MBUS300 - Final Exam (Financial Chapters 1-3, Management 1-3)

Which of the following types of accounts is closed at the end of an accounting cycle?

Dividends Ex: Revenues, expenses and dividends are closed to retained earnings at the end of an accounting cycle.

Earned revenue on account

Earning revenue on account increases assets (accounts receivable) and increases revenue, which increases net income and equity (retained earnings). It does not affect cash flows.

Which of the following are "matched" under the matching concept?

Expenses and revenues Ex: The matching concept refers to the matching of expenses to the revenues that those expenses produce.

Duluth Co. collected a $6,000 cash advance from a customer on November 1, Year 1 for services to be provided over a six-month period beginning on that date. If the year-end adjustment is properly recorded, what will be the effect of the adjusting entry on Duluth's Year 1 financial statements?

Decrease liabilities and increase revenues Ex: The adjusting entry to recognize revenue earned on the contract will increase revenues and decrease liabilities (unearned revenue).

Managerial accounting information is limited or restricted by which of the following authorities or principles?

Value-Added Principle Ex: The value-added principle means that management accountants are free to engage in any information gathering and reporting activity so long as the activity adds value in excess of its cost.

Rocky Mountain Bottling Company produces a soft drink that is sold for a dollar. At production and sales of 800,000 units, the company pays $600,000 in production costs, half of which are fixed costs. At that volume, general, selling, and administrative costs amount to $250,000, of which $70,000 are fixed costs. What is the amount of contribution margin per unit?

$0.40 Ex: Variable cost per unit = [(Production costs of $600,000 × 1/2) + (Selling and administrative costs of $250,000 − $70,000)] ÷ 800,000 = $0.60 per unitContribution margin per unit = Selling price per unit − Variable costs per unit = $1 per unit − $0.60 per unit = $0.40 per unit

On January 1, Year 2, the Supplies account of Sheldon Company had a balance of $1,200. During the year, the company purchased $3,400 of supplies on account and made partial payments totaling $3,000 on those accounts. On December 31, Year 2, Sheldon determined that there were $1,400 of supplies on hand. Which of the following would be reported on Sheldon's Year 2 financial statements?

$1,400 of supplies; $3,200 of supplies expense Ex: Supplies = Amount on hand at end of year of $1,400Supplies expense = Beginning balance of Supplies account of $1,400 of supplies on hand is the supplies asset on the balance sheet; $1,200 beginning balance + $3,400 of + Supplies purchased of $3,400 - Ending balance of Supplies account of $1,400 ending balance = $3,200

Frazier Company sells women's ski jackets. The average sales price is $275 and the variable cost per jacket is $175. Fixed Costs are $1,350,000. If Frazier sells 15,000 jackets, the contribution margin will be:

$1,500,000 Ex: Contribution margin = Revenues − Variable expenses Contribution margin = ($275 × 15,000 jackets) − ($175 × 15,000 jackets) = $1,500,000

On October 1, Year 1, Jason Company paid $7,200 to lease office space for one year beginning immediately. What is the amount of rent expense that will be reported on the Year 1 income statement and what is the cash outflow for rent that would be reported on the Year 1 statement of cash flows?

$1,800; $7,200 Ex: Monthly rent expense = Payment of $7,200 ÷ 12 months = $600 per monthRent expense (on the income statement) = $600 per month × 3 months = $1,800The $7,200 payment is the cash outflow for rent that will be reported on the statement of cash flows.

Algonquin Company reported assets of $50,000, liabilities of $22,000 and common stock of $15,000. Based on this information only, what is the amount of the company's retained earnings?

$13,000. Ex: Assets = Liabilities + Equity; Equity includes common stock and retained earnings. $50,000 = $22,000 + $15,000 + Retained earnings; Retained earnings = $13,000

Revenue on account amounted to $5,000. Cash collections of accounts receivable amounted to $2,300. Expenses for the period were $2,100. The company paid dividends of $450. What was net income for the period?

$2,900 Ex: Net income = Revenue of $5,000 - Expenses of $2,100 = $2,900; dividends decrease retained earnings but do not affect net income.

During its first year of operations, Connor Company paid $50,000 for direct materials and $36,000 in wages for production workers. Lease payments and utilities on the production facilities amounted to $14,000. General, selling, and administrative expenses were $16,000. The company produced 5,000 units and sold 4,000 units for $30.00 a unit. The average cost to produce one unit is which of the following amounts?

