Business Accounting
Midterm Exam
Course Introduction
Business Accounting introduces students to the fundamental principles and practices of accounting as they relate to the operation of a business. The course covers essential topics such as the accounting cycle, preparation and interpretation of financial statements, internal controls, and the use of accounting information for decision-making. Students will learn about assets, liabilities, equity, revenues, and expenses, as well as the importance of ethics in accounting. Through practical examples and exercises, students gain the skills necessary to analyze financial data, understand budgeting processes, and assess the financial health of a business organization.
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) Economic resources and debts of the company are shown on the balance sheet.
A)True
B)False
Answer: True
Q2) The net income of Thomas Corporation was $71,000 for this year. The beginning balance of stockholders' equity was $33,000 and the ending balance was $72,000. The company issued no common stock during the year. What was the amount of dividends distributed during the year?
A) $72,000
B) $32,000
C) $143,000
D) $33,000
Answer: B
Q3) International Financial Reporting Standards are comparatively more specific and more rule-based than U.S. GAAP.
A)True
B)False
Answer: False
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Chapter 2: Recording Business Transactions
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Sample Questions
Q1) Watson Foods, Inc. reported the following transactions for September 2019.
A. The business received $22,000 cash and issued common stock. It was credited to Common Stock.
B. The business purchased office equipment for $9,000 for which $3,500 cash was paid and the balance was put on a note payable.
C.Paid insurance expense of $1,800 cash.
D. Paid the September utility bill for $900 cash.
E. Paid $2,000 cash for September rent.
F. The business had sales of $10,000 in September. Of these sales, 60% were cash sales, and the balance was credit sales.
G. The business paid $7,000 cash for office furniture. What are the total liabilities at the end of September, 2019?
A) $10,000
B) $1,800
C) $5,500
D) $9,000
Answer: C
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4
Chapter 3: The Adjusting Process
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Sample Questions
Q1) If a company fails to make an adjusting entry to record accrued expenses, the liabilities and net income will be overstated.
A)True
B)False
Answer: False
Q2) On December 15, 2018, Donald Services, Inc. collected revenue of $3,000 in advance from a new client, and agreed to provide services to the client for the period of December 15 through January 15 of the following year. Assume that the company records deferred revenues using the alternative treatment, and journalize the adjusting entry recorded on December 31, 2018. Omit explanation.
Answer: \[\begin{array} { | c | r | r | }
\hline \text { Service Revenue } & 1,500 & \\
\hline \text { Unearned Revenue } & & 1,500 \\ \hline \end{array}\]
Q3) Under accrual basis accounting, revenue is recorded only when cash is received. A)True
B)False
Answer: False
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Page 5
Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Assets with no physical form are ________.
A) current assets
B) intangible assets
C) not listed on the balance sheet because they have no value
D) included in stockholders' equity
Q2) A balance sheet that lists the assets above the liabilities and stockholders' equity sections is a(n) ________ balance sheet.
A) report form
B) unclassified form
C) account form
D) audited form
Q3) A reversing entry ________.
A) is required by GAAP
B) is used in conjunction with deferral type adjustments
C) exactly resembles the prior adjusting entry
D) switches the debit and the credit of a previous entry
Q4) Reversing entries are dated on the first day of the new accounting period.
A)True
B)False
Q5) List the steps of the accounting cycle that take place at the end of the period.
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Chapter 5: Merchandising Operations
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Sample Questions
Q1) Merchandise inventory is included in a merchandising company's current assets.
A)True
B)False
Q2) The Merchandise Inventory account should stay current at all times in a perpetual inventory system.
A)True
B)False
Q3) The entry to close Sales Discounts Forfeited will include a debit to Income Summary.
A)True
B)False
Q4) A company sold merchandise with a cost of $213 for $440 on account. The seller uses the perpetual inventory system. The entry to record the cost of merchandise sold would include ________.
A) a debit to Sales Revenue and a credit to Cash for $440
B) a debit to Cash and a credit to Sales Revenue for $440
C) a debit to Cost of Goods Sold and a credit to Merchandise Inventory for $213
D) a debit to Merchandise Inventory for $213 and a credit to Cost of Goods Sold for $213
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) Ending inventory equals the cost of goods available for sale less beginning inventory.
A)True
B)False
Q2) An overstatement of ending merchandise inventory in the current period results in an overstatement of cost of goods sold in the current period.
