Multiple Choice Questions
1. The following information is available for Cooke Company for the current year:
Net sales ........ $1,800,000
Freight-in ......... 45,000
Purchases discounts ..... 25,000
Ending inventory ...... 120,000
The gross margin is 40% of net sales. What is the cost of goods available for sale?
a. $840,000
b. $960,000
c. $1,200,000
d. $1,220,000
2. A transaction that is material in amount, unusual in nature, and infrequent in occurrence is presented in the income statement separately as a component of income
a. Net of applicable income taxes
b. As a prior period adjustment
c. From continuing operations
d. From discontinued operations
3. Effective January 1, 2007, Younger Company adopted the accounting principle of expensing as incurred advertising and promotion costs. Previously, advertising and promotion costs applicable to future periods were recorded in prepaid expenses. Younger can justify the change, which was made for both financial statement and income tax reporting purposes. Younger’s prepaid advertising and promotion costs totaled $500,000 at December 31, 2006. Assume that the income tax rate is 30% for 2006 and 2007. The adjustment for the effect of this change in accounting principle should result in a net adjustment in the 2007 retained earnings statement of
a. $0
b. $150,000
c. $350,000
d. $500,000
4. A company changes from the first-in, first-out inventory method to the average cost method. The cumulative effect of the change on the amount of retained earnings at the beginning of the period in which the change is made is reported separately as a(n)
a. Extraordinary item
b. Component of income from discontinued operations
c. Component of income from continuing operations
d. Retrospective adjustment
5. Palo Corporation incurred the following losses, net of applicable income taxes, for the year ended December 31, 2007:
Loss on disposal of a component of Palo’s business ....... $400,000
Loss on translation of foreign currency because of devaluation .. 500,000
How much should Palo report as extraordinary losses on its 2007 income statement?
a. $0
b. $400,000
c. $500,000
d. $900,000
6. Which of the following is expensed under the principle of systematic and rational allocation?
a. Salespeople’s monthly salaries
b. Insurance premiums
c. Transportation to customers
d. Electricity to light office building
7. The following information is available for Wagner Corporation for the current year:
Sales .......... $500,000
Beginning inventory .... 180,000
Ending inventory ...... 95,000
Freight-out ....... 45,000
Purchases ......... 215,000
How much is the cost of goods sold?
a. $200,000
b. $300,000
c. $345,000
d. $440,000
8. Dobbin Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2007. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Dobbin recall all cans of this paint sold in the last six months. The management of Dobbin estimates that this recall would cost $1,000,000. What accounting recognition, if any, should be accorded this situation?
a. No recognition
b. Footnote disclosure
c. Operating expense of $1,000,000
d. Extraordinary loss of $1,000,000
9. A loss from the sale of a component of a business enterprise is reported separately as a component of income
a. After income from continuing operations and before extraordinary items
b. In income from continuing operations
c. After extraordinary items
d. Before income from continuing operations and extraordinary items
10. In a statement of cash flows, receipts from sales of property, plant, and equipment generally are classified as
a. Investing activities
b. Selling activities
c. Operating activities
d. Financing activities