Accounting II
Exam Answer Key
Course Introduction
Accounting II is an advanced course that builds upon the foundational principles covered in introductory accounting. This course delves deeper into topics such as corporate accounting, managerial accounting, and the preparation and interpretation of financial statements. Students will explore areas including partnerships, long-term assets and liabilities, equity financing, and cash flow analysis, as well as budgeting, costing, and internal controls. Through practical exercises and case studies, learners gain a comprehensive understanding of the techniques and tools necessary for effective financial analysis and decision-making in a business context.
Recommended Textbook
Horngren's Financial and Managerial Accounting 6th Edition by Tracie L. Miller Nobles
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Chapter 1: Accounting and the Business Environment
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Sample Questions
Q1) List the steps, in the correct order, that are used when analyzing transactions.
Answer: Step 1: Identify the accounts and the account type.
Step 2: Decide if each account increases or decreases.
Step 3: Determine if the accounting equation is in balance.
Q2) The primary objective of financial reporting is to provide information useful for making investment and lending decisions.
A)True
B)False Answer: True
Q3) The income statement shows whether or not a business can generate enough cash to pay its liabilities.
A)True
B)False Answer: False
Q4) Mason Company purchased land for $30,000. The president of Mason Company believes that the land is actually worth $35,000. The land can be recorded at $35,000.
A)True
B)False Answer: False
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Chapter 2: Recording Business Transactions
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Q1) Which is a true statement regarding the accounting equation?
A) The equation can be stated as assets minus liabilities equals equity.
B) The equation consists of three parts: assets, liabilities, and net income.
C) The equation is an optional tool for accountants to use.
D) The equation does not need to balance during a specific period.
Answer: A
Q2) Which of the following is a liability account?
A) Prepaid Advertising
B) Cash
C) Building
D) Unearned Rent
Answer: D
Q3) A business makes a cash payment of $12,000 to a creditor. Which of the following accounts is credited?
A) Cash
B) Accounts Payable
C) Bank
D) Accounts Receivable
Answer: A
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Page 4
Chapter 3: The Adjusting Process
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Sample Questions
Q1) Hudson Landscaping Service bought equipment for $9,600 on January 1, 2019. It has an estimated useful life of five years and zero residual value. Hudson uses the straight-line method to calculate depreciation and records depreciation expense in the books at the end of every month. As of June 30, 2019, the book value of this equipment shown on its balance sheet will be ________.
A) $8,640
B) $9,600
C) $10,560
D) $9,760
Answer: A
Q2) The revenue recognition principle requires companies to record revenue when (or as) the entity satisfies each performance obligation.
A)True
B)False
Answer: True
Q3) Deferred expenses are advanced payments of future expenses.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Answer the following questions regarding the current ratio: \(\begin{array}{|l|l|}
\hline \text { Current Ratio Question } & \text { Answer } \\
\hline \text { What does the current ratio } & \\
\text { measure? } & \\
\hline \text { How is the current ratio } \\
\text { calculated? }\\
\hline \text { When analyzing the current }\\
\text {ratio, what is the rule of }\\ \text {tlaunb?}\\
\hline \end{array}\)
Q2) The Dividends account is a permanent account.
A)True
B)False
Q3) Assets are listed in the order of their ________ on the balance sheet.
A) magnitude
B) dates of purchase
C) liquidity
D) durability
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Chapter 5: Merchandising Operations
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Sample Questions
Q1) Cost of Goods Sold appears on a multi-step income statement but not on a single-step income statement.
A)True
B)False
Q2) The Sales Discounts Forfeited account ________.
A) is a contra Sales Revenue account
B) represents additional sales revenue
C) is a balance sheet account
D) represents the discount lost when a customer does not pay within the discount period
Q3) The net cost of inventory purchased equals the purchase cost less purchase returns and allowances less purchase discounts.
A)True
B)False
Q4) Gross profit is calculated as ________.
A) sales revenue less sales discounts and allowances
B) sales revenue less operating expenses
C) net sales revenue less sales discounts
D) net sales revenue less cost of goods sold
Q5) What does the gross profit percentage measure? How is it computed?
