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# Solving various questions on income statement

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Please help with the questions in the following attachment. I'm not sure how to get the CM ratio/contribution margin.
(See attachment for data)

Stratford Company distributes a lightweight lawn chair that sells for \$120 per unit. Variable expenses are \$60.00 per unit, and fixed expenses total \$180,000 annually.

Required:
1. What is the product's CM ratio? (Do not round intermediate calculations.)

2. Use the CM ratio to determine the break-even point in sales dollars. (Do not round intermediate calculations. Round your answer to the nearest dollar amount. )

3. The company estimates that sales will increase by \$41,000 during the coming year due to increased demand. By how much should net operating income increase?

4. Assume that the operating results for last year were as follows:
a. Compute the degree of operating leverage at the current level of sales. (Round your answer to 2 decimal places.)
b. The president expects sales to increase by 19% next year. By how much should net operating income increase? (Round your intermediate calculations to 2 decimal places and final answer to the nearest dollar amount.)

5. Refer to the original data. Assume that the company sold 43,500 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a \$74,000 increase in advertising expenditures, would increase annual unit sales by 50%.

a. Prepare two contribution format income statements, one showing the results of last year's operations and one showing what the results of operations would be if these changes were made. (Input all amounts as positive values except losses which should be indicated by minus sign. Do not round intermediate calculations. Round proposed units to the nearest whole number. Round your "Per unit" answers to 2 decimal places.)
b. Would you recommend that the company do as the sales manager suggests?

6. Refer to the original data. Assume again that the company sold 43,500 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by \$1.60 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

Memofax, Inc., produces memory enhancement kits for fax machines. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's contribution format income statement for the most recent month is given in the attachment.

Required:
1. Compute the company's CM ratio and its break-even point in both units and dollars.

2. The sales manager feels that an \$7,500 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a \$71,000 increase in monthly sales. If the sales manager is right, what will be the effect on the company's monthly net operating income or loss? (Use the incremental approach in preparing your answer.) (Input the amount as a positive value.)

3. Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of \$39,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? (Input all amounts as positive values except losses which should be indicated by minus sign. )

4. Refer to the original data. The company's advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by \$0.40 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of \$4,400? (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.)

5. Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by \$124,000 per month.
a. Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Round your final answers to the nearest whole number.)
b. Assume that the company expects to sell 20,800 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Input all amounts as positive values.)

#### Solution Summary

The solution gives complete solutions for various questions on income statement and its properties. Each question is discussed in details.

\$2.19

## Balance Sheets - Income Statements Practice Questions - Multiple Choice

Practice Questions - Multiple Choice
Identify the choice that best completes the statement or answers the question.

Walker Corp. is a merchandising company that uses the periodic inventory system. Selected account balances are listed below:

Sales \$500,000
Purchases 225,000
Inventory (beginning) 16,000
Inventory (ending) 30,000
Operating Expenses 148,000
Income Tax Expense 10,000
Retained Earnings (beginning) 53,000
Dividends 15,000

____ 1. Refer to the information for Walker Corp.

Calculate net income.

a. \$289,000 c. \$131,000
b. \$141,000 d. \$116,000

____ 2. The following is from Silver Inc.'s 2012 income statement.

Purchases \$182,000
Transportation-In 11,000
Inventory, January 1, 2012 26,500
Inventory, December 31, 2012 28,800
Purchase Returns and Allowances 8,400

How much will Silver report as cost of goods purchased in its 2012 income statement?

a. \$184,600 c. \$201,400
b. \$193,000 d. \$211,100

____ 3. Which one of the following is correct?

a. Inventory losses can be identified and controlled better under the perpetual system.
b. Inventory can only be sold at the end of an accounting period under the periodic system.
c. There is no difference in cost to implement a perpetual as compared to a periodic system.
d. The perpetual system eliminates the need for an annual inventory count

____ 5. Which method of inventory costing is not acceptable for financial accounting purposes?

a. Specific Identification c. LIFO
b. FIFO d. Replacement Cost

____ 6. Which inventory costing method results in the lowest income tax expense during a period of decreasing prices?

a. FIFO c. Specific Identification
b. LIFO d. Weighted Average Cost
____ 7. County Corp. started business at the beginning of 2011. County selected the FIFO method for its inventory. In order to maximize its profits for 2011 under this method, prices must be

a. Increasing c. Stable
b. Decreasing d. Fluctuating up and down at the same amount consistently over the year

