Accounting 284 Exam #2 Review Material (Solutions in Red)

Chapter 5:

1. Which of the following is NOT considered one of the four users of the financial
statements?
a. Managers
b. Board of Directors
c. Creditors
d. Investors
e. ALL of the above would be users of the financial statements.

2. Which of the following is NOT one of the three requirements for fraud? (think fraud
triangle)
a. Incentive
b. Opportunity
c. Money
d. Character (lack of)

3. The Sarbanes Oxley Act of 2002....

a. rewards companies for not committing fraud.
b. holds top management responsible for the contents of the financial statements.
c. was put in place to prevent/deter fraud.
d. b & c
e. a & b

4. A comparative financial statement...

a. is a financial statement that can be compared to other companies. (cross-sectional analysis)
b. is a financial statement that combines the balance sheet and income statement.
c. is a financial statement that includes separate columns for multiple periods’ results, side by
side for the same company. (time series analysis)
d. None of the above.

5. Which ratio is REQUIRED to be put on the face of the income statement?

a. Asset turnover ratio.
b. Earnings per share.
c. Net profit margin ratio.
d. Gross profit percentage.

6. What is the annual form that companies are required to file with the SEC?
a. 10Q
b. 8K
c. 8Q
d. 10K
7. In 2007 Turnwell Corporation recorded total assets of $54,000 and net sales of $60,000.
In 2006 Turnwell Corporation recorded total assets of $60,000 and net sales of $56,000.
What was their 2007 asset turnover ratio?
a. 1.05
b. .98
c. .93
d. 1.03

8. Turnwell Corporation reported gross profit of $500,000, cost of goods sold of $200,000,
and net income of $150,000. What was the total amount of net sales?
a. 650,000
b. 350,000
c. 700,000
d. None of the above

Chapter 6:

**Use the following for questions 9-11 ****

Company A has $20,280 cash according to the books on Aug. 31. The company’s bank
statement states they have $16,130 cash on Aug. 31. The following information is available:

Deposits in Transit: $5,000

Outstanding Checks: $840
Interest Earned $20
Bank Service Charge $10

9. What needs to be done with the Deposits in Transit?

a. Add them to the book balance.
b. Subtract them from the book balance.
c. Add them to the bank balance.
d. Subtract them from the bank balance.

10. A bank service charge would...

a. increase the bank balance.
b. decrease the bank balance.
c. increase the book balance.
d. decrease the book balance.

11. What is the correct cash balance after reconciling the book and bank?
a. $12,740
b. $20,300
c. $20,290
d. $17,500
12. Cash equivalents are short-term, highly liquid investments that mature in.....
a. 6 months or less
b. 3 months or less
c. 2 months or less
d. 1 month or less

13. Company ABC purchases $3,000 worth of inventory on Dec. 2, 2008. The company paid
cash. What would the journal entry be (using a PERPETUAL inventory system)?
a. Debit Cash, Credit Purchases
b. Debit Cash, Credit Inventory
c. Debit Inventory, Credit Cash
d. Debit Purchases, Credit Cash

14. On January 1, 2008, Company XYZ sells Company B inventory for $5,300 on account,
terms 2/10, n/30. If Company B pays on day 9, how much cash will they need to pay?
a. $5,141
b. $5,300
c. $4,770
d. $5,194

15. Maxtor Corp. has Gross Sales of $85,000, Sales Returns & Allowances of $4,500,
Purchase Discounts of $3,500, Sales Discounts of $3,000, and COGS of $40,000. What is
their Gross Profit Percentage?
a. 48%
b. 46%
c. 206%
d. 53%

Chapter 7:

16. LIFO Conformity rule states that....

a. If a company uses LIFO on their financial statements, they must use it for tax purposes.
b. If a company uses LIFO for tax purposes, they must use it for their financial statements.
c. A company must disclose if they are using LIFO inventory method.
d. LIFO is the only method acceptable according to GAAP.

Use the following information to answer questions 17 -19 Assume a periodic inventory
system.

Quantity Cost per Unit

Beginning Inventory 200 units $10
Purchase #1 500 units $12
Purchase #2 700 units $13
Sales 550 units
17. Using LIFO (Last-in-First Out), what is the Ending Inventory?
a. $9,000
b. $7,150
c. $9,950
d. $10,900

18. Using FIFO (First-In-First-Out), what is COGS?

a. $6,200
b. $7,680
c. $10,900
d. $7,150

19. Using weighted average, what is the weighted cost per unit?
a. $12.50
b. $12.21
c. $13.54
d. $11.56

20. If you overstate COGS in the current year, you will understate__________ and
understate __________ for the current year.
a. Depreciation Expense; Net Income
b. Ending Inventory; Sales Revenue
c. Ending Inventory; Net Income
d. None of the above.

