16 Jan The process of providing information

ACC556 Financial Accounting for Managers

CHAPTER 1 EXERCISE

Question 1 When expenses exceed revenues, which of the following is true?

Answers:

a net loss results

a net income results

assets equal liabilities

assets are increased

Question 2 Which of the following is not a common way that managers use the balance sheet?

Answers:

To analyze the balances of assets, liabilities, and stockholders’ equity throughout the accounting period

To determine if the cash balance is sufficient for future needs

To analyze the balance between debt and common stock financing

To analyze the balance of accounts receivable on the last day of the accounting period MT

Question 3 Stockholders’ equity is comprised of

Answers:

common stock and dividends.

common stock and retained earnings.

dividends and retained earnings.

net income and retained earnings.

Question 4 External users want answers to all of the following questions except

Answers:

Is the company earning satisfactory income?

Will the company be able to pay its debts as they come due?

Will the company be able to afford employee pay raises this year?

How does the company compare in profitability with competitors?

Question 5 One way of stating the accounting equation is: Assets + Liabilities = Stockholders’ Equity.

Selected Answer:

False

Answers:

True

False

ACC556 Financial Accounting for Managers

CHAPTER 2 EXERCISE

Question 1 Equipment is classified on the balance sheet as

Answers:

a current asset.

property, plant, and equipment.

an intangible asset.

a long-term investment.

Question 2 Each of the following statements is justified by a fundamental quality or an enhancing of quality accounting. Write the letter in the blank next to each statement corresponding to the quality involved.

Question

Consistency

A company uses the same accounting principles from year to year.

Verifiable

Information that may be duplicated using the same methods.

Understandability

Information presented in a clear and concise fashion.

Relevance

Information that makes a difference in a decision.

Faithful representation

Information accurately depicts what really happened.

Question 3 For accounting purposes, business transactions should be kept separate from the personal transactions of the stockholders of the business.

Answers:

True

False

Question 4 Based on the following data, what is the amount of current assets?

Accounts payable……………………………………………………….. $62,000

Accounts receivable…………………………………………………….. 100,000

Cash………………………………………………………………………. 50,000

Intangible assets………………………………………………………… 100,000

Inventory…………………………………………………………………. 138,000

Long-term investments…………………………………………………. 160,000

Long-term liabilities……………………………………………………… 200,000

Short-term investments…………………………………………………. 80,000

Notes payable……………………………………………………………. 56,000

Property, plant, and equipment…………………………………………… 1,340,000

Prepaid insurance……………………………………………………….. 2,000

Answers:

$212,000

$370,000

$232,000

$230,000

Question 5 Garrison Company prepares quarterly reports, which it distributes to all stockholders and other entities that rely on its accounting information. Which of the following is the best term for the key assumption in financial reporting that Garrison is following?

Answers:

Monetary unit assumption

Going concern assumption

Economic entity assumption

Periodicity assumption.

ACC556 Financial Accounting for Managers

CHAPTER 3 EXERCISE

Question 1 The primary purpose of the trial balance is to.

Answers:

disclose the complete effect of a transaction in one place.

make sure a journal entry is not posted twice.

transfer journal entries to the ledger accounts.

prove the equality of the debit and credit amounts after posting.

Question 2 Which one of the following represents the expanded basic accounting equation?

Answers:

Assets = Liabilities + Common Stock + Dividends – Revenue – Expenses

Assets + Dividends + Expenses = Liabilities + Common Stock + Revenues

Assets= Liabilities + Common Stock + Revenues – Expenses – Dividends

Assets = Revenues + Expenses – Liabilities

Question 3 Match the items below by entering the appropriate code letter in the space provided.

Question

Account

An accounting record of increases and decreases in specific assets, liabilities, and stockholders’ equity items.

Normal account balance

The side which increases an account.

Debit

Left side of an account.

Revenue account

Has a credit normal balance

Ledger

The entire group of accounts maintained by a company.

Journal

Shows the debit and credit effects of specific transactions.

Posting

Transferring journal entries to ledger accounts.

