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MKT 515 Final Exam

MKT 515 Week 11 Final Exam – Strayer

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Chapter 9 Through 19

Chapter 9

Multiple Choice

1. In global market entry, all of the following are entry decisions that must be made by
management before entering an international market EXCEPT:

a. decide on the time of entry.
b. decide on the target product/market.
c. decide on the goals of the target markets.
d. decide on the mode of entry.
e. decide on the target budget.

2. When marketers are making the decision to enter an international market or not, the
first step is generally to:

a. decide on the target budget.
b. decide on the target product/market.
c. decide on the goals of the target markets.
d. decide on the mode of entry.
e. decide on the time of entry.

3. When marketers are making the decision to enter an international market or not, the
final step in the decision process is generally to:

a. decide on a control system to monitor the performance of the entered market.
b. decide on the target product/market.
c. decide on the goals of the target markets.
d. decide on the mode of entry.
e. decide on the time of entry.

4. Which of the following most accurately describes the first step in the market entry
decision process?

a. Decide on the goals of the target markets.
b. Decide on the mode of entry.
c. Decide on the time of entry.
d. Decide on the target product/market.
e. Decide on the marketing mix plan.

5. Which of the following is a step in the market entry decision process?

a. Forecast a corporate budget.
b. Conduct a marketing audit.
c. Decide on a mode of entry.
d. Review transportation strengths.
e. Analyze domestic demand.

6. To identify market opportunities for a given product or service, the international
marketer usually starts off with a large pool of candidate countries. To narrow down
this pool, the company will typically do a(n) _______________________.

a. internal audit.
b. external audit.
c. cross-border budget.
d. preliminary screen.
e. econometric analysis.

7. The goals of a preliminary screen to determine market opportunities are to minimize
mistakes of ignoring countries that offer viable opportunities for the product and:

a. offending local governments.
b. offending local cultures.
c. offending local merchants.
d. violating local advertising laws.
e. not wasting time on countries that offer little or no potential.

8. The four-step procedure that can be employed for the initial screening process
includes all of the following EXCEPT:

a. select indicators and data selection.
b. analyze parallel strengths and weaknesses of the market.
c. determine the importances of country indicators.
d. rate the countries in the pool on each indicator.
e. compute the overall scores for each country.

9. When Colgate-Palmolive sees prospects in countries with purchasing power as a
major driver behind market opportunities and Coca-Cola looks at per capita income
and the number of minutes that it would take someone to work to be able to afford a
Coca-Cola product, they are following which of the following steps of the initial
screening process for market entry?

a. indicator and data selection.
b. analyze parallel strengths and weaknesses of the market.
c. determine the importances of country indicators.
d. rate the countries in the pool on each indicator.
e. compute overall scores for each country.

10. A four-step procedure that can be employed for the initial screening process includes
the following EXCEPT:

a. select indicators and collect data.
b. determine importance of country indicators.
c. hire outside consultants to do a marketing audit.
d. rate the countries in the pool on each indicator.
e. compute overall score for each country.

11. When Coca-Cola looks at per capita income and the number of minutes that it would
take for somebody to work to be able to afford a Coca-Cola product, the company is
following which of the following steps of the initial screening process for
market entry?

a. indicator and data selection.
b. analyze parallel strengths and weaknesses of the market.
c. determine the importances of country indicators.
d. rate the countries in the pool on each indicator.
e. compute overall scores for each country.

12. Wrigley, the U.S. chewing gum manufacturer, has not been interested in most Latin
American markets because many of the local governments imposed ownership
restrictions. This would be an example of ________________ in markets.

a. finding opportunities
b. “weeding out”
c. cross-fertilization
d. demand conflict
e. unfairness

13. One method of assessing whether a company should enter a foreign market or not is
to use an opportunity matrix. To use such a matrix, the marketer should assess high,
moderate, and low opportunities as measured on business and political risk and
___________________ scales or cells.

a. demand
b. financial constraints
c. market opportunities
d. market sensitivity
e. distance from home market

14. All of the following are major external criteria for making a decision as to a mode of
entry into a foreign market EXCEPT:

a. company leadership.
b. market size and growth.
c. need for control.
d. government regulations.
e. local infrastructure.

15. The key determinant in the market entry choice decisions is the:

a. risk.
b. local infrastructure.
c. flexibility.
d. internal resources and assets.
e. market size and growth potential.

16. In the mode of entry, many companies see liaison office as a low-cost
___________________.

a. joint venture
b. export management company
c. listening post
d. contract exporter
e. alliance post

17. The ____________________ of a market refers to the country’s distribution system,
transportation network, and communication system.

a. demographic environment
b. infrastructure
c. logistical
d. physical distribution
e. physical infrastructure

18. Markets can be classified in four types of countries based on their respective market
attractiveness. All of the following are part of the classification scheme EXCEPT:

a. platform countries.
b. emerging countries.
c. low-tech countries.
d. growth countries.
e. maturing and established countries.

19. Markets can be classified in four types of countries based on their respective market
attractiveness. Which of the following of those types can be used to gather
intelligence and establish a network?

a. platform countries.
b. emerging countries.
c. maturing and established countries.
d. growth countries.
e. none of the above.

20. Markets can be classified in four types of countries based on their respective market
attractiveness. Hong Kong and Singapore would fall into which of the types listed
below (where the purpose would be to gather intelligence and establish a network)?

a. platform countries.
b. emerging countries.
c. maturing and established countries.
d. growth countries.
e. none of the above.

21. Markets can be classified in four types of countries based on their respective market
attractiveness. Which of the following of those types can be used to build up an
initial presence (such as through a liaison office)?

a. platform countries.
b. emerging countries.
c. maturing and established countries.
d. growth countries.
e. none of the above

22. Markets can be classified in four types of countries based on their respective market
attractiveness. Vietnam and the Philippines would fall into which of the types listed
below (where the purpose would be to build up an initial presence such as through a
liaison office)?

a. platform countries.
b. emerging countries.
c. maturing and established countries.
d. growth countries.
e. none of the above.

23. Markets can be classified in four types of countries based on their respective market
attractiveness. Which of the following countries would most likely be listed as a
maturing/established market?

a. China.
b. Burma.
c. India.
d. Taiwan.
e. China.

24. Markets can be classified in four types of countries based on their respective market
attractiveness. Which of the following countries would most likely be listed as an
established/maturing market?

a. China.
b. the Philippines.
c. India.
d. Vietnam.
e. Japan.

25. Markets can be classified in four types of countries based on their respective market
attractiveness. Which of the following countries would most likely be listed as
a growth country?

a. Hong Kong.
b. Vietnam.
c. China.
d. Taiwan.
e. Japan.

26. A _________________________ perspective argues that the desirable governance
structure (high- versus low-control mode) will depend on the comparative transaction
costs (the costs of running an operation).

a. demand-delivery
b. just-in-time management
c. management-by-objectives
d. quantity-cost allocation
e. transaction-cost analysis

27. From a transaction-cost analysis perspective, market failure typically happens when
transaction-specific assets become _________________ and therefore more high-
control situations are needed.

a. optional
b. valuable
c. expendable
d. less-valuable
e. weaker

28. Most companies start their international expansion with _________________.

a. exporting
b. joint ventures
c. licensing
d. franchising.
e. contract manufacturing.

29. In the area of exporting, a middleman could be an __________________________.

a. export outsourcing company
b. export management company
c. export production company
d. export specialist company
e. export manufacturing company

30. Companies that plan to engage in exporting have a choice between indirect,
_________________, and direct exporting.

a. licensing
b. parallel
c. cooperative
d. venture
e. summation

31. _______________________ means that the firm uses a middleman based in its home
market to do the exporting.

a. Licensing
b. Contract manufacturing
c. Cooperative exporting
d. Venture exporting
e. Indirect exporting

32. ___________________ offers several advantages. Chief among these
are the firm gets instant foreign market expertise, very little risk is involved, and
no major resource commitments are required.

a. Licensing
b. Parallel exporting
c. Cooperative exporting
d. Direct exporting
e. Indirect exporting

33. ___________________ has disadvantages. Chief among these are that the company
has little or no control over the way their product is marketed in a foreign country,
lack of adequate sales support (among other support variables) can lead to poor sales,
and bad decisions made by an intermediary can damage the corporate image.

a. Licensing
b. Parallel exporting
c. Cooperative exporting
d. Direct exporting
e. Indirect exporting

34. ______________________ means that the firm enters into an agreement
with another firm (local or foreign) where the partner will use its distribution network
to sell the exporter’s goods.

a. Licensing
b. Parallel exporting
c. Cooperative exporting
d. Venture exporting
e. Indirect exporting

35. ______________________ means that the company sets up its own
export organization within the company and relies on a middleman based in a
foreign market (foreign distributor).

a. Licensing
b. Parallel exporting
c. Cooperative exporting
d. Direct exporting
e. Indirect exporting

36. Cooperative exporting is also called:

a. specialist exporting.
b. lean exporting.
c. long-range exporting.
d. backward exporting.
e. piggyback exporting.

37. One of the most popular forms of cooperative exporting is _________________.
With this method, the company uses the overseas distribution network of another
company (local or foreign) for selling its goods in the foreign market.

a. parallel exporting.
b. venture exporting.
c. piggyback exporting.
d. make-or-buy exporting.
e. foreign export management exporting.

38. One of the main advantages of direct exporting over indirect exporting is that the
exporter has more:

a. leverage.
b. risk.
c. control over its operations.
d. budget.
e. leadership.

39. ___________________ is a contractual strategy where the firm offers some
proprietary assets to a foreign company in exchange for royalty fees.

a. Licensing
b. Parallel exporting
c. Cooperative exporting
d. Direct exporting
e. Indirect exporting

40. The Oriental Land Company in Japan owns Tokyo Disneyland. This would be
an example of an international _________________ agreement between the
Oriental Land Company (owner) and Disneyland (receives royalties).

a. licensing
b. parallel exporting
c. cooperative exporting
d. direct exporting
e. indirect exporting

41. Benefits of licensing include:

a. not very demanding on company resources.
b. always protected against copying or technical theft.
c. always a strong partner relationship.
d. low profits, therefore, low taxes.
e. licensee is always enthusiastic.

42. Nurturing a future competitor is the biggest danger in ___________________.

a. licensing
b. parallel exporting
c. cooperative exporting
d. direct exporting
e. indirect exporting

43. One of the most popular entry modes in the international marketplace for service
firms is:

a. licensing.
b. franchising.
c. cooperative exporting.
d. direct exporting.
e. indirect exporting.

44. According to the textbook, in franchising, companies can capitalize on a _______________________________.

a. cheap business formula.
b. expensive business formula.
c. winning business formula.
d. parallel business formula.
e. hybrid business formula.

45. One of the most popular franchise plans used in international marketing is
____________________ where the franchiser gives the franchise to a local
entrepreneur who in turn sells local franchises within a territory.

a. sales franchise
b. master franchise
c. strategic franchise
d. cross-country franchise
e. border-territory franchise

46. In ____________________, the company arranges with a local manufacturer to
manufacture parts of the product or even the entire product. The marketing of the
product, however, is still the responsibility of the international firm.

a. licensing
b. franchising
c. cooperative exporting
d. contract manufacturing
e. indirect exporting

47. ___________________ are(is) the prime motivation behind contract manufacturing.

a. Advertising cooperation
b. Leadership
c. Cost savings
d. Profit expansion
e. Desire to be part of a cartel

48. Like licensing and franchising, nurturing a future competitor is one of the biggest
dangers in ___________________.

a. contract manufacturing.
b. parallel exporting.
c. cooperative exporting.
d. using an export management company.
e. indirect exporting.

49. In contract manufacturing, because of “nurture-a-future competitor” threat, many
companies prefer to make ___________________ or products that involve
proprietary design features in-house.

a. just-in-time items
b. under-value items
c. low-value items
d. high-value items
e. none of the bove

50. With a __________________, the foreign company agrees to share equity and other
resources with other partners to establish a new entity in the target country.

a. contract manufacturing agreement
b. parallel exporting agreement
c. cooperative exporting agreement
d. export management company
e. joint venture

51. A major advantage of joint ventures, as compared to lesser forms of resource
commitment such as licensing, is:

a. the return potential.
b. infrastructure enhancement.
c. expansion of stockholders.
d. division of leadership.
e. an increase in ethical standards.

52. All of the following are considered benefits of forming joint ventures EXCEPT:

a. greater return potential.
b. shared profits instead of shared royalties.
c. more control over operations.
d. increased cost controls.
e. synergies.

53. With respect to joint ventures, the ________________ argument is illustrated by
not only shared capital and risk but possible contributions brought in by the local
partner in land, raw materials, expertise on the local environment, and access to
local distribution networks.

a. demand
b. parallel management
c. consensus management
d. domestication
e. synergy

54. Lack of trust and mutual conflicts can often turn ______________ into partnerships
doomed to failure.

a. contract manufacturing agreements
b. parallel exporting agreements
c. cooperative exporting agreements
d. export management companies
e. joint ventures

55. One of the problems with joint ventures is ________________ between partners. An
example would be when one partner wants to stress reduction of political and
economic controls on decision-making and the other partner wants to accept
technology and capital but precludes foreign authority infringement on sovereignty
and ideology.

a. conflicting purchasing objectives
b. conflicting process objectives
c. control objectives
d. budget objectives
e. staffing objectives

56. There are no magic ingredients to foster the stability of joint ventures, however, all
of the following are good guidelines EXCEPT:

a. pick a partner with which control can be maintained.
b. pick the right partner.
c. establish clear objectives from the beginning.
d. bridge cultural gaps.
e. get top management commitment and respect.

57. _____________________ come about when multinational companies prefer to enter
new markets with 100 percent ownership.

a. Contract manufacturing agreements
b. Parallel exporting agreements
c. Cooperative exporting agreements
d. Wholly owned subsidiaries
e. Joint ventures

58. When a multinational company chooses to invest in foreign markets with wholly
owned subsidiaries, these subsidiaries may be acquisitions or _______________
operations.

a. joint venture
b. strategic alliance
c. greenfield
d. franchise
e. piggyback

59. A _________________ operation (with respect to wholly owned subsidiaries) is one
which is started from scratch.

a. joint venture
b. strategic alliance
c. greenfield
d. franchise
e. piggyback

60. Wholly owned subsidiaries give MNCs _______________ of their operations.

a. almost no control
b. partial control
c. moderate control
d. full control
e. strategic control only

61. Advantages of wholly owned subsidiaries include all of the following EXCEPT:

a. full control.
b. control of profits.
c. own processes.
d. control government relationships.
e. can often be set quicker that other forms of investment.

62. One of the chief disadvantages of a wholly owned subsidiary is that:

a. it is often perceived as a threat to cultural or economic sovereignty.
b. it is often perceived as generating low profits.
c. it is often perceived as having problems in supply lines.
d. it is often perceived as being more expensive
e. it is often perceived as a threat to the local media for promotion.

63. One way to address hostility to foreign acquisitions in the host country is by
______________ the firm’s presence in the foreign market by hiring local managers,
sourcing locally, and developing local brands.

a. regionalizing
b. localizing
c. socializing
d. acculturating
e. emphasizing the self-reference criterion (SRC)

64. Companies that enter via wholly owned subsidiaries are sometimes perceived as a
threat to the culture and/or economic sovereignty of the____________________.

a. host country.
b. home country.
c. buffer country.
d. greenfield country.
e. high-tech country.

65. The chief reason that some firms choose acquisitions (or mergers) to enter a foreign
market is that they can:

a. receive greater tax relief.
b. receive greater profits.
c. reduce debt.
d. increase stock price.
e. enter the market more quickly.

66. When contrasted with greenfield operations, _________________ provide(s) a rapid
means to get access to the local market.

a. licensing
b. exporting
c. contract manufacturing
d. acquisitions
e. joint ventures

67. __________________ are described as a coalition of two or more organizations to
achieve strategically significant goals that are mutually beneficial.

a. Joint ventures
b. Strategic alliances
c. Greenfield operations
d. Franchises
e. Piggyback arrangements

68. The partnership established by Coca-Cola and Nestle to market ready-to-drink coffees
and teas under the Nescafe and Nestea brand names is an example of which of the
following:

a. strategic alliance.
b. contract manufacturing.
c. licensing.
d. wholly owned subsidiary.
e. exporting.

69. All of the following are illustrations of the four generic reasons for forming
strategic alliances EXCEPT:

a. offense.
b. defense.
c. catch-up.
d. remain.
e. restructure.

70. The underlying goal of _________________ in creating a strategic alliance is to
sustain the firm’s leadership position by learning new skills, getting access to new
markets and developing new technologies.

a. offense
b. defense
c. catch-up
d. remain
e. restructure

71. The strategic alliance strategy of ______________ might be enacted when the firm
has an established leadership position but that only plays a peripheral role in the
company’s business portfolio.

a. offense
b. defense
c. catch-up
d. remain
e. restructure

72. When a firm uses a strategic alliance as a vehicle to rejuvenate a business that is
not core and in which it has no leadership position, it is probably using a
________________ strategy.

a. defend
b. catch up
c. restructure
d. remain
e. none of the above

73. Decisions to exit or divest a foreign market may have all the following reasons
EXCEPT:

a. sustained losses.
b. volatility.
c. premature entry.
d. ethical reasons.
e. new market.

74. Risks of exiting a foreign market may lead to all the following EXCEPT:

a. fixed costs of exit.
b. disposition of assets.
c. short-term opportunities.
d. signal to other markets.
e. long-term opportunities.

True/False Short Answer

75. The first step in the process of entering a foreign market is to decide on the
_____________________.

76. Preliminary screening is an accepted method of reducing the number of candidates
for market entry.

77. As an example of a preliminary screening process in assessing international market
opportunities, Colgate-Palmolive uses assessments of whether people bath regularly
or not as a critical factor in deciding whether to enter a market or not.

78. To identify market opportunities for a given product (or service), the international
marketer usually starts off with a large pool of candidate cities.

79. Colgate-Palmolive views per capita purchasing power as a major driver
behind market opportunities.

80. _________________ countries (with respect to market attractiveness) can be used to
gather intelligence and establish a network.

81. An example of a platform country is India.

82. An example of a growth country is China.

83. An example of an emerging country (with respect to market attractiveness) is
the Philippines.

84. Corporate objectives have no influence in choosing entry modes.

85. From the transaction cost analysis, market failure typically happens when
transaction-specific assets become valuable.

86. When going abroad most companies start their international expansion with
_______________.

87. Piggyback exporting is when two different transportation modes (such as truck and
rail) are combined.

88. Under ___________ exporting, a firm sets up its own export department and sells its
products via a middleman located in the foreign market.

89. In a master franchise, the franchiser gives a master franchise to a local entrepreneur,
who will, in turn, sell local franchises within a territory.

90. Contract manufacturing is also known as outsourcing.

91. In a cooperative joint venture, the partners agree to raise capital in proportion to the equity stakes agreed upon.

92. Ownership strategies in foreign markets can take two forms: acquisitions and
____________________.

93. There four generic reasons for forming strategic alliances are defense, catch-up,
remain, and __________________.

94. Strategic alliances between strong and weak partners often work because of the
synergy and learning that can take place between mentor and subordinate.

95. Stable alliances have the commitment and support of the top of the parents’
organizations.

96. Exiting a country often involves substantial fixed cost.

Essay

97. List the steps in the global market entry decision process. Which of the steps is probably the most important in the overall success of the foreign venture? Justify your answer.

98. Explain what is meant by the concept of a liaison office and why some firms prefer to use this technique to enter markets.

99. Briefly, explain the concept of licensing in a foreign market. In addition, cite the benefits and drawbacks of licensing. Be specific in your responses.

100. Briefly explain the concept of joint venture. Additionally, give the benefits and drawbacks of entering into a joint venture.

101. Provide an assessment of strategic alliances. What are they used for, what are the characteristics of those that generally succeed, and what are the general types? Be sure to be specific in your answers.

Chapter 10

Multiple Choice

1. Ikea, the Swedish furniture chain, insists that all its stores carry the basic product
line with little room for adaptation to local tastes. If research of the U.S. market
showed that Americans preferred larger beds than their Swedish counterparts, which
of the following strategies would be advisable to Ikea?

a. standardization.
b. new product development.
c. adaptation.
d. withdraw from market.
e. lower prices to encourage attitude change.

2. In the Australian market, rather than manufacturing disposable diapers, Procter & Gamble decided to import them since the size of the market did not warrant local
manufacturing according to P&G. Unfortunately, by using packaging designed for the Asian region with non-English labeling, P&G alienated its customers in Australia. This is an example of improper:

a. global policy decisions.
b. pricing decisions.
c. brand policy decisions.
d. product policy decisions.
e. company policy decisions.

3. Even though other combination alternatives can be devised, companies generally can
pursue three global product strategies to penetrate foreign markets. These strategies
are to extend the home-grown product/communication strategies, adapt their strategy
to the local marketplace, and:

a. invent new products for foreign customers.
b. concentrate on services.
c. apply for permission to copy domestic products.
d. concentrate on image adjustment.
e. focus on secondary issues (such as warranties).

4. In the area of global product policy, companies can pursue three strategies to penetrate
foreign markets. The strategies include:

a. extension, adaptation, and invention.
b. extension, adaptation, and prevention.
c. extension, adaptation, and creation.
d. extension, adaptation, and placement.
e. extension, adaptation, and balancing.

5. Which of the following is NOT one of the strategic options available to the marketing
planner, considering various product policies that could be devised for the
international marketplace?

a. product and communication extension–dual extension.
b. communication extension–mono extension.
c. product extension–communications adaptation.
d. product adaptation–communications extension.
e. product and communications adaptation–dual adaptation.

6. If a company were to follow a strategy of product and communication extension
(dual extension) in a foreign market, an example of a product category that would
fit this strategy would be _________________________.

a. personal care items
b. motorscooters
c. gasoline
d. clothing
e. hand-powered washing machines

7. If a company were to follow a strategy of product adaptation-communications
extension in a foreign market, an example of a product category that would
fit this strategy would be __________________.

a. soft drinks
b. motorscooters
c. shampoo
d. clothing
e. hand-powered washing machines

8. If a company were to follow a strategy of product extension-communications
adaptation in a foreign market, an example of a product category that would
fit this strategy would be __________________.

a. soft drinks
b. gum
c. shampoo
d. clothing
e. hand-powered washing machines

9. If a company were to follow a strategy of product and communications
adaptation (dual adaptation) in a foreign market, an example of a product category that
would fit this strategy would be __________________.

a. soft drinks
b. motorscooters
c. gasoline
d. diet aids
e. hand-powered washing machines

10. If a company is an early entrant in the global arena and possesses little
in the way of resources, they will probably chose _____________________ as a
method of entry.

a. product and communication extension–dual extension
b. product invention
c. product extension–communications adaptation
d. product adaptation–communications extension
e. product and communications adaptation–dual adaptation

11. As a strategy, ____________________ will work when the company targets a
“global” segment with similar needs.

a. product and communication extension–dual extension
b. product invention
c. product extension–communications adaptation
d. product adaptation–communications extension
e. product and communications adaptation–dual adaptation

12. The biggest advantage of a product and communication extension–dual extension
policy is:

a. it is easy for management to understand.
b. it offers substantial savings because of economies of scale.
c. it passes most legal tests.
d. it is service oriented.
e. it will usually not violate cultural taboos.

13. Due to differences in the cultural or competitive environment, a company may choose
the _______________________ strategy if it wishes to keep its product economies
scale intact but customize its communications.

a. product and communication extension–dual extension
b. product invention
c. product extension–communications adaptation
d. product adaptation–communications extension
e. product and communications adaptation–dual adaptation

14. When the Wrigley chewing gum company markets its basic products abroad, it keeps
its well-known brands but customizes promotional approaches in individual
countries. Which of the following strategies best describes the strategy that
Wrigley is following?

a. product and communication extension–dual extension
b. product invention
c. product extension–communications adaptation
d. product adaptation–communications extension
e. product and communications adaptation–dual adaptation

15. Many companies add brands to their portfolio via acquisitions of local companies.
When the local brand is retained but incorporated into the existing communications
strategy, the strategy can be described as being one of:

a. product and communication extension–dual extension.
b. product invention.
c. product extension–communications adaptation.
d. product adaptation–communications extension.
e. product and communications adaptation–dual adaptation.

16. Differences in both the cultural and physical environment across countries call for a
_________________________ strategy.

a. product and communication extension–dual extension
b. product invention
c. product extension–communications adaptation
d. product adaptation–communications extension
e. product and communications adaptation–dual adaptation

17. Because of differences in preferences in flavors and government regulations
regarding the marketing of diet products, Slim-Fast normally uses which of the
following strategies?

a. product and communication extension–dual extension
b. product invention
c. product extension–communications adaptation
d. product adaptation–communications extension
e. product and communications adaptation–dual adaptation

18. Genuinely global marketers try to figure out how to create products with a global
scope rather than just for a single country. The mindset is to zero in on global
opportunities. The strategy that best describes this approach is called:

a. product and communication extension–dual extension.
b. product invention.
c. product extension–communications adaptation.
d. product adaptation–communications extension.
e. product and communications adaptation–dual adaptation.

19. Black & Decker is a good example of a company that adopts the _______________
approach to global expansion. The company aims to bring out new products that
cater to common needs and opportunities around the world.

a. product and communication extension–dual extension
b. product invention
c. product extension–communications adaptation
d. product adaptation–communications extension
e. product and communications adaptation–dual adaptation

20. __________________ means offering a uniform product on a regional or
worldwide basis (only minor alterations are made to meet local standards).

a. Customization
b. Standardization
c. Miniaturization
d. Assimilation
e. Marginalization

21. The primary advantage to using a standardization approach to marketing a product
in the international arena is:

a. minimization of costs (which can be passed on to customers).
b. more profit.
c. less service complaints.
d. less product returns.
e. standard budgets.

22. Standardization of product has a __________________ orientation (lower costs via
mass production).

a. market-driven
b. service-driven
c. budget-driven
d. promotion-driven
e. product-driven

23. ____________________ is leveraging cross-border differences in needs and wants
of the firm’s target customers.

a. Customization
b. Standardization
c. Proliferation
d. Expansion
e. Synthesizing

24. Customization of product has a ______________________ orientation (increase
customer satisfaction by adapting products to the local needs).

a. market-driven
b. service-driven
c. budget-driven
d. promotion-driven
e. product-driven

25. All of the following are factors that favor a globalized product strategy EXCEPT:

a. common customer needs.
b. global customers.
c. scale economies.
d. time-to-market.
e. rising strength of the Latin American markets.

26. Many product categories show a gradual but steady ____________________
in consumer preferences.

a. slowdown.
b. difficulties
c. convergence.
d. divergence.
e. rising strength of the Latin American markets.

27. During the last decade, car buyers in the Triad markets (Japan, the United States, and
Europe) have increasingly begun to have the same outlook and preferences in cars.
Which of the following factors that favor globalization of product, would most
accurately be associated with this trend?

a. common customer needs.
b. global customers.
c. scale economies.
d. time-to-market.
e. Europe 1992 and other Regional Market Agreements.

28. _____________________ means shortening the time to bring new product projects to
the market.

a. Delivery-to-market
b. Orientation-to-market
c. Time-to-market
d. Extension-to-market
e. Perfection-to-market

29. One attempt to combine the strengths of standardization and customization of
products is to deal with both issues as functions of product design. The
_______________ approach consists of developing a range of product parts that
can be used worldwide. The parts can be assembled into numerous product
configurations.

a. core-product
b. uniform commercial code
c. die-casting
d. modular
e. Nexus

30. In a ______________________, scale economies flow from the mass production of
more-or-less standard product components at a few manufacturing sites.

a. convergence approach
b. divergence
c. linear approach
d. forecasting approach
e. modular approach

31. One attempt to combine the strengths of standardization and customization of
products is to deal with both issues as functions of product design. The
_______________ approach consists of developing a mostly uniform core-
product/platform and then adding attachments that match local market needs.

a. core-product
b. uniform commercial code
c. die-casting
d. modular
e. PRIZM

32. With respect to product design strategies, the ___________________ approach is
very popular with the French carmaker Renault. They use common core-products
but customize them in each market (such as making stronger heaters for the Nordic
market).

a. core-product
b. uniform commercial code
c. die-casting
d. modular
e. PRIZM

33. One of the disadvantages that a global marketer may have is ___________________.
This would occur when too much standardization stifles initiative and experimentation
at the local level.

a. overcustomization
b. micro-managing
c. technocracy
d. group think
e. overstandardization

34. One of the pitfalls that a global marketer can run into is _____________. This
would occur when too much adaptation to the local market occurs and the brand
becomes vulnerable to losing its unique foreigness.

a. overcustomization
b. micro-managing
c. technocracy
d. group think
e. overstandardization

35. Adoption rates of new products are affected by:
a. population homogeneity
b. proportion of women in the labor force
c. cosmopolitanism
d. mobility
e. all of the above

36. In general, the rate of adoption of new products (in foreign markets) is driven by
individual differences, personal influences, and:

a. fashion.
b. trends.
c. cash on hand.
d. product characteristics.
e. promotion characteristics.

37. In general, the adoption of new products is driven by factors such as:

a. individual differences.
b. personal influences.
c. product characteristics.
d. all of the above.
e. none of the above.

38. ___________________ are always eager to experiment with new ideas and products.

a. Early adopters.
b. Early majority.
c. Late majority.
d. Laggards.
e. Prior adopters.

39. Which of the following would NOT be one of the five key product characteristics
that contribute to its acceptance?

a. low service maintenance.
b. relative advantage.
c. compatibility.
d. complexity.
e. trialability.

40. To what extent does the new product offer more perceived value to potential adopters
than exiting alternatives, would be a question that best fits with which of the following
key product characteristics acceptance categories?

a. observability.
b. relative advantage.
c. compatibility.
d. complexity.
e. trialability.

41. Is the product consistent with exiting values and attitudes of the individuals in the
social system, would be a question that best fits with which of the following
key product characteristics acceptance categories?

a. observability.
b. relative advantage.
c. compatibility.
d. complexity.
e. trialability.

42. Is the product easy to understand or use, would be a question that best fits with which
of the following key product characteristics acceptance categories?

a. observability.
b. relative advantage.
c. compatibility.
d. complexity.
e. trialability.

43. The adoption rate for new products in countries with a ________________
population is usually faster than in countries with a highly diverse culture.

a. heterogeneous
b. complex
c. diverse
d. homogeneous
e. polycentric

44. The adoption rate for a new product in countries with a homogeneous population
is usually faster than in countries with a highly diverse culture. Which of the
following countries would probably have the fastest adoption based on the
information provided above?

a. Ireland.
b. United States.
c. Japan.
d. United Kingdom.
e. France.

45. With respect to adoption rates in the international marketplace, it appears to be
generally true that adoption rates are higher in ______________ countries than in
____________ countries.

a. lead/lag
b. lag/lead
c. lead/middle adopters
d. lag/middle adopters
e. lead/opinion-lead

46. A _________________ country is where a product is first introduced.

a. lag
b. low-profile
c. lead
d. high-profile
e. fast

47. A _________________ country is where a product is entered after initial introduction
has taken place.

a. lag
b. low-profile
c. lead
d. high-profile
e. fast

48. _______________________ are people who look beyond their immediate social
surroundings and are not local in their opinions.

a. Domestics
b. Introverts
c. Negotiators
d. Cosmopolitans
e. Regionalists

49. All of the following are factors that affect product penetration in the European market
(according to a recent survey), EXCEPT:

a. cosmopolitanism.
b. number of locals in the market.
c. mobility.
d. percentage of children in the labor force.
e. percentage of women in the labor force.

50. A recent study examined the difference of six products in 31 developing and
developed countries across the world. A key finding was that ___________________
tend to experience a far slower adoption rate than developed countries.

a. European countries
b. global countries
c. advanced countries
d. developed countries
e. emerging market countries

51. All of the following are steps in the new product development process EXCEPT:

a. identification of new product ideas.
b. budget development.
c. screening.
d. concept testing.
e. test marketing.

52. Which of the following are among the best sources for finding new product ideas?

a. company, customers, competition, and collaborators.
b. trade magazines, television, and the internet.
c. government statistics, demographic charts, and psychological profiles.
d. reverse engineering, industrial spying, and out-of-date patents.
e. rumors, stories, and intuition.

53. Once new product ideas have been identified, the next logical step is to have
the ideas _______________.

a. modeled
b. budgeted
c. screened
d. concept tested
e. test marketed

54. ______________ is part of a formal scoring model in screening new products.

a. New Prod
b. ExProd
c. YProd
d. ZProd
e. none of the above

55. Conjoint analysis is also referred to as _____________________.

a. geometric analysis
b. trade-off analysis
c. meta analysis
d. longitudinal analysis
e. metric analysis

56. A sophisticated method (sometimes called trade-off analysis) for measuring
consumer preferences for product concepts is called:

a. chi-square.
b. correlation analysis.
c. focus groups.
d. regression analysis.
e. conjoint analysis.

57. The starting premise of _______________ is that people make trade-offs between
the different product attributes when they evaluate alternatives (or brands) from
which they pick a choice.

a. chi-square
b. correlation analysis
c. focus groups
d. regression analysis
e. conjoint analysis

58. If a consumer considered four attributes to be important in the purchase of a TV, by
using ________________ the researcher might be able to determine the trade-offs
between the different product attributes (such as purchase price or number of channels
that could be received) when the consumer evaluated the alternatives for eventual
purchase.

a. chi-square
b. correlation analysis
c. focus groups
d. regression analysis
e. conjoint analysis

59. A(n) ________________ is essentially a field experiment where the new product is
marketed in a select set of cities to assess its sales potential and scores of other
performance measures.

a. attitude screen
b. product model
c. product concept
d. test market
e. focus concept

60. Testing objectives, testing marketing mixes, making projections of sales volume,
and analyzing potential competitive marketing mixes are all reasons to conduct:

a. attitude screens.
b. product models.
c. product concepts.
d. test markets.
e. focus concepts.

