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Multiple choice

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Question 1: Cato Company is considering a capital project that will return $100,000 each year for five years. At the company's hurdle rate of 10%, the present value of the annuity is $379,100. If the return on investment in the first year is $37,910, what is the return of investment that year?

(a) $62,090
(b) $100,000
(c) $137,910
(d) None of the above

Question 2: Nicole wants to determine the net present value for a proposed capital investment. She has determined the desired rate of return, the expected investment time period, a series of cash inflows of equal amount, the salvage value of the investment, and the required cash outflows. Which of the following tables would most likely be used to calculate the net present value of the investment?

(a) Present Value of a Lump Sum
(b) Present Value of Annuity
(c) Both of the above
(d) None of the above

Question 3: Winter Company's static budget is based on a planned activity level of 25,000 units. At the same time the static budget was prepared, the management accountant prepared two additional budgets, one based on 20,000 units and one based on 30,000. The company actually produced and sold 29,000 units. In evaluating its performance, management should compare the company's actual revenues and costs to which of the following budgets?

(a) A budget based on 20,000 units
(b) A budget based on 25,000 units
(c) A budget based on 29,000 units
(d) A budget based on 30,000 units

Question 4: The Peabody Company developed the following static budget at the beginning of the company's accounting period:

Revenue (8,000 units) $16,000
Variable costs 4,000
Contribution margin $12,000
Fixed costs 4,000
Net income $ 8,000

If actual production totals 8,200 units, the flexible budget would show variable costs of:

(a) $16,400
(b) $4,800
(c) $4,100
(d) $4,000

Question 5: McDowell Company has completed its sales budget for the first quarter of 2009. Projected credit sales for the first four months of the year are shown below:

January $30,000
February $36,000
March $45,000
April $48,000

The company's past records show collection of credit sales as follows: 30% in the month of sale and the balance in the following month. The total cash collection from receivables in March will be:

(a) $38,700
(b) $45,000
(c) $42,300 units
(d) $31,800

Question 6: The Bedrock Company produces a product whose cost is $12. Assuming the company uses a cost-plus pricing system, what profit would be earned on a selling price set to earn a profit margin of 20% of cost?

(a) $2.40
(b) $9.60
(c) $12.00
(d) $14.40

Question 7: The Arizona Company produces a product that has a selling price of $12.00 and a variable cost of $9.00 per unit. The company's fixed costs are $60,000. What is the breakeven point in sales dollars?

(a) $ 80,000
(b) $100,000
(c) $120,000
(d) $240,000

Question 8: Castle Manufacturing Company experienced an accounting event that affected its financial statements as indicated below:

Which of the following accounting events could have caused the indicated effects on the firm's accounting equation?

(a) Purchased raw materials inventory with cash
(b) Transferred cost from finished goods inventory to cost of goods sold
(c) Recognized revenue from merchandise sold for cash
(d) None of the above

Question 9: Purchasing production supplies for cash is a/an:

(a) Asset source transaction
(b) Asset use transaction
(c) Asset exchange transaction
(d) Claims exchange transaction

Question 10: The following information is provided for Beach Shell Company:

Sales revenue $200,000
Variable manufacturing costs 60,000
Fixed manufacturing costs 26,000
Variable selling and general costs 24,000
Fixed selling and general costs 20,000

What is this company's contribution margin?

(a) $140,000
(b) $116,000
(c) $114,000
(d) $90,000

Question 11: Which of the following costs typically include both fixed and variable components?

(a) Direct materials
(b) Direct labor
(c) Factory overhead
(d) None of the above

Question 12: Maxton Company has total current assets of $45,000 including inventory of $10,000, and current liabilities of $21,000. The company's working capital ratio is:

(a) 0.4
(b) 0.5
(c) 2.1
(d) 2.6

Question 13: Which of the following transactions would affect cash flows?

