Principles of Accounting II Review
Questions
Course Introduction
Principles of Accounting II is a continuation of the introductory accounting course, focusing on the study and application of accounting principles in more complex business transactions. This course delves into topics such as partnerships, corporations, long-term liabilities, investments, analysis and interpretation of financial statements, and the preparation of cash flow statements. Students will also explore managerial accounting concepts including budgeting, cost-volume-profit analysis, and performance evaluation. By building on foundational accounting knowledge, this course equips students with the skills needed to understand and interpret financial information essential for effective business decision-making.
Recommended Textbook
Fundamental Accounting Principles 23rd Edition by John Wild
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Page 2
Chapter 1: Accounting in Business
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Q1) Objectivity means that financial information is supported by independent, unbiased evidence; it demands more than a person's opinion.
A)True
B)False
Answer: True
Q2) ________ are beliefs that separate right from wrong and are considered accepted standards of good and bad behavior.
Answer: Ethics
Q3) The Sarbanes-Oxley Act (SOX) does not require public companies to apply both accounting oversight and stringent internal controls.
A)True
B)False
Answer: False
Q4) The primary objective of managerial accounting is to provide general purpose financial statements to help external users analyze and interpret an organization's activities.
A)True
B)False
Answer: False
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Chapter 2: Analyzing and Recording Transactions
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Q1) When a company bills a customer for $700 for services rendered, the journal entry to record this transaction will include a $700 debit to Services Revenue.
A)True
B)False
Answer: False
Q2) Neither U.S. GAAP nor IFRS require the use of accrual basis accounting.
A)True
B)False
Answer: False
Q3) If Jerry made no investments in the business but withdrew $5,000 during the year, what was the amount of net income earned by Jerry's Butcher Shop?
Answer: Beginning owner's equity = $114,000 - $68,000 = $46,000 Ending owner's equity = $135,000 - $73,000 = $62,000 Increase in owner's equity = $62,000 - $46,000 = $16,000 Net income = $16,000 + $5,000 = $21,000
Q4) A company had total assets of $350,000, total liabilities of $101,500 and total equity of $248,500. Calculate the company's debt ratio.
Answer: Debt Ratio = Total Liabilities/Total Assets = $101,500/$350,000 = 29%
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Page 4
Chapter 3: Adjusting Accounts and Preparing Financial Statements
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Sample Questions
Q1) What adjusting entry should be made by Santa Fe, Inc. for the adjustment on December 31 of the first year assuming the company is using a calendar-year reporting period and no previous adjustments had been made?
A) Debit Subscription Expense $516 and credit Prepaid Subscriptions $516.
B) Debit Unearned Subscriptions $387 and credit Subscription Expense $387.
C) Debit Subscription Expense $387 and credit Cash $387.
D) Debit Prepaid Subscriptions $516 and credit Subscription Expense $516.
E) Debit Subscription Expense $387 and credit Prepaid Subscriptions $387.
Answer: E
Q2) Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of its related asset.
A)True
B)False
Answer: True
Q3) The accrual basis of accounting reflects the principle that revenue is recorded when it is earned, not when cash is received.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Completing the Accounting Cycle
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Sample Questions
Q1) Which of the following types of businesses might have an operating cycle longer than one year?
A) Clothing retailer.
B) Commercial airplane manufacturer.
C) Wheat farmer.
D) Florist.
E) Ski resort.
Q2) All of the following regarding reversing entries are true except:
A) Reversing entries are used to simplify a company's recordkeeping.
B) Reversing entries are recorded in response to accrued assets and accrued liabilities that were created by adjusting entries at the end of the previous accounting period.
C) Reversing entries are dated the first day of the new accounting period.
D) Reversing entries are optional.
E) Reversing entries should not be the exact opposite of previous period adjusting entries.
Q3) Trekker Bikes' current assets are $300 million and its current liabilities are $125 million. Its current ratio is 0.417.
