Accounting Gateway Exam Study Questions

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Questions from the online practice quiz

Preferred stock is called preferred because it usually has two preferences over common stock. These preferences relate to:

Dividends and distribution of assets if the corporation is dissolved.

The declaration and issuance of a stock dividend:
Question 31 options:
1) Does not change total assets, liabilities, or total shareholders' equity.
2) Decreases total shareholders' equity and increases common stock.
3) Decreases assets and decreases total shareholders' equity.
4) Does not change retained earnings or paid-in capital.

1) Does not change total assets, liabilities, or total shareholders' equity.

On December 2, Coley Corp. reacquired 2,000 shares of its $2 par value common stock for $27 each. On December 20, Coley Corp. reissued 800 shares for $15 each. Which of the following is correct of the journal entry for the reissued shares?

Credit Treasury Stock $21,600
WHY?
Treasury Stock should be credited for the COST of the shares:
First Journal Entry:
Treasury Stock 54,000
Cash 54,000

Assets = Liabilities + Shareholders' Equity (Class.)
-112,000 -112,000 ContriCap
Second Journal Entry:
Cash 12,000 (800 x 15)
Treasury Stock 21,600 (27 x 800)


Both cash and shareholders' equity have been reduced. The cash to pay for the shares and the number of shares outstanding have been reduced.

Panhandle Corporation was organized on January 3, 2010. The firm was authorized to issue 200,000 shares of $5 par common stock. During 2010, Panhandle had the following transactions relating to shareholders' equity:

Issued 60,000 shares of common stock at $7 per share.
Issued 40,000 shares of common stock at $8 per share.
Reported a net income of $200,000.
Paid dividends of $100,000.

What is total Paid-in capital at the end of 2010?

$740,000.
WHY?
60,000 x 7 = 420,000
40,000 x 8 = 320,000
420,000 + 320,000 = 740,000
Total

Which of the following would be an example of a period
cost?
a) research and development
b) general accounting
c) all of these.
d) selling and marketing

c) all of these.

Period costs are costs which are expensed immediately, such as office salaries and selling expenses, whether or not the goods are sold.
Remember that all costs that are NOT product costs (those costs associate with production of the actual product) are period cost. Also known as the "cost of running a company" or "fixed cost".

Costs are subdivided into what two major functional categories?

prime and conversion

The Cowboy company makes crab pots. Last month, direct materials costing 252,000 were put into production. Direct labor of $156,000 was incurred and overhead equaled $168,000. Selling and administrative expenses totaled $132,000 for the month and the company manufactured 3,000 crab pots.

Compute the total conversion cost.

$324,000

Conversion costs = Direct labor + overhead costs
Direct materials are obviously neither. Selling and administrative expenses are not direct labor or overhead.
So, 156,000 + 168,000 = 324,000

Pete Company manufactures footballs. The management accountant wants to calculate the fixed and variable costs associated with the leasing of machinery. Data for the past four months were collected.

Month Lease cost Machine hours
April $21,000 550
May 17,000 400
June 19,000 510
July 22,230 570
Using the high-low method calculate the fixed cost of leasing.

$4,694

Find Highest and Lowest lease cost
Subtract lowest cost from highest cost: 22,230 - 17,000 = 5,230
Subtract lowest machine hours from highest hours: 570 - 400 = 170
Divide these totals (cost by machine hours) to get the variable cost: 5,230 / 170 = 30.76470588235294
Multiply the variable cost by the highest machine hours and subtract from the highest lease cost to get the fixed cost of leasing:
30.76470588235294 * 570 = 17535.88235294118
22230 - 17535.88235294118 = 4694.11764705882 or 4694

Two methods used to determine equivalent units of production in process costing are:

weighted average and FIFO.
WHY?
Equivalent units of production assumes that production uses FIFO. FIFO method emphasizes current period costs and production.
The WA method combines the beginning work in process & current period production. The FIFO Method separates them.

Which of the following statements is NOT true about overhead?

Overhead costs are NOT incurred uniformly throughout the year - TRUE (they can differ significantly from one period to the next)

Overhead costs have a definite, identifiable relationship with units produced - FALSE (they do not have a relationship)

Low production in one month would give rise to low unit overhead costs - FALSE (it would give rise to HIGH unit overhead costs)

Overhead costs are NOT directly identifiable with units produced and a low production would not give rise to low unit overhead costs.

Unfavorable variances occur when the actual prices or usage of inputs is greater than standard prices or usage.

Favorable variances occur when the actual prices or usage of inputs is less than the standard prices or inputs.

All unfavorable variances have debit balances

All favorable variances have credit balances

Labor efficiency variance =

(Actual hours worked × Standard rate) − (Standard hours allowed × Standard rate)

Operating leverage is the relative mix of:

fixed and variable costs.
Operating leverage is the ratio of a company's fixed costs to its variable costs.
Here is the formula for operating leverage:
Operating Leverage = [Quantity x (Price - Variable Cost per Unit)] / Quantity x (Price - Variable Cost per Unit) - Fixed Operating Cost

Asset turnover ratio =

Sales revenue / Total assets

Bobick Company provided the following information for last year:

Operating income
$64,000

Sales
$200,000

Beginning operating assets
$387,000

Ending operating assets
$413,000

Bobick's turnover ratio for last year was:

0.5
Asset turnover ratio = Sales revenue / Total assets
Only count the sales revenue, not the operating income.
Then, divide that by the average of the beginning and ending asset amounts (200,000 / 400,000)

Aerotoy Company makes toy airplanes. One plane is an excellent replica of a 737; it sells for $5. Vacation Airlines wants to purchase 12,000 planes at $1.75 each to give to children flying unaccompanied. Costs per plane are as follows:

Direct materials $1.00
Direct labor 0.50
Variable overhead 0.10
Fixed overhead 0.90

No variable marketing costs would be incurred. The company is operating significantly below the maximum productive capacity. No fixed costs are avoidable. However, Vacation airlines wants its own logo and colors on the planes. The cost of the decals is $0.01 per plane and a special machine costing $1,500 would be required to affix the decals. After the order is complete, the machine would be scrapped. Should the special order be accepted?

Yes, income will increase by $180.

Revenues ($1,75 x 12,000) $21,000
Less variable costs:
Direct materials ($1 x 12,000) $12,000
Direct labor ($.50 x 12,000) $6,000
variable overhead ($.10 x 12,000) $1,200
decals ($.01 x 12,000) $120
(19,320)
Less machine cost (1,500)
Gain on special order $180

Accept special order because income will increase by $180.

Delson Company produces two types of piano legs, plain and fancy, with unit contribution margins of $8 and $12, respectively. Each piano leg must spend time on a special machine. The firm owns four machines that together provide 10,000 hours of machine time per year. The plain leg requires 0.25 hours of machine time, the fancy leg requires 0.5 hours of machine time.

How many of each type of leg must be sold to optimize total contribution margin?

40,000 plain legs; 0 fancy legs


Plain Fancy
(1) contribution margin per unit $8 $12
(2) required machine time .25 .5
CM per hour of machine time $32 $24
Since plain legs yields $32 of contribution margin per hour of machine time, all machine time should be devoted to the production of plain legs.

plain legs = 10,000 total hours / .25 hour per plain legs = 40,000 units

optimal mix: plain 40,000 units, fancy 0 units

Sales - (direct labor + direct materials) = Contribution margin
Price - Variable Costs Per Unit = Contribution Margin Per Unit
Contribution Margin Per Unit x Units Sold = Product's Contribution to Profit
Contributions to Profit From All Products - Firm's Fixed Costs = Total Firm Profit
20,000 8 + 10,000 12 = 280,000
40,000 8 + 0 12 = 320,000
0 8 + 10,000 12 = 120,000
10,000 8 + 0 12 = 80,000
0 8 + 20,000 12 = 240,000

Residual income is calculated as:

operating income - (minimum rate of return x average operating assets).
Residual income is the net operating income that is earned by the investment center. This income is the earning that is above the minimum target return. This means that a residual income is the excess income earned on the return on investment.

