# Core Concepts of Accounting Numbers and People

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## Week- 1

#### 1 – Basic accounting procedures for current assets

1.
Question 1
The following information is available for the DFG Company for the year 2014:

• The end-of-year balance sheet shows the total assets of \$750,000 and the total liabilities of \$360,000

• The beginning-of-year balance sheet shows the total liabilities of \$240,000

• The income statement for the year shows the total revenues of \$800,000 and the total expenses (except for taxes) of \$600,000; the applicable tax rate is 40%

• The company normally pays an annual dividend equal to 25% of net income

What is the beginning-of-year balance of total assets?

1 point

• \$540,000
• \$620,000
• \$580,000
• \$500,000

2.
Question 2
Suppose in terms of Question 1 the DFG Company canceled the dividend for 2014. The amount of owner’s equity in the beginning of the year then would be:

1 point

• \$280,000
• \$270,000
• \$250,000
• \$260,000

3.
Question 3
TUV Company sells plumbing appliances on credit. It uses a 5% percentage of accounts receivable at the end of the year to determine the desired allowance balance. In the beginning of 2013, the trial balance showed the following account balances:

Accounts Receivable – \$30,000

Allowance for Doubtful Accounts – \$2,200

During 2013, the summary of the activities (regarding uncollectible issues) is as follows: • Credit sales amounted to \$250,000; collections from customers – \$210,000 • The account of a client company in the amount of \$2,400 was written off What is the amount of bad debt expense charged for the year?

1 point

• \$3,580
• \$3,180
• \$2,400
• \$3,700

4.
Question 4
Now suppose that in terms of Question 3 TUV uses a direct write-off method. What would be the amount of bad debt expense charged for the year?

1 point

• \$3,580
• \$2,400
• \$3,700
• \$3,180

5.
Question 5
The finished goods inventory balances for the BNM Company for 2015 and selected data from the income statement for the year is as follows:

• Finished goods inventory, beginning of year – \$19,000; end of year – \$18,000

• Net sales amounted to \$93,600

• Cost of goods manufactured is \$81,100

What is the percentage gross margin on sales for 2015?

1 point

• 10.68%
• 13.35%
• 12.29%
• 11.75%

6.
Question 6
For the company described in Question 5, the data file for 2016 inventories fell. But the company accountants were able to retrieve the file for revenues and costs for the year:

Cost of goods manufactured is \$91,500
Cost of goods sold is \$105,700
What would be the ending inventory for 2016?

1 point

• \$3,800
• \$5,300
• \$3,000
• \$4,500

7.
Question 7
In terms of Questions 5–6, the net sales amount for 2016 is also missing. BNM believes that its relative gross margin has not changed. What is the estimate of 2016 net sales?

1 point

• \$120,300
• \$120,500
• \$119,500
• \$120,000

8.
Question 8
The following schedule shows the flow of units of inventory of Company A in 2014 (see Handout 1.7):

# of Units Cost per Unit Total Cost
Beginning inventory 80 15 \$1,200
2/1 Purchase I 40 17 680
4/15 Purchase II 30 20 600
7/1 Purchase III 70 22 1,540
10/1 Purchase IV 40 25 1,000
12/1 Purchase V 50 27 1,350
Units sold 210
Units in ending inventory 100
Under the FIFO assumption in a periodic system, what is the cost of goods sold?

1 point

• \$3,670
• \$4,830
• \$3,800
• \$4,380

9.
Question 9
In terms of Question 8, under the weighted-average cost method, what is the cost of the ending inventory?

1 point

• \$1,890
• \$1,540
• \$2,570
• \$2,055

10.
Question 10
In terms of Question 8, let’s assume that the company uses LIFO. Suppose that the market value of the goods has dropped to \$16 per unit. Based on the LCM method, what would be the cost of the ending inventory?

1 point

• \$1,540
• Can’t say
• \$2,570
• \$1,600

## Week- 2

#### 2 – Depreciation, amortization, and deferred items

1.
Question 1
ABC Company purchased a computer on January 1, 2013, for \$4,000. It is depreciated over 5 years using a straight-line method, with the salvage value of \$500. On January 1, 2015, the remaining life of the computer is revised to 1 year with the zero salvage value due to the rapid technology development. What is the depreciation expense for 2015?

1 point

\$1,000

\$2,000

\$2,500

None of the above

2.
Question 2
A machine costs \$100,000 and has an estimated useful life of 5 years and a residual value of \$10,000. If it is purchased on July 1, 2013, and the applicable tax rate is 35%, the 2015 depreciation tax shield for the straight-line depreciation is:

1 point

\$6,300

\$9,450

\$8,400

\$7,350

3.
Question 3
In terms of Question 2, what would the amount of depreciation for 2015 be, if the sum of years’ digits method is used?