61. One alternative to the test market is the _____________________.

a. thought panel
b. laboratory test market
c. internet exposure technique
d. preferred patron experiment
e. use of break-even analysis

62. If prospective customers are contacted and shown commercials for the new
product and existing brands (then asked to state attitudes and preferences of what
they have seen), then the marketing research entity will probably have conducted
a(n) __________________ instead of a full test market.

a. thought panel
b. laboratory test market
c. internet exposure technique
d. preferred patron experiment
e. break-even analysis

63. A common technique to avoid a global test market is to make global sales projections
based on product performance in a ________________ market.

a. lag
b. middle adopter
c. lead
d. opinionated
e. innovative

64. Timing is a very important element in any new product launch. One of the strategies
is described as being the ________________ where there is a phased rollout. In this
approach the product uses a trickle down approach.

a. sprinkler method
b. shotgun method
c. rifle method
d. dribble method
e. waterfall method

65. Timing is a very important element in any new product launch. One of the strategies
is described as being the ________________. This method often involves introducing
the new product in the company’s home market and then moving to other advanced
markets. Finally, less advanced markets are exposed to the product.

a. sprinkler method
b. shotgun method
c. rifle method
d. dribble method
e. waterfall method

66. The prime motive for the waterfall model (in introducing new products on a global
scale) is that the customization of the product for the foreign market is:
a. impractical.
b. very expensive.
c. time consuming.
d. promotionally limited.
e. not supported by top management.

67. Timing is a very important element in any new product launch. One of the strategies
is described as being the ________________ where there is a simultaneous
introduction of products in other markets of the world.

a. sprinkler method
b. shotgun method
c. rifle method
d. dribble method
e. waterfall method

68. A phased rollout is less demanding on the company resources whereas
____________________ are not always acceptable.

a. sprinkler rollouts
b. shotgun rollouts
c. staggered rollouts
d. dribble rollouts
e. waterfall rollouts

69. The chief reason for a company choosing the sprinkler method of new product
introduction is to off-set:

a. rising costs.
b. unstable labor.
c. competitive preemption.
d. government control.
e. shoddy promotions.

70. The waterfall strategy of sequential entry is preferable over the sprinkler model
when all of the following conditions exist EXCEPT:

a. the lifecycle of the product is relatively long.
b. high costs of entry are present.
c. very weak local competitors.
d. anticipation of fast growth.
e. no real competitors.

71. The waterfall strategy of sequential entry is preferable over the sprinkler model
when:

a. the lifecycle of the product is relatively short.
b. there are low costs of entry into the market.
c. there are many competitors.
d. there are weak local competitors.
e. fast growth is anticipated.

72. The sprinkler strategy of one to two entries (globally) is preferable over the
waterfall model when all of the following conditions exist EXCEPT:

a. the lifecycle of the product is relatively short.
b. there are low costs of entry into the market.
c. there are many competitors.
d. very weak local competitors.
e. anticipation of fast growth.

73. The sprinkler strategy of one to two entries (globally) is preferable over the
waterfall model when:

a. the lifecycle of the product is relatively long.
b. high costs of entry are present.
c. very weak local competitors exist.
d. fast growth is anticipated.
e. no real competitors exist.

74. Truly global innovators are called:

a. metanational innovators.
b. delta innovators.
c. beta innovators.
d. gamma innovators.
e. none of the above.

75. To harvest the benefits of metanational innovators, a company must pursue three
things:

a. Prospecting, assessing, and mobilizing.
b. Prospecting, assessing, and delivering.
c. Prospecting, assessing, and running.
d. Prospecting, assessing, and planning.
e. none of the above.

True/False Short Answer

76. Companies can pursue three global strategies to penetrate foreign markets. The
strategies are: extension, adaptation, and___________________.

77. Early market entrants often choose dual extension (product and communication
extension) as a strategy to enter markets with new products.

78. The biggest savings to the company when following a strategy of dual extension
is in economies of scale.

79. Because of their universally known products, the Wrigley chewing gum company can
use product adaptation-communications extension strategies effectively.

80. Local market circumstances do not favor the case of product adaptation.

81. Many companies add brands to their product portfolio via acquisitions of local brands.

82. Differences in both the cultural and physical environment across countries call for
a ________________________ strategy.

83. _________________ means offering a uniform product on a regional or worldwide
basis.

84. The goal of standardization is to minimize competition.

85. ____________________ leverages cross-border differences in needs and wants of
the firm’s target customers.

86. Five forces favor a globalized product strategy. These include: common customer
needs, global customers, scale economies, time to market, and__________________.

87. Overstandardization is a risk of the core-product approach to introducing new
products in the world market.

88. In general, the adoption of new products is driven by individual differences, personal
influences, and product characteristics.

89. With respect to categories of consumers that adopt new products, the __________
category is eager to experiment with new ideas or products.

90. The lead country is where the product is introduced first.

91. In marketing, new product ideas do not come from the company, customers,
competition, and collaborators.

92. In these days, many MNCs create organizational structures to foster global product
development.

93. Conjoint analysis is also called tradeoff analysis.

94. In the area of a global product launch strategy, two strategic options available are:
waterfall strategy and _________________________.

95. The waterfall model is also called staggered roll-out.

96. A truly global innovators are called metanational innovators.

Essay

97. List the strategic options available to the firm considering global expansion in the product area. Detail the conditions that make the strategic option favorable. Be sure to detail your answer.

98. List the forces that now favor a globalized product design strategy.

99. There are strategic options that allow firms to modify their product while keeping most of the benefits of following a uniform product policy. Explain the differences between the modular and core-product approaches.

100. Test marketing is considered a critical step in new product development in most Western countries. Comment on test marketing. Also, outline some of the shortcomings of test marketing?

101. In marketing, timing is crucial. In new product development it might be even more crucial given the risk of the venture. Explain the waterfall and sprinkler approaches to introducing a new product to the market. When is the waterfall method preferred over the sprinkler method? Be sure to be specific as to your comments on these two strategic options.

Chapter 11

Multiple Choice

1. The German company Henkel is always customizing its brand portfolio, positioning, and product formulations. The two main challenges that the company faces are:

a. global brand and beta line management.
b. global brand and quality line management.
c. global brand and modular line management.
d. global brand and hybrid line management.
e. global brand and product line management.

Difficulty: (3) Knowledge: (A) Page: 361

2. A ____________ is a name, term, sign, symbol, or combination of them which is
intended to identify the goods and services of one seller or group of sellers and to
differentiate them from those of competitors.

a. trademark
b. patent
c. signature
d. figure
e. brand

Difficulty: (1) Knowledge: (F) Page: 362

3. Linked to the brand name is a collection of assets and liabilities called ____________.

a. the trademark
b. the patent
c. knowledge
d. proprietary investments
e. brand equity

Difficulty: (2) Knowledge: (F) Page: 362

4. Brand-name awareness, perceived quality, and other associations invoked by the
brand name in the customer’s mind are all illustrations of the concept called
_______________.

a. brand color
b. brand equity
c. brand warranty
d. local brand value
e. brand mark

Difficulty: (3) Knowledge: (F) Page: 362

5. “How do we strike a balance between a global brand that shuns cultural barriers and
one that allows for local requirements” is an illustration of a question that needs to be
asked when building up and managing _________________ in a multinational setting.

a. proprietary investments
b. brand equity
c. brand warranty
d. local brand name
e. brand mark

Difficulty: (3) Knowledge: (A) Page: 362

6. All of the following are questions that must be asked when building up and managing
brand equity in a multinational setting EXCEPT:

a. How do we strike a balance between a global brand that shuns cultural barriers and
one that allows for local requirements?
b. What aspects of service are too expensive to be included in the brand warranty?
c. What aspects of brand policy can be adapted to global use?
d. Which brands are destined to become “global” mega-brands?
e. How do you execute the changeover from a local to a global brand?

Difficulty: (3) Knowledge: (F) Page: 362

7. A key strategic issue that appears on international marketers’ agendas is whether there should be a ________________________.

a. national brand
b. country brand
c. regional brand
d. local brand
e. global brand

Difficulty: (1) Knowledge: (F) Page: 362

8. A truly ________________ is one that has a consistent identity with consumers across
the world.

a. private brand
b. public brand
c. global brand
d. local brand
e. government brand

Difficulty: (2) Knowledge: (A) Page: 362

9. The most obvious reason for having a global brand would be to take advantage of:

a. power promotions.
b. a large labor and selling force.
c. economies of scale.
d. coordinated logistics.
e. corporate vision.

Difficulty: (1) Knowledge: (F) Page: 363

10. In 2008, which of the following brands was ranked the number one brand in the
world?

a. Disney
b. Coca-Cola
c. GE
d. Nokia
e. IBM

Difficulty: (2) Knowledge: (A) Page: 363, Exhibit 11-1

11. In 2008, which of the following auto brands was ranked number one in the global
auto industry?

a. BMW
b. Mercedes
c. GM
d. Ford
e. Toyota

Difficulty: (1) Knowledge: (A) Page: 363, Exhibit 11-1

12. In 2008, which of the following brands was ranked number one in the world among
the high-tech companies?

a. Microsoft.
b. IBM.
c. Intel.
d. Hewlett Packard.
e. Dell.

Difficulty: (1) Knowledge: (A) Page: 363, Exhibit 11-1
13. Marlboro quickly became the leading cigarette brand in Hong Kong when it
positioned itself as being the leading brand in the United States. This strategy is
attributed to Marlboro as being a:

a. global brand.
b. geo brand.
c. regional brand.
d. country brand.
e. local brand.

Difficulty: (1) Knowledge: (A) Page: 364

14. A desire to reflect its American roots motivated Disney to change the name for its
Paris themepark from Euro Disney to __________________.

a. Disneyland Village
b. Disneyland Park
c. Disneyland Paris
d. Disneyland Europe
e. Disneyland France

Difficulty: (2) Knowledge: (F) Page: 364

15. Brand equity for global brands varies greatly from country to country. All of the
following factors contribute to the variation EXCEPT:

a. competitive climate.
b. marketing support.
c. cultural receptivity to brands.
d. literacy.
e. product category penetration.

Difficulty: (2) Knowledge: (F) Pages: 365-66

16. Brand equity for global brands varies greatly from country to country. All of the
following factors contribute to the variation EXCEPT:

a. history.
b. competitive climate.
c. marketing support.
d. cultural receptivity to brands.
e. brand equity scale.

Difficulty: (3) Knowledge: (F) Pages: 365-66

17. ____________________ often justify(ies) local branding instead of global branding.

a. Domestic barriers
b. Regulatory barriers
c. Cultural barriers
d. Social barriers
e. Religious barriers

Difficulty: (3) Knowledge: (A) Page: 366

18. Mecca Cola is a new soft drink that was launched by a ____________________
entrepreneur to cash in on anti-America sentiments in Europe.

a. Irish
b. English
c. Dutch
d. German
e. French

Difficulty: (3) Knowledge: (F) Page: 367

19. The following four branding strategies are available to markets EXCEPT:

a. solo branding.
b. hallmark branding.
c. family(umbrella) branding.
d. Extension branding.
e. horizontal branding.

Difficulty: (2) Knowledge: (A) Pages: 367-68

20. In international marketing, a firm’s global brand structure is shaped by the following
three types of factors:

a. firm-based drivers, product-market derivers, and the manufacturing dynamics.
b. firm-based drivers, hi-tech derivers, and Web dynamics.
c. firm-based drivers, product-market derivers, and market dynamics.
d. firm-based drivers, product-market derivers, Internet dynamics.
e. none of the above

Difficulty: (3) Knowledge: (F) Page: 368

21. Brand architecture guides the dynamics of the firm’s brand __________________:

a. portfolio.
b. color.
c. basket.
d. Web
e. none of the above.

Difficulty: (1) Knowledge: (A) Page: 368

22. According to Nestle’s Branding Tree, the company has four types of brands in its
global operations EXCEPT:

a. plain brands.
b. local brands.
c. regional brands.
d. worldwide strategic brands.
e. worldwide corporate brands.

Difficulty: (3) Knowledge: (A) Page: 370, Exhibit 11-4

23. With respect to a brand name changeover strategy, the _________________ strategy
ties the new global brand name to the existing local brand name. After a transition
period, the old name is dropped.

a. transparent forewarning
b. summary axing
c. fade-in/fade-out
d. pyramid focusing
e. parallel dimension

Difficulty: (1) Knowledge: (F) Page: 371

24. Euro Disney eventually becoming Disneyland is an example:

a. transparent forewarning.
b. summary axing.
c. fade-in/fade-out.
d. pyramid focusing.
e. parallel dimension.

Difficulty: (2) Knowledge: (A) Page: 371

25. With respect to a brand name changeover strategy, the _________________ strategy
alerts customers about the brand name change (via communications such as in-store
displays).

a. transparent forewarning
b. summary axing
c. fade-in/fade-out
d. pyramid focusing
e. parallel dimension

Difficulty: (2) Knowledge: (F) Page: 371

26. When Mars candy company took over Raider candy products and used the theme
line “Now Raider becomes Twix, for it is Twix everywhere in the world,” the
company used the ________________________ strategy for changing brand names.

a. transparent forewarning
b. summary axing
c. fade-in/fade-out
d. pyramid focusing
e. parallel dimension

Difficulty: (3) Knowledge: (A) Page: 372

27. With respect to a brand name changeover strategy, the __________________ strategy
where the company simply drops the old brand name and immediately replaces it
with the global name.
a. transparent forewarning
b. summary axing
c. fade-in/fade-out
d. pyramid focusing
e. parallel dimension

Difficulty: (2) Knowledge: (F) Page: 372

28. Global product line mix options could be:

a. an extension of the home country product line
b. a subset of the home country product line
c. a mix of local and home country
d. localized only
e. all of the above

Difficulty: (2) Knowledge: (F) Page: 374

29. _________________ is a system where a single banner brand is used worldwide,
often with a sub-brand name, for almost the entire product mix of the company.

a. Domestic branding
b. National branding
c. Manufacturer’s branding
d. Store branding or private labeling
e. Umbrella (corporate) branding

Difficulty: (2) Knowledge: (F) Page: 367

30. All of the following are brand areas that might need protection EXCEPT:

a. the name itself.
b. the slogan.
c. the jingle.
d. visual imagery.
e. the size of the logo.

Difficulty: (1) Knowledge: (F) Page: 378

31. McDonald’s golden arches are part of the famous brand. Which of the following
elements best describes that element of the brand that should be protected (according
to the example provided)?

a. the name itself.
b. the slogan.
c. the jingle.
d. visual imagery.
e. the size of the logo.

Difficulty: (1) Knowledge: (A) Page: 378

32. Most companies sell a wide assortment of products. The assortment is usually
described on the dimensions of ______________________ of the product mix.

a. width and scale
b. width and timing
c. width and ingredients
d. width and length
e. scale and length

Difficulty: (1) Knowledge: (F) Page: 374

33. The ______________ of the product assortment refers to the collection of different
product lines marketed by the firm.

a. length
b. width
c. horizontal scale
d. vertical scale
e. consistency

Difficulty: (2) Knowledge: (F) Page: 374

34. The ______________ of the product assortment refers to the number of items that
the company sells within a given product line.

a. length
b. width
c. horizontal scale
d. vertical scale
e. consistency

Difficulty: (2) Knowledge: (F) Page: 374

35. When comparing the product mix in the company’s host and home markets, all of
the following are possible scenarios EXCEPT:

a. an extension of the domestic line.
b. an extension of a joint venture or strategic alliance.
c. a subset of the home market’s product line.
d. a mixture of local and nonlocal product lines.
e. a completely localized product line.

Difficulty: (2) Knowledge: (F) Page: 374

36. Small firms with narrow product assortment will normally choose which of the
following strategies when attempting to enter an international market?

a. an extension of the domestic line.
b. an extension of a joint venture or strategic alliance.
c. a subset of the home market’s product line.
d. a mixture of local and nonlocal product lines.
e. a completely localized product line.

Difficulty: (2) Knowledge: (A) Page: 374

37. Blistex, a tiny U.S. company that makes primarily lip-care products, has a very
limited range of product lines that are marketed to foreign markets. Blistex would
probably choose which of the following strategies for entering foreign markets?

a. an extension of the domestic line.
b. an extension of a joint venture or strategic alliance.
c. a subset of the home market’s product line.
d. a mixture of local and nonlocal product lines.
e. a completely localized product line.

Difficulty: (3) Knowledge: (A) Page: 374

38. All of the following are drivers that impact the composition of a firm’s international
product line EXCEPT:

a. customer service and warranty requirements.
b. customer preferences.
c. competitive climate.
d. organizational structure.
e. history.

Difficulty: (3) Knowledge: (F) Pages: 374-77

39. The __________________ procedure uses a product line as a listening post for the
new foreign market to see what product items work best.

a. drop/add matrix
b. ship and shop approach
c. probing and learning approach
d. seal and deal approach
e. push down approach

Difficulty: (2) Knowledge: (F) Page: 378

40. Product lines can be categorized as:

a. Core product, niche items, seasonal products, and filler products
b. Core product, niche items, seasonal products, and filter products
c. Core product, niche items, seasonal products, and final products
d. Core product, niche items, seasonal products, and flimsy products
e. None of the above

Difficulty: (3) Knowledge: (F) Page: 378

41. A good place to start is to analyze each individual country’s product portfolio on the
basis of a sales turnover basis. Product lines can be categorized by all the following
ways EXCEPT:

a. core products.
b. cultural products.
c. niche items.
d. seasonal products.
e. filler products.

Difficulty: (2) Knowledge: (F) Page: 378

42. With respect to product categories analyzed on the basis of sales turnover, a
_____________ product is one where the item represents the bulk of the subsidiary’s
sales volume.

a. core product
b. cultural product
c. niche item
d. seasonal product
e. filler product

Difficulty: (1) Knowledge: (F) Page: 378

43. With respect to product categories analyzed on the basis of sales turnover, a
_____________ product is one where the product appeals to a small segment of the
population (which might grow in time).

a. core product
b. cultural product
c. niche item
d. seasonal product
e. filler product

Difficulty: (2) Knowledge: (F) Page: 378

44. With respect to product categories analyzed on the basis of sales turnover, a
_____________ product is one where the product has most of its sales during limited
times during the year.

a. core product
b. cultural product
c. niche item
d. seasonal product
e. filler product

Difficulty: (1) Knowledge: (F) Page: 378

45. With respect to product categories analyzed on the basis of sales turnover, a
_____________ product is one where the product is only a small portion of the
subsidiary’s overall sales. These even might be “dead-weight” items.

a. core product
b. cultural product
c. niche item
d. seasonal product
e. filler product

Difficulty: (1) Knowledge: (F) Page: 378

46. Brand piracy might cause which outcomes?

a. revenue losses to the company
b. price increases by the MNC to identify the goods as genuine
c. better diffusion of the brand
d. consumer danger from poor quality fakes
e. both A and D

Difficulty: (2) Knowledge: (F) Pages: 378-79

47. All of the following are strategic options available to international marketers to stop
product piracy EXCEPT:

a. joint ventures.
b. lobbying activities.
c. legal action.
d. product policy options.
e. communication options.

Difficulty: (2) Knowledge: (F) Pages: 380-82

48. Pirated products tend to be of ______________ quality.

a. good
b. poor
c. high
d. special
e. none of the above

Difficulty: (1) Knowledge: (F) Page: 379

49. Trying to obtain sanctions against countries that tolerate product piracy would be an
example of which of the following strategic options available to international
marketers trying to stop product piracy?

a. joint ventures.
b. lobbying activities.
c. legal action.
d. product policy options.
e. communication options.

Difficulty: (2) Knowledge: (A) Page: 380

50. Intellectual property rights violations have been a major problem in China.
Which of the following strategic options could be available to international marketers
in the area of product piracy?

a. customs.
b. lobbying activities.
c. legal action.
d. product policy options.
e. all of the above.

Difficulty: (3) Knowledge: (A) Page: 380

51. LVMH, the owner of wide variety of upscale liquor brands, redesigned its bottles to
make it more difficult for copycatters to reuse LVMH bottles for their own brews.
This would be an example of which of the following strategic options in product
piracy:

a. product policy options.
b. lobbying activities.
c. legal action.
d. hybrid options.
e. communication options.

Difficulty: (2) Knowledge: (A) Page: 381

52. Yamaha decided to combat China’s counterfeiters by launching new motorcycle
models at a similar price as fake products. This would be an example of which of the
following strategic options in product piracy:

a. joint ventures.
b. lobbying activities.
c. legal action.
d. product policy options.
e. communication options.

Difficulty: (2) Knowledge: (A) Page: 381

53. When international marketers warn consumers about the ramifications of accepting or
buying counterfeit merchandise, this would be an example of which of the following
strategic options available to international marketers trying to stop product piracy?

a. joint ventures.
b. lobbying activities.
c. legal action.
d. product policy options.
e. communication options.

Difficulty: (1) Knowledge: (A) Page: 382

54. Holding cultural stereotypes about countries as an important source in assessing the
value of a product is an example of:

a. the country of origin (COO) effect.
b. nationalism.
c. racial bias.
d. social sensitivity.
e. xenophobia.

Difficulty: (3) Knowledge: (A) Page: 383

55. The “Made In” label as an important source of assessing the value of a product is an
example of:

a. regionalism
b. nationalism.
c. materialism
d. social sensitivity.
e. the country of origin (COO) effect.

Difficulty: (1) Knowledge: (A) Page: 383

56. Find the general statement about the country of origin (COO) effect listed below that
is NOT true.

a. COO effects are not flexible.
b. consumers prefer domestic products over imports.
c. the critical factor appears to be the place of manufacture rather than the location of
the company’s headquarters.
d. COO effects do not change very much over time.
e. demographics make a difference.

Difficulty: (2) Knowledge: (F) Pages: 383-84

57. All of the following statements about the country of origin effect (COO) are true
EXCEPT:

a. COO effects are restricted to Europe.
b. Asian consumers prefer domestic products over imports.
c. the critical factor appears to be the place of manufacture rather than the location of
the company’s headquarters.
d. COO effects do not change very much over time.
e. psychographics make a difference.

Difficulty: (2) Knowledge: (F) Pages: 383-84

58. If the country of origin (COO) effect is anticipated to be negative, a company can
follow all of the following strategies to offset the effect EXCEPT:

a. select a brand name that disguises the country of origin.
b. select a local brand name.
c. select a high prestigious price.
d. try to explain any negative government policy that might influence buyers.
e. select a relatively low price.
385-86-48

59. One of the major challenges faced by international marketers of services is:

a. protectionism.
b. high costs.
c. patent infringement.
d. piracy.
e. low profits.

Difficulty: (2) Knowledge: (F) Page: 386

60. The need for direct customer interface in providing services means that service
providers must often have ____________________.

a. a warranty
b. a command of the local language
c. a local presence
d. low profit expectation
e. an inside government contact

Difficulty: (2) Knowledge: (F) Page: 386

61. Regarding opportunities in the global service industries, some of the _________
rules have been extended to the international services trade under the new WTO regime.

a. World Bank
b. International Monetary Fund
c. United Nations
d. GATT (General Agreements on Tariffs and Trade)
e. none of the above

Difficulty: (3) Knowledge: (A) Page: 386

62. A major strength of global service firms is that their _________________.

a. local know-how
b. global know-how
c. regional know-how
d. high-tech know-how
e. political know-how

Difficulty: (1) Knowledge: (A) Page: 388

63. Global service firms often benefits from:

a. scale economies.
b. weight economies.
c. hybrid economies.
d. perfect economies.
e. visible economies.

Difficulty: (2) Knowledge: (A) Page: 388

64. To bridge cultural gaps between the home and host market, service companies often
customize the product to the local market. This can be done by spotting
_________________________.

a. environmental opportunities
b. funding opportunities
c. regional opportunities
d. cultural opportunities
e. political opportunities

Difficulty: (3) Knowledge: (A) Page: 388

True/False Short Answer

65. A ______________ is a name, term, sign, symbol, or combination of them which is
intended to identify the goods and services of one seller or group of sellers and to
differentiate them from those of competitors.

66. Brand name awareness, perceived quality, and other associations invoked by the
brand name in the customer’s mind can be described as being part of brand
equity.

67. A good example of a global brand name is Microsoft.

68. One of the chief reasons for having a global brand is economies of scale.

69. The number one brand in the world in market value is IBM.

Difficulty: (1) Knowledge: (A) Page: 363, Exhibit 11-1

70. Interbrand’s most valuable brands list is dominated by American brands.

Difficulty: (2) Knowledge: (F) Page: 363, Exhibit 11-1

71. One of the reasons for pursuing a global brand as part of product policy is what might be called a prestige factor.

Difficulty: (1) Knowledge: (F) Page: 364

72. Euro Disney changed its name to Disneyland Europe.

Difficulty: (2) Knowledge: (A) Page: 364

73. Brand equity is usually consistent from country to country.

Difficulty: (2) Knowledge: (F) Page: 365

74. In solo branding, each brand stands on its own with a product or brand manager
running it.

Difficulty: (1) Knowledge: (A) Page: 367

75. Family (umbrella) branding is a not hierarchy of brands that may use the company’s
corporate brand.

Difficulty: (2) Knowledge: (F) Page: 367

76. With respect to brand name changeover strategies, a ____________ strategy consists
of somehow tying the global brand name to the local name. Eventually, the local
brand is phased out.

77. With respect to brand name changeover strategies, a ________________ strategy
consists of alerting the consumer about an impending brand name change and then
changing the brand name to the global brand name.

78. If a company simply drops the old brand name and immediately replaces it with the
global name, it is called summary axing.

79. Companies should monitor the marketplace’s response to the brand-name change
with marketing research.

Difficulty: (2) Knowledge: (F) Page: 372

80. Pirated products tend to be of high quality.

Difficulty: (1) Knowledge: (A) Page: 379

81. Country of origin (COO) effects have been shown to be unstable over time.

Difficulty: (2) Knowledge: (F) Page: 383

82. Country of origin (COO) influences are particularly strong among the elderly.

Difficulty: (3) Knowledge: (F) Page: 383

83. Country of origin (COO) effects depend on the product category.

Difficulty: (1) Knowledge: (A) Page: 383

84. Country-image stereotypes cannot hurt a company.

Difficulty: (1) Knowledge: (A) Page: 385

85. In international marketing, trade barriers to service marketers tend to be much more
cumbersome than physical products.

Difficulty: (2) Knowledge: (A) Page: 386

86. Demand for premium quality services expands with increases in consumers’ age.

Difficulty: (2) Knowledge: (A) Page: 387

Essay

87. Deciding to move toward global branding is a difficult decision. This must often be considered with respect to the globalization versus localization issue. What are the questions that might be useful in reaching a decision as to pursue globalization over localization?

88. When the case for a transition from a local to a global (or regional) brand name is made, the firm needs to decide on how to implement the changeover in practice. Comment on the strategies that might be available for doing this and the considerations that might steer the manager toward one of the strategies.

89. Describe the strategies that might be used by multinational corporations to cope with the growing threat of product piracy. What are your feelings about purchasing pirated products? Give a brief illustration.

90. Comment on how you perceive the marketing of services on a global basis to be different from marketing tangible goods. Think about the difficulties that might be present with marketing services.

Chapter 12

Multiple Choice

1. ________________ is the only marketing mix instrument that creates revenues.

a. Product
b. Price
c. Place
d. Promotion
e. People

Difficulty: (1) Knowledge: (F) Page: 395

2. A company’s pricing policy is a highly ____________________ process based on
inputs from various departments.

a. under-functional
b. low-functional
c. geo-functional
d. bi-functional
e. cross-functional

Difficulty: (2) Knowledge: (F) Page: 395

3. All of the following are drivers that govern global pricing decisions EXCEPT:

a. company
b. customers
c. controls
d. competition
e. channels

Difficulty: (1) Knowledge: (F) Page: 396

4. In many countries, multinationals’ pricing decisions are impacted by:

a. break-even analysis
b. regression functions
c. supply and service curves
d. government policies
e. business ethics

Difficulty: (2) Knowledge: (F) Page: 396

5. When developing a pricing strategy for its global markets, one of the first steps that
a company must go through is to decide:

a. what the actual price should be.
b. how high or low to price.
c. how much money will the price bring in.
d. what it wants to accomplish with its strategy.
e. what form of controls will regulate price.

Difficulty: (3) Knowledge: (F) Page: 396

6. The most important pricing objectives of companies doing business in the United
States (including foreign-based firms) are(is) to:

a. achieve a satisfactory return on investment.
b. maintain market share.
c. meet a specified profit goal.
d. all of the above.
e. none of the above.

Difficulty: (3) Knowledge: (F) Page: 397

7. According to a recent research, all of the following are examples of important pricing
objectives EXCEPT:

a. drive competition out of business.
b. to achieve a satisfactory return on investment.
c. maintain market share.
d. expand market share.
e. to meet a specified profit goal.

Difficulty: (2) Knowledge: (A) Page: 397

8. When New Balance, the U.S.-based maker of high-tech running shoes, sells its shoes
in France as haute couture items rather than simply athletic shoes, this is an
example of:

a. country objectives.
b. company objectives.
c. consumer objectives.
d. monopoly objectives.
e. none of the above.

Difficulty: (2) Knowledge: (A) Page: 397

9. When making pricing decisions, ______________ set(s) the floor.

a. profits
b. costs
c. demand
d. supply
e. service

Difficulty: (1) Knowledge: (F) Page: 397

10. ______________ costs change with sales volume.

a. Demand
b. Supply
c. Derived
d. Fixed
e. Variable

Difficulty: (1) Knowledge: (F) Page: 397

11. _________________ costs do not vary with sales volume changes.

a. Demand
b. Supply
c. Derived
d. Fixed
e. Variable

Difficulty: (1) Knowledge: (F) Page: 397

12. In the international marketplace, _________________ pricing adds international
costs and a mark-up to the domestic manufacturing cost.

a. dynamic incremental pricing
b. export price
c. import price
d. cost-plus price
e. target-return price

Difficulty: (3) Knowledge: (F) Page: 397

13. In the international marketplace, ________________ pricing arrives at a price after
removing domestic fixed costs. Only variable export costs generated by the exporting
effort and a portion of the overhead load should be recuperated by the pricing effort
(according to this method).

a. dynamic incremental pricing
b. export price
c. import price
d. cost-plus price
e. target-return price

Difficulty: (3) Knowledge: (F) Page: 397

14. Examples of exporting-related ____________________ include manufacturing costs,
shipping expenses, insurance, and overseas promotional costs.

a. incremental costs
b. demand costs
c. fixed costs
d. target costs
e. service costs

Difficulty: (2) Knowledge: (F) Page: 397

15. One of the risks of dynamic incremental pricing (in the case where the export list
price is far below the domestic price) that ______________ can be triggered in the
export market.

a. high profit potential
b. dumping charges or accusations
c. falling profits
d. falling quality
e. falling service

Difficulty: (2) Knowledge: (A) Page: 397

16. When demand is highly price sensitive, the company needs to consider how it can
_________________ from a global perspective.

a. raise prices
b. lower prices
c. lower service
d. raise quality
e. reduce costs

Difficulty: (1) Knowledge: (F) Page: 397

17. Customers’ _________________ is a key consideration in pricing decisions.

a. location
b. buying power
c. decision power
d. thinking power
e. none of the above

Difficulty: (1) Knowledge: (F) Page: 398

18. Countries with low per-capita income are more __________________ than in
developed countries.

a. promotion sensitive
b. price sensitive
c. need sensitive
d. demand sensitive
e. service sensitive

Difficulty: (3) Knowledge: (F) Page: 398

19. One alternative for successful marketing to the price sensitive low per-capita income
market is to produce a ________________ product or lower product quality.

a. downsized
b. upgraded
c. synthetic
d. copy
e. parallel

Difficulty: (2) Knowledge: (F) Page: 398

20. According to textbook, ________________ by and large charges the same price
worldwide.

a. Starbucks
b. IBM
c. Coca-Cola
d. Toyota
e. BMW

Difficulty: (2) Knowledge: (A) Page: 398

21. According to the text, once brand loyalty has been established, _____________ will
play less of a role as a purchase criterion.

a. promotion
b. service
c. product
d. price
e. place

Difficulty: (3) Knowledge: (F) Page: 398

22. Differences in the competitive situation across countries will usually lead to:

a. cross-border price differentials.
b. local price differentials.
c. domestic price differentials.
d. intra-company price differentials.
e. company-based price differentials.

Difficulty: (1) Knowledge: (F) Page: 398

23. Once brand loyalty has been established, price will play less of a role as a
purchase criterion, and the firm may be able to institute a ________________
strategy.

a. demand-based
b. premium pricing
c. elastic pricing
d. promotion-related pricing
e. sensitivity-based

Difficulty: (2) Knowledge: (A) Page: 398

24. All of the following are reasons that competitive situations vary from country to
country (with respect to the competitive environment) EXCEPT:

a. the number of competitors varies from country to country.
b. the nature of competition changes.
c. the presence of counterfeit products.
d. the presence of gray markets.
e. the competitive position of a firm changes from one country to another.

Difficulty: (3) Knowledge: (A) Pages: 398-99

25. An example of nonprice competition that is faced in some markets is:

a. retailer sales.
b. discounts.
c. coupons.
d. advertising.
e. cents-off deals.