(a) A write-off of an uncollectible account
(b) Issuance of a stock dividend
(c) Payment of dividends declared in a previous year
(d) Recognition of depreciation expense

Question 14: On September 1, 2007, the Lilac Company purchased equipment making a down payment of $4,500 cash and signing a one-year Note Payable for the $11,500 balance. The note carried an interest rate of 7%, and all interest was to be paid on the maturity date. Which of the following correctly shows the combined effect of the purchase and the accrual of interest on December 31, 2007?

Cash Flows from
Income Operating
Activities Investing
Activities Financing
A (16,000) (268) (4,500) NA
B NA (268) NA 16,000
C (11,500) NA (11,500) NA
D (268) NA (4,500) NA

(a) A above
(b) B above
(c) C above
(d) D above

Question 15: The Deer Co. issued bonds with a face value of $50,000 and a stated interest rate of 8%. The bonds have a life of four years and were sold at 96. If Deer amortizes discounts and premiums using the straight-line method the amount of interest expense each year would be:

(a) $4,000
(b) $4,500
(c) $5,000
(d) $6,000

Question 16: On January 1, 2005, the Franklin Corporation purchased an asset that had cost $26,000. The asset had a 6-year useful life and an estimated salvage value of $2,000. Fraklin depreciates its assets on the straight-line basis. On January 1, 2009 the company spent $12,000 to improve the quality of the asset. Based on this information the recognition of depreciation expense in 2009 would act to:

(a) Increase total assets by $12,000
(b) Reduce total equity by $10,000
(c) Reduce total assets by $12,000
(d) Increase total equity by $10,000

Question 17: Generally accepted accounting principles require that companies disclose:

(a) The net realizable value of accounts receivable
(b) The amount of the Allowance for Doubtful Accounts
(c) Neither (a) nor (b)
(d) Both (a) and (b)

Question 18: At the end of the 2007 accounting period the Balencia Company determined that the market value of its inventory was $35,900. The historical cost of this inventory was $41,500. Balencia uses the perpetual inventory method. The entry necessary to reduce the inventory to the lower of cost or market will act to:

(a) Increase assets and increase liabilities
(b) Decrease assets and increase net income
(c) Increase assets and increase net income
(d) Decrease assets and decrease net income

Question 19: RJX Company provided repair service of $2,800 to a customer who paid $1,300 and promised to pay the remainder next month. Which of the following journal entries correctly records this transaction?

A Cash 1,300
Accounts Payable 1,500
Revenue 2,800

B Cash 1,300
Accounts Receivable 1,500
Revenue 1,500
Accounts Payable 1,300

C Cash 1,300
Revenue 1,300

D Accounts Receivable 1,500
Cash 1,300
Revenue 2,800

(a) A above
(b) B above
(c) C above
(d) D above

Question 20: Denim Company purchased land costing $2,400 by paying cash. The company earned $2,000 revenue on account and incurred $1,100 of operating expenses on account. As a result of these transactions:

(a) Total assets increased by $2,400
(b) Liabilities increased by $1,100
(c) Total assets increased by $5,400
(d) Both (a) and (b)

Question 21: For each of the following unrelated transactions, list the accounts that will be debited and credited.

(a) Borrowed cash from the bank.
(b) Provided services on account.
(c) Paid cash for office supplies.
(d) Collected cash due on accounts receivable.
(e) Paid cash dividends to stockholders.

Event Account Debited Account Credited

Question 22: The following transactions apply to Randy's Lawn and Garden Service for the year 2008.

(1) Issued stock to investors for $15,000 cash.
(2) Purchased land for $12,000 cash.
(3) Performed services on account for $17,000.
(4) Collected $11,200 on accounts receivable.
(5) Paid operating expenses of $6,500.


(a) Draw T-accounts and post the above transactions to the appropriate T-accounts.
(b) Prepare a balance sheet and statement of cash flows for Randy's Lawn and Garden Service for the period ended December 31, 2008.

