Practice Exam #2
1. In 2007 Turnwell Corporation recorded total assets of $54,000 and net sales of $60,000. In
2006 Turnwell Corporation recorded total assets of $60,000 and net sales of $56,000. What was
their 2007 asset turnover ratio?
a. 1.05
b. .98
c. .93
d. 1.03
2. Company A reported gross profit of $500,000, cost of goods sold of $200,000, and net income
of $150,000. What was the total amount of net sales?
a. 650,000
b. 350,000
c. 700,000
d. None of the above
3. Which of the following is not one of the four main financial statement users?
a. Managers
b. Directors
c. Creditors
d. Investors
e. None of the above
4. If a company has a higher _______________, it means they have greater financing risk.
a. Net Profit Margin
b. Asset Turnover Ratio
c. Debt-to-asset ratio
d. Current asset ratio
5. Which of the following is filed annually with the SEC?
a. Form 10-Q
b. Form 10-K
c. Form 8-K
d. Press Release
6. A $5,000 sale is made on July 1 with terms 2/10, n/30. Items with a $500 selling price are
returned on July 3. What amount, if received on July9, will be considered payment in full?
a. $4410
b. $4900
c. $4500
d. $5000
7. Which of the following is true regarding a perpetual inventory system?
a. The balance in the inventory account is updated with each inventory purchase and sale
transaction
b. Cost of goods sold is increased as sales are recorded
c. The account Purchases is not used as inventory is acquired
d. All of the above
8. A $1000 sale is made on May 1 with terms 2/10, n/30. Items with a $100 selling price are
returned on May 3. What amount, if received on May 12, will be considered payment in full?
a. $700
b. $800
c. $882
d. $900
9. Which of the following describes how payments to suppliers made within the purchase
discounts period are recorded in the perpetual inventory system (using the method shown in the
chapter)?
a. Reduce Cash, Reduce Accounts Payable
b. Reduce Cash, Reduce Accounts Payable, Reduce Inventory
c. Reduce Cash, Reduce Accounts Payable, Increase Purchase Discounts
d. Reduce Cash, Reduce Accounts Payable, Decrease Purchase Discounts
10. Using the perpetual system, what two effects are recorded when inventory is sold?
a. Increase in Sales Revenue and Decrease in Inventory
b. Increase in Cash or Accounts Receivable and increase in cost of goods sold
c. Increase in Cash and Decrease in Purchases
d. Both a & b
11. In 2006 Nordstrom had COGS of $10,100, Ending Inventory f $4500, and Ending Inventory for
the previous year of $3,200. If the cost of the inventory purchases was $12,600, what was the
cost of shrinkage?
a. $2000
b. $1200
c. $3200
d. $4900
12. Which of the following accounts is used in the periodic system and not the perpetual inventory
system?
a. Inventory
b. Allowance for Doubtful Accounts
c. Purchases
d. Cost of Goods Sold
13. What three things must exist for someone to commit fraud?
a. Opportunity, Willingness, Incentive
b. Willingness, Attitude, Opportunity
c. Incentive, Character, Personality
d. Incentive, Opportunity, Character
14. A company had the following account balances at year end:
Sales Returns and Allowances
$2,000
Accounts Payable
$32000
Accounts Receivable
$40,000
Cost of Goods Sold
$60,000
Sales Revenue
$105,000
Allowance for Doubtful Accounts
$1500
Sales Discounts
$300
What was the amount of Gross Profit for the year?
a. $45,000
b. $42,700
c. $83,500
d. $46,500
15. Use the balances in the previous question what is the amount of net sales on the income
statement?
a. $105,000
b. $103,000
c. $101,200
d. $102,700
16. Outstanding checks on a bank reconciliation should be
a. Added to the book cash balance
b. Subtracted from the book bash balance
c. Added to the bank statement
d. Subtracted from the bank statement balance
17. In 2009 the beginning inventory is $40,000, Ending Inventory is $35,000, and Purchases are
$55,000. What is Goods Available for Sale?
a. $95,000
b. $60,000
c. $85,000
d. $25,000
18. What is the inventory costing method that identifies the cost of the specific item that was sold?
a. FIFO
b. LIFO
c. Specific Identification
d. Weighted Average Cost Method
19. If costs are rising, which of the following will be true?
a. The cost of goods sold will be greater if LIFO is used rather than weighted average
b. The cost of ending inventory will be greater if FIFO is used rather than LIFO
c. The gross profit will be greater if FIFO is used rather than LIFO
d. All of the above are true
20. Which of the following is not a name of a specific type of inventory?
a. Finished goods
b. Merchandise Inventory
c. Raw Materials
d. Goods available for sale
21. An increasing inventory turnover ratio
a. Indicates longer time span between ordering and receiving of inventory
b. Indicates a shorter time span between the ordering and receiving of inventory
c. Indicates a shorter time span between the purchases and sale of inventory
d. Indicates a longer time span between the purchase of and sale of inventory
22. Which of the following is true regarding companies that report their inventories on a LIFO
basis?
