Assets 1. are normally depreciated over their useful life. Companies have the
flexibility to choose the method of depreciation, such as, straight line method,
accelerated method, etc. Using any method for depreciation is an attempt to
satisfy:
1. the cost principle
2. the matching principle which requires firms to match expenses to revenues,
the book value of fixed assets is diminished by the passage of time so the
revenues during that time are partially offset by the depreciation expense
occurring during that time
3. the full disclosure principle
4. the conservatism principle
5. the materiality principle
2. An unobservable event may occur through the passage of time, for example
interest cost on a bank loan is incurred as time passes. We record the unobservable
event:
1. When a bill for the interest is received from the bank.
2. When the loan was first taken out, we preempt the event.
3. When financial statements are being prepared. - a key accounting concept is
the recognition of economic events that are not based on specific observed
activities. Instead, interest owed, rent owed, taxes owed and others are based
on the passage of time which is recognized by the construction of financial
statements.
4. When the interest is paid.
3. Which of the following would be reported on the income statement for 2005?
1. Supplies that were received and used in 2004 but paid for in 2005.
2. Dividends that were paid in 2005.
3. Supplies that were received and used in 2005 but paid for in 2004. materials
used in 2005 can be matched with revenues during that time period and
therefore would show up as expense during that time period.
4. All of the above.
4. Your company orders and receives goods in January, pays for them in February,
sells them in March and is paid by customers in April. Using the accrual basis of
accounting:
1. expenses are recorded in February and revenues are recorded in April.
2. expenses are recorded in February and revenues are recorded in March.
3. expenses and revenues are recorded in March. Expenses must be matched to
revenues. March expenses are matched to March revenues. In January a firm
would show the adjustment to inventory and accounts payable, in February
cash and accounts payable.
4. expenses are recorded in January and revenues are recorded in April.
5. On your ninth birthday, you received $300 which you invested at 4.5 percent
interest, compounded annually. Your investment is now worth $756. How old are
you today?
1. age 29
2. age 30
3. age 31
4. age 32
5. age 33
6. TL Trucking invested $80,000 today to help fund a company expansion project
planned for 4 years from now. How much additional money will the firm have 4
years from now if it can earn 5 percent rather than 4 percent on its savings?
1. $2,940
2. $3,652 The difference between FV in 4 years at 5% = 97, 240.50 FV in 4
years at 4% 93,588.68
3. $4,008
4. $4,220
5. $4,711
7. At 11 percent compounded annually, how long would it take to quadruple (four
times) your money?
1. 6.55 years
2. 6.64 years
3. 13.09 years
4. 13.28 years
5. 13.56 years
8. This afternoon, you deposited $1,000 into a retirement savings account. The
account will earn 6% interest compounded annually. You will not withdraw any
principal or interest until you retire in forty years. Which one of the following
statements is correct?
1. The interest income earned in year six year will equal the interest income
earned in year ten.
2. The interest amount you earn will double in value every year.
3. The total amount of interest you will earn will equal $1,000 .06 40.
4. The present value of this investment is equal to $1,000.
5. The future value of this amount is equal to $1,000 (1 + 40).06.
9. Your grandmother has promised to give you $5,000 when you graduate from
college. She is expecting you to graduate two years from now. What happens to
the present value of this gift if you delay your graduation by one year and
graduate three years from now?
1. remains constant
2. increases
3. decreases
4. becomes negative
5. cannot be determined from the information provided
10. Cash flows from financing activities:
1. are always negative because the company pays dividends as well as interest
and principal on debt.
2. includes all cash inflows and outflows between a company and its
stockholders.
3. includes all cash inflows and outflows associated with a company's lending
activities.
4. are always positive unless the company is experiencing serious financial
trouble.
11. Inventory falls and unearned revenue rises during an accounting period. When the
indirect method is used, what does the company do with the changes in these
accounts to calculate net cash flows from operating activities?
1. Both are added to net income. A decrease in an asset and an increase in a
liability
2. The change in inventory is added to net income; the change in unearned
revenue is subtracted.
3. Both are subtracted from net income.
4. The change in unearned revenue is added to net income; the change in
inventory is subtracted.
12. Cinno Company reported net income of $20,000 for the year ended December 31,
2005. During the year, inventories decreased by $7,000, accounts payable
decreased by $8,000, depreciation expense was $10,000, and accounts receivable
increased by $6,500. Net cash provided by operations in 2005, computed using
the indirect method, was:
1. $10,500.
2. $22,500. 20,000 (net income) + 10,000 (depreciation) + 7,000 (inventory
decrease) - 8,000 (accounts payable decrease) 6,500 (AR increase) =
3. $38,500.