Question 23: The following events pertain to BJ's Office Supply Company for January 2008. The company uses the perpetual inventory method. Record the following events in the general journal.

(1) Jan 3. Purchased $40,000 of merchandise inventory from supplier, Kelly Distributors, Inc. The terms of the purchase: 2/10, n/30 and FOB shipping point.
(2) Jan 5. Paid $900 cash for freight to trucking company to have goods shipped from Kelly Distributors, Inc.
(3) Jan 7. (a) Sold merchandise for $8,000 to a customer on account. (b) The merchandise sold had cost $5,600.
(4) Jan 10. Returned $5,000 (list price) of defective merchandise to Kelly Distributors, Inc.
(5) Jan. 11. Paid amount due to Kelly Distributors for merchandise purchased on Jan. 3.
(6) Jan. 12. (a) Accepted a return of $1,500 of the goods sold on Jan. 7. (b) The cost of these goods was $1,100.

Event No. Account Title Debit Credit








Question 24: The following is a list of selected events for Felix Sales and Service for 2009. Felix uses a perpetual inventory system and had a zero inventory balance prior to these transactions.

(1) Purchased merchandise on account for $67,000.
(2) Sold inventory costing $48,000 for $88,000 on account.
(3) Paid transportation-out cost of $3,500 on goods sold.
(4) Paid salary expense of $25,000.
(5) A count of the inventory revealed that there was $18,500 of inventory on hand at the end of 2009.

Required: Answer the following questions based on the above information.

(a) What was Felix's net income for 2009?
(b) Compute gross margin and the gross margin percent for 2009.
(c) What amount of inventory will appear on the balance sheet for 2009?
(d) Prepare an income statement for 2009.

Question 25: The Rosedale Company had the following beginning inventory, purchases, and sales of inventory during the first quarter of 2007:

Units Cost Per Unit
January 1 Beginning balance 1,200 $15
15 Purchased 500 $16
25 Sold 700
February 5 Purchased 600 $17
18 Sold 800
March 15 Purchased 600 $16


Determine the value of the company's cost of goods sold and ending inventory at the end of March, assuming a perpetual inventory method and FIFO cost flow. Show all calculations.

Question 26: In the first year of operations, 2007, Sally's Repair Service recognized $220,000 of service revenue on account. The ending accounts receivable balance was $45,000. Sally estimates that 3% of sales on account will not be collected. Assume there were no other transactions affecting accounts receivable.


(a) What amount of cash was collected in 2007?
(b) What amount of uncollectible accounts expense was recognized in 2007?

Question 27: On May 4, 2007, the Swish Company purchased a tract of land as a factory site for $3,000,000. An existing building on the property was demolished, and construction was begun on a new factory building in July 2007 and completed December 15, 2007. Cost data are shown below.

New building $14,000,000
Cost of demolishing old building 260,000
Proceeds from sale of salvaged materials from old building 24,000
Architect's fees for design of building 500,000
Title insurance and attorney's fee for purchase of land 120,000


Compute the capitalized cost of (a) the land and (b) the new factory building.

Question 28: On January 1, 2006, Jacob's Manufacturing Company purchased equipment for $95,000. Jacob paid $2,000 to have the machine installed. The equipment is expected to have a 5 year useful life and a salvage value of $7,000.


(a) Compute depreciation expense for 2006 and 2007 using straight line depreciation.
(b) What is the book value at the beginning of 2008?
(c) Assume the equipment was sold on January 1, 2008, for $65,000. Compute the amount of gain or loss from the sale.
(d) Prepare the journal entry to record the sale of the equipment.

Question 29: The following information is available for Kellog Company for 2006.

Inventory 1/1/06 $130,000
Inventory 12/31/06 $120,000
Cost of Goods Sold, 2006 $450,000
Accounts Payable 1/1/06 $70,000
Accounts Payable 12/31/06 $92,000


(a) What amount of cash was paid for the purchase of merchandise?
(b) How will the amount computed in (a) be shown on the Statement of Cash Flows?