Hillandale Company manufactures overalls. During the year, it manufactured 125,000 overalls, using 2.9 hours of direct labor at a rate of $6.25 per hour. The materials and labor standards for manufacturing the overalls are as follows:

Direct materials (5 yards of denim @ $2 per yard)
$10

Direct labor (3 hours @ $6 per hour)
18

It tood Hillandale 600,000 yards at $1.95 per yard to make the 125,000 overalls.

What is Hillandale's labor efficiency variance?

$75,000 F

SH = 3 x 125,000 = 375,000

AH = 2.9 x 125,000 = 362,000

LEV = (AH - SH)SR

=(362,500 -375,000)($6)

=$75,000F

To calculate a direct labor efficiency variance, the formula is
Actual Units Produced × Standard Direct Labor Hours Per Unit = Standard Direct Labor Hours Allowed
Standard Direct Labor Hours Allowed− Actual Direct Labor Hours Used = Difference
Difference × Standard Direct Labor Rate = Direct Labor Efficiency Variance

Gentry Company produces speaker systems for trucks. Estimated sales (in units) in January are 20,000; in February 25,000; and in March 22,000. Each unit is priced at $45. Gentry wants to have 25% of the following month's sales in ending inventory. That requirement was met on January 1.

Each speaker system requires 2 boxes and 10 yards of wire. Boxes cost $5 each and wire is $0.90 per yard. Gentry wants to have 30% of the following month's production needs in ending raw materials inventory. On January 1, Gentry had 9,000 boxes and 100,000 yards of wire in inventory.

How many boxes does Gentry expect to purchase in January?

48,050
WHY?

30% of 20,000 = 6,000
30% of 25,000 = 7,500
30% of 22,000 = 6,600

Which of the following is part of the financial budget?

Cash Budget

Kramer, Inc., manufactures a product that passes through two processes: mixing and molding. all manufacturing costs are added uniformly in the mixing department.

Information for the mixing department for April follows:

Work in process, April 1:
Units (35% complete) 5,000

Direct materials $24,000

Direct labor $30,000

Overhead $10,000

During April, 25,000 units were completed and transferred to the molding department. The following costs were incurred by the mixing department during April:

Direct materials $90,000

Direct labor $120,000

Overhead $30,000

By April 30, 2,500 units that were 80 percent complete remained in Mixing. Kramer uses the weighted average method.

Kramer's total costs to account for would be:

$304,000
Why?
24,000 + 30,000 + 10,000 + 90,000 + 120,000 + 30,000 = 304,000

Rizzo Manufacturing produces two types of cameras: 35mm and digital. The cameras are produced using one continuous process. Four activities have been identified: machining, setups, receiving, and packing. Resource drivers have been used to assign costs to each activity. The overhead activities, their costs, and the other related data are as follows.

P MHrs Setups RO PO
35mm 10,000 100 200 400
Digital 10,000 250 800 2,000
Costs $60K $40K $8K $24K

Calculate the total overhead assigned to the 35mm cameras using packing orders to calculate a plantwide rate.

$22,000
WHY?
Add all overhead costs, first:
60,000 + 40,000 + 8,000 + 24,000 = 132,000
Then divide the 400 packing orders by 400 + 2,000 to get .166...
132,000 * .166... = 22,000
Factory overhead is the costs incurred during the manufacturing process, not including the costs of direct labor and materials. Factory overhead is normally aggregated into cost pools and allocated to units produced during the period. It is charged to expense when inventory is sold as finished goods. The allocation of factory overhead to units produced is avoided under the direct costing methodology, but mandated under absorption costing.

Which of the following would be an example of a period cost?
a) all of these.
b) selling and marketing
c) research and development
d) general accounting

a) all of these.
Remember that all costs that are NOT product costs (those costs associate with production of the actual product) are period cost. Also known as the "cost of running a company" or "fixed cost".

On September 1, 2010, Floral co. signed an $200,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2011. Floral co. should report interest payable at December 31, 2010, in the amount of:

$6,000
WHY?
200,000 * 0.09 = 18,000
18,000 / 12 = 1,500
1,500 * 4 (Sep, Oct, Nov, Dec) = 6,000

Which of the following is not a primary source of corporate debt financing?
1) Bonds.
2) Notes.
3) Leases.
4) Stocks.

4) Stocks.
WHY?
Stocks don't attract interest.

On January 1, 2010, Cow Farming Inc. purchases a tractor for $200,000 which has an expected useful life of 10 years and an estimated residual value of $10,000. What would the accumulated depreciation be on June 30, 2016, assuming Future Farming Inc. uses straight-line method for depreciation?

$123,500
Count the first year as part of the 10 years. As of June 30, 2016, the life would be 6.5.
The accumulated depreciation is calculated as follows:
$200,000 - 10,000 / 10 = 19,000
Always subtract the residual value!
19,000 * 6.5 = $123,500

Curtis Enterprises purchased equipment for $144,000 on January 1, 2010. The equipment is expected to have a five-year life, with a residual value of $12,000 at the end of five years. Using the straight-line method, depreciation expense for 2011 and the book value at December 31, 2011 would be:
1) $26,400 and $91,200.
2) $57,600 and $74,400.
3) $28,800 and $43,200.
4) $26,400 and $39,600.

$26,400 and $91,200.

Accumulated depreciation = Cost - residual value / life
144,000 - 12,000 / 5 = 26,400

Book Value = Cost - accumulated depreciation
144,000 - (26,400 * 2) = 91,200

On January 1, Oceanic Airlines sold equipment with an original cost of $450,000 and accumulated depreciation of $300,000 for $200,000 cash. How does this transaction affect the accounting equation?

Increase assets by $50,000 and increase stockholders' equity by $50,000
$450,000 - 300,000 = 150,000
$200,000 - 150,000 = 50,000

At December 31, 2009, ABC's inventory consists of 160 units of Inventory Item A, that has a cost of $3 per unit and a market value of $4 per unit; and 140 units of Inventory Item B, that has a cost of $8 per unit and a market value of $7 per unit. ABC applies LCM on an item-by-item basis. What should be the dollar amount of inventory presented on ABC's 12/31/09 balance sheet?

$1460

most businesses value inventory based on actual cost, but some record the value as the lower of cost of market value, whichever is LESS.

A) 160 @ 3 = 480
B) 140 @ 7 = 980
Total = 1,460

At January 1, 2009, Iverson Co., which uses a weighted-average cost-flow assumption, had 30 units of inventory that had cost $7 per unit. On January 4, Iverson purchased an additional 40 units for $9 per unit; and on January 19, they purchased an additional 50 units at $12 per unit. During January, Iverson sold 114 units for $15 per unit. How much was Iverson's cost of goods sold for January 2009?

$1,112
30 * 7 = $210
40 * 9 = $360
50 * 12 = $600
_____________
210+360+600 = 1,170
30+40+50 = 120
1,170/120 * 114 = 1,111.5 or 1,112

The weighted average cost method uses the average of the costs of the goods to assign costs. In other words, weighted average uses the formula: Total cost of items in inventory available for sale divided by total number of units available for sale.

On April 4, 2009, Xavier Co. purchased $1,400 of inventory, terms 5/10, n/30. Xavier paid the vendor for the goods on April 11. Xavier uses a perpetual inventory system. The journal entry to record this payment would include:

A credit to inventory for $70

Under perpetual inventory system, a purchase is recorded by debiting inventory account and crediting accounts payable assuming that the purchase is on credit. The journal entry is shown below:
Inventory — —
Accounts Payable — —

HOWEVER, a purchase discount will reduce the inventory directly. Thus:

Accounts Payable — —
Inventory — —

An overstatement of Fortune's Co.'s 2009 ending inventory would cause:

An overstatement of Fortune Co.'s 2009 net income.

In which of the following inventory cost flow assumptions does the flow of costs always correspond exactly to the physical flow of the goods?
1) LIFO
2) Average cost
3) FIFO
4) Specific identification

Specific identification

On December 29, 2009, Innovator Co., purchased $3,200 of goods from Eagleton Co., FOB destination. The goods were shipped the following day and were received by Innovator on January 3, 2010. How should these goods appear on the December 31, 2010, balance sheets of Innovator and Eagleton respectively?