Difficulty: (2) Knowledge: (A) Page: 400

26. Wide gaps in the price sensitivity between countries for the same product may
create conditions that promote _________________ markets.

a. backward
b. gray
c. white
d. demand
e. forward

Difficulty: (3) Knowledge: (A) Page: 401

27. Large cross-country price gaps open up arbitrage opportunities that lead to
_________________ imports from low-price countries to high-price ones.

a. black market
b. white market
c. zero market
d. smuggled
e. parallel

Difficulty: (2) Knowledge: (F) Page: 401

28. Sales tax rates, tariffs, and price controls are all examples of _______________ that
can have a direct or indirect impact on the pricing policies of a firm in the
international marketplace.

a. sales volume policies
b. price policies
c. government policies
d. restrictions
e. punishments

Difficulty: (2) Knowledge: (A) Page: 402

29. Huge government deficits are examples of a(n) ________________ impact on
pricing decisions.

a. direct
b. indirect
c. artificial
d. planned
e. uncontrollable

Difficulty: (2) Knowledge: (A) Page: 402

30. Inflation in an economy is an example of a(n) ________________ impact on pricing
decisions.

a. direct
b. indirect
c. artificial
d. planned
e. uncontrollable

Difficulty: (2) Knowledge: (F) Page: 402

31. To cover the incremental costs (such as shipping), the final foreign retail price will
often be much higher than the domestic retail price. This phenomenon is known as
______________________.

a. inflation.
b. the price deflator.
c. price escalation.
d. price sensitivity.
e. global arbitrage.

Difficulty: (2) Knowledge: (F) Page: 402

32. There are two ways to deal with the price escalation phenomenon. One of these
methods is to cut the export price. The other is to:

a. change the promotion strategy.
b. position the product as a (super) premium brand.
c. position the product as a lower quality brand.
d. reduce retailer margins.
e. reduce distances that the good must be shipped.

Difficulty: (3) Knowledge: (A) Page: 402

33. Which of the following would be a good option to follow if lowering the export price
were the firm’s objective?

a. rearrange the distribution channel.
b. change the promotion.
c. change the warranty provisions.
d. give more of the product in the package as an incentive to purchase.
e. study the demand curve.

Difficulty: (3) Knowledge: (A) Page: 402-3

34. All of the following are options that might be followed if the firm wished to lower
its export price on a product EXCEPT:

a. rearrange the distribution channel.
b. eliminate costly features (or make them optional).
c. downsize the product.
d. expand the warranty categories to give incentive for higher quality.
e. assemble or manufacture the product in foreign markets.

Difficulty: (2) Knowledge: (F) Pages: 402-3

35. If a firm decide to penetrate the Japanese consumer market through direct marketing
(such as catalog or telemarketing sales). Which of the following strategies best
describes this option for lowering the price of an exported product?

a. rearrange the distribution channel.
b. eliminate costly features (or make them optional).
c. downsize the product.
d. expand the warranty categories to give incentive for higher quality.
e. assemble or manufacture the product in foreign markets.

Difficulty: (2) Knowledge: (A) Pages: 402-3

36. When the U.S. levied a 10 percent tax on plus-$30,000 luxury cars, Land Rover
changed the weight of Range Rover models so they could be classed as a truck and
thereby avoid the luxury status, the company was attempting to follow which of the
price strategies listed below for lowering the price of an exported product?

a. rearrange the distribution channel.
b. eliminate costly features (or make them optional).
c. downsize the product.
d. adapt the product to escape tariffs or tax levies.
e. assemble or manufacture the product in foreign markets.

Difficulty: (1) Knowledge: (A) Page: 403

37. LEGO, the Danish toymaker, rather than worrying about finding ways to lower the
price of its product in foreign markets has chosen (most LEGO sets are sold from
$6-$223) to adopt a __________________ strategy position.

a. demand-based
b. premium pricing
c. elastic pricing
d. promotion-related pricing
e. sensitivity-based

Difficulty: (1) Knowledge: (A) Page: 403

38. When McDonald’s first opened their restaurants in Russia in 1990, the Big Mac meal
cost 6 rubles. Three years later, the same meal cost 1,100 rubles. This would be an
example of how:

a. demand can change.
b. how premium pricing can damage a product.
c. price elasticity works.
d. inflation can damage a market.
e. service is what matter the most to the average customer.

Difficulty: (1) Knowledge: (A) Page: 403

39. All of the alternatives listed below are ways to safeguard against inflation EXCEPT:

a. modify components, ingredients, parts and/or packaging materials.
b. source materials from low-cost suppliers.
c. lengthen credit terms.
d. include escalator clauses in long-term contracts.
e. quote prices in a stable currency.

Difficulty: (3) Knowledge: (F) Page: 404

40. ___________ inflation also mandates rapid inventory turnarounds.

a. High
b. Low
c. Visible
d. Hyper
e. Slow

Difficulty: (2) Knowledge: (F) Page: 404

41. To combat hyperinflation, many governments occasionally impose ______________
controls.

a. commodity
b. inflation
c. margin
d. discount
e. price

Difficulty: (1) Knowledge: (F) Page: 404

42. According to lessons learned in Brazil’s hyperinflationary economy, McDonald’s
will deal with Russia’s runaway inflation by using all of the following tools
EXCEPT:

a. emphasize cash flow management.
b. control of raw materials.
c. institute sales and price setting strategies.
d. hedge for potentially substantial distortions in the exchange rate.
e. make loans to local franchise investors to bring them past hard times.

Difficulty: (2) Knowledge: (A) Page: 404

43. Firms faced with price controls can take any of the following strategies EXCEPT:

a. shift the target segment or markets.
b. launch new products or variants of existing products.
c. negotiate with the government.
d. predict the incidence of price controls.
e. have the home government bring pressure on the host government.

Difficulty: (3) Knowledge: (F) Pages: 404-5

44. When a manufacturer of breakfast cereals for humans shifts production to a
chicken feed product to overcome the effects of price controls, the firm would be
following which of the strategies outlined below?

a. adapt the product line.
b. shift target segments or market.
c. negotiate with the government.
d. launch a variant of an existing product.
e. predict the incidence of price controls.

Difficulty: (2) Knowledge: (A) Page: 405

45. If a company that is threatened with price controls diversifies into product lines that
are relatively free of price controls, the firm would be following which of the
following strategies?

a. adapt the product line.
b. shift target segments or market.
c. negotiate with the government.
d. launch a variant of an existing product.
e. predict the incidence of price controls.

Difficulty: (2) Knowledge: (A) Page: 405

46. The most drastic reaction to government-imposed price controls is to:

a. adapt the product line.
b. shift target segments or market.
c. negotiate with the government.
d. launch a variant of an existing product.
e. leave the country.

Difficulty: (1) Knowledge: (A) Page: 405

47. One of the main reasons for staying in a country that has government-imposed
price controls to deal with hyperinflation is:

a. the government might not let you out.
b. when the danger is over you cannot get back in.
c. you gain experience for other markets with similar problems.
d. you do not want to loose face.
e. you do not want to show weakness to your competition.

Difficulty: (2) Knowledge: (A) Page: 405

48. ___________________ reflect how much one currency is worth in terms of
another currency.

a. Interest rates
b. Credit rates
c. Bond rates
d. Inflation rates
e. Exchange rates

Difficulty: (2) Knowledge: (F) Page: 405

49. All of the following are exporter strategies when the domestic currency is weak
EXCEPT:
a. stress price benefits.
b. engage in nonprice competition by improving quality, delivery, and aftersale
service.
c. expand the product line and add more.
d. shift sourcing and manufacturing to domestic market.
e. exploit export opportunities in all markets.

Difficulty: (3) Knowledge: (F) Page: 406, Exhibit 12-4

50. Which of the following are exporter strategies when the domestic currency is
strong?

a. stress price benefits.
b. engage in nonprice competition by improving quality, delivery, and aftersale
service.
c. expand the product line and add more.
d. shift sourcing and manufacturing to domestic market.
e. exploit export opportunities in all markets.

Difficulty: (3) Knowledge: (F) Page: 406, Exhibit 12-4

51. All of the following are considered to be exporter strategies when the domestic
currency is strong EXCEPT:

a. conduct conventional cash-for-goods trade.
b. engage in nonprice competition by improving quality, delivery, and aftersale
service.
c. improve productivity and engage in vigorous cost reduction.
d. shift sourcing and manufacturing overseas.
e. give priority to exports to relatively strong-currency countries.

Difficulty: (3) Knowledge: (F) Page: 406, Exhibit 12-4

52. Which of the following are considered to be exporter strategies when the domestic
currency is weak?

a. conduct conventional cash-for-goods trade.
b. engage in nonprice competition by improving quality, delivery, and aftersale
service.
c. improve productivity and engage in vigorous cost reduction.
d. shift sourcing and manufacturing overseas.
e. give priority to exports to relatively strong-currency countries.

Difficulty: (3) Knowledge: (F) Page: 406, Exhibit 12-4

53. Two major issues confronting international marketers result from currency
movement. The first of these is in which currency do we quote our prices? The
second is:

a. how much of the loss or gain (because of pass through) should be passed to
consumers?
b. how much should we invest in the local currency?
c. how much should we invest in our own currency?
d. what role should the central bank play in currency movement?
e. should we trust international arbitrage as a means of settling currency value?

Difficulty: (3) Knowledge: (A) Page: 406

54. A weakening of the U.S. dollar relative to the Japanese yen has the effect of:

a. strengthening the Japanese position in the United States.
b. strengthening the U.S. position in Japan.
c. weakening the dollar in Europe.
d. strengthening the yen in Europe.
e. all positions remain unchanged.

Difficulty: (2) Knowledge: (A) Page: 406

55. A strengthening of the U.S. dollar relative to the Japanese yen has the effect of:

a. strengthening the Japanese position in the United States.
b. strengthening the U.S. position in Japan.
c. weakening the dollar in Europe.
d. strengthening the yen in Europe.
e. all positions remain unchanged.

Difficulty: (2) Knowledge: (A) Page: 406

56. One of the ways that a weakening of the U.S. dollar relative to the Japanese yen
may not necessarily be a benefit to a U.S. firm is that:

a. the government may not allow the pass through.
b. the government might erect tariff barriers.
c. Japanese parts might become more expensive and when imported for inclusion into
an exported product, prices might actually rise.
d. other currencies might be the ones actually traded.
e. costs can be cut in other ways.

Difficulty: (2) Knowledge: (A) Page: 406

57. When considering the currency pass-through phenomenon, all of the following
factors give an indication as to the appropriate action EXCEPT:

a. the customer’s price sensitivity.
b. government actions.
c. the impact of dollar appreciation on the firm’s cost structure.
d. the impact of dollar depreciation on the firm’s cost structure.
e. the amount of competition in the export market.

Difficulty: (2) Knowledge: (A) Page: 407

58. When exporters lower their mark-ups in a more price-conscious export market than
in a price-sensitive market, with respect to exchange rate movements this is called
______________________.

a. local-currency price stability (LCPS)
b. pricing-to-market (PTM)
c. transfer pricing
d. countertrade pricing
e. demand mark-up pricing

Difficulty: (3) Knowledge: (F) Page: 408

59. When an exporter uses the _______________________ method, the effect can be
negative. Frequent adjustments of prices in response to currency movements will
distress local channels and customers.

a. local-currency price stability (LCPS)
b. pricing-to-market (PTM)
c. transfer pricing
d. countertrade pricing
e. demand mark-up pricing

Difficulty: (3) Knowledge: (A) Page: 408

60. _____________________ is a special form of pricing where mark-ups are adjusted
to stabilize prices in the buyer’s currency. This method helps to create stability in the
local currency.

a. Local-currency price stability (LCPS)
b. Pricing-to-market (PTM)
c. Transfer pricing
d. Countertrade pricing
e. Demand mark-up pricing

Difficulty: (1) Knowledge: (A) Page: 408

61. With respect to currency quotation when preparing for buying and selling
transactions, buyers and sellers generally prefer to quote in:
a. a world currency.
b. the seller’s currency.
c. the buyer’s currency.
d. their own currency.
e. the dollar.

Difficulty: (2) Knowledge: (A) Page: 409

62. When sales take place between related entities of the same company, ___________
is often used.

a. local-currency price stability (LCPS)
b. pricing-to-market (PTM)
c. transfer pricing
d. countertrade pricing
e. demand mark-up pricing

Difficulty: (2) Knowledge: (A) Page: 409

63. Transfer pricing decisions in an international context need to balance off the
interests of a broad range of stakeholders. All of the following would be examples
of those stakeholders EXCEPT:

a. the parent company.
b. the competition.
c. local country managers.
d. host government(s).
e. the domestic government.

Difficulty: (2) Knowledge: (F) Page: 409

64. There are a series of key drivers behind transfer pricing decisions. The most
important of these drivers is thought to be:

a. competition in the foreign country.
b. economic conditions in the foreign country.
c. price controls.
d. exchange controls.
e. market conditions in the foreign country.

Difficulty: (3) Knowledge: (F) Page: 409

65. __________________ uses the market mechanism as a cue for setting transfer prices.

a. Local-currency price stability (LCPS) pricing
b. Pricing-to-market (PTM)
c. Market-based pricing
d. Countertrade pricing
e. Nonmarket-based pricing

Difficulty: (2) Knowledge: (F) Page: 410

66. __________________ (as a form of market-based pricing) basically dictates that
the company charges the price that any buyer outside the company would pay (as
if the transaction occurred between two unrelated entities).

a. Local-currency price stability (LCPS) pricing
b. Pricing-to-market (PTM)
c. Arm’s length pricing
d. Countertrade pricing
e. Nonmarket-based pricing

Difficulty: (2) Knowledge: (F) Page: 410

67. ___________________ simply adds a mark-up to the cost of the goods.

a. Demand-based pricing
b. Negotiated pricing
c. Cost-based pricing
d. Markup-based pricing
e. Target return pricing

Difficulty: (2) Knowledge: (F) Page: 411

68. To conduct ________________, conflicts between country affiliates are resolved
through mutual discussion of the transfer pricing problems.

a. demand-based pricing
b. negotiated pricing
c. cost-based pricing
d. markup-based pricing
e. target return pricing

Difficulty: (1) Knowledge: (F) Page: 411

69. In the area of transfer pricing, experts suggest to set transfer prices that are as close as
possible to the _________________________________.

a. Balanced Arm’s Length Standard
b. Building Arm’s Length Standard
c. Best Arm’s Length Standard
d. Branding Arm’s Length Standard
e. Basic Arm’s Length Standard

Difficulty: (3) Knowledge: (F) Page: 411

70. ______________ occurs when imports are being sold at an “unfair” price.

a. Price fixing
b. Dumping
c. Gray marketing
d. Countertrade
e. Predatory pricing

Difficulty: (1) Knowledge: (F) Page: 412

71. To reduce exposure and risk of antidumping actions, the exporter can follow any of
the following marketing strategies EXCEPT:

a. trading-up
b. service enhancement
c. distribution
d. government intervention
e. communications

Difficulty: (2) Knowledge: (F) Page: 413

72. In the area of price coordination, the following considerations matter EXCEPT:

a. nature of customer.
b. amount of product differentiation.
c. nature of channels.
d. nature of competition.
e. role of the World Bank.

Difficulty: (1) Knowledge: (F) Pages: 414-15

73. In international marketing, purchasers often demand _____________________ from
their suppliers.

a. uniform-pricing contracts
b. diverse-pricing contracts
c. bilateral-pricing contracts
d. global-pricing contracts
e. local-pricing contracts

Difficulty: (3) Knowledge: (F) Page: 415

74. ___________________ is an umbrella term used to describe unconventional trade-
financing transactions that involve some form of noncash compensation.

a. Local-currency price stability (LCPS)
b. Pricing-to-market (PTM)
c. Arm’s length pricing
d. Countertrade
e. Nonmarket-based pricing

Difficulty: (2) Knowledge: (F) Page: 418

75. Countertrade transactions include the following options EXCEPT:

a. simple barter.
b. switch trading.
c. geo trading.
d. countertrade pricing.
e. clearing agreements.

Difficulty: (2) Knowledge: (A) Page: 419

76. In a(n) _______________, no third party is involved to carry out the transaction.

a. clearing agreement
b. offset
c. buyback arrangement
d. switch trading
e. simple barter

Difficulty: (1) Knowledge: (F) Page: 419

True/False Short Answer

77. According to the textbook, factors that impact global pricing decisions include
company, customers, competition, technology.

Difficulty: (2) Knowledge: (F) Page: 396

78. Cost differentials do not lead to wide price gaps.

Difficulty: (1) Knowledge: (F) Page: 397

79. In gray markets, products marketed in low-priced countries are shipped and resold
by unauthorized channels in high-priced markets.

Difficulty: (2) Knowledge: (F) Page: 401

80. Government policies do not have any impact on pricing decisions.

Difficulty: (1) Knowledge: (A) Page: 402

81. To cover the incremental costs of doing business in a foreign market, the final
foreign retail price will often be much higher than the domestic retail price.
This is called price _________________.

82. To combat hyperinflation, governments occasionally impose price controls.

Difficulty: (2) Knowledge: (F) Page: 404

83. One of the courses of action that a company can follow when faced with price
controls is to adapt the product line.

Difficulty: (2) Knowledge: (F) Page: 404

84. A stronger U.S. dollar undermines the competitive position of American exports.

Difficulty: (2) Knowledge: (F) Page: 406

85. An exporter strategy when faced with a weak domestic currency would be to
engage in nonprice competition by improving quality, delivery, and aftersale
service.

Difficulty: (2) Knowledge: (F) Page: 406, Exhibit 12-4

86. If an exporter were to stress price benefits, the exporter would probably be facing
a domestic currency that was perceived as being weak.

Difficulty: (2) Knowledge: (F) Page: 406, Exhibit 12-4

87. LCPS stands for:

88. In the area of international pricing, sellers and buyers usually prefer a quote in their domestic currency.

Difficulty: (2) Knowledge: (F) Page: 409

89. When sales transactions occur between related entities of the same company,
________________ pricing often occurs.

90. In arm’s-length prices, a firm uses the market mechanism as a cue for setting transfer
prices.

Difficulty: (2) Knowledge: (F) Page: 410

91. Cost-based pricing simply adds a mark-up to the cost of goods.

Difficulty: (1) Knowledge: (F) Page: 411

92. Negotiated transfer pricing is another form of nonmarket-based pricing.

Difficulty: (2) Knowledge: (F) Page: 411

93. Government-imposed market constraints favor nonmarket-based transfer pricing
methods.

Difficulty: (3) Knowledge: (F) Page: 411

94. In transfer pricing, BALS stands for:

95. Multinationals do not need to take antidumping laws into account when determining
their global pricing strategy.

Difficulty: (3) Knowledge: (F) Page: 412

96. VER is an acronym for:

97. Global pricing contract (GPCs) are demanded by governments.

Difficulty: (2) Knowledge: (F) Page: 415

98. Several multinationals doing business in the European Union harmonize their prices
to narrow price gaps between different member states..

Difficulty: (2) Knowledge: (F) Page: 415

99. When sales transactions occur in some form of compensation other than money
(such as trading corn for whiskey), the two trading companies are engaged in
________________.

100. In switch trading, a third party is involved which uses the credits to buy goods from
the deficit country.

Difficulty: (1) Knowledge: (F) Page: 419

101. Countertrade purchase is not the most popular form of countertrade.

Difficulty: (3) Knowledge: (F) Page: 419

Essay

102. In international marketing, price escalation can be a serious problem. To offset these difficulties marketers must be prepared to creatively meet the price escalation challenge. List the various ways that marketers might attack this problem.

103. Setting prices in a floating exchange rate world pose unique problems. Comment on how a company might react to floating exchange rates. What considerations are probably the most important for the decision maker to consider?

104. What is transfer pricing? Comment on the stakeholders and key drivers that impact the decision maker faced with transfer pricing.

105. Antidumping measures are very popular with most of the governments of industrialized nations. What measures might exporters consider to hedge themselves against antidumping procedures? Which method do you think is probably the best? Justify your answer.

106. Discuss the motives behind countertrade and the guidelines for making countertrade successful.

Chapter 13

Multiple Choice

1. In international marketing, advertising to some extent is a _________________
phenomenon.

a. cultural
b. social
c. general
d. static
e. global

Difficulty: (1) Knowledge: (F) Page: 427

2. ___________________ is one of most formidable barriers that international advertisers need to surmount.

a. Politics
b. Technology
c. Translation
d. Language
e. None of the above

Difficulty: (2) Knowledge: (F) Page: 427

3. In international marketing, numerous promotional efforts misfire because of
____________________ -related problems.

a. politics
b. technology
c. transfer
d. transaction
e. language

Difficulty: (2) Knowledge: (F) Page: 427

4. Translation errors include:

a. simple carelessness.
b. multiple-meaning words.
c. idioms.
d. all of the above.
e. none of the above.

Difficulty: (2) Knowledge: (F) Page: 427

5. All of the following are language barriers that can be identified as typical international
translation errors EXCEPT:

a. simple carelessness.
b. idioms.
c. local slang.
d. multiple-meaning words.
e. incorrect grammar.

Difficulty: (3) Knowledge: (F) Page: 427

6. To solve language-related barriers, companies in international markets should use
__________________ advertising agencies.

a. local
b. regional
c. global
d. transnational
e. domestic

Difficulty: (1) Knowledge: (F) Page: 428

7. In an advertising message, the original slogan was “Body by Fisher.” The translation
in a foreign market was “Corpse by Fisher.” This would be an example of which of
the following constraints on international promotion?

a. language barriers.
b. advertising regulations.
c. cultural constraints.
d. local attitudes toward advertising.
e. poor media infrastructure.

Difficulty: (1) Knowledge: (A) Page: 428

8. In an advertising message, the original slogan was “Body by Fisher.” The translation
in a foreign market was “Corpse by Fisher.” This would be an example of which of
the following types of translation errors?

a. simple carelessness.
b. idioms.
c. local slang.
d. multiple-meaning words.
e. incorrect grammar.

Difficulty: (2) Knowledge: (A) Page: 428

9. In an advertising message, the original slogan was “When I used this shirt, I felt
good.” The translation in a foreign market was “Until I used this shirt, I felt good.”
This would be an example of which of the following types of translation errors?

a. simple carelessness.
b. idioms.
c. local slang.
d. multiple-meaning words.
e. incorrect grammar.

Difficulty: (2) Knowledge: (A) Page: 428

10. In Britain, one U.S. advertiser ran a campaign that centered around the slogan
“You can use no finer napkin at your dinner table.” In Britain, some people use
the word “napkin” for the word “diapers.” This would be an example of which of
the following types of translation errors?

a. simple carelessness.
b. idioms.
c. local slang.
d. multiple-meaning words.
e. incorrect grammar.

Difficulty: (2) Knowledge: (A) Page: 428

11. In Spanish, five different words can be used for the word “tires” (cauchos, cubiertas,
gomas, llantas, and neumaticos). Obviously, this might present problems in
advertising. This would be an example of which of the following types of translation
errors?

a. simple carelessness.
b. idioms.
c. local slang.
d. multiple-meaning words.
e. incorrect grammar.

Difficulty: (1) Knowledge: (A) Page: 429, Exhibit 13-1

12. Given that so many errors can occur with translation and misunderstanding of
advertising in the foreign market, which of the following is probably the easiest
solution to the problem?

a. involve ad agencies from the company’s domestic environment.
b. involve ad agencies from the host country’s environment.
c. check with government officials.
d. employ foreign language specialists for all markets.
e. don’t worry about it, the problem usually corrects itself.

Difficulty: (3) Knowledge: (F) Page: 428

13. All of the following are strategies for dealing with translation problems in a foreign
market EXCEPT:

a. involve ad agencies from the host country’s environment.
b. don’t translate the message for the foreign market.
c. add foreign language subtitles.
d. use voice-overs that use foreign slang.
e. check with foreign officials.

Difficulty: (3) Knowledge: (F) Pages: 428-9

14. Many of the trickiest promotional issues occur in the domain of
_________________.

a. environment
b. money
c. technology
d. business
e. religion

Difficulty: (2 Knowledge: (F) Page: 429

15. Of the barriers that face a foreign company when attempting to promote products in
a foreign market, ___________________ are arguably the biggest stumbling block
to successful advertising in the foreign market.

a. language barriers
b. advertising regulations
c. cultural constraints or barriers
d. local attitudes toward advertising
e. poor media infrastructure

Difficulty: (2) Knowledge: (F) Page: 429

16. When considering barriers that are faced by international marketers attempting to
successfully advertise in foreign markets, cultural constraints can pose huge
difficulties. The trickiest problem within this category is usually posed by:

a. the government.
b. trade unions.
c. environmental rights groups.
d. women.
e. the host country’s religion(s).

Difficulty: (3) Knowledge: (F) Page: 430

17. One framework that helps with studying the influence of culture on global
advertising is the cultural classification scheme developed by Dutch researcher
Geert Hofstede. All of the following are dimensions of a value system used in
the cultural classification scheme EXCEPT:

a. power distance.
b. possessions.
c. uncertainty avoidance.
d. individualism.
e. masculinity.

Difficulty: (2) Knowledge: (F) Page: 430

18. One framework that helps with studying the influence of culture on global
advertising is the cultural classification scheme developed by Dutch researcher
Geert Hofstede. One dimension refers to the degree of inequality that is seen as
acceptable within the country. This dimension would best be described as:

a. power distance.
b. long-termism.
c. uncertainty avoidance.
d. individualism.
e. masculinity.

Difficulty: (2) Knowledge: (F) Page: 430

19. One framework that helps with studying the influence of culture on global
advertising is the cultural classification scheme developed by Dutch researcher
Geert Hofstede. One dimension refers to the extent that people within the culture
prefer structured situations with clear cut rules and little ambiguity. This dimension
would best be described as:

a. power distance.
b. long-termism.
c. uncertainty avoidance.
d. individualism.
e. masculinity.

Difficulty: (2) Knowledge: (F) Page: 430

20. If ads in a foreign country stress performance, success, and completion, they would
probably be focusing on which of the following cultural classification schemes as a
way to reach a segment of the population where this dimension was high or
important.

a. power distance.
b. long-termism.
c. uncertainty avoidance.
d. individualism.
e. masculinity.

Difficulty: (2) Knowledge: (A) Page: 430

21. With respect to budget forms for advertising, the _______________ method simply
sets the overall advertising budget based on either past or expected sales revenue.

a. percentage of sales
b. competitive parity
c. all-you-can-afford
d. objective-and-task
e. marginal increment

Difficulty: (1) Knowledge: (F) Page: 431

22. The primary appeal of the percentage of sales method of allocating an advertising
budget is its:

a. popularity.
b. accounting good sense.
c. control feature.
d. simplicity.
e. accuracy.

Difficulty: (2) Knowledge: (F) Page: 431

23. If an advertiser does not want to “rock the boat” and desires to sustain a minimum
“share of voice” they will probably choose which of the following advertising
budget forms?

a. percentage of sales
b. competitive parity
c. all-you-can-afford
d. objective-and-task
e. marginal increment

Difficulty: (2) Knowledge: (F) Page: 432

24. The most popular of the budget methods (in fact, two-thirds of respondents in a
survey said they had used the method) is the _________________ method.

a. percentage of sales
b. competitive parity
c. all-you-can-afford
d. objective-and-task
e. marginal increment

Difficulty: (2) Knowledge: (F) Page: 433

25. If an advertiser spells out the goals of their communication strategy and determines
what they would like to accomplish with advertising and then plans a budget
accordingly, they are probably using the ______________ method of budgeting.

a. percentage of sales
b. competitive parity
c. all-you-can-afford
d. objective-and-task
e. marginal increment

Difficulty: (1) Knowledge: (A) Page: 433

26. If an advertiser uses field experiments (such as systematically manipulating the
spending amount in different areas within the country to measure the impact of
advertising on the brand’s awareness, sales volume, and market share) to adjust
budget expenditures, they are probably using the ______________ method of
budgeting for advertising expense.

a. percentage of sales
b. competitive parity
c. all-you-can-afford
d. objective-and-task
e. marginal increment

Difficulty: (2) Knowledge: (A) Page: 433

27. A good case can be made for standardizing an ad campaign in the international
marketplace. All of the following would be good, justifiable reasons for
standardization EXCEPT:

a. scale economics.
b. consistent image.
c. government regulation.
d. global consumer segments.
e. creative talent.

Difficulty: (2) Knowledge: (A) Page: 435-37

28. Message consistency (an advertising standardization issue) matters a great deal in
markets with extensive media overlap or for goods that are sold to “cosmopolitan”
customers who travel the globe. The best example of a product or service that fits the
above is:

a. beer.
b. banking.
c. a beef product.
d. an automobile.
e. cosmetics.

Difficulty: (3) Knowledge: (A) Page: 439

29. In the domain of advertising, __________________ means that marketers encourage
their affiliates to adopt, or at least consider, advertising ideas that have proven
successful in other markets. Which of the following standardization benefits applies?

a. scale economics
b. consistent image
c. cross-fertilization
d. global consumer segments
e. creative talent

Difficulty: (2) Knowledge: (A) Page: 439

30. Nestle used an ad for Taster’s Choice coffee originally developed in the U.K. as its campaign in the U.S., with some minor changes to reflect actors and speech. This would be an example of which of the following reasons for using standardization in the foreign market?

a. scale economics
b. consistent image
c. cross-fertilization
d. global consumer segments
e. creative talent

Difficulty: (2) Knowledge: (A) Page: 439

31. Research from an advertising agency survey indicates that the number one reason
for standardizing multinational advertising was to:

a. take advantage of demographics.
b. take advantage of cultural similarities between the countries.
c. capitalize on the fact that the product was standardized.
d. make full use of a proven successful idea.
e. create a single brand image in all markets.

Difficulty: (3) Knowledge: (A) Page: 435

32. All of the following are barriers to standardization in international advertising
EXCEPT:

a. cultural differences.
b. budget.
c. advertising regulations.
d. differences in the degree of market development.
e. the “Not Invented Here” syndrome.

Difficulty: (2) Knowledge: (A) Page: Pages: 437-38

33. As an illustration of a barrier to advertising standardization, Ray-Ban had to re-shoot
a sunglasses commercial for Malaysia because the original version had Caucasian
actors. In Malaysia, ads featuring Caucasians are not allowed. This example would
be an example of which of the following barriers to standardization of international
advertising?

a. cultural differences.
b. budget.
c. advertising regulations.
d. differences in the degree of market development.
e. the “Not Invented Here” syndrome.

Difficulty: (2) Knowledge: (A) Pages: 437-38

34. In the area of “Not-Invented-Here” (NIH) syndrome, stonewalling attempts at
standardization may come from ________________ subsidiaries/advertising
agencies.

a. local
b. regional
c. global
d. transnational
e. multinational

Difficulty: (2) Knowledge: (F) Page: 438

35. In the ________________ approach, every country subsidiary follows its own course
developing its own ads based on what it thinks works best in its market.

a. host country
b. home country
c. foreign
d. laissez faire
e. polycentric

Difficulty: (1) Knowledge: (F) Page: 438

36. There are a variety of formats for creating international advertising. With _________
advertising, the creative strategy is highly centralized. Universal copy is developed
for all markets.

a. export
b. import
c. prototype (pattern)
d. concept cooperation
e. psychological

Difficulty: (2) Knowledge: (F) Page: 438

37. There are a variety of formats for creating international advertising. With _________
advertising, guidelines are given to local affiliates concerning the execution of the
advertising. The guidelines are then conveyed via manuals or tapes.

a. export
b. import
c. prototype (pattern)
d. concept cooperation
e. psychological

Difficulty: (2) Knowledge: (F) Page: 439

38. With prototype standardization, ____________________ spell out guidelines on the
positioning theme.

a. competitors
b. governments
c. advertising mangers
d. headquarters
e. CEOs

Difficulty: (3) Knowledge: (F) Page: 439

39. With __________________ advertising, guidelines are given to the local affiliates
concerning the execution of the advertising.

a. geotype
b. prototype
c. modulartype
d. export
e. psychological

Difficulty: (3) Knowledge: (A) Page: 439

40. Another term to describe the portfolio of media choices (and variations within those
choices) is called:

a. media decision making.
b. media super structure.
c. media infrastructure.
d. media bias.
e. media method.

Difficulty: (1) Knowledge: (F) Page: 440

41. High cost-per-thousand (CPMs) are found in areas that have a high per capita
__________.

a. LMP
b. ZNP
c. MMP
d. GNP
e. PPP

Difficulty: (3) Knowledge: (F) Page: 442

42. Recent developments in the global media landscape include the following EXCEPT:

a. growing commercialization and deregulation of mass media.
b. shift from radio and print to TV advertising.
c. rise of global and regional media.
d. growing spread of interactive marketing.
e. growing importance of high definition television.

Difficulty: (2) Knowledge: (F) Pages: 442-43

43. All of the following can be characterized as being significant trends or developments
in the international media landscape EXCEPT:

a. growing commercialization and deregulation of mass media.
b. shift from radio and print to TV advertising.
c. rise of global and regional media.
d. growing importance of state controlled advertising.
e. improved monitoring.

Difficulty: (2) Knowledge: (F) Pages: 442-43

44. Infomercial marketers now have access to over one-half of Japanese consumers.
Which of the following trends would be most representative or closely associated
with the above fact?

a. growing commercialization and deregulation of mass media.
b. shift from radio and print to TV advertising.
c. rise of global and regional media.
d. growing spread of interactive marketing.
e. improved monitoring.

Difficulty: (2) Knowledge: (A) Page: 443

45. To promote the Xbox video program, Microsoft gave away two million DVDs with an interactive commercial. This is an example of which of the following trends?

a. growing commercialization and deregulation of mass media.
b. shift from radio and print to TV advertising.
c. rise of global and regional media.
d. growing spread of interactive marketing.
e. improved monitoring.

Difficulty: (3) Knowledge: (A) Page: 443

46. Ad regulations governing the advertising of cigarettes would probably fall under
which of the following advertising regulation categories?

a. advertising of “vice products” and pharmaceuticals.
b. comparative advertising.
c. content of advertising messages.
d. advertising targeting children.
e. none of the above.

Difficulty: (1) Knowledge: (A) Page: 445

47. If advertisers disparage their competition in an advertisement, the regulation category
that would govern this practice would probably be:

a. advertising of “vice products” and pharmaceuticals.
b. comparative advertising.
c. content of advertising messages.
d. advertising targeting children.
e. all of the above.