A)True
B)False
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Chapter 5: Accounting for Merchandising Operations
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Sample Questions
Q1) An expense resulting from failing to take advantage of cash discounts when using the net method of recording purchases is called:
A) Trade discounts.
B) Discounts earned.
C) Purchases discounts.
D) Discounts lost.
E) Sales discounts.
Q2) Multiple-step income statements:
A) Are only used in perpetual inventory systems.
B) Are required by the FASB and IASB.
C) Are required for the periodic inventory system.
D) Contain more detail than a simple listing of revenues and expenses.
E) List cost of goods sold as an operating expense.
Q3) A company has sales of $695,000 and cost of goods sold of $278,000. Its gross profit equals:
A) $(417,000).
B) $973,000.
C) $695,000.
D) $417,000.
E) $278,000.
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Chapter 6: Inventories and Cost of Sales
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Q1) An advantage of FIFO is that it assigns the most recent costs to cost of goods sold, and does a better job of matching current costs with revenues on the income statement.
A)True
B)False
Q2) Using the LIFO perpetual inventory method, what is the value of inventory after the October 4 sale?
A) $3,500.
B) $3,485.
C) $3,472.
D) $3,445.
E) $3,461.
Q3) What specific costs and deductions are used to determine the final cost of merchandise inventory? Identify all costs including the incidental costs.
Q4) Underwood had cost of goods sold of $8 million and its ending inventory was $2 million. Therefore, its days' sales in inventory equals 25 days.
A)True
B)False
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8
Chapter 7: Accounting Information Systems
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Sample Questions
Q1) Match the following accounting system components a-e with their related items 1-10 by placing the correct letter next to each item.
a. Source documents
b. Input devices
c. Information processor
d. Information storage
e. Output devices
_____ 1. Computer keyboard
2. Computer hard drive
_____ 3. Journal entries
_____ 4. Journals
_____ 5. Financial statements
_____ 6. Invoice from suppliers
_____ 7. Employee paychecks
_____ 8. Computer monitor
_____ 9. Software
_____ 10. Electronic files
Q2) A special journal is used to record and post transactions of a similar type.
A)True
B)False
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Page 9
Chapter 8: Cash and Internal Controls
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Sample Questions
Q1) At the end of the day on March 15, the cash register's record shows $1,957, but the count of cash in the register is $1,965. Prepare the general journal entry to record the day's cash sales.
Q2) The entry to record reimbursement of the petty cash fund for postage expense should include:
A) A debit to Petty Cash.
B) A debit to Cash Short and Over.
C) A debit to Supplies.
D) A debit to Postage Expense.
E) A debit to Cash.
Q3) The Cash Over and Short account:
A) Is used to record the income effects of errors in making change and/or processing petty cash transactions.
B) Can never have a debit balance.
C) Can never have a credit balance.
D) Is not necessary in a computerized accounting system.
E) Is used when the cash account reports a credit balance.
Q4) The days' sales uncollected ratio measures the liquidity of accounts receivable.
A)True
B)False
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Chapter 9: Accounting for Receivables
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Q1) The accounts receivable method to estimate bad debts obtains the estimated balance in the Allowance for Doubtful Accounts in one of two ways: (1) computing the percent uncollectible from the total accounts receivable or (2) aging accounts receivable.
A)True
B)False
Q2) Craigmont uses the allowance method to account for uncollectible accounts. Its year-end unadjusted trial balance shows Accounts Receivable of $104,500, allowance for doubtful accounts of $665 (credit) and sales of $925,000. If uncollectible accounts are estimated to be 4% of accounts receivable, what is the amount of the bad debts expense adjusting entry?
A) $4,845
B) $3,700
C) $3,515
D) $4,180
E) $3,850
Q3) Calculate the amount of interest that would be owed on a $18,000, 60-day, 8% note receivable at maturity.
Q4) What is the maturity date of a 120-day note receivable dated March 5?
Q5) ________ is the charge for using borrowed money until its due date.