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Chapter 6: Merchandise Inventory
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Sample Questions
Q1) Nichols, Inc. had the following balances and transactions during 2018: \[\begin{array} { | l | l | }
\hline \text { Beginning Merchandise Inventory as of January 1,2018 } & 300 \text { units at } \$ 80 \\
\hline \text { March } 10 & \text { Sold } 80 \text { units } \\
\hline \text { June } 10 & \text { Purchased } 600 \text { units at } \$ 85 \\
\hline \text { October } 30 & \text { Sold } 380 \text { units } \\
\hline
\end{array}\] What would be reported for Ending Merchandise Inventory on the balance sheet at December 31, 2018 if the perpetual inventory system and the first-in, first-out inventory costing method are used?
A) $6,400
B) $51,000
C) $37,400
D) $24,000
Q2) What does inventory turnover measure? What does a high rate of inventory turnover indicate?
Q3) List and briefly discuss three measures that can be taken to maintain good controls over merchandise inventory.
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Page 8
Chapter 7: Internal Control and Cash
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Sample Questions
Q1) A(n) ________ is a device that enables members of a local network to access the network while keeping nonmembers out of the network.
A) burglar alarm
B) firewall
C) fireproof vault
D) electronic sensor
Q2) Which of the following items would require an adjusting entry after preparation of the bank reconciliation?
A) errors made by the bank revealed by the bank reconciliation
B) all items on the bank's side
C) errors made on the books revealed by the bank reconciliation
D) outstanding checks
Q3) As a part of the internal control over cash receipts by mail, the mailroom sends both the customer checks and the remittance advices to the accounting department.
A)True
B)False
Q4) Journalize the adjusting entry for the third reconciling item: NSF check. Omit explanation
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Chapter 8: Receivables
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Sample Questions
Q1) Historical Art is a new business. During its first year of operations, credit sales were $50,000 and collections on credit sales were $34,000. One account of $500 was written off. Management uses the percent-of-sales method to account for bad debts expense and estimates 3% of credit sales to be uncollectible. The ending balance of Allowance for Bad Debts account is ________.
A) $1,000
B) $1,500
C) $465
D) $2,505
Q2) Bad Debt Expense is not debited when a company writes off an account receivable when using the allowance method because the company has already recorded the Bad Debt Expense as an adjusting entry.
A)True
B)False
Q3) When using the direct method to account for uncollectibles, an allowance account is used.
A)True
B)False
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Chapter 9: Plant Assets, Natural Resources, and Intangibles
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Q1) On January 1, 2018, Tyson Manufacturing Corporation purchased a machine for $41,100,000. Tyson's management expects to use the machine for 32,000 hours over the next six years. The estimated residual value of the machine at the end of the sixth year is $47,000. The machine was used for 4000 hours in 2018 and 6000 hours in 2019. What is the depreciation expense for 2018 if the corporation uses the units-of-production method of depreciation? (Round any intermediate calculations to two decimal places, and your final answer to the nearest dollar.)
A) $5,131,640
B) $13,700,000
C) $7,697,460
D) $5,137,520
Q2) The expected value of an asset at the end of its useful life is known as ________.
A) book value
B) residual value
C) carrying value
D) market value
Q3) Capitalizing a cost involves crediting the asset account.
A)True
B)False
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Page 11
Chapter 10: Investments
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Q1) When a company uses excess cash to invest in equity securities with less than 20% ownership, its total equity will increase.
A)True
B)False
Q2) A debt security ________.
A) represents a credit relationship with another company or governmental entity, and typically pays interest for a fixed period
B) represents stock ownership in another company and sometimes pays dividends
C) is a standardized contract between two parties to buy or sell an underlying security at a predetermined price on a specific date
D) is a cash market transaction in which the ownership of the underlying asset is deferred until a specific date
Q3) A company can finance its assets by receiving cash or other assets from stockholders.
A)True
B)False
Q4) List and briefly describe the method used to account for investments in equity securities with more than 50% ownership.
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Page 12
Chapter 11: Current Liabilities and Payroll
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Q1) Lana Appliances sells dishwashers with a four-year warranty. In 2018, sales revenue for dishwashers is $96,000. The company estimates warranty expense at 4.5% of revenues. What is the 2018 warranty expense? (Round your final answer to the nearest dollar.)
A) $4320
B) $1080
C) $0
D) $3388
Q2) Which of the following is true of good internal controls over payroll?
A) Accounting for payroll should be separate from hiring and firing of employees.
B) Disbursement of paychecks should not be separate from the function of maintaining payroll records.
C) Hiring and firing employees should not be separated from accounting and from disbursing paychecks.
D) Cash receipts from customers should be separated from the accounting for accounts receivable.
Q3) If the likelihood of a future event is probable and the amount of the expense can be estimated, how should the company report the contingency?
