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Test Bank Description: Book title: Accounting: What the Numbers Mean, 10th Edition: David Marshall Edition: 10th Edition ISBN10: 007802529X ISBN 13 9780078025297

 

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Accounting: What the Numbers Mean 10th Edition, David Marshall

Chapter 01

Accounting – Present and Past

  1. Which of the following entities would not require accounting information pertaining to their economic activities?
    A. Social clubs.
    B. Not-for-profit entities.
    C. State governments.
    D. All of the above require accounting information.
    E. None of the above requires accounting information.
  2. Which of the following is not an objective of financial reporting described in FASB Concepts Statement No. 1?
    A. To provide information about how management of an enterprise has discharged its stewardship responsibility to owners.
    B. To measure the current market value of the business enterprise.
    C. To provide information so potential investors or creditors can make their own predictions of future earnings.
    D. To focus primarily on information about earnings and its components.
    E. All of the above are objectives of financial reporting.
  3. Which of the following statements about the Financial Accounting Standards Board is correct?
    A. The FASB is an agency of the Federal government.
    B. The FASB has the authority to fine a noncompliant firm.
    C. The FASB follows a due process procedure that permits input from interested parties before a standard is issued.
    D. The FASB is controlled by the American Institute of CPA’s.
    E. None of the above statements is correct.
  4. Major classifications of accounting activity would not include:
    A. financial accounting, internal auditing, public accounting.
    B. internal auditing, governmental accounting, managerial accounting.
    C. financial accounting, national accounting, cost accounting.
    D. auditing, income tax accounting, governmental accounting.
  5. Which of the following is not an example of a decision or informed judgment that a potential investor would make from accounting information?
    A. Future profitability based on past profitability.
    B. Probability of success of a new product development.
    C. A forecast of dividends.
    D. Assessment of risk that a company may have more debt than it can repay if the economy enters a recession.
  6. Which of the following is not an example of a decision or informed judgment that a potential employee could make from accounting information?
    A. Personnel turnover statistics (i.e., hiring and terminations).
    B. Probability of the company’s ability to make profit sharing plan contributions in the future.
    C. Assessment of the risk that the company may become bankrupt in the near future.
    D. The extent of the company’s commitment to a research program.
  7. Which of the following is qualified to express an auditor’s opinion about an entity’s financial statements?
    A. A Comptroller.
    B. A Certified Management Accountant.
    C. A Certified Internal Auditor.
    D. A Certified Public Accountant.
    E. None of the above.
  8. Which classification of accounting is most concerned with the use of economic and financial information to plan and control many of the activities of the entity?
    A. Financial accounting.
    B. Auditing-Public accounting.
    C. Managerial accounting.
    D. Income tax accounting.
  9. An unqualified auditors’ opinion about an entity’s financial statements:
    A. is a clean bill of health.
    B. means that all of the entity’s transactions during the audited period were checked out.
    C. guarantees that the entity was not involved in or the victim of any fraudulent activities during the audited period.
    D. states that they are presented in conformance with generally accepted accounting principles.
  10. Cost accounting is a subset of which of the following?
    A. Internal auditing.
    B. Public auditing.
    C. Cost analysis.
    D. Managerial accounting.

Chapter 02

Financial Statements and Accounting Concepts/Principles

  1. Which of the following is not a transaction to be recorded in the accounting records of an entity?
    A. Investment of cash by the owners.
    B. Sale of product to customers.
    C. Receipt of a plaque recognizing the firm’s encouragement of employee participation in the United Way fund drive.
    D. Receipt of services from a “quick-print” shop in exchange for the promise to provide advertising design services of equivalent value.
  1. The balance sheet might also be called:
    A. Statement of Financial Position.
    B. Statement of Assets.
    C. Statement of Change in Financial Position.
    D. None of the above.
  2. Transactions are summarized in:
    A. Financial statement footnotes.
    B. The independent auditor’s opinion letter.
    C. The entity’s accounts.
    D. None of the above.
  3. A fiscal year:
    A. is always the same as the calendar year.
    B. is frequently selected based on the firm’s operating cycle.
    C. must always end on the same date each year.
    D. must end on the last day of a month.
  4. Which of the following is not a principal form of business organization?
    A. Partnership.
    B. Sole proprietorship.
    C. Limited unregistered business.
    D. Corporation.
    E. None of the above.
  5. The time frame associated with a balance sheet is:
    A. a point in time in the past.
    B. a one-year past period of time.
    C. a single date in the future.
    D. a function of the information included in it.
  6. Current Generally Accepted Accounting Principles and auditing standards require the financial statements of an entity for the reporting period to include:
    A. Earnings and gross receipts of cash for the period.
    B. Projected earnings for the subsequent period.
    C. Financial position at the end of the period.
    D. Current market values of all assets at the end of the period.
  7. The balance sheet equation can be represented by:
    A. A = L + OE
    B. Assets – Liabilities = Owners’ Equity
    C. Net Assets = Owners’ Equity
    D. All of the above.
  8. Owners’ equity refers to which of the following?
    A. A listing of the organization’s assets and liabilities.
    B. The ownership right of the owner(s) of the entity.
    C. Probable future sacrifices of economic benefits.
    D. All of the above.
    E. None of the above.
  9. Accumulated depreciation on a balance sheet:
    A. Is part of owners’ equity.
    B. Represents the portion of the cost of an asset that is assumed to have been “used up” in the process of operating the business.
    C. Represents cash that will be used to replace worn out equipment.
    D. Recognizes the economic loss in value of an asset because of its age or use.

