ACC 563 Week 6 Quiz – Strayer University NEW

ACC/563 Week 6 Quiz – Strayer NEW

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Week 6 Quiz 4: Chapter 8

Chapter 8
Multiple Choice

1. Of the following items, the one that should be classified as a current asset is
a. Trade installment receivables normally collectible in 18 months
b. Cash designated for the redemption of callable preferred stock
c. Cash surrender value of a life insurance policy of which the company is beneficiary
d. A deposit on machinery ordered, delivery of which will be made within six months


2. The advantage of relating a company’s bad debt experience to its accounts receivable is that this approach
a. Gives a reasonable correct statement of receivables in the balance sheet
b. Relates bad debts expense to the period of sale
c. Is the only generally accepted method for valuing accounts receivable
d. Makes estimates of uncollectible accounts unnecessary


3. Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the balance sheet misleading because
a. Most short-term receivables are not interest bearing
b. The allowance for uncollectible accounts includes a discount element
c. The amount of the discount is not material
d. Most receivables can be sold to a bank or factor


4. An account that would be classified as a current liability is
a. Dividends payable in stock
b. Accounts payable – debit balance
c. Reserve for possible losses on purchase commitments
d. Excess of replacement cost over LIFO cost of basic inventory temporarily liquidated


5. Which of the following statements is not valid as it applies to inventory costing methods?
a. If inventory quantities are to be maintained, part of the earnings must be invested (plowed back) in inventories when FIFO is used during a period of rising prices.
b. LIFO tends to smooth out the net income pattern, since it matches current cost of goods sold with current revenue, when inventories remain at constant quantities.
c. When a firm using the LIFO method fails to maintain its usual inventory position (reduces stock on hand below customary levels), there may be a matching of old costs with current revenue.
d. The use of FIFO permits some control by management over the amount of net income for a period through controlled purchases, which is not true with LIFO.


6. Jamison Corporation’s inventory cost on its statement of financial position was lower using first-in, first-out than last-in, first-out. Assuming no beginning inventory, what direction did the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot be determined


7. If inventory levels are stable or increasing an argument that favors the FIFO method as compared to LIFO is
a. Income taxes tend to be reduced in periods of rising prices
b. Cost of goods sold tends to be stated at approximately current cost in the income statement
c. Cost assignments typically parallel the physical flow of the goods
d. Income tends to be smoothed as prices change over time


8. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is
c. Conventional retail
d. Weighted average


9. When inventory declines in value below original (historical) cost, and this decline is considered other than temporary, what is the maximum amount that the inventory can be valued at?
a. Sales price net of conversion costs
b. Net realizable value
c. Historical cost
d. Net realizable value reduced by a normal profit margin


10. Which of the following inventory cost flow methods involves computations based on broad inventory pools of similar items?
a. Regular quantity of goods LIFO
b. Dollar-value LIFO
c. Weighted average
d. Moving average

11. When the allowance method of recognizing bad debt expense is used, the entries at the time of collection of an account previously written off would
a. Increase net income
b. Have no effect on total current assets
c. Increase working capital
d. Decrease total current liabilities


12. The original cost of an inventory item is above the replacement cost. The replacement cost is below the net realizable value less the normal profit margin. Under the lower of cost or market method the inventory item should be priced at its
a. Original cost
b. Replacement cost
c. Net realizable value
d. Net realizable value less the normal profit margin

13. Liquidity is the ability
a. To increase net assets through regular operations
b. To generate cash from sources other than regular operations
c. To convert existing assets into cash
d. Of financial statement users to predict a company’s cash flows


14. Liquidity ratios measures the
a. Operating success of a company over a period of time
b. The ability of a company to survive over a long period of time
c. The short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash
d. The number of times interest is earned


15. Working capital is a measure of
a. Financial flexibility
b. Liquidity.
c. Profitability.
d. Solvency.


16. A common measure of liquidity is
a. Return on assets.
b. Accounts receivable turnover.
c. Profit margin.
d. Debt to equity.


1. The net realizable value of receivables is calculated as the face value of the receivables less adjustments for
a. Credit sales
b. Actual uncollected amounts adjusted for purchase discounts.
c. Bad debts already written off.
d. Estimated uncollectible accounts

18. A successful discount retail store such as Wal-Mart would probably have
a. A low inventory turnover
b. A high inventory turnover
c. Zero profit margin
d. Low volume

Use the following information to answer questions
Acme Auto Supplies
Balance Sheet
December 31, 2007

Cash $ 60,000 Accounts Payable $ 65,000
Prepaid Insurance 40,000 Salaries Payable 10,000
Accounts Receivable 50,000 Mortgage Payable 90,000
Inventory 70,000 Total Liabilities $165,000
Land held for investment 80,000
Land 95,000
Building $100,000 Common Stock $120,000
Less Accumulated Retained Earnings 250,000
Depreciation (30,000) 70,000 Total stockholders’ equity $370,000
Trademark 70,000 Total Liabilities and
Total Assets $535,000 Stockholders’ Equity $535,000

19. The total amount of working capital is
a. $155,000.
b. $145,000.
c. $60,000.
d. $150,000.


20. The current ratio is
a. 1.86 : 1.
b. 2.00 : 1.
c. 3.38 : 1.
d. 2.93 : 1.



1. Define working capital.

2. Define the following terms:
a. Cash equivalents

b. Temporary investments

c. Receivables

d. Inventories

e. Payables

f. Deferrals

g. Current maturities

3. Define the following terms:
a. LIFO liquidation

b. LIFO conformity

c. Lower of cost or market inventory valuation

4. List and briefly define the methods of accounting for investments under SFAS No. 115“Accounting for Certain Investments in Debt and Equity Securities” (FASB ASC 320).

5. Define and discuss the two methods of estimating bad debts on receivables.

6. Why are cost flow assumptions used to determine inventory valuations? Define and explain the rationale for using each of the cost flow assumptions.


7. Obtain a company’s financial statements and ask the students to compute the following:
a. Working capital
b. Current ratio
c. Acid test ratio
d. Cash flow from operations to current liabilities ratio
e. Accounts receivable turnover
f. Inventory turnover