a. They will always have a higher income tax expense
b. They will always have a higher inventory balance
c. Both of the above
d. None of the above
Use the Following information for questions 25-28
Company A uses the periodic inventory system. The following information about their inventory is
available:
Date
1/1
4/12
7/8
9/22
Transaction
Beg Inventory
Purchase
Purchase
Purchase
Number of Units
60
100
50
70
Cost per Unit
$200
$230
$210
$205
During the year, 130 units were sold at a price of $225 per unit. Other operating costs equaled $200
and their tax rate is 10%. Round final answers to the nearest dollar
23. What was the ending inventory and cost of goods sold on 12/31 under the LIFO cost flow
assumption?
a. $27,150 and $32,700
b. $28,100 and $31750
c. $32,700 and $27,150
d. $31750 and $28100
24. What was the ending inventory and cost of goods sold on 12/31 under the FIFO cost flow
assumption?
a. $27,150 and $32,700
b. $28,100 and $31750
c. $32,700 and $27,150
d. $31750 and $28100
25. What is the amount of Gross Profit, using the FIFO inventory cost flow assumption?
a.
b.
c.
d.
$2100
$5550
$3650
$1150
26. Which inventory costing method will minimize tax expense
a. FIFO
b. LIFO
c. Weighted Average
d. Specific Identification
34.
Item
A
B
C
D
Quantity
1500
750
3500
2500
Cost Per Unit
$3
$4
$2
$5
Market Unit Cost
$4
$2
$1
$3
What is the amount that should be reported for the ending inventory using the LCM rule applied to
each item?
a. $27,000
b. $18,500
c. $17000
d. $15000
36. When using the allowance method, as Bad debt expense is recorded,
a. Total assets remain the same and stockholder’s equity remains the same
b. Total assets decrease and stockholder’s equity decreases
c. Total assets increase and stockholder’s equity decreases
d. Total liabilities increase and stockholder’s equity decreases
37. Company A determines on Feb. 1, 2009, that a $1000 account receivable will be uncollectible.
What affect does this write off have on the financial statements?
a. Increases bad debt expense
b. Increases the Allowance for Doubtful Accounts
c. Decreases bad debt expense
d. Has no affect
Age
0-30 days
30-60 days
60-90 days
>90 days
Amount
$840,000
$450,000
$235,000
$65,000
Estimated Bad Debt %
1.5%
3.0%
5.7%
11.6%
38. How much should be ending inventory for the Allowance for Doubtful Accounts at the end of
2008?
a. $46,570
b. $47,650
c. $47,035
d. $37,035
39. The beginning balance of the Allowance for Doubtful Accounts for the year was $12,540. Writeoffs of bad debt equaled $5,000. How much bad debt expense should be recorded for 2009?
a. $52,035
b. $12,540
c. $17540
d. $39495
40. Company C has a beginning balance of $6,000 for the Allowance for Doubtful Accounts. During
the year, the company has recorded an additional $7,900 of bad debt. The ending balance in the
Allowance for Doubtful Accounts is $10,000. How much Accounts Receivable was written off during
the year?
a.$1900
b. $3,900
c. $10,000
d. $1900
41. Company F has sales of $600,000 and net income of $55,000 for 2008. Based on prior experience,
the company estimates 2% to be bad debt. Using the percentage of credit sales method to estimate bad
debt, how much bad debt should be recorded in 2008?
a. $12,000
b. $1,100
c. $10,900
d. $13,100
43. A note receivable is
a. a short-term contract for sale of goods on credit
b. a formal written contract outlining the terms by which the company will repay, typically
including interest
c. an informal, verbal contract that outlines the terms by which the company will repay
d. none of the above
44. If a 10 percent note receivable for $10,000 is created on January 1, 2006, and it has a maturity date
of December 31, 2010,
a. No interest revenue will be recorded in 2006
b. The note receivable will be classified as a current asset
c. Interest Revenue of $1,000 will be recorded in 2006
d. None of the above
45. ABC Company lends $1,000,000 to Company A on July 1, 2008 to be collected on June 30, 2009,
principal plus interest. The interest on the loaned is 10%. How much interest revenue should be
recognized on December 31, 2008?
