Acct 284: Financial Accounting Name



Acct 284: Financial Accounting

Exam #2

Circle the best response to each question on the exam itself and also enter your response on the answer sheet. Be sure you have answered all questions – there is no penalty for guessing.

1. Depreciation is best defined as:

a. A process used by companies to generate cash reserves for the replacement of fixed assets.

b. A process used to show the change in the market value of fixed assets.

c. A process used to allocate the cost of fixed assets over their useful lives in a systematic and rational manner.

d. A scheme created by accountants to hide the real cost of expensive fixed assets.

2. You have prepared a report that shows your company’s net sales for each year over a 10 year period. This is an example of:

a. a cross sectional analysis

b. a time series analysis

c. a vertical analysis

d. a waste of time

3. A company loaned $60,000 to an employee on April 1, 2009. The 5-year note requires the employee to pay interest for the previous year each April 1, beginning on April 1, 2010. If the interest rate is 5%, how much interest revenue should the company record in 2009?

a. $0

b. $750

c. $2,250

d. $3,000

4. A company wants to minimize the amount of income taxes it pays each year. If the company operates in an industry where inventory prices have been steadily increasing, the company would most likely choose which inventory costing method?

a. FIFO

b. LIFO

c. Weighted average

d. Specific identification

5. On April 2, 2009 a company wrote off as uncollectible a customer’s account with a balance due of $5,000. The balance in the Allowance for Doubtful Accounts was $15,000 on the date of the write off. How will the write off affect the financial statements for April?

a. Total current assets will decrease by $5,000.

b. Net income will decrease by $5,000.

c. Net accounts receivable will remain the same.

d. The balance in the Allowance for Doubtful Accounts will increase by $5,000.

6. The following table contains information related to the purchase of new equipment by a company. How much should be recorded as the total cost of the equipment?

|Invoice price |$125,000 |

|Shipping costs paid by the company |$5,000 |

|Installation costs in the existing plant |$2,500 |

|Sales taxes |$8,500 |

|Test runs to calibrate equipment settings |$1,200 |

|Routine maintenance required after 3 months |$750 |

a. $125,000

b. $133,500

c. $142,200

d. $142,950

7. A company had the following information regarding its inventory on Dec. 31, 2008:

|Item |# of Units |Cost/Unit |Replacement Cost/Unit |

|Product 1 |252 |$15.00 |$14.83 |

|Product 2 |658 |$4.19 |$4.32 |

|Product 3 |917 |$8.66 |$8.43 |

If the company applies the lower of cost or market rule on an item by item basis, how much will it report for Inventory on Dec. 31, 2008?

a. $14,478

b. $14,310

c. $14,224

d. $14,009

8. Two companies purchased identical equipment in 2008. Both companies estimate a 15 year useful life and $10,000 residual value for the equipment. Company A uses straight line depreciation and Company B uses double declining balance. Which of the following statements is true?

a. Depreciation expense in year 1 will be higher for Company A.

b. Net income for 2008 for the two companies will not be affected by the difference in depreciation methods.

c. Company B will record more depreciation expense over the 15 year period than Company A.

d. The book value at the end of 15 years will be the same for both companies.

9. Which of the following is NOT an example of a revenue expenditure?

a. the cost of putting an addition on the company warehouse

b. the cost of color ink cartridges for computer printers

c. the cost of rotating the tires on a delivery truck.

d. the cost of cleaning the carpet in the Accounting Dept.

10. On April 1, 2009, a company sold used machinery for $30,000. The machinery had an original cost of $100,000 and had $60,000 of accumulated depreciation on the sale date. This transaction will cause the company to record:

a. A $30,000 gain on the sale.

b. A $10,000 loss on the sale.

c. A $70,000 loss on the sale.

d. No gain or loss on the sale.

11. Which of the following statements about depreciation is true?

a. Depreciation expense on the income statement must be the same number taken as a deduction for depreciation on the income tax return.

b. An accountant who follows GAAP to calculate depreciation for financial reporting purposes and the IRS rules for calculating depreciation on the corporate income tax return is guilty of fraud for keeping two sets of books.

c. The IRS uses a depreciation system called MACRS.

d. Land is normally depreciated using the straight line method.

12. Goodwill:

a. Should be amortized over a fairly long period, such as 40 years.

b. May be recorded by a company when it achieves net income that is more than 20% above that of its competitors.

c. May be recorded on the books only when a company purchases another business.

d. Is classified as a current asset.

13. A company uses a LIFO periodic inventory system. On January 1, 2009, inventory consisted of 2,000 units of product that cost $3.00 per unit. On Jan. 14, 800 more units were purchased for $3.60/unit and on Jan. 29, 1,000 units were purchased at $3.95/unit. If 3,100 units were sold during the month, how much was cost of goods sold?

a. $9,300

b. $10,065

c. $10,730

d. $12,245

14. The March 31 bank statement shows a $350 NSF check for March. On the bank reconciliation this should be:

a. added to the balance per bank

b. deducted from the balance per bank

c. added to the balance per books.

d. deducted from the balance per books.

