a.
must be reported on the face of the income statement.
b.
includes all changes in equity during a period except those resulting from investments by and distributions to owners.
c.
is the net change in owners’ equity for the period.
d.
is synonymous with the term “net income.”
21. The following amounts are from Silverton Co.’s 2014 income statement:
Sales ………………………………………….
$340,000
Sales returns and allowances ……………………..
5,000
Cost of goods sold ………………………………
132,000
Utilities expense ……………………………….
66,000
Interest revenue ………………………………..
1,000
Income tax on operations …………………………
28,000
Extraordinary loss due to earthquake, net of tax ……
5,000
Interest expense ………………………………..
4,000
Salaries expense ………………………………..
46,000
Loss on sale of investments ………………………
3,000
What amount would Silverton show for income from continuing operations on a multiple-step format income statement?
a.
$52,000
b.
$68,000
c.
$57,000
d.
$96,000
340,000 – 5000 – 132000 – 66000 + 1000 – 28000 – 4000 – 46000 – 3000 =
c. $57,000
22. Saginaw Inc. decided on August 1, 2014, to dispose of a component of its business. The component was sold on November 30, 2014. Saginaw’s income for 2014 included income of $250,000 from operating the discontinued segment from January 1 to the sale date. Saginaw incurred a loss on the November 30 sale of $220,000. Ignoring income taxes, what amount should be reported in the 2014 income statement as the net income or loss under “Discontinued Operations”?
a.
$220,000 loss
b.
$30,000 loss
c.
$30,000 income
d.
$250,000 income
23. The financial statements of Mannassass Corporation for 2014 and 2015 contained the following errors:
2014
2015
Ending Inventory
$14,000 overstated
$20,000 understated
Rent Expense
$4,800 understated
$6,600 overstated
Assuming that none of the errors were detected or corrected, by what amount will 2014 operating income be overstated or understated?
a.
$9,200 overstated
b.
$9,200 understated
c.
$18,800 understated
d.
$18,800 overstated
24. In a statement of cash flows, receipts from sales of property, plant, and equipment would be classified as cash inflows from
a.
liquidating activities.
b.
operating activities.
c.
investing activities.
d.
financing activities.
25. In a statement of cash flows (indirect method), depreciation is treated as an adjustment to reported net income because depreciation
a.
is an inflow of cash to a reserve account for asset replacement.
b.
reduces the reported net income and involves an inflow of cash.
c.
reduces the reported net income but does not involve an outflow of cash.
d.
usually represents a significant portion of operating expenses.
26. Which of the following statements regarding cash equivalents is correct?
a.
A one-year Treasury note could not qualify as a cash equivalent.
b.
All investments meeting the FASB’s criteria for cash equivalents must be reported as such.
c.
The date a security is purchased determines its “original maturity” for cash equivalent classification purposes.
d.
Once established, management’s policy for classifying items as cash equivalents cannot be changed.
27. Which of the following would not be classified as an operating activity?
a.
Interest income
b.
Income tax expense
c.
Dividend income
d.
Payment of dividends
28. The amount reported as “Cash” on a company’s balance sheet normally should exclude
a.
postdated checks that are payable to the company.
b.
cash in a payroll account.
c.
undelivered checks written and signed by the company.
d.
petty cash.
29. When a specific customer’s account is written off by a company using the allowance method, the effect on net income and the net realizable value of the accounts receivable is
Net Realizable Value
Net Income of Accounts Receivable
a.
Increase Increase
b.
Decrease Decrease
c.
None None
d.
Decrease None
30. The following information is from the records of Sumter, Inc. for the year ended December 31, 2014.
Allowance for Doubtful Accounts, January 1, 2014 ..
$ 6,000
(cr)
Sales, 2014 …………………………………
2,920,000
Sales Returns and Allowances, 2014 …………….
32,000
If the basis for estimating bad debts is 1 percent of net sales, the correct amount of doubtful accounts expense for 2014 is
a.
$22,800.
b.
$23,200.
c.
$28,880.
d.
$34,880.
31. In preparing the bank reconciliation of Yardley Company for the month of July, the following information is available:
Balance per bank statement, 7/31 …………………
$60,075
Deposits in transit, 7/31 ……………………….
9,375
Outstanding checks, 7/31 ………………………..