Chart of accounts

A list of all the accounts used by a company.

Trial balance

A list of accounts and their balances at a given time.

Source document

Evidence that a transaction has taken place.

Question 4 If total liabilities decreased by $4,000, then

Answers:

stockholders’ equity must have decreased by $4,000.

assets must have decreased by $4,000, or stockholders’ equity must have increased by $4,000.

assets and stockholders’ equity each increased by $2,000.

assets must have increased by $4,000.

Question 5 All of the following are characteristics of every accounting information system except it is a system

Answers:

that collects transaction data.

that processes transaction data.

that communicates financial information to decision makers.

of data storage hardware for the chart of accounts.

ACC556 Financial Accounting for Managers

CHAPTER 4 EXERCISE

Question 1 An adjusting entry to a prepaid expense is required to recognize expired expenses.

Answers:

True

False

Question 2 Management usually wants ________ financial statements and the IRS requires all businesses to file _________ tax returns.

Answers:

annual, annual

monthly, annual

quarterly, monthly

monthly, monthly

Question 3 Unearned revenue is a prepayment that requires an adjusting entry when services are performed.

Answers:

True

False

Question 4 Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting.

Cash received from customers $48,000

Accounts receivable 12,000

Cash paid for expenses 26,000

Accounts payable (related to expenses) 3,000

Prepaid rent for next period 7,000

Answers:

$22,000

$31,000

$24,000

$15,000

Question 5 Which statement is?

Answers:

As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use.

The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles.

The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received.

As long as management is ethical, there are no problems with using the cash basis of accounting.

ACC556 Financial Accounting for Managers

CHAPTER 5 EXERCISE

Question 1 Which statement is in?

Answers:

The sales revenue account is used to record the sales of goods held for resale to customers.

Sales discounts are recorded as debits to the sales revenue account.

The sales revenue account is a revenue account.

The sales revenue account has a normal credit balance and is closed at the end of the accounting period.

Question 2 As the president of Harter Company, you notice that no discounts have been taken when settling accounts payables. What would be an acceptable explanation?

Answers:

All invoices have credit terms of n/30.

There is not sufficient cash to pay within the discount period.

Discounts are missed because no one knows how to enter them in the new accounting software.

The full amount of the invoice is being paid within the discount period and the treasurer is pocketing the discount amount.

Question 3 With the periodic inventory system, goods available for sale must be calculated before cost of goods sold.

Answers:

True

False

Question 4 Which of the following provides the best rationale regarding analysts’ views about the information value of the gross profit rate versus the gross profit amount?

Answers:

The gross profit amount is more informative than the gross profit rate because it is a dollar amount rather than a ratio.

The gross profit amount is less informative than the gross profit rate because the latter presents a meaningful relationship between gross profit and net sales.

The gross profit amount is more informative than the gross profit rate because the gross profit rate is only used to describe a few industries while the gross profit amount is universally used.

The gross profit amount is more informative than the gross profit rate because high volume operations are able to calculate the gross profit rate but not the gross profit amount.

Question 5 Which of the following items does not result in an adjustment in the merchandise inventory account under a perpetual system?

Answers:

A purchase of merchandise.

A return of merchandise inventory to the supplier

Payment of freight costs for goods shipped to a customer

Payment of freight costs for goods received from a supplier

ACC556 Financial Accounting for Managers

CHAPTER 6 EXERCISE

Question 1 The LIFO reserve is

Answers:

the difference between the value of the inventory under LIFO and the value under FIFO.

an amount used to adjust inventory to the lower of cost or market.

the difference between the value of the inventory under LIFO and the value under average cost.

the amount used to adjust inventory to history cost.

Question 2 If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions.

Answers:

True

False

Question 3 Raw materials inventories are the goods that a manufacturing company has completed and are ready to be sold to customers.

Answers:

True

False

Question 4 Noise Makers Inc has the following inventory data:

July 1 Beginning inventory 20 units at $19 $ 380

7 Purchases 70 units at $20 1,400

22 Purchases 10 units at $22 220

$2,000

A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the average cost method, the value of ending inventory is

Answers:

$620.

