Accounting Paper

Questions in addition to your weekly workshop questionsMCQ EXAMPLES

Question . Which of the following equations is correct?a. Assets = Liabilities + Owners’ Equity – (Revenues – Expenses)b. Assets + (Revenues + Expenses) = Liabilities + Owners’ Equityc. Assets + Liabilities + Owners’ Equity = Revenues – ExpensesD*. Assets – Liabilities = Owners’ Equity + (Revenues – Expenses)

Question . An entity’s owners’ equity is one-third of its total assets. Its liabilities total $100,000. What is the amount of its total assets?a. $100,000B*. $150,000c. $200,000d. $300,000

.33x +100,000= X .6666X=100,000

X=150,000

Question . The purchase of an asset for cash will:A* not affect total assets, liabilities, and owners’ equity.b. increase total assets and increase total liabilities.c. increase total assets and increase total owners’ equity.d. increase total assets.

Question . What is the value of total assets if current assets equal $2200, current liabilities equal $1500, non-current liabilities equal $800 and owners equity equals $2500?a. $2600b. $3200C*. $4800d. $1100

Question . Accounting information:a. is helpful for financing decisions but not for marketing decisions.

b. is useful for profit-making entities but is not needed for not-for-profit entities.c. must follow generally accepted accounting principles if provided to management.D* .

is useful for all economic organisations.

Question . In a firm that offers a bonus scheme based on accounting profit, managers can, in most cases, be expected to adopt a:a. profit-decreasing accounting policy.B*. profit-increasing accounting policy.c. dividend-increasing accounting policy.d. liability-increasing accounting policy.

Question . In a utilitarian ethical framework, moral correctness is based on the premise that:a. the underlying nature of an action determines its correctness.B*. the consequences of an action determine its correctness.c. the nature of an action and its consequences determines its correctness.d. All of the above are correct.

Question . Which of the following statements is true of the straight-line and/or reducing-balance methods of depreciation?a. The two methods yield different amounts of total depreciation expense over the useful life

of the asset.B*. The two methods yield the same amount of total depreciation expense over the useful life

of the asset.c. The straight-line method is applied to assets that wear and tear faster in the earlier years.d. The reducing-balance method is applied to assets that generate more revenue in later

years.

Question . Slow Trucking owned a truck that cost $30,000 when it was purchased on 1 January 20X1. It had accumulated depreciation of $18,000 at 31 December 20X2. Slow originally estimated that the truck would have a residual value after using it for 4 years of $3,000. It sold the truck for $22,500 cash on 1 January 20X3. The amount of gain (loss) on the sale of the truck was:a. $4500 gain

b. $19,500 gainc. $1500 lossD*. $10,500 gain

Question . The So-Big Company sells hot-dogs. Inventory information for a recent week is shown below:

Units Unit Cost Total CostBeginning inventory 2 $ 6 $12Purchase 4 8 32Purchase 6 10 60

If 5 units were sold during the week, what is the cost of goods sold if the LIFO periodic method is used?a. $68b. $54C*. $50d. $36

Question. Which of the following would not explain the difference between current and non-current assets?a. The future benefit of current assets will generally be used up within the entity’s operating

cycle.B*. An expenditure is classified as a non-current asset if it is considered to be material.c. An asset is classified as non-current if it is intended to be used within the business for a

considerable period of time.d. The nature and intention of the business can help determine whether an expenditure

should be classified as a non-current asset.

Question 10. The following costs were incurred in the purchase of new office equipment.

Cash price $22,000Sales tax 3,300Insurance during transit 200Installation 500

What amount should be recorded as the cost of the office equipment?

a. $22,000b. $25,300c. $25,500D*. $26,000

Question . The major accounting difference between a finance lease and an operating lease is that:a. finance leases involve larger amounts of funds.b. finance leases are for longer periods of time.C*. finance leases involve the recognition of assets and liabilities.d. finance leases are cancellable.

Question . When calculating cost of goods sold, an error was made which understated closing inventory. What effect will this have on assets in the statement of financial position and on profits in the statement of financial performance?A* Assets will be understated and profit for the period will be understated.b. Assets will be overstated and profit for the period will be overstated.c. Assets will be understated and profit for the period will be overstated.d. Assets will be overstated and profit for the period will be understated.

