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multiple choice practice

Expenditures capitalized as long-lived assets generally include those expenditures that:

are material and that have an economic benefit to the entity that extends beyond the current year


is not a term that describes part of the accounting for long-lived assets

Accounting for natural resources

involves estimating the quantity of the natural resource to be recovered

When a firm buys land on which there is a building, and the building is torn down so that an appropriate new building can be constructed on the land

the total cost of the land and old building are capitalized as land cost.

The net book value of a depreciable asset is

the difference between the asset's cost and accumulated depreciation.

When a company issues a bond at a premium:

the investors' interest income will be less than the interest received each year.

If the market price of a bond exceeds its face amount:

the coupon rate is more than the market interest rate.

net assets.

Another term frequently used to describe owners' equity is:

Accumulated depreciation.

is not an owner's equity account?

When the high-low method of estimating a cost behavior pattern is used

the cost and volume data must be reviewed for outliers.

The contribution margin format income statement is organized by:

cost behavior classifications.

The concept of operating leverage refers to

Operating income changes proportionately more than revenues for any given change in activity level.

variable cost

The cost of a single unit of production in excess of the breakeven point in units

An example of a cost likely to have an indirect relationship with products being manufactured

electricity costs for packaging equipment


costs that would result from selecting one alternative instead of the other.

Sunk Cost

cost classifications would not be considered relevant in comparing decision alternatives

Opportunity Costs

foregone benefits

The potential rental value of space used in the manufacturing process:

is an opportunity cost if production is not outsourced.


A process for recognizing the cost of an asset that should be matched against revenue earned as a result of using the asset

The entry to record depreciation on long-term assets

decreases total assets and decreases earnings before taxes

depreciation method results in equal depreciation expense for each year of an asset's useful life


When a depreciable asset is sold:

a gain arises if the sales proceeds exceed the net book value.

The present value concept is widely applied in business because:

money has value over time.

If you owed $200 at the end of each year for the next three years, the present value of the obligation would be:

less than it would be if you had to pay $300 today and $300 at the end of this year.


Noncurrent, intangible assets such as leasehold improvements, patents, and copyrights are all subject to:

Goodwill is an asset that arises because the present value of an acquired company's estimated future earnings, discounted at the acquiring firm's ROI is

more than the fair market value of the net assets of the acquired company.

Accrued expense examples

payroll taxes owed by the employer for the year. property taxes owed to local governments for the year. salaries and wages owed to employees at the end of the year. estimated product warranty costs on products sold during the year.

When choosing between issuing common stock and issuing bonds, managers of corporations should take into account

the tax advantages to the company of deducting the interest costs on bonds. the demands placed upon their company by stockholders who expect to be paid quarterly dividends. the risks associated with having to make fixed interest payments on bonds at predetermined times. the impact that the choice will have on their company's leverage.

The recognition of liabilities often results in:

the recognition of expenses. a more conservative representation of financial position. a decrease in net income. a decrease in ROI.

uncurrent liability

bonds payable

current liability

accounts payable. notes payable. unearned subscription revenue. interest payable.

In reference to the Discount on Bonds Payable and Premium on Bonds Payable accounts

The Discount on the Bonds Payable account is amortized by a credit entry each period

When borrowing money, the most important objective of the borrower should be to

minimize the APR

Interest on a note payable is most appropriately accrued:

as of the end of each accounting period during which the note is a liability.


Bonds can be sold at a discount, par, or premium.

Financial leverage

The difference between the rate of return earned on assets (ROI) and the rate of return earned on owners' equity (ROE).

Consolidated financial statements refer to

The parent's and subsidiary's financial statements are reported on a combined basis.

Rights for common stock ownership

Electing directors. Liability limited to amount invested. Approving changes in corporate charter.

If a common stock has no par value

there will not be any additional paid-in capital related to it

Rights for preferred stock

Having a priority claim to dividends relative to the common stock's claim to dividends. Having a priority claim in liquidation relative to the common stock's claim in liquidation. Having a claim to dividends that is cumulative over time if the annual dividend requirement is not satisfied.

The number of shares of a class of stock that are outstanding is the

shares issued minus the shares held in the treasury.