Difficulty: (1) Knowledge: (F) Page: 445

48. Given that advertising regulations not only govern advertising in foreign markets but
can also create difficulties, how can marketers cope? All of the following are
valid suggestions EXCEPT:

a. keep track of regulations and pending legislation.
b. challenge regulations in court.
c. adapt the marketing mix strategy.
d. try to circumvent the regulation by using local advertisers.
e. lobby for favorable regulations or results.

Difficulty: (2) Knowledge: (F) Pages: 446-47

49. When screening ad agencies, all of the following criteria might be used EXCEPT:

a. market coverage.
b. cost of agency talent and expense.
c. quality of coverage.
d. expertise with developing a central international campaign.
e. scope and quality of support services.

50. _________________ refer(s) to a collection of short-term incentive tools that lead to
quicker and/or larger sales of a particular product by consumers or the trade.

a. Advertising
b. Sales promotion
c. Internet marketing
d. Promotion
e. Publicity

Difficulty: (1) Knowledge: (F) Page: 449

51. Sampling, price-offs, coupons, sweepstakes, bonus packs, and trade allowances are
all examples of ____________________.

a. advertising
b. sales promotion
c. direct marketing
d. public relations
e. publicity

Difficulty: (2) Knowledge: (A) Page: 449

52. All of the following explain the local nature of sales promotion for the multinational
corporation EXCEPT:

a. economic development.
b. market maturity.
c. cultural perceptions.
d. trade structure.
e. new product development.

Difficulty: (3) Knowledge: (F) Pages: 449-50

53. If promotional dollars are aimed at the end-user, then the strategy is described as
being a ______________ strategy.

a. push
b. pull
c. conventional
d. vertical
e. horizontal

Difficulty: (1) Knowledge: (A) Page: 450

54. If promotional dollars are aimed at the middlemen, then the strategy is described as
being a ______________ strategy.

a. push
b. pull
c. conventional
d. vertical
e. horizontal

Difficulty: (1) Knowledge: (A) Page: 450

55. If promotional dollars are aimed at the trade or distributor, then the strategy is
described as being a ______________ strategy.

a. push
b. pull
c. conventional
d. vertical
e. horizontal

Difficulty: (1) Knowledge: (A) Page: 450

56. Procter & Gamble has attempted to cut back on _____________ strategy incentives
by introducing every-day-low-pricing.

a. push
b. pull
c. conventional
d. vertical
e. horizontal

Difficulty: (1) Knowledge: (A) Page: 450

57. Adidas, the German sportswear maker, paid a hefty $80 million to $100 million in
cash and services for sponsorship of the 2008 Beijing Summer Olympics. This is an
example of _________________________.

a. event sponsorship
b. sales sponsorship
c. trade shows
d. publicity
e. public relations

Difficulty: (1) Knowledge: (F) Page: 452

58. Although, Coca-Cola was the official sponsor of the 2002 World Cup Soccer, Pepsi
managed to sign up some of the biggest soccer celebrities, including England’s soccer
star David Beckham. In event sponsorship, this is an example of ________________.

a. guerilla marketing
b. ambush marketing
c. passive marketing
d. active marketing
e. cooperative marketing

Difficulty: (3) Knowledge: (F) Page: 452

59. All of the following are risks associated with event sponsorship EXCEPT:

a. nonsponsors can come in.
b. too many sponsorships might be sold.
c. there might be clutter among the sponsors and their messages.
d. the sponsorship might be too expensive for the number of people that show up.
e. adequate protection of the sponsorship.

Difficulty: (3) Knowledge: (F) Page: 452
60. Trade shows are also called _______________________.

a. trade marts
b. trade markets
c. trade fairs
d. trade expos
e. trade circles

Difficulty: (1) Knowledge: (F) Page: 453

61. Trade shows in Europe:

a. are about more than just business.
b. are exactly the same as in the U.S.
c. never serve refreshments or meals.
d. might be much larger than American shows.
e. both A and D

Difficulty: (1) Knowledge: (F) Page: 454

62. Which of the following does NOT describe mobile marketing?

a. It refers to ads on the sides of trucks and buses.
b. Mobile marketing cannot interact with consumers.
c. It fosters top-of-mind brand awareness.
d. It increases customer involvement.
e. Both A and B

Difficulty: (1) Knowledge: (F) Page: 453

63. In a modern sense, the goal of many MNCs is to pursue a(n)________________
program. In this program, coordination of all communication vehicles would take
place. Key ideas would be communicated in a unified manner.

a. vertical communications
b. horizontal communications
c. integrated marketing communications
d. global communications
e. synergistic communications

Difficulty: (2) Knowledge: (F) Page: 458

64. The goal of ________________________________ is to coordinate mass
advertising, sponsorships, sales promotions, packaging, point-of-purchase displays,
and so forth.

a. integrated marketing communications
b. integrated horizontal communications
c. integrated vertical communications
d. global communications
e. synergistic communications

Difficulty: (2) Knowledge: (F) Page: 458

65. A __________________________________ program goes one step further since it is
a system of active promotional management that strategically coordinates global
communications in all of its component parts both horizontally (country-level) and
vertically (promotion tools).

a. vertical communications
b. horizontal communications
c. globally integrated marketing communications
d. global communications
e. synergistic communications

Difficulty: (3) Knowledge: (F) Page: 458

True/False Short Answer

66. Language is not a major barrier in international advertising.

Difficulty: (1) Knowledge: (F) Page: 427

67. One can identify three different types of _______________________: simple carelessness, multiple-meaning words, and idioms.

68. Language barriers can occur through translation problems. The most common of
these translation difficulties are due to ____________________ , multiple-meaning
words, and idioms.

69. Language barriers can occur through translation problems. If the original slogan
was “Body by Fisher” and the translation was “Corpse by Fisher,” the problem with
translation was probably due to a problem idiom.

Difficulty: (2) Knowledge: (A) Page: 428

70. Idioms that use slang from one country to another may inadvertently lead to
embarrassing meanings in the host country.

Difficulty: (1) Knowledge: (F) Page: 428

71. One obvious cure for misinterpreted meanings of advertising slogans in foreign
countries is to reduce the usage of slogans.

Difficulty: (2) Knowledge: (F) Page: 428

72. With respect to advertising, probably the trickiest of the cultural barriers centers
around the host country’s religion.

Difficulty: (2) Knowledge: (F) Page: 429

73. One framework that helps with studying the influence of culture on global
advertising is the cultural classification scheme developed by Geert Hofstede.
The value system construct that refers to the degree of inequality that is seen as
acceptable within the country is called ________________.

74. One framework that helps with studying the influence of culture on global
advertising is the cultural classification scheme developed by Geert Hofstede. One
of these constructs is called power distance. Research has shown that ads that
position products or services as status symbols are most likely to be effective in
countries with large power distance.

Difficulty: (2) Knowledge: (A) Page: 430

75. One framework that helps with studying the influence of culture on global
advertising is the cultural classification scheme developed by Geert Hofstede.
The value system construct that refers to the extent that people within the culture
prefer structured situations with clear-cut rules and little ambiguity is called
__________________.

76. Ad campaigns that center around the hard-sell approach (such as testimonials) are
advisable for cultures with high uncertainty avoidance such as the United States.

Difficulty: (2) Knowledge: (A) Page: 430

77. In the percentage of sales method, the overall advertising budget is based on either
past or expected sales revenues.

Difficulty: (1) Knowledge: (F) Page: 431

78. Viral marketing involves the selling of disease-causing agents.

79. With respect to budget forms that can be used in advertising, the ________________
method simply sets the overall advertising budget as a percentage of sales.

80. In the competitive parity rule, advertisers do not use competitors’ advertising spending as a benchmark.

Difficulty: (1) Knowledge: (A) Page: 431

81. With respect to budget forms that can be used in advertising, the _____________
method uses competition’s spending as a benchmark and provides the measure of
the optimal spending amount.

82. The most popular budgeting rule is the objective-and-task method.

Difficulty: (1) Knowledge: (F) Page: 433

83. In the domain of advertising, ___________________ means that marketers
encourage their affiliates to adopt, or at least consider, advertising ideas that have
proven successful in other markets.

84. “Not-Invented-Here” (NIH) syndrome does not come from local subsidiaries.

Difficulty: (3) Knowledge: (F) Page: 438

85. With export advertising, the creative strategy is highly centralized.

Difficulty: (3) Knowledge: (F) Page: 438

86. With prototype standardization, headquarters spell out guidelines on the positioning
themes and brand identity.

Difficulty: (2) Knowledge: (F) Page: 439

87. Shift from TV and print to radio advertising is becoming a big reality.

Difficulty: (1) Knowledge: (F) Pages: 442-43

88. Most firms do not rely heavily on the expertise of an advertising agency.

Difficulty: (1) Knowledge: (F) Page: 447

89. Sponsorship is one of the fastest growing promotion tools.

Difficulty: (2) Knowledge: (F) Page: 451

90. The goal of many MNCs is to avoid an integrated marketing communications
approach.

Difficulty: (2) Knowledge: (F) Page: 458

Essay

91. List and discuss the major challenges faced by international advertisers.

92. What situations are conducive to localization of advertising from the viewpoint of the international advertiser?

93. How should marketers cope with advertising regulations?

94. How do you choose an advertising agency overseas?

Chapter 14

Multiple Choice

1. Unlike the United States where customers visit car dealers, a majority of cars are sold
by door-to-door salespeople in _________________.

a. India.
b. Pakistan.
c. Japan.
d. Ireland.
e. Mongolia.

Difficulty: (2) Knowledge: (A) Page: 421

2. All of the following are tasks of the average salesperson EXCEPT:

a. take orders.
b. deliver products.
c. repair products.
d. educate consumers.
e. provide technical knowledge.

Difficulty: (1) Knowledge: (F) Page: 422

3. The salesperson can best be described as being the ______________ for the company.

a. support mechanism
b. front line
c. mouthpiece
d. promoter
e. educator

Difficulty: (2) Knowledge: (F) Page: 422

4. The salesforce management process starts with setting:

a. objectives and strategy.
b. objectives and manufacturing.
c. objectives and marketing.
d. objectives and operations.
e. objectives and raw material.

Difficulty: (3) Knowledge: (F) Page: 423

5. When researchers try to put the word international into sales management and
personal selling, clarification is needed. ____________________ considerations
include issues that analyze more than one country’s assets, strengths, and situations,
or that deal directly with cross-border coordination.

a. International product
b. International strategy
c. International mix
d. Intercultural
e. Global society

Difficulty: (1) Knowledge: (F) Page: 423

6. All of the following are examples of international sales strategy issues EXCEPT:

a. sales force skill availability.
b. selling style differences.
c. country image.
d. expatriate recruiting.
e. centralized training.

Difficulty: (3) Knowledge: (F) Page: 423, Exhibit 14-1

7. Which of the following is an example of an issue that is addressed by intercultural
issues with the foreign country?

a. sales force skill availability.
b. selling style differences.
c. country image.
d. expatriate recruiting.
e. centralized training.

Difficulty: (3) Knowledge: (F) Page: 423, Exhibit 14-1

8. All of the following are examples of intercultural issues with the foreign country
EXCEPT:

a. motivation.
b. cultural sensitivity.
c. ethical standards.
d. relationship building.
e. home to host communications.

Difficulty: (2) Knowledge: (F) Page: 423, Exhibit 14-1

9. Which of the following is an example of an issue faced by international sales
strategy?

a. motivation.
b. cultural sensitivity.
c. ethical standards.
d. relationship building.
e. home to host communications.

Difficulty: (3) Knowledge: (F) Page: 423, Exhibit 14-1

10. Sales force skill availability, company image, expatriate recruiting, and centralized
training are issues relevant to ________________________ considerations.

a. international product
b. international sales strategy
c. international mix
d. intercultural issues with the foreign country
e. global society

Difficulty: (2) Knowledge: (F) Page: 423, Exhibit 14-1

11. Motivation, cultural sensitivity, ethical standards, fairness, and relationship building
are issues relevant to _______________________ considerations.

a. international product
b. international sales strategy
c. international mix
d. intercultural issues with the foreign country
e. global society

Difficulty: (1) Knowledge: (F) Page: 423, Exhibit 14-1

12. In the sales management “process,” the first step is where the manager:

a. sets objectives and strategy.
b. determines goals and purposes.
c. recruits.
d. trains.
e. supervises.

Difficulty: (2) Knowledge: (F) Page: 423

13. A key decision that a marketer must make with respect to international marketing is
_______________________. This decision limits and defines key underlying aspects
of its future sales force management.

a. which market to enter
b. how much to spend in a market
c. how to enter the market
d. how far should a market be entered
e. how long to stay in a market

Difficulty: (3) Knowledge: (A) Page: 423

14. The _________________ in(into) a market will determine how large the sales force
needs to be and will influence how much training it will require.

a. form of marketing
b. form of entry
c. form of promotion
d. form of commission
e. form of management

Difficulty: (2) Knowledge: (F) Page: 423

15. How large a sales force needs to be, how much training the sales force will need,
whether the sales force is predominately local or foreign, and the manner of
compensation are all issues influenced by the __________________ in(into) a
market.

a. form of marketing
b. form of entry
c. form of promotion
d. form of commission
e. form of management

Difficulty: (2) Knowledge: (F) Page: 423

16. With respect to sales and sales management, the entry method into a market is also
called the ____________________________.

a. zone process
b. level of migration
c. level of expatriation
d. level of complexity
e. level of integration

Difficulty: (3) Knowledge: (F) Page: 424

17. With respect to sales and sales management entry into a foreign market, _________
integration refers to greater ownership and control of the distribution channel.
a. vertical
b. horizontal
c. forward
d. backward
e. dual

Difficulty: (2) Knowledge: (A) Page: 424

18. If a company begins its foreign sales by exporting through a merchant distributor who
takes title to the product and performs all the necessary foreign sales functions, this
would be a form of ________________ integration.

a. vertical
b. horizontal
c. forward
d. backward
e. dual

Difficulty: (3) Knowledge: (A) Page: 424

19. If a company begins its foreign sales by exporting through merchant distributors and
then purchases a foreign sales subsidiary and locates product warehouses abroad, this
would be a form of _____________________ integration.

a. vertical
b. horizontal
c. forward
d. backward
e. dual

Difficulty: (3) Knowledge: (A) Page: 424

20. Selling through an Export Management Company (EMC) or an Export Trading
Company (ETC) is considered a _____________ involvement approach to
international sales.

a. low
b. middle
c. high
d. backward
e. parallel

Difficulty: (1) Knowledge: (F) Page: 424

21. _____________________ serves the needs of their clients in entering a market or
sourcing goods from a market. They are characterized by their “service” nature and
efforts to interact with and meet the needs of the exporter client.

a. A foreign franchise
b. An Export Trading Company
c. An Export Management Company
d. A Noraizi agent
e. A bulk-breaker

Difficulty: (2) Knowledge: (F) Page: 424

22. Which of the following degrees of involvement would probably be in use when
Export Management Companies, Export Trading Companies, or direct exporting
are being used by the firm?

a. limited foreign involvement and visibility
b. local management and sales force
c. expatriate management and local sales force (mixed)
d. heavy to complete expatriate sales force
e. maximum global control and world wide ownership

Difficulty: (1) Knowledge: (A) Page: 425

23. Which of the following degrees of involvement would probably be in use when
piggybacking and selling through chains are used by the firm?

a. limited foreign involvement and visibility
b. local management and sales force
c. expatriate management and local sales force (mixed)
d. heavy to complete expatriate sales force
e. maximum global control and world wide ownership

Difficulty: (2) Knowledge: (A) Page: 425

24. Many ______________________ use EMCs services mainly to test the international
arena.

a. contract manufacturers
b. franchisees
c. experienced exporters
d. inexperienced exporters
e. none of the above

Difficulty: (1) Knowledge: (A) Page: 425

25. If the company describes its situation as being concerned with a contract for sales
from the U.S., no sales force or representatives abroad, and little or no control over
the foreign marketing process, the firm will probably use which form of involvement
listed below?

a. limited foreign involvement and visibility
b. local management and sales force
c. expatriate management and local sales force (mixed)
d. heavy to complete expatriate sales force
e. maximum global control and world wide ownership

Difficulty: (2) Knowledge: (A) Page: 424, Exhibit 14-2

26. If the company uses expatriates to oversee sales regions and lead training, the firm
will probably use which form of involvement listed below?

a. limited foreign involvement and visibility
b. local management and sales force
c. expatriate management and local sales force (mixed)
d. heavy to complete expatriate sales force
e. maximum global control and world wide ownership

Difficulty: (2) Knowledge: (A) Page: 424, Exhibit 14-2

27. _____________________ is usually a large conglomerate that imports, exports,
countertrade, invests, and manufactures in the global arena.

a. A foreign franchise
b. An Export Trading Company
c. An Export Management Company
d. A Noraizi agent
e. A bulk-breaker

Difficulty: (2) Knowledge: (F) Page: 425

28. Sogoshosha (such as Mitsubishi, Mitsui, Sumitomo, and Marubeni) are the Japanese
equivalents of _______________________.

a. a foreign franchise
b. an Export Trading Company
c. an Export Management Company
d. a dealer network
e. a bulk-breaker

Difficulty: (2) Knowledge: (A) Page: 425

29. If a company follows a _______________ involvement path, it normally gives
up the ability to motivate and monitor the sales force and to train them to better serve
the customer.

a. low
b. middle
c. high
d. backward
e. parallel

Difficulty: (1) Knowledge: (F) Page: 425

30. When a company has the ____________________ involvement approach, the
company (because it uses either host country employees or expatriates) must face
the foreign culture and intercultural communication can become an issue that must
be dealt with through training.

a. low-level
b. mid-level
c. high-level
d. backward level
e. parallel level

Difficulty: (2) Knowledge: (A) Page: 426

31. Which of the following forms of company sales involvement generally have the
lowest involvement of expatriates?

a. low-level
b. mid-level
c. high-level
d. backward level
e. parallel level

Difficulty: (2) Knowledge: (A) Page: 426

32. Which of the following forms of company sales involvement generally have the
highest involvement of expatriates?

a. low-level
b. mid-level
c. high-level
d. backward level
e. parallel level

Difficulty: (2) Knowledge: (A) Page: 426

33. When a company has a _________________ involvement approach, the company
substantially controls the foreign distribution channels.
a. low-level
b. mid-level
c. high-level
d. backward level
e. parallel level

Difficulty: (1) Knowledge: (F) Page: 426

34. As an example of a company that has the _______________________ involvement
approach, the company will generally own warehouses where goods are stored and/or
own outlets where products are sold.
a. low-level
b. mid-level
c. high-level
d. backward level
e. parallel level

Difficulty: (2) Knowledge: (A) Page: 426

35. Which of the following statements MOST accurately describes the state of
international selling?

a. At the level of personal selling there is little true international selling.
b. International selling is a function of the degree of involvement.
c. Because of the global nature of business today, global selling transcends
international boundaries.
d. International selling will never work.
e. International selling is tightly monitored by most governments because of the
potential for funds outflow.

Difficulty: (3) Knowledge: (F) Page: 427

36. Which of the following statements MOST accurately describes the state of
international selling?

a. Despite growing “international sales,” salespeople typically work only in one
region.
b. International selling is a function of the degree of involvement.
c. Because of the global nature of business today, global selling transcends
international boundaries.
d. International selling will never work.
e. International selling is tightly monitored by most governments because of the
potential for funds outflow.

Difficulty: (3) Knowledge: (F) Page: 427

37. Personal selling is predominantly a _________________ activity.

a. psychological
b. ethnic
c. tribal
d. group
e. personal

Difficulty: (1) Knowledge: (F) Page: 427

38. A _________________ occurs when we group people (from what might appear
to us as very similar cultures) together in perhaps an inappropriate manner because
those people consider themselves to be different.

a. cultural assimilation
b. cultural harmony
c. cultural generalization
d. cultural syncopation
e. cultural similarity

Difficulty: (2) Knowledge: (F) Page: 428

39. Germans are typically viewed as scientifically exacting and industrious people.
However, the typical German manufacturing work week is only thirty hours and
the workers jealously guard their free time and show little interest in working
overtime. This would be an example of the dangers of ____________________.

a. cultural onomonopea
b. cultural adiaphoria
c. cultural generalization
d. cultural syncopation
e. cultural similarity

Difficulty: (2) Knowledge: (A) Page: 428

40. If a marketing manager were to mistakenly group South Koreans and Japanese
together (either as a market or by business and labor practices), this would be an
example of a _________________ problem.

a. cultural onomonopea
b. cultural adiaphoria
c. cultural generalization
d. cultural syncopation
e. cultural similarity

Difficulty: (2) Knowledge: (A) Page: 428

41. The differences between the cultures of companies in two countries are
based more on the ingrained cultural values of the ___________________.

a. consumers
b. governments
c. board of directors
d. CEOs
e. employees

Difficulty: (2) Knowledge: (A) Page: 428

42. One popular tool for characterizing people that addresses their cognitive styles is
the ____________________.

a. Kelsey-Ciebold scale.
b. Johns-Hopkins initial perception scale.
c. Majors-Hawkins Cognitive Indicator.
d. Myers-Briggs Type Indicator.
e. Spaniel test.

Difficulty: (2) Knowledge: (F) Page: 431

43. The ________________ classifies people on four personal dimensions. These are
extrovert versus introvert, sensing versus intuitive, thinking versus feeling, and
judging versus perceiving.

a. Hartman profile
b. Myers-Briggs Type Indicator
c. Majors-Hawkins Cognitive Indicator
d. Spaniel test for concepts
e. Freudian fantasy test

Difficulty: (2) Knowledge: (F) Page: 431

44. According to the Myers-Briggs Type Indicator test, the _____________ tends to
rely on the environment for guidance, be action-oriented, sociable, and communicate
with ease and frankness.

a. extrovert
b. introvert
c. sensing person
d. intuitive person
e. thinking person

Difficulty: (2) Knowledge: (F) Page: 431, Exhibit 14-4

45. According to the Myers-Briggs Type Indicator test, the _____________ tends to
show a greater concern with concepts and ideas than with external events, relative
detachment, and enjoyment of solitude and privacy over companionship.

a. extrovert
b. introvert
c. sensing person
d. intuitive person
e. thinking person

Difficulty: (2) Knowledge: (F) Page: 431, Exhibit 14-4

46. According to the Myers-Briggs Type Indicator test, the _____________ tends to
focus on immediate experience, become more realistic and practical, and develop
skills such as acute powers of observation and memory for details.

a. extrovert
b. introvert
c. sensing person
d. intuitive person
e. thinking person

Difficulty: (3) Knowledge: (F) Page: 431, Exhibit 14-4

47. According to the Myers-Briggs Type Indicator test, the _____________ tends to
value the possibility and meaning more than immediate experience, and become
more imaginative, theoretical, abstract, and future oriented.
a. extrovert
b. introvert
c. sensing person
d. intuitive person
e. thinking person

Difficulty: (3) Knowledge: (F) Page: 431, Exhibit 14-4

48. All of the following are steps in the sales force management process EXCEPT:

a. setting sales force objectives.
b. designing sales force strategy.
c. recruiting and selecting salespeople.
d. commission system management.
e. supervising salespeople.

Difficulty: (2) Knowledge: (F) Page: 433

49. The first step in the sales force management process is best described as being:

a. designing sales force strategy.
b. setting sales force objectives.
c. recruiting and selecting salespeople.
d. commission system management.
e. supervising salespeople.

Difficulty: (2) Knowledge: (F) Page: 433

50. The __________________ states explicitly what the sales force will be asked to do.

a. sales force strategy
b. sales force objectives
c. sales force training procedures
d. sales force recruiting procedures
e. sales force evaluation procedures

Difficulty: (2) Knowledge: (F) Page: 433

51. Setting sales force objectives internationally will not only depend on the company
goals but will also depend on:

a. the training procedures.
b. the recruiting procedures.
c. the evaluation procedures.
d. an analysis of the culture and the values of the country it is entering.
e. management standards for excellence.

Difficulty: (2) Knowledge: (F) Page: 434

52. __________________ addresses the structure, size, and compensation of the sales
force.

a. Sales force objectives
b. Sales force goals
c. Sales force strategy
d. Sales force policy
e. Sales force vision

Difficulty: (2) Knowledge: (F) Page: 434

53. With respect to sales force structure, the ____________________ sales force has
each salesperson responsible for a particular area (reporting up the line to regional
sales managers).

a. territorial
b. product
c. customer
d. matrix
e. “open plan”

Difficulty: (1) Knowledge: (F) Page: 434

54. With respect to sales force structure, the ______________________ sales force has
each salesperson sell only one product or product line (even when selling to a single
customer).

a. territorial
b. product
c. customer
d. matrix
e. “open plan”

Difficulty: (1) Knowledge: (F) Pages: 434-35

55. With respect to the functions of sales force strategy, the ______________ refers to
and determines the physical positioning and responsibilities of each salesperson.

a. size
b. structure
c. compensation procedure
d. modeling procedure
e. evaluation procedure

Difficulty: (1) Knowledge: (F) Page: 434

56. In order to ensure a globally consistent sales strategy, a company will likely:
a. conduct sales training on a country-by-country basis.
b. train the sales managers in the headquarters country and send them abroad.
c. bring all employees to the headquarters country for training, then send them
to their home markets.
d. hire professional sales trainers to travel abroad to train employees.
e. none of the above

Difficulty: (2) Knowledge: (a) Page: 436

57. Difficulties in setting compensation packages for global salesforces include:
a. unions may restrict wage options.
b. some cultures are not motivated to work harder regardless of monetary
incentives.
c. local firms may protest that the MNC is stealing the best talent with wages
out of line with local standards.
d. culture may dictate that people of the same rank should not be compensated
differently regardless of performance.
e. all of the above

Difficulty: (2) Knowledge: (F) Page: 446

58. Ethics for international sales reps:
a. are the same regardless of country.
b. can be taught and are no longer a problem once training has taken place.
c. don’t matter—reps should do what the home culture expects.
d. demand clear corporate policies to help reps avoid problems.
e. should be ignored until a complaint is made, then the guilty should be punished.

Difficulty: (2) Knowledge: (A) Page: 438

59. Evaluations of sales performance should be ________.
a. cumulative
b. exhaustive
c. quantitative
d. qualitative
e. both C and D

Difficulty: (2) Knowledge: (F) Page: 438

60. ____________________ the sales force means directing and motivating the sales
force to fulfill the company’s objectives and providing the resources to allow them
to do so.

a. Recruiting
b. Training
c. Evaluating
d. Supervising
e. Compensating

Difficulty: (2) Knowledge: (F) Page: 436

61. With respect to rewarding salespeople, _________________ reinforces the negative
image of the salesperson benefiting from the sale, with no regard for the purchaser’s
well-being.

a. the salary system
b. the commission system
c. the motivation system
d. the retainer system
e. the hourly wage system

Difficulty: (2) Knowledge: (F) Page: 437

62. With respect to evaluating salespeople, _________________ evaluations can be
in the form of comparisons of sales, of sales percents, or increases in sales.

a. parametric
b. qualitative
c. quantitative
d. nonparametric
e. decisional

Difficulty: (2) Knowledge: (F) Page: 438

63. Stages of the negotiation process include the following EXCEPT:

a. non-task sounding.
b. task-related information exchange.
c. foreign travel.
d. persuasion.
e. concessions and agreements.

Difficulty: (2) Knowledge: (F) Page: 439

64. In international marketing, negotiation strategies include the following EXCEPT:

a. employ an outsourcing consultant.
b. employ an agent or advisor.
c. involve a mediator.
d. induce the counterpart to follow one’s own negotiation script.
e. Adapt the counterpart’s negotiation script.

Difficulty: (3) Knowledge: (F) Page: 439

65. ___________________ are home country personnel sent overseas to manage local
operations in the foreign market.

a. Managers
b. International personnel
c. Group managers
d. Expatriates
e. Foreign managers

Difficulty: (1) Knowledge: (F) Page: 443

66. All of the following are advantages that expatriates have over foreign nationals as
managers of MNCs, EXCEPT:

a. more intelligence.
b. better communication.
c. better understanding of office politics.
d. develops better future managers.
e. better relationships with the home office.

Difficulty: (2) Knowledge: (F) Page: 444

67. All of the following are disadvantages of using expatriates over foreign nationals as
managers, EXCEPT:

a. cross-cultural training.
b. motivation.
c. honesty.
d. compensation.
e. family discord.

Difficulty: (2) Knowledge: (F) Pages: 443-44

68. The general trend among U.S. multinationals has been a decreasing use of
______________ managers overseas and an increasing reliance on ____________
foreign talent since the 1990s.

a. global, local
b. international, local
c. European, local
d. expatriate, local
e. Asian, local

Difficulty: (3) Knowledge: (A) Page: 443

69. The single most compelling reason that most expatriates return home early from
their tour of duty abroad is:

a. motivation.
b. salary.
c. health.
d. fear of the foreign environment.
e. family discord.

Difficulty: (2) Knowledge: (F) Page: 447

70. Expatica’s Relocation Services’ 2008 survey provided the following recommendations regarding reducing attrition rates EXCEPT:

a. membership in top private business clubs.
b. chances to use international experience.
c. a choice of positions upon return.
d. recognition.
e. repatriation career support.

Difficulty: (2) Knowledge: (F) Page: 448

True/False Short Answer

71. Unlike the United States, the majority of cars sold in Japan are sold door-to-door.

Difficulty: (2) Knowledge: (A) Page: 421

72. The salesperson is not the front line for the company.

Difficulty: (1) Knowledge: (F) Page: 422

73. Sales people do not sell services.

Difficulty: (1) Knowledge: (A) Page: 422

74. When considering international sales management issues, ________________
considerations are issues that analyze more than one country’s assets, strengths, and
situations, or that deal directly with cross-border coordination.

75. Sales force skill availability, country image, and expatriate recruiting are all issues
that are relevant as intercultural issues with the foreign country.

Difficulty: (3) Knowledge: (F) Page: 423, Exhibit 14-1

76. Motivation, cultural sensitivity, ethical standards, and fairness are all issues that are
relevant as intercultural issues with the foreign country.

Difficulty: (2) Knowledge: (F) Page: 423, Exhibit 14-1

77. The question of how to enter the market is central to marketing.

Difficulty: (1) Knowledge: (F) Page: 423

78. Backward integration refers to greater ownership and control of the distribution
channel.

Difficulty: (3) Knowledge: (F) Page: 423

79. If a firm has limited foreign involvement and visibility, a correct choice for them to
use in entering a foreign country would be to develop an expatriate sales force.

Difficulty: (2) Knowledge: (A) Page: 424, Exhibit 14-2

80. If a firm has limited foreign involvement and visibility, a correct choice for them to
use in entering a foreign country would be to enter into an arrangement with an
Export Management Company.

Difficulty: (2) Knowledge: (A) Page: 424, Exhibit 14-2

81. The term sogoshosha in Japan describes an Export Trading Company.

Difficulty: (2) Knowledge: (A) Page: Page: 425

82. Personal selling is predominantly a group activity.

Difficulty: (1) Knowledge: (F) Page: 427

83. At the level of personal selling there is little true international selling.

84. Equating Korean and Japanese consumers and business practices to be the same just
because they are in geographic proximity to one another would be a mistake often
made because of _______________________.

85. Myers-Briggs-Type Indicator (MBTI) is a tool for addressing people’s cognitive
styles.

Difficulty: (3) Knowledge: (F) Page: 431

86. One of the dimensions of Myers-Briggs-Type Indicator (MBTI) include ethnocentric
behavior:

Difficulty: (1) Knowledge: (F) Page: 431

87. The first step in the process of sales force management starts with recruiting and
selecting salespeople.

Difficulty: (1) Knowledge: (F) Page: 434

88. The size of the salesforce depends on the sales structure.

89. In the negotiation process, nontask soundings do not include activities that are used to
establish a rapport among the parties involved.

90. ______________ are home country personnel sent overseas to manage local
operations in the foreign market.

91. Negotiations practices do not vary enormously across cultures.

Difficulty: (2) Knowledge: (F) Page: 439

92. Expatriate involvement in international sales has been on the rise since the 1990s.

Difficulty: (2) Knowledge: (F) Page: 443

93. Once the expatriate is overseas, training becomes more difficult.

Difficulty: (3) Knowledge: (F) Page: 445

94. Cross-cultural training is on the decline in recent years.

Difficulty: (2) Knowledge: (F) Page: 445

95. Repatriation is the return of the expatriate employee from overseas.

Difficulty: (1) Knowledge: (F) Page: 446

96. Expatriates do not face a long list of difficulties upon returning home.

Difficulty: (2) Knowledge: (F) Page: 448

Essay

97. It has been said that selling is the world over. However, there are differences between the way that domestic and international selling efforts occur and are managed. Comment on these differences.

98. Considering various types of entry formats into the international arena, under what circumstances might it be advisable for the company to attempt a traveling global salesforce?

99. Considering the four major categories of the Myers-Briggs Type Indicator, which of the categories (or combination of categories) best describes you? Explain why.

100. Not all United States sales methods or systems can automatically be exported abroad. Considering the information provided by research on different cultural dimensions, why might it be difficult to adopt a U.S.-style commission system for salespeople in such countries as Japan or Mexico. Be sure to remember how these two countries might rank on the five cultural dimension scales.

101. Why do most firms still consider expatriates to be a valuable extension of their company? What are the advantages and disadvantages of using expatriates?

Chapter 15

Multiple Choice

1. In global logistics and distribution, Coca-Cola’s success relies largely on its global
distribution arm, ______________________, the world’s largest bottler group.

a. Coca-Cola Enterprises
b. Coca-Cola Network
c. Coca-Cola Web
d. Coca-Cola Team
e. Coca-Cola Trucking Co.

Difficulty: (2) Knowledge: (F) Page: 452

2. According to the textbook, which of the following famous business thinkers
characterized logistics as being “the darkest continent of business?”

a. Philip Kotler.
b. Stephen Covey.
c. Michael E. Porter.
d. Peter Drucker.
e. Tom Peters.

