Multiple Choice

 

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Question 1
In a periodic inventory system, the ending inventory and cost of goods sold must be determined by:
A. external auditors.
B. physical count.
C. a certification of inventory.
D. reference to a running inventory balance.

Question 2
The use of perpetual inventory systems is preferred where a:
A. large number of expensive inventory units exist.
B. small number of expensive inventory units exist.
C. large number of inexpensive inventory units exist.
D. small number of inexpensive inventory units exist.

Question 3
A perpetual inventory system:
A. usually maintains inventory records only in terms of physical units on hand.
B. uses a purchases account to record additions to inventory.
C. eliminates the need to periodically take a physical inventory count.
D. keeps a running record of the amount of inventory on hand.

Question 4
Goods held on consignment are included in the inventory of:
A. the consignor.
B. the consignee.
C. both the consignor and the consignee.
D. neither the consignor nor the consignee.

Question 5
Examples of variable costs include all of the following EXCEPT:
A. raw materials costs.
B. the plant manager’s salary.
C. direct labor costs.
D. electricity used in running production machinery.

Question 6
Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to:
A. match current costs with current revenues.
B. match current costs with oldest revenues.
C. match oldest costs with current revenues.
D. match oldest costs with oldest revenues.

Question 7
LIFO reserve disclosure is required because LIFO inventory costs are:
A. higher than FIFO inventory costs.
B. lower than FIFO inventory costs.
C. equal to FIFO inventory costs.
D. usually of no consequence.

Question 8
The conversion of a LIFO inventory to approximate the inventory at FIFO is accomplished through application of which one of the following formulas?
A. FIFO inventory = LIFO inventory x LIFO reserve
B. FIFO inventory = LIFO inventory ÷ LIFO reserve
C. FIFO inventory = LIFO inventory – LIFO reserve
D. FIFO inventory = LIFO inventory + LIFO reserve

Question 9
As a firm liquidates old LIFO layers of inventory, the lower costs of the LIFO layers are matched against current sales dollars resulting in a profit margin that is:
A. inflated.
B. deflated.
C. lower than normal.
D. always the same as under FIFO.

Question 10
Inventory turnover distortion under LIFO inventory costing may be adjusted by:
A. adding the LIFO reserve amounts to cost of goods sold and adjusting beginning and ending inventory for LIFO liquidation profits whenever LIFO dipping occurs.
B. subtracting the LIFO reserve amounts from cost of goods sold and adjusting beginning and ending inventory for LIFO liquidation profits whenever LIFO dipping occurs.
C. adding the LIFO reserve amounts to beginning and ending inventory and adjusting cost of goods sold for LIFO liquidation profits whenever LIFO dipping occurs.
D. subtracting the LIFO reserve amounts from beginning and ending inventory and adjusting cost of goods sold for LIFO liquidation profits whenever LIFO dipping occurs.

Question 11
The LIFO conformity rule states that:
A. if LIFO is used for tax purposes, the external financial statements must also use LIFO.
B. if FIFO is used for tax purposes, the external financial statements must also use FIFO.
C. if LIFO is used for tax purposes, the external financial statements must also use FIFO.
D. if FIFO is used for tax purposes, the external financial statements must also use LIFO.

Question 12
Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported income tends to:
A. become highly volatile.
B. decrease.
C. increase.
D. remain the same.

Question 13
Table 5-3
Amanda Company had the following inventory transactions in August.
Purchases Sales Balance
Aug. 1 Balance 200 @ $3.20
Aug. 2 150 @ $5.50
Aug. 4 550 @ $3.10
Aug. 5 400 @ 5.50
Aug. 7 300 @ 3.30
Aug. 8 250 @ 5.50
Aug. 12 100 @ 6.00
Aug. 13 450 @ 3.40
Aug. 20 300 @ 6.00
Aug. 21 125 @ 3.50
Aug. 29 100 @ 6.00
Refer to Table 5-3. If Amanda uses a periodic inventory system, the LIFO basis ending inventory is:
A. $1,027.50.
B. $1,040.00.
C. $1,072.50.
D. $1,117.50.