$20.00 Ex: Average cost per unit = (Materials cost + Labor costs + Overhead costs) ÷ Number of units producedAverage cost per unit = ($50,000 + $36,000 + $14,000) ÷ 5,000 units = $20.00 per unit

Jarvis Company produces a product that has a selling price of $20.00 and a variable cost of $15.00 per unit. The company's fixed costs are $50,000. What is the break-even point measured in sales dollars?

$200,000 Ex: Break-even point in dollars = Fixed costs ÷ Contribution margin ratioContribution margin ratio = (Selling price per unit − Variable costs per unit) ÷ Selling price per unitBreak-even point in dollars = $50,000 ÷ [($20 per unit − $15 per unit) ÷ $20 per unit] = $50,000 ÷ 0.25 = $200,000

Retained earnings at the beginning and ending of the accounting period were $300 and $800, respectively. Revenues of $1,100 and dividends paid to stockholders of $200 were reported during the period. What was the amount of expenses reported for the period?

$400 Ex: Beginning retained earnings + Revenues − Expenses − Dividends = Ending retained earnings$300 + $1,100 − Expenses − $200 = $800Expenses = $400

Revenue on account amounted to $9,000. Cash collections of accounts receivable amounted to $8,100. Cash paid for operating expenses was $7,500. The amount of employee salaries accrued at the end of the year was $900. What was the net cash flow from operating activities?

$600 Ex: Cash collected on accounts receivable of $8,100 − Cash paid for operating expenses of $7,500 = $600. Revenue earned on account and accrued salaries are not cash flow activities.

During its first year of operations, Silverman Company paid $14,000 for direct materials and $19,000 for production workers' wages. Lease payments and utilities on the production facilities amounted to $17,000 while general, selling, and administrative expenses totaled $8,000. The company produced 5,000 units and sold 3,000 units at a price of $15.00 a unit.What was Silverman's net income for the first year in operation?

$7,000 Ex: Average cost per unit = (Materials cost + Labor costs + Overhead costs) ÷ Number of units producedAverage cost per unit = ($14,000 + $19,000 + $17,000) ÷ 5,000 units = $10.00 per unitCost of goods sold = Number of units sold × Average cost per unitCost of goods sold = 3,000 units sold × $10.00 per unit = $30,000Net income = Revenue − Cost of goods sold − Selling and administrative expensesNet income = (3,000 units × $15 per unit) − (3,000 units sold × $10.00 per unit) − $8,000 = $7,000

Anton believes his company's overhead costs are driven (affected) by the number of machine hours because the production process is heavily automated. During the period, the company produced 3,000 units of Product A requiring a total of 100 machine hours and 2,000 units of Product B requiring a total of 25 machine hours. What allocation rate should be used if the company incurs overhead costs of $10,000?

$80 per machine hour Ex: The company's overhead costs are driven (affected) by the number of machine hours because the production process is heavily automated. As a result, the allocation rate should be based on machine hours.Allocation rate = Overhead cost ÷ Allocation baseAllocation rate = $10,000 ÷ (100 machine hours + 25 machine hours) = $80 per machine hour

Turner Company reported assets of $20,000 (including cash of $9,000), liabilities of $8,000, common stock of $7,000, and retained earnings of $5,000. Based on this information, what can be concluded?

25% of Turner's assets are from prior earnings, $5,000 is the maximum possible dividend, and 40% of assets are the result of borrowed resources. Ex: Retained earnings of $5,000 is equal to 25% of the company's assets, indicating that 25% of Turner's assets are from prior earnings. $8,000, or 40%, of Turner's assets are liabilities, indicating that those assets are the result of borrowed resources. A company can pay out no more in dividends than it has in its Retained Earnings account.

Wham Company sells electronic squirrel repellants for $60. Variable costs are 60% of sales and total fixed costs are $40,000. What is the firm's magnitude of operating leverage if 2,000 units are sold?

6.00 Ex: Net income = Sales − Variable expenses − Fixed expensesNet income = ($60 × 2,000 units) − ($60 × 0.60 × 2,000 units) − $40,000 = $48,000 − $40,000 = $8,000 Magnitude of operating leverage = Contribution margin ÷ Net incomeMagnitude of operating leverage = $48,000 ÷ $8,000 = 6.00

The closing entry for the Dividends account would involve which of the following?

A credit to Dividends Ex: The closing entry to move the balance of the dividends account to the retained earnings account would include a debit to retained earnings to decrease that account. The credit to the dividends account leaves a zero balance in that account.

Benson Co. purchased land and paid the full purchase price in cash. Which of the following would be included in the journal entry necessary to record this event?

A debit to Land and a credit to Cash Ex: Land, an asset, is increased with a debit, and cash, another asset, is decreased with a credit.

Which one of the following would not be included in a closing entry?