4. $51,500.
13. Depreciation is added back to net income in a statement of cash flows prepared
using the indirect method because it:
1. reduces income but not cash. Depreciation is a non-cash expense it was
deducted from the income statement and now needs to be added back.
2. is a cash inflow.
3. is a revenue.
4. is a valuation concept.
14. Sales revenue was $171,356 and cash collected from customers was $167,803.
Which of the following would be consistent with this difference?
1. Accounts receivable could have decreased.
2. Cash payments could have been larger than the expense accounts.
3. Accounts receivable could have increased. While we dont know anything
about cash payments this would explain the given difference
4. Cash payments could have been smaller than the expense accounts.
15. The retained earnings account has a beginning balance of $321,975 and an ending
balance of $356,413. Net income is $40,251. Which of the following statements
is true?
1. $5,813 would be subtracted when determining cash flows from financing
activities. Because Net income is greater than the difference between
beginning and ending retained earnings dividends in the amount of that
difference must have been paid to shareholders.
2. $40,251 would be added when determining cash flows from financing
activities.
3. $34,438 would be added when determining cash flows from financing
activities.
4. All of the above.
16. The net cash flow from operating activities is an inflow of $37,042, the net cash
flow from investing activities is an outflow of $16,831, and the net cash flow
from financing activities is an outflow of $26,397. If the beginning cash account
balance is $11,283, what is the ending cash account balance?
1. $5,097 total cash flow must be 37,042 16,831 26,397 = -6,186
2. ($6,186)
3. $38,759
4. $27,476
17. The PE ratio for EFG, Inc. is 14.4. If EFG stock is selling for a share price of
$12.00 and has ten-million shares outstanding, what was net income last year?
1. $10,000,000
2. $8,333,333.33 PE ratio is Price per share earnings per share. So PE of 14.4
for a firm whose shares are selling for $12.00 implies an earnings per share of
$.8333 times ten-million shares.
3. $12,000,000
4. $144,000,000
18. A&L, Inc. was sued by a major competitor. The case was thrown out of court as
being too stupid for words. The next day the price of its shares increased by 15%.
This is an indication that:
1. The book value of the company's assets decreased by 15%
2. The company has 15% less money for dividend payments
3. The companys retained earnings decreased by 15%
4. The shareholders are theoretically 15% better off Theoretically because
shareholders do not have to sell then it is simply a paper gain the
stock may go back down or up even more but until the shares are sold no
real gain or loss has been experienced
5. Two of the answers are correct
19. Consider the following three statements about Fixed Costs:
I
Fixed Costs do not change, over a relevant range, directly with
volume.
II
Fixed Costs usually are larger than total variable costs.
III
Fixed Costs usually are variable over a long period of time.
You would conclude that:
1. Only statement (I) is true.
2. Only statement (II) is true.
3. Only statement (III) is true.
4. Both statements (I) and (III) are true over the long run all costs are
variable
5. Statements (I), (II), and (III) are all true.
Start Questions Dealing with Nichols
Nichols's Income Statement for the year 2007 is as follows:
Revenue
$ 1,000,000
Variable Costs
600,000
Contribution
400,000
Margin
Fixed
200,000
Expenses
Earnings before Interest & Tax
200,000
20. By how much would Nichols's revenues have to fall before the company reaches
its breakeven point?
1. $ 300,000
2. $ 400,000
3. $ 500,000 Breakeven is 200,000/contribution margin ratio or 500,000.
1,000,000 - 500,000
4. $ 600,000
5. Cannot be evaluated with the data available.
21. Given the 2007 data as presented, how much would Nicholss EBIT change with
an additional $100,000 in revenue?
1. $ 30,000
2. $ 40,000 the contribution margin ratio is 40% meaning that 40% of revenue
goes to gross profit, since the fixed costs are fully covered that 40% goes
directly to operating profit
3. $ 50,000
4. $ 60,000
5. More than $ 60,000
End of Nichols Questions
Start Questions Dealing with Roberts Industries
Consider the following selected data from the financial statements of Roberts Industries.