Chapter 03

Fundamental Interpretations Made from Financial Statement Data

  1. Financial statement ratios support informed judgments and decision making most effectively:
    A. When viewed for a single year.
    B. When viewed as a trend of entity data.
    C. When compared to an industry average for the most recent year.
    D. When the trend of entity data is compared to the trend of industry data.
  2. When comparing entity financial ratios with industry ratios:
    A. It should be assumed that the data result from the consistent application of alternative accounting methods.
    B. Relative values at a point in time may not be significant.
    C. Relates dividends paid to the entity’s assets.
    D. Entity ratios should not be compared with industry ratios.
  3. The return on investment measure of performance:
    A. Is not as important a measure of management effectiveness as the amount of net income.
    B. Relates dividends paid to the entity’s assets.
    C. Is calculated using net income as the amount of return.
    D. Is calculated by dividing average assets for a period by the amount of net income for the period.
  4. Another term for return on investment is:
    A. Return on equity.
    B. Return on assets.
    C. Return on retained earnings.
    D. None of these.
  5. The return on investment measure of performance:
    A. Is relevant only to business enterprises.
    B. Is used by individuals to compare investment performance.
    C. Is calculated using sales as the amount of return.
    D. Is calculated using total assets at the beginning of the period as the amount of investment.
  6. An advantage of the DuPont model for calculating ROI is that:
    A. It focuses on asset utilization as well as net income.
    B. It is easier to use than the straightforward ROI formula.
    C. It uses average assets and the straightforward ROI formula does not.
    D. It uses owners’ equity.
  7. A firm has an ROI of 15%, turnover of 3, and sales of $6 million. The firm’s margin is:
    A. $900,00
    B. 5%
    C. 30%
    D. $300,000
  8. A firm’s net income is $260,000 on sales of $31.5 million. Average assets for the period were $7 million. For the year:
    A. Margin was 5%, turnover was 1.2, and ROI was 6%.
    B. Margin was 6%, turnover was 1.5, and ROI was 6%.
    C. Margin was 4%, turnover was 1.2, and ROI was 4.8%.
    D. Margin was 1%, turnover was 4.5, and ROI was 4.5%.
  9. Another term for return on equity is:
    A. Return on investment.
    B. Return on assets.
    C. Return on retained earnings.
    D. None of these.
  10. Return on equity:
    A. Will be the same as return on investment.
    B. Relates dividends and turnover.
    C. Relates dividends and owners’ equity.
    D. Relates net income and owners’ equity.

Chapter 04

The Bookkeeping Process and Transaction Analysis

  1. An expanded version of the accounting equation could be:
    A. A + Rev = L + OE – Exp
    B. A – L = Paid-in Capital – Rev – Exp
    C. A = L + Paid-in Capital + Beginning Retained Earnings + Rev – Exp
    D. A = L + Paid-in Capital – Rev + Exp
  1. In the seller’s records, the sale of merchandise on account would:
    A. Increase assets and increase expenses.
    B. Increase assets and decrease liabilities.
    C. Increase assets and increase paid-in capital.
    D. Increase assets and decrease revenues.
  2. In an advertiser’s records, a newspaper ad submitted and published this week with the agreement to pay for it next week would:
    A. Decrease assets and decrease expenses.
    B. Increase liabilities and increase expenses.
    C. Decrease assets and increase revenue.
    D. Increase assets and decrease liabilities.
  3. In the buyer’s records, the purchase of merchandise on account would:
    A. Increase assets and increase expenses.
    B. Increase assets and increase liabilities.
    C. Increase liabilities and increase paid-in capital.
    D. Have no effect on total assets.
  4. A newspaper ad submitted and published this week, with the agreement to pay for it next week would, in the newspaper’s records:
    A. Increase assets and increase revenues.
    B. Increase assets and decrease liabilities.
    C. Increase assets and increase expenses.
    D. Have no effect on total assets.
  5. A debit entry will:
    A. Decrease an asset account.
    B. Increase a liability account.
    C. Increase paid-in capital.
    D. Increase an expense account.
  6. A credit entry will:
    A. Increase an asset account.
    B. Increase a liability account.
    C. Decrease paid-in capital.
    D. Increase an expense account.
  7. A credit entry to an account will:
    A. Always decrease the account balance.
    B. Always increase the account balance.
    C. Increase the balance of a revenue account.
    D. Increase the balance of an expense account.
  8. A debit entry to an account will:
    A. Always decrease the account balance.
    B. Always increase the account balance.
    C. Increase the balance of a revenue account.
    D. Increase the balance of an expense account.
  1. Sage, Inc. has 20 employees who each earn $100 per day and are paid every Friday. The end of the accounting period is on a Wednesday. How much wages should the firm accrue at the end of the period?
    A. $2,000.
    B. $1,000.
    C. $0.
    D. $6,000.