____ 8. If the amount assigned to ending inventory is incorrect,

a. The balance sheet is affected, but the income statement is not
b. The income statement is affected, but the balance sheet is not
c. The balance sheet is affected, but cost of goods sold is not
d. Both the balance sheet and the income statement are affected

____ 9. Lettermen Inc. uses a perpetual inventory system.

Jan. 1 On hand, 10 units at \$2 each \$ 20
4 Sold 8 units for \$10 each 80
22 Purchased 50 units at \$4 each 200
26 Sold 48 units for \$10 each 480

If Lettermen uses the FIFO method, how much is cost of goods sold for the month of January?

a. \$204 c. \$212
b. \$208 d. \$560

__ 10.Which of these is not an acceptable inventory costing method under IFRS?

a. FIFO
b. LIFO
c. Specific Identification
d. Average cost

____ 11. Effective cash management and control includes all of the following except :

a. The use of a petty cash fund c. Short-term investments of excess cash
b. Bank reconciliations d. Purchase of stocks and bonds

____ 12. Which one of the following procedures is not part of preparing a bank reconciliation of a checking account

a. Tracing deposits listed on the bank statement to the books to identify deposits in transit
b. Arranging canceled checks in numerical order and tracing them to the books to identify outstanding checks
c. Identifying items added on the bank statement which have not been recorded as cash receipts by the company
d. Preparing adjustments to reverse the transactions recorded for checks that are still outstanding

____ 13. Which one of the following items would be subtracted from the balance per bank statement in a bank reconciliation?

a. Outstanding checks c. Service charges
b. Deposit in transit d. Interest on customer note

____ 14. Hardin Company accepted a check from Reyes Company as payment for services rendered by Hardin Company. Later Hardin's bank statement revealed that Reyes' check was an NSF check. Recognizing the NSF check on Hardin's books would act to:

a. Decrease total assets c. Both a. and b.
b. Decrease total owners' equity d. Have no effect on Total Assets

____ 15. Which of the following represents the board of directors subset that acts as a direct contact between stockholders and the independent accounting firm?

a. Audit committee c. External auditors
b. Internal audit staff d. Stockholders' representative

____ 16. Having only one person authorized to both prepare and sign checks is a violation of what internal control procedure?

a. Segregation of duties c. Independent verifications
b. Independent review and appraisal d. Proper authorizations

____ 17. Which one of the following documents is used in the control of cash disbursements?

a. Income Statement c. Receiving reports
b. Bank deposit slips d. Cash register tapes

____ 18. Which one of the following is a sound internal control procedure for cash disbursements?

a. Making copies of purchase orders for the receiving department so they know how many items to be expected upon delivery
b. Using presigned checks to facilitate payment within the cash discount period
c. Comparing purchase requisitions, purchase orders, receiving reports, and invoices
d. Requiring the signature of the purchasing department supervisor on checks

____ 19. Which one of the following situations reflects a weak internal control system?

a. all employees are well supervised
b. a single employee is responsible for comparing a receiving report to an invoice
c. all employees must take their vacations
d. a single employee is responsible for collecting and recording of cash

____ 20. If receipts from cash sales of \$7,500 were recorded incorrectly as \$5,700 in the company's books, then this item would be included on the bank reconciliation as a(n)

a. deduction from the balance per company's records
b. addition to the balance per bank statement
c. deduction from the balance per bank statement
d. addition to the balance per company's records

____ 21. For what reason would a company buy 10% of the common stock of a second company?

a. The company has idle cash and wishes to have a higher return than that
available from temporary money market investments.
b. The company wishes to insure a steady source of goods from the 2nd company.
c. The company wishes to prepare consolidated financial statements.
d. More than one of the above is correct.

24. missing

____ 25. The entry to recognize the write-off of the specific uncollectible accounts will act to:

a. Increase total assets and total equity
b. Increase total assets and decrease total equity
c. Decrease total assets and total equity
d. Not affect total assets or total equity

____ 26. Friese Inc. lends \$70,000 on a 120-day, 9% promissory note. The total interest that Friese will receive at maturity is
a. \$6,300 c. \$525
b. \$2,100 d. \$1,890

Angel, Inc.
Angel, Inc. purchased a crane at a cost of \$80,000. The crane has an estimated residual value of \$5,000 and an estimated life of 8 years, or 12,500
hours of operation. The crane was purchased on January 1, 2011 and was used 2,700 hours in 2011 and 2,600 hours in 2012.