Question 30: The following income statement was prepared by Beardsmen Company for 2008:

Sales $100,000
Cost of goods sold 58,500
Gross margin $ 41,500
Selling and administrative expense 25,000
Interest expense 3,000
Total operating expenses 28,000
Income before taxes 13,500
Income tax expense 4,050
Net income $ 9,450


Perform vertical analysis for Beardsmen Company's 2008 income statement.

Question 31: The following information applies to Isha Construction Company (ICC):

2007 2006
Net sales $425,000 $300,000
Income before interest and taxes 63,750 42,000
Net income 27,625 28,000
Interest expense 10,625 7,500
Stockholders' equity, December 31 386,750 270,000
Common stock 375,150 246,600
Preferred stock dividends $ 12,000 $ 12,000

Information on the number of shares outstanding is provided below:

Average number of common shares outstanding for 2006 38,000
Average number of common shares outstanding for 2007 33,000


Compute the following ratios for ICC for 2007 and 2006:

(a) Number of times interest is earned;
(b) Earnings per share;
(c) Price-earnings ratio (Market prices: 2007 $8.75 per share, 2006 $7.50 per share);
(d) Return on equity; and
(e) Net margin.

Question 32: The Omega Company makes three joint products: products X, Y, and Z. For each batch, the materials cost is $8,000, direct labor cost is $2,000, and manufacturing overhead is $5,000. From each batch, the company makes 2,000 pounds of X, 1,200 pounds of Y, and 800 pounds of Z.


(a) What are the total joint costs for each batch of the products?
(b) Allocate the joint costs to each of the three products.
(c) Determine the cost per pound for product X.

Question 33: For the month of January 2009, Buckrider's Corporation had a beginning balance of $31,600 in Work in Process Inventory. During the month, the company added the following costs to Work in Process: direct materials, $45,450; direct labor, $27,000; and manufacturing overhead, $40,500. The ending balance in Work in Process Inventory was $18,700. What was the Cost of Goods Manufactured for the period? Prepare a schedule that shows the calculation of the cost of goods manufactured.

Question 34: GFW Group is a consulting firm specializing in mergers and acquisitions. In addition to the three partners, the firm employs nine consultants who work directly with clients. The average budgeted compensation for the twelve professionals is $130,000. Each consultant is budgeted at 1,600 billable hours per year. All professional labor costs are included in a single direct cost pool and are traced to jobs on a per hour basis. All non-professional labor costs are included in a single overhead cost pool and are allocated to jobs using professional labor hours as the allocation base. Budgeted overhead costs total $1,200,000. During the period the firm worked on the following jobs:

(a) The Franklin-Smith Account: Consultants booked 100 hours
(b) The Preston-Enoch account: Consultants booked 175 hours.


(1) Compute the budgeted direct cost rate per hour of professional labor.
(2) Compute the budgeted overhead cost rate per hour of professional labor.
(3) Compute the cost assigned to each job.
(4) Compute the fee to be charged to each client assuming the company uses a cost plus pricing approach and marks up cost by 20%.

Question 35: The Oasis Company has two departments, assembly and finishing. Consider the following data for the Assembly Department:

Units Percent
Complete Direct
Material Direct
Beginning work in process 1,000 90% $ 2,475
Started during the month 9,000
Completed during the month 7,500
Ending work in process 2,500 60%

Costs added during the month $11,700 $6,750 $4,050 $22,500


(1) Compute the number of equivalent whole units for the Assembly Department.
(2) Calculate the cost per equivalent whole unit.
(3) Compute the amount of costs that should be transferred to the Finishing Department.
(4) Compute the amount of costs that should be assigned to the 2,500 units in ending inventory.


Solution Summary

The solution explains some multiple choice questions in financial accounting