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Chapter 12: Long-Term Liabilities
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Sample Questions
Q1) Why would a corporation issue bonds payable instead of issuing stock?
A) Debt is a less expensive source of capital than stock.
B) Borrowing by issuing bonds payable carries no risk to the company.
C) Debt affects the percentage of ownership of the corporation by the stockholders.
D) Debt does not have to be shown on the balance sheet.
Q2) Which of the following companies has the greatest financial risk?
A) Lewis, Inc.
B) Jackson, Inc.
C) Jones Corp.
D) Roberts Corp.
Q3) Which of the following describes a secured bond?
A) a bond that matures in installments at regular intervals
B) a bond that is backed by issuer's specific assets
C) a bond that matures at one specified time
D) a bond that is not backed by specific assets
Q4) Compound interest means that interest is calculated only on the principal amount.
A)True
B)False
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Page 14
Chapter 13: Stockholders Equity
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Q1) Daniel Corporation had net income for 2018 of $75,000. Daniel had 6000 shares of common stock outstanding at the beginning of the year and 22,000 shares of common stock outstanding at the end of the year. There were 8000 shares of preferred stock outstanding all year. During 2018, Daniel declared and paid preferred dividends of $26,000. On December 31, 2018, the market price of Daniel's common stock is $45 per share and the market price of its preferred stock is $73 per share. What is Daniel's price/earnings ratio at December 31, 2018? (Round any intermediate calculations and your final answer to the nearest cent.)
A) 12.86
B) 20.86
C) 13.20
D) 13.63
Q2) Treasury stock is a corporation's own stock that it has previously issued and later reacquired.
A)True
B)False
Q3) No journal entry is made on the dividend declaration date.
A)True
B)False
Q4) List the four basic rights of stockholders.
Page 15
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Chapter 14: The Statement of Cash Flows
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Sample Questions
Q1) Financing activities on the statement of cash flows affect the long-term liability and equity accounts.
A)True
B)False
Q2) Delaware Coatings Company uses the indirect method to prepare its statement of cash flows. Refer to the following information for the year 2019: Net cash provided by operating activities: $45,000
Net cash used for investing activities: $(29,000)
Net cash provided by financing activities: $2000
What is the net change in cash during the year?
A) $(18,000)
B) $43,000
C) $18,000
D) $(16,000)
Q3) Nevada Sales purchased some equipment for $12,000 by issuing a five-year note payable. This will appear in the non-cash investing and financing activities section of the statement of cash flows.
A)True
B)False
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Page 16
Chapter 15: Financial Statement Analysis
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Sample Questions
Q1) The acid-test ratio measures a company's ability to pay all its current liabilities if they came due immediately.
A)True
B)False
Q2) Regarding the profit margin ratio, which of the following statements is incorrect?
A) The higher the profit margin ratio, the more sales dollars end up as profit.
B) The profit margin ratio is computed by dividing net sales by net income.
C) The profit margin ratio shows how much net income a business earns on every $1.00 of sales.
D) The profit margin ratio focuses on the profitability of a company and is often reported in the business press.
Q3) An accounts receivable turnover that is too high may indicate that credit is too tight, causing the loss of sales to good customers.
A)True
B)False
Q4) If the debt ratio is too high, the company may be unable to pay its debts.
A)True
B)False
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Chapter 16: Introduction to Managerial Accounting
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Q1) At the beginning of the year, Swift, Inc.'s Work-in-Process Inventory account had a balance of $124,000. During the year, $250,000 of direct materials were used in production, and $72,000 of direct labor costs were incurred. Manufacturing overhead amounted to $832,000. The cost of goods manufactured was $676,000. What is the balance in the Work-in-Process Inventory account on December 31?
A) $1,154,000
B) $1,352,000
C) $676,000
D) $602,000
Q2) The jobs that are directly involved in providing goods or services to customers are called ________.
A) staff positions
B) functional positions
C) line positions
D) human relations positions
Q3) The cost of direct materials cannot easily be traced to the manufactured product, and therefore, it is a component of manufacturing overhead.