A debit to Unearned Revenue Ex: Closing entries move all current year data from the temporary accounts (revenues, expenses, and dividends) into the retained earnings account. The Unearned Revenue account is a liability account; it is not closed.

What is the term that is used to describe the difference between the total debit and credit amounts in a T-account?

Account balance Ex: For any given account, the difference between the total debit and credit amounts is the account balance.

Select the correct statement regarding fixed costs.

All of these are correct statements. There is a contradiction between the term "fixed cost per unit" and the behavior pattern implied by the term. Fixed cost per unit is not fixed. Total fixed cost remains constant when volume changes. Ex: The total amount of a fixed cost does not change when volume changes. In contrast, fixed cost per unit is not fixed. It changes as the volume changes. The fixed cost per unit decreases when volume increases and the fixed cost per unit increases when volume decreases.

Why do accountants normally calculate cost per unit as an average?

All of these are justifications for computing average unit costs. Determining the exact cost of a product is virtually impossible. Some manufacturing-related costs cannot be accurately traced to specific units of product. Even when producing multiple units of the same product, normal variations occur in the amount of materials and labor used.

Contribution margin ratio will remain the same at various levels of sales even if total fixed costs are altered.

An increase in fixed costs causes the break-even point to increase.

Recognizing an expense may be accompanied by which of the following?

An increase in liabilities Ex: Recognizing an expense may be accompanied by an increase in liabilities (i.e. accounts payable, salaries payable) or a decrease in assets (i.e. cash, prepaid rent or insurance).

How would a payment for rent paid in advance be classified?

Asset exchange transaction Ex: Purchasing prepaid rent increases one asset (prepaid rent) and decreases another asset (cash). Therefore, it is classified as an asset exchange transaction.

If a company provides services to clients but has not yet collected any cash, how should that transaction be classified?

Asset source transaction Ex: This transaction increases assets (accounts receivable) and increases equity (revenue increases retained earnings), and is therefore classified as an asset source transaction.

What is the balance of the Common Stock account?

Assets = Liabilities + Equity $8,800 + $3,000 + $16,000 = $2,500 + Equity Equity = $25,300 Equity = Common stock + Retained earnings $25,300 = Common Stock + ($5,400 + $19,000 - $15,500) $25,300 = Common Stock + $9,900 Common Stock = $15,400

What is the effect on the balance sheet of making cash sales of inventory to customers for profit?

Assets and stockholders' equity increase. Ex: The first part of the transaction is recording revenue from the sale. Recording cash revenue increases the asset account, Cash, and increases the stockholders' equity account, Retained Earnings. The second part of the transaction is removing the inventory that has been sold which decreases the asset account, Inventory, and decreases the stockholders' equity account, Retained Earnings. Overall, since the inventory was sold at a profit, the transaction will increase assets and stockholders' equity.

During Year 2, Millstone Company provided$6,500 of services for cash, paid cash dividends of $1,000 to owners, and paid $4,000 cash for expenses. Liabilities were unchanged. Which of the following statements accurately describes the effect of these events on the elements of the company's financial statements?

Assets increased by $1,500. Ex: Cash, an asset, increased by $1,500 (calculated as receipts of $6,500 −payment of $1,000 −payment of $4,000). Equity also increased by $1,500 (calculated as revenue of $6,500 −dividends of $1,000 −expenses of $4,000).

Hazeltine Company issued common stock for $200,000 cash. What happened as a result of this event?

Assets, claims, and equity all increased. Ex: Issuing common stock increases both assets (cash) and equity (common stock). Equity and liabilities collectively make up claims in the accounting equation.

The following information relates to Marshall Manufacturing's current accounting period: Raw materials used $34,000 Direct labor wages 66,000 Sales salaries and commissions 50,000 Depreciation on production equipment 6,000 Rent on manufacturing facilities 4,000 Administrative supplies and utilities 10,000 Sales revenue 210,000 Units produced 10,000 Units sold 10,000 Based on this information, what is the company's net income?

Average cost per unit = (Materials cost + Labor costs + Overhead costs) ÷ Number of units producedAverage cost per unit = [$34,000 + $66,000 + ($6,000 + $4,000)] ÷ 10,000 units = $11.00 per unitCost of goods sold = Number of units sold × Average cost per unitCost of goods sold = 10,000 units sold × $11.00 per unit = $110,000Net income = Revenue − Cost of goods sold − Selling and administrative expensesNet income = $210,000 − $110,000 − ($50,000 + $10,000) = $40,000

Which of the following financial statements provides information about a company as of a specific point in time?

