EXAM II PRACTICE QUESTIONS
DISCLAIMER - PLEASE READ:
These practice exam problems will serve as an excellent review for the actual exam. These questions should give students a good idea of the format and rigor of problems to be encountered on the exams. The practice exam questions; however, are NOT intended to be comprehensive in their coverage of the topics that may be included on the exam. Simply learning the concepts reflected in these sample questions will NOT be adequate for complete exam preparation. In order to be successful on the exam, students must be comfortable with ALL concepts and problems covered in the online lectures.
1. Prices have been rising during recent years. Companies Able and Baker are identical in operations except that Able accounts for its inventory using FIFO and Baker accounts for its inventory using LIFO. Regarding only the effects of this difference in inventory choice, which of the following statements is true?
A. the inventory amount on Able’s balance sheet less closely approximates current costs than does the inventory on Baker’s balance sheet
B. the cost of goods sold for Able more closely approximates current costs than does the cost of goods sold for Baker
C. the total assets on Able’s balance sheet are more than Baker’s total assets
D. Baker’s net income is greater than Able’s net income
E. both (a) and (c) are correct
2. During May, XYZ Company paid its employees $36,000 cash as salaries. The salaries payable account at May 1 had a balance of $4,000 while the salaries payable account at May 31 had a balance of $8,000. The amount of salaries expense shown on the income statement for May was equal to:
A. $36,000
B. $44,000
C. $32,000
D. $28,000
E. $40,000
3. On January 1, 2019, Tremen Company acquired 40% of the outstanding stock of Delany Company. Tremen paid $3,000,000 for the investment. Delany reported net income of $1,000,000 for 2019, and paid $150,000 quarterly dividends to its shareholders. At December 31, 2019, the balance in the investment in Delany Company account would be equal to:
A. $3,250,000
B. $3,080,000
C. $3,160,000
D. $3,400,000
E. $3,340,000
4. XYZ Company received payment from a customer on a $1,000 balance that had been written off as
uncollectible six months ago. The proper journal entry to record the recovery would be:
A. Cash 1,000
Allowance for Doubtful Accounts 1,000
B. Cash 1,000
Bad Debt Expense ........................................ 1,000
C. Allowance for Doubtful Accounts 1,000
Bad Debt Expense ........................................ 1,000
D. Allowance for Doubtful Accounts 1,000
Accounts Receivable 1,000
E. Bad Debt Expense ....................................... 1,000
Accounts Receivable 1,000
5. Chen Company’s financial statements show a net income of $184,000. The following items also appear on Chen’s financial statements:
depreciation expense $40,000
accounts receivable decrease … … ... 12,000
inventory increase ………………… 28,000
accounts payable increase ………… 8,000
Using the indirect method, Chen’s net cash flow from operating activities is equal to:
A. $232,000
B. $136,000
C. $216,000
D. $175,000
E. $272,000
6. During 2020, ABC Company reported ending inventory of $20,000; sales revenue of $90,000; and a gross profit of $40,000. The cost of goods available for sale during 2020 totaled:
A. $110,000
B. $ 70,000
C. $ 60,000
D. $ 50,000
E. $ 40,000
7. In a statement of cash flows, payments of dividends to stockholders are classified as:
A. operating activities
B. investing activities
C. financing activities
D. none of the above as dividends are reported in the income statement, not the statement of cash flows
E. both (a) and (c) are correct
8. The Red River Company had credit sales of $800,000 during 2022. The accounts receivable balance at the beginning and end of 2020 were $40,000 and $140,000 respectively. What was the amount of cash collected from customers during the year?
A. $700,000
B. $800,000
C. $840,000
D. $850,000
E. $900,000
9. On January 1, 2019, Nana Company paid $100,000 to acquire 8,000 shares of Papa Company’s common stock. The 8,000 shares represent 10% of the total outstanding stock of Papa Company. Papa Company reported net income of $52,000 for 2019. The fair value of the Papa stock on December 31, 2019 was $45 per share. What amount will be reported in the December 31, 2019 balance sheet of Nana Company for its investment in Papa Company?
A. $284,400
B. $300,000
C. $315,600
D. $360,000
E. $405,800
10. During an inflationary period, which inventory costing alternative will result in the lowest ending inventory balance?
A. FIFO
B. LIFO
C. weighted average
D. all inventory costing alternatives will result in the same net income
E. none of the above are correct
11. Jackson Company had the following account balances:
Jackson Company would report cost of goods sold of:
A. $43,300
B. $43,800
C. $45,000
D. $44,300
12. The cost of goods sold during the year was $90,000. Additional information is provided below:
January 1 December 31
|
Accounts payable
|
$15,000
|
$10,000
|
|
Inventory
|
$20,000
|
$60,000
|
What was the amount of cash paid to suppliers for purchases of inventory?
A. $ 75,000
B. $ 85,000
C. $ 95,000
D. $125,000
E. $135,000
13. On August 15, 2020, Hobson Company paid $980,000 to purchase 12% of the outstanding stock of Jacob Company. In its 2020 income statement, Hobson reported an unrealized loss of $13,000 related to this investment. The market value of the investment in Jacob Company at December 31, 2021 was $926,000. The unrealized loss that Hobson should include in its 2021 income statement related to its investment in Jacob Company would be equal to:
A. $41,000
B. $28,000
C. $0
D. $13,000
E. $54,000
14. XYZ Company purchased inventory for $3,450 on account. The credit terms were 4/15, n/30. XYZ returned merchandise in the amount of $600 and paid the balance due within the discount period. How much cash did XYZ Company pay?
