriable costs.
    True    False

 

  1. Inventoriable cost is a synonym of product cost.
    True    False

 

  1. Manufacturing costs behave as variable or fixed costs.
    True    False

 

  1. The two primary types of cost behavior are fixed and variable.
    True    False

 

  1. Direct materials cost is a fixed cost because it always occurs in a production process.
    True    False

 

  1. Fixed costs remain constant within a defined range of activity or time period.
    True    False

 

  1. Costs can also be classified as value-adding or non-value-adding costs.
    True    False

 

  1. Building depreciation is an example of a direct product cost in a manufacturing company.
    True    False

 

  1. Direct costs can be conveniently traced to a cost object.
    True    False

 

  1. Variable costs per unit change in an inversely proportional rate to changes in volume.
    True    False

 

  1. Total variable costs remain constant within a defined time period or range of activity.
    True    False

 

  1. In a manufacturing company, an accountant’s salary is a value-adding cost.
    True    False

 

  1. Non-value-adding costs increase the cost of a product.
    True    False

 

  1. Direct materials are the only materials used in a product.
    True    False

 

  1. Lubrication used for machines is an example of a direct material.
    True    False

 

  1. Minor materials and other production supplies that cannot be conveniently traced to specific products are accounted for as indirect materials.
    True    False

 

  1. Product unit cost is made up of direct materials and indirect materials only.
    True    False

 

  1. Cost of sugar is an indirect cost in the manufacture of candy bars.
    True    False

 

  1. Property taxes and equipment depreciation are examples of indirect manufacturing costs.
    True    False

 

  1. The costs of labor for maintenance and inspections are examples of direct labor.
    True    False

 

  1. The product is the cost object when assigning indirect product costs.
    True    False

 

  1. Product costs for a manufacturing company consist of cost of direct materials, direct labor, and overhead.
    True    False

 

  1. Period cost and product cost are synonymous terms.
    True    False

 

  1. All product costs are expensed in the period in which they are paid in cash.
    True    False

 

  1. Period costs are charged against the revenue of the current period.
    True    False

 

  1. Both product costs and period costs could appear on the balance sheet.
    True    False

 

  1. Direct labor cannot be traced to products as it is invisible.
    True    False

 

  1. Both direct and indirect labor costs can be directly traced to finished products.
    True    False

 

  1. Both indirect materials and indirect labor are overhead costs.
    True    False

 

  1. Both direct labor and indirect labor are recorded in the Work in Process Inventory account as the product is being manufactured.
    True    False

 

  1. At the end of an accounting period, the balance in the Finished Goods Inventory account is the sum of costs of products completed and the cost of goods sold as of that date.
    True    False

 

  1. The costs of materials used in production are transferred from the Materials Inventory account directly to the Cost of Goods Sold account.
    True    False

 

  1. Factory employees’ wages are recorded into the Work in Process Inventory account.
    True    False

 

  1. Indirect product costs incurred are charged directly to the Cost of Goods Sold account.
    True    False

 

  1. As units are completed, their costs are transferred from the Materials Inventory account to the Finished Goods Inventory account.
    True    False

 

  1. A materials request form is prepared whenever the purchasing department orders materials.
    True    False

 

  1. A job order cost card can be used to record all product costs incurred during production.
    True    False

 

  1. Materials costs flow from the Materials Inventory account to the Work in Process Inventory account to the Finished Goods Inventory account.
    True    False

 

  1. Total manufacturing costs decrease the balance of the Work in Process Inventory account.
    True    False

 

  1. Recording cost of goods manufactured increases the Work in Process Inventory account.
    True    False

 

  1. Overhead costs are not recorded in the Work in Process Inventory account.
    True    False

 

  1. Total manufacturing costs include all direct materials used as well as all direct labor costs and overhead costs incurred during a period.
    True    False

 

  1. Overhead costs can be directly traced to products once the products are completed.
    True    False

 

  1. Overhead costs are traced to products in the same way that direct materials and direct labor are traced.
    True    False

 

  1. Wages of machine operators and other workers involved in actually shaping the product are classified as indirect labor costs.
    True    False

 

  1. Salaries of supervisory production personnel should be classified as direct labor costs.
    True    False

 

  1. A production cost is classified as an overhead cost if it is not directly traceable to an end product or a cost object.
    True    False

 

  1. Period costs flow through three types of inventory accounts before becoming part of the cost of goods sold amount.
    True    False

 

  1. The costs of marketing and delivering a product are recorded in the Work in Process Inventory account.
    True    False

 

  1. The cost of goods sold decreases the balance in the Finished Goods Inventory account.
    True    False

 

  1. Some period costs can be found in inventory accounts on the balance sheet.
    True    False

 

  1. In a manufacturing company, the cost of direct materials, direct labor, and overhead will most likely become a part of the Cost of Goods Sold account balance.
    True    False

 

  1. Product costs can be found on both the balance sheet and the income statement.
    True    False

 

  1. Cost of goods manufactured appears on the income statement of a manufacturing company in a similar manner as purchases appear on the income statement of a merchandising company.
    True    False

 

  1. Total manufacturing costs and the change in the Work in Process Inventory are used to compute the cost of goods sold.
    True    False

 

  1. Product unit cost is the sum of direct materials, direct labor, and overhead divided by the total number of units produced.
    True    False

 

  1. The standard costing method uses the sum of actual direct materials, actual direct labor, and actual overhead to determine the product unit cost.
    True    False

 

  1. Standard costing combines actual direct costs of materials and labor with estimated overhead costs to determine a product unit cost.
    True    False

 

  1. The product costs that appear in the financial statements are estimated product costs.
    True    False

 

  1. The standard costing method uses estimated costs to find product unit cost.
    True    False

 

  1. The key to the preparation of an income statement for a manufacturing company is proper determination of the cost of goods manufactured.
    True    False

 

  1. The terms total manufacturing costs and total cost of goods manufactured are synonymous.
    True    False

 

  1. The amount of cost of goods sold and cost of goods manufactured will be the same if a company sells all of the units it produced.
    True    False

 

  1. The cost of goods manufactured is added to the beginning balance of finished goods inventory to obtain the total cost of goods available for sale.
    True    False

 

  1. The amount of cost of goods manufactured is transferred from the Work in Process Inventory account to the Finished Goods Inventory account.
    True    False

 

  1. Product unit cost is computed by dividing the cost of goods sold by the number of units sold.
    True    False

 

  1. The changes in the balance of Work in Process Inventory and the total manufacturing costs for a period are used to compute cost of goods manufactured.
    True    False

 

  1. Manufacturing costs incurred in an accounting period cannot be included in the cost of goods sold for the subsequent accounting period.
    True    False

 

  1. Managers use managerial accounting principles to guide their actions and decisions in the management process.
    True    False

 

  1. A supply chain includes only processes and services that add value to the final product or service.
    True    False

 

  1. The overriding goal of a business is to increase the value of the stakeholders’ interest in the business.
    True    False

 

  1. The evaluation stage of management process includes comparing actual with the established standards.
    True    False

 

  1. Management accounting accumulates, maintains, and processes an organization’s financial and nonfinancial information.
    True    False

 

  1. Management accounting complements each stage of the management process.
    True    False

 

  1. The management process and management accounting are identical.
    True    False

 

  1. The four stages of the management process are: planning, performing, evaluating, and communicating.
    True    False

 

  1. The key to produce an accurate and useful report include identifying the why, who, what, and when of the report.
    True    False

 

  1. A business plan is a comprehensive statement of how a company will achieve its objectives.
    True    False

 

  1. A manager should focus on the purpose of a report while preparing it.
    True    False

 

  1. When there is an ethical conflict, the management accountant should resign if the immediate supervisor is involved in the conflict.
    True    False

 

  1. Practitioners of management accounting and financial management have a responsibility to communicate information fairly and objectively.
    True    False

 

  1. All ethical conflicts are resolved by the accountant of a company.
    True    False

 

  1. Although some management accountants strive to update their knowledge and skills, such updating is within the realm of management accountants’ ethical standards.
    True    False

 

  1. The management accountant must be knowledgeable about all relevant laws, regulations, and technical standards that pertain to his or her duties.
    True    False

 

  1. If a management accountant gives information about a future merger of his or her company to a relative, the accountant has acted ethically.
    True    False

 

  1. Management accountants working in purchasing department must decline gifts from company vendors; because this might influence, or be perceived as influencing their performance or decision analyses.
    True    False

 

  1. Management accountants are obligated to refrain from activities that would prejudice their ability to carry out their duties.
    True    False

 

  1. Management accountants who alter reports to meet targeted levels of performance are not acting unethically, because their job is to provide information that will aid in communicating the goals of the business.
    True    False

 

  1. Although the purpose of the confidentiality standard is to encourage management accountants to remain loyal to their company, failure to disclose knowledge of internal illegal acts to outside authorities can result in the accountants being charged as an accessory to the crime.
    True    False

 

  1. Management accounting reports
    A. are primarily used by parties inside the organization.
    B. must be prepared on a periodic basis.
    C. are generally publicly available.
    D. are based on generally accepted accounting principles.

 

  1. Which of the following user groups will use managerial accounting information for decision-making purposes?
    A. Customers
    B. Lenders
    C. Employees
    D. Stockholders

 

  1. Management accounting reports are
    A. prepared using the double-entry system of accounting.
    B. prepared periodically.
    C. based on generally accepted accounting principles.
    D. driven by user’s needs.

 

  1. Which of the following statements is true of financial and managerial accounting?
    A. Both use historical costs as their primary unit of measurement.
    B. Both depend on the double-entry system of accounting.
    C. Both require adherence to generally accepted accounting principles.
    D. Both assist managers in decision making.

 

  1. Managerial accounting information is primarily used by
    A. lenders.
    B. supply-chain partners.
    C. governmental agencies.
    D. customers.

 

  1. Which of the following is a difference between managerial and financial accounting?
    A. Managerial accounting reports non-monetary information whereas financial accounting reports both monetary and non-monetary information.
    B. Managerial accounting is used by government authorities whereas financial accounting is used by stockholders.
    C. Managerial accounting prepares reports monthly whereas financial accounting prepares reports annually.
    D. Managerial information is confidential whereas financial accounting information is publicly available.