Balance sheet The balance sheet provides information about a company as of a specific point in time, the other three statements provide information about a period of time such as a month, a quarter, or a year.

Liabilities are reported on which of the following financial statement(s)?

Balance sheet Ex: Liabilities is an element on the balance sheet. As such, liabilities do not appear on the income statement, statement of cash flows, or the statement of changes in stockholders' equity.

Explain how the following general journal entry affects the accounting equation. Accounts receivable 500 Service revenue 500

Both assets and stockholders' equity increase. Ex: A debit to accounts receivable increases assets and a credit to service revenue increases stockholders' equity (retained earnings).

At the break-even point:

Both sales would be equal to total costs and contribution margin would be equal to total fixed costs are correct. Ex: Since net income is zero at the break-even point, sales would be equal to total costs and contribution margin would be equal to total fixed costs. However, sales would not be equal to fixed costs.

Which of the following costs would be classified as a direct cost for a company that produces motorcycles?

Both seats used in the motorcycles and wages of motorcycle assembly workers are correct. Ex: Direct costs can be traced to a specific product. The costs of the seats used in the motorcycles and wages of motorcycle assembly workers are direct costs. An indirect cost cannot be easily or economically traced to a specific product. The rent of the manufacturing facility that produces motorcycles is an indirect cost.

What happens to break-even point when the sales price per unit decreases?

Break-even point increases. Ex: Recall that the break-even point in units equals fixed costs divided by the contribution margin per unit. If selling price per unit decreases, the contribution margin per unit decreases and the break-even point in units increases. In addition, recall that the break-even point in sales dollars equals fixed costs divided by the contribution margin ratio. If selling price per unit decreases, the contribution margin ratio decreases and the break-even point in sales dollars also increases.

When a business provides services for cash, which elements of the accounting equation are affected?

Cash and Revenue Ex: Providing services for cash increases a company's assets (cash) and equity (revenue, which closes to retained earnings).

Which of the following appears in the investing activities section of the statement of cash flows?

Cash outflow for the purchase of land Ex: Purchasing land (a long-lived asset) for cash is an investing activity. Issuing common stock and paying dividends are both financing activities. Cash inflow from interest revenue is an operating activity.

Which of the following is an asset exchange transaction?

Collected cash on accounts receivable Ex: Collecting cash on accounts receivable is an asset exchange transaction that increases one asset (cash) and decreases another asset (accounts receivable). Issuing common stock is an asset source transaction. Accruing salary expense and recognizing revenue earned on a contract where the cash had been collected at an earlier date are both claims exchange transactions.

What is the term used to describe the right side of a T-account?

Credit side The right side of an account is the credit side.

Which resource providers lend financial resources to a business with the expectation of repayment with interest?

Creditors Ex: Businesses borrow money from creditors, and repay the amount borrowed, plus an additional fee known as interest. Investors, in contrast, provide financial resources in exchange for ownership interest in the business. Consumers demand goods and services from businesses.

Which of the following statements regarding credit entries is true?

Credits increase the common stock account. Ex: Debits increase asset accounts; credits decrease asset accounts. Debits decrease liability and stockholders' equity accounts; credits increase liability and stockholders' equity accounts. Common Stock, a stockholders' equity account, is increased with a credit.

Bruce Company recently reduced its advertising budget. All other costs and revenues were unchanged. Select the response that indicates the impact of the advertising cuts on the company's break-even point and margin of safety. Break-even Point Margin of Safety A)Increase Increase B)Decrease Decrease C)Increase Decrease D)Decrease Increase

D Recall that the break-even point equals fixed costs divided by the contribution margin per unit. If fixed costs, such as advertising, decrease, the break-even point decreases. The margin of safety equals the excess of budgeted sales over break-even sales. If the break-even point decreases, the margin of safety increases.

What is the term used to describe the left side of a T-account?

Debit side Ex: The left side of an account is the debit side.

Which of the following statements about debits is false?

Debits increase liabilities. Ex: Debits increase asset accounts; credits decrease asset accounts.Debits decrease liability and stockholders' equity accounts; credits increase liability and stockholders' equity accounts.

Which of the following costs typically include both fixed and variable components?

Factory overhead

Target costing begins with determining the cost of the product and then focusing on developing ways to sell the product at a price that will enable the company to achieve its desired profit margin.

False

To attain a target profit, the total gross margin generated from sales must be sufficient to cover total fixed costs plus the target profit.

False

Techpro has a selling price of $10 and variable costs of $6. If both the selling price and the variable costs increase by 10%, the break-even point will not change.