Question Able Company sells a product for $50 per unit, its variable costs are $35 per unit and its total fixed costs are $45,000. What is Able’s break-even point?A*. 3000 units.b. 150,000 units.c. 1286 units.d. 64,286 units.

Question Which of the following shows a combination of fixed and variable cost for a production plant?a. Costs of building and costs of equipmentb. Land purchase costs and costs of equipmentC*. Cost of building and costs of materialsd. Land purchase costs and general manager’s salary

Question Arches Manufacturing Company provides the following information:

CostsDirect labour $16,000Direct materials 20,000Direct labour hours 4,000Manufacturing overhead 36,000Variable selling expenses 12,000Number of units produced 800

What is the total unit cost of one unit of finished product?a. $90.00b. $95.00C*. $105.00d. $87.00

Question . Jany Ltd produces 20,000 golf balls. Each golf ball sells for $8, and it costs $2000 to produce the golf balls. The cost of the fixed plant and equipment needed to produce the golf balls is $1500 per period. The break-even point for Jany Ltd is (to the nearest integer):A*. 190 golf balls.b. 200 golf balls.c. 210 golf balls.d. 220 golf balls.

Question. A company has net profit of $10,000, sales price per unit of $25 and fixed costs of $40,000. The company would like to increase profits by 50%. What percentage increase in sales volume would be needed to achieve this goal?a. 20%b. 10%c. 12.5%D*. Answer cannot be determined from the information given.

Ques tion . Winter Sales, Inc. sells many kinds of winter sports equipment, primarily through telemarketing. Its sales staff is paid 15% of all sales dollars generated. In order to decrease the uncertainty of this arrangement for its staff and increase loyalty, the company is considering a change in the method of payment. The company would like to pay its 100 employees $1000 per month plus 10% of sales. Using cost-volume-profit analysis, what volume of sales dollars does the company need to exceed per month to make this new method more profitable for the company than the old method?

a. $360,000B*. $2,000,000c. $1,000,000d. Answer cannot be determined from the information given.

Question . Bowden Company forecasts sales for the third quarter at 10,000 units. The desired ending inventory for the second quarter is 2000 units and for the third quarter 3000 units. How many units must be produced in the third quarter?a. 9000 unitsB*. 11,000 unitsc. 12,000 unitsd. 13,000 units

Question . Hamilton has budgeted total manufacturing overhead costs for the year as $125,000, based on 20,000 direct labour hours. The ratio of variable manufacturing overhead costs to fixed manufacturing overhead costs is 2:1. In a given month, 2000 direct labour hours are budgeted for production. How much overhead is budgeted?A*. $12,500.00b. $11,805.55c. $11,110.42d. $10,416.67

Theory question:Best Guide: Weekly WS Review Questions from your Text Book

Numerical QuestionsChapter 19 WS questionsChapter 20 WS questions

Chapter 14Text Book: Question: 13 (Chapter 14)

Profitability:20X6 20X5 20X4

ROR on ordinary shareholders funds = 14% = 8.8% = 8.6%

Indicates an increasing profitability almost on a par with the industry.

20X6 20X5 20X4

Net profit marginGross profit margin

13.2%38%

15%41%

17%39%

A fairly constant gross profit margin with a falling net profit margin indicates a rising level of expenses such as depreciation, wages, interest, etc.. These should be analysed further. In this case a large part of the trend is due to increased interest charges on long-term debt.

20X6 20X5 20X4

Times interest covered 5 10 11

This is a potentially dangerous situation since profitability is not quite good enough to offset the higher charges incurred to obtain funds.

Short-term solvency:20X6 20X5 20X4

Current ratioQuick ratio

1.490.65

1.840.75

2.250.90

Short-term solvency is contracting. This may be serious depending on how efficiently funds can be generated.

20X6 20X5 20X4

Accounts receivable turnoverInventory turnoverOperating cycle

75 days152 days227 days



Cash generation has improved greatly but still lags behind the norm for the industry (150 day operating cycle). Increases here can make allowances for the lower levels of liquid funds held.