____ 27. Refer to the information for Angel, Inc,

Based on this information, what method of depreciation will produce the maximum depreciation expense in 2012?

a. Straight-line
b. Double-declining-balance
c. Units-of-production
d. All methods produce the same expense in 2012.

____ 28. At the end of 2011, Global Productions determined that one of its copyrights was worthless. The copyright had a cost of \$320,000. The copyright had been amortized for 8 years of its estimated 25-year legal life. Which of the following statements is the justification for removing the remaining cost of the copyright from the accounting records?

a. The copyright no longer represents a future benefit to the company.
b. The federal government does not allow copyrights to be recorded as assets once they are deemed worthless.
c. The cost of the copyright represents an obligation to return capital contributions to the stockholders.
d. The cost of the copyright has usefulness that will impact the net income of future accounting periods.

____ 29. Interest is capitalized when incurred in connection with the construction of plant assets because

a. interest is considered a part of the acquisition cost of related plant asset.
b. the decision to purchase a plant asset is a business decision separate from the financing decision.
c. many plant assets last longer than 20 years.
d. interest is considered an expense of the period.

____ 31. Many companies use MACRS (Modified Accelerated Cost Recovery System) depreciation for

a. financial reporting purposes and a different method for tax purposes.
b. financial reporting purposes because depreciation is not allowed for tax purposes.
c. tax purposes because it results in a larger net income in the early years of a plant asset's life
d. tax purposes because of a desire to report higher expenses in early years in order to pay lower taxes.

On January 1, 2011, Donovan's Transport Company purchased a ship for \$2,000,000. It has a ten-year useful life and a residual value of \$50,000. The company uses the double-declining-balance method.

____ 32. What was the depreciation expense for Donovan's Transport for the year ended December 31, 2011?

a. \$ -0- c. \$390,000
b. \$195,000 d. \$400,000

____ 33. What was the depreciation expense for Donovan's Transport for the year ended December 31, 2012?

a. \$ -0- c. \$320,000
b. \$160,000 d. \$400,000

____ 34. All of the following are included in the acquisition cost of property, plant, and equipment except:

a. transportation costs
b. taxes on the purchase
c. installation costs
d. maintenance costs
____ 35. Which of the following below is an example of a capital expenditure?

a. cleaning the carpet in the front room
b. tune-up for a company truck
c. replacing an engine in a company car
d. replacing all burned-out light bulbs in the factory

____ 36. The payment of accounts payable results in a(n)

a. decrease in liabilities and a decrease in assets.
b. decrease in liabilities and an increase in assets.
c. increase in liabilities and a decrease in owners' equity.
d. decrease in liabilities and an increase in owners' equity.

____ 37. If a company purchases \$3,200 worth of inventory with terms of 2/10, n/30 on March 3 and pays April 2, then the amount p aid to the seller would be

a. \$3,136 c. \$3,168
b. \$3,150 d. \$3,200

____ 38. Almost all current liabilities affect the operating category of the statement of cash flows, but one that does not affect cash provided by operating activities is

a. accounts payable. c. notes payable.
b. interest payable. d. taxes payable.

____ 39. A company's balance sheet shows the account, Notes Payable. This resulted from a loan made by the company's bank. If the end-of-year balance in the notes payable account exceeds the beginning-of-year balance by \$5,000, this is shown on the cash flow statement as an

a. inflow of cash of \$5,000 in the operating activities category.
b. outflow of cash of \$5,000 in the operating activities category.
c. inflow of cash of \$5,000 in the financing activities category.
d. outflow of cash of \$5,000 in the financing activities category.

____ 40. In 2012, Salem, Inc. sold 1,000 carpets for \$50 each. The carpets carry a 2-year warranty for repairs. Salem estimates that repair costs will average 2% of the total selling price. What is the amount that would be recorded in the warranty liability account as a result of selling the carpets during 2012?

a. \$1,000
b. \$ 500
c. \$ 20
d. No liability should be recorded until the carpets are returned for repairs.

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