False Ex: Contribution margin before changes = $10 per unit − $6 per unit = $4 per unitContribution margin after changes = ($10 per unit × 1.10) − ($6 per unit × 1.10) = $4.40 per unitRecall that the break-even point equals fixed costs divided by the contribution margin per unit. If the contribution margin per unit increases, the break-even point decreases.

Which of the following groups has the primary responsibility for establishing generally accepted accounting principles for business entities in the United States?

Financial Accounting Standards Board (FASB) Ex: The Financial Accounting Standards Board is a privately funded group charged with establishing accounting standards for the U.S. It is not a branch of the U.S. government.

Which type of accounting information is intended to satisfy the needs of external users of accounting information?

Financial accounting Ex: Financial accounting is intended to satisfy the needs of external users of accounting information. Managerial accounting, including cost accounting, is intended for the needs of internal users, or managers, of a business. Tax accounting is specifically intended for tax regulatory agencies.

Select the correct statement regarding managerial and financial accounting.

Financial accounting is more highly regulated than managerial accounting. Ex: Financial accounting deals with regulated, historical, financial information that pertains to the whole company and is designed primarily to meet the information needs of outsiders. Managerial accounting is concerned with unregulated financial, economic, and nonfinancial data, which pertains more to the sub-units of the organization, that is current and future oriented, and that is designed primarily to meet the information needs of insiders.

Ashley Bradshaw is the manager of one department in a large store. In this capacity, which of the following kinds of information would she be interested in?

Financial, economic, and nonfinancial data Ex: Managers rely on financial, economic, and nonfinancial data to make decisions and evaluate performance.

In which section of a statement of cash flows would the payment of cash dividends be reported?

Financing activities. Ex: Paying cash dividends, and any cash exchanged between a company and its stockholders, is a financing activity.

Select the incorrect statement regarding fixed and variable costs.

Fixed cost per unit remains constant as the number of units increases.

Which of the following costs is not considered a period cost?

Freight paid on a purchase of raw materials Ex: Period costs are associated with the general, selling, and administrative functions of the business. Product costs are all costs incurred to obtain a product or provide a service. Freight paid on a purchase of raw materials is considered a product cost.

Which of the following statements regarding Company A is incorrect?

If Company A has fixed costs of $720,000, a selling price of $50 per unit, and contribution margin of $30 per unit, its break-even point in units is 36,000 units. Ex: Break-even point in units = Fixed costs ÷ Contribution margin per unitBreak-even point in units = $720,000 ÷ $30 per unit = 24,000 units (rather than 36,000 units)Selling price per unit − Variable cost per unit = Contribution margin per unit$50 per unit − Variable costs per unit = $30 per unit (which is the increase in profit for each additional unit sold)Variable costs per unit = $50 per unit − $30 per unit = $20 per unit

The activity director for City Recreation is planning an activity. She is considering alternative ways to set up the activity's cost structure. Select the incorrect statement from the following.

If the director expects a low turnout, she should use a fixed cost structure. Ex: A manager who expects revenues to increase should use a fixed cost structure. On the other hand, if future sales growth is uncertain or if the manager believes revenue is likely to decline, a variable cost structure makes more sense. Shifting the cost structure from fixed to variable reduces not only the level of risk but also the potential for profits.

Which of the following costs should not be recorded as an expense?

Insurance on factory building Ex: Product costs (i.e. manufacturing costs) are all costs incurred to obtain a product or provide a service. These costs are treated as assets, recorded in inventory, and expensed when the associated products are sold. Period costs (i.e. non-manufacturing costs) are all costs not associated with a product. They are associated with the general, selling, and administrative functions of the business and most are expensed in the period in which the associated economic sacrifice is made. The insurance on the factory building is a product cost and should be recorded in inventory.

Which of the following statement is true regarding the trial balance?

Incorrectly recording a cash sale as a sale on account would not cause the trial balance to be out of balance. Ex: Even if the debit and credit totals on the trial balance are equal, there may be errors in the accounting records. For example, equal trial balance totals would not disclose errors like the following: failure to record transactions; misclassifications (such as debiting the wrong account); or incorrectly recording the amount of a transaction. The income statement is prepared using the adjusted trial balance.

Delta Company experienced an accounting event that affected its financial statements as indicated below

Incurred a cash expense Ex: Incurring a cash expense would decrease assets (cash) and decrease equity (retained earnings). It would increase expenses and decrease net income, and would be reported as a cash outflow for operating activities on the statement of cash flows.

Which of the following best represents a characteristic of managerial accounting?

Information is based on estimates and is bounded by relevance and timeliness. Ex: While financial accounting is characterized by its objectivity, reliability, consistency, and historical nature, managerial accounting is more concerned with relevance and timeliness. Managerial accounting uses more estimates and fewer facts than financial accounting.