$640.

$651.

$660.

Question 5 Which statement concerning lower of cost or market (LCM) is in?

Answers:

LCM is an example of a company choosing the accounting method that will be least likely to overstate assets and income.

Under the LCM basis, market does not apply because assets are always recorded and maintained at cost.

The LCM basis uses current replacement cost because a decline in this cost usually leads to a decline in the selling price of the inventory item.

LCM is applied after one of the cost flow assumptions has been applied.

ACC556 Financial Accounting for Managers

CHAPTER 7 EXERCISE

Question 1 In large companies, the independent internal verification procedure is often assigned to

Answers:

computer operators.

management.

internal auditors.

outside CPAs.

Question 2 Under the concept of establishment of responsibility, how many people should have the ultimate responsibility?

Answers:

Everyone in the organization.

An individual and his/her supervisor.

Only one individual.

The CEO.

Question 3 Cash equivalents are highly liquid investments that can be converted into a specific amount of cash.

Answers:

True

False

Question 4 All of the following are true regarding the management and monitoring of cash except

Answers:

companies may have plenty of sales, but insufficient cash to support operations.

the cash to cash operating cycle for a manufacturer is generally shorter than that of a merchandising company.

manufacturers may experience a significant lag between the purchase of raw materials and the receipt of cash from customers.

companies should have sufficient cash to meet payments but minimize the amount of non-revenue-generating cash on hand.

Question 5 Sam’s Grocery Store has the following policy. ‘Only one cashier can have access to a cash drawer.’ Which internal control principle supports this policy?

Answers:

Documentation procedures.

Segregation of duties.

Physical controls.

Establishment of responsibilities.

ACC556 Financial Accounting for Managers

CHAPTER 8 EXERCISE

Question 1 Bad Debt Expense is considered

Answers:

an avoidable cost in doing business on a credit basis.

an internal control weakness.

a necessary risk of doing business on a credit basis.

avoidable unless there is a recession.

Question 2 An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.

Answers:

True

False

Question 3 The expense recognition

Answers:

requires that all credit losses be recorded when an individual customer cannot pay.

necessitates the recording of an estimated amount for bad debts.

results in the recording of a known amount for bad debt losses.

is not involved in the decision of when to expense a credit loss.

Question 4 On January 15, Nifty Company sells merchandise on account to Martinez Associates for $3,000 with terms 3/10, n/30. On January 20, Martinez returns merchandise worth $600 to Nifty. On January 24, payment is received from Martinez for the balance due. What is the amount of cash received?

Answers:

$2,400

$2,328

$2,310

$1,680

Question 5 If a company has significant concentrations of credit risk, it must discuss this risk in the notes to its financial statements.

Answers:

True

False

ACC556 Financial Accounting for Managers

CHAPTER 9 EXERCISE

Question 1 Recording depreciation on plant assets affects the balance sheet and the income statement.

Answers:

True

False

Question 2 The book value of an asset will equal its fair value at the date of sale if

Answers:

a gain on disposal is recorded.

no gain or loss on disposal is recorded.

the plant asset is fully depreciated.

a loss on disposal is recorded.

Question 3 Which of the following statements concerning financial statement presentation is false?

Answers:

Intangibles are reported separately under Intangible Assets.

The balances of major classes of assets may be disclosed in the footnotes.

The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes.

The balances of all individual assets, as they appear in the subsidiary plant ledger, should be disclosed in the footnotes.

Question 4 A plant asset was purchased on January 1 for $45,000 with an estimated salvage value of $5,000 at the end of its useful life. The current year’s Depreciation Expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $25,000. The remaining useful life of the plant asset is

Answers:

10 years.

8 years.

5 years.

3 years.

Question 5 The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method that

Answers:

is used for tax purposes.

must be used for financial statement purposes.

is required by the SEC.

expenses an asset over a single year because capital acquisitions must be expensed in the year purchased.

ACC556 Financial Accounting for Managers

CHAPTER 10 EXERCISE

Question 1 Most notes are not interest bearing.