Chapter 05

Accounting for and Presentation of Current Assets

  1.  The current assets of most companies are usually made up of:
    A. assets that are currently used in the operations of the company.
    B. cash and assets expected to be converted to cash within a year.
    C. a very small proportion (less than 10%) of the total assets of the entity.
    D. cash, marketable securities, and accounts and notes receivable.
  2. Which of the following is the correct balance sheet presentation for current assets?
    A. Cash, inventories, account receivables, prepaid expenses.
    B. Cash equivalents, cash, other current assets, accounts receivable.
    C. Accounts receivable, inventories, prepaid expenses, other current assets.
    D. Marketable securities, cash, notes receivable, prepaid expenses.
  3. The principal reason for reconciling the cash balance per books with the balance shown on the bank statement is to:
    A. determine the amount of cash in the account actually available to the entity.
    B. satisfy generally accepted accounting principles.
    C. verify the amount of petty cash on hand.
    D. determine whether or not the entity has issued an NSF check.
  4. For which of the following reconciling items would an adjusting entry be necessary?
    A. A deposit in transit.
    B. An error by the bank.
    C. Outstanding checks.
    D. A bank service charge.
  5. When a manufacturer invests in short-term marketable securities:
    A. the return on investment is more important than the risk involved.
    B. the securities are likely to have a maturity date more than a year in the future.
    C. the market value of the securities is likely to fluctuate significantly.
    D. risk avoidance is of great importance.
  6. A cash equivalent is a current asset that:
    A. Will be converted to cash within one year.
    B. Will be converted to cash within one month.
    C. Is readily convertible into cash with a minimal risk.
    D. Is readily convertible into cash with a substantial risk.
    E. None of the above.
  1. The accounting concept or principle applied when the cost of short-term marketable securities is adjusted to market value is:
    A. objectivity.
    B. matching revenue and expense.
    C. original cost.
    D. consistency.
  2. The accrual of interest on short-term marketable securities results in:
    A. an increase in current assets and a decrease in net income.
    B. an increase in current assets and an increase in net income.
    C. an increase in noncurrent assets and an increase in liabilities.
    D. an increase in current liabilities and an increase in net income.
  3. The accounting concept or principle applied when an allowance is provided for estimated uncollectible accounts receivable is:
    A. consistency.
    B. matching revenue and expense.
    C. original cost.
    D. objectivity.
  4. The allowance for uncollectible accounts is a(n):
    A. asset.
    B. contra current asset.
    C. expense.
    D. contra revenue.

Chapter 06

Accounting for and Presentation of Property, Plant, and Equipment, and Other Noncurrent Assets

  1. When a firm buys land on which there is a building, and the building is torn down so that an appropriate new building can be constructed on the land:
    A. any of the purchase cost allocated to the old building is reported as a loss.
    B. the cost assigned to the land excludes the cost of the old building.
    C. the total cost of the land and old building are capitalized as land cost.
    D. any of the purchase cost allocated to the old building is capitalized as part of the cost of the new building.
  2. Expenditures capitalized as long-lived assets generally include those expenditures that:
    A. are made for normal repairs to maintain the usefulness of the asset over a number of years.
    B. are for items that have a physical life of more than a year, regardless of their cost.
    C. are material and that have an economic benefit to the entity only in the current year.
    D. are material and that have an economic benefit to the entity that extends beyond the current year.
  3. Which of the following accounting concepts/principles is most significant in the development of a capitalization policy?
    A. Matching of revenue and expense.
    B. Materiality.
    C. Original Cost.
    D. Consistency.
  4. Which of the following statements best describes the process of accounting for depreciation?
    A. A process that attempts to recognize loss in economic value over a period of time.
    B. A process for setting aside cash so funds will be available to replace the asset.
    C. A process for recognizing the cost of an asset that should be matched against revenue earned as a result of using the asset.
    D. A process for recognizing all of the cost associated with using an asset in a revenue generating activity.
  5. The entry to record depreciation expense:
    A. increases a contra long-term asset and decreases net income.
    B. decreases a contra long-term asset and decreases net income.
    C. decreases working capital and decreases net income.
    D. decreases a long-term asset and increases a contra long-term asset.
  6. The net book value of a depreciable asset is:
    A. the fair market value of the asset.
    B. the amount for which the asset should be insured.
    C. the difference between the asset’s cost and accumulated depreciation.
    D. the difference between the asset’s cost and depreciation expense.
  7. It is not unusual for a company to use different depreciation methods for book and tax purposes. When this happens, the firm usually:
    A. uses an accelerated depreciation method for book purposes.
    B. uses an accelerated depreciation method for tax purposes.
    C. is trying to maximize its taxable income.
    D. is trying to minimize its book income.
  8. The present value concept is widely applied in business because:
    A. inflation erodes the purchasing power of money.
    B. money has value over time.
    C. accounting for operating leases requires its use.
    D. most obligations are settled within a year.
  9. When an accelerated depreciation method is used to calculate depreciation expense:
    A. the net book value of the asset halfway through its useful life will be less than if straight-line depreciation is used.
    B. the net book value of the asset at the end of its useful life will be less than if straight-line depreciation is used.
    C. depreciation expense will be less in the early years of the asset’s life than if straight-line depreciation is used.
    D. the accumulated depreciation account balance will increase by a larger amount in the last half of an asset’s life than if straight-line depreciation is used.