A)True
B)False
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Page 18
Chapter 17: Job Order Costing
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Q1) Gill Manufacturing uses a predetermined overhead allocation rate based on direct labor cost. At the beginning of the year, Gill estimated total manufacturing overhead costs at $1,030,000 and total direct labor costs at $830,000. In June, Gill completed Job 511. The details of Job 511 are shown below. \[\begin{array} { | l | r | }
\hline \text { Direct materials cost } & \$ 23,500 \\
\hline \text { Direct labor cost } & \$ 13,000 \\
\hline \text { Direct labor hours } & 300 \text { hours } \\
\hline \text { Units of product produced } & 400 \text { units } \\
\hline
\end{array}\] How much was the total job cost of Job 511? (Round any percentages to two decimal places and your final answer to the nearest dollar.)
A) $36,872
B) $52,633
C) $65,664
D) $36,996
Q2) Broxsie Fabrication, Inc. issued $60,000 of direct materials and $15,500 of indirect materials to production. Prepare the journal entry to record the transaction. Omit explanation.
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Page 19
Chapter 18: Process Costing
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Q1) In a process costing system, a department's total production costs incurred in a particular period must equal the total costs transferred out of the department.
A)True
B)False
Q2) During September, the Filtering Department of Tithonia, Inc. had a beginning Work-in-Process Inventory of 600 units with costs of $140,000. During the month, it started and completed 800 units. It had 220 units in the ending Work-in-Process Inventory. What is the number of equivalent units of production for transferred in units in the Filtering Department in September under the first-in, first-out (FIFO) method?
A) 600 units
B) 1020 units
C) 1620 units
D) 380 units
Q3) Under a process costing system, product costs are accumulated with respect to jobs completed.
A)True
B)False
Q4) How is a production cost report prepared using the FIFO method?
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Page 20
Chapter 19: Cost Management Systems: Activity-Based
Just-In-Time
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Q1) Tungsten, Inc. manufactures both normal and premium tube lights. The company allocates manufacturing overhead using a single plantwide rate with machine hours as the allocation base. Estimated overhead costs for the year are $102,000. Additional estimated information is given below. \[\begin{array} { | l | r | r | }
\hline & \text { Normal } & \text { Premium } \\
\hline \text { Machine hours (MHr) } & 24,000 & 39,000 \\
\hline \text { Direct materials } & \$ 51,000 & \$ 480,000 \\ \hline
\end{array}\] Calculate the predetermined overhead allocation rate. (Round your answer to the nearest cent.)
A) $4.25 per direct labor hour
B) $1.62 per machine hour
C) $2.62 per machine hour
D) $0.19 per direct labor hour
Q2) The just-in-time costing system waits until the units are completed to record the cost of production.
A)True
B)False
Q3) What is the purpose of implementing a just-in-time inventory system?
Page 21
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Chapter 20: Cost Volume Profit Analysis
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Q1) Louis Petit, a manager of Doggone Gorgeous, Inc., was reviewing the water bills of a dog daycare and spa. He determined that its highest and lowest bills of $3800 and $2000 were incurred in the months of May and November, respectively. If 600 dogs were washed in May and 200 dogs were washed in November, what was the fixed cost associated with the company's water bill? (Round any intermediate calculations to the nearest cent and your final answer to the nearest dollar.)
A) $2000
B) $3800
C) $1100
D) $1800
Q2) Sales mix, or product mix, is the combination of products that make up total sales. A)True
B)False
Q3) Reeds Paper Company sells a product for $80 per unit. Variable costs are $25 per unit, and fixed costs are $4,000 per month. Andres sold 2,000 units in October. Prepare an income statement for October using the contribution margin format.
Q4) List the cost-volume-profit (CVP) assumptions.
Q5) How is the unit contribution margin calculated?
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Chapter 21: Variable Costing
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Q1) Variable costing can also be used in service companies, especially in making short-term decisions.
A)True
B)False
Q2) Last year, Adara Company produced 11,000 units and sold 9000 units. The company had no beginning inventory. They incurred the following costs: \[\begin{array} { | l | r | }
\hline \text { Direct materials per unit } & \$ 18 \\
\hline \text { Direct labor per unit } & \$ 15 \\
\hline \text { Variable overhead per unit } & \$ 7 \\
\hline \text { Total fixed manufacturing } & \$ 55,000 \\
\text { pverhead } & \\
\hline \text { Total selling and administrative } &\$ 80,000\\
\hline
\end{array}\] Adara's product cost per unit under variable costing is
A) $45
B) $40
C) $46
D) $52
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Page 23
Chapter 22: Master Budgets
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Q1) Regarding the sales budget, which of the following statements is incorrect?
A) The forecast of sales revenue is the cornerstone of the master budget.
B) The level of sales affects expenses and almost all other elements of the master budget.