A)True
B)False
Q3) Which of the following inventory costing methods is based on the actual cost of each particular unit of inventory?
A) specific identification
B) weighted-average
C) last-in, first-out
D) first-in, first-out
Q4) For all four inventory costing methods, cost of goods sold is always equal to the sum of beginning inventory plus net purchases.
A)True
B)False
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8
Chapter 7: Internal Control and Cash
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Sample Questions
Q1) List the four steps, the proper order, of the purchasing and payment process.
Q2) Concerning how companies control cash received by mail, state which employee should perform the following duties:
\[\begin{array} {| l | l | }
\hline \text { Duty } & \begin{array} { l }
\text { Employee who should perform } \\
\text { the duty }
\end{array} \\
\hline \text { Use the remittance advices to } & \\
\text { record the journal entries for } & \\
\text { cash receipts } & \\
\hline \text { Deposit the customer checks in } & \\
\text { the bank } & \\
\hline \end{array}\]
Q3) Journalize the adjusting entry for the fourth reconciling item: Bank service charge. Omit explanation
Q4) Discuss the roles of the internal auditors and the external auditors.
Q5) Define internal control.
Q6) List and briefly discuss the five components of internal control.
Page 9
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Chapter 8: Receivables
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Sample Questions
Q1) Companies that follow GAAP are required to use the direct write-off method for uncollectible accounts receivable.
A)True
B)False
Q2) Under the direct write-off method, which of the following is included in the entry to write off an uncollectible account?
A) a credit to the Allowance for Bad Debts
B) a credit to the customer's Account Receivable
C) a debit to Allowance for Uncollectible Accounts
D) No entry is made to write off uncollectible accounts.
Q3) Notes receivable represent a written promise that a party will pay a fixed amount of principal plus interest on a stated maturity date.
A)True B)False
Q4) The acid-test ratio is also known as the quick ratio. A)True B)False
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Chapter 9: Plant Assets, Natural Resources, and Intangibles
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Sample Questions
Q1) Brentwood Auto Repair purchased a new machine and placed it in service on June 14. Which of the following is NOT included in the cost of equipment?
A) cost of testing the machine on June 12
B) purchase commission
C) sales tax
D) a six month insurance policy which was paid on June 5 and became effective on June 15
Q2) A truck was acquired for $100,000 and has accumulated depreciation of $70,000. The business exchanges the truck for a new one. The new truck has a market value of $120,000 and the business pays $100,000 cash. Assume the exchange has commercial substance. Prepare the journal entry to record this transaction. Omit explanation.
Q3) On June 30, 2018, Staton Island, Inc. discarded equipment costing $40,000. Accumulated Depreciation as of December 31, 2017, was $25,000. Assume annual depreciation on the equipment is $2,500. Prepare the journal entries for the 2018 depreciation expense and for the disposal of the equipment. Omit explanation.
Q4) A natural resource is an asset that comes from the earth and is consumed.
A)True B)False
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Chapter 10: Investments
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Sample Questions
Q1) When a company receives interest revenue on a bond investment, total stockholders' equity remains unchanged.
A)True
B)False
Q2) Trading debt investments are categorized as current assets.
A)True
B)False
Q3) Which of the following is an example of debt securities?
A) preferred stocks
B) real estate
C) common stocks
D) corporate bonds
Q4) Under the equity method, the investee must annually record its share of the investor's net income.
A)True
B)False
Q5) Creditors invest in a company and hope to receive a return on their investment.
A)True
B)False
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Chapter 11: Current Liabilities and Payroll
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Sample Questions
Q1) If the likelihood of a future event is reasonably possible, how should the company report the contingency?
Describe the situation in a note to the financial statements.
Q2) The expense for warranty costs is recorded in the period ________.
A) when the product is sold
B) when the product is repaired or replaced
C) when cash is paid to repair or replace the product
D) when cash is collected from the sale of the product
Q3) Employer FICA is paid by the employer and recorded as a payroll tax expense.
A)True
B)False
Q4) Estimated Warranty Payable is included in the liability section of the balance sheet. A)True B)False
Q5) Maywood, Inc. withholds $720 from Steve's paycheck for federal income tax. This amount is part of the company's payroll tax expense.
