Practice Exam #2

1.  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?

  1. 1.05
  2. .98
  3. .93
  4. 1.03

2.  Company A 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?

  1. 650,000
  2. 350,000
  3. 700,000
  4. None of the above

3.  Which of the following is not one of the four main financial statement users?

  1. Managers
  2. Directors
  3. Creditors
  4. Investors
  5. None of the above

4.  If a company has a higher ______, it means they have greater financing risk.

  1. Net Profit Margin
  2. Asset Turnover Ratio
  3. Debt-to-asset ratio
  4. Current asset ratio

5.  Which of the following is filed annually with the SEC?

  1. Form 10-Q
  2. Form 10-K
  3. Form 8-K
  4. Press Release

6.  A $5,000 sale is made on July 1 with terms 2/10, n/30. Items with a $500 selling price are returned on July 3. What amount, if received on July9, will be considered payment in full?

  1. $4410
  2. $4900
  3. $4500
  4. $5000

7.  Which of the following is true regarding a perpetual inventory system?

  1. The balance in the inventory account is updated with each inventory purchase and sale transaction
  2. Cost of goods sold is increased as sales are recorded
  3. The account Purchases is not used as inventory is acquired
  4. All of the above

8.  A $1000 sale is made on May 1 with terms 2/10, n/30. Items with a $100 selling price are returned on May 3. What amount, if received on May 12, will be considered payment in full?

  1. $700
  2. $800
  3. $882
  4. $900

9.  Which of the following describes how payments to suppliers made within the purchase discounts period are recorded in the perpetual inventory system (using the method shown in the chapter)?

  1. Reduce Cash, Reduce Accounts Payable
  2. Reduce Cash, Reduce Accounts Payable, Reduce Inventory
  3. Reduce Cash, Reduce Accounts Payable, Increase Purchase Discounts
  4. Reduce Cash, Reduce Accounts Payable, Decrease Purchase Discounts

10.  Using the perpetual system, what two effects are recorded when inventory is sold?

  1. Increase in Sales Revenue and Decrease in Inventory
  2. Increase in Cash or Accounts Receivable and increase in cost of goods sold
  3. Increase in Cash and Decrease in Purchases
  4. Both a & b

11.  In 2006 Nordstrom had COGS of $10,100, Ending Inventory f $4500, and Ending Inventory for the previous year of $3,200. If the cost of the inventory purchases was $12,600, what was the cost of shrinkage?

  1. $2000
  2. $1200
  3. $3200
  4. $4900

12.  Which of the following accounts is used in the periodic system and not the perpetual inventory system?

  1. Inventory
  2. Allowance for Doubtful Accounts
  3. Purchases
  4. Cost of Goods Sold

13.  What three things must exist for someone to commit fraud?

  1. Opportunity, Willingness, Incentive
  2. Willingness, Attitude, Opportunity
  3. Incentive, Character, Personality
  4. Incentive, Opportunity, Character

14.  When comparing a company’s financial statement with other companies in the same industry, what type of qualitative analysis is used?

  1. Time Series Analysis
  2. Cross-Sectional analysis
  3. Consistency
  4. Relevance

15.  A company had the following account balances at year end:

Sales Returns and Allowances $2,000

Accounts Payable $32000

Accounts Receivable $40,000

Cost of Goods Sold $60,000

Sales Revenue $105,000

Allowance for Doubtful Accounts $1500

Sales Discounts $300

What was the amount of Gross Profit for the year?

a.  $45,000

b.  $42,700

c.  $83,500

d.  $46,500

16.  Use the balances in the previous question what is the amount of net sales on the income statement?

  1. $105,000
  2. $103,000
  3. $101,200
  4. $102,700

17.  Outstanding checks on a bank reconciliation should be

  1. Added to the book cash balance
  2. Subtracted from the book bash balance
  3. Added to the bank statement
  4. Subtracted from the bank statement balance

18.  In 2009 the beginning inventory is $40,000, Ending Inventory is $35,000, and Purchases are $55,000. What is Goods Available for Sale?

