ACCT 504 Week 4, Midterm Exam 3 SOLVED

ACCT 504 Week 4, Midterm Exam 3 SOLVED

1. (TCO A, B, C) Which of the following statements concerning users of accounting information is incorrect? (Points : 3)
      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.

2. (TCO C) Issuing shares of stock in exchange for cash is an example of a(n) (Points : 3)
      delivering activity.
      investing activity.
      financing activity.
      operating activity.

3. (TCO C) The statement of cash flows would disclose the payment of a dividend (Points : 3)
      nowhere on the statement.
      in the operating activities section.
      in the investing activities section.
      in the financing activities section.

4. (TCO A) The cost of assets consumed or services used is also known as (Points : 3)
      a revenue.
      an expense.
      a liability.
      an asset.

5. (TCO C) Finley Company recorded the following cash transactions for the year:
Paid $90,000 for salaries.
Paid $40,000 to purchase office equipment.
Paid $10,000 for utilities.
Paid $4,000 in dividends.
Collected $150,000 from customers.
What was Finley's net cash provided by operating activities? (Points : 3)

6. (TCO A) A current asset is (Points : 3)
      the last asset purchased by a business.
      an asset which is currently being used to produce a product or service.
      usually found as a separate classification in the income statement.
      expected to be converted to cash or used in the business within a relatively short period of time.

7. (TCO A) Which of the following is not considered an asset? (Points : 3)
      Accounts receivable

8. (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? (Points : 3)

9. (TCO B) For 2007 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 2007 earnings per share? (Points : 3)

10. (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? (Points : 3)
      $ 66,000

11. (TCO D) Is the purchase of equipment treated as an expense at the time of purchase? Why or why not? (Points : 3)
      No, GAAP requires that 10% of the cost be expensed each year. This minimizes attempts to mislead financial statement users.
      Yes, the matching principle requires that the cost be expensed in the period of purchase.
      No, the cost needs to be allocated to the years of expected use.
      Yes, the actual life of the asset is not known, thus there is no acceptable way to allocate the cost.

12. (TCO D) Which one of the following is not a part of an account? (Points : 3)
      Credit side
      Trial balance
      Debit side

13. (TCO D) The classification and normal balance of the dividend account is (Points : 3)
      a revenue, with a credit balance.
      an expense, with a debit balance.
      a liability, with a credit balance.
      under stockholders' equity, with a debit balance.

14. (TCO D) A debit is not the normal balance for which account listed below? (Points : 3)
      Accounts Receivable
      Service Revenue

15. (TCO D) Which of the following accounts follows the rules of debit and credit in relation to increases and decreases in the opposite manner? (Points : 3)
      Prepaid insurance and dividends
      Dividends and medical fees earned
      Interest payable and common stock
      Advertising expense and land
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1. (TCO E) One of the accounting concepts upon which adjustments for prepayments and accruals are based is (Points : 3)
      monetary unit.
      economic entity.

2. (TCO E) In a merchandising business, revenue may be considered earned when (Points : 3)
      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

3. (TCO E) Why do generally accepted accounting principles require the application of the revenue recognition principle? (Points : 3)
      Failure to apply the revenue recognition principle could lead to an overstatement of revenue.
      It is easy to apply the revenue recognition principle because revenue issues are always easy to identify and resolve.
      Recording revenue when cash is received is an objective application of the revenue recognition principle.
      Accounting software has made the revenue recognition easy to apply.

4. The following is selected information from M Corporation for the fiscal year ending October 31, 2007:

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

(TCO E) Based on the accrual basis of accounting, what is M Corporation's net income for the year ending October 31, 2007?

(Points : 3)

5. (TCO E) The general term employed to indicate an expense that has not been paid or revenue that has not been received and has not yet been recognized in the accounts is (Points : 3)
      contra asset.

6. (TCO B) A merchandiser that sells directly to consumers is a (Points : 3)
      service enterprise.