a. $100,000
b. $0
c. $50,000
d. $1,100,000
46. Which of the following assets are NOT depreciated?
a. Land
b. Equipment
c. Vehicles
d. Buildings
47. All of the following are intangible assets except:
a. Licensing rights
b. Equipment
c. Trademarks
d. Copyrights
48. Which of the following is not included in the acquisition of a piece of equipment?
a. Purchase Price
b. Transportation cost
c. Routine maintenance
d. Installation costs
49. When recording depreciation, which of the following statements is true?
a. Total assets increase and stockholder’s equity increases
b. Total assets decrease and total liabilities increase
c. Total assets decrease and stockholder’s equity increases
d. None of the above are true
50. On January 1, 2005, Company D purchases a piece of equipment for $60,000. The accumulated
depreciation up to date is $15,000. The estimated salvage value is $10,000. What is the book (carrying)
value of this piece of equipment?
a. $60,000
b. $45,000
c. $35,000
d. $50,000
51. On January 1, 2008, Company ABC purchased equipment for $70,000. The estimated salvage
value is $10,000. The estimated useful life is 12 years. Using STRAIGHT LINE depreciation, how
much is the depreciation expense per year?
a. $10,000
b. $1,200
c. $5,000
d. $80,000
52. On January 1, 2009, Company C purchases equipment for $100,000. The estimated useful life in
units is 200,000 units. The estimated salvage value is $20,000. During 2009, the equipment’s output is
15,000 unites. In the next year (2010), the output is $25,000 units. What is the accumulated
depreciation at the end of 2010 (after 2 years)?
a. $6,000
b. $10,000
c. $16,000
d. $12,000
53. Company C uses double declining balance depreciation method. On January 1, 201, they purchase
a piece of equipment for $120,000. The estimated salvage value is $10,000. Useful life is estimated to
be 10 years. What is the depreciation expense for 1011 (the second year)?
a. $24,000
b. $43,200
c. 19,200
d. $11,000
55. A machine cost $200,000 has an estimated residual value of $40,000, and has an estimated useful
life of four years. The company uses the double-declining balance method to depreciate. What is the
accumulated depreciation after three years?
a. $175,000
b. $100,000
c. $120,000
d. $50,000
56. Using the same information in (question 55) what is the book value after two years?
a. $100,000
b. $120,000
c. $50,000
d. $25,000
57. Company D uses straight-line depreciation for all of its depreciate assets. They sold a piece of
machinery on December 31, 2007, that it purchased on January 1, 2006, for $10,000. The asset had a
five-year life, zero residual value, and accumulated deprecation as of December 31, 2006, of $2,000. If
the sales price of the used machine was $7,500, the resulting gain or loss on disposal was which of the
following amounts?
a. Loss of $3,500
b. Gain of $3,500
c. Loss of $1,500
d. Gain of $1,500
58. Company ABC sold a delivery truck for $16,000. They had originally purchased the truck for
$28,000, and had recorded depreciation for three years. What is the gain or loss on disposal on the
truck if the accumulated depreciation was $15,000?
a. Loss of $1,000
b. Gain of $1,000
c. Loss of $3,000
d. Gain of $3,000
59. Company G bought a delivery truck for $73,000 on January 1, 2004. They estimate the useful life
of the truck to be 10 years and its residual value to be $8,000. If Company G uses the units-ofproduction method when they have estimated the truck will be driven 500,000 miles over its life, what
is the depreciation expense in 2005 when the truck is driven 60,000 miles?
a. $8760
b. $8820
c. 7800
d. 9108
RATIOS:
Debt to Asset Ratio = Total Liabilities/Total Assets
- the percentage of assets financed by debt
- a higher ratio means greater financing risk
Asset Turnover Ratio = Total Sales Revenue/Avg Total Assets
- how well assets are used to generate sales
- a higher ratio means greater efficiency
Net Profit Margin = Net Income/ Total Sales Revenue
- how well expenses are controlled
- a higher ratio means better performance
Gross Profit % = (Net Sales – COGS)/Net Sales
- the percentage of profit earned on each dollar of sales, after considering the
cost of products sold
- a higher ratio means that greater profit is available to cover operating and
other expenses
Inventory Turnover Ratio = COGS/Average Inventory
- The number of times inventory turns over during the period
- A higher ratio means faster turnover
Days to Sell = 365/Inventory Turnover Ratio
- Average number of days from purchase to sale
- A higher number means a longer time to sell
Receivables Turnover Ratio = Net Sales Revenue/Average Net Receivables
- The number of times receivables turn over during the period
- A higher Ratio means faster turnover
Days to collect = 365/Receivables Turnover Ratio
- Average number of days from sale on account to collection
- A higher number means a longer time to collect
Fixed Asset Turnover Ratio = Net Sales Revenue/ Average Net Fixed Assets
- Dollars of sales generated for each dollar invested in (tangible) fixed assets
- A higher ratio implies greater efficiency