DeVry NY ACCT 504 Week 4, Midterm Exam 2

16 Jul DeVry NY ACCT 504 Week 4, Midterm Exam 2

CO 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.
Taxing authorities are considered external users.

Instructor Explanation: Chapter 1 page 7

 

 

ACCT 504 Wk_4 Midterm 30 Multiple Chioce and 2 Explainatory
2. 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.

Instructor Explanation: Chapter 1 page 9

 

 

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

Student Answer:   Delivering

Financing

Investing

Operating

Instructor Explanation: Chapter 1 page 10

 

 

4. 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.

Instructor Explanation: Chapter 1 page 10

 

 

5. 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

Instructor Explanation: $75,000 – 45,000 – 5,000 = $25,000
Chapter 1 page 10

 

 

6. 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.

Instructor Explanation: Chapter 2 page 49

 

 

7. 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.
Instructor Explanation: Chapter 2 page 51

 

 

8. 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

$3,200,000

Instructor Explanation: Gross cost of plant assets utilized – accumulated depreciation Chapter 2 page 51

 

 

9. 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

Instructor Explanation: $30,000/6,000 = $5.00
Chapter 2 page 56

 

 

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

Instructor Explanation: $2,499,000 – $2,292,000 = $207,000
Chapter 2 page 57

 

 

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.
Instructor Explanation: Chapter 3 page 108

 

 

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

 

 

 

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

Instructor Explanation: Chapter 3 page 116

 

 

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

Instructor Explanation: Chapter 3 page 116

 

 

15. Question : (TCO D) Which of the following accounts follows the rules of debit and credit in relation to increases and decreases in the opposite manner?

Student Answer:   Prepaid insurance and dividends

Dividends and medical fees earned

Interest payable and common stock

Advertising expense and land

Instructor Explanation: Chapter 3 page 116

 

 

 

(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.

Instructor Explanation: Chapter 4 page 164

 

 

2. 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

Instructor Explanation: Chapter 4 page 164

 

 

3. 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

Instructor Explanation: Chapter 4 page 171

 

 

4. 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

Instructor Explanation: $350,000 – 200,000 = $150,000
Chapter 4 pages 166-167

 

 

5. 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

Instructor Explanation: Chapter 4 pages 167-168

 

 

6. 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

Instructor Explanation: Chapter 5 page 228

 

 

7. 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

Instructor Explanation: $3,000 x 98% = $2,940
Chapter 5 page 234

 

 

8. 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.

Instructor Explanation: ($20,000 – $400) x 98% = $19,208 + $100 for freight = $19,308 Chapter 5 page 235

 

 

9. 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.

Instructor Explanation: Chapter 6 page 284

 

 

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
Instructor Explanation: Chapter 6 pages 284-285

 

 

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

Instructor Explanation: Chapter 6 page 286

 

 

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.
Instructor Explanation: Chapter 6 page 286

 

 

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.

Instructor Explanation: Chapter 6 page 288

 

 

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.
Instructor Explanation: Chapter 5 page 230

 

 

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

Student Answer:    a retailer.

a wholesaler.

a broker.

a service enterprise.

Instructor Explanation: Chapter 5 page 228

 

 

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).

Student Answer:
Instructor Explanation: Accounting is based on the double-entry system. This system records the dual effect of each transaction in the appropriate accounts, thus keeping the accounting equation in balance. Each transaction is analyzed and recorded using this dual effect system. If you do not have this basic understanding, the remaining chapters will become increasingly more difficult. You will not have the ability to make journal entries for the many new topics in these upcoming chapters.
Pages 111 through 116

 

 

2. 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:
1. Prepare an income statement for the year ended December 31, 2010.
2. 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.

Student Answer:  Caltor Company Income Statement For the month Ended December 31, 2010 Revenues Sales 1279000 Cost of Goods Sold 710000 Gross Profit 1989000 Operating Expenses Administrative expense 239000 Selling expense 45000 Interest expense 5000
Instructor Explanation: 1. CALTOR COMPANY
Income Statement
For the Year Ended December 31, 2010
Revenues

Net sales  $1,279,000
Cost of Goods Sold   710,000
Gross Profit   $569,000

Expenses:
Selling expenses  45,000
Administrative expenses  239,000
Interest expense  68,000
Total expenses   $352,000
Net income  $217,000

2. Profit margin ratio: $217,000 ÷ $1,279,000 = 16.9%
Gross profit rate: $569,000 / $1,279,000 = 44.49%
Page 235 and pages 241 through 244