C) The budgeted sales are carried from the sales budget to the balance sheet.
D) Budgeted total sales for each product equal the sales price multiplied by the expected number of units sold.
Q2) List the four budgeting objectives. Why is this process a loop?
Q3) A strategic budget is a long-term financial plan used to coordinate the activities needed to achieve the long-term goals of the company.
A)True
B)False
Q4) The manufacturing overhead budget calculates the budgeted overhead cost for the year and also the predetermined overhead allocation rate for the year.
A)True
B)False
Q5) List the budgets that are affected by the budgeted number of units to be produced.
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Page 24
Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) Sales volume variance
A)the difference between actual results and expected results in the flexible budget for the actual units sold
B)measures how well the business keeps unit material and labor costs within standards
C)the difference between the expected results in the flexible budget for the actual units sold and the static budget
D)the difference between actual results and the expected results in the static budget
E)measures how well the business uses its materials or human resources
Q2) When a manufacturing company uses a standard cost system, an unfavorable variance is a contra expense.
A)True
B)False
Q3) A static budget is prepared for only one level of sales volume. A)True
B)False
Q4) What does the fixed overhead cost variance measure?
Q5) What does the fixed overhead volume variance measure?
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Chapter 24: Responsibility Accounting and Performance Evaluation
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Q1) The best measure for evaluating the effectiveness of a manger in an investment center would be ________.
A) residual income measures
B) success in controlling costs
C) success in meeting budgeted revenues
D) current ratio measures
Q2) In a decentralized company, segment managers may not fully understand the big picture when making decisions.
A)True
B)False
Q3) One part of the balanced scorecard helps management answer the question, "How do we look to investors and creditors?" Which of the four perspectives is being described with this statement?
A) financial
B) customer
C) internal business
D) learning and growth
Q4) Define market-based transfer price. When should market-based transfer pricing be used? Explain your answer.
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Chapter 25: Short-Term Business Decisions
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Q1) Woodstock Furniture manufactures a small table and a large table. The small table sells for $800, has variable costs of $580 per table, and takes 10 direct labor hours to manufacture. The large table sells for $1500, has variable costs of $970, and takes eight direct labor hours to manufacture. The company has a maximum of 5000 direct labor hours per month when operating at full capacity. If there are no constraints on sales of either product, and the company could choose any proportions of product mix that they wanted, what is the optimum product mix to maximize operating income of the company?
A) 500 units of small and 625 units of large
B) 0 units of small and 625 units of large
C) 625 units of small and 500 units of large
D) 500 units of small and 0 units of large
Q2) If a company wants to be a price-taker, which of the following strategies should be taken?
A) Enter a competitive market and focus on cost cutting.
B) Produce a unique product.
C) Exploit the value of a fashionable brand name.
D) Differentiate the product clearly from the competitors.
Q3) Explain the difference between price-takers and price-setters.
Q4) Define the terms "Relevant Cost" and "Sunk Cost."
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Chapter 26: Capital Investment Decisions
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Q1) Net present value is defined as the difference between the present value of the investment's net cash inflows and the investment's initial cost.
A)True
B)False
Q2) If the expected accounting rate of return meets or exceeds the required rate of return, the decision rule is to not make the investment.
A)True B)False
Q3) Compound interest assumes that all interest earned will remain invested and earn additional interest at the same interest rate.
A)True
B)False
Q4) The accounting rate of return is calculated by dividing the average annual operating income by the average amount invested.
A)True B)False
Q5) If the net cash inflows are unequal, how is the payback period (in years) of an investment calculated?
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Page 28
Chapter 27: Understanding Accounting Information Systems
and their Components
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Q1) Cash disbursement journals also are known as ________.
A) sales journals
B) purchases journals
C) cash receipts journals
D) cash payments journals
Q2) Which of the following is a column in a purchases journal?
A) Cost of Goods Sold CR
B) Accounts Payable CR
C) Sales Revenue DR
D) Other Accounts CR
Q3) Which of the following is true of a purchases journal?
A) For a periodic inventory system, the Merchandise Inventory DR column is replaced with a column titled Cost of Goods Sold DR.
B) Cash purchases are recorded in the purchases journal.
C) For a perpetual inventory system, a column titled Purchases DR is needed.
D) The Other Accounts DR column is used for purchases on account of items other than merchandise inventory and office supplies.
Q4) Describe the transactions recorded in the purchases journal.
Q5) List and describe two features of an effective accounting information system.
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