Question 14
Refer to Table 5-3. If Amanda uses a perpetual inventory system, the LIFO basis ending inventory is:
A. $1,027.50.
B. $1,040.00.
C. $1,067.50.
D. $1,117.50.

Question 15
Refer to Table 5-3. If Amanda uses a perpetual inventory system, the FIFO basis ending inventory is:
A. $1,027.50.
B. $1,040.00.
C. $1,117.50.
D. $1,137.50.

Question 16
The ABC Company reported merchandise inventory at LIFO of $450,000 on the year-end financial statements. The company also reported a LIFO Reserve of $45,000. An estimate of the inventory balance if the inventory had been reported using the FIFO assumption is:
A. $360,000.
B. $405,000.
C. $455,000.
D. $495,000.

Question 17
The Sea King Corporation reported a LIFO Reserve of $50,000 at the end of the year. The beginning of the year LIFO Reserve was $40,000. The Cost of Goods Sold was $395,000 under LIFO. The Cost of Goods Sold under FIFO should be:
A. $375,000.
B. $385,000.
C. $445,000.
D. $485,000.

Question 18
As a firm liquidates old LIFO layers of inventory, the lower costs of the LIFO layers are matched against current sales dollars resulting in a profit margin that is:
A. always the same as under FIFO.
B. deflated.
C. inflated.
D. lower than normal.

Question 19
WAM, Inc. uses the lower of cost or market method to determine inventory value. The following information relates to Product W at the end of the year: cost $26; replacement cost $20; selling price $30; cost of completion $2; and normal profit $7. Based upon this information, the lower of cost or market for Product W is:
A. $20.
B. $21.
C. $23.
D. $26.

Question 20
Table 5-4
Dollar Value LIFO Inventory Data:
Year Year End Price Price Index
1 $200,000 100
2 250,000 105
3 296,000 108
4 286,000 110
Refer to Table 5-4. The inventory under dollar value LIFO at the end of Year 3 is __________ and at the end of Year 4 is __________.
A. $274,075; $238,096
B. $276,800; $240,000
C. $278,856; $263,657
D. $300,000; $286,000

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Expert Answers
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Teller Co. sold 20,900 units of its only product and incurred a $71,860 loss (ignoring taxes) for the current year as shown here. During a planning session for year 2012’s activities, the production manager notes that variable costs can be reduced 40% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $159,000. The maximum output capacity of the company is 40,000 units per year.

TELLER COMPANY
Contribution Margin Income Statement
For Year Ended December 31, 2011
Sales 802560
Variable Cost 601920
Contribution Margin 200640
Fixed Costs 272500
Net Loss (71860)

Prepare a fore casted contribution margin income statement for 2012 that shows the expected results with the machine installed. Assume that the unit sales price and the number of un
its sold (20,900 units) will not change, and no income taxes will be due

Compute the sales level required in both dollars and units to earn $203,000 of after-tax income in 2012 with the machine installed and no change in the unit sales price. Assume that the income tax rate is 30%.
Sales level required in dollars $1311819
Sales level required in units 34162 units

Prepare a fore casted contribution margin income statement that shows the results at the sales level computed in part 4. Assume an income tax rate of 30%. (Use the units in your answer from Part 4 in your calculation of Sales and Variable Cost. Your Net Income might be higher than required amount due to rounding. Input all amounts as positive values. Round your “Sales level required in units” to nearest whole number. Round your intermediate calculations to 2 decimal places and final answers to the nearest whole number. Omit the “quot; sign in your response.)

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Suntron Company.
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(Components of internal control) The chapter identified five components of internal control.
Listed below are specific control policies and procedures prescribed by Suntron Company.

1. Management gives careful consideration to the requisite knowledge and skills personnel
need at all levels of the organization.

2. General controls and application controls are established in the electronic data processing
department.

3. Management acts to reduce or eliminate incentives and temptations that might lead
individuals to engage in dishonest or illegal acts.