Which of the following accounts is increased with a debit?

Insurance expense Ex: Debits increase asset accounts; credits decrease asset accounts. Debits decrease liability and stockholders' equity accounts; credits increase liability and stockholders' equity accounts. Debit entries increase expense accounts. Expenses, however, decrease stockholders' equity (retained earnings). Debiting an expense account, therefore, reduces stockholders' equity.

All of the following are features of managerial accounting except:

Managerial accounting is concerned with unregulated financial, economic, and nonfinancial data, which pertains more to the sub-units of the organization, that is current and future oriented, and that is designed primarily to meet the information needs of insiders. Financial accounting information is characterized by objectivity, reliability, consistency, and accuracy.

Select the incorrect statement regarding costs and expenses.

Manufacturing-related costs are initially recorded as expenses. Ex: Product costs (i.e. manufacturing costs) are all costs incurred to obtain a product or provide a service. These costs are treated as assets, recorded in inventory, and expensed when the associated products are sold. Period costs (i.e. non-manufacturing costs) are all costs not associated with a product. They are associated with the general, selling, and administrative functions of the business and most are expensed in the period in which the associated economic sacrifice is made.

Which of the following errors would cause the debit side of a trial balance to be larger than the credit side?

None of these answer choices would cause the debit side of the trial balance to be larger than the credit side. Ex: Equal trial balance totals would not disclose errors in misclassifications; that is, debiting the wrong account or crediting the wrong account. Even though the balances in the individual accounts would be incorrect as a result of each of the errors described, the totals in the trial balance would be in balance.

Garrison Company acquired $23,000 by issuing common stock. Which of the following accurately reflects how this event affects the company's financial statements?

Option A Ex: Issuing common stock increases assets (cash) and equity (common stock). It does not affect the income statement, but is reported as a cash inflow for financing activities on the statement of cash flows.

Zimmerman Company sold land for $25,000 cash. The original cost of the land was $25,000. Which of the following accurately reflects how this event affects the company's financial statements?

Option A Ex: Selling land for cash increases one asset (cash) and decreases another asset (land), so it does not affect overall assets, liabilities or equity. It does not affect the income statement, but is reported as a cash inflow for investing activities on the statement of cash flows.

Janzen Company recorded employee salaries earned but not yet paid. Which of the following represents the effect of this transaction on the financial statements?

Option D Ex: Accruing salaries expense increases liabilities (salaries payable) and increases expenses, which decreases net income and equity (retained earnings). It does not affect cash flows.

Jackson Company paid $500 cash for salary expenses. Which of the following accurately reflects how this event affects the company's financial statements?

Paying cash for expenses decreases assets (cash) and decreases equity (retained earnings) on the balance sheet. It increases expenses which decreases net income on the income statement, and is reported as a cash outflow for operating activities on the statement of cash flows.

Which of the following is frequently used to describe the expenses that are matched in the same accounting period in which they are incurred?

Period costs Ex: When the connection between and expense and the corresponding revenue is vague, accountants commonly match the expense with the period in which it is incurred. Those expenses are frequently called period costs.

Which of the following accounts is decreased with a credit?

Prepaid Insurance Ex: Debits increase asset accounts; credits decrease asset accounts. Debits decrease liability and stockholders' equity accounts; credits increase liability and stockholders' equity accounts. Prepaid insurance, an asset account, is decreased with a credit.

Which of the following statements is true with regard to product costs versus general, selling, and administrative costs?

Product costs associated with units sold appear on the income statement as cost of goods sold. Ex: Product costs are all costs incurred to obtain a product or provide a service. These costs are treated as assets, recorded in inventory, and expensed (as cost of goods sold) when the associated products are sold. Period costs are all costs not associated with a product. They are associated with the general, selling, and administrative functions of the business and most are expensed in the period in which the associated economic sacrifice is made. A product cost would be the cost of direct materials used in the production of a product. A period cost would be rent on administrative facilities.

Which of the following events would not require a year-end adjusting entry?

Providing services on account during the year Ex: Providing services on account does not require an adjusting entry at the end of the accounting period. Accounts receivable is increased when services are provided on account and is decreased when payment is received from customers. Supplies and prepaid rent both require year-end adjusting entries to recognize expense.

Which of the following adjustments would not be described as an accrual?

Recording insurance expense relating to insurance premiums that were paid in advance Ex: The term deferral describes a revenue or an expense event that is recognized after cash has been exchanged. Commonly, deferred expenses include prepaid insurance. On the other hand, the term accrual describes a revenue or an expense event that is recognized before cash is exchanged. The other three answer choices describe accruals:interest receivable, accounts payable, and salaries payable.