21. Company A had beginning inventory of $10,000 on January 1. Cost of Goods Sold were
$15,000. Ending inventory on December 31 was $9,000. How much inventory was
purchased during the year?
a. $10,000
b. $24,000
c. $12,000
d. $14,000

22. In times of rising prices, what method will give you the highest COGS?
a. LIFO
b. FIFO
c. Weighted Average
d. None of the above

Chapter 8
23. A note receivable is...
a. an informal, verbal contract that outlines the terms by which a party will repay
b. a formal written contract outlining the terms by which a party will repay, typically including
interest.
c. an informal, verbal contract that outlines the terms by which a party will repay, typically
including interest.
d. none of the above

24. What accounting principle is the reason we estimate and record the amount of bad debt
we will have in the period that we make the sale?
a. Conservatism
b. Full disclose
c. Matching
d. Reliability

25. Company A has sales of $540,000 for 2008. Based on prior experience, the company
estimates 2.5% to be bad debt. How much bad debt should be recorded for 2008 using the
Percentage of Credit Sales method?
a. $13,500
b. $13,000
c. $14,000
d. $12,500

26. Company A determines on Feb. 1, 2009, that a $1,000 account receivable will be
uncollectible. What affect does this write off have on the financial statements?
a. Increases bad debt expense
b. Increases the Allowance for Doubtful Accounts
c. Decreases bad debt expense
d. Has no affect.

27. Company B has a beginning balance of $3,000 for the Allowance for Doubtful Accounts.
During the year, the company has estimated an additional $8,500 of bad debt. The ending
balance in the Allowance for Doubtful Accounts is $6,500. How much A/R was written off
during the year?
a. $11,500
b. $5,000
c. $6,000
d. $11,000

28. ABC Company lends $1,000,000 to Company ZYZ on July 1, 2008 to be collected on
June 30, 2009, principal plus interest. The interest on the loan is 10%. How much interest
revenue should be recognized on December 31, 2008?
a. $100,000
b. $0
c. $50,000
d. $1,100,000
Chapter 9

29. Which of the following assets are NOT depreciated?

a. Land
b. Equipment
c. Vehicles
d. Buildings
e. A & D

30. All of the following are intangible assets except:

a. Licensing rights
b. Land
c. Trademarks
d. Copyrights
e. All of these are intangible assets

31. Which of the following are not included in the acquisition cost of a piece of equipment?
a. Purchase price
b. Transportation charges
c. Routine maintenance
d. Installation costs

32. Which of the following are not capitalized?

a. A major engine overall on a piece of equipment.
b. A new delivery truck
c. A new addition to an existing building
d. Routine maintenance on a fork-lift

33. On January 1, 2005, Company D purchased a piece of equipment for $60,000. The
accumulated depreciation up to date is $15,000. The estimated salvage value is $10,000.
What is the book(carrying) value of this piece of equipment?
a. $60,000
b. $45,000
c. $35,000
d. $50,000

34. On January 1, 2008, Company ABC purchased equipment for $70,000. The estimated
salvage value is $10,000. The estimated useful life is 12 years. Using STRAIGHT LINE
depreciation, how much is the depreciation expense per year?
a. $10,000
b. $1,200
c. $5,000
d. $80,000
35. On January 1, 2009, XYZ Company purchases equipment for $100,000. The estimated
useful life in units is 200,000 units. The estimated salvage value is $20,000. During 2009, the
equipment’s output is 15,000 units. In the next year (2010), the output is 25,000 units. What
is the accumulated depreciation at the end of 2010 (after 2 years)?
a. $6,000
b. $10,000
c. $16,000
d. $12,000

36. B Company uses double declining balance depreciation method. On January 1, 2010,
they purchase a piece of equipment for $120,000. The estimated salvage value is $10,000.
Useful life is estimated to be 10 years. What is the depreciation expense for 2011 (the second
year)?
a. $24,000
b. $43,200
c. $19,200
d. $11,000

37. Company Z purchased a building for $250,000. Five years later, they sell the building
for $220,000. To date, the accumulated depreciation is $40,000. How much of a gain or loss
should Company Z record for the year of sale?
a. $10,000 Loss
b. $10,000 Gain
c. $20,000 Gain
d. $30,000 Loss

RATIOS:

Debt to Asset Ratio = Total Liabilities/Total Assets

Asset Turnover Ratio = Total Sales Revenue/Avg Total Assets
Net Profit Margin = Net Income/ Total Sales Revenue
Gross Profit % = (Net Sales – COGS)/Net Sales OR Gross Profit/Net Sales
Inventory Turnover Ratio = COGS/Average Inventory
Days to Sell = 365/Inventory Turnover Ratio
Interest = P x IR x T
Receivables Turnover Ratio = Net Credit Sales/Average Net Accounts Receivable
Days to Collect = 365/Receivables Turnover Ratio
Fixed Asset Turnover Ratio = Sales/Avg. Net Fixed Assets