None on Innovator's balance sheet and all $3,200 on Eagleton's balance sheet.
Why?
FOB (Freight On Board) Destination and FOB Shipping specifies whether the buyer or seller owns the goods, and therefore, who pays for the shipping and includes the items in their inventory. FOB Destination means that the seller owns the goods until the buyer receives them.
In the past, you would be able to determine when title transferred for goods based on the FOB point. For example, at year- and period-end goods in transit under "FOB destination" (North American usage) appear on the seller's balance sheet but not in the buyers balance sheet, as the risk and rewards of ownership change to the buyer at the "destination" port.

On September 27, 2009, Ichi Co., which uses a perpetual inventory system, purchased 100 units of Product W from Howard Co. for $7 per unit. On October 13, Ichi returned 5 units to Howard because they were defective. The journal entry to record this return would be:

Debit accounts payable and credit inventory.
(Recreate journal entry for original transaction)
Units 700
Accounts Payable 700
In perpetual inventory system, merchandise inventory and cost of goods sold are updated continuously on each sale and purchase transaction. Some other transactions may also require an update to inventory account for example, sale/purchase return, purchase discounts etc. Purchases are directly debited to inventory account whereas for each sale two journal entries are made: one to record sale value of inventory and other to record cost of goods sold. Purchases account is not used in perpetual inventory system.

As of October 1, 2009, Cowboy Co. had a balance in accounts receivable of $300,000 and the net realizable value of their accounts receivable was $295,000. On October 2, Cowboy wrote off a $5,000 bad debt. What is the net realizable value of Cowboy's accounts receivable after this write-off?

$295,000
Writing off bad debt does not affect the balance of the receivables account.
Show journal entry of write-off

On September 1 of the current year Middelton Corp. issues cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp report during the current year?

$40.
1000 * .12 / 3
You divide by three because the note was accepted in September, so it was only valid for remaining 1/3 of the year.

1000 x 12% x (4/12)

On March 1 of the current year Ford Co. loaned $100,000 to a supplier and accepted an 10%, 18-month note from the supplier. The journal entry to record the issuance of the note would include a:

Debit to notes receivable for $100,000

Notes Receivable $100,000
Cash $100,000

Which of the following does not change the balance in the accounts receivable account?
1) Collections from customer accounts
2) Returns on credit sales
3) Write-offs
4) Bad debts expense adjustment

Bad debts expense adjustment

Why?

F13 n/r and interest

The following financial information is from Morgan Lab Supplies adjusted trial balance:

Accounts payable $15,000
Accounts receivable10,500
Cash 9,500
Common Stock 12,000
Cost of goods sold 47,500
PPE 70,000
Inventory 40,000
Notes payable (due in 6 mos) 43,000
Operating expenses 35,000
Retained earnings 5,000
Sales revenue 137,500

What amount should Morgan report as Stockholders' Equity for the current year?

$72,000
WHY?
Assets - Liabilities = Stockholders' Equity

Asset accounts: accounts receivable, cash, inventory, PPE.
Liability accounts: accounts payable, notes payable.

COGS and operating expense are expense accounts, and sales revenue is a revenue account. Common stock and retained earnings are equity accounts.

So, 10,500 + 9,500 + 40,000 + 70,000 - 15,000 + 43,000 = 72,000

Stockholders' equity is made up of a company's issued common stock, preferred shares, warrants and accumulated profits, known as retained earnings. Stockholders' equity is the ownership portion of a company's capital structure, the other portion being long-term debt. The capital structure is how a company finances the purchase of assets, the development of projects and the servicing of liabilities. Growth of stockholders' equity is a sign that a company is operating profitably. There are several ways to increase stockholders' equity.

On March 3, Cobra Inc. purchased a desk for $450 on account. On March 22, Cobra purchased another desk for $500 also on account, and then on March 24, Cobra paid $400 on account. At the end of March, what amount should Cobra report for desks (assuming these two desks were the only desks they had)?

$950.

The accounts payable account has a beginning balance of $12,000 and the company purchased $50,000 of supplies on account during the month. The ending balance was $10,000. How much did the company pay to creditors during the month?

$52,000.

The following table contains financial information for Fisher Inc. in 2010 before closing entries:

Cash $26,000
Common Stock $40,000
Supplies $ 4,000
Other Expenses $ 1,500
Accounts Payable $20,000
Revenues $40,000
Wage Expense $ 3,000
Prepaid Rent $ 4,000
Dividends $ 3,000
Equipment $45,000
How many of the above accounts are permanent?

6
WHY?
Permanent accounts are balance sheet accounts. They are not closed after each period. Their balances are carried forward into the next period. Permanent accounts are also called real accounts.
Cash, Common Stock, Accounts Payable, Prepaid Rent, Dividends, and Equipment are balance sheet accounts.
The Prepaid Rent does not count as a regular expense because the expense is deferred.
Temporary accounts are closed at the end of each period. These are mostly income statement accounts, except for a distribution account that is an equity statement account. Temporary accounts are also called nominal accounts.
The process of transferring the balances from the temporary accounts to the permanent account (i.e., the Retained Earnings account), is referred to as closing the accounts or closing the books.

Which financial statement reports the result of a firm's operations across a specific time period?

Income Statement

Adjusting entries:
1) Usually are recorded at the beginning of the accounting period.
2) Adjust the balance of revenue and expense accounts to zero.
3) Always change at least one income statement account balance and one balance sheet account balance.
4) Can include the cash account.

Always change at least one income statement account balance and one balance sheet account balance.

If Willis Corp assesses their supplies at the end of the period and discovers that the supplies present are less than amount of supplies currently listed in the account on the books, what type of adjusting entry should be made?

debit Supplies Expense, credit Supplies.

The journal entry to record the transaction would be:
Cash (A) $20,000
Unearned Revenue (L) $20,000
(increased assets, increased liabilities)

Allen Company has had a net income of $15,000, $8,000, $19,000, and $6,000 over the first four years of the company's existence. If the average amount of dividends paid over the last four years is $1,500, what is the ending retained earnings balance?

$42,000

To answer this question, look at the RE T-account. Remember that since it is a stockholder's equity account it carries a balance on the credit (right) side. We also know that Net Income affects the RE account by INCREASING the T-account through closing entries on the credit side and dividends DECREASE the T-account in closing entries on the debit side. Since there is an average of 1,500 of dividends paid of the last four years you can debit the RE account 1,500 for each each.

Retained Earnings
|$-0- beg. bal
$1,500|$15,000 Net Income
$1,500|$8,000 Net Income
$1,500 |$19,000 Net Income
$1,500| $6,000 Net Income
??? Ending Balance

Now figure the ending balance by adding up the credit side and subtracting the debit side. 48,000 - 6,000 = $42,000

Creditors' claims to a corporation's resources are referred to as:
1) Liabilities
2) Stockholders' equity
3) Dividends
4) Assets

Liabilities

Liabilities are debts that a corporation owes to other entities thus a creditor's claim on a company's resources is a liabiltiy (as opposed to an owner's claim on a company's resources--stockholder's equity).

Which statement below best describes the accounting equation?
1) Equality of revenue and expense transactions over time.
2) The change in retained earnings equals net income less dividends.
3) Resources of the company equal creditors' and owners' claims to those resources.
4) Financing activities equal investing and operating activities.

Resources of the company equal creditors' and owners' claims to those resources.

The accounting equation is Assets = Liabilities + Stockholders Equity.
Assets are resources OWNED by a company
Liabilities are debts or services OWED by a company
Stockholders Equity represents owners claims to the resources of a company.

If a company has stockholders' equity of $100,000 at the end of the year, which of the following statements is always true?
1) Total revenues earned during the year equal $100,000.
2) The company's assets exceed liabilities by $100,000.
3) The company has issued $100,000 of common stock.
4) Net income for the year equals $100,000.

2) The company's assets exceed liabilities by $100,000.

Remember that A = L + SE which means that if SE = 100,000 Assets must be $100,000 greater than liabilities to make this equation true.