Question 2 Unearned revenues are received before goods are delivered or services are rendered.

Question 3 Material gains or losses on bond redemption are reported as part of other gains/losses on the income statement.

Question 4 Liabilities are classified on the balance sheet as current or

Question 5 With an interest-bearing note, the amount of assets received upon issuance of the note is generally

ACC556 Financial Accounting for Managers

CHAPTER 11 EXERCISE

Question 1 A corporation is not an entity that is separate and distinct from its owners.

Question 2 A stockholder has the right to vote in the election of the board of directors.

Question 3 The acquisition of treasury stock by a corporation increases total assets and total stockholders’ equity.

Question 4 Cash dividends are not a liability of the corporation until they are declared by the board of directors.

Question 5 A detailed stockholders’ equity section in the balance sheet will list the names of individuals who are eligible to receive dividends on the date of record.

ACC556 Financial Accounting for Managers

CHAPTER 12 EXERCISE

Question 1 The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement.

True

False

Question 2 The acquisition of a building by issuing bonds would be considered an investing and financing activity that did not affect cash.

Answers:

True

False

Question 3 The statement of cash flows

Answers:

must be prepared on a daily basis.

summarizes the operating, financing, and investing activities of an entity.

is another name for the income statement.

is a special section of the income statement.

Question 4 Generally, the most important category on the statement of cash flows is cash flows from

Answers:

operating activities.

investing activities.

financing activities.

significant noncash activities.

Question 5 Which of the following transactions does not affect cash during a period?

Answers:

Write-off of an uncollectible account.

Collection of an accounts receivable.

Sale of treasury stock.

Redeeming bonds before maturity.

ACC556 Financial Accounting for Managers

CHAPTER 13 EXERCISE

Question 1 Comprehensive income includes all revenues, expenses, gains, losses, and dividends.

Answers:

True

False

Question 2 A primary purpose of vertical analysis is to observe trends over a three-year period.

Answers:

True

False

Question 3 Leverage and return on equity are closely related.

Answers:

True

False

Question 4 Because pro forma earnings are based on specific rules, these amounts are highly reliable.

Answers:

True

False

Question 5 Which of the following income statement figures would probably be the best indicator of a company’s future performance?

Answers:

Total revenues

Income from operations

Net income

Gross profit

ACC556 Financial Accounting for Managers

CHAPTER 21 EXERCISE

Question 1 A benefit of budgeting is that it provides definite objectives for evaluating performance.

Answers:

True

False

Question 2 Effective budgeting requires clearly defined lines of authority and responsibility.

Answers:

True

False

Question 3 Financial budgets must be completed before the operating budgets can be prepared.

Answers:

True

False

Question 4 The budgeted income statement indicates the expected profitability of operations for the next year.

Answers:

True

False

Question 5 Why are budgets useful in the planning process?

Answers:

They provide management with information about the company’s past performance.

They help communicate goals and provide a basis for evaluation.

They guarantee the company will be profitable if it meets its objectives.

They enable the budget committee to earn their paycheck.

ACC556 Financial Accounting for Managers

CHAPTER 22 EXERCISE

Question 1 Management by exception means that management will investigate areas where actual results differ from planned results if the items are material and controllable.

Answers:

True

False

Question 2 Budget reports provide the feedback needed by management to see whether actual operations are on course.

Answers:

True

False

Question 3 The manager of an investment center can improve ROI by reducing average operating assets.

Answers:

True

False

Question 4 What is budgetary control?

Answers:

Another name for a flexible budget

The degree to which the CFO controls the budget

The use of budgets in controlling operations

The process of providing information on budget differences to lower level managers

Question 5 What is the primary difference between a static budget and a flexible budget?

Answers:

The static budget contains only fixed costs, while the flexible budget contains only variable costs.

The static budget is prepared for a single level of activity, while a flexible budget is adjusted for different activity levels.

The static budget is constructed using input from only upper level management, while a flexible budget obtains input from all levels of management.

The static budget is prepared only for units produced, while a flexible budget reflects the number of units sold.