Question

1) Interest on a note payable is most appropriately accrued:

            A)   when the note is signed.

            B)   as of the end of each accounting period during which the note is a liability.

            C)   when principal payments on the note are made.

            D)   when the interest is paid.

2) A magazine publisher has an account called "unearned subscription revenue". The transaction that causes the balance of this account to decrease is:

            A)   cash is received from new subscribers.

            B)   magazines are printed for the publisher.

            C)   magazines are mailed to subscribers.

            D)   subscriptions are sold to new subscribers

3) As the total unit sales volume changes:

A. total of variable costs changes.

B. total of fixed costs changes.

C. variable costs per unit change.

D. fixed costs per unit stay the same.

4) A company has sales of $450 and a gross profit % of 40%. It plans to introduce a new improved version at a selling price of $540. What is the required unit cost of goods sold to achieve the same GP % as for its existing business? ______

           

                       

True or False

5. _____ For a start-up company, debt financing is riskier than equity financing.
6. _____Revenue from sources other than the primary operating activity of a business is usually called “other income”.
7. _____ Giving longer payment terms to customers will probably decrease the # of day’s sales outstanding (DSO ratio).
8. _____ According to “Bigger Than Enron”, Waste Management increased its profits by “trade loading”.
9. _____ According to “Bigger Than Enron”, Waste Management increased its profits by increasing the depreciation period for its trucks.
10. _____ According to “No Accounting Skills”, only the elite residents of Florence understood double entry accounting.
11. _____ An increase in the debt equity ratio indicates that the firm is more likely to default on its loan obligations.
12. _____ According to “No Accounting Skills”, the Italians founded the first publicly traded company.
13. _____ A receivable that arises as a result of a sales transaction will always be reported as a current asset, even if the maturity of the receivable is longer than one year, provided that it does not bear any interest.
14. _____The interest on a 6%, 60-day note for $5,000 is $60.
15. _____ A decrease in the fixed asset turnover indicates better utilization of fixed assets.
16. _____ According to “No Accounting Skills”, accounting should be part of a high school education.
17. _____ An increase in the share price will decrease the dividend yield.
18. _____ A decrease in the EPS will decrease the P/E ratio.
19. _____ An increase in the share price will increase the P/E ratio.
20. _____ The payment of rent for the following year will decrease cash but will not affect net income for the current year.
21. _____ An increase in the variable costs per unit will decrease the contribution margin.
22. _____ During a period of decreasing prices (deflation), the use of LIFO will result in higher net income than using the weighted average method of inventory valuation.
23. A sale of a $600 item on account subject to a sales tax of 5% would result in an account receivable of $630 (hint: who collects sales taxes?)
24. _____ An increase in fixed costs will reduce the contribution margin.
25. _____ An increase in fixed costs will increase the breakeven point.
26. _____ An increase in the selling price will increase the breakeven point.
27. _____ Ketchup is a variable cost for McDonalds.
28.            Real estate taxes are a variable cost for McDonalds.

Answer 1

Answer to Question 1:

The correct option is B.

Explanation: Interest on a notes payable (liability) has to be accrued in the respective accounting period irrespective of whether payment is made or not.

Answer to Question 2:

The correct option is C.

Explanation: Unearned Subscription Revenue is a liability account which represents cash received from subscribers in advance for services to be provided in the future. So when we mail subscribers (who have paid in advance) the magazines, we can recognize subscription revenue to that extent, hence causing unearned subscription revenue to decrease.

Answer to Question 3:

The correct option is A.

Explanation: Total Variable Costs change with changes in volume in sales unit or changes business operating level activity.

Answer to Question 4:

If gross profit is 40%, then variable cost ratio to sales = 60% (100 - 40).

Hence with the new selling price at $ 540, cost of goods sold will have to be = 540*60% = $ 324, to maintain 40% gross profit.