Receivables turnover has deteriorated particularly given that credit terms are net 45 days. A review of credit procedures may be warranted and perhaps action on long-outstanding receivables.

Leverage:20X6 20X5 20X4

Debt/Tangible net assets 1.42 0.76 0.64

Increases in long-term debt have gone into long-term investment – this is an essentially health situation. However, the returns from this investment are not yet great enough to offset the interest burden.

20X6 20X5 20X4Debt / Total assets 49% 32% 29%

The firm has increased debt levels beyond those for the industry. This is a cause for concern.

SummaryWhile Jayco’s profitability is still consistent with that of the industry, its increased debt levels and deteriorating liquidity are a cause for

concern. Jayco needs to examine the collection of debtors. However, the increase in share price is evidence of market confidence in Jayco and its ability to service the higher levels of debt.

IMPORTANT RATIOsAsset TurnoverSales TurnoverReturn on SalesLiquidity Ratios (CR and QR)Earning Per ShareEfficiency Ratios (Debtor and Inventory Turnover ratios)

Question 9 (Chapter 14)a Declining profitability as measured by:

20X4 20X5 20X6Net profit margin 10% 8.3% 6.25%

Increase in sales is offset by increase in materials costs:Material costs/sales 37.5% 38.9% 47.75%Return on shareholders funds 10% 7.5% 6.25%Pre-tax return on total assets(assume 30% tax)

7050 90 000

5550 90 000

5737 105 000

= 7.8% = 6.1% = 5.5%

This trend may be levelling out.b Debt retired for equity in 20X6 has improved the ability to cover fixed charges in 20X6.

Times interest earnedDebt/equity ratio

550%

450%

4.1240%

All the additional investment has gone into work in progress. This indicates that the equity increase was made to acquire working capital since short-term sources had been exhausted. Notice that there is no long-term finance.

c • Perhaps attempt to retire short-term debt in favour of long-term debt which is generally less expensive and provides more flexibility

• Attempt to speed up work in progress to release funds for further investment• Need to examine costs of materials: can these be reduced? If not, can the company increase its prices? Lower profit on increased

sales is not a good sign. However, there may be problems in the economy (e.g., a recession) or competitive pressures which prevent price rises

Chapter 4Question 14 & 15( chapter 4)14

Mickey LtdBalance sheet as at 30 June 20X1

$ $ $

Current assetsBankAccounts receivableInventoryLoan receivable(1/7/20X1)Other current assets

Total current assetsNon-current assetsLoan receivable(30/6/20X3)Fixtures and fittingsPlant and equipmentLand and buildings

Total non-current assetsTotal assets

Current liabilitiesAccounts payableSalaries payableTax payableOther current liabilities

Total current liabilitiesNon-current liabilitiesDebentures payableLoan payable(31/12/20X3)Total non-current liabilitiesTotal liabilitiesNet assets

Total owners’ equity

10 00015 70027 20010 000

700

100 00072003600

120 000

10 3006200

12 3001200

137 000100 000

63 600

230 800

30 000

237 000

294 400

267 00027 40027 400

15ABC Co. Ltd Balance sheet

Assets $ $ Liabilities and owners’ equity

$ $

Current assetsDebtorsInventoryPrepaid rent

10 00020 000

2000 32 000

Current liabilitiesBank overdraftCreditors

12 00090 000 102 000

Non-current assetsMotor vehiclesPlant & equipmentLandBuildings

20 00015 00050 000

100 000 185 000

Owner’s equityCapitalRetained earnings

80 00035 000 115 000

Total assets 217 000

Total liabilities and owners’ equity

217 000

Chapter 6

Question 6 Chapter 6

6 a

Mandy Plover worksheet

ASSETS = LIABILITIES + OWNERS EQUITYDate Bank Prepaid

RentFixtures & Fittings

Computer Supplies Accounts Receivable

Prepaid Lease Rent

=Accounts Payable Capital Profit & Loss

July 1 30 000–3000

–275–50

–475

300030 000

–275–50

–4752 –1000 10003 17 500 17 5004 –1380 1380

15 2750 275015 No entry15 –750 –75016 225 –22516 –2000 200018 –17 500 –17 50022 300 300