Given the information below about David Corp, how much dividends did the company pay?
Beginning retained earnings: $35000
Ending retained earnings: $95000
Increase in cash $25000
Net Income $85000
Change in S/H's equity: $20000

$30000
1) Record the total retained earnings as it appears on the balance sheet at the beginning of the period.
2) Locate the net income for the period on the income statement for the period.
3) Add the net income and the beginning retained earnings. This will give you the retained earnings before any dividends are paid.
4) Subtract the retained earnings for the end of the period for the total amount paid in dividends.

FOR PER SHARE PAYOUT AMOUNT: Divide the dividend total by the number of shares outstanding as listed on the balance sheet for the dividend paid per share.


On questions like this watch out for extra information (or what they call "distractors"). You should use a T-account to organize RELEVANT information.

Retained Earnings
| $35,000 beg. bal
??? Div | $85,000 Net Income
$90,000 End. Bal

Add the credits (remember that because retained earnings is a stockholder's equity account it has a normal credit balance) then subtract the debits to get the ending balance. You will use some simple algebra:

35,000 + 85,000 - Div = 90,000
120,000 - Div = 90,000
30,000 = Dividends

Sparky's Revenge provided the following sales information for the coming year:
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Units: 40000 40000 30000 80000
Avg $/unit 5 5 5 6
Assuming that the beginning inventory is 3000 units and that the company policy is to have 25% of the next quarter's sales in inventory, which quarter will have the lowest production?

Answer: Quarter 2
Qtr 1 Qtr 2 Qtr 3 Qtr 4
Sales 40000 40000 30000 80000
DEI (25%) 10000 7500 20000
Units req. 50000 47500 50000
Beg. Inv. (3000) (10000) (7500)
Prod req 47000 37500 42500

Which of the accounts are decreased on the debit side and increased on the credit side?
1) Liabilities, stockholders' equity, and revenues.
2) Dividends, liabilities, and assets.
3) Expenses, dividends, and stockholders' equity.
4) Assets, dividends, and expenses.

1) Liabilities, stockholders' equity, and revenues.

The best trick to remembering debit and credit balances is "DEALOR" here is how it works:

___________
D E A | L O R
(debit)| (credit)
Dividends
Expenses
Assets
_________
Liabilities
Owner's (Stockholder's)Equity
Revenues

If Willis Corp makes a sale in year 1 but provides the services in year two, what adjusting entry is required in Year 2 when services are rendered?
1) Debit revenues, credit accounts receivable.
2) Debit cash; credit revenues.
3) Debit accounts receivable, credit revenues.
4) Debit unearned revenues, credit revenue.

4) Debit unearned revenues, credit revenue.
Original journal entry:
Debit Cash $
Credit Unearned Revenue $

On September 1, Morgan Lab Supplies purchased $30,000 in inventory on account. How does this transaction affect the accounting equation?
1) Increase assets by $30,000 and increase liabilities by $30,000
2) Increase assets by $30,000 and decrease liabilities by $30,000
3) Decrease assets by $30,000 and increase liabilities by $30,000
4) No effect

1) Increase assets by $30,000 and increase liabilities by $30,000

Which financial statement has three major sections of operating, investing, and financing?
1) Income Statement
2) Statement of Retained Earnings
3) Balance Sheet
4) Statement of Cash Flows

4) Statement of Cash Flows

Which of the following accounts will have a non-zero balance on the post-closing trial balance?
1) Insurance expense
2) Service revenue
3) Cost of goods sold
4) Prepaid insurance expense

4) Prepaid insurance expense

The employees of Neat Clothes work Monday through Friday. Every other Friday the company issues payroll checks totaling $32,000. The current pay period ends on Friday, January 3. Neat Clothes is now preparing financial statements for the year ended December 31. What is the adjusting entry to record accrued salaries at the end of the year?

1)
Salaries Payable 22,400
Salaries Expense 22,400
2)
Salaries Expense 6,400
Salaries Payable 6,400
3)
Salaries Expense 9,600
Salaries Payable 9,600
4)
Salaries Expense 22,400
Salaries Payable 22,400

4)
Salaries Expense 22,400
Salaries Payable 22,400

2 weeks salary = 32,000
32,000 / 10 (only count working days, not wknds) = 3,200
10 - 3 (January 1, 2, 3) = 7
7 * 3,200 = 22,400
Debit salary expense 22,400

On September 1, 2010, Gold Magazine sold 600 one-year subscriptions for $90 each. The total amount received was credited to unearned subscriptions revenue. What would be the required adjusting entry at December 31, 2010?
1)
Unearned Subscriptions Revenue 36,000
Subscriptions Revenue 36,000
2)
Unearned Subscriptions Revenue 54,000
Subscriptions Revenue 54,000
3)
Unearned Subscriptions Revenue 18,000
Subscriptions Revenue 18,000
4)
Unearned Subscriptions Revenue 18,000
Subscriptions Payable 18,000

3)
Unearned Subscriptions Revenue 18,000
Subscriptions Revenue 18,000

Original Journal Entry:
Cash
Unearned Subscriptions Revenue

600 * 90 = 54,000/12 = 4,500
Sep, Oct, Nov, Dec = 4
4,500 * 4 = 18,000

Debit what was originally credited (unearned)
Credit earned (why?)

Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:
1) Operating, $2,000; financing $16,000.
2) Operating, $0; financing $18,000.
3) Operating, $12,000; financing $6,000.
4) Operating, $18,000; financing $0.

3) Operating, $12,000; financing $6,000.

A company's entry to write off actual bad debts would include a:
1) Credit to allowance for uncollectible accounts.
2) Credit to bad debts expense.
3) Debit to accounts receivable.
4) Credit to accounts receivable.

4) Credit to accounts receivable to decrease the A/R. Show journal entry:
Accounts receivable $Credit
Allowance for bad debts $Debit

As of October 1, 2009, Cuomo Co. had a balance in accounts receivable of $580,000 and an allowance for uncollectible accounts of $6,000. On October 2, Cuomo wrote off a $3,000 bad debt. What is the net realizable value of Cuomo's accounts receivable after this write-off?
1) $586,000
2) $571,000
3) $574,000
4) $577,000

3) $574,000

On September 1 of the current year Walters Co. loaned $70,000 to a supplier and accepted a 3%, 6-month note from the supplier. How much interest receivable should Walters record with respect to this note on December 31, 2009?
1) $1,400
2) $2,100
3) $1,050
4) $700

4) $700

$70,000 x 3% x 4/12 = 700

Prior to year-end adjusting entries, Cowboy Co. had a balance in accounts receivable of $300,000 and an allowance for uncollectible accounts of $5,000. Cuomo then recorded bad debt expense of $3,000. What is the net realizable value of Cuomo's accounts receivable after this adjustment?
1) $292,000
2) $298,000
3) $297,000
4) $295,000

1) $292,000
WHY?

Always use the Allowance method - the direct method is not allowed under the GAAP.

Accounts receivable is overstated. It is what you expect to collect, until the bad debts are specifically identified. We know that some customers do not pay. so what is the real value of the A/R? Note: Bad debt expense is understated.
An estimate can be based on all of these factors:
Size of the receivables
Age of the receivables
Past loss experience

Journal entry of bad debt expense:

SO:
Accounts Receivable 300,000
Less Allowance for UA 5,000
Less Allowance for BD 3,000
Net Accounts Receivable 292,000

NOTE: Accounts receivable is not reduced, but the NET realizable value of accounts receivable is!

On July 10, 2010, Cowboy Co., which uses a periodic inventory system, purchased 20 units from Pete Co. for $10 per unit. On October 13, Cowboy returned 15 units to Pete because they were defective. The journal entry Cowboy Co would record for this return would be:
1) Debit accounts payable and credit inventory.
2) Debit accounts payable and credit purchase returns.
3) Debit purchase returns and credit accounts payable.
4) Debit accounts payable and credit purchases.

2) Debit accounts payable and credit purchase returns.
Original journal entry:
Units 200
Accounts Payable 200
Return journal entry:
.Accounts Payable 150
Purchase Returns 150
Purchases Account and Purchase Returns and Allowances Account are only used in periodic inventory system and are updated continuously. In perpetual inventory system purchases are directly debited to inventory account and purchase returns are directly credited to inventory account.