Page 11
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Chapter 10: Plant Assets Natural Resoures and Intangibles
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Q1) Which of the following statements regarding increases in the value of plant assets under U.S. GAAP and IFRS is true?
A) IFRS prohibits upward asset revaluations.
B) Under GAAP, a company can reverse an impairment and record that increase in income.
C) U.S. GAAP prohibits companies from recording increases in the value of plant assets.
D) U.S. GAAP allows companies to record increases in the value of plant assets.
E) Under IFRS, an impairment increase beyond as asset's original cost is not recorded.
Q2) The depreciation method in which a plant asset's depreciation expense for a period is determined by applying a constant depreciation rate to the asset's beginning-of-period book value is called:
A) Units-of-production depreciation.
B) Declining-balance depreciation.
C) Book value depreciation.
D) Modified accelerated cost recovery system (MACRS) depreciation.
E) Straight-line depreciation.
Q3) Define plant assets and identify the four primary issues in accounting for them.
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Page 12
Chapter 11: Current Liabilities and Payroll Accounting
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Sample Questions
Q1) Athena Company's salaried employees earn two weeks of vacation per year. It pays $858,000 in total employee salaries for 52 weeks but its employees work only 50. Record Athena Company's weekly journal entry to record the vacation expense:
A) Debit Vacation Benefits Expense $17,160; credit Vacation Benefits Payable $17,160.
B) Debit Vacation Benefits Payable $16,500; credit Vacation Benefits Expense $16,500.
C) Debit Vacation Benefits Payable $660; credit Vacation Benefits Expense $660.
D) Debit Vacation Benefits Expense $16,500; credit Vacation Benefits Payable $16,500.
E) Debit Vacation Benefits Expense $660; credit Vacation Benefits Payable $660.
Q2) What is the journal entry that Indigo Company would make, when it records payment of the note on the maturity date? (Use 360 days a year.)
A) Debit Cash $4,575; credit Interest Revenue $75; credit Notes Payable $4,500.
B) Debit Notes Payable $4,500; credit Interest Expense $75, credit Cash $4,425.
C) Debit Notes Payable $4,500; debit Interest Expense $75; credit Cash $4,575.
D) Debit Cash $4,575; credit Interest Revenue $75; credit Notes Receivable $4,500.
E) Debit Notes Payable $4,500; debit Interest Expense $112; credit Cash $4,612.
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Chapter 12: Accounting for Partnerships
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Sample Questions
Q1) Assuming net income for the current year is $105,000, the journal entry to allocate net income is:
A) Debit Income Summary, $105,000; Credit Zheng, Capital, $52,500, Credit Murray, Capital, $52,500.
B) Debit Zheng, Capital, $57,500, Debit Murray, Capital, $47,500; Credit Income Summary, $105,000;
C) Debit Income Summary, $105,000; Credit Zheng, Capital, $35,000, Credit Murray, Capital, $70,000.
D) Debit Income Summary, $105,000; Credit Zheng, Capital, $57,500, Credit Murray, Capital, $47,500.
E) Debit Income Summary, $105,000; Credit Zheng, Capital, $42,500, Credit Murray, Capital, $62,500.
Q2) Palmer withdraws from the FAP Partnership. The remaining partners agree to buy out her share for her capital balance of $65,000. Prepare the journal entry to record the withdrawal from the partnership.
Q3) Partners are taxed on their withdrawals, not on their share of partnership income. A)True B)False
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Chapter 13: Accounting for Corporations
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Q1) A stock dividend, declared by a corporations's directors, is a distribution of additional shares of the corporation's own stock to its stockholders without the receipt of any payment in return.
A)True
B)False
Q2) Assuming the treasury shares were all purchased at the same price, the cost per share of the treasury stock is:
A) $1.28.
B) $10.50.
C) $10.00.
D) $11.50.
E) $1.15.
Q3) A company has earnings per share of $6.50. Its dividend per share is $0.50, and its market price per share is $80. Its price-earnings ratio equals 13.
