4. Using the same information above, what is the firm's profit margin for the year

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1 Accounting 211 Practice Questions: Chapters Assume a building was purchased for $50,000 and used for five of its estimated 10-year life. It has a residual value of $5,000 and the straight-line method is used. The book value of the building after the five years' usage would be reported on the balance sheet at a. $10,000 b. $25,000 c. $27,500 d. $30, A clear distinction between return on assets and return on equity is that return on assets a. must always be a smaller percentage than is return on equity b. measures effectiveness of financing decisions while return on equity measures financial leverage c. is more important to investors than is return on equity d. is a measure of management's investment decisions that excludes any consideration of how the investments were financed 3. The following information is available for a company. Total Assets $340 Accounts payable 30 Net income 32 Interest expense 10 Net sales revenue 737 Income tax rate 60% The firm's return on assets for the year was approximately a. 4.3% b. 6.4% c. 9.4% d. 7.5% 4. Using the same information above, what is the firm's profit margin for the year a. 2.9% b. 4.3% c. 7.5% d. 9.4% The following information is for the next 7 questions The Digit Company sells widgets. Inventory information for a recent week is below. Units Unit Cost Total Cost Beginning inventory 400 $4 $1,600 Purchase ,500 Purchase ,600 five hundred units were sold during the week 5. What is the COGS for the week, if the LIFO method is used? 6. What is the COGS for the week, if the FIFO method is used?

2 7. What is the cost per unit of inventory, if the Weighted -average method is used? a. $5.133 b. $5.677 c. $6 d. $7 8. What is the COGS for the week, if the Weighted- average method is used? a. $2,567 c. $5, What is the End. Inventory cost, if the LIFO method is used? 10. What is the End. Inventory cost, if the FIFO method is used? 11. What is the End. Inventory cost, if the Weighted -average method is used? a. $2,567 c. $5, The Rainy Corp. is preparing its 1998 income statements. In doing so, cost of goods sold and salary expense are both deducted in computing which of the following? Operating Income Gross Profit a. No No b. No Yes c. Yes Yes d. Yes No 13.Which of the following statements is NOT true? a. profit margin is the ratio of net income to operating revenues b. profit margin is a measure of a company's ability to generate profit from its sales c. profit margin is a measure of effectiveness d. profit margin is a component of return on assets 14. Golf Company reported accounts receivable of $20,000 at the beginning of It reported a balance of $14,000 at the end of From this information, it is possible to determine that during 1998 a. credit sales were higher than cash collected from customers b. credit sales were less than cash collected from customers c. the firm was doing a poor job of collecting its receivables d. credit sales decreased from the prior year

3 15.An advocate of the LIFO inventory method would maintain that a. current costs are matched with current selling prices b. the lowest possible costs are always shown in the ending inventory c. the oldest inventory is relieved of its cost before the newer purchases d. the highest possible costs are always shown in the ending inventory 16. Sonny Co. recorded sales (all credit) of $450,000 during the current year. The ending balance in accounts receivable was $80,000. On the basis of past experience, Sonny estimated uncollectible accounts as 3% of ending A/R. The amount of bad debts expense and net A/R are: Bad Debts expense Net A/R a. $ 2,400 $80,000 b. $13,500 $80,000 c. $ 2,400 $77,600 d. $13,500 $66, A present responsibility of a firm to transfer resources to some other entity at some future time is: a. asset b. liability c. owners equity d. revenues 18. A debt that is secured by specific assets is: a. Secured bond b. Unsecured bond c. Serial bond d. Callable bond 19. Specific assets that are used to secure bonds or notes payable are called: a) long-term assets b) liquid assets c) collateral d) current assets 20. Bonds that can be called by a issuer at a stated call price at specific dates and prices are called: a) Secured bond b) Unsecured bond c) Serial bond d) Callable bond 21. Potential litigation cost is an example of: a) commitment b) contingent liability c) asset d) expense 22. Leased asset is an example of: a) commitment b) contingent liability c) asset d) expense

4 23. Which of the following equations is true regarding number of shares? a) Authorised = unissued + issued and outstanding b) Treasury stock = authorised issued and outstanding c) Issued = issued and outstanding + treasury stock d) Unissued = treasury stock + authorized 24. Which of the following is true regarding claims on a firm s profit? (e.g., Stock > bonds implies that stock has higher claim than bonds do) a) Common stock > Preferred stock > Bonds b) Common stock > Bonds > Preferred stock c) Bonds > Preferred stock > Common stock d) Preferred stock > Common stock > Bonds 25. ABC Corporation issues 10,000 shares of common stocks with par value at $10. The current market price in the stock market is at $40. What would be the resulting paid-in capital? a) $100,000 b) $400,000 c) $300,000 d) $500, The right to maintain the same percentage of ownership when new shares are issued is known as: a) The right to vote b) The right to participate in profit c) The right to participate in asset liquidation d) Pre-emptive right 27. Which of the following statements is not true about financial leverage? a) Financial leverage = Total assets / shareholders equity b) Financial leverage is a use of debt financing to increase ROE c) Financial leverage works well for shareholders when a firm is profitable d) ROA = ROE * Financial Leverage 28. Which of the following is most preferred when a firm has high default risk? a) Low current ratio b) Low working capital c) High profitability d) Efficient cash flow management 29. The expenditures to repair or maintain PP&E assets that enhance their values are considered as: a) amortization expense b) depreciation expense c) operating expenditure d) capital expenditure 30. Book value of a plant asset is : a) Historical cost - Depreciation expense b) Historical cost - Accumulated depreciation c) Selling price - Historical cost d) Selling price - Accumulated depreciation