4. Management is alert to complaints received from customers about billing errors.

5. Management gives special consideration to the risks that can arise from the use of information
technology in the accounting system.

6. Employees’ responsibilities are assigned so as to avoid any individual’s being in a position
to both commit an error or irregularity and then conceal it.

7. IT management has designed controls to prevent unauthorized use of IT equipment,
data files, and computer programs.

8. The processing of payroll includes a check on the total number of hours submitted. If more than 65 hours are reported in a weekly pay period, the transaction is printed on
an exception report and put in a suspense file for additional review or additional
authorization.

9. Suntron’s internal audit staff periodically assesses the effectiveness of various ICS
components.

10. Policy manuals, accounting and financial reporting manuals, and a chart of accounts
have been developed and implemented.
Required
a. Identify the components of internal control to which each policy or procedure relates.
b. For each item, identify one other policy or procedure for that internal control component
that is not on the preceding list.

11-21 (Assessing control risk) An auditor is required to obtain a sufficient understanding of each
of the components of an entity’s system of internal control to plan the audit of the entity’s
financial statements and to assess control risk for the assertions embodied in the account
balance, transaction class, and disclosure components of the financial statements.
Required
a. Explain the reasons an auditor may assess control risk at the maximum level for one or
more assertions embodied in an account balance.
b. What must an auditor do to support assessing control risk at less than the maximum
level when the auditor has determined that controls have been placed in operation?
c. What should an auditor consider when seeking a further reduction in the planned
assessed level of control risk?
d. What are an auditor’s documentation requirements concerning an entity’s system of

internal control and the assessed level of control risk?

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Seven Situations
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The limitations of the CPA’s professional responsibilities when he or she is associated with unaudited financial statements are often misunderstood. These misunderstandings can be substantially reduced by carefully following professional pronouncements in the course of the work and taking other appropriate measures.
Required
The following list describes seven situations the CPA may encounter or contentions he or she may have to deal with in the association with and preparation of unaudited financial statements. Briefly discuss the extent of the CPA’s responsibilities and, if appropriate, the actions that should be taken to minimize any misunderstandings. Number your answers to correspond with the numbering in the following list.

1. The CPA was engaged by telephone to perform write-up work including the preparation of financial statements. The client believes that the CPA has been engaged to audit the financial statements.

2. A group of businessmen who own a farm that is managed by an independent agent engage a CPA to prepare quarterly unaudited financial statements for them. The CPA prepares the financial statements from information given by the independent agent. Subsequently, the businessmen find the statements were inaccurate because their independent agent was embezzling funds. The businessmen refuse to pay the CPA’s fee and blame the CPA for allowing the situation to go undetected, contending that the CPA should not have relied on representations from the independent agent

3. In comparing the trial balance with the general ledger, the CPA finds an account labeled “audit fees” in which the client has accumulated the CPA’s quarterly billings for accounting services, including the preparation of quarterly unaudited financial statements.

4. Unaudited financial statements were accompanied by the following letter of transmittal from the CPA: We are enclosing your company’s balance sheet as of June 30, 20X0, and the related statements of income and retained earnings and cash flows for the six months then ended that we have reviewed

5. TO determine appropriate account classification, the CPA reviewed a number of the clients invoices. The CPA noted in the working papers that some invoices were missing but did nothing further because the CPA felt they did not affect the un audited financial statements he or she was preparing. When the client subsequently discovered that invoices were missing, the client contended that the CPA should not have ignored the missing invoices when preparing the financial statements and had a responsibility to at least inform the client that they were missing.

6. The CPA has prepared a draft of unaudited financial statements prepared by the client’s records. While reviewing this draft the client, the CPA learns that the land and building were recorded at appraisal value.