A)True
B)False
Q4) What is a stock split? How is a stock split different from a stock dividend?
Q5) A corporation is responsible for its own acts and debts because it is considered a__________ .
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Chapter 14: Long-Term Liabilities
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Q1) What is a bond? Identify and discuss the different characteristics and features bonds may possess.
Q2) An ________ is a series of equal payments at equal time intervals.
Q3) Operating leases are long-term or noncancelable leases in which the lessor transfers substantially all the risks and rewards of ownership to the lessee.
A)True
B)False
Q4) The Premium on Bonds Payable account is a(n):
A) Contra asset account.
B) Contra revenue account.
C) Adjunct liability account.
D) Equity account.
E) Revenue account.
Q5) A company issued 10-year, 9% bonds with a par value of $500,000 when the market rate was 9.5%. The company received $484,087 in cash proceeds. Using the straight-line method, prepare the issuer's journal entry to record the first semiannual interest payment and the amortization of any bond discount or premium.(Round amounts to the nearest whole dollar)
Q6) How are bond issue prices determined?
Page 16
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Chapter 15: Investments
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Q1) Segmental Manufacturing owns 35% of Glesson Corp. stock. Glesson pays a total of $47,000 in cash dividends for the period. Segmental's entry to record the dividend transaction would include a:
A) Credit to Investment Revenue for $47,000.
B) Credit to Long-Term Investments for $16,450.
C) Credit to Cash for $16,450.
D) Debit to Long-Term Investments for $16,450.
E) Debit to Cash for $47,000.
Q2) 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.
A) $2.48
B) $0.2759
C) $0.82777
D) $1.00
E) $1.82777
Q3) An investing company that owns more than ________ of another (investee) company's voting stock is presumed to have controlling influence over the investee.
Q4) Discuss the reasons companies make investments.
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Page 17
Chapter 16: Reporting the Statement of Cash Flows
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Q1) The full disclosure principle requires that noncash investing and financing activities be disclosed in the financial statements.
A)True
B)False
Q2) A purchase of land in exchange for a long-term note payable must be disclosed as a noncash investing and financing activity.
A)True B)False
Q3) Financing activities include receiving cash dividends from investments in other companies' stocks.
A)True
B)False
Q4) A cash dividend payment to shareholders during the year should be reported on the statement of cash flows as:
A) A decrease in cash flows from operating activities
B) A decrease in cash flows from investing activities
C) A decrease in cash flows from financing activities
D) An increase in cash flows from investing activities
E) An increase in cash flows from financing activities
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Chapter 17: Analysis of Financial Statements
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Q1) How long a company holds inventory before selling it can be measured by dividing cost of goods sold by the average inventory balance to determine the:
A) Current ratio.
B) Price earnings ratio.
C) Accounts receivable turnover.
D) Inventory turnover.
E) Days' sales uncollected.
Q2) A company paid cash dividends on its preferred stock of $40,000 in the current year when its net income was $120,000 and its average common stockholders' equity was $640,000. What is the company's return on common stockholders' equity?
Q3) A company reports basic earnings per share of $3.50, cash dividends per share of $0.75, and a market price per share of $64.75. The company's dividend yield equals 21.4%.
A)True B)False
Q4) Describe the purpose of horizontal financial statement analysis and how it is applied.
Q5) Ratios may be expressed as (1) ________, (2) ________, or (3) ________.
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Page 19
Chapter 18: Managerial Accounting Concepts and Principles
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Q1) A lean business model aims to eliminate waste while satisfying the customer and providing a positive return to the company.
A)True
B)False
Q2) The cost of workers who assist in, or supervise, the manufacturing process, not linked to specific units of product is called:
A) Indirect labor.
B) Direct labor.
C) Basic labor.
D) Unspecified labor.
E) Joint labor.
Q3) ________ is an activity that provides financial and nonfinancial information to an organization's managers and other internal decision makers.
Q4) What is managerial accounting and how is it used to aid decision makers?
