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ACCT 504 Midterm Exam 3

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ACCT 504 Midterm Exam 3

1. Question :

(TCO A, B, C) Which of the following statements concerning users of accounting information is incorrect?

	Student Answer:		Management is considered an internal user.
			Present and prospective creditors are considered external users.
			Regulatory authorities such as the SEC are considered internal users.

Question :

(TCO C) Issuing shares of stock in exchange for cash is an example of a(n):

	Student Answer:		delivering activity.
			investing activity.
			financing activity.
			operating activity.

Question :

(TCO C) Which activities involve putting the resources of the business into action to generate a profit?

	Student Answer:		Delivering
			Financing
			Investing
			Operating

Question :

(TCO A) The cost of assets consumed or services used is also known as:

	Student Answer:		a revenue.
			an expense.
			a liability.
			an asset.

Question :

(TCO C) Edwards Company recorded the following cash transactions for the year:

Paid $45,000 for salaries.
Paid $20,000 to purchase office equipment.
Paid $5,000 for utilities.
Paid $2,000 in dividends.
Collected $75,000 from customers.

What was Edwards’ net cash provided by operating activities?

	Student Answer:		$25,000
			$5,000
			$30,000
			$23,000

Question :

(TCO A) On a classified balance sheet, prepaid insurance is classified as:

	Student Answer:		an intangible asset.
			property, plant, and equipment.
			a current asset.
			a long-term investment.

Question :

(TCO A) An intangible asset:

	Student Answer:		may have the capacity to earn revenue for its owner.
			is worthless because it has no physical substance.
			is converted into a tangible asset during the operating cycle.
			cannot be reported on the balance sheet because it lacks physical substance.

Question :

(TCO A) These are selected account balances on December 31, 2007.

-Land (location of the corporation’s office building) $200,000
-Land (held for future use) 300,000
-Corporate Office Building 1,200,000
-Inventory 400,000
-Equipment 900,000
-Office Furniture 200,000
-Accumulated Depreciation 600,000

What is the total NET amount of property, plant, and equipment that will appear on the balance sheet?

	Student Answer:		$1,900,000
			$2,600,000
			$2,200,000

Question :

(TCO B) For 2010, Landford Corporation reported net income of $30,000; net sales $400,000; and average share outstanding 6,000. There were no preferred stock dividends. What was the 2010 earnings per share?

	Student Answer:		$4.66
			$0.20
			$66.67
			$5.00

10.

Question :

(TCO B) Liondale Corporation had beginning retained earnings of $2,292,000 and ending retained earnings of $2,499,000. During the year, they issued common stock totaling $141,000. There were no dividends issued. What was their net income for the year?

	Student Answer:		$207,000
			$ 66,000
			$348,000
			$273,000

11.

Question :

(TCO D) On March 1, 2010, Dillon Company hires a new employee who will start the work on March 6. The employee will be paid on the last day of each month. Should a journal entry be made on March 6? Why or why not?

	Student Answer:		Yes, the company is now obligated to pay the employee, thus that event must be recorded on March 6.
			No, hiring an employee is an important event; however, it is not an economic event that should be recorded on March 6.
			Yes, failure to record the event on March 6 would cause the financial statements to be misleading.
			No, the journal entry should be made on March 1 which is the date of hiring.

12.

Question :

(TCO D) Which one of the following is not a part of an account?

	Student Answer:		Credit side
			Trial balance
			Debit side
			Title

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13.

Question :

(TCO D) Which of the following describes the classification and normal balance of the retained earnings account?

	Student Answer:		Asset, debit
			Stockholders’ equity, credit
			Revenues, credit
			Expense, debit

14.

Question :

(TCO D) A debit is the normal balance for which account listed below?

	Student Answer:		Furniture
			Accounts payable
			Rent revenue
			Capital stock issued

(TCO E) An accounting time period that is one year in length is called:

	Student Answer:		a fiscal year.
			an interim period.
			the time period assumption.
			a reporting period.

Question :

(TCO E) In a merchandising business, revenue may be considered earned when:

	Student Answer:		cash is received from the customers
			a product is delivered to a customer.
			an order is received from a customer
			a customer shows interest in a product

Question :

(TCO E) On April 1, 2010, M Corporation paid $48,000 cash for equipment that will be used in business operations. The equipment will be used for four years and will have no residual value. M records depreciation expense of $9,000 for the calendar year ending December 31, 2010. Which accounting principle has been violated?