23 –780 –78029 –750 –75029 300 30031 340 3110 3450

Balance 3985 3000 1000 17 500 1380 4855 2000 = 0 30 000 3720AdjustmentRentLeaseSupplies*

–1000

-115–1000

–1000–1000

–115Adjusted Balance

3985 2000 1000 17 500 1265 4855 1000 = 0 30 000 1605

*Assumed to last for one year, therefore 1380 x 1/12 = 11

bMandy Plover

Income statement for month ending 31 July

$ $RevenueLess Expenses

WagesRentMotor Vehicle LeaseTelephoneElectricity FeeOffice Equipment RentBad DebtsSupplies

Net Profit

15001000100027550

475780115

6800

5195

1605

Mandy PloverBalance sheet as at 31 July

Assets $ $ Liabilities and owners’ equity

$

Current assetsBankAccounts receivableSuppliesPrepaid rentPrepaid lease rent

39854855126520001000 13 105

Owners’ equityCapitalRetained earnings

30 0001605

Non-current assetsFixtures and fittingsComputer

1 00017 500 18 500

Total assets 31 605 31 605

c For the month of July, Mandy has made a profit of $1605. However, this figure is overstated for the following reasons:

• No expense recorded for electricity or telephone as no account has been received as at 31 July

• No depreciation recorded for the computer or the signs• No allowance made for any further bad debts• Based on the investment of $30 000, Mandy is receiving the following return:

= 64.2 per cent per annum

The other issue Mandy must consider is whether her wages of $750 per fortnight represent what she could earn elsewhere. If in fact her wages are understated at $750 per fortnight or $20 000 per annum, then her return on investment is overstated.

Finally the effect of the lease of the BMW must be considered. For July the impact on profit has only been $1000 but in future months the impact will be $2000 per month. If Mandy continues to earn the same profit each month then the following figures show the impact of the BMW:

Net profit for July $1605Add back BMW lease cost 1000

$2605

x 12 for full year x 1231 260

Less full year cost of BMW –24 0007260

Return on investment:

= 24.2 per centIn summary then, Mandy’s business looks very promising. However, further analysis is required after a few more months of business to enable a more accurate assessment of the financials. Perhaps Mandy could earn a higher return by investing her money in shares and working for someone else but then she loses her independence and perhaps the BMW car. Even if she continues in her own business she could improve the return on her investment by choosing to lease a less expensive motor vehicle.

Chapter 7Question 20 (Chapter 7)20 a i FIFO:

20X0 Cost of goods sold

2300750475

3525

@@@

$24.0624.3825.00

$55 33818 28511 87585 498

Inventory525500250

1275

@@@

25.0025.3125.62

13 12512 655

640532 185


1275875875825

3850

@@@

25.6225.6226.26

32 18522 41822 41821 66598 686

Inventory50

12501300

@@

26.2626.56

131333 20034 513


13001250875263

3688

@@@

26.5626.8826.88

34 51333 20023 520

706998 302

Inventory612875

1487

@@

26.8826.88

16 45123 52039 971

ii LIFO:20X0 Cost of goods

sold250500

1000750

10253525

@@@@@

25.6225.3125.0024.3824.06

640512 65525 00018 28524 66287 007

Inventory1275 @ 24.06 30 676


1250875875850

3850

@@@@

26.5626.2625.6225.62

33 20022 97822 41821 777

100 373Inventory

127525

1300

@@

24.0625.62

30 676641

31 31720X2 Cost of goods

sold875875875

10633688

@@@@

26.8826.8826.8826.56

23 52023 52023 52028 23398 793

Inventory1275

25187

1487

@@@

24.0625.6226.56

30 676641

496736 284

iii Average:20X0 Cost of goods sold

Inventory35251275

@@

24.51724.517

86 42231 259

20X1 Cost of goods soldInventory

38501300

@@

25.68425.684

98 88333 389

20X2 Cost of goods soldInventory

36881487

@@

26.50226.502

97 73939 408

Note: It should be pointed out to students that a lot of effort can be saved by simply applying the equation beginning inventory + purchases = COGS + closing inventory.