8,625
Deposit erroneously recorded by bank to Yardley’s
account, 7/18 ………………………………..
375
Bank service charges for July ……………………
75
What is the correct cash balance at July 31?
a.
$52,875
b.
$54,375
c.
$54,825
d.
$60,450
32. Lawson Corporation’s checkbook balance on December 31, 2014, was $8,000. In addition, Lawson held the following items in its safe on December 31:
Check payable to Lawson Corporation, dated January 2, 2015, not included in December 31 checkbook balance..
$2,000
Check payable to Lawson Corporation, deposited December 20, and included in December 31 checkbook balance, but returned by bank on December 30, stamped “NSF.” The check was redeposited January 2, 2015, and cleared January 7 ..
400
Post-dated checks …………………………………
150
Check drawn on Lawson Corporation’s account, payable to a vendor, dated and recorded December 31, but not mailed until January 15, 2015 …………………………….
1,000
The proper amount to be shown as cash on Lawson’s balance sheet at December 31, 2014, is
a.
$7,600.
b.
$8,000.
c.
$8,600.
d.
$9,750.
33. Which of the following would be considered part of the category “trade receivables”?
a.
Advances to employees
b.
Amounts due from customers
c.
Dividends receivable
d.
Income tax refunds receivable
34. The installment method of recognizing revenue
a.
should be used only in cases in which no reasonable basis exists for estimating the collectibility of receivables.
b.
is not a generally accepted accounting principle under any circumstances.
c.
should be used for book purposes only if it is used for tax purposes.
d.
is an acceptable alternative accounting principle for a firm that makes installment sales.
s
35. The cost recovery method is
a.
used only when circumstances surrounding a sale are so uncertain that earlier recognition is impossible.
b.
the most common method of accounting for real estate sales.
c.
similar to percentage-of-completion accounting.
d.
never acceptable under generally accepted accounting principles.
36. Goods on consignment should be included in the inventory of
a.
the consignor but not the consignee.
b.
both the consignor and the consignee.
c.
the consignee but not the consignor.
d.
neither the consignor nor the consignee.
37. Gunner Construction, Inc. has consistently used the percentage-of-completion method of recognizing revenue. During 2014, Gunner started work on a $2,500,000 fixed-price construction contract. The accounting records disclosed the following data for the year ended December 31, 2014:
Costs incurred ………………………………….
$ 465,000
Estimated cost to complete ……………………….
2,085,000
Progress billings ……………………………….
550,000
Collections …………………………………….
350,000
How much loss should Gunner have recognized in 2014?
a.
$15,000
b.
$35,000
c.
$50,000
d.
$315,000
38. Commodity L sells for $12.00; selling expenses are $2.40; normal profit is $3.00. If the cost of Commodity L is $7.80 and the replacement cost is $6.00, the lower of cost or market is
a.
$5.40.
b.
$6.60.
c.
$6.00.
d.
$7.80.
39. Montana Company is a wholesale electronics distributor. On December 31, 2014, it prepared the following partial income statement:
Gross sales ………………………….
$800,400
Sales discounts ………………………
400
Net sales ……………………………
$800,000
Cost of goods sold:
Beginning inventory …………………
$300,000
Net purchases ………………………
300,000
Given this information, if Montana Company’s gross margin is 30 percent of net sales, what is the correct ending inventory balance?
a.
$40,000
b.
$240,000
c.
$360,000
d.
$600,000
40. Which of the following statements is true?
a.
A company must use the FIFO cost flow assumption for taxes as well as for financial accounting and reporting.
b.
A company may use FIFO for inventory valuation purposes on the balance sheet provided that LIFO cost of goods sold is reported on the income statement.
c.
Application of LIFO for financial reporting purposes must strictly follow IRS regulations relating to LIFO.
d.
LIFO is the only inventory method that must be used for financial reporting purposes if used for tax purposes.
41. A company using a periodic inventory system neglected to record a purchase of merchandise on account at year-end. This merchandise was omitted from the year-end physical count. How will these errors affect inventory at year-end and cost of goods sold for the year?
Cost of
Inventory Goods Sold
a.
No effect Understate
b.
Understate No effect
c.
Understate Understate
d.
No effect Overstate
42. If goods shipped FOB destination are in transit at the end of the year, they should be included in the inventory balance of the
a.
seller.
b.
common carrier.
c.
buyer.
d.
bank.