Please assume that there were no sales of property plant and equipment in either 2006 or
2007. All data in are $,000s.
Net Income
Depreciation
Expense
PPE at Cost
Accounts
Receivable
Inventory
Revenue
Cash
2006
120
24
320
154
250
1,240
94
2007
145 Accounts Payable
41
Wages Payable
437 Long-Term Debt
134 Contributed Capital
260 Retained Earnings
1,440
70
2006
49
26
2007
44
36
114
80
156
80
390
525
22. What is 2007 cash inflow as related to Operating Activities?
1. Less than $ 150,000
2. Between $ 150,000 and $ 155,000
3. Between $ 155,000 and $ 160,000
4. Between $ 160,000 and $ 165,000
5. More than $ 165,000 Net income 145,000 + depreciation 41,000 + decrease in
AR 20,000 - increase in Inventory 10,000 - decrease in AP 5,000 + increase in
wages payable 10,000 = 201,000
23. What is 2007 cash outflow as related to Investing Activities?
1. Less than $ 100,000
2. Between $ 100,000 and $ 105,000
3. Between $ 105,000 and $ 110,000
4. Between $ 110,000 and $ 115,000
5. More than $ 115,000 increase in PPE 117,000 cash otflow
24. What is 2007 cash inflow as related to Financing Activities?
1. Less than $ 40,000
Dividends paid are the difference between 145,000 in
2.
3.
4.
5.
net income and the 135,000 in increased retained earnings or 10,000 cash
outflow add that to the 42,000 net cash inflow related to the change in long
term debt to arrive at a cash inflow of 32,000
Between $ 40,000 and $ 45,000
Between $ 45,000 and $ 50,000
Between $ 50,000 and $ 55,000
More than $ 55,000
25. What is 2007 total cash outflow?
1. Between $ 0 and $ 5,000
2. Between $ 5,000 and $ 10,000
3. Between $ 10,000 and $ 15,000
4. Between $ 15,000 and $ 20,000
5. More than $ 20,000 The total decrease in cash was 24,000 94,000 in 06
and 70,000 in 07
End Questions Dealing with Roberts Industries
Start Questions Dealing with Wus Wonderful Exterminators (WWE)
WWE was a retailer in Chestnut Hill Massachusetts dedicated to providing one-stopshopping for all your pest elimination needs. The store was divided into three relatively
equal size sections: Vermin (mostly mouse and rat traps), Insects (cockroach traps were
WWEs specialty), and Snakes (long sticks and burlap bags). The company had been in
business for many years and was extremely popular with residents of the local university.
WWEs accountant delivered the following information to the companys CEO.
Common expenses were divided equally across departments.
Wus Wonderful Exterminators
Income Statement (Departmental)
Year Ending August 31, 2008 all amounts in dollars
Vermin
Insect
Snake
Sales
840,000
720,000
240,000
Cost of Goods Sold
336,000
396,000
98,000
Gross Margin
504,000
324,000
142,000
Department Managers
90,000
96,000
56,000
Store Rent
44,000
44,000
44,000
Store Utilities
16,000
16,000
16,000
CEO Salary
52,000
52,000
52,000
Operating Income (loss)
302,000
116,000
(26,000)
Total
1,800,000
830,000
970,000
242,000
132,000
48,000
156,000
392,000
26. The CEO scanned the report with horror and exclaimed we need to get out of the
snake extermination business!!!!! If we werent in the snake extermination
business WWE would have earned an additional $26,000 last year. The
accountant calmed the CEO down and said no, without the Snake Department
WWE would have
1. Earned $86,000 less The gross margin of 108,000 minus the unallocated
minus the department managers salary of 60,000 is 48,000 which is the loss
in contribution margin.
2. Earned $86,000 more
3. Earned $48,000 more
4. Earned $48,000 less
27. If the Snake Department were eliminated the Net Income of the Vermin and Insect
Departments on the Departmental Income Statement would have been:
1. $246,000 and $60,000 respectively
2.
3.
4.
5.
total income without the snake
department would have been 420,000. Reallocating the rent, utilities, and
CEOs salary by two departments rather than three.
$303,000 and $117,000 respectively
$340,000 and $154,000 respectively
$357,000 and $171,000 respectively
$374,000 and $188,000 respectively
End Questions Dealing with Wus Wonderful Exterminators (WWE)
Start Questions on S&S
28. Sae and Samy started a successful business during the fall of 2008. Their
company reported the following amounts on its income statement: total revenues,
$191,500; selling, general & administrative expenses, $45,000; interest expenses,
$12,000; net income, $67,900; and income tax expenses, $24,900. What was the
amount of its operating profit (EBIT)?
1. $36,900
2. 67,900
3. 92,800
4. 104,800 Since Cost of Sales is not shown the easiest way to approach the
problem is by adding interest and taxes back into net income: $67,900 +
$12,000 + 24,900
5. $146,500
29. Having done so well during the fall, Sae and Samy decided to keep the company
going and named it Sae & Samys (S&S). The first year of S&Ss operations are
summarized in the portion of the income statement shown below:
S&S Inc.