A)True
B)False
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Chapter 12: Long-Term Liabilities
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Sample Questions
Q1) On January 1, 2019, Drake Services issued $20,000 of 8% bonds that mature in five years. The bonds were issued at par. Prepare the journal entry to issue bonds. Omit explanation.
Q2) If bonds with a face value of $209,000 are issued at 93, the amount of cash proceeds is ________.
A) $208,907
B) $209,000
C) $194,370
D) $179,740
Q3) On December 31, 2018, Country Living Sales has 10-year Bonds Payable of $89,000 and Discount on Bonds Payable of $2350. How will this be shown on the December 31, 2018 Balance Sheet?
A) Bonds Payable $89,000 less Discount on Bonds Payable $2350 for a carrying amount of $86,650
B) Bonds Payable $89,000 plus Discount on Bonds Payable for a carrying amount of $91,350
C) Bonds Payable $89,000
D) Bonds Payable $89,000 less one-tenth of $2350 for a carrying amount of $88,765
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Chapter 13: Stockholders Equity
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Sample Questions
Q1) On November 1, 2018, Nada, Inc. declared a dividend of $5.00 per share on common stock. Nada, Inc. has 20,000 shares of common stock outstanding and no preferred stock. The date of record is November 15, and the payment date is November 30, 2018. Which of the following is the journal entry needed on November 30, 2018?
A) Debit Cash Dividends $100,000, and credit Dividends Payable-Common $100,000.
B) Debit Dividends Payable-Common $100,000, and credit Cash $100,000.
C) Debit Cash $100,000, and credit Dividends Payable-Common $100,000.
D) Debit Cash Dividends $100,000, and credit Cash $100,000.
Q2) In the event of a corporate liquidation, preferred stockholders ________.
A) are guaranteed to receive a full refund of the stock purchase price
B) have first claim on remaining corporate assets after debts are paid
C) are guaranteed to receive the par value of the preferred stock
D) may retain their proportionate share of voting rights
Q3) Stock issued at amounts in excess of par value results in a gain that is reported on the income statement.
A)True
B)False
Q4) Define treasury stock and provide two reasons why a corporation would purchase treasury stock.
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Chapter 14: The Statement of Cash Flows
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Sample Questions
Q1) The total change in cash should equal the net income for the period.
A)True
B)False
Q2) Which of the following statements accurately describes the statement of cash flows?
A) It shows the relative proportion of debt and assets.
B) It is the link between the accrual-based income statement and the cash reported on the balance sheet.
C) It indicates when long-term debt will mature.
D) It is the link between net income and earnings per share.
Q3) The purchase of equipment financed by a long-term notes payable is an example of ________.
A) investing activity
B) financing activity
C) operating activity
D) non-cash investing and financing activity
Q4) Under IFRS, interest revenue and dividend income may be reported either as an operating activity or an investing activity.
A)True
B)False
Page 16
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Chapter 15: Financial Statement Analysis
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Sample Questions
Q1) Which of the following is NOT a decision tool based on working capital?
A) cash ratio
B) acid-test ratio
C) current ratio
D) dividend payout ratio
Q2) The dividend payout ratio measures the annual dividend per share as a proportion of the market price per share.
A)True
B)False
Q3) An external auditor is responsible for assessing the effectiveness of a company's internal controls.
A)True
B)False
Q4) An adverse opinion is issued if the auditor finds that the financial statements are not presented fairly.
A)True
B)False
Q5) The price/earnings ratio shows the market price of $1 of earnings.
A)True
B)False
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Chapter 16: Introduction to Managerial Accounting
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Sample Questions
Q1) Stone Beauty, Inc. is a merchandiser of stone ornaments. The company sold 8000 units during the year. The company has provided the following information: \[\begin{array} { | l | r | }
\hline \text { Sales Revenue } & \$ 559,000 \\
\hline \text { Purchases (excluding freight in) } & 303,000 \\
\hline \text { Selling and Administrative Expenses } & 67,000 \\
\hline \text { Freight In } & 14,000 \\
\hline \text { Beginning Merchandise Inventory } & 46,000 \\
\hline \text { Ending Merchandise Inventory } & 43,000 \\
\hline
\end{array}\] What is the cost of goods available for sale for the year?
A) $363,000
B) $320,000
C) $349,000
D) $335,000
Q2) Comparing actual results to expected results is part of the
A) controlling function of managerial accounting.
B) planning function of managerial accounting.