43.Digipro Inc. is a wholesaler of photography equipment. The activity for the VTC cameras during July is shown below:
Balance/
Date
Transaction
Units
Cost
July 1
Inventory
2,000
$36.00
7
Purchase
3,000
37.00
12
Sales
3,600
21
Purchase
5,000
37.88
22
Sales
3,800
29
Purchase
1,600
38.11
If Digipro Inc. uses the average cost method to account for inventory, the ending inventory of VTC cameras at July 31 is reported as
a.
$153,400.
b.
$156,912.
c.
$158,736.
d.
$159,464.
44. An asset is being constructed for an enterprise’s own use. The asset has been financed with a specific new borrowing. The interest cost incurred during the construction period as a result of expenditures for the asset is
a.
a part of the historical cost of acquiring the asset to be written off over the estimated useful life of the asset.
b.
interest expense in the construction period.
c.
recorded as a deferred charge and amortized over the term of the borrowing.
d.
a part of the historical cost of acquiring the asset to be written off over the term of the borrowing used to finance the construction of the asset.
45. Which of the following research and development related costs should be capitalized and amortized over current and future periods?
a.
Labor and material costs incurred in building a prototype model.
b.
Cost of testing equipment that will also be used in another separate research and development project scheduled to begin next year.
c.
Administrative salaries allocated to research and development.
d.
Research findings purchased from another company to aid a particular research project currently in process.
46. An improvement made to a machine increased its fair market value and its production capacity by 25 percent without extending the machine’s useful life. The cost of the improvement should be
a.
expensed.
b.
debited to Accumulated Depreciation.
c.
capitalized in the machine account.
d.
allocated between Accumulated Depreciation and the machine account.
47. On February 12, Oceans Company purchased a tract of land as a factory site for $190,000. An existing building on the property was razed and construction was begun on a new factory building in March of the same year. Additional data are available as follows:
Cost of razing old building ……………………..
$ 55,000
Title insurance and legal fees to purchase land ……
7,500
Architect’s fees ……………………………….
52,500
New building construction cost …………………..
975,000
The recorded cost of the completed factory building should be
a.
$1,165,000
b.
$1,220,000
c.
$1,027,500
d.
$1,082,500
48. The Morris Corporation acquired land, buildings, and equipment from a bankrupt company at a lump-sum price of $180,000. At the time of acquisition, Morris paid $12,000 to have the assets appraised. The appraisal disclosed the following values:
Land …………………………………………..
$120,000
Buildings ………………………………………
80,000
Equipment ………………………………………
40,000
What cost should be assigned to the land, buildings, and equipment, respectively?
a.
$64,000, $64,000, and $64,000
b.
$90,000, $60,000, and $30,000
c.
$96,000, $64,000, and $32,000
d.
$120,000, $80,000, and $40,000
49. Stanley Company purchased a machine that was installed and placed in service on January 2, 2013, at a total cost of $680,000. Residual value was estimated at $70,000. The machine is being depreciated over ten years by the double-declining-balance method. For the year 2014, Stanley should record depreciation expense of
a.
$108,800
b.
$97,600
c.
$68,000
d.
$61,000
50. The Chisholm Company purchased a machine on November 1, 2005, for $148,000. At the time of acquisition, the machine was estimated to have a useful life of ten years and an estimated salvage value of $4,000. Chisholm has recorded monthly depreciation using the straight-line method. On July 1, 2014, the machine was sold for $13,000. What should be the loss recognized from the sale of the machine?
a.
$4,000
b.
$5,000
c.
$10,200
d.
$13,000
Solution: Computation of the following
Dep Expenses = (148000-4000)/10 = 14400 per year /12 = 1200 Per month
Total Dep
2005 2 Months 2400
2006 12 Months 14400
2007 12 Months 14400
2008 12 Months 14400
2009 12 Months 14400
2010 12 Months 14400
2011 12 Months 14400
2012 12 Months 14400
2013 12 Months 14400
2014 6 Months 7200
Total depreciation amt 124,800
Loss on sale = 148000-124800 = 23200 july 1 2014 asset value
Loss on sale = asset value on july 1 2014 – Sold price
Loss on sale = 23200-13000 = 10200