7. The CPA is engaged to review, but not audit, the financial statements prepared by the client’
s controller. During this review, the CPA learns of several items that by Generally Accepted Accounting Principles would require adjustment of the statements and footnote disclosures. The controller agrees to make the recommended adjustments to the statements but says that he or she is not going to add the footnotes because the statements are unaudited

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VLSM Spreadsheet
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You have just been promoted to a new position as the Senior Network Engineer of your company and are anxious to make a good impression on your superiors. For this assignment, you are asked to design a plan to increase the network addressing in several departments due to a major expansion. There will be a requirement for additional employees in every department and you will need to increase the IP addressing in Department A by 65 additional addresses, Department B by 30 additional addresses, Department C by 15 additional addresses, and Department D by 5 additional addresses. You have a Class C address of 192.168.75.0 and are currently supporting 30 users in Department A, 27 users in Department B, 11 users in Department C, and 9 users in Department D. Each department is supported by one or more switches and connects to a router. This change will need to be in four routers: one supporting Department A, one supporting Department B, one supporting Department C, and one supporting Department D. Sub nets need to be created to connect Router A to Router B, Router B to Router C, and Router C to Router D.
Current Departments
Current sub net mask
Additional users
Department A 30 users
255.255.255.224 or /27
65
Department B 27 users
255.255.255.224 or /27
30
Department C 11 users
255.255.255.224 or /27
15

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Multiple Choice Answers
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1.The Silver Company uses a predetermined overhead rate in applying overhead to production orders on a labor cost basis in Department A and on a machine hours basis in Department B. At the beginning of the year, the company made the following estimates:
Dept. A Dept B.
direct labor cost $60,000 $40,000
factory over head $90,000 $45,000
direct labor hours 6,000 9,000
machine hours 2,000 15,000
What predetermined overhead rate would be used in Department A and Department B respectively?
150% and 300%.
150% and $3.00.
$1.50 and 300%.
$1.50 and $3.00

2.Scottso Corporation applies overhead using a normal costing approach based upon machine-hours. Budgeted factory overhead was $266,400, budgeted machine-hours were 18,500. Actual factory overhead was $287,920, actual machine-hours were 19,050. How much is the over- or underapplied overhead? (Do not round your intermediate calculations.)
$21,520 underapplied
$13,600 underapplied
$7,920 overapplied
$0

3.The predetermined overhead rate for manufacturing overhead for 2008 is $4.00 per direct labor hour. Employees are expected to earn $5.00 per hour and the company is planning on paying its employees $100,000 during the year. However, only 75% of the employees are classified as “direct labor.” What was the estimated manufacturing overhead for 2008?

4.Given the following information, compute the total number of units for the period.
direct labor hours 12,000
direct labor cost $2.70 per hour
direct materials cost $75 per unit
total manufacturing cost $132,600
fixed overhead cost $36,000
variable overhead cost 50% of total labor cost
A. 360
B. 432
C. 640
D. 840

5.The WISCO company uses a weighted-average process costing system. The following data are available”
Beginning inventory 0
units started in production 20,000
units finished during the period 16,000
units in process at the end of the period
(complete as to materials, 1/4 complete as to labor and overhead) 4,000
cost of materials used $35,200
labor and overhead cost $37,400
Equivalent units of production for material are
16,000.
17,000.
19,000.
20,000.

6.Equivalent units of production for labor and overhead are
16,000.
17,000.
19,000.
20,000

7.Unit cost of material is
$2.20.
$2.07.
$1.85.
$1.76.

8.Unit cost of labor and overhead is
$2.34.
$2.20.
$1.97.
$1.87.

9.Total cost of the 16,000 units finished is (Do not round any intermediate calculations.)
$63,360.
$67,320.
$72,640.
$65,120.

10.Total cost of the 4,000 units of the ending inventory (Do not round any intermediate calculations.)
$15,840.
$14,520.
$9,240.
$8,910.

