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MBA5010 Practice Questions for Exam 1

Note: These questions represent the type of questions that may be found on the exam, but the summation of these questions does not constitute an exam.


  1. Which of the following statements about users of financial accounting information is true? 
    A.Users of financial accounting information are the same as the preparers.
    B. Users of financial accounting information normally work for the entity.
    C. Users of financial accounting information are normally external to the firm.
    D. Users of financial accounting information normally have direct access to the information about the entity.


  1. Which of the following is an important feature of external auditors? 
    A.They are independent of the entity.
    B. They have previous experience managing the entity.
    C. They have an ownership interest in the entity.
    D. They provide many other services to the entity while engaged as auditors.


  1. Which of the following statements best describes the income statement? 
    A.It provides information about the financial position of an entity at a specific point in time.
    B. It measures the economic performance of the entity over a period of time.
    C. It summarizes the changes to retained earnings during a period.
    D. It shows how an entity managed its cash during the reporting period.


  1. Trout Co. ordered and received inventory worth $45,000 on credit. What is the effect of this transaction on the accounting equation? 
    A.Assets increases by $45,000 and liabilities increases by $45,000.
    B. Assets increases by $45,000 and liabilities decreases by $45,000.
    C. Assets decreases by $45,000 and liabilities increases by $45,000.
    D. Assets decreases by $45,000 and liabilities decreases by $45,000.


  1. A shareholder invested $75,000, made up of $50,000 in cash and a vehicle worth $25,000, in a new company and received shares in exchange. What is the effect of this transaction on the accounting equation? 
    A.Assets increases by $75,000 and owners' equity increases by $75,000.
    B. Assets increases by $75,000 owners' equity increases by $50,000, and liabilities increases by $25,000.
    C. Assets increases by $50,000 and owners' equity increases by $50,000.
    D. Assets increases by $50,000 and liabilities increases by $50,000.


  1. Which of the following would be considered as an asset for accounting purposes? 
    A.Employees who work for the company
    B. Research into new products for the company
    C. A building owned by the company but rented out
    D. Advertising spent on attracting customers to the company
  2. The opening balance of retained earnings for Musicala Inc. was $325,000. During the year, it earned net income of $52,400 and paid dividends of $16,000. What is the closing balance of retained earnings? 
    B. $309,000
    C. $361,400
    D. $377,400
  3. Lennox Limited reported sales of $5,000,000, cost of goods sold of $3,200,000, operating expenses of $1,400,000, and income tax expense of $160,000 for the year. What is the gross profit for the year? 
    A. $240,000
    B. $400,000
    C. $1,800,000
    D. $3,200,000
  4. Campus Computers sells computers and provides internet access to students. The average computer system purchased is $2,500, and for an additional $100, students get wireless access on campus for the year. Wireless access purchased alone costs $180. At the time of sale of a computer with internet access, how much unearned revenue should Campus Computers recognize? 
    B. $100
    C. $180
    D. $2600
  5. Schumacher Restorations specializes in restoring antique cars. Normally the company requires the customer to pay a deposit before proceeding with the restoration; the balance is due when the car is returned to the client. The car is not returned if the amount is not paid. Sometimes the cars are stored, for a fee, for the winter months before being returned to the client. When should Schumacher recognize the revenue from storage fees? 
    A.When the winter season is over.
    B. Gradually on a month by month basis.
    C. When the car is delivered.
    D. When the cash is collected.
  6. Beaver Dam Builders Inc. has collected the following information about a dam it is building: costs to date $300,000, estimated total costs $1,200,000, estimated total revenues $1,600,000. If Beaver Dam uses the percentage-of-completion method to recognize revenue, how much revenue related to the project have they recognized to date? 
    B. $400,000
    C. $1,200,000
    D. $1,600,000.


  1. A company sold a piece of land for $40,000 which had an original cost of $55,000. What is the cash flow effect of this transaction? 
    A.A $55,000 increase in cash flows from operations.
    B. A $40,000 increase in cash flows from operations.
    C. A $55,000 increase in cash flows from investing activities.
    D. A $40,000 increase in cash flows from investing activities.
  2. Ralston Hardware reported the following items for 2014:


    Experience indicates that 3% of the outstanding accounts receivable at the end of each year ultimately will be uncollectible. What should be the December 31, 2014, bad debt expense using the percentage- of-receivables method? 
    A. $3,330
    B. $6,330
    C. $9,330
    D. $19,590

($125,000 + $653,000 - $567,000) x .03 = $6,330 CR; $6,330 - $3,000 = $3,330

  1. St. John's Inc. reported accounts receivable on January 1, 2013, of $500,000 and on December 31, 2013, of $550,000. Sales for the year were $4,000,000. What is their accounts receivable turnover ratio for the year? 
    A.7 times
    B. 7.3 times
    C. 7.6 times
    D. 8.0 times


  1. Hopewell Ltd. had 1,000 units of inventory on hand at the beginning of the year worth $4,000. During the year, they purchased 15,000 units at $4.25 and 10,000 units at $4.40. They sold 24,500 units during the year at an average price of $7.50 and pay taxes at 25%. If Hopewell uses average cost for inventory valuation, what was their gross profit for the year closest to? 
    B. $77,780.50
    C. $78,400.00
    D. $80,605.75

Avg cost = ($4,000 + 15,000 * $4.25 + 10,000 * $4.4)/26,000 = $4.298, Gross profit = ($7.50- $4.30) x 24,500 units sold = $78,400

  1. Jordan Precision Welding had sales of $134,000 for the month of June. The company's gross profit was $36,000. The company had beginning inventory of $70,000, and a physical inventory count indicated that ending inventory was $66,000. What was the company's inventory turnover ratio for June closest too? 
    B. 1.44
    C. 1.48
    D. 1.97

COGS = ($134,000 - $36,000) = $98,000, Avg. inv = ($70,000 + $66,000)/2 = $68,000
Inventory turnover ratio = $98,000/$68,000 = 1.44

  1. On January 1, 2013, LaMonte Paint and Repair purchased a piece of equipment that cost $300,000. It has an estimated useful life 10 years over which it was expected to produce 100,000 units of output. The equipment is expected to have an estimated residual value of $80,000. The company amortizes all equipment using the straight-line method. In the first two years of operation, the asset produced units of output as follows: 2013, 18,000 units; 2014, 15,000 units. The accounting year ends December 31. What is the amount of depreciation expense and in the accumulated depreciation account (after adjusting entries) at the end of 2014?

    A. Option A
    B. Option B
    C. Option C
    D. Option D

[$300,000 - $80,000]/10 = $22,000/yr, accumulated depreciation for 2 years = $44,000


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