A stock dividend is similar to a cash dividend in that

retained earnings and the amount of potential future dividends is reduced by each.

The principal reason for a company having a common stock split is to:

decrease the market value per share of common stock.

Treasury stock

authorized and issued, but not currently outstanding.

Similarities between preferred stock and bonds

Each has a fixed claim to annual income (dividends and interest, respectively). Each has a fixed claim on assets (liquidating value and principal amount, respectively). Each may be callable and/or convertible.

Which of the following would not affect total Retained Earnings?

Stock splits.

Minority Interest in Subsidiaries

does not appear in the owners' equity section of a balance sheet

Managerial accounting, as opposed to financial accounting, is primarily concerned with

Emphasizing the future.

Activities included in a generally accepted definition of the management process include:

Planning, organizing, and controlling.

Contribution margin can be expressed as

Sales minus variable expenses

The contribution margin income statement:

Reports expenses based upon cost behavior pattern rather than cost function.

The relevant range concept refers to:

A firm's range of activity.

Cost behavior refers to:

Costs that are variable or fixed.

calculation for the contribution margin ratio

Contribution margin divided by revenue.

Cost-volume-profit analysis assumes fixed costs:

Remains constant as activity changes.

break-even point:

Fixed cost is always equal to the contribution margin.

Increasing variable cost per unit.

will increase a company's break-even point

A job order costing system would probably be appropriate for a firm that produces

stained glass windows

Suppose your accounting textbook is the cost object of concern. The paper used to print the textbook is a

direct cost

An example of a period cost is:

advertising and promotion expenditures

An example of a product cost is:

the advertising expense for that product

Costs may be allocated to a product or activity for many purposes, but care must be exercised when using allocated costs because:

Arbitrarily allocated costs may not behave in the way assumed in the allocation method.

Common costs pertain to costs that:

Are not directly traceable to a cost object.

sequence of flow of costs for a manufacturing firm

Raw materials, work-in-process, finished goods, cost of goods sold.

An industry most likely to use process costing is:

Coal mining.

When a manufacturing firm has a highly automated plant, the most probable basis for applying manufacturing overhead costs to units produced would be:

Machine hours.

Overapplied overhead would result when

Overhead applied to production exceeds actual overhead costs incurred.

Benefits of Budgeting

Budgeting provides benchmarks against which performance can be measured. Budgeting forces managers to concentrate on planning and to formalize their planning efforts. Budgeting requires different functional areas of the firm to communicate and coordinate activities.

When costs are classified according to a time horizon perspective

Costs are labeled committed or discretionary

The cash budget is prepared

After the budgeted income statement.

The key data element on which the entire budget is based is the:

Sales/revenue budget.

last budgeted financial statement to be prepared

Budgeted balance sheet.

Operating expenses are best budgeted on the basis of knowledge about

Cost behavior patterns.

The amount of production to budget would be calculated as

Ending inventory + sales - beginning inventory.

continuous budget

Is a budget that is revised monthly by adding a new month at the end of the 12-month budget period.

standard cost

Is a budget for a single unit of product. Is a budget for a single unit of product. Identifies the price and quantity of production resources that should be incurred to produce each unit of product. Can be used by manufacturing firms and service organizations.

Attainable standards, as compared to ideal standards:

Are more likely to elicit employee enthusiasm.

sunk cost

when comparing decision alternatives sunk coast is irrelevant

In considering whether to accept a special order at a price less than the normal selling price of the product, but the additional sales will make use of presently idle capacity these are relevant costs

fixed manufacturing overhead that can be avoided. Direct materials. Variable overhead. Direct labor.

The cost of capital used in the capital budgeting process is primarily a function of:


Chuck's investment proposal would be inferior to Edna's proposal if it was expected to have a

Longer payback period.

If the net present value of a proposed investment is positive:

The cost of capital is lower that the internal rate of return.

If an asset costs $32,000, has an expected useful life of 10 years, is expected to have a $4,000 salvage value and generates net annual cash inflows of $8,000 a year, the cash payback period is:

4 years

The type of costs included in a management analysis relating to a capital budgeting decision should be limited to:

Relevant costs.

A capital budgeting technique that considers the time value of money is the:

Internal rate of return.

Internal rate of return.

Net present value is zero.

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