 

  1. The unit of measurement used in management accounting reports is
    A. primarily the historical dollar.
    B. usually current replacement cost.
    C. any measurement unit that is useful in a particular situation.
    D. the measurement unit used by competing companies.

 

  1. Which of the following costs is not an inventoriable cost?
    A. Cost to ship products to a customer
    B. Cost of factory machinery used in production
    C. Cost to design the product
    D. Plant supervisor’s salary

 

  1. Which of the following is a product cost?
    A. General expenses
    B. Selling expenses
    C. Advertising expenses
    D. Material handling expenses

 

  1. Which of the following is not a reason to classify costs as either product or period costs?
    A. To determine unit manufacturing costs
    B. To determine if the costs are fixed or variable
    C. To analyze costs for control purposes
    D. To report production costs on the income statement

 

  1. Depreciation expense could be
    A. a period cost.
    B. a product cost.
    C. a fixed cost.
    D. All of these

 

  1. Which of the following is a period cost?
    A. Advertising costs
    B. Indirect materials
    C. Manufacturing overhead
    D. Direct materials

 

  1. Period cost is also called
    A. variable cost.
    B. direct cost.
    C. value-adding cost.
    D. noninventoriable cost.

 

  1. Prime costs is the sum of
    A. the direct labor costs and indirect labor costs.
    B. the direct material costs, direct labor costs, and overhead costs.
    C. the direct labor costs and overhead costs.
    D. the direct materials costs and direct labor costs.

 

  1. Which of the following is not a product cost?
    A. Depreciation on office furniture
    B. Manufacturing overhead
    C. Direct labor
    D. Direct materials

 

  1. Which of the following is a variable cost?
    A. Raw materials
    B. Rent
    C. Insurance expense
    D. Salaries

 

  1. Velocity Ltd. is a sports car manufacturer. Which of the following is a value-adding cost for Velocity?
    A. Salary of the payroll department
    B. Cost of tires used in cars
    C. Cost of office supplies
    D. Salary of operations manager

 

  1. Which of the following is included in prime costs?
    A. Overhead costs
    B. Indirect materials costs
    C. Selling and administrative costs
    D. Direct labor costs

 

  1. Conversion costs consist of
    A. direct materials costs and direct labor costs.
    B. direct labor costs and overhead costs.
    C. direct materials costs and overhead costs.
    D. direct labor costs and indirect labor costs.

 

  1. The three elements of product costs are
    A. direct materials, work in process, and overhead.
    B. direct materials, work in process, and finished goods.
    C. direct materials, direct labor, and overhead.
    D. direct materials, direct labor, and period costs.

 

  1. Materials and supplies that cannot be traced conveniently to specific products are called
    A. indirect materials.
    B. raw materials.
    C. waste materials.
    D. direct materials.

 

  1. Which of the following terms apply to materials and supplies that can be traced conveniently to specific products?
    A. Indirect materials
    B. Indirect manufacturing costs
    C. Direct costs
    D. Manufacturing overhead

 

  1. Period costs are
    A. charged against the revenue of the current period.
    B. initially recognized on the balance sheet as inventory.
    C. charged to the period in which the product generates revenue.
    D. further classified as direct costs and indirect costs.

 

  1. The factory personnel whose wages are traceable directly to a product include
    A. maintenance personnel.
    B. support personnel.
    C. factory supervisors.
    D. employees who help to shape the product.

 

  1. Costs such as salary of supervisors and other support personnel, which are accounted for as overhead costs, are called
    A. period labor costs.
    B. sales assistance costs.
    C. indirect labor costs.
    D. prime labor costs.

 

  1. All manufacturing costs incurred and assigned to products that are being produced are classified as
    A. variable costs.
    B. allocated costs.
    C. product costs.
    D. overhead costs.

 

  1. Which of the following labor costs would be included in direct labor?
    A. Maintenance workers
    B. Machine operators
    C. Managers and supervisors
    D. Materials storeroom custodian

 

  1. Which of the following costs is considered overhead?
    A. Indirect labor costs only
    B. Direct materials costs only
    C. Both indirect materials and indirect labor costs
    D. Direct materials and direct labor costs

 

  1. Woodies Inc. produces wooden desks. Which of the following is not an indirect material for Woodies?
    A. Wood in a desk
    B. Nails in a desk
    C. Screws in a desk
    D. Lubricants for production machinery

 

  1. Which of the following is not a product cost?
    A. Indirect materials costs
    B. Packaging costs
    C. Direct labor costs
    D. Overhead costs

 

  1. Which of the following documents initiates the purchasing of materials?
    A. Job order cost sheet
    B. Receiving report
    C. Purchase request
    D. Purchase order

 

  1. Overhead costs are
    A. not allocated to the Work in Process Inventory account.
    B. not charged directly to the Finished Goods Inventory account.
    C. expensed in the period in which they are incurred.
    D. not considered product costs.

 

  1. In a manufacturing environment, direct labor costs initially flow
    A. into the Materials Inventory account.
    B. into the Cost of Goods Sold account.
    C. into the Work in Process Inventory account.
    D. into the Finished Goods Inventory account.

 

  1. In a manufacturing environment, costs of materials initially flow
    A. into the Work in Process Inventory account.
    B. into the Materials Inventory account.
    C. into the Cost of Goods Sold account.
    D. into the Finished Goods Inventory account.

 

  1. All manufacturing costs that are assigned to completed (but unsold) products should be classified as
    A. materials inventory costs.
    B. cost of goods sold.
    C. work in process inventory costs.
    D. finished goods inventory costs.

 

  1. Which of the following accounts includes the cost of completed but unsold units of a manufacturing firm?
    A. Cost of Goods Sold
    B. Finished Goods Inventory
    C. Work in Process Inventory
    D. Materials Inventory

 

  1. Which of the following accounts contain only one type of product cost?
    A. Work in Process Inventory
    B. Materials Inventory
    C. Finished Goods Inventory
    D. Cost of Goods Sold

 

  1. Which of the following is a source document for purchase of materials?
    A. Vendor’s invoice
    B. Purchase request
    C. Receiving report
    D. All of these

 

  1. Total manufacturing costs incurred during a period are transferred to the
    A. Cost of Goods Sold account.
    B. Work in Process Inventory account.
    C. Finished Goods Inventory account.
    D. Overhead account.

 

  1. Which of the following equations is correct?
    A. Total Manufacturing Costs = Direct Materials + Direct Labor + Selling Costs
    B. Total Manufacturing Costs = Direct Materials + Direct Labor + Overhead
    C. Total Manufacturing Costs = Direct Labor + Overhead + Selling Costs + Administrative Costs
    D. Total Manufacturing Costs = Product Costs + Period Costs

 

  1. The presentation of merchandise inventory on the balance sheet of a merchandising company most nearly resembles the presentation of __________ inventory on the balance sheet of a manufacturing company.
    A. materials
    B. finished goods
    C. manufacturing supplies
    D. work in process

 

  1. From Jolier’s year-end income statement, you observe that the finished goods inventory has doubled during the year. This would indicate that during the year Jolier
    A. sold more goods than were produced.
    B. produced more goods than last year.
    C. produced more goods than were sold.
    D. sold more goods than last year.

 

  1. The income statement for a manufacturing company usually contains a detailed computation of the
    A. total manufacturing cost.
    B. cost of goods sold.
    C. total cost of materials used.
    D. total overhead.

 

  1. Consider the following information: direct materials used totaled $124,700; direct labor amounted to $412,000; overhead was computed to be $789,600; Work in Process Inventory on March 1, 2014, was $482,500; and Work in Process Inventory on March 31, 2014, was $597,100. What was the cost of goods manufactured?
    A. $1,211,700
    B. $729,200
    C. $1,440,900
    D. $422,100

 

  1. Which of the following should not be included in the computation of cost of goods manufactured?
    A. Factory power costs
    B. Indirect materials costs
    C. Selling costs
    D. Direct materials costs

 

  1. Which of the following types of product costs appear in the financial statements?
    A. Predetermined overhead costs
    B. Estimated costs
    C. Standard costs
    D. Actual costs

 

  1. Which of the following accounts decreases when cost of goods manufactured is recorded?
    A. Work in Process Inventory
    B. Finished Goods Inventory
    C. Overhead
    D. Cost of Goods Sold

 

  1. Cost of goods manufactured is equal to
    A. Direct Materials + Direct Labor + Overhead.
    B. Beginning Work in Process Inventory + Total Manufacturing Costs – Ending Work in Process Inventory.
    C. Beginning Work in Process Inventory + Period Costs – Ending Work in Process Inventory.
    D. Beginning Work in Process Inventory + Product Costs.

 

  1. To calculate the total cost of goods manufactured from total manufacturing costs
    A. subtract all period costs from total manufacturing costs.
    B. add beginning and subtract ending finished goods inventory to total manufacturing costs.
    C. you must know how many goods were sold during the period.
    D. add beginning and subtract ending work in process inventory to total manufacturing costs.

 

  1. Which of the following is exclusive to a production-oriented company?
    A. Balance sheet
    B. Statement of cash flows
    C. Income statement
    D. Statement of cost of goods manufactured

 

  1. The Finished Goods Inventory and the Cost of Goods Sold for a manufacturing company for the year 2014 are as follows: May 1 Finished Goods Inventory, $470,500; May 31 Finished Goods Inventory, $125,000; Cost of Goods Sold for the year, $1,110,000. The cost of goods manufactured for the month was
    A. $1,455,500.
    B. $595,500.
    C. $985,000.
    D. $764,500.

 

  1. Which of the following account balances is not reported on the balance sheet?
    A. Materials Inventory
    B. Manufacturing Patents
    C. Cost of Goods Sold
    D. Work in Process Inventory

 

  1. Which of the following contains period costs?
    A. Work in Process Inventory
    B. Finished Goods Inventory
    C. Cost of Goods Sold
    D. Selling and administrative expenses

 

  1. The beginning finished goods inventory of Ronald Co. was $480,125. Goods completed during the year cost $963,250. The ending finished goods inventory was dangerously low, having been reduced to $135,850. The cost of goods sold for the year for Ronald Co. was
    A. $618,975.
    B. $1,307,525.
    C. $1,579,225.
    D. $1,171,675.