1 point

\$27,000

\$18,000

\$24,000

\$21,000

4.
Question 4
SDF Company bought the stock portfolio on January 1, 2014 to hold for 1 year. By the end of the year, the stock prices have changed:

Stock Number of Shares Cost (1/1/2014) Market Price (12/31/2014)
ABC 200 \$15,000 \$80
DEF 500 \$27,500 \$50
GHI 250 \$25,000 \$105
SDF holds the portfolio. During the year, the company would recognize:

1 point

A realized loss of \$250 in the income statement

A realized loss of \$250 in owner’ equity section of the balance sheet

An unrealized loss of \$250 in the income statement

An unrealized loss of \$250 in owner’ equity section of the balance sheet

5.
Question 5
Suppose in terms of Question 4, when buying the stock portfolio, SDF decided to hold it for 10 years. During 2014, the company would recognize:

1 point

An unrealized loss of \$250 in the income statement

An unrealized loss of \$250 in owner’ equity portion of the balance sheet

A realized loss of \$250 in the income statement

A realized loss of \$250 in owner’ equity portion of the balance sheet

6.
Question 6
On July 1, 2010, Cynthia Corporation issued bonds with the face value of \$400,000 carrying a 6% coupon. The bonds were issued at an 8% yield to maturity. Coupon payment dates are June 30 and December 31, the maturity date – June 30, 2020. The bond discount amortization for 6 months ending June 30, 2015 under the effective interest method will be:

1 point

\$2,498

\$2,810

\$2,702

\$2,598

7.
Question 7
In terms of Question 6, the total balance of the Discount on Bonds account as of December 31, 2013 will be:

1 point

\$19,027

\$14,419

\$35,335

\$39,943

8.
Question 8
In terms of Question 6 suppose that the straight-line amortization of
the bond discount is used. Then the interest expense for 6 months ending June
30, 2017 will amount to:

1 point

\$12,000

\$14,718

\$13,826

\$10,641

9.
Question 9
The market price of the stock of WP Corporation is \$66. If WP declares a 100% stock dividend, the market price will probably adjust to:

1 point

\$50

\$66

\$33

\$132

10.
Question 10
The equipment costs \$48,000, has no salvage value, and is depreciated over 4 years. Straight-line depreciation is used for income reporting, and the sum-of-years’ digits depreciation method – for tax purposes. The tax rate is 40%. The deferred income tax account at the end of year 2 will show:

1 point

A debit balance of \$2,880

A debit balance of \$3,840

A credit balance of \$2,880

A credit balance of \$3,840

## Week- 3

#### 3 – SCF inputs and ROI ratios

1.
Question 1
Presented below is selected data taken from the records of UVW Company:

December 31, 2012 December 31, 2013
Plant Assets \$189,000 \$360,000
–– Accumulated Depreciation (36,000) (24,000)
Dividends Payable 10,000 16,000
Common Stock 120,000 156,000
Retained Earnings 22,000 42,000
Some additional information for the period (year 2013) includes:

• Plant assets that cost \$50,000 and were 70% depreciated were sold during the year for \$12,000

• Dividends declared during the year amounted to \$8,000 • Land was purchased by UVW Company in exchange for common stock

Based on the data provided, the depreciation charged for the year 2013 equals:

1 point

\$12,000

\$23,000

\$24,000

None of the above

2.
Question 2
In terms of Question 1, the equipment was sold during 2013 at:

1 point

A gain of \$12,000

A loss of \$3,000

A loss of \$38,000

A gain of \$3,000

3.
Question 3
In terms of Question 1, the net income for 2013 amounted to:

1 point

\$28,000

\$22,000

\$26,000

\$20,000

4.
Question 4
In terms of Question 1, the cost of land acquired in exchange for common stock is:

1 point

\$25,000

\$36,000

\$61,000

None of the above

5.
Question 5
In terms of Question 1, the cash purchases of PPE in 2013 amounted to:

1 point

\$221,000

\$160,000

\$171,000

\$130,000

6.
Question 6
The following selected data for WTY Company has been extracted from the company’s reports for 2012 and 2013:

2012 2013
Net income \$336,000 \$558,000
Common dividends \$160,000 \$288,000
Market price/share \$42 \$56
Average number of shares outstanding 80,000 120,000
Assume there is no preferred stock. Then the P/E ratio in 2013 is approximately:

1 point

10

11

12

9

7.
Question 7
The TYU Company’s return on assets (ROA) is 12%. The company has no debt (even short-term). Its total assets are \$2 million and the applicable tax rate is 30%. The company is planning to take a bank loan. The interest charged by the bank is related to the company’s leverage as per following table:

Leverage (Debt/Equity) Interest Rate
(1) 0.25 7%
(2) 0.50 9%
(3) 1.00 11%
(4) 1.50 13%
(5) 2.00 16%
The company’s current ROE is:

1 point

13.8%

12.0%

13.6%

14.9%

8.
Question 8
In terms of Question 7, the ROE at the leverage ratio of 1.00 is:

1 point

14.9%

13.8%

16.3%

12.0%

9.
Question 9
In terms of Question 7, what is the optimal leverage, i.e., the one that maximizes ROE (of all listed)?

1 point

2.00

1.00

0.50

1.50

10.
Question 10
In terms of Question 7, assume that the company has trade payables of \$300,000 and intends to maintain this level. Recall that trade receivables carry no interest and are not included in the leverage calculations. What would be ROE without the bank borrowing?

1 point

13.6%

12.0%

14.1%

12.8%

## Week- 4

1.
Question 1
The performance forecasts based on managerial accounting data compared to those based on financial accounting data are expected to be:

1 point

Of the same quality

Less reliable

More reliable

Depends on the objective

2.
Question 2
While making decisions based on managerial accounting data, the manager should:

1 point

Keep collecting information until it’s complete and comprehensive

Make the decision based on intuition

Postpone the decision until all important information arrives

None of the above

3.
Question 3
Last November, Healthy Sandwiches made 2,500 sandwiches and served 4,500 cups of coffee. It paid \$675 for electricity. Last December it made 3,000 sandwiches and served 5,400 cups of coffee. The December electricity bill showed \$700. What is the estimated monthly fixed cost of electricity?

1 point

Can’t say

\$575

\$600

\$550

4.
Question 4
XYZ Corp. sells three products – A, B, and C with the following forecasted data:

Product A Product B Product C
Total sales \$15,000 \$28,000 \$17,000
Total variable costs \$7,000 \$16,000 \$13,000
The contribution margin ratio at XYZ is equal to:

1 point

30%

20%

50%

40%

5.
Question 5
Suppose we apply a CVP analysis. If the selling price per unit doubles while the variable cost per unit stays the same, the new break-even point (in units produced) will be:

1 point

Equal to half of the initial break-even point

Less than half of the initial break-even point

More than half of the initial break-even point

6.
Question 6
Suppose we apply a CVP analysis. If the variable cost per unit doubles while the selling price per unit stays the same, the new break-even point (in units produced) will be:

1 point

Equal to twice the initial break-even point

Less than twice the initial break-even point

More than twice the initial break-even point

7.
Question 7
When a company refines its cost allocation system, the following remain unchanged:

1 point

Total costs

Total direct costs

Total indirect costs

All of the above

8.
Question 8
UVW Company manufactures a single product and has the following cost structure:

Variable cost per unit:
Direct materials \$4
Direct labor \$5
Variable selling and G&A expenses \$3
Fixed annual costs:
Fixed selling and G&A expenses \$80,000
The company makes 40,000 units a year. The total manufacturing cost per unit is:

1 point

\$14

\$16

\$21

\$19

9.
Question 9
A company has three production departments – A, B, and C. Each department allocates overhead costs to products based on direct labor dollars. The production departments had the following expected data:

Department Expected Overhead Direct Labor (USD)
A \$200,000 \$20,000
B \$120,000 \$10,000
C \$600,000 \$40,000
A product P requires \$3,000 of direct labor in Department A, \$2,000 of direct labor in Department B, and \$1,000 of direct labor in Department C. How much overhead is allocated to the product?

1 point

\$75,000

\$69,000

\$60,000

\$66,000

10.
Question 10
In terms of Question 9, suppose that product Q requires 50% more direct labor from Department A, and twice as much as P from department C. Department B does not participate in the production of Q. How much overhead is allocated to the product Q?

1 point

\$78,000

\$75,000

\$84,000

\$69,000

## Week- 5

#### 5 – Costs, activities, and relevance

1.
Question 1
NMK Company wants to apply the ABC approach to its customers. The following activities and costs are traced using cost drivers:

Activity Expected Cost Cost Driver Expected Use of Cost Driver
Customer service \$150,000 Number of calls 15,000
Accounting \$180,000 Number of customers 3,000
What is the indirect cost of a customer who buys \$40,000 of NMK’s products and requires 30 calls for customer service?