  1. $95,000
  2. $60,000
  3. $85,000
  4. $25,000

19.  What is the inventory costing method that identifies the cost of the specific item that was sold?

  1. FIFO
  2. LIFO
  3. Specific Identification
  4. Weighted Average Cost Method

20.  Each period the cost of goods available for sale is allocated between

  1. Assets and Liabilities
  2. Assets and Expenses
  3. Assets and Revenues
  4. Expenses and Liabilities

21.  If costs are rising, which of the following will be true?

  1. The cost of goods sold will be greater if LIFO is used rather than weighted average
  2. The cost of ending inventory will be greater if FIFO is used rather than LIFO
  3. The gross profit will be greater if FIFO is used rather than LIFO
  4. All of the above are true

22.  Which of the following is not a name of a specific type of inventory?

  1. Finished goods
  2. Merchandise Inventory
  3. Raw Materials
  4. Goods available for sale

23.  An increasing inventory turnover ratio

  1. Indicates longer time span between ordering and receiving of inventory
  2. Indicates a shorter time span between the ordering and receiving of inventory
  3. Indicates a shorter time span between the purchases and sale of inventory
  4. Indicates a longer time span between the purchase of and sale of inventory

24.  Which of the following is true regarding companies that report their inventories on a LIFO basis?

  1. They will always have a higher income tax expense
  2. They will always have a higher inventory balance
  3. Both of the above
  4. None of the above

Use the Following information for questions 25-28

Company A uses the periodic inventory system. The following information about their inventory is available:

Date Transaction Number of Units Cost per Unit

1/1 Beg Inventory 60 $200

4/12 Purchase 100 $230

7/8 Purchase 50 $210

9/22 Purchase 70 $205

During the year, 130 units were sold at a price of $225 per unit. Other operating costs equaled $200 and their tax rate is 10%. Round final answers to the nearest dollar

25.  What was the ending inventory and cost of goods sold on 12/31 under the LIFO cost flow assumption?

  1. $27,150 and $32,700
  2. $28,100 and $31750
  3. $32,700 and $27,150
  4. $31750 and $28100

26.  What was the ending inventory and cost of goods sold on 12/31 under the FIFO cost flow assumption?

  1. $27,150 and $32,700
  2. $28,100 and $31750
  3. $32,700 and $27,150
  4. $31750 and $28100

27.  What is the amount of Gross Profit, using the FIFO inventory cost flow assumption?

  1. $2100
  2. $5550
  3. $3650
  4. $1150

28.  Which inventory costing method will minimize tax expense

  1. FIFO
  2. LIFO
  3. Weighted Average
  4. Specific Identification

29.. Item Quantity Cost Per Unit Market Unit Cost

A 1500 $3 $4

B 750 $4 $2

C 3500 $2 $1

D 2500 $5 $3

What is the amount that should be reported for the ending inventory using the LCM rule applied to each item?

a.  $27,000

b.  $18,500

c.  $17000

d.  $15000

30. Oakley recorded inventory on the balance sheet at $119,035 in 2005, $115,061 in 2004, and $98,691 in 2003. Cost of Goods sold on the balance sheet was $227,230 in 2005, $262,483 in 2004, and $245,578 in 2003. What was the inventory turnover ratio in 2004?

a.2.5 times

b.1.94 times

c. 2.12 times

d.3 times

31. When using the allowance method, as Bad debt expense is recorded,

  1. Total assets remain the same and stockholder’s equity remains the same
  2. Total assets decrease and stockholder’s equity decreases
  3. Total assets increase and stockholder’s equity decreases
  4. Total liabilities increase and stockholder’s equity decreases

32. Company A determines on Feb. 1, 2009, that a $1000 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

Age Amount Estimated Bad Debt %

0-30 days $840,000 1.5%

30-60 days $450,000 3.0%

60-90 days $235,000 5.7%

>90 days $65,000 11.6%

33. How much should be ending inventory for the Allowance for Doubtful Accounts at the end of 2008?

  1. $46,570
  2. $47,650
  3. $47,035
  4. $37,035

34. The beginning balance of the Allowance for Doubtful Accounts for the year was $12,540. Write-offs of bad debt equaled $5,000. How much bad debt expense should be recorded for 2009? (Using the information from 33)

a.  $52,035

b.  $12,540

c.  $17540

d.  $39495

35. Company C has a beginning balance of $6,000 for the Allowance for Doubtful Accounts. During the year, the company has recorded an additional $7,900 of bad debt. The ending balance in the Allowance for Doubtful Accounts is $10,000. How much Accounts Receivable was written off during the year?