 

  1. The following are costs for a selected period: direct materials used in production, $75,000; direct labor cost of converting materials into product, $150,000; total indirect costs of manufacturing, $45,000. What is the unit cost of manufacturing 30,000 units in this period?
    A. $7.50
    B. $9.00
    C. $6.00
    D. $4.00

 

  1. Recorded costs for the DC5 Division, which manufactured 6,000 units of Product DC5 during the month, are as follows:
Direct materials $458,000
Direct labor 400,000
Indirect production costs 80,000
Supervisory services     40,000
Total $978,000
   

The per-unit cost of manufacturing Product DC5 this month is
A. $163.
B. $152.
C. $170.
D. $150.

 

  1. Which of the following is the formula used to compute product unit cost?
    A. (Direct Materials + Direct Labor) / Number of Units Produced
    B. (Direct Materials + Direct Labor + Overhead) / Number of Units Produced
    C. (Direct Labor + Overhead) / Number of Units Produced
    D. (Indirect Materials + Indirect Labor + Overhead) / Number of Units Produced

 

  1. Which of the following represents normal cost measurement?
    A. Actual Direct Materials + Actual Direct Labor + Actual Overhead
    B. Actual Direct Materials + Actual Direct Labor + Estimated Overhead
    C. Estimated Direct Materials + Estimated Direct Labor + Actual Overhead
    D. Actual Direct Materials + Estimated Direct Labor + Estimated Overhead

 

  1. Which cost measurement method calculates product unit cost using estimates for direct materials, direct labor, and overhead?
    A. Standard costing
    B. Actual costing
    C. Full costing
    D. Normal costing

 

  1. Which of the following is not a stage in the management process?
    A. Evaluating
    B. Communicating
    C. Planning
    D. Recording

 

  1. The fundamental way in which a company will achieve its goal is described in its
    A. balance sheet and income statement.
    B. cash flow statement.
    C. budget.
    D. mission statement.

 

  1. Which of the following activities is not a part of the “perform” stage in the management process?
    A. Producing products as per customer specifications
    B. Manage supply chain relationships
    C. Identifying operating activities that minimize waste
    D. Calculating variances by comparing estimated and actual costs

 

  1. Management accounting activities
    A. are synonymous with financial accounting activities.
    B. are substitute for the management process.
    C. complement the management process.
    D. have nothing to do with the management process.

 

  1. Which of the following is not one of the key questions to be addressed when preparing an accounting report?
    A. What is audience’s familiarity with accounting?
    B. What information should be included?
    C. When is it due and what method of presentation is best?
    D. How long should the information be valid?

 

  1. Which of the following questions do not dictate a managerial report’s format?
    A. Who should write the report?
    B. To whom should the report be distributed?
    C. What is the purpose of the report?
    D. What information is needed?

 

  1. If the report is urgently needed, it is sometimes necessary to sacrifice accuracy in the interest of
    A. timeliness
    B. personal feelings.
    C. profits.
    D. expectations.

 

  1. Which of the following is one of the integrity standards of management accountants?
    A. Refraining from accepting hospitality gifts from coworkers
    B. Refraining from activities that the company does not actively endorse
    C. Avoiding actual or apparent conflicts of interest
    D. Avoiding only those conflicts of interest that occur between coworkers

 

  1. Steve, the management accountant of a company, is not familiar with the concept of prudence in financial reporting. Which of the following IMA standards is Steve violating?
    A. Confidentiality
    B. Materiality
    C. Disclosure
    D. Competence

 

  1. The credibility standard of management accountants state that management accountants must communicate information fairly and objectively. This means essentially that accountants must perform each task
    A. as professionals, possessing the degree of skill of those management accountants who held the position before them.
    B. to provide relevant information, both positive and negative, to the recipients of their reports.
    C. in conformity with generally accepted accounting principles.
    D. to the satisfaction of government regulators.

 

  1. 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 relative could stand to gain personally from that information.
    D. not violated ethical standards because the information was relayed to a family member only.

 

  1. Suppose a management accountant becomes aware that a poor judgment he or she made has resulted in the loss of one of the company’s clients. Is the accountant bound to share this information with the company? (The accountant doubts that the company will ever find out about it directly.)
    A. The management accountant is bound to respond honestly to inquiries regarding the adequacy of professional judgments but is not bound to communicate them if not directly asked.
    B. The management accountant is bound to communicate this error in judgment only if another client cannot be found.
    C. The management accountant is not bound to communicate this error.
    D. The management accountant is bound to communicate unfavorable and favorable judgments made, even if not directly asked.

 

  1. Management accounting differs from financial accounting in many ways. Indicate with an “X” in the appropriate column whether each of the following characteristics relates to financial accounting, management accounting, or neither.
  Financial Accounting Management Accounting Neither
Primary Users:      
Owners, stockholders, lenders, customers, governmental agencies      
Managers and lenders only      
Managers, employees, supply-chain partners      
Report Format:      
Flexible, driven by user’s needs      
Based on generally accepted accounting principles      
Nature of information:      
Objective and verifiable; reports on past performance      
Objective and verifiable for decision making; subjective for planning      
Publicly available      
Units of Measure:      
Monetary at historical or current market or projected values; physical measures of time or number of objects      
Dollars at historical values only      
Monetary at historical or current market values      
       

 

 

 

 

 

 

  1. Complete the following chart by placing an “X” under the applicable column headings. Classify each cost as a fixed cost or a variable cost and as either a direct or indirect product cost or a period cost.
Item Cost Behavior Product Costs Period Cost  
  Fixed Variable Direct Indirect  
Glue used in furniture          
Wages of production-line workers          
Wages of factory custodian          
Grapes used in making grape jelly          
Rent of factory          
Factory insurance          
Company president’s salary          
Factory washroom supplies          
Sugar in candy products          
Wages of a machinist          
Office supplies used          
           

 

 

 

 

 

 

  1. Complete the following chart by placing an “X” under the applicable column heading. Classify each cost as a fixed cost or variable cost and as either a direct or indirect product cost or a period cost.
Item Cost Behavior Product Costs Period Cost  
  Fixed Variable Direct Indirect  
Wages of assembly line workers          
Office salaries          
Salary of factory supervisor          
Depreciation on factory          
Sales commissions          
Paper used to make books          
Factory property taxes          
Screws in a calculator          
Office receptionist’s payroll          
Wages of a machineman          
Advertising          
           

 

 

 

 

 

 

  1. Identify and explain the important questions a manager must address before preparing a managerial report. (Hint: Think “w’s.”)

 

 

 

 

 

  1. Give two examples of each stage in the management process.

 

 

 

 

 

  1. Assume you are the president of the business club at your school. You are thinking about creating a fundraising project to generate money for next year’s operations. Develop an outline of your ideas using the various stages of the management process.

 

 

 

 

 

  1. The Chief Financial Officer (CFO) of your company has asked you to help her develop a cost control report to be distributed within the company. She wants your input concerning what she should think about before developing such a report. Discuss the significant points, in detail, the CFO should consider before the cost control report is prepared.

 

 

 

 

 

  1. Accountants must have high professional ethics. List and briefly describe five ethical standards that management accountants subscribe to that, in your opinion, help maintain the impression that accountants are highly ethical.

 

 

 

 

 

  1. Suppose a management accountant becomes aware of a confidential but illegal act that has occurred within her company. The management accountant must consider what she is ethically bound to do about this situation. Three alternative responses to this situation are given below. State whether you agree or disagree with each, and briefly detail your reasons.

    a. The accountant must remain loyal to the company at all times and should report the occurrence only to appropriate officials within the company.

    b. The accountant is bound to inform officials only if she stands to personally gain (make money) from knowledge of the illegal act.

    c. The accountant must exercise personal judgment; a clear-cut answer does not exist given the limited information provided.

 

 

 

 

 

  1. Identify the document needed to support each of the following activities in a manufacturing organization:
1. Sales invoice      Placing an order for direct materials with a supplier   ____
2. Purchase order      Recording direct labor time at the beginning and end of each work shift   ____
3. Receiving report      Issuing direct materials into production   ____
4. Materials requisition      Recording the costs of a specific job requiring direct materials, direct labor, and overhead   ____
5. Job order cost card      Billing a customer for a completed order   ____
6. Time card      Receiving direct materials at the dock   ____

 

  1. Job #178 consists of 500 units and has total of direct materials, $48,000; direct labor, $58,000; and overhead, $35,000.

    a.  What is the unit product cost?
    b.  What are the prime costs per unit?
    c.  What are the conversion costs per unit?