Difficulty: (3) Knowledge: (F) Page: 452

3. As firms start operating on a global basis, ___________________ need to manage the shipping of raw materials, components, and supplies among various manufacturing sites at the most economical and reliable rates.

a. human resource managers
b. logistics managers
c. operations managers
d. outsourcing managers
e. information technology managers

Difficulty: (2) Knowledge: (F) Page: 452

4. In 2011, the total logistics cost represented about 8.5 percent of the GDP, or $1 trillion in the _________________.

a. U.S.
b. Ireland
c. Portugal
d. Belgium
e. Romania

Difficulty: (1) Knowledge: (F) Page: 452

5. In 2012, in the U.S., the total logistics cost was ______ percent of the U.S. GDP.

a. 1
b. 3
c. 5.5
d. 8.5
e. 10.5

Difficulty: (2 Knowledge: (F) Page: 452

6. __________________ transportation refers to the seamless transfer of goods from
one mode of transportation (such as an aircraft) to another (such as a ship) and
vice versa without the hassle of unpacking and repackaging of goods to suit the
dimensions of the mode of transportation being used.

a. Bi-polar
b. Bi-modal
c. Intercontinental
d. Dual-basic
e. Intermodal

Difficulty: (2) Knowledge: (F) Page: 452

7. __________________ refers to the means of keeping continuous tabs on the exact
location of the goods being shipped in the logistics chain.

a. Data processing
b. Messaging service
c. Tracking technology
d. Computerized messaging
e. Hybrid technology

Difficulty: (2) Knowledge: (F) Page: 452

8. With electronic tracking technology, shippers are able to quickly react to any
disruption in the shipments because the shipper knows where exactly the goods are
in real time and:

a. labor can be adjusted accordingly.
b. the alternative means can be quickly mobilized should problems develop.
c. costs can always be evaluated.
d. losses are rare.
e. customer service is now at a premium.

Difficulty: (1) Knowledge: (A) Page: 452

9. ________________ is defined as the design and management of a system that directs
and controls the flows of materials into, through and out of the firm across national
boundaries to achieve its corporate objectives at a minimum total cost.

a. Global goods flow
b. Global distribution
c. Global logistics
d. Global wholesaling
e. Global shipping

Difficulty: (2) Knowledge: (F) Page: 453

10. Global logistics encompasses:

a. advertising and personal selling.
b. purchasing and manufacturing.
c. materials management and trucking.
d. materials management and physical distribution.
e. pricing and manufacturing.

Difficulty: (2) Knowledge: (A) Page: 453

11. ___________________ refers to the inflow of raw materials, parts, and supplies in
and through the firm.

a. Global logistics
b. Physical distribution
c. Materials management
d. Purchasing processes
e. Global distribution

Difficulty: (2) Knowledge: (F) Page: 453

12. The global logistics process begins with which of the following?

a. materials management
b. processing and assembly
c. physical distribution
d. raw materials, components, and supplies
e. finished products ready for shipment

Difficulty: (2) Knowledge: (F) Page: 453

13. When raw materials, components, and supplies are converted or manipulated for
processing and assembly by the firm, the process is monitored and controlled by
the ________________________ function of the firm.

a. physical distribution
b. purchasing
c. intermodal transportation
d. materials handling
e. materials management

Difficulty: (3) Knowledge: (A) Page: 453

14. _______________________ refers to the movement of the firm’s finished products
to its customers, consisting of transportation, warehousing, inventory, customer
service/order entry, and admission.

a. Physical distribution
b. Purchasing
c. Intermodal transportation
d. Global logistics
e. Materials management

Difficulty: (2) Knowledge: (F) Page: 453

15. All of the following are activities that occur during physical distribution EXCEPT:

a. transportation.
b. warehousing.
c. inventory.
d. order entry.
e. promotion and advertising.

Difficulty: (1) Knowledge: (A) Page: 453, Exhibit 15-1

16. With respect to distribution costs, a geographically large country such as the United
States will normally incur more ______________________ costs than in smaller
countries.

a. transportation, insurance, and inventory
b. warehousing, customer service/order entry, and general administration
c. transportation and inventory
d. materials handling
e. warehousing and transportation

Difficulty: (3) Knowledge: (A) Page: 453

17. Which of the following factors contribute significantly to the increased complexity
and cost of global logistics as compared to domestic logistics?

a. domestic intermediaries
b. service
c. purchasing
d. exchange rate fluctuation
e. materials handling

Difficulty: (1) Knowledge: (F) Page: 455

18. All of the following factors contributed significantly to the increased complexity and
cost of global logistics as compared to domestic logistics EXCEPT:

a. exchange rate fluctuation.
b. distance.
c. domestic intermediaries.
d. foreign intermediaries.
e. negotiations with government officials and distributors.

Difficulty: (2) Knowledge: (F) Page: 455

19. Recently the U.S. dollar depreciated while the Japanese yen soared in value. Honda
found that it was much cheaper to ship its Accord models to Europe from its Ohio
plant than from Japan. This could most accurately be classed as a move made
because of problems or opportunities with:

a. distance.
b. logistics.
c. exchange rate fluctuations.
d. foreign intermediaries.
e. domestic intermediaries.

Difficulty: (1) Knowledge: (A) Page: 455

20. The bulk of international trade is handled by ________________________.

a. ocean shipping
b. air transport
c. trucking services
d. railroads
e. inland waterways

Difficulty: (1) Knowledge: (A) Page: 455

21. The most important factors in determining an optimal mode of transportation for
foreign markets are the value-to-volume ratio, perishability of the product, and:

a. the cost of transportation.
b. intermodal ratio.
c. total cost ratio to inventory and warehousing expense.
d. the cost of insurance.
e. the distance to speed relationship.

Difficulty: (2) Knowledge: (F) Page: 456

22. All of the following are important factors in determining an optimal mode of
transportation to be used in foreign markets EXCEPT:
a. the cost of transportation.
b. the value-to-volume ratio.
c. the perishability of the product.
d. obsolescence along the product life cycle.
e. the cost of insurance.

Difficulty: (3) Knowledge: (F) Pages: 456

23. The _________________ is determined by how much value is added to the materials
used in the product.

a. perishability of the product
b. cost of transportation
c. the cost of insurance
d. the value-to-volume ratio
e. the intermodal ratio

Difficulty: (1) Knowledge: (F) Page: 456

24. The ________________ of the product refers to the quality degradation over time
and/or product obsolescence along the product life cycle.

a. perishability
b. cost of transportation
c. cost of insurance
d. value-to-volume ratio
e. intermodal ratio

Difficulty: (1) Knowledge: (F) Page: 456

25. All of the following are viable options for shipping products internationally on a
global basis (anywhere in the world) EXCEPT:

a. ocean shipping.
b. air freight.
c. cargo liner service.
d. truck.
e. intermodal transportation.

Difficulty: (2) Knowledge: (A) Page: 456

26. The primary forms of ocean shipping include all of the following EXCEPT:

a. liner service.
b. bulk shipping.
c. tanker shipping.
d. irregular runs.
e. FedEx surface.

Difficulty: (1) Knowledge: (A) Page: 456

27. If a product were to be categorized as being heavy, bulky, and nonperishable,
probably the best form of global shipping would be:

a. ocean shipping.
b. air freight.
c. truck.
d. rail.
e. barge.

Difficulty: (1) Knowledge: (F) Page: 456

28. If a company wished to ship semiconductor chips abroad, they would probably
choose:

a. ocean shipping.
b. air freight.
c. truck.
d. rail.
e. barge.

Difficulty: (1) Knowledge: (A) Page: 457

29. Research has shown that if Nike or Reebok were to be transporting their footwear
from plants in Asia to the United States, they would probably choose which of the
following transportation modes?

a. ocean shipping
b. air freight
c. truck
d. rail
e. barge

Difficulty: (2) Knowledge: (A) Page: 458

30. The traditional logistics strategy involves ____________________ based on
forecasting and inventory speculation.

a. supply and demand
b. anticipatory demand management
c. inventory volume equations
d. purchasing ratios
e. microeconomic principles

Difficulty: (2) Knowledge: (F) Page: 458

31. Information technology, electronic data interchange, and intermodal transportation
have made ____________________ a reality in physical distribution.

a. low cost transportation
b. a “no returns” policy
c. ultimate distribution service
d. just-in-time delivery
e. accurate purchasing management

Difficulty: (2) Knowledge: (F) Page: 458

32. Multinational corporations can use ________________ as a strategic tool in dealing
with currency fluctuations and as a hedge against inflation.

a. buying power
b. just-in-time management
c. just-in-time delivery
d. purchasing management
e. inventory

Difficulty: (3) Knowledge: (F) Page: 458

33. By increasing ___________________ before imminent depreciation of a currency
instead of holding cash, the firm may reduce its exposure to currency depreciation
losses.

a. buying power
b. plant and equipment
c. trucks
d. materials handling equipment (such as forklifts)
e. inventory

Difficulty: (2) Knowledge: (F) Page: 458

34. ___________ inventories also provide a hedge against inflation because the value of
the goods/parts held in inventory remains the same compared to the buying power of
local currency.

a. High-tech
b. Low-tech
c. High
d. Low
e. None of the above

Difficulty: (3) Knowledge: (A) Page: 458

35. __________________ refers to coordinating production and distribution across
geographic boundaries.

a. Rationalization
b. Utility management
c. Physical distribution management
d. Logistic integration
e. Logistic modeling

Difficulty: (2) Knowledge: (F) Page: 459

36. _________________ means reducing resources to achieve more efficient and
cost-effective operations.

a. Rationalization
b. Utility management
c. Physical distribution management
d. Logistic integration
e. Logistic modeling

Difficulty: (2) Knowledge: (F) Page: 459

37. Another profound change in the last decade is the proliferation of _______________.

a. IT warehouses
b. e-commerce
c. information technology
d. global shipping traffic
e. global air traffic

Difficulty: (2) Knowledge: (F) Page: 459

38. 3PL stands for:

a. third-party logistics.
b. third-power logistics.
c. third-peer logistics.
d. third-production logistics.
e. none of the above.

Difficulty: (1) Knowledge: (F) Page: 461

39. The largest third-party logistics sector is the value-added ________________ and
_________________ industry.

a. warehousing, purchasing
b. warehousing, manufacturing
c. warehousing, distribution
d. warehousing, painting
e. none of the above

Difficulty: (2) Knowledge: (F) Page: 461

40. The trend toward third-party logistics is a result of the _____________ and the
_____________.

a. Internet, enterprise resource planning
b. Internet, technology simulations
c. Internet, customer relationship management
d. Internet, Intranet
e. none of the above

Difficulty: (2) Knowledge: (A) Page: 462

41. The Internet and Intranet facilitate __________________________.

a. parallel delivery.
b. cheap delivery.
c. expensive delivery.
d. forward-time delivery.
e. on-time delivery.

Difficulty: (1) Knowledge: (F) Page: 462

42. _________________ influences decisions regarding what activities and
technologies a company should concentrate its investment and managerial
resources in (in relation to its competitors in the industry).
a. Relative advantage
b. Absolute cost advantage
c. Comparative advantage
d. Competitive advantage
e. Sourcing advantage

Difficulty: (2) Knowledge: (F) Page: 464

43. __________________ affects the company’s decision about where to source and
market, based on lower cost of labor and other resources in one country relative to
another.

a. Relative advantage
b. Absolute cost advantage
c. Comparative advantage
d. Competitive advantage
e. Sourcing advantage

Difficulty: (2) Knowledge: (F) Page: 464

44. Some distribution companies even find that the best way to be successful is to create a
distribution ________________.

a. alliances
b. mergers
c. acquisitions
d. consortia
e. joint ventures

Difficulty: (3) Knowledge: (F) Page: 463

45. Sourcing strategy includes two basic choices. One of these is intra-firm sourcing
and the other is __________________.

a. importing
b. outsourcing
c. in-sourcing
d. matrix manipulation
e. horizontal integration

Difficulty: (1) Knowledge: (F) Page: 465

46. As a type of intra-firm sourcing, _____________________ is when a company
procures major components in-house by producing them domestically.

a. domestic in-house sourcing
b. offshore subsidiary sourcing
c. domestic purchasing arrangement
d. offshore outsourcing (offshore sourcing)
e. export management company

Difficulty: (2) Knowledge: (F) Page: 465

47. As a type of intra-firm sourcing, _____________________ is when a company
procures major components from its foreign subsidiary.

a. domestic in-house sourcing
b. offshore subsidiary sourcing
c. domestic purchasing arrangement
d. offshore outsourcing (offshore sourcing)
e. export management company

Difficulty: (1) Knowledge: (F) Page: 465

48. As a type of outsourcing, _____________________ is when a company
buys major components from independent suppliers at home.

a. domestic in-house sourcing
b. offshore subsidiary sourcing
c. a domestic purchasing arrangement
d. offshore outsourcing (offshore sourcing)
e. export management company

Difficulty: (2) Knowledge: (F) Pages: 466

49. As a type of outsourcing, _____________________ is when a company
buys major components from independent suppliers overseas.

a. domestic in-house sourcing
b. offshore subsidiary sourcing
c. a domestic purchasing arrangement
d. offshore outsourcing (offshore sourcing)
e. export management company

Difficulty: (1) Knowledge: (F) Page: 466

50. Covisint is probably the largest global online ________ procurement system.

a. C2B
b. B2B
c. B2G
d. C2C
e. B2C

Difficulty: (2) Knowledge: (F) Page: 466-67

51. Typical B2B procurement systems rely on _______________ that emphasize the
lowest bids on a global basis.

a. promotions
b. selling
c. manufacturing
d. auctions
e. production

Difficulty: (2) Knowledge: (F) Page: 469

52. Companies that outsource to the extent that they adopt a “designer role” in
global competition (i.e., offer innovations in product design without investing
in manufacturing process technology) have been described by some as being:

a. vertical corporations.
b. horizontal corporations.
c. hollow corporations.
d. supply and demand corporations.
e. monopoly manufacturers.

Difficulty: (3) Knowledge: (F) Page: 468

53. A __________________ is an area that is located within a nation, but is considered
outside of the customs territory of the nation.

a. border zone
b. red zone district
c. warehouse district
d. dock facility
e. free trade zone

Difficulty: (1) Knowledge: (F) Page: 472

54. In the United States, a free trade zone is officially called a __________________.

a. Maquiladora operation
b. border zone
c. red zone district
d. Foreign Trade Zone
e. Channel Zone

Difficulty: (2) Knowledge: (F) Page: 473

55. All of the following are benefits of using a free trade zone EXCEPT:

a. duty deferral and elimination.
b. lower tariff rates.
c. no government interference in intelligence gathering activities.
d. exchange rate hedging.
e. “Made in U.S.A.” designation.

Difficulty: (1) Knowledge: (F) Page: 473, Exhibit 15-4

56. Duty deferral and elimination, lower tariff rates, exchange rate hedging, and a
“Made in U.S.A.” designation are all benefits of using a __________________.

a. Maquiladora operation
b. border zone
c. red zone district
d. Foreign Trade Zone
e. Channel Zone

Difficulty: (2) Knowledge: (F) Page: 473, Exhibit 15-4

57. At the macro-level, benefits of using a free trade zone include all of the following
EXCEPT:

a. increased investment and employment.
b. more revenue through increased local taxes.
c. obtaining a beachhead in a foreign market without being in the mainstream
distribution process.
d. the ability to reassemble large shipments into different groupings.
e. no duties on labor.

Difficulty: (3) Knowledge: (A) Page: 473, Exhibit 15-4

58. Japan has established trade zones to increase __________________.

a. maquiladora operations
b. assembly operations
c. imports
d. exports
e. none of the above

Difficulty: (3) Knowledge: (F) Page: 474

59. Various governments have established ____________________________.

a. export processing circles.
b. export processing groups.
c. export processing clans.
d. export processing networks.
e. export processing zones.

Difficulty: (3) Knowledge: (A) Page: 474

60. _________________________ usually provide tax- and duty-free treatment of
production facilities whose output is meant to be exported.

a. Gray products processing zones
b. High-tech processing zones
c. Maquiladora processing zones
d. Export processing zones
e. Import processing zones

Difficulty: (2) Knowledge: (F) Page: 474

61. To show the increasing power of retailers in today’s business world, the traditional
supply chain that was once powered by the manufacturer has been turned around.
Distribution today is characterized as being ____________ in nature.

a. push
b. pull
c. vertical shove
d. horizontal slant
e. parallelism

Difficulty: (2) Knowledge: (F) Page: 480

62. Which of the following should a company NOT do with a channel partner?

a. seek companies with good contacts
b. treat companies as short-term partners
c. withhold information from the distribution partner
d. allow the distribution partner to make marketing strategy decisions
e. all of the above

Difficulty: (3) Knowledge: (A) Page: 476-77

63. If a retail firm sells a product under its own store name it is called a:

a. unique brand.
b. vertical brand.
c. horizontal brand.
d. store brand or private label.
e. hybrid label.

Difficulty: (1) Knowledge: (F) Page: 479

64. When Heinz sells its soup products to grocery store chains and allows them to
put their own store names on the product, the product is being sold as a:

a. domestic brand.
b. national brand.
c. manufacturers brand.
d. store brand or private label.
e. service label.

Difficulty: (1) Knowledge: (A) Page: 479

65. In which of the following countries are store brands marginal players because of
loyalty to national or manufacturer brands?

a. United States.
b. United Kingdom.
c. Japan.
d. France.
e. Canada.

Difficulty: (3) Knowledge: (A) Page: 480

66. All of the following are factors that have explained the success of private labels
in recent years EXCEPT:

a. better packaging decoration.
b. improved quality of private-label products.
c. development of premium private-label brands.
d. expansion into new product categories.
e. internationalization of retail chains.

Difficulty: (2) Knowledge: (F) Page: 480

67. As a branding strategy, _______________ is especially attractive to MNCs that
face well-entrenched incumbent brands in the markets they plan to enter. (This
overcomes the problem of shelf-space denial.)

a. domestic branding
b. national branding
c. manufacturers branding
d. store branding or private labeling
e. service labeling

Difficulty: (1) Knowledge: (F) Page: 480

68. The traditional supply chain powered by manufacturer push is becoming a:

a. demand chain driven by logistics.
b. demand chain driven by advertising.
c. service chain driven by customer service.
d. service chain driven by response time.
e. demand chain driven by customer pull.

Difficulty: (1) Knowledge: (F) Page: 480

69. With respect to strategies available to the business unit, a ____________ strategy
appears to be more effective than a __________ strategy in emerging markets.

a. service/product
b. product/service
c. push/pull
d. pull/push
e. pull/parallel

Difficulty: (2) Knowledge: (A) Page: 480

70. On-time retail information management carries two distinct advantages which are:

a. reduced inventory and accounting information at the retail level.
b. reduced inventory and market information at the retail level.
c. reduced inventory and manufacturing information at the retail level.
d. reduced inventory and production information at the retail level.
e. reduced inventory and outsourcing information at the retail level.

Difficulty: (3) Knowledge: (A) Page: 481

71. Industrialized countries tend to have a lower distribution outlet density than the
_______________________.

a. regional markets
b. global markets
c. world markets
d. submerging markets
e. emerging markets

Difficulty: (2) Knowledge: (A) Page: 482

72. The Large Scale Retail Store Law (LSRSL) in _______________ helped to protect
small retail stores.

a. Singapore
b. Pakistan
c. Indonesia
d. Japan
e. South Korea

Difficulty: (2) Knowledge: (A) Page: 483

73. In _________________, store hours are limited and stores do not open on Sundays.

a. Germany
b. USA
c. Mexico
d. Brazil
e. UK

Difficulty: (2) Knowledge: (A) Page: 485

74. _______________ is the fastest growing Internet market in Asia.

a. China
b. India
c. Indonesia
d. Hong Kong
e. South Korea

Difficulty: (2) Knowledge: (A) Page: 486

75. The Mexican version of the free trade zone is called the _________________.

a. Maquiladora operation or industry
b. border zone
c. red zone district
d. Foreign Trade Zone
e. Channel Zone

Difficulty: (2) Knowledge: (F) Page: 489

76. In Mexico another name for the Maquiladora operation or industry is the:

a. in-bond or twin-plant program.
b. bonded warehouse.
c. border zone.
d. cross border zone.
e. indentured zone.

Difficulty: (2) Knowledge: (F) Page: 489

77. In Mexico, the free trade zone program (also called the in-bond or twin-plant
program) is called the _____________________________.

a. Maquiladora operation or industry
b. border zone
c. red zone district
d. Foreign Trade Zone
e. Channel Zone

Difficulty: (2) Knowledge: (A) Page: 489

78. Mexico allows duty-free imports of machinery and equipment for manufacturing
as well as components for further processing and assembly, as long as at least 80
percent of the plant’s output is exported. This is called a _______________
industry.

a. moonlighting
b. cross border
c. gray market
d. TRW
e. Maquiladora

Difficulty: (2) Knowledge: (A) Page: 489

79. Mexico’s border industrialization program was developed in __________.

a. 1945
b. 1955
c. 1965
d. 1975
e. 1985

Difficulty: (3) Knowledge: (F) Page: 489

80. Mexico permits _______ percent foreign ownership of the maquiladora plants in the
designated maquiladora zone.

a. 25
b. 50
c. 75
d. 90
e. 100

Difficulty: (2) Knowledge: (F) Page: 489

81. Mexico is an attractive location for ____________ intensive assembly.

a. capital
b. labor
c. technology
d. repair
e. service

Difficulty: (1) Knowledge: (A) Page: 489

True/False Short Answer

82. When Peter Drucker described logistics as “the darkest continent of business” he
probably meant it is was ________________________.

83. In 2008, in the United States, total logistical cost is estimated to be about 20 percent of the country’s GDP.

84. Global logistics encompasses materials management only.

Difficulty: (1) Knowledge: (F) Page: 453

85. _________________ transportation refers to the seamless transfer of goods from one
mode of transport to another and vice versa without the hassle of unpacking and
repackaging.

86. Materials management does not include the inflow of raw material, parts, and supplies through the firm.

Difficulty: (2) Knowledge: (F) Page: 453

87. ________________ is defined as the design and management of a system that
directs and controls the flows of materials into, through and out of the firm across
national boundaries to achieve its corporate objectives at a minimum total cost.

88. Global logistics, unlike domestic logistics, does not put emphasis on physical
distribution.

Difficulty: (2) Knowledge: (F) Page: 453

89. ___________________ refers to the inflow of raw materials, parts, and supplies
in and through the firm.

90. ___________________ refers to the movement of the firm’s finished products
to its customers, consisting of transportation, warehousing, inventory,
customer service/order entry, and administration.

91. Materials management refers to the movement of the firm’s finished products
to its customers, consisting of transportation, warehousing, inventory,
customer service/order entry, and administration.

92. Physical distribution refers to the inflow of raw materials, parts, and supplies
in and through the firm.

93. The bulk of international trade is handled by airlines.

94. The inventory-to-volume ratio is determined by how much value is added to materials
used in the product.

95. Air freight represents more than 40 percent of the value of goods shipped in
international commerce.

96. Ocean shipping is used extensively for the transport of heavy perishable cargoes.

97. In intermodal transportation, only one type of transportation is employed.

98. Rationalization means reducing resources to achieve more efficient and cost-effective operations.

Difficulty: (1) Knowledge: (A) Page: 459

99. ____________________ refers to coordinating production and distribution
across geographic boundaries.

100. In global logistics and distribution, 3PL stands for:

101. A ___________________ is an area that is located within a nation, but is
considered outside of the customs territory of the nation.

102. The Mexican version of a free trade zone is called the ___________________.

103. Wal-Mart is the largest retailer in the world.

104. LSRSL stands for:

105. In China, basket shopping is still considered the norm for most consumers.

Difficulty: (2) Knowledge: (A) Page: 485

106. An agent intermediary takes title to goods.

Difficulty: (1) Knowledge: (F) Page: 475

107. A merchant intermediary does not take title to goods.

Difficulty: (1) Knowledge: (F) Page: 475

108. In Japan, private brands are very popular.

Difficulty: (2) Knowledge: (F) Page: 480

Essay

109. Explain what the terms global logistics, materials management, and physical distribution mean. Describe the various operations and procedures encompassed by these terms.

110. The global logistics manager must understand the specific properties of the different modes of transportation in order to use them optimally. What are the most important factors in determining an optimal mode of transportation? List and briefly describe each of the factors.

111. Explain the role that so called “third-party logistics” (3PL) companies play in contemporary international trade. Cite the advantages of using third-party companies in the trade process.

112. Explain the role of the free trade zone in modern trade. Explain the free trade zone’s relationship and benefit to global logistics.

113. In which parts of the world are private labels popular? Why? What factors might explain this?

114. Explain the concept and function of the Maquiladora operation or industry in Mexico.

Chapter 16

Multiple Choice

1. ___________________ is the most popular way for many companies to become
international.

a. Exporting
b. Importing
c. Licensing
d. Contract manufacturing
e. None of the above

Difficulty: (2) Knowledge: (F) Page: 491

2. _______________ is usually the first entry mode of entry used by many companies.

a. Exporting
b. Importing
c. Licensing
d. Contract manufacturing
e. None of the above

Difficulty: (1) Knowledge: (F) Page: 491

3. In 2011, an estimated _______________ American jobs depended on international trade and export expansion.

a. 1 million
b. 8 million
c. 10 million
d. 15 million
e. 20 million

Difficulty: (3) Knowledge: (F) Page: 492

4. In 2011, exports represented about __________ percent of the U.S. GDP.

a. 5 percent
b. 8 percent
c. 9 percent
d. 10 percent
e. 14 percent

Difficulty: (3) Knowledge: (F) Page: 492

5. For a firm beginning exports for the first time, the first step is to use available
___________________.

a. primary data
b. secondary data
c. tertiary data
d. Internet data
e. intranet data

Difficulty: (2) Knowledge: (F) Page: 492

6. As an aid to expanding information about world trade, increasingly, international
marketing information is available in the form of ____________________.

a. CD-ROMs
b. electronic encyclopedias
c. electronic databases
d. CIA reports
e. government intelligence reports

Difficulty: (2) Knowledge: (F) Page: 492

7. Which of the following countries is the largest participant in database growth?

a. United Kingdom
b. Germany
c. Japan
d. France
e. United States

Difficulty: (1) Knowledge: (A) Page: 492

8. Approximately how many databases (that can be used to help with international
trade) are available online in the world?

a. 1,000
b. 3,000
c. 4,000
d. 5,000
e. 6,000

Difficulty: (3) Knowledge: (F) Page: 492

9. Conducting export research on China and Russia would best be done by:

a. doing database research.
b. doing on-line searches.
c. doing field work.
d. using existing government facts and figures.
e. using data supplied by trade missions.

Difficulty: (2) Knowledge: (A) Page: 493

10. The identification of an appropriate overseas market and an appropriate segment
involves grouping by all of the following criteria EXCEPT:

a. socioeconomic characteristics.
b. political and legal characteristics.
c. consumer variables.
d. service variables.
e. financial conditions.

Difficulty: (2) Knowledge: (F) Page: 493

11. When attempting to identify an appropriate overseas market and an appropriate
segment, socioeconomic variables should be considered. All of the following
are socioeconomic variables that should be considered EXCEPT:

a. demographics.
b. economic.
c. geographic.
d. econometrics.
e. climatic characteristics.

Difficulty: (2) Knowledge: (F) Page: 493

12. When attempting to identify an appropriate overseas market and an appropriate
segment, consumer variables should be considered. All of the following
are consumer variables that should be considered EXCEPT:

a. service quality.
b. purchase frequency.
c. lifestyle.
d. preferences.
e. purchase behavior.

Difficulty: (2) Knowledge: (F) Page: 493

13. To get an idea of market segments in a foreign country, the marketer can first
group regions within countries across the world by macroeconomic variables.
An illustration of one of these macroeconomic variables would be:

a. level of industrial development.
b. purchase preferences.
c. services sought.
d. lifestyles.
e. purchase frequency.

Difficulty: (2) Knowledge: (A) Page: 493

14. Data for grouping along macroeconomic criteria are available from international
agencies such as:

a. the International Court of Justice
b. the World Court.
c. the World Bank.
d. the National Geographic Society.
e. the World Economic Council.

Difficulty: (2) Knowledge: (F) Page: 494

15. The easiest product to sell abroad with respect to logistics is a(n) _____________
product.

a. differentiated
b. semi-standardized
c. clustered
d. gray market
e. standardized

Difficulty: (1) Knowledge: (F) Page: 494

16. _________________ exporting involves the use of independent U.S. middlemen
to market the firm’s products overseas.

a. Direct
b. Indirect
c. Parallel
d. Synchronized
e. Dual

Difficulty: (2) Knowledge: (F) Page: 495

17. When independent U.S. middlemen market a firm’s goods in an overseas market,
they are called ______________________. They market through their own network
of foreign distributors and their own sales force.

a. exporters
b. export specialists
c. export representatives
d. distribution specialists
e. parallel exporters

Difficulty: (2) Knowledge: (F) Page: 495

18. The CEM stands for:

a. cash export manager.
b. customs export manager.
c. charismatic export manager.
d. combination export manager.
e. collective export manager.

Difficulty: (2) Knowledge: (F) Page: 495

19. The _________________ acts as the export department to a small exporter or a
large producer with small overseas sales.

a. combination export manager (CEM)
b. export merchant
c. export commission house
d. piggyback exporter
e. trading company

Difficulty: (2) Knowledge: (F) Page: 495

20. The Japanese trading companies are known as:

a. keiretsus
b. chaebols
c. sogonets
d. sogoshoshas
e. akimonos

Difficulty: (3) Knowledge: (F) Page: 495

21. In order to expand their exporting activities, many Japanese firms rely on giant
general trading companies known as _________________________.

a. keiretsus
b. chaebols
c. sogonets
d. sogoshoshas
e. akimonos

Difficulty: (3) Knowledge: (F) Page: 495

22. All of the following are common types of export representatives in the United
States EXCEPT:

a. combination export manager (CEM).
b. export merchant.
c. export commission house.
d. export consortium.
e. the trading company.

Difficulty: (3) Knowledge: (F) Page: 495

23. The _________________ buys and sells on their own accounts and assumes all the
responsibilities of exporting a product. Manufacturers do not control sales activities.

a. combination export manager (CEM)
b. export merchant
c. export commission house
d. piggyback exporter
e. trading company

Difficulty: (2) Knowledge: (F) Page: 495

24. The _____________________ is someone who brings together an overseas buyer
and a U.S. manufacturer for the purpose of an export sale and earns a commission
for establishing a contact that results in a sale.

a. combination export manager (CEM)
b. export broker
c. export commission house
d. piggyback exporter
e. trading company

Difficulty: (2) Knowledge: (F) Page: 495

25. A(n) ____________________ places orders on behalf of its foreign clients
with U.S. manufacturers and acts as a finder for its client to get the best buy.

a. combination export manager (CEM)
b. export broker
c. export commission house
d. piggyback exporter
e. trading company

Difficulty: (2) Knowledge: (F) Page: 495

26. ___________________ are large, foreign organizations engaged in exporting and
importing. They buy on their own account and export the goods to their home
country.

a. Combination export manager (CEM)
b. Export broker
c. Export commission house
d. Piggyback exporter
e. Trading companies

Difficulty: (2) Knowledge: (F) Page: 495

27. A(n) ___________________ refers to the practice where U.S. firms that have an
established export department assume, under a cooperative agreement, the
responsibility of exporting the products of other U.S. companies.

a. combination export manager (CEM)
b. export broker
c. export commission house
d. piggyback exporter
e. trading company

Difficulty: (2) Knowledge: (F) Page: 496

28. Which of the following is an example of a large trading company?

a. IBM.
b. General Motors.
c. Mitsui.
d. Volvo.
e. Wal-Mart.

Difficulty: (1) Knowledge: (A) Page: 496

29. _________________ exporting occurs when a manufacturer or exporter sells directly
to an importer or buyer located in a foreign market.

a. Direct
b. Indirect
c. Parallel
d. Synchronized
e. Dual

Difficulty: (2) Knowledge: (F) Page: 496

30. With respect to direct exporting, the primary difference between a foreign sales
subsidiary and a foreign sales branch is that the foreign sales branch:

a. is larger.
b. is smaller.
c. is not a separate legal entity.
d. uses home country managers.
e. does not pay taxes.

Difficulty: (2) Knowledge: (A) Page: 497

31. The following characteristics (high set-up costs, higher credit risks, and higher
customer loyalty) apply to which of the following forms of exporting?

a. direct
b. indirect
c. parallel
d. synchronized
e. dual

Difficulty: (2) Knowledge: (A) Page: 497, Exhibit 16-2

32. In the U.S., ______________________ allows exporters to file export information at
no cost over the Internet.

a. Auxiliary Export System
b. Amended Export System
c. Automated Export System
d. Alliance Export System
e. none of the above

Difficulty: (3) Knowledge: (F) Page: 497

33. All exports from the United States (except to Canada and U.S. territories) require
a(n) _____________________.

a. letter of credit.
b. letter of ownership.
c. letter for transportation permission.
d. export license.
e. social security number.

Difficulty: (2) Knowledge: (A) Page: 498

34. The second pillar of the export transaction is the logistics of the export transaction.
Included in this transaction are all of the following EXCEPT:

a. a bill of lading.
b. the terms of sale.
c. the payment.
d. a dispute mechanism.
e. monitoring of the shipment and delivery of the goods.

Difficulty: (3) Knowledge: (F) Page: 499

35. A(n) _________________________ is a contract between the exporter and the
shipper indicating that the shipper has accepted responsibility for the goods and
will provide transportation in return for payment.

a. bill of disclosure
b. term of sale
c. payment statement
d. transportation invoice
e. bill of lading

Difficulty: (2) Knowledge: (F) Page: 499

36. A(n) _______________________ is a bill for the goods stating basic information
about the transaction, including a description of the merchandise, total cost of the
goods sold, addresses of the buyer and seller, and delivery and payment.

a. bill of disclosure
b. term of sale
c. payment statement
d. commercial invoice
e. bill of lading

Difficulty: (2) Knowledge: (F) Page: 499

37. When the exporter quotes a price for the goods, including charges for delivery
of the goods alongside a vessel at a port (the seller covers all costs of unloading and
wharfage at the shipment port and the buyer covers all other charges to get the goods
to the buyer), this form of terms of shipment is called:

a. ex-works.
b. free alongside ship (FAS).
c. free on board (FOB).
d. cost and freight (CFR).
e. Cost, Insurance, and Freight (CIF).