Moped, Inc. purchased machinery at a cost of $22,000 on January 1, 2011. The expected useful life is 5 years and the asset is expected to have salvage value of $2,000. Moped depreciates its assets via the double-declining balance method.

  1. What is the firm’s depreciation expense for the year ended December 31, 2011?
    A. $2,000
    B. $4,400
    C. $6,000
    D. $8,800

Chapter 07

Accounting for and Presentation of Liabilities

  1. A transaction that is likely to cause an increase in a current liability is:
    A. payment of accrued wages.
    B. accrual of interest expense.
    C. depreciation of equipment.
    D. accrual of bad debts expense.
  2. The payment of a current liability will:
    A. decrease net income.
    B. decrease working capital.
    C. increase working capital.
    D. not affect working capital.
  3. A working capital loan will generally:
    A. not have an interest rate.
    B. require that interest (if any) be paid monthly.
    C. not affect working capital.
    D. be classified as a long-term liability.
  4. Computing a borrower’s effective interest rate is another application of which of the following concepts?
    A. Present value concept.
    B. Current value concept.
    C. Periodic interest concept.
    D. None of the above.
  5. Which of the following is a true statement regarding interest calculation methods?
    A. Interest is calculated on either a straight basis or a delayed basis.
    B. Interest is calculated on either a straight basis or an undiscounted basis.
    C. If a borrower receives a loan on a discount basis, the APR will be less than the simple interest.
    D. If a borrower receives a loan on a discount basis, the APR will be more than the simple interest rate.
  6. A loan discount is:
    A. a loan used to purchase a bond at a discount.
    B. a discount market interest rate on a loan.
    C. the same as a bond discount.
    D. none of the above.
  7. Cassady, Inc. borrowed $5,000 for 3 months at an APR of 10%. The amount of interest paid on this loan was:
    A. $240
    B. $120
    C. $125
    D. $500
  8. Orpah, Inc. borrowed $12,000 for 4 months on a discount basis. The lender used an interest rate of 8% to calculate the discount. The amount of cash Orpah, Inc. actually had available to use from this loan was:
    A. $11,040
    B. $11,680
    C. $12,000
    D. $12,320
  9. When borrowing money, the most important objective of the borrower should be to:
    A. minimize monthly payments.
    B. minimize the APR.
    C. avoid borrowing on a discount basis.
    D. make the maturity date as far in the future as possible.
  10. Interest on a note payable is most appropriately accrued:
    A. when the note is signed.
    B. as of the end of each accounting period during which the note is a liability.
    C. when principal payments on the note are made.
    D. when the interest is paid.

Chapter 08

Accounting for and Presentation of Owners’ Equity

  1. Which of the following is not a right or attribute of common stock ownership?
    A. Electing directors.
    B. Liability limited to amount invested.
    C. Approving changes in corporate charter.
    D. Determining dividend policy.
  2. Which of the terms is not used to identify owners’ equity?
    A. Partner’s capital.
    B. Proprietor’s capital.
    C. Paid-in-capital and retained earnings.
    D. Additional-paid-in-retained earnings.
  3. Which of the following is not an owner’s equity account?
    A. Common stock.
    B. Capital stock.
    C. Retained earnings.
    D. Accumulated depreciation.
    E. Paid-in-capital in excess of par.
  4. Another term frequently used to describe owners’ equity is:
    A. net assets.
    B. gross assets.
    C. paid-in capital.
    D. capital stock.
  5. Which of the following is one of the two generally practiced methods for electing corporate directors?
    A. Democratic voting.
    B. Representative voting.
    C. Cumulative voting.
    D. Census voting.
    E. None of the above.
  6. If a common stock has no par value:
    A. there is no way of determining the market value per share.
    B. the stock must have a stated value.
    C. there will not be any additional paid-in capital related to it.
    D. the stockholders do not have a preemptive right.
  7. When common stock has a par value:
    A. the liability of the stockholders is limited to the par value.
    B. there will probably be additional paid-in capital in the balance sheet.
    C. the market value of the stock will be higher than if there is no par value.
    D. the paid-in capital will equal the par value of the number of shares issued.
  8. The dollar amount of the common stock in the balance sheet of a corporation that has common stock with a par value is the number of shares:
    A. issued, multiplied by the amount received per share.
    B. outstanding, multiplied by the amount received per share.
    C. issued, multiplied by the par value per share.
    D. outstanding, multiplied by the par value per share.
  9. Which of the following is not usually a right or attribute of preferred stock?
    A. Having a claim to dividends in excess of the annual dividend requirement if dividends on common stock exceed dividends on preferred stock.
    B. Having a priority claim to dividends relative to the common stock’s claim to dividends.
    C. Having a priority claim in liquidation relative to the common stock’s claim in liquidation.
    D. Having a claim to dividends that is cumulative over time if the annual dividend requirement is not satisfied.
  10. Additional paid-in capital is most likely to appear in the balance sheet of a corporation that:
    A. has par value stock.
    B. has no-par value stock.
    C. has issued stock at different dates.
    D. has issued stock dividends.