7. (TCO A,B) Detailed records of movements in merchandise (each purchase and sale) are not maintained in the inventory account in a (Points : 3)
      perpetual inventory system.
      periodic inventory system.
      double entry accounting system.
      business that sells expensive merchandise.

8. (TCO B) Hunter Company purchased merchandise inventory with an invoice price of $12,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Hunter Company pays within the discount period? (Points : 3)

9. Zach's Market recorded the following events involving a recent purchase of merchandise:

Received goods for $50,000, terms 2/10, n/30.
Returned $1,000 of the shipment for credit.
Paid $250 freight on the shipment.
Paid the invoice within the discount period.
(TCO A) As a result of these events, the company's merchandise inventory

(Points : 3)
      increased by $48,020.
      increased by $49,250.
      increased by $48,265.
      increased by $48,270.

10. (TCO A) The factor which determines whether or not goods should be included in a physical count of inventory is (Points : 3)
      physical possession.
      legal title.
      management's judgment.
      whether or not the purchase price has been paid.

11. TCO A -- Which statement is false? (Points : 3)
      Taking a physical inventory involves actually counting, weighing, or measuring each kind of inventory on hand.
      No matter whether a periodic or perpetual inventory system is used, all companies need to determine inventory quantities at the end of each accounting period.
      An inventory count is generally more accurate when goods are not being sold or received during the counting.
      Companies that use a perpetual inventory system must take a physical inventory to determine inventory on hand on the balance sheet date and to determine cost of goods sold for the accounting period.

12. (TCO A) Which of the following items will increase inventoriable costs for the buyer of goods? (Points : 3)
      Purchase returns and allowances granted by the seller
      Purchase discounts taken by the purchaser
      Freight charges paid by the seller
      Freight charges paid by the purchaser

13. TCO A -- Which of the following statements is true regarding inventory cost flow assumptions? (Points : 3)
      A company may use more than one cost-flow assumptions 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.

14. TCO A -- In a period of declining prices, which of the following inventory methods generally results in the lowest balance sheet figure for inventory? (Points : 3)
      Average cost method
      LIFO method
      FIFO method
      Need more information to answer

15. (TCO B) Which of the following is a true statement about inventory systems? (Points : 3)
      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.

2. (TCOs B&E)   The adjusted trial balance of Gertz Company included the following selected accounts:

Sales Returns and Allowances
$  50,000
Sales Discounts
Cost of Goods Sold
Advertising Expense
Interest Expense
Store Salaries Expense
Utilities Expense
Depreciation Expense
Interest Revenue

(1). Use the above information to prepare a multiple-step income statement for the year ended December 31, 2007.
(2). Calculate the profit margin ratio and gross profit rate.  To qualify for full credit, you must state the formula you are using, show your computations, and explain your findings. (Points : 35)

Sales Revenues                                                                                575,000
Less: Sales returns and allowances                          (50,000)
Less: Sales discounts                                                      (9,500)
Net sales                                                                             515,500
Cost of Goods Sold                                                         (347,000)

Gross Profit                                                                        168,500

Operating Expenses
Freight-out                                                                         (2,000)
Advertising expense                                                      (15,000)
Interest expense                                                             (19,000)
Store salaries expense                                                  (74,000)
Utilities expense                                                             (18,000)
Depreciation expense                                                   (3,500)

Total operating expenses                                            (131,500)

Other revenues and gains

Interest revenue                                                             25,000

Net income                                                                        62,000

Gross Profit Margin = Net Income / Net Sales = 62,000 / 515,500 = 12.03%

The gross profit margin is a ratio of the net income and the net sales.  The higher this ratio, the greater the net income the company is making off its sales.

Gross Profit Rate = Gross Profit / Net Sales = 168,500 / 515,500 = 32.69%

The gross profit rate is a ratio of the gross profit and the net sales.  The higher this ratio, the greater the gross profit the company is achieving compared to its sales.  The gross profit rate is widely considered to be more informative than the gross profit amount because it demonstrates a more useful relationship between gross profit and net sales.

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)