C) reporting function of managerial accounting.
D) organizing function of managerial accounting.
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Chapter 17: Job Order Costing
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Sample Questions
Q1) The journal entry to record direct labor costs actually incurred involves a debit to the
A) Work-in-Process Inventory account
B) Wages Payable account
C) Manufacturing Overhead account
D) Raw Materials Inventory account
Q2) Cost accounting systems are used ________.
A) to accumulate product cost information
B) to accumulate and assign period costs to products
C) by manufacturing companies, not service companies
D) by stockholders for decision-making purposes
Q3) If the debit side of the Manufacturing Overhead account totals more than the credit side of the account, the manufacturing overhead is overallocated.
A)True
B)False
Q4) The information from a cost accounting system allows managers to make decisions about planning and directing, but not about controlling.
A)True
B)False
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Chapter 18: Process Costing
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Q1) On September 30, the Sorting Department of Java Works had ending Work-in-Process Inventory of 30,000 units that was 46% complete for materials and 36% complete for conversion costs. The company uses the FIFO method. This means that for the beginning Work-in-Process Inventory, ________% of the materials and ________% of conversion costs were added during October.
A) 46; 36
B) 64; 54
C) 54; 64
D) 36; 46
Q2) During August, the Filtering Department of Speedwell, Inc. had a beginning Work-in-Process Inventory balance of 120 units with costs of $60,000. During the month, it started and completed 260 units. It had 30 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 August under the first-in, first-out (FIFO) method?
A) 120 units
B) 410 units
C) 290 units
D) 230 units
Q3) 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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Sample Questions
Q1) ________ are costs incurred to avoid poor-quality goods or services.
A) Prevention costs
B) Appraisal costs
C) Internal failure costs
D) External failure costs
Q2) ________ is a costing system that starts with output that has been completed and then assigns manufacturing costs to units sold and to inventories.
A) Job costing
B) Batch costing
C) Backflush costing
D) Process costing
Q3) Target pricing considers all production costs and all nonmanufacturing costs in its analysis.
A)True
B)False
Q4) List and briefly discuss three major differences between just-in-time costing (JIT) and traditional costing.
Q5) Why is activity-based costing used? What is an activity? Give an example of an activity.
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Chapter 20: Cost Volume Profit Analysis
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Q1) Choice Creations, Inc. sells hand sewn shirts at $58.00 per shirt. It incurs monthly fixed costs of $8000. The contribution margin ratio is calculated to be 30%. What is the variable cost per shirt? (Round any intermediate calculations and your final answer to two decimal places.)
A) $40.60 per shirt
B) $75.40 per shirt
C) $58.00 per shirt
D) $17.40 per shirt
Q2) The Doughboys Pizza Company sells pizzas in two different sizes-medium and large. The two products sell in equal numbers. The contribution margin of a medium pizza is $16, and the contribution margin of a large pizza is $18. The weighted average contribution margin is $17.
A)True
B)False
Q3) If the volume of activity doubles in the relevant range, total variable costs will also double.
A)True
B)False
Q4) How is the contribution margin calculated?
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Chapter 21: Variable Costing
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Sample Questions
Q1) Sunrise Breakfast Foods, Inc. has two products-waffles and toaster pastries. Financial data for both the products follows:
\[\begin{array} { | l | r | r | }
\hline & \text { Waffles } & \text { Pastries } \\
\hline \text { Sales price per unit } & \$ 500 & \$ 1,000 \\
\hline \text { Variable manufacturing cost per unit } & 320 & 750 \\
\hline \text { Sales commission (\% of sales) } & 7 \% & 5 \% \\
\hline
\end{array}\] Sunrise has two sales representatives-Iolana and Sachi. Each sales representative sold a total of 1,500 units during the month of March. Iolana had a sales mix of 70% waffles and 30% pastries. Sachi had a sales mix of 60% waffles and 40% pastries. Which sales representative has the highest contribution ratio? Explain the reason for your answer. (Round your percent answers to two decimal places.)
Q2) Which of the following costing methods charges all the manufacturing costs to the products?
A) variable costing
B) direct costing
C) absorption costing
D) contribution costing
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Page 23
Chapter 22: Master Budgets
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Q1) The forecast of sales revenue is the cornerstone of the master budget.
A)True
B)False
Q2) All organizations use one standardized budgeting process.