Chapter 09

The Income Statement and the Statement of Cash Flows

  1. The first caption in most income statements in annual reports is:
    A. gross sales.
    B. net sales.
    C. earned revenues.
    D. sales, less sales returns and allowances.
  2. Gains differ from revenues because gains:
    A. are not a result of the entity’s ongoing, central operations.
    B. do not have to be realized.
    C. are reported as income from operating activities.
    D. do not involve any offsetting costs or expenses.
  3. Under most circumstances, in order to recognize revenue:
    A. cash must have been received.
    B. the entity must expect to receive cash in the future.
    C. the entity must have paid for all expenses incurred in generating the revenue.
    D. the revenue must be realized or realizable, and earned.
  4. The concept of matching revenue and expense refers to the fact that:
    A. expenses for a period equal the revenues for the period.
    B. all costs incurred in the process of earning revenue during a period are recorded as an expense in that period.
    C. all cash disbursements during a period are subtracted from all cash receipts during the period.
    D. costs incurred in the process of earning revenue during a period are deferred and expensed in a future period.
  5. Most entities satisfy the accounting criteria for recognizing revenue when:
    A. an order is received from a customer.
    B. cash is received from a customer.
    C. an unearned revenue account is credited.
    D. a product is delivered or a service is provided.
  6. Most entities satisfy the accounting criteria for recognizing an expense when:
    A. a commitment is made to purchase a product or service.
    B. cash is paid to a supplier.
    C. a cost is incurred in the revenue generating process.
    D. a dividend is paid to stockholders.
  7. The gross profit ratio is useful to the manager for each of the following purposes except that:
    A. it can be used to determine the selling price to set for an item.
    B. it can be used to estimate the amount of inventory lost in a fire.
    C. it can be used to determine the amount available from a given amount of revenue to cover operating expenses.
    D. it can be used to estimate the amount of operating expenses for a period.
  8. Which of the following accounts is not included in the calculation for Gross Profit?
    A. Revenue.
    B. Cost of goods sold.
    C. Net sales.
    D. General and selling expenses.
  1. When the periodic inventory system is used:
    A. operating profit from the sale of an item from inventory is known when the item is sold.
    B. gross profit from the sale of an item from inventory is known when the item is sold.
    C. cost of goods sold can be calculated by subtracting the ending inventory amount from the sum of beginning inventory and purchases.
    D. a physical inventory must be taken in order to estimate the cost of goods sold.
  2. Income from operations is:
    A. sometimes called the “bottom line”.
    B. sometimes used in the ROI calculation.
    C. usually used in the ROE calculation.
    D. usually calculated after income tax expense.

Chapter 10

Corporate Governance, Explanatory Notes and Other Disclosures

  1. Corporate governance includes concerns about:
    A. business ethics and social responsibility.
    B. the responsibilities of the board of directors.
    C. equitable treatment of stakeholders.
    D. disclosures and transparency.
    E. all of the above.
  2. The most powerful corporate governance legislation to date has been:
    A. the Sarbanes-Oxley Act (SOX) of 2002.
    B. the creation of the American Institute of Certified Public Accountants.
    C. Corporate Ethics Code of 2007.
    D. the regulation of inventory management practices by the SEC.
  3. The Sarbanes-Oxley Act (SOX) of 2002 does not specifically prohibit an independent auditor from performing the following non-audit function(s) for an audit client:
    A. financial information systems design and implementation.
    B. internal audit outsourcing services.
    C. tax services.
    D. “expert” services.
    E. SOX specifically prohibits an independent auditor from performing all of the non-audit services for an audit client.
  4. Which is the following descriptions is not one of the “Seven Financial Shenanigans” identified by Howard Schilit and listed in Exhibit 10-1:
    A. recording revenue too soon or that is of a questionable quality.
    B. boosting income with one-time gains.
    C. failing to record intangible assets which the company has ownership rights to.
    D. shifting future expenses to the current period as a special charge.
    E. failing to record or improperly reducing liabilities.
  5. The explanatory notes to the financial statements:
    A. should be referred to if more than a cursory, and perhaps misleading impression of a firm’s financial position and its results of operations is to be achieved.
    B. are not an integral part of the financial statements.
    C. include a great deal of detailed information that is potentially useful only to a financial analyst making a detailed appraisal of the future prospects of the entity.
    D. are used by many entities to hide information from the reader of the financial statements by including in the explanatory notes information that should be shown in detail on the financial statements themselves.
  6. The nature and content of disclosures relate to all of the following except:
    A. accounting changes.
    B. segment information.
    C. fair market value.
    D. contingencies and commitments.
    E. events subsequent to the balance sheet date.
  7. Which of the following is not a topic that is likely to be discussed as a significant accounting policy?
    A. Depreciation method.
    B. Earnings per share of common stock calculation details.
    C. Inventory valuation method.
    D. Method of estimating uncollectible accounts receivable.
  8. The explanatory notes to the financial statements:
    A. are not an integral part of the financial statements.
    B. explain the significant accounting policies of the company.
    C. usually disclose the amount of the company’s bad debts expense.
    D. describe management’s product development plans for the coming year.
  9. Significant accounting policies are described in the explanatory notes to the financial statements because:
    A. there isn’t enough space for them to be included in the captions of the financial statements.
    B. if the accrual basis of accounting is used, “matching” of revenues and expenses may not take place.
    C. the reader must be aware of which of the alternative generally accepted accounting practices have been used.
    D. none of the above.
  10. When an entity changes its accounting from one generally accepted method to another generally accepted method:
    A. financial statements of all prior years are changed to maintain comparability.
    B. an explanatory note stating that the change was approved by the Financial Accounting Standards Board is required.
    C. the dollar effect of the change on both the balance sheet and income statement must be disclosed.
    D. changes like this are not permitted.