Q5) Expenditures necessary and integral to the manufacture of finished products are ________ costs.
Q6) A ________ cost does not change in total in proportion to changes in the volume of activity within the relevant range.
Page 20
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Chapter 19: Job Order Costing
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Q1) If overhead is underapplied, it means that individual jobs have been charged too much during the year and the cost of goods sold reported is too high.
A)True
B)False
Q2) The journal entry to record the issuance of materials to production is:
A) Debit Raw Materials Inventory $195,000; credit Work in Process Inventory $195,000.
B) Debit Work in Process Inventory $140,000; debit Raw Materials Inventory $24,000; credit Materials Inventory $164,000.
C) Debit Finished Goods Inventory $140,000; credit Raw Materials Inventory $140,000.
D) Debit Work in Process Inventory $140,000; debit Factory Overhead $24,000; credit Raw Materials Inventory $164,000.
E) Debit Raw Materials Inventory $153,000; credit Accounts Payable $153,000.
Q3) Describe the flow of the raw materials, both direct and indirect, through the inventory accounts from purchase to use.
Q4) Briefly describe how manufacturing firms dispose of overapplied or underapplied factory overhead.
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Page 21
Chapter 20: Process Costing
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Q1) A company uses a process costing system and the weighted average method for inventory costs. The following information is available regarding conversion activities for the current year: \(\begin{array}{ll}
\text { Work in Process, January } 1 & 5,500 \text { units, } 80 \% \text { complete } \\ \text { Work in Process, December } 31 & 7,800 \text { units, } 50 \% \text { complete } \end{array}\)
Units completed and transferred to finished goods 46,900 units
Calculate the equivalent units of production for direct labor for the year.
Q2) Compute the number of physical units transferred to finished goods.
A) 144,000.
B) 165,000.
C) 110,000.
D) 135,000.
E) 105,000.
Q3) What are the four steps in accounting for production activity in a period?
Q4) A ________ contains features of both process and job order costing systems.
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Page 22
Chapter 21: Cost-Volume-Profit Analysis
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Q1) Margin Company has total fixed costs of $360,000 and variable costs of $14 per unit. If the unit sales price is reduced from $24 to $20 and advertising is increased by $10,000, sales will increase from 40,000 to 65,000 units. Should Margin reduce its per unit sales price and pay for the additional advertising? (Support your answer with calculations.)
Q2) A cost that remains unchanged in total despite variations in volume of activity within a relevant range is a:
A) Curvilinear cost.
B) Standard cost.
C) Variable cost.
D) Step-wise variable cost.
E) Fixed cost.
Q3) A graphic depiction of the break-even point is known as a cost-volume-profit (CVP) chart.
A)True B)False
Q4) Define variable cost, fixed cost, and mixed cost.
Q5) Under variable costing, fixed overhead costs are excluded from product costs. A)True B)False
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Chapter 22: Master Budgets and Planning
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Q1) Total August sales are anticipated to be:
A) $67,500.
B) $64,260.
C) $61,250.
D) $60,000.
E) $63,000.
Q2) The total amount of direct materials in ounces, to be purchased in July is:
A) 16,200 oz.
B) 15,800 oz.
C) 15,880 oz.
D) 19,040 oz.
E) 15,720 oz.
Q3) Compute the amount of accounts receivable reported on the company's budgeted balance sheet for June 30.
A) $532,500.
B) $712,500.
C) $617,500.
D) $463,125.
E) $561,500.
Q4) Describe at least five benefits of budgeting.
Page 24
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Chapter 23: Flexible Budgets and Standard Costs
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Q1) Levelor Company's flexible budget shows $10,710 of overhead at 75% of capacity, which was the operating level achieved during May. However, the company applied overhead to production during May at a rate of $2.00 per direct labor hour based on a budgeted operating level of 6,120 direct labor hours (90% of capacity). If overhead actually incurred was $11,183 during May, the controllable variance for the month was:
A) $473 unfavorable.