 

 

 

 

 

  1. Use the information below for the year ended December 31, 2014, to prepare the statement of cost of goods manufactured.
Inventories Beginning Ending
Materials inventory $32,600 $ 32,500
Work in process inventory 41,200 41,800
Direct materials purchased   168,000
Total direct labor costs   245,200
Total indirect labor costs   52,100
Utilities   27,300
Depreciation   35,000
Small tools   2,500
Factory insurance   1,600
Factory supervision   45,200
Miscellaneous overhead costs   7,200
     

 

 

 

 

 

 

  1. Use the information below for the year ended December 31, 2014, to prepare the statement of cost of goods manufactured.
Inventories Beginning Ending
Materials inventory $41,000 $ 51,000
Work in process inventory 62,000 78,000
Direct materials purchased   258,000
Total direct labor costs   372,000
Total indirect labor costs   67,000
Utilities   41,000
Depreciation   54,000
Small tools   5,000
Factory insurance   3,000
Factory supervision   66,000
Miscellaneous overhead costs   11,000
     

 

 

 

 

 

 

  1. Fill in the missing data for Company B:
  Company B
Direct materials used $ 9,000
Direct labor cost 4,000
Overhead (a)
Total manufacturing costs 25,000
Work in process inventory, Jan. 1 1,000
Work in process inventory, Dec. 31 3,500
Sales revenue 40,000
Finished goods inventory, Jan. 1 (b)
Cost of goods manufactured (c)
Cost of goods available for sale (d)
Finished goods inventory, Dec. 31 4,000
Cost of goods sold 26,500
Gross margin (e)
Operating expenses (f)
Net operating income 5,500
   

 

 

 

 

 

 

  1. Fill in the missing data for Company C:
  Company C
Direct materials used $ 6,000
Direct labor cost (a)
Overhead 7,000
Total manufacturing costs 18,000
Work in process inventory, Jan. 1 2,000
Work in process inventory, Dec. 31 (b)
Sales revenue 30,000
Finished goods inventory, Jan. 1 7,000
Cost of goods manufactured (c)
Cost of goods available for sale 23,000
Finished goods inventory, Dec. 31 (d)
Cost of goods sold 18,000
Gross margin (e)
Operating expenses (f)
Operating income 3,000
   

 

 

 

 

 

 

  1. Sorrel Pharmaceuticals Corporation manufactures a variety of drugs that are marketed internationally. Inventories on May 31 and June 30 were as follows:
  May 31 June 30
Materials Inventory $354,100 $327,400
Work in Process Inventory 112,600 116,400
Finished Goods Inventory 138,500 142,800
     

Purchases of materials for June were $142,600. Direct labor costs were incurred and computed on the basis of 27,000 hours at $8 per hour. Actual overhead costs incurred in June were as follows: operating supplies used, $5,700; janitorial and materials handling labor, $38,100; employee benefits, $110,800; heat, light, and power, $50,000; factory depreciation, $8,400; property taxes, $8,000; and expired portion of insurance premiums, $12,000. Net sales for June were $992,700. Selling and administrative expenses were $165,000.

Prepare a statement of cost of goods manufactured for the month ended June 30.

 

 

 

 

 

  1. As the management accountant for Bynami Enterprises Inc., you have been asked to prepare a statement of cost of goods manufactured at the end of the second quarter. Account balances at that time were as follows:
Materials inventory, April 1 $  510,500
Work in process inventory, April 1 697,300
Finished goods inventory, April 1 701,200
Direct materials purchased during the quarter 1,105,400
Direct labor costs 154,800
Depreciation expense, plant and equipment 16,200
Plant supervisors’ salaries 50,600
Insurance expense, plant and equipment 1,100
Utilities expense, plant 4,000
Indirect labor costs 16,800
Manufacturing supplies expense 3,400
Small tools expense 1,500
   

June 30 inventories were as follows: materials, $540,200; work in process, $795,400; and finished goods, $604,100. Prepare the statement of cost of goods manufactured for the second quarter.

 

 

 

 

 

  1. Yamishi Production had the following inventories for the first quarter of 2014:
  Beginning Ending
Materials $606,600 $522,100
Work in process 312,100 280,800
Finished goods 416,100 540,200
     

Purchases of materials during the quarter were $427,800. Total direct labor costs were incurred in the amount of $1,482,000. Actual overhead costs were incurred as follows: operating supplies used, $17,100; janitorial and maintenance, $87,300; employee benefits, $26,400; utilities, $162,000; depreciation of factory, $43,200; property taxes, $24,000; factory insurance, $29,000. Net sales for the quarter were $3,562,200. Selling and administrative expenses were $508,000. Income taxes should be computed at 40 percent.

Prepare a statement of cost of goods manufactured for the first quarter of 2014.

 

 

 

 

 

  1. Dale, Smith, and Associates, a CPA firm, is trying to determine the hourly cost of its junior accountants in the auditing department. The following data have been gathered.
Monthly salaries of 4 junior accountants @ $3,000 each $12,000  
Monthly auditing department overhead costs $83,160  
Average number of hours worked each month 800  hr
     

Assuming 40 percent of the monthly overhead costs for the auditing department are attributable to the junior accountants, compute the hourly cost of their services.(Round your answer to two decimal places.)

 

 

 

 

 

 

 

Chapter 17: Managerial Accounting and Cost Concepts Key

  1. Management accounting is a subordinate activity to financial accounting.
    FALSE

 

  1. Management accounting is a profession that involves partnering in management decision making.
    TRUE

 

  1. Financial accounting information is confidential and private.
    FALSE

 

  1. Management accounting provides reports that are future oriented.
    TRUE

 

  1. Accounting rules applicable to management accounting are the same as those used for financial accounting.
    FALSE

 

  1. Management accounting exists primarily for the benefit of people inside a company.
    TRUE

 

  1. Financial accounting relies on the criterion of usefulness rather than formal guidelines in reporting information.
    FALSE

 

  1. Management accounting information demands more objectivity than financial accounting information.
    FALSE

 

  1. Managerial accounting reports should be prepared when they are needed, without regard to calendar dates or regularity of issue.
    TRUE

 

  1. The overall guideline or limit for management accounting information is that the report or analysis must be meaningful and must answer the questions or issues under review.
    TRUE

 

  1. The reporting format of financial accounting information is based on generally accepted accounting principles.
    TRUE

 

  1. Reporting format of managerial accounting is flexible and driven by user’s needs.
    TRUE

 

  1. Management accounting data must be expressed in historical dollars.
    FALSE

 

  1. Management accounting information is objective and verifiable for decision making.
    TRUE

 

  1. Primary users of managerial accounting include governmental agencies.
    FALSE

 

  1. Financial accounting reports are prepared on a periodic basis.
    TRUE

 

  1. Managerial accounting primarily provides information on past performance.
    FALSE

 

  1. Management accounting information is determined objectively and is verifiable, whereas financial accounting is more subjective.
    FALSE

 

  1. Managerial accounting’s main emphasis is on full and accurate accounting for and disclosure of a company’s operating results.
    FALSE

 

  1. Similar to financial accounting reports, management accounting reports are standardized in format.
    FALSE

 

  1. Neither the amount of detail nor the format of a management accounting report is affected by those to whom the report is sent.
    FALSE

 

  1. Management accounting formats are identical for all companies.
    FALSE

 

  1. Period costs are also called noninventoriable costs.
    TRUE

 

  1. Inventoriable cost is a synonym of product cost.
    TRUE

 

  1. Manufacturing costs behave as variable or fixed costs.
    TRUE

 

  1. The two primary types of cost behavior are fixed and variable.
    TRUE

 

  1. Direct materials cost is a fixed cost because it always occurs in a production process.
    FALSE

 

  1. Fixed costs remain constant within a defined range of activity or time period.
    TRUE

 

  1. Costs can also be classified as value-adding or non-value-adding costs.
    TRUE

 

  1. Building depreciation is an example of a direct product cost in a manufacturing company.
    FALSE

 

  1. Direct costs can be conveniently traced to a cost object.
    TRUE

 

  1. Variable costs per unit change in an inversely proportional rate to changes in volume.
    FALSE

 

  1. Total variable costs remain constant within a defined time period or range of activity.
    FALSE

 

  1. In a manufacturing company, an accountant’s salary is a value-adding cost.
    FALSE

 

  1. Non-value-adding costs increase the cost of a product.
    TRUE

 

  1. Direct materials are the only materials used in a product.
    FALSE

 

  1. Lubrication used for machines is an example of a direct material.
    FALSE

 

  1. Minor materials and other production supplies that cannot be conveniently traced to specific products are accounted for as indirect materials.
    TRUE

 

  1. Product unit cost is made up of direct materials and indirect materials only.
    FALSE

 

  1. Cost of sugar is an indirect cost in the manufacture of candy bars.
    FALSE

 

  1. Property taxes and equipment depreciation are examples of indirect manufacturing costs.
    TRUE

 

  1. The costs of labor for maintenance and inspections are examples of direct labor.
    FALSE

 

  1. The product is the cost object when assigning indirect product costs.
    TRUE

 

  1. Product costs for a manufacturing company consist of cost of direct materials, direct labor, and overhead.
    TRUE

 

  1. Period cost and product cost are synonymous terms.
    FALSE

 

  1. All product costs are expensed in the period in which they are paid in cash.
    FALSE

 

  1. Period costs are charged against the revenue of the current period.
    TRUE

 

  1. Both product costs and period costs could appear on the balance sheet.
    FALSE

 

  1. Direct labor cannot be traced to products as it is invisible.
    FALSE

 

  1. Both direct and indirect labor costs can be directly traced to finished products.
    FALSE

 

  1. Both indirect materials and indirect labor are overhead costs.
    TRUE

 

  1. Both direct labor and indirect labor are recorded in the Work in Process Inventory account as the product is being manufactured.
    TRUE

 

  1. At the end of an accounting period, the balance in the Finished Goods Inventory account is the sum of costs of products completed and the cost of goods sold as of that date.
    FALSE

 

  1. The costs of materials used in production are transferred from the Materials Inventory account directly to the Cost of Goods Sold account.
    FALSE

 

  1. Factory employees’ wages are recorded into the Work in Process Inventory account.
    TRUE

 

  1. Indirect product costs incurred are charged directly to the Cost of Goods Sold account.
    FALSE

 

  1. As units are completed, their costs are transferred from the Materials Inventory account to the Finished Goods Inventory account.
    FALSE

 

  1. A materials request form is prepared whenever the purchasing department orders materials.
    FALSE

 

  1. A job order cost card can be used to record all product costs incurred during production.
    TRUE

 

  1. Materials costs flow from the Materials Inventory account to the Work in Process Inventory account to the Finished Goods Inventory account.
    TRUE

 

  1. Total manufacturing costs decrease the balance of the Work in Process Inventory account.
    FALSE

 

  1. Recording cost of goods manufactured increases the Work in Process Inventory account.
    FALSE

 

  1. Overhead costs are not recorded in the Work in Process Inventory account.
    FALSE

 

  1. Total manufacturing costs include all direct materials used as well as all direct labor costs and overhead costs incurred during a period.
    TRUE

 

  1. Overhead costs can be directly traced to products once the products are completed.
    FALSE

 

  1. Overhead costs are traced to products in the same way that direct materials and direct labor are traced.
    FALSE

 

  1. Wages of machine operators and other workers involved in actually shaping the product are classified as indirect labor costs.
    FALSE

 

  1. Salaries of supervisory production personnel should be classified as direct labor costs.
    FALSE

 

