Exam 2 Review
1.
The Sarbanes-Oxley Act or 2002 introduced stiffer punishment for fraud in accounting. What 3 things are required for fraud to occur? a.
Incentive, Purpose, Cash b.
Cash, Assets, Opportunity c.
Incentive, Opportunity, Character d.
Character, Incentive, Cash
2.
Income Tax Expense was $80,000 for Amazon Company. The tax rate was 40%.
Other Expenses for Amazon.com was $10,000. General & Administrative expenses were 20,000. Net Sales for Amazon was $400,000. Determine Amazon’s cost of goods sold. a.
$210,000 b.
$200,000 c.
$190,000 d.
$180,000
Income Before Taxes X 0.4 = $80,000
Income Before taxes = $80,000/0.4 = $200,000
Income From operations – other expenses = Income before taxes
Income from operations = $200,000-10,000
= $190,000
Gross profit = Income from operations + G&A
= $190,000+20,000
= $210,000
Net sales – COGS = gross profit
COGS = net sales – gross profit = $400,000-210,000 = $190,000
3.
When an annual report is audited and released annual, which of the following forms is filed with the SEC? a.
Form 10k b.
Form 8K c.
Form 10Q d.
No filing required unless a major transaction occurs

4.
In reconciling the checking account, Morris Company noted the following items for the month of October:
Ending book balance
Deposits in transit
$5,775
$1,250
Outstanding checks
NSF check
Bank service charges
$2,075
$ 450
$ 25
Bank interest expense $ 250
Ending bank balance $ 5,875
What is the correct cas h balance at the end of October? a.
$5,000 b.
$5,050 c.
$4,000 d.
$5,750
Ending Book balance $5,775
NSF Check ($450)
Bank service charge (25)
Bank int expense (250)
-----------------------------------------
Ending Book balance $5,050 - Adjusted
5.
Target Company had 2009 and 2010 ending inventory of $2,000 and $4,000 respectively. In 2010, Target made $7,000 worth of purchases. What was Target’s cost of goods sold in 2010? a.
$5,000 b.
$11,000 c.
$6,000 d.
$3,000
COGS = Beg Inv + Purchases – Ending Inv
= 2000 + 7000 – 4000
= $5,000
6.
Under the perpetual inventory system, a.
There is a purchase account involved b.
As inventory is sold, no entry is needed c.
To account for ending inventory, purchases account is closed and cost of goods sold is created

d.
Inventory is increased as purchased, and reduced as sold
7.
On March 1 st , Kellogg’s Company made gross sales of $400,000 with terms 2/10,n30.
The customer later returned goods worth $20,000 because of defect on March 3 rd
.
Calculate the net sales of Kellogg’s company assuming the customer rendered full payment on March 9 th in the same year. a.
$380,000 b.
$360,000 c.
$372,000 d.
$372,400
Net sales = Gross sales – sales return & allowance – sales discounts
= 400,000 – 20,000 – [((400,000-20,000) X 2%)
= 372,400
8.
Which of the following parties would have a raw materials inventory, work-inprocess inventory and finished goods inventory? a.
A retailer b.
A manufacturer c.
A distributor d.
None of the above
9.
Under which of the following inventory methods, cost of goods sold would generally be the highest? a.
FIFO b.
LIFO c.
Weighted-average method d.
Specific identification method
Answer questions 10, 11 and 12 based on the following information :
September 1 – Inventory balance on hand is $5,000 (500 units of inventory)
6 – Purchased 200 units @ $10.50 each
7 – Sold 500 units @ $15.00 each
8 – Purchased 200 units @ $11 each
19 – Sold 300 units @ $15.00 each
10.
Assuming the above company uses the FIFO inventory method, what would the cost of goods sold be? a.
$8,000 b.
$8,050 c.
$8,200 d.
$9,600
[( 500 units X $10) + (200units X $10.50) + (100units X $11)]

11.
Now assume the company uses a LIFO inventory method, what would the ending balance in inventory be at the end of September? a.
$1,000 b.
$1,200 c.
$1,400 d.
$1,600
Since its LIFO, only the first 100 units in beginning inventory will be left. Each units costs $10, so 100 X $10 = $1,000
12.
Assuming the company uses the LIFO inventory method, what would gross profit be? a.
$3,000 b.
$3,700 c.
$3,900 d.
$4,200
From previously, ending inv of LIFO would be $1,000.
Beg Inv = $5,000
Net sales = (500X$15.00 + 300 X $15.00) = $12,000
COGS = Beg Inv + Purchases – EI
= 5000 + 4,300 – 1,000
= 8,300
Gross profit = net sales –COGS
= 12,000 – 8,300
= $3,700
13.
According to the lower-of cost or market rule, what would the inventory balance be based on the following information?
Men’s sneakers
Quantity
20
Women’s sneakers
15 a.
$1,400 b.
$1,550 c.
$1,600 d.
$1,750
Unit Cost
$50
$40
Replacement cost
$40
$50
14.
Bad debt expense is : a.
The actual write-off a company has to make because debtors defaulted b.
A fixed amount a company occurs every year based on the size of the company c.
An amount which is charged to expense arising from situations such as a debtor’s bankruptcy.