B) $1,530 unfavorable.
C) $1,057 favorable.
D) $1,530 favorable.
E) $473 favorable.
Q2) The usefulness of a flexible budget depends on the valid classification of variable and fixed costs.
A)True
B)False
Q3) While companies strive to achieve ideal standards, reality implies that some loss of materials usually occurs with any process.
A)True
B)False
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Chapter 24: Performance Measurement and Responsibility Accounting
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Q1) Expenses that are not easily associated with a specific department, and which are incurred for the joint benefit of more than one department, are:
A) Fixed expenses.
B) Direct expenses.
C) Variable expenses.
D) Indirect expenses.
E) Uncontrollable expenses.
Q2) Departmental contribution to overhead is calculated as the amount of sales of the department less:
A) Joint costs.
B) Direct expenses.
C) Controllable costs.
D) Direct and indirect costs.
E) Product and period costs.
Q3) Direct expenses require allocation across departments because they cannot be readily traced to one department.
A)True
B)False
Q4) Define joint costs and explain how joint costs can be allocated.
26
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Chapter 25: Capital Budgeting and Managerial Decisions
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Q1) A company must decide between scrapping or rebuilding units that do not pass inspection. The company has 15,000 such units that cost $6 per unit to manufacture. The units were built to satisfy a special order, which must still be satisfied if the defective units are scrapped. The units can be sold as scrap for $2.50 each or they can be reworked for $4.50 each and sold for the full price of $9.00 each. If the units are sold as scrap, the company will have to build 15,000 replacement units and sell them at the full price.
Required:
(1) What is the net return from selling the units as scrap?
(2) What is the net return from reworking and selling the units?
(3) Should the company sell the units as scrap or rework them?
Q2) The annual average investment amount used to calculate the accounting rate of return is:
A) $48,950
B) $72,000
C) $70,000
D) $37,000
E) $74,000
Q3) A(n) ________ requires a future outlay of cash and is relevant for current and future decision making.
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Chapter 26: Present and Future Values in Accounting
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Sample Questions
Q1) City Peewee League borrowed $883,212, and must make annual year-end payments of $120,000 each. If City's interest rate is 6%, how many years will it take to pay off the loan?
Q2) Molly borrows money by promising to make a single payment of $100,000 at the end of 5 years. How much money is Molly able to borrow if the interest rate is 10%, compounded semiannually? (<sup>PV</sup><sup> </sup><sup>of</sup><sup> </sup><sup>$1</sup>, <sup>FV</sup><sup> </sup><sup>of</sup><sup> </sup><sup>$1</sup>, <sup>PVA</sup><sup> </sup><sup>of</sup><sup> </sup><sup>$1</sup>, and <sup>FVA</sup><sup> </sup><sup>of</sup><sup> </sup><sup>$1</sup>) (Use appropriate factor(s) from the tables provided.)
A) $61,390
B) $62,090
C) $38,550
D) $74,850
E) $78,350
Q3) A company borrows money from the bank by promising to make 8 semiannual payments of $9,000 each. How much is the company able to borrow if the interest rate is 10% compounded semiannually?
Q4) Explain the concept of the present value of a single amount.
Q5) Explain the concept of the future value of an annuity.
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Chapter 27: Activity-Based Costing
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Sample Questions
Q1) An activity-based cost allocation system:
A) Traces costs to products on the basis of activities performed on them.
B) Does not involve the level of detail and the number of allocations that companies make with traditional allocation methods.
C) Does not provide total unit cost data.
D) Does not provide for the allocation of any cost to products that cannot be directly traced to those products.
E) Is one form of a direct or variable costing system.
Q2) With activity-based costing, complex products are assigned a larger portion of overhead.
A)True
B)False
Q3) According to the activity-based costing system, the total overhead cost for producing the 340 units of the J71B product is:
A) $17,957.92
B) $30,972.72
C) $15,504.00
D) $21,622.72
E) $37,126.72
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