  1. A production cost is classified as an overhead cost if it is not directly traceable to an end product or a cost object.
    TRUE

 

  1. Period costs flow through three types of inventory accounts before becoming part of the cost of goods sold amount.
    FALSE

 

  1. The costs of marketing and delivering a product are recorded in the Work in Process Inventory account.
    FALSE

 

  1. The cost of goods sold decreases the balance in the Finished Goods Inventory account.
    TRUE

 

  1. Some period costs can be found in inventory accounts on the balance sheet.
    FALSE

 

  1. In a manufacturing company, the cost of direct materials, direct labor, and overhead will most likely become a part of the Cost of Goods Sold account balance.
    TRUE

 

  1. Product costs can be found on both the balance sheet and the income statement.
    TRUE

 

  1. Cost of goods manufactured appears on the income statement of a manufacturing company in a similar manner as purchases appear on the income statement of a merchandising company.
    TRUE

 

  1. Total manufacturing costs and the change in the Work in Process Inventory are used to compute the cost of goods sold.
    FALSE

 

  1. Product unit cost is the sum of direct materials, direct labor, and overhead divided by the total number of units produced.
    TRUE

 

  1. The standard costing method uses the sum of actual direct materials, actual direct labor, and actual overhead to determine the product unit cost.
    FALSE

 

  1. Standard costing combines actual direct costs of materials and labor with estimated overhead costs to determine a product unit cost.
    FALSE

 

  1. The product costs that appear in the financial statements are estimated product costs.
    FALSE

 

  1. The standard costing method uses estimated costs to find product unit cost.
    TRUE

 

  1. The key to the preparation of an income statement for a manufacturing company is proper determination of the cost of goods manufactured.
    TRUE

 

  1. The terms total manufacturing costs and total cost of goods manufactured are synonymous.
    FALSE

 

  1. The amount of cost of goods sold and cost of goods manufactured will be the same if a company sells all of the units it produced.
    TRUE

 

  1. The cost of goods manufactured is added to the beginning balance of finished goods inventory to obtain the total cost of goods available for sale.
    TRUE

 

  1. The amount of cost of goods manufactured is transferred from the Work in Process Inventory account to the Finished Goods Inventory account.
    TRUE

 

  1. Product unit cost is computed by dividing the cost of goods sold by the number of units sold.
    FALSE

 

  1. The changes in the balance of Work in Process Inventory and the total manufacturing costs for a period are used to compute cost of goods manufactured.
    TRUE

 

  1. Manufacturing costs incurred in an accounting period cannot be included in the cost of goods sold for the subsequent accounting period.
    FALSE

 

  1. Managers use managerial accounting principles to guide their actions and decisions in the management process.
    TRUE

 

  1. A supply chain includes only processes and services that add value to the final product or service.
    FALSE

 

  1. The overriding goal of a business is to increase the value of the stakeholders’ interest in the business.
    TRUE

 

  1. The evaluation stage of management process includes comparing actual with the established standards.
    TRUE

 

  1. Management accounting accumulates, maintains, and processes an organization’s financial and nonfinancial information.
    TRUE

 

  1. Management accounting complements each stage of the management process.
    TRUE

 

  1. The management process and management accounting are identical.
    FALSE

 

  1. The four stages of the management process are: planning, performing, evaluating, and communicating.
    TRUE

 

  1. The key to produce an accurate and useful report include identifying the why, who, what, and when of the report.
    TRUE

 

  1. A business plan is a comprehensive statement of how a company will achieve its objectives.
    TRUE

 

  1. A manager should focus on the purpose of a report while preparing it.
    TRUE

 

  1. When there is an ethical conflict, the management accountant should resign if the immediate supervisor is involved in the conflict.
    FALSE

 

  1. Practitioners of management accounting and financial management have a responsibility to communicate information fairly and objectively.
    TRUE

 

  1. All ethical conflicts are resolved by the accountant of a company.
    FALSE

 

  1. Although some management accountants strive to update their knowledge and skills, such updating is within the realm of management accountants’ ethical standards.
    TRUE

 

  1. The management accountant must be knowledgeable about all relevant laws, regulations, and technical standards that pertain to his or her duties.
    TRUE

 

  1. If a management accountant gives information about a future merger of his or her company to a relative, the accountant has acted ethically.
    FALSE

 

  1. Management accountants working in purchasing department must decline gifts from company vendors; because this might influence, or be perceived as influencing their performance or decision analyses.
    TRUE

 

  1. Management accountants are obligated to refrain from activities that would prejudice their ability to carry out their duties.
    TRUE

 

  1. Management accountants who alter reports to meet targeted levels of performance are not acting unethically, because their job is to provide information that will aid in communicating the goals of the business.
    FALSE

 

  1. Although the purpose of the confidentiality standard is to encourage management accountants to remain loyal to their company, failure to disclose knowledge of internal illegal acts to outside authorities can result in the accountants being charged as an accessory to the crime.
    TRUE

 

  1. Management accounting reports
    A.are primarily used by parties inside the organization.
    B. must be prepared on a periodic basis.
    C. are generally publicly available.
    D. are based on generally accepted accounting principles.

 

  1. Which of the following user groups will use managerial accounting information for decision-making purposes?
    A.Customers
    B. Lenders
    C. Employees
    D. Stockholders

 

  1. Management accounting reports are
    A.prepared using the double-entry system of accounting.
    B. prepared periodically.
    C. based on generally accepted accounting principles.
    D. driven by user’s needs.

 

  1. Which of the following statements is true of financial and managerial accounting?
    A.Both use historical costs as their primary unit of measurement.
    B. Both depend on the double-entry system of accounting.
    C. Both require adherence to generally accepted accounting principles.
    D. Both assist managers in decision making.

 

  1. Managerial accounting information is primarily used by
    A.lenders.
    B. supply-chain partners.
    C. governmental agencies.
    D. customers.

 

  1. Which of the following is a difference between managerial and financial accounting?
    A.Managerial accounting reports non-monetary information whereas financial accounting reports both monetary and non-monetary information.
    B. Managerial accounting is used by government authorities whereas financial accounting is used by stockholders.
    C. Managerial accounting prepares reports monthly whereas financial accounting prepares reports annually.
    D. Managerial information is confidential whereas financial accounting information is publicly available.

 

  1. The unit of measurement used in management accounting reports is
    A.primarily the historical dollar.
    B. usually current replacement cost.
    C. any measurement unit that is useful in a particular situation.
    D. the measurement unit used by competing companies.

 

  1. Which of the following costs is not an inventoriable cost?
    A.Cost to ship products to a customer
    B. Cost of factory machinery used in production
    C. Cost to design the product
    D. Plant supervisor’s salary

 

  1. Which of the following is a product cost?
    A.General expenses
    B. Selling expenses
    C. Advertising expenses
    D. Material handling expenses

 

  1. Which of the following is not a reason to classify costs as either product or period costs?
    A.To determine unit manufacturing costs
    B. To determine if the costs are fixed or variable
    C. To analyze costs for control purposes
    D. To report production costs on the income statement

 

  1. Depreciation expense could be
    A.a period cost.
    B. a product cost.
    C. a fixed cost.
    D. All of these

 

  1. Which of the following is a period cost?
    A.Advertising costs
    B. Indirect materials
    C. Manufacturing overhead
    D. Direct materials

 

  1. Period cost is also called
    A.variable cost.
    B. direct cost.
    C. value-adding cost.
    D. noninventoriable cost.

 

  1. Prime costs is the sum of
    A.the direct labor costs and indirect labor costs.
    B. the direct material costs, direct labor costs, and overhead costs.
    C. the direct labor costs and overhead costs.
    D. the direct materials costs and direct labor costs.

 

  1. Which of the following is not a product cost?
    A.Depreciation on office furniture
    B. Manufacturing overhead
    C. Direct labor
    D. Direct materials

 

  1. Which of the following is a variable cost?
    A.Raw materials
    B. Rent
    C. Insurance expense
    D. Salaries

 

  1. Velocity Ltd. is a sports car manufacturer. Which of the following is a value-adding cost for Velocity?
    A.Salary of the payroll department
    B. Cost of tires used in cars
    C. Cost of office supplies
    D. Salary of operations manager

 

  1. Which of the following is included in prime costs?
    A.Overhead costs
    B. Indirect materials costs
    C. Selling and administrative costs
    D. Direct labor costs

 

  1. Conversion costs consist of
    A.direct materials costs and direct labor costs.
    B. direct labor costs and overhead costs.
    C. direct materials costs and overhead costs.
    D. direct labor costs and indirect labor costs.

 

  1. The three elements of product costs are
    A.direct materials, work in process, and overhead.
    B. direct materials, work in process, and finished goods.
    C. direct materials, direct labor, and overhead.
    D. direct materials, direct labor, and period costs.

 

  1. Materials and supplies that cannot be traced conveniently to specific products are called
    A.indirect materials.
    B. raw materials.
    C. waste materials.
    D. direct materials.

 

  1. Which of the following terms apply to materials and supplies that can be traced conveniently to specific products?
    A.Indirect materials
    B. Indirect manufacturing costs
    C. Direct costs
    D. Manufacturing overhead

 

  1. Period costs are
    A.charged against the revenue of the current period.
    B. initially recognized on the balance sheet as inventory.
    C. charged to the period in which the product generates revenue.
    D. further classified as direct costs and indirect costs.

 

  1. The factory personnel whose wages are traceable directly to a product include
    A.maintenance personnel.
    B. support personnel.
    C. factory supervisors.
    D. employees who help to shape the product.

 

  1. Costs such as salary of supervisors and other support personnel, which are accounted for as overhead costs, are called
    A.period labor costs.
    B. sales assistance costs.
    C. indirect labor costs.
    D. prime labor costs.

 

  1. All manufacturing costs incurred and assigned to products that are being produced are classified as
    A.variable costs.
    B. allocated costs.
    C. product costs.
    D. overhead costs.