Difficulty: (3) Knowledge: (A) Page: 501, Exhibit 16-4

38. INCOTERMS 2000 which went into effect from January 1, 2000 and is an acronym
for ____________________________, are the internationally accepted standard
definitions for the terms of sale by the International Chamber of Commerce.

a. Industrial Commercial Terms
b. Insurance Commercial Terms
c. Irrevocable Commercial Terms
d. International Commercial Terms
e. none of the above

Difficulty: (3) Knowledge: (F) Page: 501

39. When the exporter quotes a price for the goods, including charges for delivery
of the goods alongside a vessel at a port (the seller covers all costs of unloading and
wharfage plus loading the goods on the vessel and the buyer covers all other charges
to get the goods to the buyer), this form of terms of shipment is called:

a. ex-works.
b. free alongside ship (FAS).
c. free on board (FOB).
d. cost and freight (CFR).
e. Cost, Insurance, and Freight (CIF).

Difficulty: (3) Knowledge: (A) Page: 501, Exhibit 16-4

40. All of the following are possible payment terms for goods exported to another nation
EXCEPT:

a. advance payment
b. third party draft.
c. confirmed irrevocable letter of credit.
d. unconfirmed irrevocable letter of credit
e. open account

Difficulty: (3) Knowledge: (F) Page: 502, Exhibit 16-5

41. A(n) __________________ is a payment form where a shipment is held by the
importer until the merchandise has been sold, at which time payment is made to the
exporter.

a. cash with order
b. confirmed irrevocable letter of credit
c. sight draft
d. time draft
e. consignment

Difficulty: (1) Knowledge: (F) Page: 502, Exhibit 16-5

42. A(n) _______________________ is a payment form where a cash payment occurs
when the order is placed.

a. cash with order
b. confirmed irrevocable letter of credit
c. sight draft
d. time draft
e. consignment

Difficulty: (1) Knowledge: (F) Page: 502, Exhibit 16-5

43. A(n) ________________________ is a payment form where a draft is so drawn as to
be payable on presentation to the drawee (usually the buyer).

a. cash with order
b. third party draft
c. confirmed irrevocable letter of credit
d. sight draft
e. time draft

Difficulty: (2) Knowledge: (F) Page: 502, Exhibit 16-5

44. The terms of payment between the exporter and importer are a matter of negotiation
and depend on a variety of factors. All of the following might be on that list of
factors EXCEPT:

a. the buyer’s credit standing.
b. the seller’s reputation.
c. the amount of the sale transaction.
d. the risks associated with the type of merchandise to be shipped.
e. the usual practice in the trade.

Difficulty: (2) Knowledge: (F) Page: 500

45. _______________ risk is the risk that the importer will not pay or fail to pay on the
agreed terms.

a. Credit
b. Exchange
c. Transfer
d. Importer
e. Exporter

Difficulty: (1) Knowledge: (F) Page: 500

46. ___________________ risk exists when the sale is in the importer’s currency and
that currency depreciates in terms of the dollar, leaving the exporter with a lesser
number of dollars.

a. Foreign credit
b. Foreign exchange
c. Foreign transfer
d. Foreign payment
e. Foreign delivery

Difficulty: (1) Knowledge: (F) Page: 500

47. ___________________ risk refers to the chances that payment will not be made
due to the importer’s inability to obtain U.S. dollars and transfer them to the
exporter.

a. Credit
b. Exchange
c. Transfer
d. Importer
e. Exporter

Difficulty: (1) Knowledge: (F) Page: 500

48. A confirmed irrevocable letter of credit is issued by the ____________ bank and
confirmed by a bank usually in the ____________ country.

a. importer’s, exporter’s
b. exporter’s, importer’s
c. investment, exporter’s
d. government’s, exporter’s
e. none of the above

Difficulty: (3) Knowledge: (F) Page: 502, Exhibit 16-5

49. A shipment that is held by the importer until the merchandise has been sold is called:

a. advance payment.
b. confirmed irrevocable letter of credit.
c. unconfirmed irrevocable letter of credit.
d. open account.
e. consignment.

Difficulty: (2) Knowledge: (F) Page: 502, Exhibit 16-5

50. The Japan External Trade Organization (JETRO) which helps foreign businesses to
export to Japan is affiliated with Japan’s _____________________________.

a. Ministry of Business, Trade, and Industry
b. Ministry of Economy, Trade, and Industry
c. Ministry of Economy, Trade, and Technology
d. Ministry of Economy, Trade, and Logistics
e. Ministry of Economy, Trade, and Agriculture

Difficulty: (3) Knowledge: (F) Page: 504

51. The Ex-Im Bank is described as being a:

a. bank that lends exclusively to importers.
b. new name for the old “World Bank.”
c. federally supported bank whose mission is to thwart communism by making
loans to anti-communist nations and exporters.
d. federally supported bank whose mission is to support exporters with necessary
credit.
e. bank which is not in existence yet. The concept still awaits Congressional
approval.

Difficulty: (2) Knowledge: (F) Page: 505

52. The main emphasis of the Ex-Im Bank’s lending practices today is in the area of:

a. loans to Japan.
b. loans to Taiwan.
c. loans to Mexico.
d. loans for prior bankrupt countries.
e. project finance (such as infrastructure projects—roads, dams, etc.).

Difficulty: (2) Knowledge: (A) Page: 505

53. Ex-Im Bank is not an aid or development agency, but a_____________________
corporation.

a. state
b. domestic
c. regional
d. private
e. government

Difficulty: (2) Knowledge: (A) Page: 505

54. Ex-Im Bank has two major programs in place which include:

a. Project Finance Division and Working Capital Program.
b. Project Finance Division and Working Capital Business Program.
c. Project Finance Division and Working Capital Export Program.
d. Project Finance Division and Working Capital Guarantee Program.
e. Project Finance Division and Working Capital Infrastructure Program.

Difficulty: (1) Knowledge: (A) Page: 505

55. One of the biggest advantages the United States has in importing is that U.S.
companies can:

a. order unlimited amounts of goods.
b. always sell what they order abroad.
c. be assured that the government will support their trade efforts.
d. pay in U.S. dollars–a currency accepted everywhere.
e. always turn a profit with the goods they buy because of market demand.

Difficulty: (3) Knowledge: (A) Page: 508

56. Since most world trade is done in dollars, the U.S. importer does not usually need to
_____________ foreign exchange transactions.

a. capitalize
b. hedge
c. capitate
d. survey
e. monitor

Difficulty: (1) Knowledge: (F) Page: 508

57. All of the following are activities that an importer would normally go through in
order to complete the purchase process. Which of the items listed below does not
logically fit?

a. Find a bank in the exporter’s country to handle financial transactions.
b. Establish a letter of credit to smooth the process.
c. Decide on the mode of transfer of goods.
d. Always use an export or import middleman to expedite the process.
e. Check compliance with national laws.

Difficulty: (2) Knowledge: (A) Page: 510

58. When a shipment reaches the United States, the consignee (usually the importer) will
file ______________ with the port director at the port of entry.

a. visas
b. product passports
c. bills of landing
d. bills of shipping
e. entry documents

Difficulty: (2) Knowledge: (F) Page: 510

59. With respect to shipments entering the United States, a(n) __________ is a guarantee
by someone that the duties and any potential penalties will be paid to the customs
of the importing country.

a. line of credit
b. transfer
c. bond
d. permit
e. tariff

Difficulty: (1) Knowledge: (F) Page: 510

60. Merchandise arriving from Canada and Mexico, trade fair goods, and perishable
goods and shipments assigned to the U.S. government almost always utilize the
____________________ to enable fast delivery after arrival.

a. quick release form
b. quick permit form
c. Customs form 7200
d. Special Permit for Immediate Delivery
e. block and load release form

Difficulty: (2) Knowledge: (A) Page: 511

61. If goods enter a ________________, they can be re-exported anytime (up to five
years) without payment of duty.

a. holding pen
b. corporate security zone
c. bonded warehouse
d. wharf zone
e. parallel import zone

Difficulty: (2) Knowledge: (F) Page: 511

62. When import duties are paid, the _________________ duty is a percentage of the
value of the merchandise.

a. ad valorem
b. specific
c. compound
d. nontariff
e. import

Difficulty: (1) Knowledge: (F) Page: 511

63. When import duties are paid, the _________________ duty is a specified amount
of the per unit weight or other quantity of the merchandise.

a. ad valorem
b. specific
c. compound
d. nontariff
e. import

Difficulty: (2) Knowledge: (F) Page: 511

64. When import duties are paid, the _________________ duty is a combination of a
specified amount of the per unit weight or other quantity of the merchandise plus
an ad valorem rate.

a. bonded
b. corkage
c. compound
d. nontariff
e. import

Difficulty: (1) Knowledge: (F) Page: 511

65. _________________ duties are assessed on imported merchandise sold to
importers in the United States at a price that is less than the fair market value.

a. Ad valorem
b. Specific
c. Compound
d. Nontariff
e. Antidumping

Difficulty: (1) Knowledge: (F) Page: 511

66. ______________________ duties are duties that are assessed to counter the
effects of subsidies provided by foreign governments to goods that are exported
to the United States.

a. Ad valorem
b. Specific
c. Compound
d. Countervailing
e. Antidumping

Difficulty: (1) Knowledge: (F) Page: 511

67. ________________ channels refer to the legal export/import transaction involving
genuine products into a country by intermediaries other than the authorized
distributors.

a. Black market
b. Gray market
c. Positioned
d. Zoned
e. Red zone

Difficulty: (2) Knowledge: (F) Page: 512

68. Another name for gray market channels is _________________.

a. positioned imports
b. concentric marketing
c. strategic entry imports
d. parallel imports
e. sidebar hedging

Difficulty: (2) Knowledge: (A) Page: 512

69. Brand reputation is a critical element in _________________ products.

a. gray
b. black
c. furniture
d. smuggled
e. none of the above

Difficulty: (1) Knowledge: (A) Page: 512

70. All of the following conditions lend to the development of gray markets EXCEPT:

a. currency fluctuations.
b. differences in market demand.
c. legal differences.
d. opportunistic behavior.
e. foreign trade outlets.

Difficulty: (3) Knowledge: (A) Page: 513

True/False Short Answer

71. Exporting is the first mode of foreign entry used by many companies.

Difficulty: (1) Knowledge: (F) Page: 491

72. Exports represent about 4 percent of the U.S. gross domestic product (GDP).

Difficulty: (3)Knowledge: (F) Page: 492

73. For a firm beginning exports for the first time, the first step is to use available primary data.

Difficulty: (1) Knowledge: (F) Page: 492

74. The World Bank publishes the World Development Report.

Difficulty: (2) Knowledge: (F) Page: 494

75. A standardized product is not the easiest to sell abroad.

Difficulty: (1) Knowledge: (F) Page: 494

76. _________________ exporting involves using independent U.S. middlemen to
market the firm’s products overseas.

77. The combination export manager (CEM) acts as the import department to a small
importer.

Difficulty: (2) Knowledge: (F) Page: 495

78. Piggyback exporting refers to the practice where U.S. firms that have an established
export department assume, under a cooperative agreement, the responsibility of
exporting the products of other U.S. companies.

Difficulty: (2) Knowledge: (F) Page: 495

79. In the U.S., the Automated Export System (AES) enables exporters to file import
information at no cost over the Internet.

Difficulty: (1) Knowledge: (F) Page: 497

80. Exports from the United States do not require an export license.

Difficulty: (1) Knowledge: (F) Page: 498

81. A bill of lading is a contract between the exporter and the shipper indicating that the
shipper has accepted responsibility for the goods and will provide transportation in
return for payment.

Difficulty: (1) Knowledge: (F) Page: 499

82. INCOTERMS is an acronym for _____________________________________.

83. FOB is an acronym for ______________________.

84. Exchange risk is the risk that the importer will not pay or fail to pay on the agreed
terms.
Difficulty: (2) Knowledge: (F) Page: 502

85. A confirmed irrevocable letter of credit is issued by the importer’s bank and
confirmed by a bank usually in the exporter’s country.

Difficulty: (3) Knowledge: (F) Page: 502

86. The Japan External Trade Organization (JETRO) is affiliated with the U.S.
department of Commerce.

Difficulty: (1) Knowledge: (F) Page: 504

87. The World Bank is a federally supported bank whose mission is to support the Ex-Im
Bank.

Difficulty: (1) Knowledge: (F) Page: 505

88. The American Export Trading Company act was passed in 1982.

Difficulty: (2) Knowledge: (F) Page: 506

89. More than 90 percent of the world’s trade is denominated in U.S. dollars.

Difficulty: (2) Knowledge: (F) Page: 508

90. With respect to importing fees, a(n) ______________ duty is a percentage of the
value of the merchandise.

91. Antidumping duties are assessed on imported merchandise sold to importers in
the United States at a price that is less than the fair market value.

Difficulty: (2) Knowledge: (F) Page: 511

92. Gray market channels are also known as parallel imports.

Difficulty: (1) Knowledge: (F) Page: 512

93. Three conditions are necessary for gray markets to develop. The conditions include:
(a) Availability of products in other markets, (b) limited trade barriers, and (c)
_______________________.

94. Gray marketing is an illegal trade transaction.

95. Smuggling and black market activities are illegal global markets.

Essay

96. Indicate the factors that a prospective exporter might examine to choose an export market.

97. Describe the direct and indirect channels of distribution that are available to exporters. As part of the description process, indicate any conditions or advantages that might be present in these channels.

98. Pick three (3) of the options available to exporters when it comes to terms of payment. Explain each of the options available based on your choice.

99. Describe the role the U.S. government plays in maintaining and fostering export activities. Demonstrate this role with specific examples of activities that the government might undertake.

100. Describe gray markets. Explain how they develop. Describe your feelings about buying from a gray market.

Chapter 17

Multiple Choice

1. The capstone of a company’s global marketing activities is its ____________________________.

a. strategic marketing plan.
b. strategic marketing design.
c. strategic marketing circle.
d. strategic marketing products.
e. strategic marketing processes.

Difficulty: (2) Knowledge: (F) Page: 575

2. The content of a global strategic marketing plan covers the following four areas
EXCEPT:

a. a market situation analysis.
b. objectives.
c. strategies.
d. regional analysis.
e. action plans.

Difficulty: (2) Knowledge: (F) Page: 576

3. The first step of a global strategic marketing plan starts with:

a. market situation analysis.
b. actions plans.
c. strategies.
d. global ranking.
e. objectives.

Difficulty: (1) Knowledge: (F) Page: 576

4. Top-down strategic planning is based on a _____________________ approach.

a. decentralized
b. centralized
c. regional
d. globalized
e. local

Difficulty: (2) Knowledge: (F) Page: 576

5. A bottom-up planning approach starts with the ______________ subsidiaries.

a. local
b. global
c. transnational
d. manufacturing
e. high-tech

Difficulty: (2) Knowledge: (F) Page: 576

6. A recent survey of large multinational corporations found that pure ______________
planning was most popular (used by 66 percent of the companies surveyed).

a. bottom-up
b. top-down
c. strategic
d. long-term
e. short-term

Difficulty: (3) Knowledge: (F) Page: 576

7. A series of key criteria impact global organizations and their organizational designs.
All of the following would be major environmental influences on the organizational
design decision and structure EXCEPT:

a. competitive environment.
b. rate of environmental change.
c. product diversity.
d. regional trading blocs.
e. nature of customers.

Difficulty: (2) Knowledge: (F) Pages: 577-78

8. As international sales grow, the organizational structure will evolve to mirror the
growing importance of the firm’s _________________ activities.

a. local
b. regional
c. global
d. strategic
e. manufacturing

Difficulty: (1) Knowledge: (F) Page: 578

9. A series of key criteria impact global organizations and their organizational designs.
All of the following would be major firm-specific factors on the organizational
design decision and structure EXCEPT:

a. strategic importance of international business.
b. product diversity.
c. company heritage.
d. regional trading blocs.
e. quality of local managerial skills.

Difficulty: (3) Knowledge: (F) Page: 578

10. Which of the following would be considered a key environmental factor that
influences
global organization design decisions and structure?

a. strategic importance of international business.
b. product diversity.
c. company heritage.
d. regional trading blocs.
e. quality of local managerial skills.

Difficulty: (3) Knowledge: (F) Page: 578

11. In the area of global organizational design, the major firm-specific factors include the
following EXCEPT:

a. local customers.
b. strategic importance of international business.
c. product diversity.
d. company heritage.
e. quality of local managerial skills.

Difficulty: (3) Knowledge: (A) Page: 578

12. Typically, when overseas sales account for a very small fraction of the company’s
overall sales revenues, ____________________ can easily handle the firm’s
global activities.

a. complex organizational structures
b. network organizational structures
c. simple organizational structures
d. a virtual system
e. a matrix system

Difficulty: (1) Knowledge: (A) Page: 579

13. All of the following are examples of the principal designs that firms can adopt to
organize their global activities EXCEPT:

a. an international division.
b. a city division.
c. a product-based structure.
d. a geographic structure.
e. a matrix structure.

Difficulty: (2) Knowledge: (F) Pages: 578-79

14. Under the _____________________ design of global activities organization, the
company basically has two entities (the domestic division and the international
division).

a. international division
b. cryptic division
c. product-based structure
d. geographic structure
e. matrix structure

Difficulty: (1) Knowledge: (A) Page: 578

15. Under the _____________________ design of global activities organization, the
company is organized along its various product divisions.

a. international division
b. cryptic division
c. product-based structure
d. geographic structure
e. matrix structure

Difficulty: (1) Knowledge: (A) Page: 578

16. Under the _____________________ design of global activities organization, the
company is configured along areas such as countries, regions, or some combination
of these two levels.

a. international division
b. cryptic division
c. product-based structure
d. geographic structure
e. matrix structure

Difficulty: (1) Knowledge: (A) Page: 578

17. Under the _____________________ design of global activities organization, the
company uses the option of integrating two approaches so there is a dual chain of
command.

a. international division
b. cryptic division
c. product-based structure
d. geographic structure
e. matrix structure

Difficulty: (1) Knowledge: (A) Page: 579

18. Most companies that engage in global marketing will initially start off by establishing
a(n):

a. city division.
b. country division.
c. international division.
d. export department.
e. export commission manager.

Difficulty: (2) Knowledge: (F) Page: 579

19. Which of the following organizational structures is most appropriate for the company
whose product line is not too diverse and does not require a large amount of
adaptation to the local country needs?

a. international division
b. cryptic division
c. global product division structure
d. geographic structure
e. matrix structure

Difficulty: (2) Knowledge: (A) Page: 579

20. Which of the following organizational structures is most appropriate for the high-tech
company with highly complex products or MNCs with a very diversified product
portfolio?

a. international division
b. cryptic division
c. global product division structure
d. geographic structure
e. matrix structure

Difficulty: (2) Knowledge: (A) Page: 579

21. If a high-tech company organizes itself by breaking into business networks, radio
communications, public telecommunications, components, and microwave systems,
which of the following organizational structures would probably be in use?

a. international division
b. global product division structure
c. global network solutions
d. geographic structure
e. matrix structure

Difficulty: (3) Knowledge: (A) Page: 579

22. All of the following are benefits of the global product division structure EXCEPT:

a. large degree of flexibility in terms of cross-country resource allocation.
b. large degree of flexibility in terms of cross-country strategic planning.
c. scale economics.
d. facilitates a global focus.
e. easy communication and coordination among the various product divisions
without duplication of effort.

Difficulty: (2) Knowledge: (F) Page: 579

23. Which of the following areas are very difficult for a global product division to
accomplish (therefore, this area is a shortcoming)?

a. large degree of flexibility in terms of cross-country resource allocation.
b. large degree of flexibility in terms of cross-country strategic planning.
c. scale economics.
d. facilitates a global focus.
e. easy communication and coordination among the various product divisions
without duplication of effort.

Difficulty: (3) Knowledge: (A) Page: 580

24. All of the following are problems with country-based subsidiaries EXCEPT:

a. they are too costly.
b. they have coordination problems with corporate headquarters.
c. cross-fertilization is hindered.
d. local market conditions go unnoticed.
e. a not-invented-here mentality exists.

Difficulty: (3) Knowledge: (F) Page: 580

25. All of the following are profiles that are suggested for the twenty-first century
country manager EXCEPT:

a. the trader.
b. the power broker.
c. the builder.
d. the ambassador.
e. the cabinet member.

Difficulty: (3) Knowledge: (F) Pages: 581-82

26. As a profile of a twenty-first century country manager, _________________
establishes a beachhead in a new market or heads a recently acquired local distributor.
They should have an entrepreneurial spirit.

a. the trader
b. the representative
c. the builder
d. the ambassador
e. the cabinet member

Difficulty: (2) Knowledge: (A) Page: 581

27. As a profile of a twenty-first century country manager, _________________
is a team player with profit and loss responsibility for a small- to medium-sized
country. Team-manship is key here.
a. the trader
b. the representative
c. the builder
d. the ambassador
e. the cabinet member

Difficulty: (2) Knowledge: (A) Page: 582

28. As a profile of a twenty-first century country manager, _________________
develops local markets. They are entrepreneurs who are willing to be part of regional
global strategy teams.

a. the trader
b. the representative
c. the builder
d. the ambassador
e. the cabinet member

Difficulty: (2) Knowledge: (A) Page: 582

29. As a profile of a twenty-first century country manager, _________________
is in charge of large and/or strategic markets. Prime responsibilities include handling
government relations and integrating acquisitions and strategic alliances.

a. the trader
b. the power broker
c. the builder
d. the ambassador
e. the cabinet member

Difficulty: (2) Knowledge: (A) Page: 582

30. With respect to regional structures, a recent survey found that all of the following
roles were performed EXCEPT:

a. scouting.
b. liberating.
c. strategic simulation.
d. signaling commitment.
e. pooling resources.

Difficulty: (3) Knowledge: (F) Page: 583

31. The _________________ structure of organization explicitly recognizes the
multidimensional nature of global strategic decision making.

a. international division
b. customer division
c. global product division
d. geographic
e. matrix

Difficulty: (2) Knowledge: (F) Page: 583

32. The primary advantages of the matrix structure for organizing is that they represent
the growing complexities of the global market arena and:

a. it fosters team spirit and cooperation among managers.
b. it secures higher profits.
c. it does not duplicate efforts.
d. it has smooth and accurate communications.
e. it has clear lines of communication with no confusion.

Difficulty: (2) Knowledge: (F) Page: 584

33. All of the following are considered to advantages of the matrix structure of
organizing EXCEPT:

a. it fosters team spirit.
b. it fosters cooperation among managers.
c. it does not duplicate efforts.
d. it causes managers to think globally.
e. it causes managers to think globally but act locally.

Difficulty: (3) Knowledge: (F) Page: 584

34. Which of the following would be considered a disadvantage or drawback of the
matrix structure of organizing?

a. it does not foster team spirit.
b. it does not foster cooperation among managers.
c. it duplicates efforts and can cause confusion.
d. it prohibits managers from thinking globally.
e. it causes managers to think locally only.

Difficulty: (2) Knowledge: (A) Page: 584

35. All of the following are disadvantages or drawbacks of the matrix structure of
organizing EXCEPT:

a. dual reporting leads to conflicts and confusion.
b. dual profit responsibilities lead to conflicts and confusion.
c. bureaucratic bloat.
d. power clashes can occur.
e. managers think globally and act locally.

Difficulty: (1) Knowledge: (A) Page: 584

36. The __________________ is one solution that has been suggested to cope with the
shortcomings associated with the classical hierarchical organization structures.

a. international division
b. global network
c. global product division
d. geographic
e. matrix

Difficulty: (2) Knowledge: (F) Page: 585

37. The __________________ model is an attempt to reconcile the tension between
the need for local responsiveness and the wish to be an integrated whole.

a. international division
b. global network
c. global product division
d. geographic
e. matrix

Difficulty: (2) Knowledge: (F) Page: 585

38. Asea Brown Boveri (ABB), the Swiss-Swedish engineering company is an example
of ______________________.

a. local networking
b. regional networking
c. global networking
d. domestic networking
e. high-tech networking

Difficulty: (2) Knowledge: (F) Page: 586

39. The networked global organization is sometimes referred to as
_____________________.

a. international.
b. multinational.
c. transnational.
d. local-national.
e. quasi-national.

Difficulty: (3) Knowledge: (A) Page: 585

40. In the area of global branding strategies, the following options are used EXCEPT:

a. global branding committee.
b. brand champion.
c. global brand manager.
d. informal, ad-hoc branding meetings.
e. network meetings.

Difficulty: (2) Knowledge: (F) Pages: 26-27

41. In the process of global brand management, if a company decides against a formal
structure, it might still find it worthwhile to have an informal mechanism. This
usually takes the form of a(n) ______________ branding meeting.

a. ad-hoc
b. temporary
c. longitudinal
d. outside
e. domestic

Difficulty: (2) Knowledge: (F) Page: 587

42. Global branding committees are usually made up of ________________
executives.

a. matrix
b. network
c. medium-line
d. top-line
e. bottom-line

Difficulty: (2) Knowledge: (F) Page: 587

43. A ______________________ is a top-line executive (sometimes CEO) who
serves as the brand’s advocate.

a. brand champion
b. product champion
c. local champion
d. corporate champion
e. high-tech champion

Difficulty: (1) Knowledge: (F) Page: 587

44. Global brand manager positions are created when top management lacks
___________________ expertise:

a. high-tech
b. human resources
c. operational
d. manufacturing
e. marketing

Difficulty: (1) Knowledge: (F) Page: 587

45. Several management theorists have made an attempt to come up with the “right”
fit between the MNC’s environment (internal and external) and the organizational
setup. One popular model examines the relationship between organizational
structure, _____________________, and the importance of foreign sales to the
company (as a share of total sales).

a. product prices
b. domestic services
c. foreign product deliveries
d. foreign product diversity
e. purchasing habits

Difficulty: (3) Knowledge: (F) Page: 589, Exhibit 17-6

46. The Stopford and Wells model shows the relationship between the:

a. organizational structure, foreign product diversity and domestic sales.
b. organizational structure, foreign product diversity and local sales.
c. organizational structure, foreign product diversity and the importance of foreign
sales.
d. organizational structure, foreign product diversity and regional sales.
e. organizational structure, foreign product diversity and high-tech sales.

Difficulty: (3) Knowledge: (F) Page: 589, Exhibit 17-6

47. According to the Stopford and Wells model, when companies first explore the global
marketplace, they start off with a(n) ___________________________.

a. local division
b. regional division
c. international division
d. global division
e. none of the above

Difficulty: (2) Knowledge: (F) Page: 589, Exhibit 17-6

48. According to the Stopford and Wells model, as foreign sales expand without an
increase in the firm’s foreign product assortment diversity, the company will most
likely switch to a __________________________ structure.

a. host-country area
b. home-country area
c. global area
d. geographic area
e. local area

Difficulty: (3) Knowledge: (F) Page: 589, Exhibit 17-6

49. A(n) ____________________ can be described as being where country and
regional managers look at strategic issues from multiple perspectives.

a. glocal mindset
b. global mindset
c. local mindset
d. regional mindset
e. country mindset

Difficulty: (1) Knowledge: (F) Page: 590

50. To make global marketing strategies work, companies need to establish a(n)
____________________.

a. career system.
b. development system.
c. control system.
d. appeals system.
e. listening system.

Difficulty: (1) Knowledge: (F) Page: 590

51. The main purpose of a _____________ is to ensure that the behaviors of the
various parties within the organization are in line with the company’s strategic
goals.

a. career system
b. development system
c. control system
d. appeals system
e. listening system

Difficulty: (1) Knowledge: (F) Page: 590

52. All of the following are parts (or basic building blocks) of a formal control system
EXCEPT:

a. the establishment of performance standards.
b. the measurement and evaluation of performance against standards.
c. the analysis and correction of deviation from standards.
d. perfection training.
e. none of the above.

Difficulty: (1) Knowledge: (F) Page: 590-91

53. Formal control systems are also called ________________ control systems.

a. administrative
b. conductive
c. selective
d. bureaucratic
e. strategic

Difficulty: (2) Knowledge: (F) Page: 590

54. The first step in any control process should be to:

a. clearly establish rewards and punishments.
b. set standards (metrics).
c. set controls.
d. set monitoring mechanisms.
e. establish who the controller is.

Difficulty: (1) Knowledge: (F) Page: 590

55. The two types of standards are behavior and ____________________________.

a. outcome-based.
b. performance-based.
c. intellectual-based.
d. strategic-based.
e. structural-based.

Difficulty: (2) Knowledge: (F) Page: 590

56. Although proper reward systems are crucial to motivate subsidiary managers, a
recent study has shown that the key role played is by the presence of ____________.

a. strong leadership
b. bonuses
c. perks
d. due process
e. nondiscrimination

Difficulty: (3) Knowledge: (F) Page: 591

57. The two most common forms of informal control are human resource development
and _________________.

a. manufacturing
b. production
c. network structure
d. strategic control
e. corporate culture

Difficulty: (3) Knowledge: (F) Page: 591

58. Corporate cultures can be clan-based or ___________________.

a. market based
b. leader based
c. employee based
d. symbol based
e. tradition based

Difficulty: (3) Knowledge: (F) Page: 591

59. The __________________ form of corporate culture is distinguished by an
embodiment of a long socialization process; strong, power norms; and a
defined set of internalized controls.

a. market based
b. leader based
c. employee based
d. clan based
e. tradition based

Difficulty: (2) Knowledge: (A) Page: 591

60. The _________________ form of corporate culture is distinguished by norms that
are loose or absent; socialization processes are limited; and control systems are purely
based on performance measures.

a. market based
b. leader based
c. employee based
d. clan based
e. tradition based

Difficulty: (2) Knowledge: (A) Page: 591

61. To shape a shared vision, cultural values primarily demand which of the following
properties?

a. easy to understand in only one way and written in English.
b. have clarity, continuity, and consistency.
c. have symbolism, sex-appeal, and sensitivity.
d. be dynamic, demanding, and declarative.
e. be global, gifted, and guiding.

Difficulty: (2) Knowledge: (A) Page: 592

62. The company’s management programs are another major ________________ control
tools.

a. informal
b. formal
c. simple
d. dynamic
e. complex

Difficulty: (1) Knowledge: (A) Page: 592

True/False Short Answer

63. The capstone of a company’s global marketing activities is its strategic marketing plan.

Difficulty: (1) Knowledge: (F) Page: 575

64. The first step of a global strategic marketing plan starts with market situation analysis.

Difficulty: (2) Knowledge: (F) Page: 576

65. The content of a global strategic marketing plan covers four areas which include:
market situation analysis, objectives, strategies, and ____________________.

66. Companies with substantial product diversity tend to go for a global geographic
division configuration.

Difficulty: (2) Knowledge: (F) Page: 579

67. The charter of the international division is to develop and coordinate the firm’s global
operations.

Difficulty: (3) Knowledge: (F) Page: 579

68. The global product structure is most appropriate for companies whose product line
is not too diverse and does not need a large amount of adaptation to local country
needs.

Difficulty: (2) Knowledge: (A) Page: 579

69. Under the ________________ design, the company configures its organization
along geographic areas.

70. Country-focused organizations can be very good forms of structure because they
tend to be less costly than other forms.

Difficulty: (3) Knowledge: (F) Page: 580

71. Under the __________________ design, the company integrates two approaches and
has a dual chain of command.

72. Some corporate strategy experts believe that in the twenty-first century, the role of the
country manager will be minimal.

Difficulty: (2) Knowledge: (F) Page: 581

73. The ___________________ type of manager is characterized as being in charge of
large and/or strategic markets. They also handle government relations.

74. With respect to organizational forms, the matrix structure explicitly recognizes the
multidimensional nature of global strategic decision making.

Difficulty: (1) Knowledge: (F) Page: 583

75. The matrix structure explicitly recognizes the multidimensional nature of global
strategic decision making.

Difficulty: (2) Knowledge: (A) Page: 583

76. Matrix structure can be a bureaucratic bloat.

Difficulty: (2) Knowledge: (A) Page: 583

77. The network global organization is sometimes also referred to as an “ethnocentric”
organization.

Difficulty: (1) Knowledge: (F) Page: 585

78. Asea Brown Boveri is a prime example of networking.

Difficulty: (2) Knowledge: (F) Page: 585

79. A brand champion is not a top-line executive.

Difficulty: (3) Knowledge: (F) Page: 587

80. The Stopford-Wells international structural stages model shows the relationship
between the MNCs’ networks and their overseas productivity.

Difficulty: (3) Knowledge: (A) Page: 589

81. The concept of a glocal mind-set encourages looking at strategic issues from multiple
perspectives.

Difficulty: (3) Knowledge: (A) Page: 590

82. The first step in the control process is to set standards.

Difficulty: (1) Knowledge: (F) Page: 590

83. Clan cultures embody a long socialization process, strong powerful norms, and a
defined set of internalized controls.

Difficulty: (2) Knowledge: (F) Page: 591

84. In market cultures, norms are always very strong.

Difficulty: (3) Knowledge: (F) Page: 591

85. The company’s management programs are another major formal control tools.

Difficulty: (2) Knowledge: (F) Page: 592

Essay

86. List and briefly discuss the key criteria that impact global organizational design.

87. List and briefly describe the principal organizational design options that firms can use to organize their global activities. Cite the advantages and disadvantages of each form.

88. Describe the five profiles that country managers might need to fit to be able to lead their organizations into the challenges of the twenty-first century.

89. Explain how a global networked organization might differ from a matrix organizational structure. To answer this question, review the characteristics of both structures carefully.

