The following multiple choice questions are worth 2 points apiece

1. The payment of an account payable would:
a. Increase owner’s equity
b. Increase net assets
c. Have no effect on net assets
d. Have no effect on total assets
e. Increase liabilities

2. The balance in the capital account after all closing entries have been posted is:
a. Equal to net income or loss for the period
b. The same as the balance of the account on the work sheet
c. The balance that will appear on the balance sheet
d. Always more than the balance of the account on the work sheet
e. Equals the difference between total debt and cash

3. The _____________ provides a financial summary of the firm’s operating results during a specified period.
a. Balance sheet
b. Income statement
c. Statement of cash flows
d. Statement of retained earnings
e. Footnotes to the financial statements

4. Which of the following represents an income-earning activity?
a. A firm sells goods on credit
b. A client makes a payment on account
c. A firm records the sale of an asset at book value
d. A firm deposits the cash proceeds of a new loan into the bank
e. All of the above

5. The accounting equation is defined as:
a. Assets + Liabilities = Owner’s Equity
b. Assets + Owner’s Equity = Liabilities
c. Assets = Liabilities + Owner’s Equity
d. Assets = Liabilities – Owner’s Equity
e. None of the above

6. The Statement of Cash flows identifies three main activities. They are:
a. Operating, Cash and Investing
b. Income, Operating and Financing
c. Cash, Investing and Financing
d. Income, Operating, Investing
e. Operating, Investing and Financing
7. Which of the following does not measure a company’s profitability?
a. Gross Margin
b. Inventory turn
c. Return on equity
d. Net margin
e. Return on assets

8. Which of the following statements is false?
a. The current ratio measures the ability to pay current liabilities with current assets
b. A company generally prefers to have a high debt ratio
c. The debt ratio measures a business’s ability to pay long-term liabilities with long-term assets
d. A company generally prefers to have high profit margins
e. A company generally prefers to have a high current ratio

9. A ‘fixed cost’ is a cost that _____________ at all output levels over a relevant range
a. Is always computed as a percentage of sales revenues
b. Varies with differing output levels
c. Is computed based upon profit levels
d. Is always a ‘period’ costs
e. Remains constant and the same value

10. In computing the Operating Leverage, of a product (or products), which of the following items is not used?
a. Variable costs
b. Fixed costs
c. Number of units produced
d. Total revenue
e. ‘Period’ costs

11. Which of the following is not a component of working capital?
a. Cash
b. Accounts receivable
c. Inventory
d. Equipment
e. Marketable securities

12. Which of the following is not a goal of working capital management?
a. Manage risk within the components of working capital
b. Maximize the level of cash
c. Optimize the combination of margins and turn
d. Provide capacity for sales growth
e. Support product sales

13. Cash management can be enhanced by all but the following:
a. Timely receipt of funds
b. Large cushion of cash balances
c. Concentration and investment of excess funds
d. Establishing credit and other contingency reserves
e. Managed disbursement of funds

14. All of the following are functions of security exchanges except:
a. Allocating scarce capital
b. Aiding in new financing
c. Creating continuous markets
d. Holding demand deposits
e. Trading shares of stock

15. Short-term securities are traded in the _______________ markets.
a. Capital
b. Operations
c. Money
d. Both a and c
e. All of the above

16. Securities regulators such as the SEC serve the public by:
a. Telling the public which are good and bad investments
b. Requiring transparency, timeliness and adherence to GAAP of publicly traded firms
c. Requiring all firms that have equity investors to adhere to the same rules for reporting
d. All of the above
e. None of the above

17. Closing the accounts consists of journalizing and posting entries which will zero out all temporary accounts.
a. True
b. False

18. Financial ratios are often inter-related such that there may be trade-offs between them
a. True
b. False

19. A financial intermediary is an organization that raises money from investors and provides financing for individual, companies and other organizations.
a. True
b. False

20. Every time that stock is sold on a stock market, the company whose share is bought receives the proceeds.
a. True
b. False

Questions 21 and 22 are worth 20 points apiece

21. Cash and Accrual Basis Accounting

In the course of your examination of the books and records of Karen Company, you find the following data:

Salaries earned by employees in 2009 $61,000
Salaries paid in 2009 53,000
Total sales revenue in 2009 927,000
Cash collected from sales in 2009 952,000
Utilities expense incurred in 2009 7,500
Utility bills paid in 2009 6,300
Cost of goods sold in 2009 602,000
Cash paid on purchases in 2009 613,000
Inventory at December 31, 2009 416,000
Tax assessment for 2009 6,210
Taxes paid in 2009 5,930
Rent Expense for 2009 36,000
Rent paid in 2009 41,000

1. Compute Karen’s net income for 2009 using cash-basis accounting

2. Compute Karen’s net income for 2009 using accrual-basis accounting

3. Why is accrual-basis accounting normally used?

22. Financial Ratios

The following information for SuperStar Company is provided:

Current Assets $215,000
Long-term assets 780,000
Current Liabilities 120,000
Long-term liabilities 330,000
Owners’ Equity 545,000
Sales for year 1,875,000
Net income for year 178,000
Average market price per share 90.00
Average number of shares outstanding 50,000

1. Compute the current ratio, debt ratio, return on sales, return on equity, asset turnover, and price-earnings ratio.


2. What do these ratios show for SuperStar Company?
Questions 23 and 24 are worth 10 points apiece

23. Recognizing Revenue

The Ho Man Tin Tennis Club sells lifetime memberships for $20,000 each. A lifetime membership entitles a person to unlimited access to the club’s tennis courts, weight room, exercise equipment and swimming pool. Once a lifetime membership fee is paid, it is not refundable for any reason.

Judy Chan and her partners are owners of Ho Man Tin Tennis Club. In order to overcome a cash shortage, they intend to seek investment funds from new partners. Judy and her partners are meeting with their accountant to provide information for preparation of financial statements. They are considering when they should recognize revenue from the sale of lifetime memberships.


Answer the following questions:
1. When should the lifetime membership fees be recognized as revenue? Remember they are nonrefundable.
2. What incentives would Judy and her partners have for recognizing the entire amount of the lifetime membership fee as revenue at the time it is collected? Since the entire amount will ultimately be recognized anyway, what difference does the timing make?
24. Product Costing

The total manufacturing cost data on DuPont’s Teflon product line are provided below:

Direct materials $60.00 per gallon
Direct labor $1.80 per gallon
Manufacturing overhead:
Variable $3.20 per gallon
Fixed $3,200,000 per month
General corporate sales and admin costs $6,400,000 per month

Assuming that DuPont expects to produce 100,000 gallons in the next month, what appears to be the total manufacturing cost on average to produce one gallon of Teflon?