1 point

\$2,280

\$2,420

\$2,230

\$2,360

2.
Question 2
In terms of Question 1, what is the major indirect cost component for the described customer?

1 point

Can’t say

Customer service

Accounting

3.
Question 3
In terms of Question 1, suppose that NMK has been able to reduce its unit cost of a call by 15% and the advertising costs by 10%. By how much would the indirect cost of the mentioned customer decrease?

1 point

10.8%

10.0%

10.2%

10.4%

4.
Question 4
Which of the following costs are not relevant in a make-or-buy decision:

1 point

Variable costs of producing the item

Costs that are avoidable by buying rather than making

Depreciation of the equipment

The opportunity cost of freed space

5.
Question 5
TUV Company makes many products including Product P that has a contribution margin of \$35,000. Fixed costs total \$100,000. If Product P is dropped, \$80,000 of fixed costs will stay unchanged. Dropping Product P will lead to the following change in TUV’s operating income:

1 point

An increase by \$15,000

A decrease by \$35,000

A decrease by \$15,000

An increase by \$20,000

6.
Question 6
DFG Company each year manufactures 3,000 components that are used in one of its products. The unit cost of manufacturing this component is:

Variable cost \$8.50
Fixed cost \$6.00
Total cost \$14.50
An outside supplier is ready to ship the component of the proper quality at \$13 per unit and to meet the desired schedule. If the offer is taken, three quarters of the fixed costs incurred in manufacturing the component can be saved. The operating income from purchasing the component from the outside supplier will:

1 point

Not change

Decrease by \$13,500

Decrease by \$9,000

Increase by \$4,500

7.
Question 7
In terms of Question 6, if only two thirds of fixed costs could be avoided, the operating income would:

1 point

Decrease by \$1,500

Decrease by \$7,500

Increase by \$1,500

Not change

8.
Question 8
Product P has a contribution margin of \$9 per unit, a contribution margin ratio of 40%, and requires 3 machine-hours to produce. Product Q has a contribution margin of \$15 per unit, a contribution margin ratio of 30%, and requires 5 machine-hours to produce. If the constraint is machine-hours, the company should manufacture:

1 point

The company is indifferent between products P and Q

Product Q since it has the highest contribution margin per unit

Product P since it has the highest contribution margin ratio

Product P since it requires fewer machine-hours than does Product Q

9.
Question 9
GHJ Products, Inc. has received a special order for 500 units of its best-selling gadget. The customer offered \$150 apiece. The unit cost of the gadget, at its normal sales level of 50,000 a year is as follows:

Variable production costs \$98.50
Fixed production cost \$33.50
Variable selling and marketing costs \$10.50
Fixed selling and administration cost \$23.50
To produce the special order, the company will have to readjust part of its equipment at a total cost of \$25,500 without any other increase in fixed costs. The special order would involve much lower variable selling and marketing costs of just \$0.50 per unit. The order will not influence other sales of GHJ. The effect of accepting the special order on the company’s operating income will be:

1 point

\$16,750 decrease

No change

\$25,500 increase

\$33,500 decrease

10.
Question 10
The income statement for the department of business development at LLQ Partners. Consulting is as follows:

Sales \$500,000
––– Less variable expenses \$100,000
––– Contribution margin \$400,000
––– Less fixed expenses
––––––– Salaries \$250,000
––––––– Professional insurance \$10,000
––––––– Rent \$70,000
––– Net operating income (loss) \$ (30,000)
Due to its poor results, partners are thinking about closing down the department. In this case, all specialists can be fired, and the secretary with the salary of \$30,000 a year will be transferred as an assistant to the taxation department. The company will also save half of the rent. Should the department be closed down?

1 point

Can’t say

Yes

It makes no difference

No

## Final Test

1- Direct labor costs last year were estimated at \$30 per labor hour of direct labor.

What is the total manufacturing cost of Product A under the old costing system?
2 points

\$648

\$1,896

\$2,544

None of the above

2.
Question 2
In terms of Question 1, the total manufacturing cost of Product A under the new costing system (compared to the old system) will:

2 points

Decrease by 6.0%

Not change

Increase by 6.4%

Decrease by 23.5%

3.
Question 3
In terms of Question 1, the total direct cost for making Product B under the new costing system is:

2 points

\$1,379

\$1,746

\$129

\$1,250

4.
Question 4
In terms of Question 1, the total direct cost of making Product B under the new costing system (compared to the old system) will:

2 points

Decrease by 1%

Increase by 10.3%

Not change

Increase by 32.0%

5.
Question 5
In terms of Question 1, what is the total indirect cost of making Product C under the new costing system?

2 points

\$520

\$549

\$925

\$1,445

6.
Question 6
In terms of Question 1, the change in the total indirect cost for Product C under the new costing system (compared to the old system) will be:

2 points

A decrease by 5.3%

An increase by 163.2%

An increase by 68.5%

An increase by 64.1%

7.
Question 7
In terms of Question 1, what is the product whose indirect costs grew most significantly under the new system (compared to the old system)?

