Problem 1. Which of the following is not an example of a decision or informed judgment that a potential investor would make from accounting information?
A) Future profitability based on past profitability.
B) Probability of success of a new product development.
C) A forecast of dividends.
D) Assessment of risk that a company may have more debt than it can repay if the economy enters a recession.
Problem 2. On January 31, an entity's balance sheet showed total assets of $750 and liabilities of $250. Owners' equity at January 31 was:
A) $ 500
B) $1,000
C) $ 750
D) $ 250
Problem 3. An accounts receivable results from the sale of:
A) Property, plant and equipment for cash
B) Goods and services to customers on account
C) Goods and services to customers for cash.
D) The firm's common stock.
E) None of the above.
Problem 4. Gains differ from revenues because gains:
A) are not a result of the entity's ongoing, central operations.
B) do not have to be realized.
C) are reported as income from operating activities.
D) do not involve any offsetting costs or expenses.
Problem 5. Under most circumstances, in order to recognize revenue:
A) cash must have been received.
B) the entity must expect to receive cash in the future.
C) the entity must have paid for all expenses incurred in generating the revenue.
D) the revenue must be realized or realizable, and earned.
Problem 6. Most entities satisfy the accounting criteria for recognizing an expense when:
A) a commitment is made to purchase a product or service.
B) cash is paid to a supplier.
C) a cost is incurred in the revenue generating process.
D) a dividend is paid to stockholders.
Problem 7. Which of the following accounts are not included in the calculation for Gross Profit?
A) Revenue.
B) Cost of goods sold.
C) Net sales.
D) General and selling expenses.
Problem 8. Which of the following is not a category of financial statement ratios?
A) Financial leverage.
B) Liquidity.
C) Profitability.
D) Prospectus.
Problem 9. The comparison of activity measures of different companies is complicated by the fact that:
A) different inventory cost flow assumptions may be used.
B) dollar amounts of assets may be significantly different.
C) only one of the companies may have preferred stock outstanding.
D) the number of shares of common stock issued may be significantly different.
Problem 10. An individual interested in making a judgment about the profitability of a company should:
A) review the trend of working capital for several years.
B) calculate the company's ROI for the most recent year.
C) review the trend of the company's ROI for several years.
D) compare the company's ROI for the most recent year with the industry average ROI for the most recent year.
Problem 11. To which function of management is CVP analysis most applicable?
A) Planning.
B) Organizing.
C) Directing.
D) Controlling.
Problem 12. An example of a product cost is:
A) advertising expense for the product.
B) a portion of the president's travel expenses.
C) interest expense on a loan to finance inventory.
D) production line maintenance costs.
Problem 13. An example of a cost that is likely to have a variable behavior pattern is:
A) sales force salaries.
B) depreciation of production equipment.
C) salaries of production supervisors.
D) direct labor costs.
Problem 14. An example of a cost likely to have a fixed behavior pattern is:
A) sales force commission.
B) raw material costs.
C) advertising costs.
D) electricity costs for packaging equipment.
Problem 15. The cash budget is especially important to a firm when:
A) there is not a lot of confidence in the sales forecast.
B) it has a relatively large amount of operating cash.
C) the P/E ratio has been trending downwards.
D) it may have to negotiate a short-term bank loan.
Problem 16. Prepaid expenses classified as current assets represent:
A) current year expenses that have been accrued.
B) current year disbursements that will be matched against revenues of the next year.
C) cash that has been segregated to pay for future expenses.
D) expenses of the current year that have been paid in advance.
Problem 17. The term, "earned," in revenue recognition refers to which of the following?
A) The entity has completed, or substantially completed, the activities it must perform to be entitled to the revenue benefits.
B) The product or service has been exchanged for cash, claims to cash, or an asset that is readily convertible to a known amount of cash or claims to cash.
C) The entity has received an irrevocable order for goods or services.
D) Cash has been received with an irrevocable order for goods or services.
E) None of the above.
Problem 18. Management's use of resources can best be evaluated by focusing on measures of:
A) liquidity.
B) activity.
C) leverage.
D) book value.
Problem 19. Which of the following is a true statement regarding absorption and/or direct costing?
A) A firm can choose to use either absorption or direct costing for income tax purposes.
B) A firm can choose to use either absorption or direct costing for financial reporting purposes.
C) Direct costing assigns only direct materials and direct labor to products.
D) Absorption costing includes fixed overhead in product costs whereas direct costing does not.
E) None of the above.
Problem 20. The overhead component of product cost is:
A) the sum of the actual overhead costs incurred in the manufacture of the product.
B) likely to be the same amount for every product made by the company.
C) an estimated amount based on labor hours, machine hours, or some other activity.
D) determined at the end of the year when actual costs and actual production are known.