90. Although some feel country managers are obsolete, most companies believe they are essential to the firm. What reasons make country managers more important than ever? What roles will they play?

Chapter 18

Multiple Choice

1. Emerging markets can be found in which of the following areas?

a. Africa
b. Asia
c. Latin America
d. Eastern Europe
e. All of the above

Difficulty: (1) Knowledge: (F) Page: 597

2. Emerging markets refer to:

a. countries that used to be called “less developed countries.”
b. countries that were previously called “Third World.”
c. countries that lacked convertible currency.
d. countries that were communist.
e. both a and b

3. Which of the following is NOT a category of emerging markets?

a. developed countries
b. advanced emerging
c. secondary emerging
d. frontier countries
e. both a and d

4. Which of these does not describe the BRIC nations?

a. They consist of Brazil, Russia, India and China.
b. They have large populations.
c. They constitute almost 15 percent of world GDP.
d. They are developed countries.
e. All have growing economies.

5. The BRIC nations:

a. are all rich in natural resources.
b. are small countries with high income economies
c. are expected to surpass the GDP of the G7 nations within 20 years.
d. constitute a trade bloc.
e. none of the above

6. The Next Eleven:

a. is a George Clooney movie sequel.
b. consists of a diverse group of emerging markets.
c. constitute their own trade bloc.
d. are all located in Asia.
e. none of the above

7. Which of the following nations is NOT a member of the Next Eleven?

a. Malaysia
b. Indonesia
c. Egypt
d. Mexico
e. Nigeria

Difficulty: (2) Knowledge: (F) Page: 599

8. What event caused severe setbacks to many emerging markets?

a. global warming
b. China’s rise as a global superpower
c. losses in the World Cup soccer matches
d. the Asian financial crisis
e. EU focus on North Africa as a trading partner

9. Emigrant workers from emerging markets:

a. are a nuisance to the countries they work in.
b. deplete the economy of their home country.
c. are almost always unskilled workers.
d. form local communities abroad that can be leveraged.
e. travel only within their own continent.

Difficulty: (2) Knowledge: (A) Page: 599

10. Which country has the greatest number of mobile phone subscribers per 100 inhabitants?

a. Italy
b. Russia
c. Germany
d. United Kingdom
e. Nigeria

Difficulty: (1) Knowledge: (F) Page: 601, Exhibit 18-2

11. After China, the country with the largest shopping malls in the world is:

a. United States
b. Philippines
c. Turkey
d. Canada
e. Malaysia

Difficulty: (1) Knowledge: (F) Page: 602, Exhibit 18-3

12. Because emerging markets have underdeveloped infrastructure:

a. they cannot afford the best products from MNCs.
b. they can leapfrog old technology.
c. they are more eager to adopt new products.
d. R&D efforts are centered in these markets to generate new ideas.
e. distribution channels will be easier to set up.

Difficulty: (2) Knowledge: (A) Page: 600

13. Emerging markets:

a. cannot afford the most modern products.
b. are innovative in service offerings.
c. embrace new products quickly.
d. have low time-to-takeoff for new products.
e. all of the above

Difficulty: (2) Knowledge: (A) Page: 605

14. Global competitors:

a. are not headquartered in emerging markets.
b. duel for market share in emerging markets but only consist of MNCs from developed countries.
c. come only from the BRIC nations.
d. may emerge from any nation to challenge established MNCs.
e. none of the above

Difficulty: (2) Knowledge: (A) Page: 607

15. Significant companies from emerging markets are leaders in which of these industries?

a. smart phones
b. computers
c. beer
d. cars
e. all of the above

Difficulty: (2) Knowledge: (F) Page: 604

16. Acer, the world leader in laptop manufacturing and design, is based in which country?

a. South Korea
b. Taiwan
c. China
d. Japan
e. Singapore

Difficulty: (2) Knowledge: (F) Pages: 604

17. Jollibee competes in which industry around the world?

a. theme parks
b. entertainment
c. fast food
d. children’s clothing
e. shoes

Difficulty: (2) Knowledge: (F) Page: 603

18. Jollibee is a major international player that has its headquarters in ________.

a. Malaysia
b. Indonesia
c. China
d. Philippines
e. India

Difficulty: (2) Knowledge: (F) Page: 604

19. Which of the following brands has NOT been bought by firms in emerging markets?

a. Miller beer
b. Jaguar
c. IBM PC
d. Ferrari
e. Budweiser

Difficulty: (2) Knowledge: (F) Page: 604

20. One strategy used by the new champions to succeed in major markets is:

a. reviving old technology to save money.
b. copying the same model as MNCs from developed markets but with cheaper items.
c. employing the latest technology.
d. training staff in foreign companies first.
e. both a and d

Difficulty: (2) Knowledge: (A) Pages: 604-6

21. Emerging market champions:

a. avoid new technology because it is too expensive.
b. use a combination of old technology and cheap labor for a competitive advantage.
c. leapfrog to the newest technologies to offer quality products.
d. copy MNC products to avoid problems with product development.
e. try to avoid innovation.

Difficulty: (2) Knowledge: (A) Page: 605

22. Rapid scale-up of new champions:

a. doesn’t occur because capital is in short supply.
b. can be done by absorbing smaller rivals.
c. is achieved by investing more than smaller rivals.
d. both b and c
e. can only be done with the help of outside loans from such as the World Bank.

Difficulty: (2) Knowledge: (A) Page: 606

23. When would emerging market companies use a dodge strategy?

a. when its assets are transferable
b. when there is little pressure to globalize
c. when industry pressure is high
d. when assets are only valuable in the home market
e. both c and d

Difficulty: (3) Knowledge: (A) Page: 606

24. An emerging market company would be a defender when:

a. its assets are transferable.
b. there is little pressure to globalize.
c. industry pressure is high.
d. assets are only valuable in the home market.
e. both b and d

Difficulty: (3) Knowledge: (A) Pages: 606-7

25. When competing with the new champions from emerging markets, MNCs:

a. should give up—the new champions have cheaper labor and the latest technology.
b. can ignore the new champions—they are only effective in emerging markets.
c. should focus on the high end of the market and leave the rest to the local companies.
d. buy out local rivals and use them to challenge the new champion in the home market.
e. none of the above

Difficulty: (2) Knowledge: (A) Page: 608

26. MNCs are being threatened by new champions from the emerging markets. Which of the following strategies is NOT recommended for them?

a. Continue to use low cost sourcing in emerging markets.
b. Sell only goods developed by home country R&D in emerging markets.
c. Ignore emerging market branding strategies as being too elementary.
d. Do not invest in the mass markets of emerging economies as they will never amount to much revenue.
e. All of the above are not suggested.

Difficulty: (2) Knowledge: (A) Page: 608

27. Companies from the emerging markets are proving to be surprising challengers to older, larger MNCs. Which of the following would you recommend as an MNC strategic response?

a. Invest in growing mass markets of developing countries.
b. Partner with companies from the emerging markets.
c. Buy out smaller rival firms in the emerging markets.
d. Consider developing countries as more than just manufacturing sites.
e. All of the above

Difficulty: (2) Knowledge: (A) Page: 608

28. BOP stands for:

a. a type of music common to developing countries.
b. bottom of the pyramid.
c. bottom of the pile.
d. boost our profits.
e. none of the above

Difficulty: (1) Knowledge: (F) Page: 608

29. Some people are optimistic about the BOP as a market segment. This is because:

a. they are hopeless romantics and can’t face reality.
b. there is a great deal of untapped money in the BOP.
c. BOP is critical for long term growth of the company.
d. the BOP needs help and would welcome input from outsiders.
e. only b and c

Difficulty: (3) Knowledge: (A) Page: 609

30. Despite its dismal financial condition, the BOP has support as a viable market segment. This is because:

a. Wal-Mart concentrated in a similar area in the U.S. and became a world player.
b. incomes are expected to rise over time and this segment could become brand loyal.
c. challenges faced here could be the basis for new and innovative products.
d. the BOP is a source of cheap labor.
e. both b and c

Difficulty: (3) Knowledge: (A) Page: 609

31. The BOP:

a. constitutes a majority of the world’s population.
b. generates $2 an hour in wages.
c. is found mostly in the western hemisphere.
d. does not offer opportunities for MNCs.
e. is a viable market for only small firms with very cheap products.

Difficulty: (2) Knowledge: (A) Pages: 608-9

32. Bottom of the pyramid means:

a. lower class Egyptians.
b. the lowest level of consumer involvement with your product.
c. the lowest satisfaction level of Maslow’s hierarchy.
d. people earning less than $2 per day.
e. the first step toward $1 million on a game show.

Difficulty: (1) Knowledge: (F) Page: 608

33. Compared to developed countries, segments in emerging markets are:

a. enormous.
b. much more coarse and difficult to define.
c. harder to reach because media options are not as well developed.
d. less wealthy.
e. all of the above

Difficulty: (3) Knowledge: (A) Page: 610

34. Hindustan Unilever pursued the following strategy to expand its market share in India.

a. retained the low unit price concept only for shampoo
b. focused its efforts on the BOP masses
c. emphasized local R&D efforts
d. concentrated on the urban population for sales
e. offered a wide variety of brands to tightly segment the market

Difficulty: (3) Knowledge: (F) Page: 610, Global Perspective 18-1

35. Hindustan Lever decided that its product line should include:

a. only products for the rich, so it could charge a premium.
b. products for all three major segments: affluent, middle income, and low income.
c. low income only, to capture the entire lower end as loyal customers for the future.
d. only the middle income, as they were ignored by other firms.
e. both the middle and upper income groups, as profit margins were viable there.

Difficulty: (2) Knowledge: (A) Page: 610, Global Perspective 18-1

36. Social marketing—in the form of new product development and/or aiding development:

a. is not practiced by emerging market companies.
b. is a waste of time—the population won’t be exposed to the messages and is unlikely to follow directions.
c. can expand market opportunities for the firm.
d. builds goodwill that can be leveraged into greater profits.
e. both c and d

Difficulty: (2) Knowledge: (A) Page: 610, Global Perspective 18-1

37. What best describes the outcome of early entry into emerging markets?

a. It can be lucrative, especially for huge markets like China and India.
b. It is likely to fail because the markets don’t or can’t appreciate the product.
c. It will probably face few direct competitors.
d. Products will be too expensive for local consumers.
e. None of the above

Difficulty: (2) Knowledge: (A) Page: 611

38. There are many reasons why a company might prefer to be a follower in a new market, not a first entrant. Which of these is NOT one of those reasons?

a. reduced profits because the market is already gone
b. fewer pitfalls as the follower can see the mistakes of the first-mover
c. better developed marketing channels
d. competitive response from other MNCs and local competitors
e. none of the above

Difficulty: (2) Knowledge: (A) Page: 611

39. Why is being a first-mover attractive in emerging markets?

a. Pent-up demand may lead to high initial sales.
b. Governments are eager to offer concessions to first-movers.
c. Early entrants get best access to key marketing resources.
d. Marketing dollars generate higher productivity.
e. All of the above

Difficulty: (2) Knowledge: (A) Page: 611

40. What approach should smaller firms take in emerging markets?

a. Be a follower so you don’t make costly mistakes.
b. Be a first-mover—to the victor go the spoils.
c. Be a first-mover to outmaneuver larger firms eyeing the same market.
d. Avoid the markets altogether—they take too much time and effort to develop compared to the pay-off for a small firm.
e. Merge with a local company.

Difficulty: (3) Knowledge: (A) Page: 611

41. The risks of entering emerging markets:

a. are financial, but only in terms of getting paid promptly and in full.
b. are financial, but include both currency volatility and getting paid.
c. are marketing related only—we wouldn’t enter a country where we couldn’t get paid.
d. are marketing and currency volatility driven.
e. cover the enter spectrum of marketing and financial risks.

Difficulty: (2) Knowledge: (A) Page: 612

42. Entry strategies for emerging markets include _______.

a. export
b. licensing
c. joint venture
d. direct investment
e. all of the above

Difficulty: (1) Knowledge: (A) Page: 612

43. The preferred entry mode(s) for emerging markets:

a. include(s) both licensing and minority joint venture.
b. seek(s) to adapt products to ensure the capture of the market.
c. involve(s) direct investment to close the market to local challengers and later MNCs.
d. focus (focuses) on marketing instead of sales.
e. both a and b

Difficulty: (2) Knowledge: (A) Page: 612

44. Which of the following is not a common risk when entering emerging markets?

a. product piracy
b. enforcing property rights
c. well-developed marketing infrastructure
d. antitrust laws
e. government intervention

Difficulty: (2) Knowledge: (A) Page: 612

45. When MNCs enter an emerging market, they are likely to:

a. share product secrets with the new country.
b. insist on tight corporate control.
c. take a high risk approach to increase the chance for greater rewards.
d. emphasize sales as a measure of success.
e. both b and d

Difficulty: (2) Knowledge: (A) Page: 612

46. Product policies that have been pursued when entering emerging markets include:

a. no adaptation—the risks and expense are too great.
b. selling a narrow range of premium goods.
c. pursuing backward innovation.
d. anchoring the product entry with products near the end of their life cycle in the home market.
e. all of the above

Difficulty: (3) Knowledge: (A) Page: 613

47. Probably the least effective product design option is:

a. no adaptation—sell what we already make.
b. to sell our normal products at premium prices.
c. to sell a stripped down version of a normal good.
d. to extend the product life cycle by selling obsolete goods abroad.
e. All of the above are equally effective.

Difficulty: (2) Knowledge: (A) Page: 613

48. Backward innovation and selling obsolete goods:

a. run a risk of consumer backlash in emerging markets.
b. could save the company money on product development.
c. should not be used because cutting edge products are most highly favored in emerging markets.
d. are entirely different approaches to entering a market.
e. a, b and c are all reasonable answers

Difficulty: (3) Knowledge: (A) Page: 613

49. Common features that products must have to be successful in emerging markets include:

a. the very latest designs.
b. the widest variety of options.
c. ruggedness.
d. high quality.
e. warranties.

Difficulty: (3) Knowledge: (A) Page: 613

50. Companies have used which of the following methods to enhance product acceptance in emerging markets?

a. washing machines that can restart after a power outage
b. changing detergent formulae to use more water
c. selling a top-end water purifier in India for greater assurance of pure water
d. lowering quality to keep prices low
e. all of the above

Difficulty: (2) Knowledge: (A) Page: 613

51. When designing a product for emerging markets, companies should consider which of the following?

a. low price, ruggedness, and low quality
b. low price, inconsistent quality, and ability to run without electricity
c. high price, consistent quality, and a warranty
d. low incomes, unreliable power supplies, and scarce resources
e. low price, back-up power supplies, and a warranty

Difficulty: (2) Knowledge: (A) Page: 613

52. A manually operated sewing machine would:

a. be a backward innovation.
b. be an example of a product life cycle extension.
c. be rejected in emerging markets as not being modern enough.
d. be too difficult to operate.
e. likely have the idea copied as soon as it hit the market.

Difficulty: (3) Knowledge: (A) Page: 613

53. Brand strategies proven to succeed in emerging markets include:

a. pursuing only the wealthy—they don’t require product or price changes.
b. aiming brands at various market segments with different formulae and prices.
c. focusing on the emerging middle class for its growing buying power and eventual loyalty.
d. purchasing a local brand as part of the product offering.
e. both b and d

Difficulty: (3) Knowledge: (A) Page: 613

54. Which of the following is MOST likely to be used when packaging for emerging markets?

a. large packages to cater to the bigger families common in these countries
b. large packages because an entire village will share the product
c. smaller packages at lower price points
d. large packages with individual wrappers so merchants can resell in smaller quantities
e. both c and d

Difficulty: (3) Knowledge: (A) Pages: 614-15

55. Package design in emerging markets can largely ignore the feature of ________.

a. sturdiness
b. heat resistance
c. freshness
d. sustainability
e. none of the above

Difficulty: (1) Knowledge: (A) Page: 614-15

56. Because of the climate and sales conditions of many emerging markets, packages should:

a. come frozen so freshness and safety are ensured.
b. be made of the cheapest materials to save money.
c. be sold with reusable containers.
d. allow people to see and smell the product before buying.
e. all of the above

Difficulty: (2) Knowledge: (A) Page: 614-15

57. A package characteristic with perhaps greater significance in emerging markets than developed countries is ________.

a. refrigeration
b. sustainability
c. safety
d. variety of sizes
e. metal containers

Difficulty: (3) Knowledge: (A) Page: 615

58. The pricing strategy most likely to succeed in emerging markets is:

a. very low prices that everyone can afford—large volume makes up for low margins.
b. premium pricing only—establish the image of quality and save money on not having to adapt the product for local sale.
c. cater to the growing middle class and raise prices as income goes up.
d. saturate all price points with different products and make money at all levels.
e. All of the above are equally viable.

Difficulty: (2) Knowledge: (A) Page: 615

59. Why is distribution considered to be the biggest challenge when entering an emerging market?

a. It isn’t—pricing is.
b. It isn’t—product adaptation is.
c. Distribution infrastructure is too complex to navigate.
d. The country’s land mass is a deterrent.
e. All of the above

Difficulty: (2) Knowledge: (A) Page: 616

60. Which of the following is NOT a reason why distribution is difficult in emerging markets?

a. Local and rural areas can both be easily reached.
b. Shopping malls and supermarkets are on the rise in emerging markets.
c. Traditional retailers can be hard to work with.
d. Operating capital of retailers may be lacking.
e. Local brands are difficult to displace on the shelves.

Difficulty: (2) Knowledge: (A) Page: 616

61. P&G succeeded in Russia by:

a. using door to door sales reps.
b. direct export to a single large distributor in Moscow.
c. partnering with EU firms that already had a presence in Russia.
d. developing its own distributor network in exchange for exclusivity.
e. none of the above—Unilever is the dominant player in Russia.

Difficulty: (2) Knowledge: (F) Page: 617

62. When managing distributors in emerging markets, MNCs should:

a. pick partners with extensive local product-market knowledge.
b. choose partners with excellent English-speaking skills.
c. focus on entrepreneurs to build local good-will.
d. only enter markets with a company-owned distributor network.
e. select distributors who are competent working with MNCs.

Difficulty: (2) Knowledge: (A) Page: 618

63. Direct selling in emerging markets:

a. is attractive because of the rapid growth of internet sales.
b. often works best in a B2B setting.
c. is valuable in countries where face-to-face sales are common.
d. both b and c
e. none of the above—direct selling should be avoided as too difficult to supervise.

Difficulty: (2) Knowledge: (A) Page: 618

64. Emerging market distributors seeking exclusive territories should:

a. be told yes, on a temporary basis.
b. be denied, because this policy retards rapid market development.
c. be ignored—we will set up a company-owned distribution network.
d. be told no territories exist—everyone can sell everywhere, and the winner gets the final contract.
e. none of the above

Difficulty: (2) Knowledge: (A) Page: 619

65. Communication challenges include:

a. raising brand awareness.
b. educating customers about product use and benefits.
c. creating brand image.
d. gaining loyalty.
e. all of the above

Difficulty: (2) Knowledge: (F) Page: 619

66. Push strategies:

a. are less viable in emerging markets than pull strategies.
b. are never used in emerging markets because channels are in disarray.
c. work well in many countries because of the enormous channel power of distributors.
d. result in the MNC being cheated because channel members keep the incentives for themselves.
e. never reach consumers.

Difficulty: (2) Knowledge: (A) Page: 619

67. Which of the following is a reason why a push strategy would succeed in emerging markets?

a. more frequent shopping than in developed countries
b. heavy reliance on retailer recommendations about brands
c. significant distributor power
d. numerous opportunities for brand switching
e. all of the above

Difficulty: (2) Knowledge: (A) Page: 619

68. Why might pull strategies aimed at consumers in emerging markets NOT be very successful?

a. They don’t understand the message about the product.
b. Coupons may be stolen and never reach the consumer for redemption.
c. Mass media are less effective in the emerging nations.
d. All of the above apply.
e. None of the above apply—emerging market consumers love coupons.

Difficulty: (3) Knowledge: (A) Page: 619

True/False Short Answer

69. Emerging markets are not a tempting target for MNCs.

Difficulty: (1) Knowledge: (F) Page: 597

70. The most busy McDonald’s in the world is in Peking.

Difficulty: (1) Knowledge: (F) Page: 597

71. The bulk of the revenues from some MNCs come from emerging markets.

Difficulty: (1) Knowledge: (F) Page: 598

72. Transition economies are those that are moving from very poor to more developed.

Difficulty: (1) Knowledge: (F) Page: 598

73. Iran is one of the BRIC nations.

Difficulty: (1) Knowledge: (F) Page: 598

74. BRIC stands for “big, rich, independent countries”.

Difficulty: (1) Knowledge: (F) Page: 598

75. Remittances from foreign workers are important to emerging market economies.

Difficulty: (1) Knowledge: (F) Page: 599

76. Most of the world’s largest shopping malls are in Asia.

Difficulty: (1) Knowledge: (F) Page: 602, Exhibit 18-3

77. No companies from emerging market countries have made it to the Fortune Global 500 list.

Difficulty: (1) Knowledge: (F) Page: 603

78. Most of the largest banks in the world are from the United States.

Difficulty: (1) Knowledge: (F) Page: 603

79. Product piracy is not a problem in China.

Difficulty: (1) Knowledge: (F) Page: 604

80. Products from emerging markets only compete as low-end challengers to established brands.

Difficulty: (2) Knowledge: (A) Page: 604

81. MNCs cannot use products developed in emerging markets because the quality standards are too low to be transferred to MNC home markets.

Difficulty: (2) Knowledge: (A) Page: 608

82. India is experiencing changes in its income pattern from pyramid to diamond.

Difficulty: (2) Knowledge: (A) Page: 610, Global Perspective 18-1

83. Hindustan Unilever is a major corporation based in Pakistan.

Difficulty: (2) Knowledge: (F) Page: 610, Global Perspective 18-1

84. Social marketing in the Third World is a waste of time and money.

Difficulty: (2) Knowledge: (A) Page: 610, Global Perspective 18-1

85. Risk levels of entering emerging markets are higher than those for developed countries.

Difficulty: (1) Knowledge: (A) Page: 612

86. Backward innovation and selling obsolete goods are different names for the same product strategy.

Difficulty: (2) Knowledge: (F) Page: 613

87. The most common packaging choice for emerging markets is a smaller package.

Difficulty: (1) Knowledge: (A) Page: 614

88. Frugal engineering means making very cheap, low quality products so you can get the most profit.

Difficulty: (1) Knowledge: (A) Page: 615

89. Local autonomy should always be granted to distributors because they know the market better than the MNC.

Difficulty: (2) Knowledge: (A) Page: 619

90. Push strategies are more likely to be successful in emerging markets than pull strategies.

Difficulty: (2) Knowledge: (A) Page: 619

91. Billboards can be effective in reaching both rich and poor consumers in emerging markets.

Difficulty: (2) Knowledge: (A) Page: 619

Essay

92. Describe the characteristics that define emerging markets.

93. Despite coming from humble origins and lacking much of the resources of the major global firms, many companies from emerging markets are serious challengers in world markets. What strategies do they employ to enable them to succeed?

94. What are the strategic options for emerging market firms in global marketing? Under what conditions would each be suggested?

95. There are some commonly held beliefs about marketing mix strategy that have been proven to be less than optimal. Identify some of these.

96. Describe the communication challenges faced when entering emerging markets.

Chapter 19

Multiple Choice

1. According to the text, the Web clearly provides a unique _______________ and
______________ channel to marketers across the globe.

a. distribution, higher education
b. distribution, production
c. distribution, network
d. distribution, communication
e. none of the above

Difficulty: (2) Knowledge: (A) Page: 626

2. According to this textbook, compared to the U.S., Europe as a future Internet
market will be:
a. better, because virtual retailers have a competitive advantage over traditional
stores.
b. worse because there are so many languages.
c. better because delivery is faster.
d. worse because Europe has less well developed Internet infrastructure.
e. both A and C

Difficulty: (2) Knowledge: (A) Page: 626

3. Although the Internet has become a global phenomenon, it first originated in (the):

a. Italy.
b. Japan.
c. U.S.A.
d. Belgium.
e. Singapore.

Difficulty: (1) Knowledge: (F) Page: 627

4. In 2005, the worldwide Internet population surpassed 1 billion.

a. 1 billion
b. 2 billion
c. 3 billion
d. 4 billion
e. 5 billion

Difficulty: (2) Knowledge: (F) Page: 627

5. The country with the most Internet users is:
a. United States
b. Japan
c. India
d. China
e. none of the above

Difficulty: (2) Knowledge: (F) Page: 627, Exhibit 19-1

6. The country with the highest penetration rate of Internet users is:
a. United States
b. Japan
c. South Korea
d. United Kingdom
e. Canada

Difficulty: (2) Knowledge: (F) Page: 627, Exhibit 19-1

7. The majority of the Internet users now live outside of ________________ speaking
countries.

a. English
b. French
c. Arabic
d. German
e. Spanish

Difficulty: (1) Knowledge: (F) Page: 628

8. Which of the following is NOT a barrier to Internet marketing?

a. language
b. culture
c. infrastructure
d. access charges
e. none of the above

Difficulty: (2) Knowledge: (F) Page: 627

9. The barriers to global e-commerce are:

a. language barriers.
b. cultural barriers.
c. infrastructure.
d. all of the above.
e. none of the above.

Difficulty: (1) Knowledge: (A) Page: 627

10. The structural barriers to global e-commerce include the following EXCEPT:
a. language barriers.
b. cultural barriers.
c. infrastructure.
d. knowledge barriers.
e. roaming charges.

Difficulty: (1) Knowledge: (A) Page: 630-31

11. Which of these languages is NOT in the top three on Internet sites?

a. Hindu
b. Chinese
c. Spanish
d. German
e. Both a and d

Difficulty: (2) Knowledge: (F) Page: 628

12. Using only English on a website:

a. is doomed to fail.
b. is ethnocentric.
c. works in some industries like aerospace.
d. limits your market.
e. both c and d

Difficulty: (3) Knowledge: (A) Page: 628

13. In global e-commerce, Web site localization services have created the need for more:

a. translators.
b. copy writers.
c. media specialists.
d. network specialists.
e. knowledge experts.

Difficulty: (2) Knowledge: (A) Page: 628

14. Companies that wish to make their Web sites international by translating the
information and content into other languages have two alternatives that may include:

a. hire a firm or a person doing the translation.
b. use a software having the translation function.
c. use only English.
d. both a and b
e. both b and c

Difficulty: (2) Knowledge: (A) Page: 628

15. Which of these would NOT be a barrier to Internet marketing?

a. preference for face-to-face business transactions
b. lack of familiarity with credit cards
c. strict Internet security measures
d. website wording, logos, and colors
e. patriotism

Difficulty: (2) Knowledge: (F) Pages: 628-9

16. In the Asia-Pacific region, B2B e-commerce activities are facing obstacles which
could hinder the growth of the Internet. These obstacles include:

a. doing business on a face-to-face basis.
b. cultivating relationships and secrecy issues.
c. reluctance to share information.
d. all of the above are obstacles.
e. none of the above are obstacles.

Difficulty: (1) Knowledge: (A) Pages: 628-9

17. In many countries, businesspeople prefer to do business on a________________.

a. virtual basis.
b. simple basis.
c. complex basis.
d. face-to-face basis.
e. none of the above.

Difficulty: (1) Knowledge: (A) Page: 628

18. E-readiness for Brazil, India, Russia and China is:

a. unknown—they won’t answer the surveys.
b. excellent—their relative backwardness lets them jump ahead with the latest
technology.
c. middle of the pack because their economies are growing rapidly.
d. very low.
e. none of the above

Difficulty: (2) Knowledge: (F) Page: 631

19. ISP is an acronym for:

a. Internet strategies provider.
b. Internet standards provider.
c. Internet service provider.
d. Internet system provider.
e. none of the above.

Difficulty: (1) Knowledge: (A) Page: 629

20. In many European markets, consumers are reluctant to surf the Web because of:

a. high telecommunication charges.
b. low per capita income.
c. government rules and regulations.
d. distribution costs.
e. limited training and education.

Difficulty: (2)Knowledge: (F) Page: 632

21. In many countries, the cost of going online can be reduced by:

a. government deregulations.
b. increased competition.
c. new access alternatives.
d. all of the above.
e. none of the above.

Difficulty: (2) Knowledge: (A) Page: 632

22. In Japan, access to the web was previously dominated by ______________________, the Japanese telecom firm, which charges sky-high fees.

a. British Telecom.
b. Toyota.
c. Nippon Telephone & Telegraph (NTT).
d. Seven-Eleven Japan.
e. AT&T.

Difficulty: (1) Knowledge: (A) Page: 632

23. In the Internet world, there are many unsolved issues. For example, e-commerce is global but the national laws are mostly ________________.

a. local
b. regional
c. political
d. religious
e. secular

Difficulty: (1) Knowledge: (A) Page: 632

24. At the global level, a new nongovernmental body has been established to resolve domain disputes. The name of this body is:

a. Internet Corporation for Domain Names (ICDN).
b. Internet Corporation for Assigned Names (ICAN).
c. Internet Corporation for Assigned Names and Numbers (ICANN).
d. Internet Corporation for Networks (ICN).
e. Internet Corporation for Domain Disputes (ICDD).

Difficulty: (3) Knowledge: (F) Page: 633

25. In the area of global marketing, the Internet offers two major benefits to companies that may be interested in selling their products worldwide. The two benefits include:

a. cost/efficiency savings and accessibility (connectivity).
b. cost/efficiency savings and brand image.
c. cost/efficiency savings and product standardization.
d. cost/efficiency savings and high quality intelligence.
e. cost/efficiency savings and product image.

Difficulty: (3) Knowledge: (A) Page: 633

26. According to the text, regarding the profile of Internet buyers, differences across countries are mainly due to two factors which are:

a. access charges and availability of computer programmers.
b. access charges and availability of outsourcing.
c. access charges and availability of entertainment options.
d. access charges and availability of CNN.
e. access charges and availability of AOL.
.
Difficulty: (3) Knowledge: (A) Page: 634

27. At the core of any global Web marketing strategy is the conflict between local responsiveness and _______________________.

a. local integration
b. regional integration
c. transnational integration
d. polycentric integration
e. global integration
.
Difficulty: (3) Knowledge: (A) Page: 637

28. In the product policy area, the Internet can help build:

a. regional brands.
b. food brands only.
c. global brands.
d. high-tech brands.
e. tangible brands.
.
Difficulty: (2) Knowledge: (A) Page: 641

29. Marketing of services differs from tangible goods in four areas:

a. intangibility, simultaneity, heterogeneity, and perishability.
b. intangibility, simultaneity, heterogeneity, and collectivity.
c. intangibility, simultaneity, heterogeneity, and connectivity.
d. intangibility, simultaneity, heterogeneity, and believability.
e. intangibility, simultaneity, heterogeneity, and credibility.

Difficulty: (2) Knowledge: (A) Page: 643

30. India Yahoo! is different from normal portals because is has:

a. no online auctions.
b. astrology.
c. no online shopping.
d. real estate.
e. cricket.

Difficulty: (2) Knowledge: (F) Page: 642

31. In some countries, customers might resent having the human element removed from
the service encounter because of:

a. cultural factors.
b. national factors.
c. technology factors.
d. consumption factors.
e. international factors.

Difficulty: (2) Knowledge: (A) Page: 644

32. In international marketing, a Web site gives service marketers the ability to offer _________ hour service to customers worldwide.

a. 10
b. 15
c. 20
d. 22
e. 24

Difficulty: (1) Knowledge: (F) Page: 644

33. Because of the Internet, many MNCs’ pricing decisions are less _____________.

a. national
b. flexible
c. creative
d. rigid
e. vertical

Difficulty: (3) Knowledge: (A) Page: 644

34. In the area of pricing, the Internet facilitates:

a. work transparency.
b. price transparency.
c. profit transparency.
d. channel transparency.
e. none of the above is true.

Difficulty: (2) Knowledge: (A) Page: 644

35. For global marketers, the Web could affect the firm’s high margins because of:

a. profit transparency.
b. channel transparency.
c. price transparency.
d. channel captaincy.
e. knowledge transparency.

Difficulty: (2) Knowledge: (A) Page: 644

36. In Internet marketing, consumers often are aware of low prices because of the availability of brand and pricing information. This is a result of:

a. profit transparency.
b. knowledge transparency.
c. labor transparency.
d. profit transparency.
e. price transparency.

Difficulty: (2) Knowledge: (A) Page: 644

37. To deal with price transparency issues in Internet marketing, companies can use methods such as:

a. cutting prices in high-price countries.
b. localizing the products.
c. refusal to handle orders from overseas.
d. All of the above methods can be used.
e. None of the above methods are used.

Difficulty: (3) Knowledge: (A) Page: 645

38. In many industries, connectivity means that existing channels/distributors can be bypassed by connecting:

a. buyers and suppliers.
b. buyers and governments.
c. buyers and software companies.
d. buyers and advertisers.
e. buyers and media companies.

Difficulty: (1) Knowledge: (A) Page: 645

39. Manufacturers who plan to add the Internet to their existing international channels should be aware of two possibilities:

a. replacement effect and international effect.
b. replacement effect and complementary effect.
c. complementary effect and managerial effect.
d. complementary effect and adaptation effect.
e. replacement effect and quality effect.

Difficulty: (1) Knowledge: (A) Page: 645

40. In international distribution, replacement effect can:

a. cannibalize existing distribution channels.
b. delete existing distribution channels.
c. replace existing distribution channels.
d. downsize existing distribution channels.
e. add more distribution channels

Difficulty: (2) Knowledge: (A) Page: 645

41. In international distribution, complementary effect can:

a. expand the overall business.
b. cannibalize existing distribution channels.
c. materialize the overall business.
d. downsize existing distribution channels.
e. none of the above.