During periods of inflation, which of the following cost flow assumptions would tend to produce the lowest number for ending inventory?
1) Specific identification
2) FIFO
3) Average cost
4) LIFO

4) LIFO
why?

An understatement of Yardley Co.'s 2009 beginning inventory would cause:
1) An overstatement of Yardley Co.'s 2009 cost of goods sold
2) An understatement of Yardley Co.'s 2009 net income.
3) None of the other answers is correct.
4) An understatement of Yardley Co.'s 2010 net income.

3) None of the other answers is correct.
COGS would only be overstated if it was ENDING inventory.
An understatement of ENDING inventory would cause an understatement of 2009 net income.
2010 net income is not affected, since it is a new accounting period.

On December 7, 2009, XYZ Co. sold 260 units of Product U to a customer for $9 per unit. The goods had cost Ditzler Co. $5 per unit, and XYZ uses a perpetual inventory system. The journal entry to record this sale would not include:
1) A debit to sales for $2,340.
2) A credit to inventory for $1,300.
3) A debit to accounts receivable for $2,340
4) A debit to cost of goods sold for $1,300.

1) A debit to sales for $2,340.
Why?
260 x 9 = 2,340
Under perpetual inventory system, a purchase is recorded by debiting inventory account and crediting accounts payable assuming that the purchase is on credit. The journal entry is shown below:

Inventory — —
Accounts Payable — —

Inventory records for Marvin Company revealed the following:
Date Trans. # of Units Unit Cost Total Cost
Mar. 1 Beg inv 2,000 $1 2,000
Mar. 10 Purch 1,200 2 2,400
Mar. 16 Purch 1,600 3 4,800
Mar. 23 Purch 1,200 4 4,800
Total 6,000 14,000

Marvin sold 4,600 units of inventory during the month. The ending inventory assuming LIFO would be:

$1,400.
$5,400.
$7,200.
$12,600.

$1,400.
Start taking away inventory from the last lots purchased (LIFO):
1200 + 1600 + 1200 + (2000 - 600) = 6000 sold, leaving
1400 first units still in inventory.
1400 x $1 = $1,400

The following information pertains to Julia & Co.:
March 1. Beginning inventory = 30 units @ $5
March 3. Purchased 15 units @ $4
March 9. Sold 20 units @ $8

What is the cost of goods sold for Julia & Co. assuming it uses LIFO?
1) $85
2) $160
3) $100
4) $90

1) $85
20 units sold - 15 were taken from the March 3 transaction ($60), and 5 were taken from beginning inventory (5x5=$25). 60 + 25 = 85

LIFO (last in first out) assumes that the last or latest items bought are the first items to be sold.
In contrast, FIFO (first in, first out) accounting means that the costs assigned to goods are the costs for the first goods bought. In other words, the company assumes that the first goods sold are the oldest or the first goods bought.

At December 31, 2009, Dawkins' inventory consists of 160 units of Inventory Item A, that has a cost of $3 per unit and a market value of $1 per unit; and 140 units of Inventory Item B, that has a cost of $6 per unit and a market value of $8 per unit. Dawkins applies LCM on an item-by-item basis. What should be the dollar amount of inventory presented on Dawkins' 12/31/09 balance sheet?
1) $1,280
2) $1,000
3) $1,320
4) $600

2) $1,000
WHY?
most businesses value inventory based on actual cost, but some record the value as the lower of cost of market value, whichever is LESS.
160 X 1 = 160 (use 1 because it is lower than 3)
140 X 6 = 840 (use 6 because it is lower than 8)
840 + 160 = 1,000

On January 1, Hilton company sold equipment with an original cost of $1,800,000 and accumulated depreciation of $1,200,000 for $800,000 cash. How does this transaction affect the accounting equation?

Decrease assets by $1,800,000 and increase stockholders' equity by $200,000

No effect

Increase assets by $200,000 and increase stockholders' equity by $200,000

Increase assets by $800,000 and increase stockholders' equity by $200,000

Increase assets by $200,000 and increase stockholders' equity by $200,000
WHY?
-$1,800,000.00
$1,200,000.00
____________
-$600,000.00
$800,000.00
____________
$200,000.00

When bonds are issued at a premium, what happens to the carrying value and interest expense over the life of the bonds?
1) Carrying value increases and interest expense decreases.
2) Carrying value and interest expense increase.
3) Carrying value decreases and interest expense increases.
4) Carrying value and interest expense decrease.

4) Carrying value and interest expense decrease.

WHY?

The premium on a bond will decrease interest expense over the life of the bond to the issuer and decrease interest revenue to the investor. The issuer received more than face value when the bond was issued but will repay on the face value. The excess (premium) is amortized over the life of the bond and reduces periodic interest expense. The investor also receives less back at the due date than the amount invested. This difference (premium) reduces the return to less than the cash payments received. (Discount increases interest expense/revenue and premium reduces interest expense/revenue.)

On January 1, 2007 Elliott Medical Supplies, Inc. received cash by signing a note payable for $400,000. The note carries an interest rate of 9% and equal payments of $158,022 are due each December 31. After Elliott makes the first payment of $158,022 on December 31, 2007 what will the balance be in the "Notes Payable" account?
$400,000
$241,978
$364,000
$277,978

$277,978
$400,000 * .09 = 36,000
$400,000 + 36,000 = 436,000
$436,000 - 158,022 = 277,978

When preparing the balance sheet, treasury stock should be
Added in the stockholders' equity section.
Reported as a liability.
Reported as an investment in the asset section.
Subtracted in the stockholders' equity section.

Subtracted in the stockholders' equity section.

The issuer of a 5% common stock dividend to common stockholders should debit retained earnings for an amount equal to the
1) minimum legal requirements.
2) par or stated value of the shares issued.
3) market value of the shares issued.
4) book value of the shares issued.

3) market value of the shares issued.
WHY? Because under 10% is a small dividend??

A company issued 20,000 shares of $1 par value stock for $5 per share. What is true about the journal entry to record the issuance?
1) Credit Additional Paid-In Capital $80,000
2) Credit Cash $100,000
3) Credit Common Stock $100,000
4) Debit Common Stock $100,000

1) Credit Additional Paid-In Capital $80,000
$5 - $1 = $4 * 20,000 = $80,000

Baker Company reflected the following balances in the stockholders' equity section at December 31, 2007: Common Stock, par $15, 60,000 shares outstanding; Preferred Stock, 6%, $100 par, 2,000 shares outstanding. Based on these terms, the preferred stock should receive dividends of $6 per share each year.Baker Co. has not paid any dividends since its formation on January 1, 2005. Assuming that the preferred stock is cumulative and Baker's pays $100,000 in dividends during the current year, how much will the common stockholders receive?
$64,000
$88,000
$36,000
$ 12,000

$64,000

Since the preferred stock is "cumulative" the dividends must be paid first to the preferred stock shareholders for all years 2005, 2006, and 2007 before any dividends can be paid to the common stock shareholders.

preferred stock dividends are paid 6% x $100 = $6 dividends x 2000 shares x 3 years (2005 - 2007) = $36,000 in preferred stock dividends.

Common shareholders split what is left: $100,000 - $36,000 = $64,000

Which of the following would be an example of a fixed cost?
a) property taxes
b) raw materials
c) sales commissions
d) utilities

a) property taxes

Product cost is the sum of:
prime cost and conversion cost.
conversion cost and direct materials.
conversion cost and direct labor.
prime cost and direct labor.

conversion cost and direct materials

The Bayou company makes crab pots. Last month, direct materials costing $126,000 were put into production. Direct labor of $78,000 was incurred and overhead equaled $84,000. Selling and administrative expenses totaled $66,000 for the month and the company manufactured 3,000 crab pots.