	Student Answer:		Revenue recognition principle
			No principle has been violated because M has correctly matched the expense for using the equipment to the period during which it generated revenue.
			Matching principle because the cash was paid in 2007 and should be expensed in 2007.
			Cost principle

Question :

(TCO E) The following is selected information from M Corporation for the fiscal year ending October 31, 2010:

Cash received from customers $300,000
Revenue earned 350,000
Cash paid for expenses 170,000
Expenses incurred 200,000

Based on the accrual basis of accounting, what is M Corporation’s net income for the year ending October 31, 2010?

	Student Answer:		$140,000
			$114,000
			$82,000
			$150,000

Question :

(TCO E) Adjusting entries are made to ensure that:

	Student Answer:		expense are recognized in the period in which they are incurred.
			revenues are recorded in the period in which they are earned.
			balance sheet and income statement accounts have correct balances at the end of an accounting period.
			All of the above

Question :

(TCO A, B) Which of the following expressions is incorrect?

	Student Answer:		Gross profit – operating expenses = net income
			Sales – cost of goods sold – operating expenses = net income
			Net income + operating expenses = gross profit
			Operating expenses – cost of goods sold = gross profit

Question :

(TCO B) Hunter Company purchased merchandise inventory with an invoice price of $3,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Hunter Company pays within the discount period?

	Student Answer:		$2,940
			$2,760
			$2,700
			$3,000

Question :

(TCO A, B) Jake’s Market recorded the following events involving a recent purchase of merchandise:

Received goods for $20,000, terms 2/10, n/30.
Returned $400 of the shipment for credit.
Paid $100 freight on the shipment.
Paid the invoice within the discount period.

As a result of these events, the company’s merchandise inventory:

	Student Answer:		increased by $19,208.
			increased by $19,700.
			increased by $19,306.
			increased by $19,308.

Question :

(TCO A) The factor which determines whether or not goods should be included in a physical count of inventory is:

	Student Answer:		physical possession.
			legal title.
			management’s judgment.
			whether or not the purchase price has been paid.

10.

Question :

(TCO A) Barnes Company is taking a physical inventory on March 31, the last day of its fiscal year. Which of the following must be included in this inventory count?

	Student Answer:		Goods in transit to Barnes, FOB destination
			Goods that Barnes is holding on consignment for Parker Company
			Goods in transit that Barnes has sold to Smith Company, FOB shipping point
			Goods that Barnes is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due

11.

Question :

(TCO A) A problem with the specific identification method is that:

	Student Answer:		inventories can be reported at actual costs.
			management can manipulate income.
			matching is not achieved.
			the lower of cost or market basis cannot be applied

12.

Question :

(TCO A) Which of the following statements is true regarding inventory cost flow assumptions?

	Student Answer:		A company may use more than one cost-flow assumption concurrently for different product lines.
			A company must comply with the method specified by industry standards.
			A company must use the same method for domestic and foreign operations.
			A company may never change its inventory costing method once it has chosen a method.

13.

Question :

(TCO A) In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the:

	Student Answer:		FIFO method.
			LIFO method.
			average cost method.
			tax method.

14.

Question :

(TCO B) Which of the following is a true statement about inventory systems?

	Student Answer:		Periodic inventory systems require more detailed inventory records.
			Perpetual inventory systems require more detailed inventory records.
			A periodic system requires cost of goods sold be determined after each sale.
			A perpetual system determines cost of goods sold only at the end of the accounting period.

15.

Question :

(TCO B) A merchandiser that sells directly to consumers is:

	Student Answer:		a retailer.
			a wholesaler.
			a broker.
			a service enterprise.

(TCO D) A classmate is considering dropping his accounting class because he cannot understand the rules of debits and credits.
Explain the rules of debits and credits in a way that will help him understand them. Cite examples for each of the major sections of the balance sheet (assets, liabilities and stockholders’ equity) and the income statement (revenues and expenses).

Question :

(TCOs B & E) The Caltor Company gathered the following condensed data for the year ended December 31, 2010:

Cost of goods sold $ 710,000
Net sales 1,279,000
Administrative expenses 239,000
Interest expense 68,000
Dividends paid 38,000
Selling expenses 45,000

Instructions:

Prepare an income statement for the year ended December 31, 2010.
Compute the profit margin ratio and gross profit rate. Caltor Company s assets at the beginning of the year were $770,000 and were $830,000 at the end of the year. To qualify for full credit, you must state the formula you are using, show your computations and explain your findings.

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