A. $2,800
B. $2,736
C. $3,450
D. $2,739
E. $2,850
15. ZZ, Inc. reported accounts receivable of $60,000 at January 1, 2024 and accounts receivable of $80,000 at December 31, 2024. During 2024, ZZ, Inc. reported sales revenue of $400,000 and net income of $100,000. The accounts receivable turnover for 2024 was equal to:
A. 5.00
B. 1.43
C. 5.71
D. 1.25
E. 6.67
Use the following information for questions 16 – 18.
Warren Clothing Store sells jeans. During January 2023, its inventory records of one brand of designer jeans were as follows:
Units Unit Cost Total Cost
January 1 Beginning inventory 100 pairs $22 $2,200
January 6 Purchase 40 pairs $25 $1,000
January 10 Sale 30 pairs
January 15 Purchase 70 pairs $30 $2,100
January 20 Sale 100 pairs
January 25 Purchase 40 pairs $35 $1,400
16. Under FIFO, the cost of goods sold for January would be equal to:
A. $3,750
B. $2,700
C. $3,250
D. $2,950
E. $4,000
17. Under LIFO, the ending inventory at January 31 would be equal to:
A. $3,750
B. $2,700
C. $3,250
D. $2,950
E. $4,000
18. Assume the company sells each pair of jeans for $40. Under weighted average method, the gross profit for January would be equal to:
A. $1,716
B. $1,984
C. $3,216
D. $3,484
E. $5,200
19. The account allowance for doubtful accounts is classified as a(n):
A. expense
B. contra revenue account
C. contra equity account
D. contra asset account
E. none of the above are correct
Use the following information for questions 20 – 21.
Betty DeRose, Inc. prepared the following aging schedule for its accounts receivable at December 31, 2023:
|
Category
|
Amount
|
% estimated to be uncollectible
|
|
not past due
|
$100,000
|
1%
|
|
1 – 30 days past due
|
50,000
|
3%
|
|
31 – 60 days past due
|
20,000
|
5%
|
|
61 – 90 days past due
|
10,000
|
20%
|
|
over 90 days past due
|
8,000
|
40%
|
total accounts receivable $188,000
The balance in the allowance for doubtful accounts was a credit balance of $500 before the adjustment for bad debt expense.
20. Betty’s 2023 bad debt expense is equal to:
A. $8,200
B. $8,500
C. $8,700
D. $9,000
E. $9,200
21. The net realizable value at December 31, 2023 is:
A. $179,300
B. $179,800
C. $179,000
D. $179,500
E. $178,800
22. Hawk Corporation purchased 10,000 shares (8%) of Diamond Corporation stock in 2028 for $50 per share. Diamond's market value was $60 per share on December 31, 2028 and $65 on December 31, 2029. During 2030, Hawk sold all of its Diamond stock for $70 per share. In its 2030 income statement, Hawk would report:
A. a realized gain of $50,000
B. a realized gain of $100,000
C. a realized gain of $150,000
D. a realized gain of $200,000
E. a realized gain of $300,000
23. Baxter Company reported the following information at December 10, :
Accounts Receivable .. … … … … … … … … … $ 34,600
Allowance for Doubtful Accounts … … … … . 3,100
On December 11, 2019, Baxter Company wrote-off an account receivable of $2,000 that had been determined to be uncollectible. The net realizable value after the write-off is equal to:
A. $29,500
B. $33,500
C. $31,500
D. $35,500
E. $37,700
24. During a deflationaryperiod, which inventory costing alternative will result in a firm paying the lowest income taxes?
A. FIFO
B. LIFO
C. weighted average
D. all inventory costing alternatives will result in the same income tax expense
E. none of the above are correct
25. A negative net cash flow from operating activities indicates that:
A. the company is selling its assets for more than it cost to purchase them which is a good sign for cash flows
B. the company is paying more money to owners and creditors than it is receiving from them
C. the company is re-investing in itself in order to grow and expand
D. the company had a net loss using the cash basis of accounting
E. the company is selling off its long-term assets which is not a good sign for financial health
26. In the statement of cash flows, inflows and outflows of cash from buying and selling investments are classified as:
A. operating activities
B. investing activities
C. financing activities
D. either (a) or (b) depending on the amount spent
E. either (b) or (c) depending on the amount spent
27. XYZ Company wrote off as uncollectible an account receivable from a bankrupt customer. This action will:
A. have no effect on total current assets
B. reduce total current assets
C. reduce net income for the period
D. reduce the amount of owner’s equity
E. both (c) and (d) are correct
28. Jamestown Manufacturing produces farm machinery. Its 2022 statement of cash flows included the following items, among others:
Dividends paid $ 23,000
Purchases of stock of other companies 14,500
Purchases of equipment 75,000
Depreciation on equipment 22,500
Sale of common stock 124,250
Paid off long term note payable 45,000
Net income 36,234
What is the amount of net cash flows from financing activities for 2022?
A. $41,750
B. $92,484
C. $79,250
D. $56,250
E. $68,580
29. An adjustment at the end of an accounting period for uncollectible accounts receivable is necessary under GAAP to comply with the:
A. historical cost concept
B. matching concept
C. consistency principle
D. realization principle
E. none of the above are correct
30. During 2024, ABC Company had cost of goods sold of $720,000 and an inventory turnover ratio of 2.5. ABC
had inventory of $260,000 at January 1, 2024. The inventory at December 31, 2024 was equal to:
A. $288,000
B. $650,000
C. $274,000
D. $460,000
E. $316,000