d.
An estimated amount based on credit sales or Accounts receivable
15.
Maxis Corporation has beginning balance in Allowance for Doubtful Accounts of
$2,000. Assuming credit sales totaled $50,000 and Celcom estimates 5% of net credit sales to be bad debt, what amount of bad debt expense would be recorded if Celcom uses the balance sheet method? a.
$500 b.
$2,500 c.
$2,000 d.
$1,500
Allowance for Doubtful Accounts
Beginning balance 2,000
Bad debt expense $5,00
Ending Balance $2, 500 (50,000 X
In this case, bad debt expense is a plug figure.
5%)
16.
Assume beginning balance of a company’s allowance for doubtful accounts is $4,000.
Net credit sales are $250,000 and 4% is estimated as bad debt. If the income statement method was used, what would bad debt expense be? a.
$6,000 b.
$10,000 c.
$14,000 d.
None of the above
Allowance for Doubtful Accounts
Beginning balance 4,000
Bad debt expense $10,000 (250,000 X 4%)
Since it’s the income statement method, bad debt expense is directly calculated from thje percentage of credit sales.
17.
Maxwell Company uses the income statement method for estimated bad debt expense. It estimates 2% of its $500,000 credit sales to be bad debt. Assume the beginning balance in the allowance for doubtful account was $4,000 and ending balance was $8,000. Determine the amount of write-off’s that the company made during the year. a.
$2,000 b.
$4,000

c.
$6,000 d.
$8,000
Write off $6, 000
Allowance for Doubtful Accounts
Beginning balance 4,000
Bad debt expense 10,000
Ending Balance 8,000
18.
Method Company issued cash for a $20,000, 5% note on May 1 st
, 2010. The note is due in one year. On December 31 st , 2010, the fiscal year end, determine the amount of interest revenue recorded by Method. a.
$556 b.
$667 c.
$1,000 d.
$500
$20,000 X 5% X 8/12 = $667
19.
Which of the following assets is not amortized? a.
Goodwill b.
Trademarks c.
Trucks d.
Patents
20.
Which of the following is not depreciated? a.
Building b.
Equipment c.
Trucks d.
Land
21.
Using which method of depreciation would result in the highest depreciation expense when the asset is fully depreciated? a.
Straight-line b.
Units of Production c.
Double Declining balance d.
All methods results in the same depreciation expense at the end
22.
An equipment had a life of 8 years, cost of $20,000 and salvage value of $2,000.
What is the depreciation expense for this equipment in the first year? a.
$2,250 b.
$2,500 c.
$3,000 d.
$4,000
($20,000-2000) / 8 = $2,250

23.
Cy purchased a building with an estimated life of 10 years, for $200,000. The building is expected to have $20,000 in salvage value at the end of its life. Using the double declining balance method, what would accumulated depreciation be in the second year? a.
$32,000 b.
$40,000 c.
$ 72,000 d.
$20,000
Step 1 : Calculate DDRate = 1/10 X 2 = 0.20
Step 2 : Calculate depreciation expense for years 1 and 2.
Year 1 : DDR X BV = 0.2 X 200,000 = $40,000
Year 2 : 0.20 X (200,000-40,000) = $32,000
Accumulated depreciation = $40,000 + $32,000 = $72,000
24.
Which of the following would be part of the cost recorded in for the purchase of an equipment? a.
Purchase price of the equipment b.
Installation cost for the equipment c.
Transportation of the equipment d.
All of the above
25.
The copy machine of Iowa State had an estimated useful life of 8 years. After its 5 th year of use, the machine was sold for $5,000. The cost of the machine originally was
$15,000. Assuming at the end of the 5 th year, the accumulated depreciation was
$5,000. What was the gain / loss on the sale of the copy machine? a.
Gain of $5,000 b.
Loss of $5,000 c.
Gain of $15,000 d.
Loss of $10,000
BV of machine at selling date = cost – acc dep = $15,000 – 5,000 = $10,000
Selling price = $5,000
So, 10,000 – 5,000 = Loss of $5,000
26.
A company has a debt-to-assets ratio of 0.5. What does this tell us about the company? (DTO = total liabilities / total assets) a.
For every $1 in liabilities, this company owns assets worth $0.50 b.
Liabilities increase by 0.5 times every year

c.
Total liabilities are more than assets by 0.5 d.
This company uses debt and equity evenly.
27.
Company A has asset turnover ratio this year of 1.20 compared to last year’s 0.9.
Which of the following information is false about Company A? a.
The company has generated more Sales revenue compared to last year. b.
The company has a lower average total assets compared to last year. c.
The company generated $1.20 in revenue for every $1 in assets available this year. d.
The company generated $1.20 more in revenue for every $1 in assets compared to last year.
28.
IBM Corp had cost of goods sold of $200,000 in 2010. Over the year, gross sales were $600,000. Sales return & allowance was $20,000 while sales discounts were
$10,000. Determine the Gross profit percentage for IBM
(Gross Profit % = Gross Profit / Net Sales) a.
50% b.
65% c.
70% d.
75%
29.
A high inventory turnover ratio indicates that…..
(Inventory turnover ratio = COGS / Avg Inventory) a.
The company generates a large amount of gross profit b.
The company’s inventory levels are constantly low c.
The company has high sales revenue d.
The company’s inventory is sold at a speedy rate.
30.
Asset impairment occurs when a.
The value of our asset increased above the fair market value b.
The asset is used and depreciated c.
The future cash flows from the asset has fallen below book value d.
The asset is sold to another party for a lower price that our book value