a.$1900

b. $3,900

c. $10,000

d. $1900

36. Company F has sales of $600,000 and net income of $55,000 for 2008. Based on prior experience, the company estimates 2% to be bad debt. Using the percentage of credit sales method to estimate bad debt, how much bad debt should be recorded in 2008?

a. $12,000

b. $1,100

c. $10,900

d. $13,100

37. Company D recorded an increase in estimated bad debts on December 31, 2007.

a. Net Income increases and Total Assets increase

b. Net Income and Total Assets are not affected

c. Net Income decreases and Total Assets decrease

d. Net Income decreases and Total Assets increase

38. A note receivable is

a. a short-term contract for sale of goods on credit

b. a formal written contract outlining the terms by which the company will repay, typically including interest

c. an informal, verbal contract that outlines the terms by which the company will repay

d. none of the above

39. If a 10 percent note receivable for $10,000 is created on January 1, 2006, and it has a maturity date of December 31, 2010,

a. No interest revenue will be recorded in 2006

b. The note receivable will be classified as a current asset

c. Interest Revenue of $1,000 will be recorded in 2006

d. None of the above

40. ABC Company lends $1,000,000 to Company A on July 1, 2008 to be collected on June 30, 2009, principal plus interest. The interest on the loaned 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

41. Which of the following assets are NOT depreciated?

a. Land

b. Equipment

c. Vehicles

d. Buildings

42. All of the following are intangible assets except:

a. Licensing rights

b. Equipment

c. Trademarks

d. Copyrights

43. Which of the following is not included in the acquisition of a piece of equipment?

a. Purchase Price

b. Transportation cost

c. Routine maintenance

d. Installation costs

44. When recording depreciation, which of the following statements is true?

a. Total assets increase and stockholder’s equity increases

b. Total assets decrease and total liabilities increase

c. Total assets decrease and stockholder’s equity increases

d. None of the above are true

45. On January 1, 2005, Company D purchases 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

46. 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

47. On January 1, 2009, Company C 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 unites. 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

48. Company C uses double declining balance depreciation method. On January 1, 201, 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 1011 (the second year)?

a. $24,000

b. $43,200

c. 19,200

d. $11,000

49. A machine that cost $200,000 has an estimated residual value of $40,000, and has an estimated useful life of four years. The company uses straight-line depreciation. What is the book value after two years?

a. $160,000

b. $120,000

c. $80,000

d. None of the above

50. A machine cost $200,000 has an estimated residual value of $40,000, and has an estimated useful life of four years. The company uses the double-declining balance method to depreciate. What is the accumulated depreciation after three years?

a. $175,000

b. $100,000

c. $120,000

d. $50,000

51. Using the same information in (question 50) what is the book value after two years?

a. $100,000

b. $120,000

c. $50,000

d. $25,000

52. Company D uses straight-line depreciation for all of its depreciate assets. They sold a piece of machinery on December 31, 2007, that it purchased on January 1, 2006, for $10,000. The asset had a five-year life, zero residual value, and accumulated deprecation as of December 31, 2006, of $2,000. If the sales price of the used machine was $7,500, the resulting gain or loss on disposal was which of the following amounts?

a. Loss of $3,500

b. Gain of $3,500

c. Loss of $1,500

d. Gain of $1,500

53. Company ABC sold a delivery truck for $16,000. They had originally purchased the truck for $28,000, and had recorded depreciation for three years. What is the gain or loss on disposal on the truck if the accumulated depreciation was $15,000?

a. Loss of $1,000

b. Gain of $1,000

c. Loss of $3,000

d. Gain of $3,000

54. Company G bought a delivery truck for $73,000 on January 1, 2004. They estimate the useful life of the truck to be 10 years and its residual value to be $8,000. If Company G uses the units-of-production method when they have estimated the truck will be driven 500,000 miles over its life, what is the depreciation expense in 2005 when the truck is driven 60,000 miles?

a. $8760

b. $8820

c. 7800

d. 9108

RATIOS:

Debt to Asset Ratio = Total Liabilities/Total Assets

-  the percentage of assets financed by debt

-  a higher ratio means greater financing risk