Chapter 11

Financial Statement Analysis

  1. Which of the following is not a category of financial statement ratios?
    A. Financial leverage.
    B. Liquidity.
    C. Profitability.
    D. Prospectus.
  2. Management’s use of resources can best be evaluated by focusing on measures of:
    A. liquidity.
    B. activity.
    C. leverage.
    D. book value.
  3. An individual interested in making a judgment about the profitability of a company should:
    A. review the trend of working capital for several years.
    B. calculate the company’s ROI for the most recent year.
    C. review the trend of the company’s ROI for several years.
    D. compare the company’s ROI for the most recent year with the industry average ROI for the most recent year.
  4. An entity’s current ratio will be influenced by:
    A. the inventory cost flow assumption used.
    B. writing off an overdue account receivable against the allowance for uncollectible accounts.
    C. the depreciation method used.
    D. issuance of a stock dividend.
  5. A potential creditor’s judgment about granting credit would be most influenced by the potential customer’s:
    A. current ratio at the end of the prior fiscal year.
    B. most recent acid-test ratio.
    C. trend of acid-test ratio over the past three years.
    D. practice with respect to taking cash discounts offered by current suppliers.
  6. The comparison of activity measures of different companies is complicated by the fact that:
    A. different inventory cost flow assumptions may be used.
    B. dollar amounts of assets may be significantly different.
    C. only one of the companies may have preferred stock outstanding.
    D. the number of shares of common stock issued may be significantly different.
  7. The inventory turnover calculation:
    A. is wrong unless cost of goods sold is used in the numerator.
    B. is wrong unless sales is used in the numerator.
    C. is an alternative way of expressing the number of days’ sales in inventory.
    D. requires knowledge of the inventory cost flow assumption being used.
  8. If a firm’s payment terms for sales made on account to its customers were 2/10, n30, the number of days’ sales in accounts receivable would be expected to be:
    A. less than 10.
    B. between 10 and 25.
    C. between 25 and 40.
    D. over 40.
  9. Asset turnover calculations:
    A. are made by dividing the average asset balance during the year by the sales for the year.
    B. are made by dividing sales for the year by the asset balance at the end of the year.
    C. communicate information about how promptly the entity pays its bills.
    D. should be evaluated by observing the turnover trend over a period of time.
  10. When a firm has financial leverage:
    A. ROI will be greater than ROE.
    B. ROI will usually be less than it would be without leverage.
    C. risk is greater than if there isn’t any leverage.
    D. the firm will always have a higher ROE than it would without leverage.