2 points

Product A

Product B

Product C

8.
Question 8
In terms of Question 1, which of the following requirements/costs contributed mostly to the percentage change in the total manufacturing cost for Product C under the new system (compared to the old system)?

2 points

Direct materials

Manufacturing time

Direct labor

All of the above

9.
Question 9
J, J, J & Associates (later JJJ) decided to fine-tune the costing system using ABC. The old system included just one direct cost pool (time of professionals) and one pool of indirect costs (support of consulting). The total budgeted cost of support of consulting for the next year amounted to \$15.6 million. A thorough project analysis and the IT technologies allowed allocating formerly indirect costs to specific projects thus treating many more costs as direct.

The refined costing system includes five direct cost pools:
• Billable time of partners – for each of the 20 partners the annual compensation is \$270,000, and each partner works for 1,800 billable hours

• Time of specialists – for each of the 150 specialists the annual compensation is \$80,000, and each specialist works for 1,600 hours

• Time of IT specialists – for each of the 24 IT specialists the annual compensation is \$96,000, and each IT specialist works for 2,000 hours

• Telephone/Internet/Mailing – costs are determined based on providers’ bills

• Business expenses and travel and – costs are determined based on providers’ bills

The refined costing system includes three indirect cost pools and the following cost allocation bases:
• General support of consulting – annual budgeted costs are \$8,832,000. Cost allocation base – consulting professional-hours

• Professional insurance – annual budgeted costs are \$2,610,000. Cost allocation base – the cost of professionals’ time (in USD)

• Assistants’ services – annual budgeted costs are \$792,000. Cost allocation base – partner-hours

The budgeted cost for a partner-hour is:
1 point

\$125

\$175

\$100

\$150

10.
Question 10
In terms of Question 9, the budgeted cost for a specialist-hour is:

1 point

\$55

\$60

\$50

\$45

11.
Question 11
In terms of Question 9, the budgeted cost for an IT specialist-hour is:

1 point

\$45

\$55

\$48

\$40

12.
Question 12
In terms of Question 9, the budgeted cost allocation rate (CAR) for the general support of consulting is:

2 points

\$32/hour

\$24/hour

\$20/hour

\$28/hour

13.
Question 13
In terms of Question 9, the budgeted cost allocation rate (CAR) for the professional insurance as percentage of the cost of professional time is:

2 points

18%

15%

17%

16%

14.
Question 14
In terms of Question 9, the budgeted cost allocation rate (CAR) for the assistants’ services is:

1 point

\$24/partner-hour

\$26/partner-hour

\$20/partner-hour

\$22/partner-hour

15.
Question 15
In terms of Question 9, the total budgeted direct costs as percentage of the total cost under the ABC system will amount to:

2 points

37.1%

62.9%

47.3%

52.7%

16.
Question 16
In terms of Question 9, the total budgeted direct costs not related to the time of all specialists under the ABC system will amount to:

2 points

\$2,304,000

\$668,000

\$1,062,000

\$882,000

17.
Question 17
Recall our example of preparing the operational budget for BGW, Inc. (see video Lectures 6.4 – 6.9 and Handouts 6.2 – 6.3). At the very end of the example, we have come up with the budgeted income statement for the company (see Handout 6.3 and the following table):

The Budgeted Income Statement
From Schedule
Revenues S-1 \$3,840,000
Cost of goods sold S-7 (2,511,600)
Gross margin 1,328,400
Operating costs
––– R&D S-8 140,000
––– Marketing S-8 210,000
––– Distribution S-8 105,000
––– Customer service S-8 63,000
––– G&A S-8 402,000 920,000

• The company pays the income tax at the rate of 40% of the taxable income

The budgeted interest expense for the year is estimated at:

3 points

\$10,675

\$16,800

\$9,625

\$11,375

18.
Question 18
In terms of Question 17, the budgeted income taxes for the year are estimated at:

2 points

\$158,810

\$160,780

\$156,640

\$163,520

19.
Question 19
In terms of Question 17, the budgeted annual net income for BGW will amount to:

2 points

\$240,200

\$245,040

\$238,215

\$249,830