5 Use the following information to answer the next 3 questions ROE = 12%, ROA = 6%, Sales = 50,000, and total assets = $100, Shareholders equity would be: a) 40,000 b) 50,000 c) 100,000 d) 200, Net income would be: a) 6,000 b) 7,000 c) 8,000 d) 9, Debt to equity ratio would (approximately) be: a) 0.5 b) 1.0 c) 1.5 d) Gain or loss on sale of PP&E is : a) Historical cost - Book value b) Historical cost - Accumulated depreciation c) Selling price - Historical cost d) Selling price Book value Use the following information to answer the next 5 questions On Dec 31, 1997, a truck had its accumulated depreciation (over three years) of $6,000. The firm originally expected to use the truck for 5 years and estimated to sell it for $3,000 at the end of the useful life (Dec 31, 1999). However, the firm decided to sell it on Jan 1, 1998 at $9,000. The firm prepared financial statements on an annual basis ending Dec What was the depreciation expense-truck for year 1996, using the straight-line method? b) $4,000 c) $2,000 d) $1, What was the accumulated depreciation as of Dec 31, 1996, using the straight-line method? b) $4,000 c) $2,000 d) $1, What was the (historical) cost of the truck? b) $10,000 c) $11,000 d) $13,000

6 38. What was the book value of the truck at the time that it was sold? b) $7,000 c) $8,000 d) $9, What was the gain or loss on sale of the truck? a) Gain of $2,000 b) Loss of $2,000 c) Gain of $3,000 d) Loss of $3,000 Use the following information to answer the next 2 questions Kratai Company purchased a $10,000 machine on Jan 1, The firm expected to use it to produce boxes for five years. The estimated residual value and total boxes produced were $1,000 and 9,000. The amounts of actual boxes produced are as follows: year ,700 boxes, year , year , What was the depreciation expense for year 1997, using the units of production method? a) $1,700 b) $1,800 c) $1,900 d) $3, What was the accumulated depreciation as of Dec 31, 1998, using the units of production method? a) $1,700 b) $1,800 c) $3,600 d) $5, Which of the following is not true about ROA (return on assets)? a) ROA is a measure of a firm s ability to use its assets to generate profits. b) ROA = ROE / financial leverage c) ROA can be negative d) Higher ROE does not imply higher ROA 43. Which of the following ratios is a summary measure of the success of a company s financing, investing, and operating activities? a) ROA b) ROE c) Gross margin d) Financial leverage 44. If prices are rising steadily during an accounting period, then a) Gross margin will be higher with LIFO than with FIFO. b) LIFO will ensure that the ending inventory is stated at or near current market values on the balance sheet c) Costs of goods sold will be closet to current costs with FIFO d) LIFO will minimize income taxes

7 Use the following information to answer the next 4 questions: Vanessa borrowed $10,000 from a bank at the beginning of year The annual interest rate is 12%. 45. If the bank collects interest at the end of a year and Vanessa pays off the loan at the end of 2002, what is the interest she has paid for the loan over these three years? a) $3,600. b) $4,049 c) $5,832 d) $5, Suppose the loan is due at the end of If Vanessa wants to pay back the loan and interest by an instalment under which she would pay an equal amount each month, what is the instalment? a) $833 b) $883 c) $933 d) $ Suppose the loan is due at the end of If Vanessa pays half of the loan at the end of 2000, and pays the rest of the loan at the end of 2001, how much interest she can save compared with the situation that she pays back the entire loan at the end of 2001? a) $600 b) $644 c) $700 d) $ What amount would you accumulate if you invest $5,000 at the end of each year for 15 years if the annual interest rate is 6%? a) $116,380 b) $142,500 c) $143,450 d) $134, If you receive annual salary $60,000 from Company A for 20 years, what is the value of this job to you now if the annual interest rate is 6%? a) $116,380 b) $142,500 c) $143,450 d) $134, Which of the following an investor has to consider when he analyses capital structure of a firm? a) total assets b) total revenues c) total working capital d) total long-term liabilities