Compute the per-unit product cost.

a) $54
b) $68
c) $96
d) $118

c) $96
WHY?
Direct Materials + Direct Labor + Overhead / # of units = per-unit product cost
Selling & admin are NOT manufacturing costs, which are the only costs you use to calculate the per-unit cost.
So: 126,000 + 78,000 + 84,000 / 3,000 = 96

Cowboy Company sells a product for $20, variable costs are $9 per unit, and total fixed costs are $5,040. What is the per unit contribution margin?
a) $9
b) $29
c) $11
d) $20

c) $11
sales price per unit - variable cost per unit = per unit contribution margin
20 - 9 = 11

The document that lists the total cost for a single job is a:
a) job-order cost sheet.
b) none of these.
c) time ticket.
d) purchase order.
e) materials requisition form.

a) job-order cost sheet.

Setups, material handling, and inspection are all possible examples of:
a) product diversity.
b) unit level overhead activities.
c) non-unit level overhead activities.
d) sustainable development.
e) none of these.

c) non-unit level overhead activities.

The budget that described how many units must be produced in order to meet sales needs and ending inventory objectives is the:
a) budgeted income statement.
b) cash budget.
c) none of these.
d) direct materials purchases budget.
e) production budget.

e) production budget.

The materials usage variance is calculated by the equation:

a) (Standard Price x Actual Quantity) - (Standard Price x Standard Quantity).
b) (Actual Price x Actual Quantity) - (Standard Price x Actual Quantity).
c) (Actual Price x Standard Quantity) - (Actual Quantity x Standard Price).
d) (Actual Price x Standard Quality) - (Standard Price x Actual Quantity).
e) None of these.

a) (Standard Price x Actual Quantity) - (Standard Price x Standard Quantity).

Future costs that differ across alternatives are:

a) relevant costs.
b) product costs.
c) variable costs.
d) opportunity costs.
e) sunk costs.

a) relevant costs.

Return on investment (ROI) is calculated as follows:
a) operating income/average operating assets.
b) average operating assets/operating income.
c) (beginning operating assets + ending operating assets)/2.
d) sales/average operating assets.

a) operating income/average operating assets.

Tarzan Company makes jungle gyms for children. The price is $120 and variable expenses are $90 per unit. Total fixed expenses are $253,750. Last year, Tarzan sold 12,000 jungle gyms.

What was the margin of safety for Tarzan last year? (Round to the nearest whole number.)
a) $425,000

b) $106,250

c) $1,014,360

d) $360,000

e) $1,440,000

a) $425,000
WHY?
1. Break even: 253,750/(120 - 90) = 8458.33... units
2. Margin of safety = 12,000 - 8458.33... = -3541.66... units
-3541.66... * 120 = 425,000

Paney Company makes calendars. Information on cost per unit is as follows:

Direct materials $1.50
Direct labor 1.20
Variable overhead 0.90
Fixed overhead 1.00
Variable marketing expense 0.40

Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10.

What is the contribution margin ratio?

a) 50%
b) 44%
c) 40%
d) 36%
e) 60%

e) 60%

Price - Variable Costs Per Unit = Contribution Margin Per Unit

$10 - (1.50 + 1.20 + 0.90 + 0.40) = 6

6/10 = 60%

John Smith has just invested $360,000 in a day spa. He expects to receive income of $80,000 a year, and to have the investment for 10 years. What is the accounting rate of return?
a) 2.222%
b) 450%
c) 45%
d) 22.22%
e) 4.5%

d) 22.22%
WHY?
on a BAII Plus, plug in 10 for N, nothing for I/Y, -360,000 for PV, 80,000 for PMT, and a positive 360,000 for FV. Compute for interest.

In December, Morgan Lab Supplies collected $10,000 in cash for sales from November. Assuming the November transaction was properly recorded, what net effect does the December collection have on the accounting equation?
1) Increase assets by $10,000 and increase stockholders' equity by $10,000
2) Decrease assets by $10,000 and increase stockholders' equity by $10,000
3) Increase assets by $10,000 and increase liabilities by $10,000
4) No effect

4) No effect

Sometimes with these "second" transactions it is easier to write out the initial entry and then the current entry.
Nov.
Accounts Receivable (A) $10,000
Sales Revenue (SE) $10,000
Dec.
Cash (A) $10,000
Accounts Receivable (A) $10,000
If you do not look at both entries you may forget that you need to close out the accounts receivable account now that you have received the cash. If you already provided the service or product then revenue would have been recorded in November along with the A/R.
Since an asset (cash) increased then an asset (A/R) decreased by the same amount, there is no effect to the accounting equation. You can see that the accounting equation was affected in November when revenue was recorded.

Die Hard Company provides services to customers totaling $5,000, for which it billed the customers. How would the transaction be recorded?
Question 5 options:

Debit cash $5,000, credit service revenue $5,000.
Debit accounts receivable $5,000, credit service revenue $5,000.
Debit service revenue $5,000, credit accounts receivable $5,000.
Debit accounts receivable $5,000, credit cash $5,000.

Debit accounts receivable $5,000, credit service revenue $5,000.

Accounts receivable 5,000
Service Revenue 5,000

The statement of cash flows reports cash flows from the activities of:

Operating, purchasing, and investing.
Financing, investing, and operating.
Using, investing, and financing.
Borrowing, paying, and investing.

Financing, investing, and operating.

Cowboy Company purchased a two-year hazard insurance policy on July 1 and recorded the $3,600 premium to prepaid insurance. At its December 31 year-end, Cowboy Company would record which of the following adjusting entries?

Insurance Expense 3,600
Prepaid Insurance 3,600

Insurance Expense 900
Prepaid Insurance 2,700
Insurance Payable 3,600

Prepaid Insurance 900
Insurance Expense 900

Insurance Expense 900
Prepaid Insurance 900

3,600 / 24 * 6 = 900

The prepaid expense will be recognized as expense in the next accounting period to which the insurance expense relates. Therefore, the following accounting entry should be recorded at year-end:

Insurance Expense 900
Prepaid Insurance 900

Expense must be recorded in the accounting period in which it is incurred. Therefore, prepaid expense must be not be shown as expense in the accounting period in which it is paid but instead it must be presented as such in the subsequent accounting periods in which the services in respect of the prepaid expense have been performed.
You should therefore recognize an asset in respect of expense it has paid in advance until such time as the services that are due in relation to the prepaid expense have been performed by the suppliers/contractors. Following accounting entry is required to account for the prepaid expense:

Original Journal Entry:
Debit Prepaid Insurance (Asset)
Credit Cash

On August 1, 2010, Pete Inc. paid $36,000 for 18 months worth of rent on their warehouse. What would be the amount of rent expense in the 2010 financial statements for Rents-A-lot under both the cash-basis and accrual-basis accounting?
1) Cash-basis = $36,000; Accrual-basis = $36,000.
2) Cash-basis = $36,000; Accrual-basis = $10,000.
3) Cash-basis = $60,000; Accrual-basis = $36,000.
4) Cash-basis = $0; Accrual-basis = $24,000.

2) Cash-basis = $36,000; Accrual-basis = $10,000.
Why?
36,000/18 = 2,000
Aug, Sept, Oct, Nov, Dec = 5
5 * 2,000 = 10,000

Assume that net income was $100,000, depreciation expense was $5,000, accounts receivable increased by $7,500 and accounts payable increased by $2,500. The amount of cash flows from operating activities is:
Question 11 options:
1) $110,000
2) $95,000
3) $105,000
4) $100,000

4) $100,000
Why? Because
100,000 + 5,000 - 7,500 + 2,500

On April 1 of the current year, Pete Co. loaned $75,000 to a supplier and accepted a 7%, 20-month note from the supplier. The maturity value of this note is:
1) $80,250
2) $75,000
3) $78,938
4) $83,750

4) $83,750
$75,000 + [75,000 x 7% x (20/12)] = 83,750

The Bayou company makes crab pots. Last month, direct materials costing $126,000 were put into production. Direct labor of $78,000 was incurred and overhead equaled $84,000. Selling and administrative expenses totaled $66,000 for the month and the company manufactured 3,000 crab pots.
Compute the total prime cost.
a) $204,000
b) $288,000
c) $150,000
d) $162,000

Find direct materials cost.
Find direct labor cost.
Prime cost = direct material + Direct Labor
126,000 + 78,000 = 204,000

Which of the following businesses is most likely to use process costing?
a) chemical plant
b) architectural firm
c) dentist's office
d) manufacturer of fine furniture

a) chemical plant
Process costing is appropriate for companies that produce a continuous mass of like units through series of operations or process. Also, when one order does not affect the production process and a standardization of the process and product exists. However, if there are significant differences among the costs of various products, a process costing system would not provide adequate product-cost information. Costing is generally used in such industries such as petroleum, coal mining, chemicals, textiles, paper, plastic, glass, and food.