15. A company reported $1,668,000 of net sales for 2008. Inventory at the beginning of the year was $2,000,000 and at the end of the year was $1,577,000. Inventory was purchased during the year for $1,000,900. How much was gross profit for 2008?

a. $91,000

b. $244,100

c. $576,100

d. $667,100

Use the following information to answer the next three questions:

|Equipment cost |$240,000 |

|Estimated useful life |10 years |

|Estimated residual value |$60,000 |

|Estimated units to be produced |800,000 |

16. If the company uses the double-declining balance method for depreciating its equipment, how much depreciation expense will it record in the second year?

a. $38,400

b. $40,800

c. $21,600

d. $22,200

17. If the company uses the straight line method for depreciating its equipment, what is the equipment’s book value at the end of the fourth year?

a. $180,000

b. $168,000

c. $108,000

d. $72,000

18. How much depreciation expense will the company record in a year when the equipment is used to produce 120,000 units?

a. $2,700

b. $9,000

c. $27,000

d. $36,000

19. Your company received an order from a new customer on April 8. The order was shipped on April 12. The customer mailed a check for payment in full on May 4. Your company received the check on May 6. Your company should record sales revenue related to these transactions on:

a. April 8

b. April 12

c. May 4

d. May 6

20. A company uses a periodic inventory system. On January 1, 2009, inventory consisted of 2,200 units of product that cost $3.00 per unit. On Jan. 9, 1,900 more units were purchased for $3.20/unit and on Jan. 20, 1,200 units were purchased at $3.45/unit. If 4,000 units were sold during the month, how much was ending inventory using the weighted average method?

a. $4,125

b. $4,182

c. $3,900

d. $12,694

21. At the end of 2008 a company understated its ending inventory by $10,000. This will cause:

a. Cost of goods sold for 2008 to be understated.

b. Net income for 2008 to be understated.

c. Stockholder’s equity at the end of 2008 to be overstated.

d. Ending inventory at the end of 2009 to be overstated.

22. A company recorded $960,000 of credit sales in 2008. On Dec. 31, 2008 the balance in Accounts Receivable was $310,000 debit and the balance in the Allowance for Doubtful Accounts was $7,200 credit. If the company normally experiences a 3.5% loss rate on its credit sales, how much bad debt expense should it record on Dec. 31, 2008?

a. $3,650

b. $26,400

c. $33,600

d. $18,050

23. A company that uses a perpetual inventory system will:

a. have to calculate the cost of goods sold at the end of the accounting period.

b. update the balance of the Inventory account whenever a sale is made.

c. not be concerned about internal controls for inventory.

d. record purchases of inventory items in a Purchases account.

24. Company A uses LIFO and Company B uses FIFO for inventory valuation. If this is the only difference between the two companies for 2008,

a. Company A will report a lower dollar amount for ending inventory and a higher cost of goods sold.

b. Company B will report a lower dollar amount for ending inventory and a higher cost of goods sold.

c. Ending inventory will be the same for both companies.

d. None of the above.

25. A company has the following items to consider in calculating its ending inventory on Dec. 31, 2008:

• A physical count of items on hand in the warehouse shows merchandise that cost $212,500.

• Items held on consignment from another company are stored in a separate room. The items cost the other company $22,400.

• Goods costing $1,675 were shipped to a customer on Dec. 30, 2008 fob shipping point. The customer received the goods on Jan. 4, 2009.

• Goods costing $14,950 were shipped to the company by its supplier on Dec. 31, 2008 fob destination. The company received the goods on Jan. 2, 2009.

How much should the company report for Inventory on Dec. 31, 2008?

a. $212,500

b. $234,900

c. $236,575

d. $251,525

26. A company had $632,000 of gross accounts receivable on March 31, which can be separated in the following categories: 1-30 days, $429,000; 31 – 60 days, $154,000; 61-90 days, $40,000; over 90 days, $9,000. Estimated uncollectible amounts for each category are 1%, 3%, 18%, and 40% respectively. The balance in the Allowance for Doubtful Accounts on March 31 is $12,000 credit. How much is bad debt expense using the aging of receivables method?

a. $19,710

b. $7,710

c. $31,710

d. Cannot be determined from the information given.

27. Your company sold merchandise to a customer on account for $15,000 on April 1. The customer returned $3,000 of the merchandise on April 3 because it was defective. If your company offers payment terms of 2/15,n/30, how much should the customer pay on April 10 to pay the account in full?

a. $12,000

b. $11,760

c. $11,700

d. $10,200

28. A fixed asset is said to be impaired when:

a. the estimated future cash flows related to the asset are less than its book value.

b. it continually breaks down and causes the assembly line to stop until it is fixed.

c. its book value is equal to its residual value.

d. it could be sold in the second hand market for more than book value.

29. On Jan. 1, 2008 the balance in the Allowance for Doubtful Accounts was $18,642. During 2008 $12,745 of accounts receivable were written off as uncollectible. If the balance in the account on Dec. 31, 2008 after adjusting entries were made was $16,884, how much was bad debt expense for the year?

a. $10,987

b. $1,758

c. $14,503

d. Cannot be determined from the information given.

30. A publicly held company files its annual report with the SEC using:

a. Form AIG

b. Form 10-Q

c. Form 8-K

d. Form 10-K

31. In a multistep income statement, which one of the following should not be included in the calculation of “income from operations” for a manufacturer of hula hoops?

a. the cost of plastic material for hula hoops sold

b. advertising expense

c. interest expense

d. sales revenue

32. A company had $1,500,000 in net credit sales for 2008. On Jan. 1, 2008 Accounts Receivable had a balance of $360,000 and on Dec. 31, 2008 the balance was $300,000. The Allowance for Doubtful Accounts had a credit balance of $5,000 at the beginning of the year and a credit balance of $9,000 at the end of the year. On average, how many days did it take the company to collect on an account receivable during 2008? (Hint: receivables turnover ratio = net credit sales / average net accounts receivable; days to collect = 365 /accounts receivable turnover)

a. 73.0 days

b. 80.2 days

c. 78.7 days

d. 69.3 days

33. Company A reported a fixed asset turnover for 2008 of 1.68 and Company B reported 1.23. This tells us that:

a. Company is using its fixed assets more efficiently than Company B to generate revenue.

b. Company A has more fixed assets than Company B.

c. Company A replaces its fixed assets more frequently than Company B.

d. Company B has older assets.

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