Which of the following types of accounts is not closed at the end of an accounting cycle?

Retained earnings Ex: Revenues, expenses and dividends are closed to retained earnings at the end of an accounting cycle. Retained earnings is a permanent account that is reported on the balance sheet.

A company's total assets increased during the period while its liabilities and common stock were unchanged. No dividends were declared or paid during the period. Which of the following would explain this situation?

Revenues were greater than expenses during the period. Ex: Assets = Liabilities + Stockholders' equityAssets = Liabilities + Common stock + Retained earnings If a company's total assets increased while liabilities and common stock were unchanged, retained earnings must have increased. In order for retained earnings to increase, the company must have reported net income. In other words, its revenues must have been greater than its expenses.

Which of the following costs should be recorded as an expense?

Salary of administrative employee Ex: Product costs (i.e. manufacturing costs) are all costs incurred to obtain a product or provide a service. These costs are treated as assets, recorded in inventory, and expensed when the associated products are sold. Period costs (i.e. non-manufacturing costs) are all costs not associated with a product. They are associated with the general, selling, and administrative functions of the business and most are expensed in the period in which the associated economic sacrifice is made.

Select the incorrect statement regarding the relationship between type of user and type of information.

Senior executives need less aggregated information than do lower-level managers. Ex: Senior executives need more aggregated information than do lower-level managers.

Which of the following accounts would not appear on a balance sheet?

Service Revenue Ex: Service Revenue and Interest Expense are income statement accounts and, as such, they do not appear on the balance sheet. Unearned Revenue, despite having the word "revenue" in its title, is a liability account that appears on the balance sheet, as does Salaries Payable.

Which of the following statements is true?

The balance in the retained earnings account in the trial balance will equal the retained earnings balance on the balance sheet only after closing entries have been posted to the general ledger. Ex: Every entry (not only closing entries) must include at least one debit to an account and at least one credit to an account. This system is called double-entry accounting. Adjusting entries are recorded before (rather than after) the closing entries are recorded. If the debit total does not equal the credit total on the trial balance, the accountant knows to search for an error. Even if the totals are equal, however, there may be errors in the accounting records. Prior to posting closing entries, the balance in the retained earnings account will be the balance at the beginning of the accounting period. Only after closing entries are posted will the trial balance reflect the same retained earnings account balance as the balance sheet.

If total fixed costs increase while variable costs and sales price are unchanged, what happens to the break-even point?

The break-even point increases, and therefore more units must be sold to break even. Ex: Recall that the break-even point equals fixed costs divided by the contribution margin per unit. If fixed costs increase, the break-even point increases. As a result, more units must be sold to break even.

Select the correct statement regarding the contribution margin ratio.

The contribution margin ratio can be calculated using either total amounts or per unit amounts. Ex: The contribution margin ratio is contribution margin divided by sales. It can be calculated using per unit amounts such as contribution margin per unit / sales price per unit. It can also be calculated using total amounts such as total contribution margin / total sales.

Which of the following statements is true regarding a trial balance that balances?

The equality of debits and credits has been proven. Ex: The trial balance only proves the equality of debits and credits. It does not detect missing or incorrect entries that were recorded with equal debits and credits. If the debit total does not equal the credit total on the trial balance, adjusted trial balance, or post-closing trial balance, the accountant knows to search for an error.

A $200 credit to Interest Payable was instead recorded in error as a $200 credit to Cash in an adjusting entry, which has been posted to the ledger accounts. Which of the following is the result of this error?

Total assets are understated by $200. Ex: This misclassification (crediting the wrong account) will not cause the debit and credit totals on the trial balance to be out of balance. Crediting an asset (Cash) instead of crediting a liability (Interest Payable) would understate total assets and understate total liabilities. That error has no effect on net income.

Yi Company provided services to a customer for $5,500 cash. Based on this information alone, which of the following statements is true?

Total assets increased and net income increased. Ex: Providing services to a customer for cash increases assets and equity on the balance sheet. It also increases revenue, and therefore, net income on the income statement.

Li Company paid cash to purchase land. What happened as a result of this business event?

Total assets were unaffected. Ex: Paying cash for land is an asset exchange transaction that increases one asset (land) and decreases another asset (cash). The result is no overall change in total assets.

Select the incorrect statement regarding the relevant range of volume.

Total cost per unit is expected to remain constant Ex: Within the relevant range, the total cost per unit will decrease as volume increases..