Which of the following is an advantage of budgeting?
a) provides information useful for control
b) forces managers to plan
c) all of these
d) provides information for improved decision making
e) improves communication

c) all of these

Which of the following is true regarding the disposition of materials and labor variances?
Question 43 options:
a) If the materials price variance is material, it is prorated among Materials Inventory, Materials Usage Variance, Work in Process, and Finished Goods.
b) The materials usage variance and the labor variances, if material, are prorated among Work in Process, Finished Goods, and Cost of Goods Sold.
c)
The variances for materials and labor are closed directly to Cost of Goods Sold regardless of materiality.

d) The materials usage variance and the labor variances are always closed to Variance Expense.
e) The materials usage variance and the labor variances are always prorated among Work in Process, Finished Goods, and Cost of Goods Sold.

At the end of the year, the variances for materials and labor usually are closed to the Cost of Goods Sold. This practice is acceptable provided the variances are not material in amount. If the variances are material, they must be prorated among various accounts. For the materials price variance, it is prorated among Materials Inventory, Materials Usage Variance, Work in Process, Finished Goods, and Cost of Goods Sold. The remaining materials and labor variances are prorated among Work in Process, Finished Goods, and Cost of Goods Sold.

Melody Company sells a product for $14, variable costs are $10 per unit, and total fixed costs are $5,040. What is the per unit contribution margin?

a) $4
b) $10
c) $14
d) $24

Contribution Margin = Revenues - Variable Expenses
a) $4

A company provided the following data:

Sales
$540,000

Variable costs
$378,000

Fixed costs
$120,000

Expected production and sales in units
40,000

What is the break-even point in sales dollars?

a) $171,429

b) 400,000

c) $498,000

d) $150,000

e) $112,500

Break even point = Fixed Expenses ÷ Contribution Margin RATIO
Contribution margin = Revenues - variable expenses
540,000/40,000 - 378,000/40,000 = 162,000/40,000
CM Ratio = Contribution Margin / Sales
162,000/540,000 = 4.05%

540,000 / 40,000 = $13.5 (price per unit)
378,000 / 40,000 = $9.45 (variable costs)
13.50 - 9.45 = 4.05
120,000 / 4.05 = 29629.629...
29629.629... * 13.50 = 400,000

The accounting equation is defined as:

1) Assets = Liabilities - Owners' Equity
2) Liabilities + Revenues = Assets
3) Assets = Liabilities + Owners' Equity
4) Net Income = Revenues - Expenses

3) Assets = Liabilities + Owners' Equity

Kramer, Inc., manufactures a product that passes through two processes: mixing and molding. all manufacturing costs are added uniformly in the mixing department.

Information for the mixing department for April follows:

Work in process, April 1:
Units (35% complete)
5,000

Direct materials
$24,000

Direct labor
$30,000

Overhead
$10,000

During April, 25,000 units were completed and transferred to the molding department. The following costs were incurred by the mixing department during April:

Direct materials
$90,000

Direct labor
$120,000

Overhead
$30,000

By April 30, 2,500 units that were 80 percent complete remained in Mixing. Kramer uses the weighted average method. (Hint: EWIP)

Kramer's cost of April's ending work in process for the mixing department would be:
a) $21,400
b) $19,200
c) $17,500
d) $22,520

d) $22,520
Units completed 25,000
add: EWIP x % completed (2,500 x 80%) 2,000
Equivalent units 27,000

unit cost = [beg. cost (apr.1) + current costs (current apr)] / equivalent units

[(24,000 + 30,000 + 10,000) + (90,000 +120,000+30,000)] / 27,000 = 11.26 (rounded)

cost of EWIP = EWIP equivalent units x unit cost

2,000 x 11.26 = $22,520

GAAP is an abbreviation for:
Question 2 options:
1) Generally applied accounting procedures.
2) Generally accepted accounting principles.
3) Generally accepted auditing practices.
4) Generally authorized accounting procedures.

2) Generally accepted accounting principles.

The financial statement that represents the accounting equation is the:
Statement of stockholders' equity.
Balance Sheet.
Income statement.
Statement of cash flows.

Balance sheet.
The Balance Sheet shows that Assets = Liabilities + Equity

Ramirez Mining Co. (RMC) issued callable bonds on January 1, 2010. RMC's accountant has projected the following amortization schedule from issuance until maturity: (see table in Quiz)

RMC issued the bonds:
1) At par.
2) Cannot be determined from the given information.
3) At a discount.
4) At a premium.

4) At a discount (why?)
If bonds have been issued at a discount, over the life of the bonds, the carrying value of the bonds will INCREASE.

If the bond's interest rate is equal to the current market rate for similar bonds, the bond will sell at par. This means that it will be purchased for exactly the amount listed on the face of the bond. In this case, the carrying value of the bond will always be equal to its face value.

If a bond's interest rate is higher than the current market rate, the bond will sell at a premium. When a bond trades at a price above the face value, it is said to be selling at a premium. Investors will be more attracted to this bond (because of its high interest payments), and thus will be willing to purchase it for more than its face value. The amount paid in excess of the face value is referred to as the bond premium.

If a bond's interest rate is lower than the current market rate, the bond will sell at a discount. The bond will be purchased for less than its face value to compensate for its relatively low interest payments.

Honeydew Company produces two products, a high end laptop computer under the label Bunsen Laptops, and an inexpensive desktop computer under the label Beaker Computers. The total overhead from the two products is $14,000.

The controller has collected the expected annual prime costs for each product, the machine hours, the setup hours, and the expected production.

Bunsen Beaker
Total prime costs $96,000 $102,000
Units 2,000 3,000
Direct Labor Hours 20,000 5,000
Machine Hours 750 1,500
Setup Hours 50 50
Calculate the overhead cost allocated to the Bunsen Laptops, using a plantwide rate based on machine hours.

Question 40 options:
a) $5,600
b) $7,000
c) $11,200
d) $4,667
e) $12,444

750 Bunsen Machine hours / (750 Bunsen Machine hours + 1500 Beaker Machine hours) = (1/3) rate x 14,000 total overhead from the two products = $4,667

Plantwide overhead:
rate, based on budgeted factory overhead cost and budgeted activity, that is established before a period begins.

Also called the Predetermined Overhead Rate = Budgeted Yearly Total Factory Overhead Costs / Budgeted Yearly Activity (direct labor-hours, etc.)
Budgeted activity units used in the denominator of the formula, more often called the denominator level, are measured in direct labor-hours, machine-hours, direct labor costs, or production units.

Weighted Average Method Overview

When using the weighted average method, you divide the cost of goods available for sale by the number of units available for sale, which yields the weighted-average cost per unit. In this calculation, the cost of goods available for sale is the sum of beginning inventory and net purchases. You then use this weighted-average figure to assign a cost to both ending inventory and the cost of goods sold.

Weighted average costing is commonly used in situations where:

Inventory items are so intermingled that it is impossible to assign a specific cost to an individual unit.
The accounting system is not sufficiently sophisticated to track FIFO or LIFO inventory layers.
Inventory items are so commoditized (i.e., identical to each other) that there is no way to assign a cost to an individual unit.

The net result of using weighted average costing is that the recorded amount of inventory on hand represents a value somewhere between the oldest and newest units purchased into stock. Similarly, the cost of goods sold will reflect a cost somewhere between that of the oldest and newest units that were sold during the period.

Sorrell Company makes all its sales on account. Accounts receivable payment experience is as follows:

Percent paid in the month of sale
30%

Percent paid in the month after the sale
60%

Percent paid in the second month after the sale
8%

Sorrell provided information on sales as follows:

May $100,000
June $120,000
July $130,000
August (expected) $150,000

What is budgeted cash to be collected on account for the month of August?