b FIFO:20X2 Cost of goods sold

Inventory

148718883375

500

@@

@

26.8827.19

27.19

39 97151 33591 306

_____13 595

LIFO:20X2 Cost of goods sold

Inventory

238818725

775

500

@@@@

@

27.1926.5625.6224.06

24.06

64 9304967641

18 647_____89 185

12 030

Tutors should discuss the lowering of cost of goods sold and hence the increase in profit in 20X2 for LIFO compared to FIFO. This is contrary to the other three years and is despite the fact that costs still increased in 20X2. This is due to the lowering of the ending stock levels and as a result the lower unit cost flowing through cost of goods sold under LIFO.

Chapter 17 5 a The predetermined overhead rate:

Cost Centre X based on direct labour cost basis:$140 000/$100 000 = $1.40 per $ of direct labour costCost Centre Y based on machine hour basis:$150 000/20 000 hrs = $7.50 per machine hour

b The total production cost for BNH:X$

Y$

Direct materialDirect labourOverheadsX $1.40 x $32 000Y $7.50 x 13 000 hrs

20 00032 000

44 800

96 800

40 00021 000

97 500158 500

Total cost of production $XY

96 800158 500255 300

c Unit cost of product BNH:Total cost of production/No. of units$255 300/20 000 units = $12.77 per unit

d The over-absorbed or under-absorbed overhead for 20X1:X $

Actual costAbsorbed overheads:X $144 200 x $1.40Over-absorbed overhead

160 000

201 88041 880

Y $Actual costAbsorbed overheads:Y 18 000 hrs x $7.50Under-absorbed overhead

138 000

135 0003000

X over-absorbedY under-absorbedTotal over-absorbed

41 880(3000)38 880

9 a Cost drivers:Construction 3 000 000 = $30 per DLH

100 000Inspection 1 000 000 = $50 per TTI

20 000Testing 500 000 = $62.50 per TTT

8 000Mustang

$Jaguar

$Direct materials 160 000 120 000Construction (4000 x $30) 120 000 (6 000 x $30) 180 000Inspection (800 x $50) 40 000 (1 200 x $50) 60 000Testing (200 x $62.50) 12 500 (300 x $62.50) 18 750Total cost 332 500 378 750

b Overhead applied was 120 000 + 180 000 + 40 000 + 60 000 + 12 500 + 18 750 or $431 250.Actual overhead was $440 000.Overhead under-applied by $8750.

Chapter 1811 a The amount of trousers Cords sell each month.

Using the break-even equation where x is the number of pairs of trousers to earn a profit of $22 080 each month:S(x) = VC(x) + FC + P36(x) = 20(x) + 52 800 + 22 08016(x) = 74 880x = 4680 pairs of trousers

b Fixed costs have now increased to ($52 800 + $6 000) $58 800.The break-even point, using the break-even equation:

34(x) = 20(x) + 58 80014(x) = 58 800

x = 4200 pairs of trousersThe break-even point before the changes in price and advertising expenditure was:

36(x) = 20(x) + 52 800x = 3300 pairs

Profit on sales of 5800 pairs of trousers:34(5,800) = 20(5 800) + 58 800 + PP = $22 400

Comments regarding the sales director’s proposals:– small increase in profits of $320 (1.4 per cent)– much higher break-even point and therefore the proposal is riskier than previous

operating level– what is the likelihood that sales will, indeed, increase to 5800 units (24 per cent

increase)Assumptions:– all variable costs remain unchanged and are proportional to volume within this

range of activity– fixed costs do not change– capacity is available– efficiency does not change, e.g., no economies of scale– business environment not changing (e.g., government policy, competitors)

c i Required profit 15 per cent increase on $22 080 x 1.15 = $25 39234(x) = 20(x) + 58 800 + 25 39214(x) = 84 192x = 6014 pairs of trousers (to the nearest whole number)

ii Assuming that the Sales Director’s policies were not adopted:36(x) = 20(x) + 52 800 + 25 392x = 4887 pairs of trousers

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Accounting Paper