 

  1. Which of the following labor costs would be included in direct labor?
    A.Maintenance workers
    B. Machine operators
    C. Managers and supervisors
    D. Materials storeroom custodian

 

  1. Which of the following costs is considered overhead?
    A.Indirect labor costs only
    B. Direct materials costs only
    C. Both indirect materials and indirect labor costs
    D. Direct materials and direct labor costs

 

  1. Woodies Inc. produces wooden desks. Which of the following is not an indirect material for Woodies?
    A.Wood in a desk
    B. Nails in a desk
    C. Screws in a desk
    D. Lubricants for production machinery

 

  1. Which of the following is not a product cost?
    A.Indirect materials costs
    B. Packaging costs
    C. Direct labor costs
    D. Overhead costs

 

  1. Which of the following documents initiates the purchasing of materials?
    A.Job order cost sheet
    B. Receiving report
    C. Purchase request
    D. Purchase order

 

  1. Overhead costs are
    A.not allocated to the Work in Process Inventory account.
    B. not charged directly to the Finished Goods Inventory account.
    C. expensed in the period in which they are incurred.
    D. not considered product costs.

 

  1. In a manufacturing environment, direct labor costs initially flow
    A.into the Materials Inventory account.
    B. into the Cost of Goods Sold account.
    C. into the Work in Process Inventory account.
    D. into the Finished Goods Inventory account.

 

  1. In a manufacturing environment, costs of materials initially flow
    A.into the Work in Process Inventory account.
    B. into the Materials Inventory account.
    C. into the Cost of Goods Sold account.
    D. into the Finished Goods Inventory account.

 

  1. All manufacturing costs that are assigned to completed (but unsold) products should be classified as
    A.materials inventory costs.
    B. cost of goods sold.
    C. work in process inventory costs.
    D. finished goods inventory costs.

 

  1. Which of the following accounts includes the cost of completed but unsold units of a manufacturing firm?
    A.Cost of Goods Sold
    B. Finished Goods Inventory
    C. Work in Process Inventory
    D. Materials Inventory

 

  1. Which of the following accounts contain only one type of product cost?
    A.Work in Process Inventory
    B. Materials Inventory
    C. Finished Goods Inventory
    D. Cost of Goods Sold

 

  1. Which of the following is a source document for purchase of materials?
    A.Vendor’s invoice
    B. Purchase request
    C. Receiving report
    D. All of these

 

  1. Total manufacturing costs incurred during a period are transferred to the
    A.Cost of Goods Sold account.
    B. Work in Process Inventory account.
    C. Finished Goods Inventory account.
    D. Overhead account.

 

  1. Which of the following equations is correct?
    A.Total Manufacturing Costs = Direct Materials + Direct Labor + Selling Costs
    B. Total Manufacturing Costs = Direct Materials + Direct Labor + Overhead
    C. Total Manufacturing Costs = Direct Labor + Overhead + Selling Costs + Administrative Costs
    D. Total Manufacturing Costs = Product Costs + Period Costs

 

  1. The presentation of merchandise inventory on the balance sheet of a merchandising company most nearly resembles the presentation of __________ inventory on the balance sheet of a manufacturing company.
    A.materials
    B. finished goods
    C. manufacturing supplies
    D. work in process

 

  1. From Jolier’s year-end income statement, you observe that the finished goods inventory has doubled during the year. This would indicate that during the year Jolier
    A.sold more goods than were produced.
    B. produced more goods than last year.
    C. produced more goods than were sold.
    D. sold more goods than last year.

 

  1. The income statement for a manufacturing company usually contains a detailed computation of the
    A.total manufacturing cost.
    B. cost of goods sold.
    C. total cost of materials used.
    D. total overhead.

 

  1. Consider the following information: direct materials used totaled $124,700; direct labor amounted to $412,000; overhead was computed to be $789,600; Work in Process Inventory on March 1, 2014, was $482,500; and Work in Process Inventory on March 31, 2014, was $597,100. What was the cost of goods manufactured?
    A.$1,211,700
    B. $729,200
    C. $1,440,900
    D. $422,100

 

  1. Which of the following should not be included in the computation of cost of goods manufactured?
    A.Factory power costs
    B. Indirect materials costs
    C. Selling costs
    D. Direct materials costs

 

  1. Which of the following types of product costs appear in the financial statements?
    A.Predetermined overhead costs
    B. Estimated costs
    C. Standard costs
    D. Actual costs

 

  1. Which of the following accounts decreases when cost of goods manufactured is recorded?
    A.Work in Process Inventory
    B. Finished Goods Inventory
    C. Overhead
    D. Cost of Goods Sold

 

  1. Cost of goods manufactured is equal to
    A.Direct Materials + Direct Labor + Overhead.
    B. Beginning Work in Process Inventory + Total Manufacturing Costs – Ending Work in Process Inventory.
    C. Beginning Work in Process Inventory + Period Costs – Ending Work in Process Inventory.
    D. Beginning Work in Process Inventory + Product Costs.

 

  1. To calculate the total cost of goods manufactured from total manufacturing costs
    A.subtract all period costs from total manufacturing costs.
    B. add beginning and subtract ending finished goods inventory to total manufacturing costs.
    C. you must know how many goods were sold during the period.
    D. add beginning and subtract ending work in process inventory to total manufacturing costs.

 

  1. Which of the following is exclusive to a production-oriented company?
    A.Balance sheet
    B. Statement of cash flows
    C. Income statement
    D. Statement of cost of goods manufactured

 

  1. The Finished Goods Inventory and the Cost of Goods Sold for a manufacturing company for the year 2014 are as follows: May 1 Finished Goods Inventory, $470,500; May 31 Finished Goods Inventory, $125,000; Cost of Goods Sold for the year, $1,110,000. The cost of goods manufactured for the month was
    A.$1,455,500.
    B. $595,500.
    C. $985,000.
    D. $764,500.

 

  1. Which of the following account balances is not reported on the balance sheet?
    A.Materials Inventory
    B. Manufacturing Patents
    C. Cost of Goods Sold
    D. Work in Process Inventory

 

  1. Which of the following contains period costs?
    A.Work in Process Inventory
    B. Finished Goods Inventory
    C. Cost of Goods Sold
    D. Selling and administrative expenses

 

  1. The beginning finished goods inventory of Ronald Co. was $480,125. Goods completed during the year cost $963,250. The ending finished goods inventory was dangerously low, having been reduced to $135,850. The cost of goods sold for the year for Ronald Co. was
    A.$618,975.
    B. $1,307,525.
    C. $1,579,225.
    D. $1,171,675.

 

  1. The following are costs for a selected period: direct materials used in production, $75,000; direct labor cost of converting materials into product, $150,000; total indirect costs of manufacturing, $45,000. What is the unit cost of manufacturing 30,000 units in this period?
    A.$7.50
    B. $9.00
    C. $6.00
    D. $4.00

 

  1. Recorded costs for the DC5 Division, which manufactured 6,000 units of Product DC5 during the month, are as follows:
Direct materials $458,000
Direct labor 400,000
Indirect production costs 80,000
Supervisory services     40,000
Total $978,000
   

The per-unit cost of manufacturing Product DC5 this month is
A. $163.
B. $152.
C. $170.
D. $150.

 

  1. Which of the following is the formula used to compute product unit cost?
    A.(Direct Materials + Direct Labor) / Number of Units Produced
    B. (Direct Materials + Direct Labor + Overhead) / Number of Units Produced
    C. (Direct Labor + Overhead) / Number of Units Produced
    D. (Indirect Materials + Indirect Labor + Overhead) / Number of Units Produced

 

  1. Which of the following represents normal cost measurement?
    A.Actual Direct Materials + Actual Direct Labor + Actual Overhead
    B. Actual Direct Materials + Actual Direct Labor + Estimated Overhead
    C. Estimated Direct Materials + Estimated Direct Labor + Actual Overhead
    D. Actual Direct Materials + Estimated Direct Labor + Estimated Overhead

 

  1. Which cost measurement method calculates product unit cost using estimates for direct materials, direct labor, and overhead?
    A.Standard costing
    B. Actual costing
    C. Full costing
    D. Normal costing

 

  1. Which of the following is not a stage in the management process?
    A.Evaluating
    B. Communicating
    C. Planning
    D. Recording

 

  1. The fundamental way in which a company will achieve its goal is described in its
    A.balance sheet and income statement.
    B. cash flow statement.
    C. budget.
    D. mission statement.

 

  1. Which of the following activities is not a part of the “perform” stage in the management process?
    A.Producing products as per customer specifications
    B. Manage supply chain relationships
    C. Identifying operating activities that minimize waste
    D. Calculating variances by comparing estimated and actual costs

 

  1. Management accounting activities
    A.are synonymous with financial accounting activities.
    B. are substitute for the management process.
    C. complement the management process.
    D. have nothing to do with the management process.

 

  1. Which of the following is not one of the key questions to be addressed when preparing an accounting report?
    A.What is audience’s familiarity with accounting?
    B. What information should be included?
    C. When is it due and what method of presentation is best?
    D. How long should the information be valid?

 

  1. Which of the following questions do not dictate a managerial report’s format?
    A.Who should write the report?
    B. To whom should the report be distributed?
    C. What is the purpose of the report?
    D. What information is needed?

 

  1. If the report is urgently needed, it is sometimes necessary to sacrifice accuracy in the interest of
    A.timeliness
    B. personal feelings.
    C. profits.
    D. expectations.

 

  1. Which of the following is one of the integrity standards of management accountants?
    A.Refraining from accepting hospitality gifts from coworkers
    B. Refraining from activities that the company does not actively endorse
    C. Avoiding actual or apparent conflicts of interest
    D. Avoiding only those conflicts of interest that occur between coworkers

 

  1. Steve, the management accountant of a company, is not familiar with the concept of prudence in financial reporting. Which of the following IMA standards is Steve violating?
    A.Confidentiality
    B. Materiality
    C. Disclosure
    D. Competence

 

  1. The credibility standard of management accountants state that management accountants must communicate information fairly and objectively. This means essentially that accountants must perform each task
    A.as professionals, possessing the degree of skill of those management accountants who held the position before them.
    B. to provide relevant information, both positive and negative, to the recipients of their reports.
    C. in conformity with generally accepted accounting principles.
    D. to the satisfaction of government regulators.

 

  1. 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 relative could stand to gain personally from that information.
    D. not violated ethical standards because the information was relayed to a family member only.