Chapter 12

Managerial Accounting and Cost-Volume-Profit Relationships

  1. Managerial accounting supports the management process most significantly by:
    A. measuring and reporting financial results after the fact.
    B. determining the goals and objectives of the entity.
    C. providing estimates of financial results for various plans.
    D. establishing operating policies to be followed during a period of time.
  2. Activities included in a generally accepted definition of management accounting include:
    A. planning, organizing, controlling
    B. planning, operating, reporting
    C. preparing, operating, creating
    D. preparing, organizing, converting
  3. Which of the following activities is not part of the management planning and control cycle?
    A. Data collection and performance feedback.
    B. Implementation of plans.
    C. Providing information to investors and creditors.
    D. Revisiting plans.
  4. Performance analysis in the planning and control cycle relates to the act of:
    A. planning.
    B. managing.
    C. controlling.
    D. revising plans.
  5. Which of the following statements does not describe a characteristic of management accounting?
    A. Management accounting must conform to GAAP.
    B. Approximate amounts rather than accurate amounts or refined estimates are often used in management accounting.
    C. Management accounting places a great deal of emphasis on the future.
    D. Management accounting is more concerned with units of the organization rather than with the organization as a whole.
  6. Managerial accounting, as compared to financial accounting:
    A. must conform to GAAP.
    B. places a great deal of emphasis on historical transactions.
    C. uses frequent and prompt control reports.
    D. focuses on information prepared for the investors and creditors.
  7. Management accounting is:
    A. a highly technical subject that people in personnel or engineering should not be expected to understand.
    B. performed by individuals who seldom work with people in other functional areas of the organization.
    C. the principal activity involved in determining the goals and objectives of the entity.
    D. an activity that gets involved with virtually all of the other functional areas of the organization.
  8. Managerial accounting, as opposed to financial accounting, is primarily concerned with:
    A. preparing the current balance sheet of the company.
    B. present and future planning and control.
    C. providing information to investors and creditors.
    D. historical results of operations.
  9. Managerial accounting can best be described as:
    A. the preparation and distribution of the financial statements.
    B. the preparation and distribution of the corporate tax return.
    C. the preparation and use of accounting information within the organization.
    D. meeting the requirements of generally accepted accounting principles.
  10. Simplifying assumptions made when using cost behavior pattern data include:
    A. relevant range and liquidity.
    B. fixed activity and linearity.
    C. relevant range and linearity.
    D. activity range and variability.

Chapter 13

Cost Accounting and Reporting

  1. The term “cost” means:
    A. the price paid for a raw material.
    B. the wage paid to a worker.
    C. the price charged by an entity for its services.
    D. all of the above.
  2. Cost accounting is primarily concerned with:
    A. accumulation and determination of product or service cost.
    B. income measurement and inventory valuation.
    C. generally accepted accounting principles.
    D. all of the above.
  3. Which of the following is more relevant to management accounting than to cost accounting?
    A. Accumulation and determination of product or service cost.
    B. Income measurement and inventory valuation.
    C. Generally accepted accounting principles.
    D. Providing managers information for planning and control purposes.
  4. The sequence of activities that add value to the organization are:
    A. the value processes.
    B. the chain of production events.
    C. the value chain.
    D. the strategic cost initiatives.
  5. Which of the following activities is not included in the organization’s value chain?
    A. Marketing.
    B. Finance.
    C. Customer service.
    D. Research and development.
  6. For the partial value chain functions given below, which sequence is correct?
    A. Design, production, marketing
    B. Marketing, production, distribution
    C. Research and development, production, distribution
    D. Customer service, marketing, distribution
  7. An example of a product cost is:
    A. advertising expense for the product.
    B. a portion of the president’s travel expenses.
    C. interest expense on a loan to finance inventory.
    D. production line maintenance costs.
  8. Which of the following costs would be classified as a period cost?
    A. Production line maintenance costs.
    B. Advertising expense for the product.
    C. Plant electricity.
    D. Indirect labor.
  9. Direct costs pertain to costs that:
    A. are traceable to a cost object.
    B. are not traceable to a cost object.
    C. are commonly incurred.
    D. are variable costs.
  10. The overhead component of product cost is:
    A. the sum of the actual overhead costs incurred in the manufacture of the product.
    B. likely to be the same amount for every product made by the company.
    C. an estimated amount based on labor hours, machine hours, or some other activity.
    D. determined at the end of the year when actual costs and actual production are known.

Chapter 14

Cost Planning

  1. An example of a committed cost is:
    A. employee training.
    B. manufacturing supplies.
    C. real estate taxes.
    D. charitable contributions.
  2. Which of the following is not a strong reason for budgeting?
    A. Budgets provide a benchmark for judging performance.
    B. Budgeting requires little effort by non-accounting managers.
    C. Budgeting requires management to plan.
    D. Budgeting requires coordination among the functional areas of the firm.
  3. The budgeting process that most likely creates an attitude supportive of achieving organization goals is:
    A. top-down approach.
    B. zero based approach.
    C. proportionate increase approach.
    D. participative approach.
  4. A budgeting approach that implies little or no input from lower levels of management is known as the:
    A. top-down approach.
    B. zero based approach.
    C. proportionate increase approach.
    D. participative approach.
  5. Budget slack is:
    A. sometimes called padding or cushion.
    B. the result of budget estimates submitted that are slightly higher than what the costs are really expected to be.
    C. an allowance for contingencies built into a budget.
    D. all of the above.
  6. Zero-based budgeting forces managers to:
    A. identify and prioritize the activities that are carried out in their departments.
    B. justify all of their expenditures for each budget period.
    C. both A and B.
    D. none of the above.
  7. A budget that is prepared for several periods in the future, then revised several times prior to the budget period is called a:
    A. rolling budget.
    B. zero-based budget.
    C. discretionary budget.
    D. single-period budget.
  8. A budget that has been prepared only once prior to the budget period is called a:
    A. continuous budget.
    B. zero-based budget.
    C. discretionary budget.
    D. single-period budget.
  9. A budgeting process that involves justifying resource requirements based on an analysis and prioritization of organizational objectives is called:
    A. continuous budgeting.
    B. zero-based budgeting.
    C. discretionary budgeting.
    D. single-period budgeting.
  10. ___________ budgets are generally more expensive to maintain than single-period budgets because more time and effort is required in their preparation.
    A. Zero-based
    B. Continuous
    C. Discretionary
    D. Production