11.The Finishing Department had 5,000 incomplete units in its beginning Work-in-Process Inventory which were 100% complete as to materials and 30% complete as to conversion costs. 15,000 units were received from the previous department. The ending Work-in-Process Inventory consisted of 2,000 units which were 50% complete as to materials and 30% complete as to conversion costs. The Finishing Department uses first-in, first-out (FIFO) process costing
How many units were transferred-out during the period?
12,000
13,000
18,000
20,000

12.The How many units were started and completed during the period?
12,000
13,000
18,000
20,000

13.What are the equivalent units of production for materials during the period?
12,000
13,000
14,000
15,000

14.What are the equivalent units of production for the conversion costs during the period?
14,500
15,100
16,500
17,100 

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Multiple Choice Answers
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1. Two common ways of retiring bonds before maturity are to (1) exercise a call option or (2) purchase them on the open market.  
True 
False 

2. A company purchased equipment and signed a 7-year installment loan at 9% annual interest. The annual payments equal $9,000. The present value of an annuit
y for 7 years at 9% is 5.0330. The present value of the loan is: 

$9,000.
$5,033.
$63,000.
$57,330.
$45,297.

3. A company’s debt-to-equity ratio was 1.0 at the end of Year 1. By the end of Year 2, it had increased to 1.7. Since the ratio increased from Year 1 to Year 2, the degree of risk in the firm’s financing structure decreased during Year 2.  
True 
False 

4. A company had net income of $2,660,000, net sales of $25,000,000, and average total assets of $8,000,000. Its return on total assets equals:  
3.01%.
10.64%.
32.00%.
33.25%.
300.75%.

5. A bond traded at 102½ means that:  
The bond pays 2.5% interest.
The bond traded at $1,025 per $1,000 bond.
The market rate of interest is 2.5%.
The bonds were retired at $1,025 each.
The market rate of interest is 2 ½ % above the contract rate. 

6. Consolidated financial statements:  
Show the results of operations, cash flows, and the financial position of all entities under a parent’s control.
Show the results of operations, cash flows, and the financial position of the parent only.
Show the results of operations, cash flows, and the financial position of the subsidiary only.
Include the investments account on the balance sheet.
Do not include a balance sheet. 

7. A basic present value concept is that cash paid or received in the future is worth less than the same amount of cash today.  
True 
False 

8. The contract between the bond issuer and the bondholders, which identifies the rights and obligations of the parties, is called a(n):  
Debenture.
Bond indenture.
Mortgage.
Installment note.
Mortgage contract.

9. The present value of an annuity can be best or easier computed as the sum of the individual future values for each payment.  
True 
False 

10. The debt-to-equity ratio:  
Is calculated by dividing book value of secured liabilities by book value of pledged assets.
Is a means of assessing the risk of a company’s financing structure.
Is not relevant to secured creditors.
Can always be calculated from information provided in a company’s income statement.
Must be calculated from the market values of assets and liabilities. 

11. An investor purchased $50,000 of bonds and holds them to maturity. The investor’s journal entry to record the proceeds should include a debit to Cash for $50,000 and a credit to Long-Term Investments for $50,000.  
True 
False 

12. Callable bonds have an option exercise able by the issuer to retire them at a stated dollar amount prior to maturity.  
True 
False 

13. A company issues 9%, 20-year bonds with a par value of $750,000. The current market rate is 8%. The amount of interest owed to the bondholders for each semiannual interest payment is.  
$60,000.
$33,750.
$67,500.
$30,000.
$375,000.

14. A company borrowed cash from the bank by signing a 5-year, 8% installment note. The present value of an annuity at 8% for 5 years is 3.9927. Each annuity payment equals $75,137.13. The present value of the note is:  
$75,137.13.
$94,013.13.
$300,000.00.
$375,137.13.
$197,810.00.

15. If the exchange rate for Canadian and U.S. dollars is 0.82777 to 1, this implies that 3 Canadian dollars will buy ____ worth of U.S. dollars.  
$0.2759
$0.82777
$1.82777
$2.48
None of these.

16. Debt securities:  
Can be short-term investments.
Can be long-term investments.
Can have a cost higher than the maturity value of the debt security.
Can have a cost lower than the maturity value of the debt security.
All of these.

17. On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. Prepare the journal entry to record the first interest payment.
     