 

  1. Suppose a management accountant becomes aware that a poor judgment he or she made has resulted in the loss of one of the company’s clients. Is the accountant bound to share this information with the company? (The accountant doubts that the company will ever find out about it directly.)
    A.The management accountant is bound to respond honestly to inquiries regarding the adequacy of professional judgments but is not bound to communicate them if not directly asked.
    B. The management accountant is bound to communicate this error in judgment only if another client cannot be found.
    C. The management accountant is not bound to communicate this error.
    D. The management accountant is bound to communicate unfavorable and favorable judgments made, even if not directly asked.

 

  1. Management accounting differs from financial accounting in many ways. Indicate with an “X” in the appropriate column whether each of the following characteristics relates to financial accounting, management accounting, or neither.
  Financial Accounting Management Accounting Neither
Primary Users:      
Owners, stockholders, lenders, customers, governmental agencies      
Managers and lenders only      
Managers, employees, supply-chain partners      
Report Format:      
Flexible, driven by user’s needs      
Based on generally accepted accounting principles      
Nature of information:      
Objective and verifiable; reports on past performance      
Objective and verifiable for decision making; subjective for planning      
Publicly available      
Units of Measure:      
Monetary at historical or current market or projected values; physical measures of time or number of objects      
Dollars at historical values only      
Monetary at historical or current market values      
       

 

 

  Financial Accounting Management Accounting Neither
Primary Users:      
Owners, stockholders, lenders, customers, governmental agencies X    
Managers and lenders only     X
Managers, employees, supply-chain partners   X  
Report Format      
Flexible, driven by user’s needs   X  
Based on generally accepted accounting principles X    
Nature of information:      
Objective and verifiable; reports on past performance X    
Objective and verifiable for decision making; subjective for planning   X  
Publicly available X    
Units of Measure:      
Monetary at historical or current market or projected values; physical measures of time or number of objects   X  
Dollars at historical values only     X
Monetary at historical or current market values X    
       

 

  1. Complete the following chart by placing an “X” under the applicable column headings. Classify each cost as a fixed cost or a variable cost and as either a direct or indirect product cost or a period cost.
Item Cost Behavior Product Costs Period Cost  
  Fixed Variable Direct Indirect  
Glue used in furniture          
Wages of production-line workers          
Wages of factory custodian          
Grapes used in making grape jelly          
Rent of factory          
Factory insurance          
Company president’s salary          
Factory washroom supplies          
Sugar in candy products          
Wages of a machinist          
Office supplies used          
           

 

 

Item Cost Behavior Product Costs Period Cost  
  Fixed Variable Direct Indirect  
Glue used in furniture   X   X  
Wages of production-line workers   X X    
Wages of factory custodian   X   X  
Grapes used in making grape jelly   X X    
Rent of factory X     X  
Factory insurance X     X  
Company president’s salary X       X
Factory washroom supplies   X   X  
Sugar in candy products   X X    
Wages of a machinist   X X    
Office supplies used   X     X
           

 

  1. Complete the following chart by placing an “X” under the applicable column heading. Classify each cost as a fixed cost or variable cost and as either a direct or indirect product cost or a period cost.
Item Cost Behavior Product Costs Period Cost  
  Fixed Variable Direct Indirect  
Wages of assembly line workers          
Office salaries          
Salary of factory supervisor          
Depreciation on factory          
Sales commissions          
Paper used to make books          
Factory property taxes          
Screws in a calculator          
Office receptionist’s payroll          
Wages of a machineman          
Advertising          
           

 

 

Item Cost Behavior Product Cost Period Cost  
  Fixed Variable Direct Indirect  
Wages of assembly line workers   X X    
Office salaries X       X
Salary of factory supervisor X     X  
Depreciation on factory X     X  
Sales commissions   X     X
Paper used to make books   X X    
Factory property taxes X     X  
Screws in a calculator   X   X  
Office receptionist’s payroll X       X
Wages of a machineman   X X    
Advertising X       X
           

 

  1. Identify and explain the important questions a manager must address before preparing a managerial report. (Hint: Think “w’s.”)

Why: To establish the purpose of the report
Who: To determine whom the report is targeting, who will receive it, and who will read it; dictates the level of detail necessary for the report
What: To determine the content and style of the report
When: To determine when the report should be completed and distributed at a time when it will be most valuable to those who use it

 

  1. Give two examples of each stage in the management process.

Plan: Determining the mission statement (strategic objectives and operating objectives); developing a business plan
Perform: Hiring and training personnel; properly matching human and technical resources to the work that must be done; purchasing/leasing facilities; maintaining inventories for sale; identifying operating activities that can minimize waste; improving the quality of products or services
Evaluate: Comparing actual to expected performance; correcting problems; revising original plans
Communicate: Preparing external and internal reports

 

  1. Assume you are the president of the business club at your school. You are thinking about creating a fundraising project to generate money for next year’s operations. Develop an outline of your ideas using the various stages of the management process.

Note: Student answers will vary considerably; however, they should adequately cover the four stages of the management process. An example answer is given below.

Plan:  Under strategic planning, you need to define the objective, i.e., how much needs to be raised. In addition, the target market needs to be identified—for example, students, faculty, businesses, or the community at large. The operating plan would then specify how to approach the target markets.

Perform: This would involve explaining the plan to the membership, getting volunteers to help, and performing the actual work, such as coordinating the mailings, staffing the donation booths, making phone calls, and visiting potential donors.

Evaluate: This would involve comparing actual performance to expected performance on a daily basis and making adjustments as needed.

Communicate: This would involve preparing and presenting a report on the results achieved to the membership.

 

  1. The Chief Financial Officer (CFO) of your company has asked you to help her develop a cost control report to be distributed within the company. She wants your input concerning what she should think about before developing such a report. Discuss the significant points, in detail, the CFO should consider before the cost control report is prepared.

In addition to identifying the Why, Who, What, and When of the report, students should address the specific points that need to be considered under each topic.

Why: What is the purpose of the report? Is the intent to report on total costs or is the report going to be concerned with specific costs? Are the costs being considered for the entire company or for specific segments of the company?

Who: Who is going to receive the report? Is it going to specific line managers or to someone higher up in the company or to both groups? In other words, is it going to individuals actually incurring the costs or to individuals that are just familiar with the costs being reported?

What: Can the information needed to prepare the report be obtained from existing source documents and other sources or not? How will the information be presented? As columnar data, as charts and graphs, as dollar amounts, as percentages, as year-to-date costs, as actual compared to budget, as actual this year compared to actual last year, or some other way?

When: How often will the report be prepared? Daily, weekly, monthly, quarterly, annually? Is the report going to be used to influence current operations or future operations?

 

  1. Accountants must have high professional ethics. List and briefly describe five ethical standards that management accountants subscribe to that, in your opinion, help maintain the impression that accountants are highly ethical.

The student should list any five of the following ethical standards:

Competence:

Each member has a responsibility to:
1. Maintain an appropriate level of professional expertise by continually developing knowledge and skills.
2. Perform professional duties in accordance with relevant laws, regulations, and technical standards.
3. Provide decision support information and recommendations that are accurate, clear, concise, and timely.
4. Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

Confidentiality:

Each member has a responsibility to:
1. Keep information confidential except when disclosure is authorized or legally required.
2. Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates’ activities to ensure compliance.
3. Refrain from using confidential information for unethical or illegal advantage.

Integrity:

Each member has a responsibility to:
1. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.
2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
3. Abstain from engaging in or supporting any activity that might discredit the profession.

Credibility:

Each member has a responsibility to:
1. Communicate information fairly and objectively.
2. Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.
3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

 

  1. Suppose a management accountant becomes aware of a confidential but illegal act that has occurred within her company. The management accountant must consider what she is ethically bound to do about this situation. Three alternative responses to this situation are given below. State whether you agree or disagree with each, and briefly detail your reasons.

    a. The accountant must remain loyal to the company at all times and should report the occurrence only to appropriate officials within the company.

    b. The accountant is bound to inform officials only if she stands to personally gain (make money) from knowledge of the illegal act.

    c. The accountant must exercise personal judgment; a clear-cut answer does not exist given the limited information provided.

  2. The confidentiality standards state that management accountants must refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so. As such, the student should recognize that illegal acts could be an exception to the confidentiality standard. The severity and nature of the illegal act may dictate the accountant’s obligation to disclose knowledge of this act to outside officials. An example would be an act involving a felony. Although the thrust of the confidentiality standard encourages accountants to remain loyal to their company in refraining from communicating confidential information, failure to disclose knowledge of illegal acts to outside authorities may result in their being charged as an accessory to the crime. Discussing the illegal act with officials inside the company would likely be the minimum amount of communication required.

    b. The confidentiality standards specifically state that management accountants should refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties. As such, if an accountant could stand to personal gain from knowledge of the illegal act, then refraining from communicating this information may give the appearance that the accountant is obtaining illegal profits from this information. Depending on the severity of the illegal act, the accountant should communicate knowledge of this act to officials inside or outside the company to avoid even the appearance of unethical behavior.

    c. As noted in parts a and b, the appropriate action dictated by this situation involves consideration of the severity and consequences of the illegal act. The severity and nature of the illegal act may dictate the accountant’s obligation to disclose knowledge of this act to outside officials. In all likelihood, the required procedure should at a minimum include discussing the knowledge of this act with company officials.

 

  1. Identify the document needed to support each of the following activities in a manufacturing organization:
1. Sales invoice      Placing an order for direct materials with a supplier   2
2. Purchase order      Recording direct labor time at the beginning and end of each work shift   6
3. Receiving report      Issuing direct materials into production   4
4. Materials requisition      Recording the costs of a specific job requiring direct materials, direct labor, and overhead   5
5. Job order cost card      Billing a customer for a completed order   1
6. Time card      Receiving direct materials at the dock   3

 

  1. Job #178 consists of 500 units and has total of direct materials, $48,000; direct labor, $58,000; and overhead, $35,000.

    a.  What is the unit product cost?
    b.  What are the prime costs per unit?
    c.  What are the conversion costs per unit?