Income Statement
Year Ending August 31, 2008
($)
Revenue (4,660 units sold)
466,000
Variable Costs
224,400
Contribution Margin
241,600
Fixed Costs
150,000
Operating Profit (EBIT)
91,600
S&Ss breakeven revenue is:
1. More than $300,000
2. Between $280,000 and $300,000 CMR = 241,600/466,000 = .5185; Fixed
Costs 150,000/ .5185 = 289,321.19
3. Between $260,000 and $280,000
4. Between $240,000 and $260,000
5. Less than $240,000
30. S&Ss unit contribution is:
1. Less than $20 per unit
2. Between $20 and $40 per unit
3. Between $40 and $60 per unit Selling price per unit is $100 (466,000/4,660);
Variable cost per unit is $48.15; unit contribution is then $100 - $48.15 =
$51.85
4. Between $60 and $80 per unit
5. More than $80 per unit
31. If S&S is operating at its breakeven volume, its operating profit will be:
1. Negative
2. $0 duh
3. $100,000
4. $141,000
5. Need more information
End S&S Questions
32. Stock indices, like the S&P 500, the Dow Jones Industrials, or the Nasdaq 100,
are meant to
1. provide a means of comparison for stocks or portfolio of stocks. Stock
indices are particularly useful to evaluate how a particular stock or collection
of stocks is doing from a relative perspective.
2. substitute for having to track individual stocks.
3. make following the market more exciting.
4. track specific industries.
5. allow people to invest more easily.
33. During February the Green Grass Fertilizer Company buys and pays cash for a
six-month inventory of fertilizer in order to receive a bulk discount. The cost of
the fertilizer is recorded
1. immediately as an expense.
2. as a liability, which will later be reduced as the fertilizer is used.
3. partially as an expense and partially as a liability.
4. as an asset, which will later be reduced as the fertilizer is used. The fertilizer
will go into inventory until it is used. It is only expensed when it is used.
34. Gilroy & Company purchases a set of hockey jerseys for $1,000 in cash which it
then sells to a student group called the Dog Pound for $1,250 in cash. Which of
the following entries will be recorded when Gilroy & Companys accountant
enters these transactions?
1. Cash will be debited $1,000 and credited for $1,250.
2. Cash will be credited $1,250 and debited for $1,250.
3. Inventory will be debited for $1,250 and credited for $1,250.
4. Cash will be debited for $1,000 and Inventory will be credited for $1,000.
5. Inventory will be debited for $1,000 and it will be credited for $1,000. The
inventory is increased (debit) when the jerseys are purchased and received and
subsequently decreased (credit) when the jerseys are sold and delivered.
35. The legal structure that allows the least control of the business by owners is the
1. Sole proprietorship
2. Partnership
3. Corporation the owners are the shareholders who have very little say in the
day-to-day activities of the firm
4. More than one of the above
36. Failure to record depreciation expense during a year
1. understates net income.
2. overstates total assets. failure to depreciate means that the net PPE value is
higher than it should be
3. overstates total debt.
4. overstates contributed capital.
37. Receiving cash from a customer in payment of an account receivable would:
1. increase total assets and increase owner's equity
2. increase owner's equity and increase liabilities
3. increase total assets and decrease liabilities
4. have no effect on total assets or liabilities an exchange of one asset for
another of equivalent value
38. Your company's president donates a large amount of her own money to charity
and receives significant publicity that includes the company's name. How would
the benefits of this publicity appear on the balance sheet?
1. It would appear as a current asset.
2. It would appear as a liability.
3. It would appear as a long-term asset.
4. It would not appear on the balance sheet. The entity principle
39. What is the difference between wages expense and wages payable?
1. Expense is money paid, payable is money owed
2. Expense is resources used, payable is money owed - duh
3. Expense is money paid, payable is resources used
4. Expense is resources used, payable is money paid
40. The statement of cash flows is made up of 3 different activities. The Operating
Activities would include items such as receiving of interests and dividends.
1. TRUE Receipt of both interest and dividends are considered operating
activities
2. FALSE
41. The statement of cash flows is made up of 3 different activities. The Operating
Activities would include items such as paying of interests and dividends.
1. TRUE
2. FALSE Paying of dividends is a financing activity.
42. When a company bought a piece of equipment by paying a cash deposit and
borrowing the rest, then you would expect one of the following to be false:
1. The net book value of the company to remain unchanged.
2. The net increase in total assets is matched by the net increase in liabilities.
3. Current assets are decreased by the amount of cash paid.
4. The total asset is increased by the amount of the equipment purchased. Total
assets will increase by the purchase price for the equipment but decrease by
the amount of the cash deposit.
5. There is no change in the stockholders' equity.