18. A company paid $500,000 for 12% bonds with a par value of $500,000. The bonds pay 6% interest semiannually on September 1 and March 1. The company intends to hold the bonds until they mature. Prepare the journal entries for the following dates and transactions related to this bond acquisition.
(1)Bonds purchased on September 1.
(2) Year-end adjusting entry, December 31.
(3) Receipt of semiannual interest March 1.
(4) Redemption of the bonds at maturity on August 31. 

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Multiple Choice Answers
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 The value of geometric mean return calculation, compared to an arithmetic mean, is that it computes;
Compound cumulative returns
Returns over several years
Inflation adjusted returns
Better average single period returns

To determine real returns on a portfolio, as compared to nominal returns, investors typically take _____________into consideration
Purchasing power parity
Household income
The consumer prices index
Currency valuations

Which of the following is a value that can never be valid correlation coefficient


-0.8

0.0

1.0

1.4
In a portfolio containing 2 stocks with perfect inverse correlations, the standard deviation of returns will always be
Zero
Small
Large
Uncertain

In the case of a portfolio with two securities, the factors that determine total portfolio risk are the variance of each security, the covariance between the securities and the _______for each security
Standard deviation
Dispersion
Geometric mean
Portfolio weights

Which of the following statements regarding the correlation coefficient is NOT true?
It is a statistical measure
It measures the relationship between two securities returns
It determines the causes of relationships between 2 securities returns
All the above are true

Which of the following is TRUE regarding the expected return of a portfolio
It is weighted average only for stocks portfolios
It can only be positive
It can never be above the highest individual return
All the above are true

While bond investor may focus primarily on coupon interest received, the total return on bond held to maturity
may also depend on:

Changes in interest rates
Capital gain or loss
Adjustments to par value
Dividends payments

While all securities are expose to market risk to a certain extent, it primarily affects;
Common stocks
Corporate bonds
Treasury securities
International investments

Assume you just purchased a bond for $950. The bond has a face value of $1000 matures in one year and has a 5% coupon. Your total return on this investment at maturity, assuming no default on payments, will be.


5.0%

9.3%

10.5%

12.2%


 
It is necessary to calculate a return relative for an investment when the investor desires to take the further step of determining a/an:
Inflation adjusted return
Arithmetic mean
Cumulative wealth index
Discounted cash flow

  
A U.S. investor who chooses to buy stock of a foreign company denominated in the local currency is in effect.
Reducing exchange rate risk
Hedging a portfolio
Buying dollars
Selling dollars

Calculate the arithmetic mean given the following total return values;

4.0%, 8.3%, 12.6%, -5.2%, and 2.9%
3.61%
4.35%
4.52%
5.23%

A standard deviation is commonly employed to understand risk of investments. The arithmetic tool is particularly useful because it measures
Dispersion
Weighting
Mean values
Concentricity

The equity premium is an important concept in finance, but is often misunderstood. And important source of controversy in this regard is the difference between ______ and _____________ risk premium
Historical; expected
Realized; guaranteed
Calculated; estimated
Variable; fixed

When an investor looks at a cumulative wealth index, the value change over time is substantially influenced by the effects of:
Indexing
Inflating
Discounting
Compounding

Mary is evaluating the risk (return deviation) of a model stock portfolio she has constructed. She knows that an ex ante set of returns is a more useful approach. However she first to decides to examine ex post returns because she knows that for a well-diversified portfolio, they are likely to be:
Within one standard deviation
Reasonably steady across time
Cumulatively accurate
More indicative of future results

Regardless of the number of assets held in a portfolio or the proportion of total funds placed in each asset, the expected return on the portfolio is always a/an ______ of the expected returns for the individual assets in the portfolio.
Arithmetic mean
Geometric mean
Weighted average
Combine aggregate

Modern portfolio theory is similar to principles used in the insurance business in that its risks reduction properties are founded on the:
Rule of diminishing returns
Theory in increasing utility
Law of large numbers
Principles of cause and effect

A central tenet of portfolio theory is that diversification can greatly reduce a portfolio’s ______risk
Systematic
Company specific
Interest rate
Market