  2. ($48,000 + $58,000 + $35,000) / 500 units = $282 per unit
    b.  Prime Costs = Direct Materials + Direct Labor; so ($48,000 + $58,000) / 500 units = $212 per unit
    c. Conversion Costs = Direct Labor + Overhead; so ($58,000 + $35,000) / 500 units = $186 per unit

 

  1. Use the information below for the year ended December 31, 2014, to prepare the statement of cost of goods manufactured.
Inventories Beginning Ending
Materials inventory $32,600 $ 32,500
Work in process inventory 41,200 41,800
Direct materials purchased   168,000
Total direct labor costs   245,200
Total indirect labor costs   52,100
Utilities   27,300
Depreciation   35,000
Small tools   2,500
Factory insurance   1,600
Factory supervision   45,200
Miscellaneous overhead costs   7,200
     

 

 

Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2014
 
Direct materials used    
  Materials inventory, January 1 $ 32,600  
  Direct materials purchased   168,000  
  Cost of direct materials available for use $200,600  
  Less materials inventory, December 31    32,500  
  Cost of direct materials used   $168,100
Direct labor costs   245,200
Overhead costs    
  Indirect labor costs $ 52,100  
  Utilities 27,300  
  Depreciation 35,000  
  Small tools 2,500  
  Factory insurance 1,600  
  Factory supervision 45,200  
  Miscellaneous overhead costs     7,200  
  Total overhead costs    170,900
Total manufacturing costs   $584,200
Add work in process inventory, January 1       41,200
Total cost of work in process during the year   $625,400
Less work in process inventory, December 31      41,800
Cost of goods manufactured   $583,600
     

 

  1. Use the information below for the year ended December 31, 2014, to prepare the statement of cost of goods manufactured.
Inventories Beginning Ending
Materials inventory $41,000 $ 51,000
Work in process inventory 62,000 78,000
Direct materials purchased   258,000
Total direct labor costs   372,000
Total indirect labor costs   67,000
Utilities   41,000
Depreciation   54,000
Small tools   5,000
Factory insurance   3,000
Factory supervision   66,000
Miscellaneous overhead costs   11,000
     

 

 

Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2014
 
Direct materials used    
  Materials inventory, January 1 $ 41,000  
  Direct materials purchased   258,000  
  Cost of direct materials available for use $299,000  
  Less materials inventory, December 31    51,000  
  Cost of direct materials used   $248,000
Direct labor costs   372,000
Overhead costs    
  Indirect labor costs $ 67,000  
  Utilities 41,000  
  Depreciation 54,000  
  Small Tools 5,000  
  Factory Insurance 3,000  
  Factory supervision 66,000  
  Miscellaneous overhead costs    11,000  
  Total overhead costs     247,000
Total manufacturing costs   $867,000
Add work in process inventory, January 1      62,000
Total cost of work in process during the year   $929,000
Less work in process inventory, December 31      78,000
Cost of goods manufactured   $851,000
     

 

  1. Fill in the missing data for Company B:
  Company B
Direct materials used $ 9,000
Direct labor cost 4,000
Overhead (a)
Total manufacturing costs 25,000
Work in process inventory, Jan. 1 1,000
Work in process inventory, Dec. 31 3,500
Sales revenue 40,000
Finished goods inventory, Jan. 1 (b)
Cost of goods manufactured (c)
Cost of goods available for sale (d)
Finished goods inventory, Dec. 31 4,000
Cost of goods sold 26,500
Gross margin (e)
Operating expenses (f)
Net operating income 5,500
   

 

  1. $12,000
    b. $8,000
    c. $22,500
    d. $30,500
    e. $13,500
    f. $8,000

 

  1. Fill in the missing data for Company C:
  Company C
Direct materials used $ 6,000
Direct labor cost (a)
Overhead 7,000
Total manufacturing costs 18,000
Work in process inventory, Jan. 1 2,000
Work in process inventory, Dec. 31 (b)
Sales revenue 30,000
Finished goods inventory, Jan. 1 7,000
Cost of goods manufactured (c)
Cost of goods available for sale 23,000
Finished goods inventory, Dec. 31 (d)
Cost of goods sold 18,000
Gross margin (e)
Operating expenses (f)
Operating income 3,000
   

 

  1. $5,000
    b. $4,000
    c. $16,000
    d. $5,000
    e. $12,000
    f. $9,000

 

  1. Sorrel Pharmaceuticals Corporation manufactures a variety of drugs that are marketed internationally. Inventories on May 31 and June 30 were as follows:
  May 31 June 30
Materials Inventory $354,100 $327,400
Work in Process Inventory 112,600 116,400
Finished Goods Inventory 138,500 142,800
     

Purchases of materials for June were $142,600. Direct labor costs were incurred and computed on the basis of 27,000 hours at $8 per hour. Actual overhead costs incurred in June were as follows: operating supplies used, $5,700; janitorial and materials handling labor, $38,100; employee benefits, $110,800; heat, light, and power, $50,000; factory depreciation, $8,400; property taxes, $8,000; and expired portion of insurance premiums, $12,000. Net sales for June were $992,700. Selling and administrative expenses were $165,000.

Prepare a statement of cost of goods manufactured for the month ended June 30.

 

Sorrel Pharmaceuticals Corporation
Statement of Cost of Goods Manufactured
For the Month Ended June 30
 
Direct materials used    
  Materials inventory, May 1 $354,100  
  Direct materials purchased  142,600  
  Cost of direct materials available for use $496,700  
  Less Materials Inventory, June 30  327,400  
Cost of direct materials used   $169,300
Direct labor costs   216,000
Overhead costs    
  Operating supplies $  5,700  
  Janitorial and materials handling labor 38,100  
  Employee benefits 110,800  
  Heat, light, and power 50,000  
  Factory depreciation 8,400  
  Property taxes 8,000  
  Expired portion of insurance premiums   12,000  
Total overhead costs    233,000
Total manufacturing costs   $618,300
  Add work in process inventory, May 31    112,600
  Total cost of work in process during the month   $730,900
  Less work in process inventory, June 30    116,400
Cost of goods manufactured   $614,500
     

 

  1. As the management accountant for Bynami Enterprises Inc., you have been asked to prepare a statement of cost of goods manufactured at the end of the second quarter. Account balances at that time were as follows:
Materials inventory, April 1 $  510,500
Work in process inventory, April 1 697,300
Finished goods inventory, April 1 701,200
Direct materials purchased during the quarter 1,105,400
Direct labor costs 154,800
Depreciation expense, plant and equipment 16,200
Plant supervisors’ salaries 50,600
Insurance expense, plant and equipment 1,100
Utilities expense, plant 4,000
Indirect labor costs 16,800
Manufacturing supplies expense 3,400
Small tools expense 1,500
   

June 30 inventories were as follows: materials, $540,200; work in process, $795,400; and finished goods, $604,100. Prepare the statement of cost of goods manufactured for the second quarter.

 

Bynami Enterprises, Inc.
Statement of Cost of Goods Manufactured
For the Quarter Ended June 30
 
   Direct materials used    
     Materials inventory, April 1 $  510,500  
     Direct materials purchased   1,105,400  
     Cost of direct materials available for use $1,615,900  
     Less materials inventory, June 30     540,200  
      Cost of direct materials used   $1,075,700
   Direct labor costs   154,800
   Overhead costs    
     Depreciation expense, plant and equipment $   16,200  
     Plant supervisors’ salaries 50,600  
     Insurance expense, plant and equipment 1,100  
     Utilities expense, plant 4,000  
     Indirect labor costs 16,800  
     Manufacturing supplies expense 3,400  
     Small tools expense      1,500  
     Total overhead costs         93,600
   Total manufacturing costs   $1,324,100
   Add work in process inventory, April 1       697,300
   Total cost of work in process during the
quarter
  $2,021,400
   Less work in process inventory, June 30       795,400
   Cost of goods manufactured   $1,226,000
     

 

  1. Yamishi Production had the following inventories for the first quarter of 2014:
  Beginning Ending
Materials $606,600 $522,100
Work in process 312,100 280,800
Finished goods 416,100 540,200
     

Purchases of materials during the quarter were $427,800. Total direct labor costs were incurred in the amount of $1,482,000. Actual overhead costs were incurred as follows: operating supplies used, $17,100; janitorial and maintenance, $87,300; employee benefits, $26,400; utilities, $162,000; depreciation of factory, $43,200; property taxes, $24,000; factory insurance, $29,000. Net sales for the quarter were $3,562,200. Selling and administrative expenses were $508,000. Income taxes should be computed at 40 percent.

Prepare a statement of cost of goods manufactured for the first quarter of 2014.

 

Yamishi Production
Statement of Cost of Goods Manufactured
For the Quarter Ended March 31, 2014
 
Direct materials used    
  Materials inventory, January 1 $  606,600  
  Direct materials purchased    427,800  
  Cost of direct materials available for use $1,034,400  
  Less materials inventory, March 1    522,100  
Cost of direct materials used   $  512,300
Direct labor   1,482,000
Overhead costs    
  Operating supplies $   17,100  
  Janitorial and maintenance 87,300  
  Employee benefits 26,400  
  Utilities 162,000  
  Depreciation of factory 43,200  
  Property taxes 24,000  
  Factory insurance     29,000  
Total overhead costs      389,000
Total manufacturing costs   $2,383,300
  Add work in process inventory, January 1      312,100
  Total cost of work in process during the quarter   $2,695,400
  Less work in process inventory, March 31      280,800
Cost of goods manufactured   $2,414,600
     

 

  1. Dale, Smith, and Associates, a CPA firm, is trying to determine the hourly cost of its junior accountants in the auditing department. The following data have been gathered.
Monthly salaries of 4 junior accountants @ $3,000 each $12,000  
Monthly auditing department overhead costs $83,160  
Average number of hours worked each month 800  hr
     

Assuming 40 percent of the monthly overhead costs for the auditing department are attributable to the junior accountants, compute the hourly cost of their services.(Round your answer to two decimal places.)

 

Salaries $12,000
Overhead costs ($83,160 ´ 40%)   33,264
Total costs $45,264
Divide by monthly hours        800
Cost per hour  $ 56.58
   

 

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