Question 44 options:
a) $54,600
b) $150,000
c) $132,600
d) $45,000
e) $132,000

c) $132,600

120,000 * .08 = 9,600
130,000 * .6 = 78,000
150,000 * .3 = 45,000
___________________
132, 600
OR
Month of Sale (August) 150,000 x 30% = 45,000

Month after sale (July) 130,000 x 60% = 78,000

2 months after sale (June) 120,000 x 8%=9,600

cash collections for August = $132,600

Hillandale Company manufactures overalls. During the year, it manufactured 125,000 overalls, using 2.9 hours of direct labor at a rate of $6.25 per hour. The materials and labor standards for manufacturing the overalls are as follows:

Direct materials (5 yards of denim @ $2 per yard)
$10
Direct labor (3 hours @ $6 per hour)
$18
It took Hillandale 600,000 yards at $1.95 per yard to make the 125,000 overalls.

What is Hillandale's labor efficiency variance?

Question 45 options:
a) $75,000 F
b) $78,125 U
c) $75,000 U
d) $78,125 F

125,000 * 3 = 375,000
125,000 * 2.9 = 362,500
Difference = 12,500
12,500 * 6 (SLR) = 75,000

To calculate a direct materials efficiency variance, the formula is (actual quantity used × standard price) − (standard quantity allowed × standard price).

A negative DMEV is unfavorable, a positive DMEV is favorable.

Darth Company is considering the purchase of new heavy construction equipment that will cost $2,000,000 and have a life of 8 years with no expected salvage value. The expected cash flows associated with the project are as follows:

Year Cash Revenues Cash Expenses & Depreciations

1 $2,400,000 $1,900,000
2 $2,400,000 $1,900,000
3 $2,400,000 $1,900,000
4 $2,400,000 $1,900,000
5 $2,400,000 $1,900,000
6 $2,400,000 $1,900,000
7 $2,400,000 $1,900,000
8 $2,400,000 $1,900,000

What is the average annual income for this project?
a) $2,400,000
b) $62,500
c) $300,000
d) $500,000
e) $1,900,000

$2,400,000 - 1,900,000 = $500,000 (average annual income)
Cost: $2,000,000 - salvage value (0) = 2,000,000
500,000 / 200,000 = .25 or 25% accounting rate of return

Net Income = cash revenues - cash expenses and depreciation

= $2,400,000 - $1,900,000 = $500,000

$500,000 is also the average and annual income because cash revenues, cash expenses, and depreciation are the same every year:

average income = ($500,000 Net Income x 8 years)/8 years = $500,000

Which of the following best describes a revenue recognition. {calc}
1) Paying dividends to stockholders.
2) Owning resources.
3) Providing goods and services to a customer.
4) Receiving cash from a customer.

3) Providing goods and services to a customer.

The revenue recognition principle states that revenue will be recognized when EARNED (not necessarily when cash is received).

Production cost is the sum of:
prime cost and conversion cost.
conversion cost and direct materials.
conversion cost and direct labor.
prime cost and direct labor.

conversion cost and direct materials.

Which of the following is a primary source of corporate debt financing?
A) Accounts receivable.
B) Accounts payable.
C) Inventories.
D) Bonds.

D) Bonds.

If bonds are issued with a stated interest rate higher than the market interest rate, the bonds will be issued at
A) A premium.
B) Face amount.
C) A discount.
D) A discount or premium depending on the maturity date.

A) A premium.

On September 1 of the current year Robinson Inc. loaned $80,000 to a supplier and accepted a 5%, 7-month note from the supplier. How much interest receivable should Robinson record on September 1, of the current year when the note is issued?

1) $1,333
2) None
3) $2,333
4) $4,000

2) None
No interest has accrued on issue date. Interest should be recorded when earned (monthly).

Stimpleton Company engages in the following cash payments:
Purchase equipment: 2,000
Pay rent: 500
Repay loan to the bank: 5,000
Pay workers' salaries: 1,000

What is the total amount of cash paid for operating activities?
1) $6,000.
2) $2,000.
3) $7,000.
4) $1,500.

4) $1,500.
500 + 1,000

During October, The Allen Corp received $20,000 in advance for managment fees to be completed in future years. How does this transaction affect the accounting equation?
Question 4 options:
1) Increase assets by $20,000 and increase liabilities by $20,000
2) Increase assets by $20,000 and increase stockholders' equity by $20,000
3) No effect

4) Decrease assets by $20,000 and increase liabilities by $20,000

3) Increase assets by $20,000 and increase liabilities by $20,000
WHY?
The journal entry to record the transaction would be:

Cash (A) $20,000
Unearned Revenue (L) $20,000
(increased assets, increased liabilities)

On September 1 of the current year Walters Co. loaned $80,000 to a supplier and accepted a 5%, 7-month note from the supplier. Assuming the supplier pays the note in full at the due date, the journal entry to record receipt of this payment would include:

Question 13 options:
1) A credit to interest payable for $100

2) A credit to interest revenue for $1,000

3) A credit to cash for $80,000

4) A credit to note receivable for $82,333

2) A credit to interest revenue for $1,000

Cash 82,333
Notes Receivable 80,000
Interest Receivable 1,333
Interest Revenue 1,000

Some interest was earned (but not paid) in the first year and some interest was earned in the the second year.
80,000 x .05 = 4,000 / 12 = 333.33 x 4 = 1,333 interest earned the first year.

Future costs that differ across alternatives are:
Question 46 options:
a) variable costs.
b) product costs.
c) opportunity costs.
d) sunk costs.
e) relevant costs.

e) relevant costs

Relevant costs possess two characteristics: (1) they are future costs AND (2) they differ across alternatives.
Sunk costs are irrelevant future costs that do not differ between alternatives.

On February 1, 2010, Gundy Corp. issues cash and accepts a $10,000 note that offers 5% interest and is due in six months. Record the transaction on August 1, 2010, when the borrower pays Gundy Corp the correct amount owed.

Question 13 options:
1)
Cash 2,200
Notes Receivable 2,200
2)
Cash 10,250
Interest Revenue 250
Notes Receivable 10,000
3)
Cash 2,000
Interest Revenue 200
Notes Receivable 2,200
4)
Cash 2,100
Notes Receivable 2,100

2)
Cash 10,250
Interest Revenue 250
Notes Receivable 10,000
WHY?

On January 2, 2009, Yoo Corporation, which uses a periodic inventory system, purchased 200 units of Product E for $14.49 per unit on account. Yoo expects to be able to sell 100 of these units within a week of their receipt. The journal entry that Yoo should make to record this purchase would be:
Question 17 options:
1) Debit inventory and credit accounts payable.
2) Debit purchases and credit accounts payable.
3) Debit both inventory and cost of goods sold; and credit accounts payable.
4) Debit inventory and credit notes payable.

2) Debit purchases and credit accounts payable.

Purchases 2,898
Accounts Payable 2,898

Flying High Company manufactures model airplanes. During the month, it manufactured 10,000 airplanes. Each one used an average of 6.5 direct labor hours and an average of 1.5 sheets of aluminum. It normally manufactures 7,500 airplanes. materials and labor standards for making the airplanes are as follows:

Direct Materials (1 sheet of aluminum @ $10.00)
$10.00

Direct Materials (other accessories @ $8.75)
8.75

Direct Labor (6 hours @ $7.00)
42.00

Compute the standard number of sheets of aluminum allowed.

Question 45 options:
a) 11,250 sheets
b) 7,500 sheets
c) 10,000 sheets
d) 15,000 sheets

= 1 sheet (from DM) x 10,000 airplanes = 10,000 sheets
standard quantity of materials allowed = unit quantity standard x actual output

Which of the following is true regarding variances?
Question 43 options:
a) Favorable variances are always debits.
b) None of these are true.
c) Unfavorable variances occur whenever actual prices or actual usage of inputs are greater than standard prices or standard usage.
d) Favorable variances occur whenever actual prices or actual usage of inputs are greater than standard prices or standard usage.
e) Unfavorable variances are always credits.

c) Unfavorable variances occur whenever actual prices or actual usage of inputs are greater than standard prices or standard usage.

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