Chapter 15

Cost Control

  1. ________________ is a technique used to filter cost information contained in performance reports to each manager within the organization at an appropriate level of detail or summarization.
    A. Managerial reporting
    B. Responsibility reporting
    C. Financial reporting
    D. Segment reporting
  2. The term noncontrollable cost:
    A. implies that there is really nothing the manager can do to influence the amount of cost.
    B. only applies to long-term costs.
    C. never applies to short-term costs.
    D. is another term for discretionary cost.
  3. An example of a cost that is noncontrollable in the short run is:
    A. direct labor.
    B. property taxes.
    C. raw materials.
    D. supervisors salaries.
  4. The key difference between a controllable cost and a noncontrollable cost is:
    A. the large amount of the cost.
    B. the frequency of cost incurrence.
    C. the short term ability to influence the cost by the manager.
    D. whether the cost is fixed or variable.
  5. The principal objective of a performance report is to:
    A. highlight activities that need management’s attention.
    B. direct blame to those managers who did not meet goals.
    C. provide a basis for rewarding effective managers.
    D. highlight budgets that have been incorrectly established.
  6. For performance reports to be most effective for management by exception, they should:
    A. be issued at the same time for all responsibility centers.
    B. be held until the financial statements for the month have been issued.
    C. be issued as soon after the activity or period covered as possible.
    D. show all of the costs associated with the responsibility center being reported about.
  7. The best reason for flexing a budget is to:
    A. permit a more accurate determination of variances.
    B. revise a budget at the beginning of a period.
    C. adjust actual results so they are closer to budgeted amounts.
    D. recognize the cost behavior pattern of budgeted amounts.
  8. A budget adjusted to reflect a budget allowance based on actual activity achieved rather than the planned level of activity in the original budget is a:
    A. static budget.
    B. rolling budget.
    C. controllable budget.
    D. flexible budget.
  9. If the actual level of activity is different from the budgeted level, a _________ budget is prepared for the actual level of activity.
    A. continuous
    B. zero-based
    C. master
    D. flexible
  10. When analyzing end of period production cost variances, which of the following product cost components will not need “flexing”?
    A. direct material.
    B. direct labor.
    C. variable manufacturing overhead.
    D. fixed manufacturing overhead.

Chapter 16

Decision Making

  1.  The method of evaluating financial data that change under different courses of action is called:
    A. financial statement analysis.
    B. break-even analysis.
    C. incremental analysis.
    D. cost-benefit analysis.
  2. Braizen, Inc. produces a product with a $30 per-unit variable cost and an $80 per-unit sales price. Fixed manufacturing overhead costs are $100,000. The firm has a one-time opportunity to sell an additional 1,000 units at $60 each that would not affect its current sales. Assuming the company has sufficient capacity to produce the additional units, how would the acceptance of the special order affect net income?
    A. Income would decrease by $30,000.
    B. Income would increase by $30,000.
    C. Income would increase by $140,000.
    D. Income would increase by $40,000.
  3. Opportunity costs are:
    A. included in inventory.
    B. foregone benefits.
    C. sunk costs.
    D. included in cost of goods sold.
  4. A sunk cost is a cost that:
    A. has been incurred and cannot be eliminated.
    B. is never relevant in decision-making.
    C. is never a differential cost.
    D. all of the above.
  5. _____________ is a cost management technique in which the firm determines the required cost for a product or service in order to earn a desired profit when the marketplace establishes the product’s selling price.
    A. Relevant costing
    B. Product costing
    C. Differential costing
    D. Target costing
  6. ______________ can be measured as the income that could have been earned on an asset, based on the potential rate of return that is lost or sacrificed when one alternative use of the asset is chosen over another.
    A. Target cost
    B. Sunk cost
    C. Opportunity cost
    D. Allocated cost
  7. _____________ costs between two alternative projects are those that would result from selecting one alternative instead of the other.
    A. Allocated
    B. Differential
    C. Sunk
    D. Irrelevant
  8. Which of the following cost classifications would not be considered relevant in comparing decision alternatives?
    A. Opportunity cost.
    B. Differential cost.
    C. Sunk cost.
    D. None of the above.
  9. In considering whether to accept a special order at a price less than the normal selling price of the product and where the additional sales will make use of present idle capacity, which of the following costs will not be relevant?
    A. Direct labor.
    B. Direct materials.
    C. Variable manufacturing overhead.
    D. Fixed manufacturing overhead that cannot be avoided.
  10. A cost classified “for decision making purposes” would include:
    A. period cost.
    B. opportunity cost.
    C. controllable cost.
    D. inventoriable cost.