A)True
B)False
Q3) The financial budget of a merchandising company is similar to that of a manufacturing company.
A)True
B)False
Q4) To develop the cost of goods sold budget, it is necessary to start by calculating the projected cost to produce each unit.
A)True
B)False
Q5) The cash budget of a manufacturer is comprised of three sections: cash receipts, cash payments and long-term financing.
A)True
B)False
Q6) List the four budgeting objectives. Why is this process a loop?
Page 24
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Chapter 23: Flexible Budgets and Standard Cost Systems
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Q1) Aquatic Marine Stores Company manufactures special metallic materials and decorative fittings for luxury yachts that require highly skilled labor. Aquatic uses standard costs to prepare its flexible budget. For the first quarter of the year, direct materials and direct labor standards for one of their popular products were as follows: Direct materials: 5 pounds per unit; $6 per pound
Direct labor: 4 hours per unit; $16 per hour
During the first quarter, Aquatic produced 3000 units of this product. Actual direct materials and direct labor costs were $65,000 and $326,000, respectively. For the purpose of preparing the flexible budget, calculate the total standard direct materials cost at a production volume of 3000 units.
A) $90,000
B) $65,000
C) $15,000
D) $18,000
Q2) List the direct materials variances, and briefly describe each.
Q3) A favorable variance has a debit balance and is a contra revenue.
A)True
B)False
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25
Chapter 24: Responsibility Accounting and Performance Evaluation
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Q1) A responsibility accounting system evaluates the performance of each responsibility center and its manager.
A)True
B)False
Q2) The limitations of financial performance measures reinforce the importance of the balanced scorecard.
A)True
B)False
Q3) When a division is operating at capacity, the transfer price should be ________.
A) based on opportunity cost
B) a market-based transfer price
C) a cost-based transfer price
D) the total manufacturing cost
Q4) A unique factor of responsibility accounting performance reports is the focus on responsibility and controllability.
A)True
B)False
Q5) Discuss the difference between a centralized company and a decentralized company.
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Chapter 25: Short-Term Business Decisions
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Q1) ________ refers to the benefit given up by choosing an alternative course of action.
A) Opportunity cost
B) Sunk cost
C) Relevant cost
D) Irrelevant cost
Q2) Deeper Clean Company makes bulk quantities of cleaning fluids. They currently sell 1,400 containers a month at a sales price of $25 per unit. If they add a new scent, they could charge $30 per unit for the improved product. It would cost them a total of $1,000 per month to make that alteration. If they decide to process further, it will improve their operating income.
A)True
B)False
Q3) Differential analysis is a method that looks at how operating income would differ under each budget scenario.
A)True
B)False
Q4) Define the terms "Relevant Cost" and "Sunk Cost."
Q5) Explain the difference between price-takers and price-setters.
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Chapter 26: Capital Investment Decisions
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Q1) When computing the present value, the interest rate will vary depending on the amount of risk. Riskier investments, such as FDIC-insured bank deposits, command higher interest rates.
A)True
B)False
Q2) All else being equal, investments with longer payback periods are preferable.
A)True
B)False
Q3) Walden Industries is considering investing in production-management software that costs $630,000, has $67,000 residual value, and leads to cost savings of $1,650,000 per year over its five-year life. Calculate the average amount invested in the asset that should be used for calculating the accounting rate of return.
A) $697,000
B) $630,000
C) $348,500
D) $67,000
Q4) List the steps of the capital budgeting process and identify actions that relate to each step.
Q5) What are the strengths of the net present value capital budgeting method?
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Chapter 27: Understanding Accounting Information Systems
and their Components
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Q1) Which of the following is true of a sales journal prepared under the perpetual inventory system?
A) It includes a Cost of Goods Sold DR, Merchandise Inventory CR column.
B) It records both cash and credit sales transactions.
C) All transactions recorded in a sales journal also are entered in the general journal.
D) It cannot be used with a perpetual inventory system.
Q2) Which of the following is an example of a source document in a computerized accounting information system?
A) purchase invoices
B) balance sheet
C) cash payments journal
D) income statement
Q3) In a purchases journal, the total of the ________ column is not posted to the general ledger.
A) Merchandise Inventory DR
B) Other Accounts DR, Amount
C) Accounts Payable CR
D) Office Supplies DR
Q4) Describe the transactions recorded in the purchases journal.
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