Contribution margin ratio will remain the same at various levels of sales even if total fixed costs are altered.

True

In order to perform cost-volume-profit analysis, a company must be able to identify its variable and fixed costs.

True

Jensen Company has a contribution margin ratio of 45%. This means that its variable costs are 55% of sales.

True

When computing the break-even point in units, a company should round to the next whole unit because partial units ordinarily are not sold.

True

Why are adjusting entries recorded at the end of the accounting period?

Unrecorded accruals and deferrals must be recognized before the financial statements can be prepared. Ex: At the end of the accounting period, a company will have several unrecorded accruals and deferrals that must be recognized before the financial statements can be prepared. As a result, adjusting entries always involve (1) an asset or liability account and (2) a revenue or expense account.

Java Joe operates a chain of coffee shops. The company pays rent of $20,000 per year for each shop. Supplies (napkins, bags, and condiments) are purchased as needed. The manager of each shop is paid a salary of $3,000 per month, and all other employees are paid on an hourly basis. Relative to the number of customers for a shop, the cost of supplies is which kind of cost?

Variable cost Ex: When the volume increases, the total cost of supplies increases; when volume decreases, the total decreases; as such, the cost of supplies is a variable cost.

Which of the following statements best describes the balance in a revenue account at the beginning of an accounting period?

Zero Ex: The temporary accounts (that is, revenue, expense, and dividends) are closed prior to the start of the next accounting cycle. After closing, these accounts have zero balances and are ready to capture the revenue, expense, and dividend information for the next annual accounting period.

Rock Creek Bottling Company pays its production manager a salary of $6,000 per month. Salespersons are paid strictly on commission, at $1.50 for each case of product sold.For Rock Creek Bottling Company, the cost of the salespersons' commissions is an example of:

a variable cost. Ex: Since the salespersons are paid strictly on commission, at $1.50 for each case of product sold, the total cost of the salespersons' commissions would increase as the sales volume increases. As such, this cost would be classified as a variable cost.

Manufacturing costs that cannot be traced to specific units of product in a cost-effective manner include:

both depreciation on production equipment and indirect labor. Ex: An indirect product cost (i.e. indirect manufacturing cost) cannot be easily or economically traced to a specific product. Both depreciation on production equipment and indirect labor cannot be traced to specific units of product in a cost-effective manner.

Camden Company sets the selling price for its product by adding a markup to the product's variable manufacturing costs. This approach to pricing is referred to as:

cost-plus pricing

All of the following would be considered a fixed cost for a bottled water company except:

hourly wages for machine operators.

A cost that contains both fixed and variable elements is referred to as a:

mixed cost.

A pricing strategy that sets the price at a premium under the assumption that people will pay more for the product because of the product's brand name, media attention, or some other reason that has piqued the interest of the public is known as:

prestige pricing.

Craft, Inc. normally produces between 120,000 and 150,000 units each year. Producing more than 150,000 units alters the company's cost structure. For example, fixed costs increase because more space must be rented, and additional supervisors must be hired. The production range between 120,000 and 150,000 is called the:

relevant range.

Operating leverage exists when:

small percentage changes in revenue produce large percentage changes in profit. Ex: Operating leverage is the cost structure condition that produces a proportionately larger percentage change in net income for a given percentage change in revenue. Business managers apply operating leverage to magnify small changes in revenue into dramatic changes in profitability.

The pricing strategy that begins with the determination of a price at which a product will sell and then focuses on developing a cost structure for the product that will yield a profit is known as:

target costing.

In order to prepare a contribution format income statement, costs must be separated into:

variable and fixed costs.

For a manufacturing company, product costs include all of the following except:

warehousing costs of finished goods. Ex: Product costs are all costs incurred to obtain a product or provide a service. Period costs are associated with the general, selling, and administrative functions of the business. The cost of storing finished goods is considered a period cost.

Hard Nails and Bright Nails are competing nail salons. Both companies have the same number of customers. Both charge the same price for a manicure. The only difference is that Hard Nails pays its manicurists on a salary basis (i.e., a fixed cost structure) while Bright Nails pays its manicurists on the basis of the number of customers they serve (i.e., a variable cost structure). Both companies currently make the same amount of net income. If sales of both salons increase by an equal amount, Hard Nails:

will earn a higher profit than Bright Nails. Ex: When sales change, the amount of the corresponding change in net income is directly influenced by the company's cost structure. The more fixed cost, the greater the fluctuation in net income. Since Hard Nails has a fixed cost structure while Bright Nails has a variable cost structure, if sales of both salons increase by an equal amount, Hard Nails will earn a higher profit than Bright Nails.