Difficulty: (2) Knowledge: (A) Pages: 645-6

42. Click-and-mortar retailers are defined as:

a. those large retail chains trying to compete by pursuing no Web site presence.
b. those large retail chains trying to compete by making alliances and joint ventures.
c. those large retail chains trying to compete by going international.
d. those large retail chains trying to compete by hiring Web specialists.
e. those large retail chains trying to compete by setting up a Web site presence.

Difficulty: (2) Knowledge: (A) Page: 647

43. Click-and-mortar chains provide one advantage where:

a. products cannot be returned to the local stores.
b. products can be returned to the local stores.
c. click-and mortar stores have no Web sites.
d. All of the above.
e. None of the above.

Difficulty: (1) Knowledge: (A) Page: 647

44. In international marketing, many well-known brands in pure web retailing (e-trade, Amazon.com) still have limited ________________________ expertise.

a. local
b. international
c. regional
d. economic
e. political

Difficulty: (1) Knowledge: (A) Page: 648

45. Success of an e-tailing model will depend on three factors which include:

a. consumer behavior, cost structure, and networks.
b. consumer behavior, cost structure, and government policies.
c. consumer behavior, cost structure, and logistics.
d. consumer behavior, cost structure, and human resources.
e. consumer behavior, cost structure, and manufacturing.

Difficulty: (2) Knowledge: (A) Page: 648

46. According to Jupiter Research, online advertising spending is expected to grow to around ____________ in the U.S. by 2009.

a. $10 billion
b. $16 billion
c. $20 billion
d. $30 billion
e. $35 billion

Difficulty: (3) Knowledge: (F) Page: 648

47. The Internet offers advantages to international advertisers which include:

a. global reach.
b. interactivity.
c. precise information
d. all of the above.
e. none of the above.

Difficulty: (2) Knowledge: (A) Pages: 648-9

48. In Internet advertising, by clicking on the banner ad, users can be taken to the:

a. internet’s databank.
b. advertiser’s web site.
c. Netscape’s site.
d. Yahoo’s site.
e. none of the above.

Difficulty: (1) Knowledge: (A) Page: 649

49. According to the text, the ultimate success of an online campaign depends on the following factors EXCEPT:

a. the nature of the product.
b. the targeting.
c. choice of the site.
d. execution of the ad.
e. hiring an efficient CEO.

Difficulty: (2) Knowledge: (A) Page: 650

50. Although Internet advertising is growing at a very rapid pace, many advertisers are skeptical about its potential as a global promotion tool because of (the):

a. annoyance factor.
b. audience measurement.
c. click-thru rates.
d. high access and/or phone charges
e. all of the above.
.
Difficulty: (1) Knowledge: (A) Page: 650

51. International marketers who plan on using the Web as an advertising tool should familiarize themselves with:

a. advertising regulations and restrictions in foreign markets.
b. search engines.
c. distribution channels.
d. digital networks.
e. digital suppliers.

Difficulty: (2) Knowledge: (A) Page: 650

52. Keyword search advertising allows the company to have a link to its Web site when
people are looking for ________________________ -related information.

a. people
b. market
c. product
d. country
e. none of the above

Difficulty: (2) Knowledge: (A) Page: 649

53. In Internet advertising, microsites are created to promote ____________________
brands.

a. hybrid
b. individual
c. complex
d. global
e. none of the above

Difficulty: (1) Knowledge: (A) Page: 649

54. The ultimate success of an online campaign hinges on four factors which include:

a. nature of the product, the target, choice of site, and color
b. nature of the product, the target, choice of site, and graphics
c. nature of the product, the target, choice of site, and banners
d. nature of the product, the target, choice of site, and execution of the ad
e. none of the above

Difficulty: (3) Knowledge: (A) Page: 650

55. Online campaigns would work for __________________________________.

a. high involvement goods.
b. low involvement goods.
c. vertical involvement goods
d. horizontal involvement goods
e. none o the above

Difficulty: (2) Knowledge: (A) Page: 650

True/False Short Answer

56. Small and medium-size companies (SMEs) are also participating in the area of e-commerce and Internet-related opportunities.

Difficulty: (1) Knowledge: (A) Page: 626

57. Internet usage worldwide is not growing.

Difficulty: (1) Knowledge: (A) Page: 627

58. ISP is an acronym for Internet Standards Provider.

Difficulty: (2) Knowledge: (A) Page: 629

59. Knowledge barrier is not one of the barriers in Internet-related activities.

Difficulty: (1) Knowledge: (A) Page: 628

60. In many European markets, consumers are reluctant to spend time surfing the Web
because of higher telecommunication charges.

Difficulty: (2) Knowledge: (F) Page: 632

61. There are many unsolved issues in the Internet. For example, e-commerce is global
but the national laws are mostly transnational.

Difficulty: (1) Knowledge: (A) Page: 632

62. The Internet has leveled the playing field between large and small firms in global
competition.

63. Asians have the most favorable attitude toward Internet shopping.

64. The Internet is not helping companies to create global brands.

Difficulty: (3) Knowledge: (A) Page: 634

65. Google is the #1 search engine throughout the world.

66. Consumer co-creation involves customers in value creation.

67. Mass customization is not the major plus of the Web.

Difficulty: (1) Knowledge: (A) Page: 644

68. Web sites enable companies to manage perishability.

Difficulty: (1) Knowledge: (A) Page: 644

69. In international marketing, a Web site gives service marketers the ability to offer 24 hour service to customers worldwide.

Difficulty: (1) Knowledge: (F) Page: 644

70. For global marketers, the Web could affect the firm’s high margins because of price transparency.

Difficulty: (2) Knowledge: (A) Page: 644

71. In many industries, connectivity means that existing channels can be bypassed by
connecting buyers and suppliers directly.

Difficulty: (1) Knowledge: (A) Page: 645

72. In international distribution, replacement effect does not cannibalize existing distribution channels.

Difficulty: (2) Knowledge: (A) Page: 645

73. It is estimated that most of the Internet advertising spending will be spent in Japan.

Difficulty: (1) Knowledge: (A) Page: 648

74. Banner advertising is not used in Internet advertising.

Difficulty: (1) Knowledge: (A) Page: 648

75. Keyword search advertising allows the company to have a link to its competitors.

Difficulty: (2) Knowledge: (A) Page: 649

76. Microsites are used to promote a particular brand.

Difficulty: (2) Knowledge: (A) Page: 649

77. Online campaigns would work for high-involvement goods whose buyers engage in
product research and price comparisons.

Difficulty: (3) Knowledge: (A) Page: 650

Essay

78. Describe briefly the history of the Internet. Which nations are becoming prominent among Internet users? How does their growth compare with the Internet readiness shown in Exhibit 19-2?

79. Although global e-commerce is expected to increase, it has encountered obstacles and structural barriers. Discuss these structural barriers.

80. Discuss some of the ramifications of the Internet for global marketing strategies. Also explain some of the challenges faced by international marketers in the areas of global branding and Internet-based new products.

CIS 513 Week 7 Case Study 2 – Strayer University New

CIS/513 Week 7 Case Study 2 – Strayer New

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Case Study 2: Security in Bluetooth and other Mobile Devices

Before supporting mobile and wireless devices, organizations need to ensure that they have analyzed the potential security and implementation issues associated with those devices. Additionally, they need to ensure that they have taken the proper precautions and implemented the proper security controls to mitigate vulnerabilities. Read the NIST Draft SP 800-164, Guidelines on Hardware-Rooted Security in Mobile Devices, located at http://csrc.nist.gov/publications/drafts/800-164/sp800_164_draft.pdf.

Write a four to five (4-5) page paper in which you:
1. Based on what you read in the NIST SP 800-164 publication, select an industry (such as Banking, Finance, Education, or Healthcare) and assess the security risks and vulnerabilities associated with mobile devices in this environment. Describe the security controls that this industry needs to implement to mitigate wireless vulnerabilities.
2. Assess the strategic implications of deciding to implement wireless and mobile technologies into the selected industry environment.
3. Analyze the factors that business managers must consider when determining if wireless and mobile devices are appropriate in their business environment.
4. Establishing multiple layers of defense is important in security. Describe why and how the different types of security controls are necessary to mitigate potential security issues. Describe how the types of radio signals and structure of wireless and cellular networks impact the security of wireless networks.
5. Create a Network Architecture diagram depicting the layers of security controls to mitigate security threats in a large corporate environment through the use of graphical tools in Microsoft Word or Visio, or an open source alternative such as Dia. Note: The graphically depicted solution is not included in the required page length.
6. Use at least four (4) quality resources in this assignment. Note: Wikipedia and similar Websites do not qualify as quality resources.

Your assignment must follow these formatting requirements:
• Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
• Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

CIS 554 Week 7 Assignment 3 – Strayer University New

CIS/554 Week 7 Assignment 3 – Strayer New

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Assignment 3: Planning a Software Development Project

This assignment consists of two (2) sections: a written project plan, and a project plan that is created through the use of MS Project. You must submit both sections as separate files for the completion of this assignment. Label each file name according to the section of the assignment it is written for.

Imagine that you have been hired as a project manager assisting in the development of a mobile application and cloud-based solution which is designed to streamline your organization’s delivery operation. As project manager, you are to manage the development and release of the mobile client platform in the cloud-based infrastructure that will use GPS tracking to track the shipment and delivery of goods in trucks across the United States.

The mobile client will have three (3) modules consisting of a search customer screen, search address screen, and confirm delivery screen. Programmers have reviewed the requirements and estimate that each module will take 200 hours to complete by one (1) programmer.

In addition to delivering the mobile-based application, your project will require upgrading the internal network and application infrastructure to a cloud-based model to support the new mobile platform. This effort will require your team to procure network appliances to optimize the security factors of the cloud-based platform.

One last component of the project scope is to provide training to operation support staff and fifty (50) truck drivers staffed across four (4) regions of the U.S. Your project team consists of two (2) programmers, a technical writer, four (4) technical trainers, two (2) network engineers, and one (1) system administrator.

Section 1: Written Project Plan
1. Write a three to four (3-4) page paper in which you:
a. Determine the factors that must be considered and observed throughout the WBS development process and explain why.
b. Create a WBS for the scope of the project. Note: The WBS must be in indented format as shown in Figure 5.5B in Chapter 5 of the text.
c. Analyze the various activities required for this project and provide an estimate of duration for each activity based on the number of resources available for the project. Include assumptions and basis for each estimate.
d. Recommend the estimation technique that should be used for each activity (i.e., PERT, Delphi, Analogy, Expert Judgment, or Rule of Thumb).
e. Determine the major milestones that the project will encounter.
f. Describe the logical sequence of planned activities required to achieve the project and analyze how monitoring durations on the critical path influence the success of the project.

Section 1 of your assignment must follow these formatting requirements:
• Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
• Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

ACC 304 Discussion Questions Week 1-11 – NEW

ACC/304 Discussion Questions Week 1-11

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ACC 304 Week 1-11 Discussion Question Solutions

Week 1 DQ 1
“Convergence”
Please respond to the following:
• From the e-Activity, provide an analysis of the current status of the convergence of GAAP and IFR.
• Based on your analysis, what area do you believe is the most challenging to converge and why?
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 1 DQ 2
“Accountable Events”
Please respond to the following:
• The Internal Revenue Code allows some accountable events to be considered differently for income tax reporting purposes and financial accounting purposes, while other accountable events must be reported the same. Identify an event related to inventories that is treated different for income tax purposes and financial accounting purposes.

• Discuss why it might be desirable to report this event differently for financial accounting purposes. Do you agree with the difference in treatment? Support your position.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 2 DQ 1
“LIFO Accounting”
Please respond to the following:
• From the e-Activity, discuss whether or not you agree or disagree with the disallowance of LIFO for valuing inventory.

• Determine how the disallowance of LIFO will impact U.S. multinational firms that report under IFRS.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 2 DQ 2
“Retail Valuation of Inventory”
Please respond to the following:
• High-volume retailers generally use the retail method for valuing inventories instead of the various cost methods. Identify and evaluate the conditions that may distort the results under the retail method.
• Compare the advantages of using the retail method with those of using the cost methods of inventory pricing.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 3 DQ 1
“Rental Income”
Please respond to the following:
• From the video, explain to a client how he / she would determine the rental income need for a desired return on his /her investment.
• From the second e-Activity in which you researched furnished rental properties, evaluate how the New York rent scenario presented compares to the average rent-to-value ratio of an average furnished apartment in your area. State your area and cite your source for rent averages in your area.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 3 DQ 2
“Nonmonetary Exchanges”
Please respond to the following:
• Examine how the purchases and sales of inventory with the same counterparty are similar to the accounting for other nonmonetary exchanges.
• From the third e-Activity, compare the reporting of nonmonetary exchanges of property plant and equipment under GAAP with IFRS. Identify any problems that may result upon convergence with the treatment.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 4 DQ 1
“MF Global”
Please respond to the following:
• From the first e-Activity, analyze and explain the weaknesses within MF Global and how it led to this crisis.
• Make a recommendation as to how organizational failures may be minimized in the future.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 4 DQ 2
“Asset Impairment”
Please respond to the following:
• From the second e-Activity, Identify and discuss some of the conditions that may lead to an impairment of long-lived assets. How could these conditions relate to the impairment of Marriott’s time-shares? Explain your response.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 5 DQ 1
“AICPA”
Please respond to the following:
• From the e-Activity, assume that you are a practicing CPA working in a public accounting firm. Discuss how a membership to the AICPA would help you professionally.
• Identify other professional accounting organizations and explain how each may help you professionally.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 5 DQ 2
“Accounting Careers”
Please respond to the following:
• Identify at least two different accounting careers that you would like to pursue. What excites you about these careers?
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 6 DQ 1
“PCAOB”
Please respond to the following:
• From the e-Activity, identify and evaluate the issues related to the internally created software for HouseRaising. Discuss the potential problems related to the capitalization of internally created software and the requirements for capitalization under GAAP.

• Identify and evaluate the issues related to goodwill for UpSNAP. Discuss these issues in the context of recent FASB guidelines on goodwill impairment.

• Discuss the actions you would employ as a CPA to prevent a disciplinary action by the PCAOB in this situation.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 6 DQ 2
“Research and Development Costs”
Please respond to the following:
• Evaluate the practical and conceptual reasons for the reporting requirements of research and development costs required by GAAP. Do you agree with the reporting requirements? Explain your response.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 7 DQ 1
“Signs of Illegal Activity”
Please respond to the following:
• From the first e-Activity, explain how you, as a financial advisor, could mitigate the risk of being held responsible for a client who is laundering money.
• Assume that you are a CPA working in a public accounting firm and discover that your client is involved with money laundering and other fraudulent activities. What would you do?
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 7 DQ 2
“Overstock.com”
Please respond to the following:
• From the second and third e-Activity, evaluate and discuss how the under billings should have been accounted for in the original financial statements.

• Should the under billings be treated as gain contingencies? Explain your position.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 8 DQ 1
“Information Revealed in the 10-Q”
Please respond to the following:
• From the e-Activity, evaluate the “Off the Balance Sheet Arrangements” reflected in the 10-Qs of Freddie Mae and Freddie Mac. Explain how these red flags were ignored by the SEC and its public accounting firm.
• Describe the accounting rules and regulations you would introduce to ensure that these types of accounting irregularities do not occur in the future
• Analyze how Variable Interest Entities (VIEs) can result in understatement of liabilities.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 8 DQ 2
“Extinguishment of Debt”
Please respond to the following:
• Gains or losses from the early extinguishment of debt can be accounted for in three ways: (1) amortized over remaining life of the debt; (2) amortized over the life of the new debt; or (3) recognized in the period of the adjustment. Develop supporting arguments for or against each of the three theoretical methods of accounting for the gains or losses from the early extinguishment of debt.
• Which method is generally accepted? Why do you think this method is generally accepted? Explain your position.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 9 DQ 1
“Groupon”
Please respond to the following:
• From the e-Activity, explain the questionable accounting issue at Groupon and how would it affect the company’s financial statements.
• Assume that you are a CPA working for the public accounting firm that audits Groupon and discover the questionable accounting activity. What would you do? Why?
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 9 DQ 2
“Stock Dividends”
Please respond to the following:
• A company is considering issuing a 10% stock dividend to common stockholders. What are the accounting implications of the stock dividend?

• Should the stock dividend be issued to all stockholders of record or to stockholders of record excluding shares held as treasury stock? Why or why not?
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 10 DQ 1
“XBRL Corporation”
Please respond to the following:
• From the first and second e-Activities, discuss how you believe XBRL will impact the financial reporting of public and private U.S. corporations.
• Do you support the use of XBRL? Why or Why not?
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 10 DQ 2
“Stock Warrants”
Please respond to the following:
• From the third and fourth e-Activities, discuss the significance of the price at which stock warrants are issued in relation to the market price.
• Analyze and evaluate the impact that financial instruments known as stock appreciation rights (SARs) have on earnings per share (EPS). Do not use calculations.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 11 DQ 1
“The GAO”
Please respond to the following:
• From the e-Activity, provide an analysis and explanation of the role of the GAO.
• Evaluate at least one recommendation made by GAO on the Troubled Asset Relief Program (TARP). Will this recommendation improve the way TARP funds are administered? Support your position.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

Week 11 DQ 2
“Course Wrap-Up” Please respond to the following:
• Analyze how the concepts of this course can be applied to your current or future work position.
• Explain the most valuable concept learned in this course and why you found it valuable.
Please make sure you post an Initial Post and at least one Reply Post in this Thread All posts should be substantive and add value to the discussion. Please make sure your posts are grammatically correct and do not have any spelling errors. Each post should have original content and you must cite any sources that you quote or paraphrase. For additional guidance, please refer to the Threaded Discussion Announcement posted in the course.

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ACC 206 Accounting principles II – Strayer – A+ Graded

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CHAPTER 1

ACCOUNTINGIN ACTION

CHAPTERSTUDY OBJECTIVES

1. Explain what accounting is.

2. Identify the users and uses of accounting.

3. Understand why ethics is a fundamental business concept.

4. Explain generally accepted accounting principles and the cost principle.

5. Explain the monetary unit assumption and the economic entity assumption.

6. State the accounting equation, and define assets, liabilities, and owner’s equity.

7. Analyze the effects of business transactions on the accounting equation.

8. Understand the four financial statements and how they are prepared.

9. Explain the career opportunities in

TRUE-FALSESTATEMENTS

1. Owners of business firms are the only people who need accounting information.

2. Transactions that can be measured in dollars and cents are recorded in the financial information system.

3. The hiring of a new company president is an economic event recorded by the financial information system.

4. Management of a business enterprise is the major external user of information.

5. Accounting communicates financial information about a business enterprise to both internal and external users.

6. Accounting information is used only by external users with a financial interest in a business enterprise.

7. Financial statements are the major means of communicating accounting information to interested parties.

8. Bookkeeping and accounting are one and the same because the bookkeeping function includes the accounting process.
1 – 5

9. The origins of accounting are attributed to Luca Pacioli, a famous mathematician.

10. The study of accounting will be useful only if a student is interested in working for a profit-oriented business firm.

11. Private accountants are accountants who are not employees of business enterprises.

12. The study of accounting is not useful for a business career unless your career objective is to become an accountant.

13. A working knowledge of accounting is not relevant to a lawyer or an architect.

14. Expressing an opinion as to the fairness of the information presented in financial statements is a service performed by CPAs.

15. Accountants rely on a fundamental business concept—ethical behavior—in reporting financial information.

16. The primary accounting standard-setting body in the United States is the International AccountingStandards Board.

17. The Financial Accounting Standards Board is a part of the Securities and Exchange Commission.

18. The Securities and Exchange Commission overseas U.S. financial markets and accounting standard-setting bodies.

19. The cost and fair market value of an asset are the same at the time of acquisition and in all subsequent periods.

20. Even though a partnership is not a separate legal entity, for accounting purposes the partnership affairs should be kept separate from the personal activities of the owners.

21. A partnership must have more than one owner.

22. The economic entity assumption requires that the activities of an entity be kept separate and distinct from the activities of its owner and all other economic entities.

23. The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records.

24. In order to possess future service potential, an asset must have physical substance.

25. Owners’ claims to total business assets take precedence over the claims of creditors because owners invest assets in the business and are liable for losses.

26. The basic accounting equation states that Assets = Liabilities.

27. Accountantsrecord both internal and external transactions.

28. Internal transactions do not affect the basic accounting equation because they are economic events that occur entirely within one company.

29. The purchase of store equipment for cash reduces the owner’s equity by an equal amount.

30. The purchase of office equipment on credit increases total assets and total liabilities.

31. The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a company during a period.

32. Net income for the period is determined by subtracting total expenses and drawings from total revenues.

Additional True-False Questions

33. Identifying is the process of keeping a chronological diary of events measured in dollars and cents.

34. Management consulting includes examining the financial statements of companies and expressing an opinion as to the fairness of their presentation.

35. Accountantsdo not have to worry about issues of ethics.

36. At the time an asset is acquired, cost and value should be the same.

37. The monetary unit assumption requires that all dollar amounts be rounded to the nearest dollar.
38. The basic accounting equation is in balance when the creditor and ownership claims against the business equal the assets.

39. External transactions involve economic events between the company and some other enterprise or party.

40. In the owner’s equity statement, revenues are listed first, followed by expenses, and net income (or net loss).

Answers to True-False Statements

1 – 7

MULTIPLECHOICE QUESTIONS

41. Accountantsrefer to an economic event as a a. purchase.
b. sale.
c. transaction.
d. change in ownership.

42. The process of recording transactions has become more efficient because a. fewer events can be quantified in financial terms.
b. computers are used in processing business events.
c. more people have been hired to record business transactions. d. business events are recorded only at the end of the year.

43. Communicationof economic events is the part of the accounting process that involves a. identifying economic events.
b. quantifying transactions into dollars and cents. c. preparing accounting reports.
d. recording and classifying information.

44. Which of the following events cannot be quantified into dollars and cents and recorded as an accounting transaction?
a. The appointment of a new CPA firm to perform an audit. b. The purchase of a new computer.
c. The sale of store equipment. d. Payment of income taxes.

45. The use of computers in recording business events a. has made the recording process more efficient.
b. does not use the same principles as manual accounting systems.
c. has greatly impacted the identification stage of the accounting process. d. is economical only for large businesses.

46. The accounting process involves all of the following except
a. identifying economic transactions that are relevant to the business.
b. communicatingfinancial information to users by preparing financial reports. c. recording nonquantifiable economic events.
d. analyzing and interpreting financial reports.

47. The accounting process is correctly sequenced as a. identification, communication, recording.
b. recording, communication, identification. c. identification, recording, communication. d. communication, recording, identification.

48. Which of the following techniques are not used by accountants to interpret and report financial information?
a. Graphs
b. Special memos for each class of external users c. Charts
d. Ratios

49. Which of the following would not be considered an internal user of accounting data for the XYZ Company?
a. President of the company b. Production manager
c. Merchandise inventory clerk
d. President of the employees’ labor union

50. Which of the following would not be considered an external user of accounting data for the XYZ Company?
a. Internal Revenue Service Agent b. Management
c. Creditors d. Customers

51. Which of the following would not be considered internal users of accounting data for a company?
a. The president of a company b. The controller of a company c. Creditors of a company
d. Salesmen of the company

52. Which of the following is an external user of accounting information? a. Labor unions
b. Finance directors c. Company officers d. Managers

53. Which one of the following is not an external user of accounting information? a. Regulatory agencies
b. Customers c. Investors
d. All of these are external users

54. Bookkeeping differs from accounting in that bookkeeping primarily involves which part of the accounting process?
a. Identification
b. Communication c. Recording
d. Analysis

a55. All of the following are services offered by public accountants except a. budgeting.
b. auditing.
c. tax planning. d. consulting.

a56. Which list below best describes the major services performed by public accountants? a. Bookkeeping, mergers, budgets
b. Employee training, auditing, bookkeeping c. Auditing, taxation, management consulting
d. Cost accounting, production scheduling, recruiting
Accountingin Action 1 – 9

a57. Preparing tax returns and engaging in tax planning is performed by a. public accountants only.
b. private accountants only.
c. both public and private accountants. d. IRS accountants only.

a58. A private accountant can perform many activities in a business organization but would not work in
a. budgeting.
b. accounting information systems. c. external auditing.
d. tax accounting.

59. The origins of accounting are generally attributed to the work of a. Christopher Columbus.
b. Abner Doubleday. c. Luca Pacioli.
d. Leonardo da Vinci.

60. Financial accounting provides economic and financial information for all of the following except
a. creditors. b. investors. c. managers.
d. other external users.

61. The final step in solving an ethical dilemma is to
a. identify and analyze the principal elements in the situation. b. recognize an ethical situation.
c. identify the alternatives and weigh the impact of each alternative on stakeholders. d. recognize the ethical issues involved.

62. The first step in solving an ethical dilemma is to
a. identify and analyze the principal elements in the situation. b. identify the alternatives.
c. recognize an ethical situation and the ethical issues involved. d. weigh the impact of each alternative on various stakeholders.

63. Ethics are the standards of conduct by which one’s actions are judged as a. right or wrong.
b. honest or dishonest. c. fair or unfair.
d. all of these.

64. Generally accepted accounting principles are
a. income tax regulations of the Internal Revenue Service. b. standards that indicate how to report economic events. c. theories that are based on physical laws of the universe.
d. principles that have been proven correct by academic researchers.
1 – 10

65. The cost principle requires that when assets are acquired, they be recorded at a. appraisal value.
b. exchange price paid. c. selling price.
d. list price.

66. The cost of an asset and its fair market value are a. never the same.
b. the same when the asset is sold.
c. irrelevant when the asset is used by the business in its operations. d. the same on the date of acquisition.

67. The body of theory underlying accounting is not based on a. physical laws of nature.
b. concepts. c. principles. d. definitions.

68. The private sector organization involved in developing accounting principles is the a. Feasible Accounting Standards Body.
b. Financial Accounting Studies Board.
c. Financial Accounting Standards Board. d. Financial Auditors’ Standards Body.

69. The SEC and FASB are two organizations that are primarily responsible for establishing generally accepted accounting principles. It is true that
a. they are both governmental agencies.
b. the SEC is a private organization of accountants.
c. the SEC often mandates guidelines when no accounting principles exist. d. the SEC and FASB rarely cooperate in developing accounting standards.

70. GAAP stands for
a. Generally Accepted Auditing Procedures. b. Generally Accepted Accounting Principles. c. Generally Accepted Auditing Principles.
d. Generally Accepted Accounting Procedures.

71. Which of the following is not a characteristic of the cost principle? a. Reliability
b. Subjectivity c. Objectivity d. Verifiability

72. The ACE Company has five plants nationwide that cost $100 million. The current market value of the plants is $500 million. The plants will be recorded and reported as assets at a. $100 million.
b. $600 million. c. $400 million. d. $500 million.
Accountingin Action 1 – 11

73. All of the following are advantages cost has over other valuations except that it a. is reliable.
b. can be objectively measured. c. can be verified.
d. is relevant.

74. The proprietorship form of business organization a. must have at least three owners in most states.
b. representsthe largest number of businesses in the United States.
c. combines the records of the business with the personal records of the owner.
d. is characterized by a legal distinction between the business as an economic unit and the owner.

75. The economic entity assumption requires that the activities
a. of different entities can be combined if all the entities are corporations. b. must be reported to the Securities and Exchange Commission.
c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners.
d. of an entity be kept separate from the activities of its owner.

76. A business organized as a corporation
a. is not a separate legal entity in most states.
b. requires that stockholders be personally liable for the debts of the business. c. is owned by its stockholders.
d. terminates when one of its original stockholders dies.

77. The partnership form of business organization a. is a separate legal entity.
b. is a common form of organizationfor service-type businesses. c. enjoys an unlimited life.
d. has limited liability.

78. Which of the following is not an advantage of the corporate form of business organization? a. Limited liability of stockholders
b. Transferability of ownership
c. Unlimited personal liability for stockholders d. Unlimited life

79. A small neighborhood barber shop that is operated by its owner would likely be organized as a
a. joint venture. b. partnership. c. corporation. d. proprietorship.

80. Joan and Sara met at law school and decide to start a small law practice after graduation. They agree to split revenues and expenses evenly. The most common form of business organization for a business such as this would be a
a. joint venture. b. partnership. c. corporation. d. proprietorship.

81. Which of the following is true regarding the corporate form of business organization? a. Corporations are the most prevalent form of business organization.
b. Corporate businesses are generally smaller in size than partnerships and proprietor-ships.
c. The revenues of corporations are greater than the combined revenues of partnerships and proprietorships.
d. Corporations are separate legal entities organized exclusively under federal law.

82. A basic assumption of accounting that requires activities of an entity be kept separate from the activities of its owner is referred to as the
a. stand alone concept.
b. monetary unit assumption. c. corporate form of ownership. d. economic entity assumption.

83. Deb Smith is the proprietor (owner) of Smitty’s, a retailer of athletic apparel. When recording the financial transactions of Smitty’s, Deb does not record an entry for a car she purchased for personal use. Deb took out a personal loan to pay for the car. What accounting concept guides Deb’s behavior in this situation?
a. Pay back concept
b. Economic entity assumption c. Cash basis concept
d. Monetary unit assumption

84. A basic assumption of accounting assumes that the dollar is a. unrelated to business transactions.
b. a poor measure of economic activities.
c. the common unit of measure for all business transactions. d. useless in measuring an economic event.

85. The assumption that the unit of measure remains sufficiently constant over time is part of the
a. economic entity assumption. b. cost principle.
c. historical cost principle.
d. monetary unit assumption.

86. A business that enjoys limited liability is a a. proprietorship.
b. partnership. c. corporation.
d. sole proprietorship.

87. A problem with the monetary unit assumption is that a. the dollar has not been stable over time.
b. the dollar has been stable over time.
c. the dollar is a common medium of exchange.
d. it is impossible to account for international transactions.
1 – 13
88. The common characteristic possessed by all assets is a. long life.
b. great monetary value. c. tangible nature.
d. future economic benefit.

89. Owner’s equity is best depicted by the following: a. Assets = Liabilities.
b. Liabilities + Assets.
c. Residual equity + Assets. d. Assets – Liabilities.

90. The basic accounting equation may be expressed as a. Assets = Equities.
b. Assets – Liabilities = Owner’s Equity. c. Assets = Liabilities + Owner’s Equity. d. all of these.

91. Liabilities
a. are future economic benefits.
b. are existing debts and obligations. c. possess service potential.
d. are things of value used by the business in its operation.

92. Liabilities of a company would not include a. notes payable.
b. accounts payable. c. wages payable. d. cash.

93. Liabilities of a company are owed to a. debtors.
b. benefactors. c. creditors.
d. underwriters.

94. Owner’s equity can be described as a. creditorship claim on total assets. b. ownership claim on total assets. c. benefactor’s claim on total assets. d. debtor claim on total assets.

95. Owner’s equity is often referred to as a. residual equity.
b. leftovers. c. spoils.
d. second equity.

96. When an owner withdraws cash or other assets from a business for personal use, these withdrawals are termed
a. depletions.
b. consumptions. c. drawings.
d. a credit line.

97. Capital is
a. an owner’s permanent investment in the business. b. equal to liabilities minus owner’s equity.
c. equal to assets minus owner’s equity. d. equal to liabilities plus drawings.

98. Revenues would not result from a. sale of merchandise.
b. initial investment of cash by owner. c. performance of services.
d. rental of property.

99. Sources of increases to owner’s equity are a. additional investments by owners.
b. purchases of merchandise. c. withdrawals by the owner. d. expenses.

100. The basic accounting equation cannot be restated as a. Assets – Liabilities = Owner’s Equity.
b. Assets – Owner’s Equity = Liabilities. c. Owner’s Equity + Liabilities = Assets. d. Assets + Liabilities = Owner’s Equity.

101. Owner’s equity is decreased by all of the following except a. owner’s investments.
b. owner’s withdrawals. c. expenses.
d. owner’s drawings.

102. A net loss will result during a time period when a. liabilities exceed assets.
b. drawings exceed investments. c. expenses exceed revenues. d. revenues exceed expenses.

103. If total liabilities increased by $15,000 and owner’s equity increased by $5,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $20,000 decrease b. $20,000 increase c. $25,000 increase d. $30,000 increase
1 – 15

104. If total liabilities decreased by $15,000 and owner’s equity increased by $5,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $20,000 increase b. $10,000 decrease c. $10,000 increase d. $15,000 decrease

105. If total liabilities decreased by $25,000 and owner’s equity increased by $5,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $20,000 decrease b. $20,000 increase c. $25,000 increase d. $30,000 increase

106. If total liabilities decreased by $15,000 and owner’s equity decreased by $5,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $20,000 increase b. $10,000 increase c. $20,000 decrease d. $10,000 decrease

107. If total liabilities increased by $14,000 during a period of time and owner’s equity decreased by $6,000 during the same period, then the amount and direction (increase or decrease) of the period’s change in total assets is a(n)
a. $14,000 increase. b. $20,000 increase. c. $8,000 decrease. d. $8,000 increase.

108. The accounting equation for Goodboys Enterprises is as follows:

Assets Liabilities $120,000 = $60,000
Owner’s Equity + $60,000

If Goodboys purchases office equipment on account for $12,000, the accounting equation will change to
Assets Liabilties Owner’s Equity a. $120,000 = $60,000 + $60,000
b. $132,000 = $60,000 + $72,000 c. $132,000 = $66,000 + $66,000 d. $132,000 = $72,000 + $60,000

109. As of June 30, 2008, Houston Company has assets of $100,000 and owner’s equity of $5,000.What are the liabilities for Houston Company as of June 30, 2008?
a. $85,000 b. $90,000 c. $95,000 d. $100,000

110. Owner’s equity is increased by a. drawings.
b. revenues. c. expenses. d. liabilities.

111. Owner’s equity is decreased by a. assets.
b. revenues. c. expenses. d. liabilities.

112. If total liabilities increased by $4,000, then a. assets must have decreased by $4,000.
b. owner’s equity must have increased by $4,000.
c. assets must have increased by $4,000, or owner’s equity must have decreased by $4,000.
d. assets and owner’s equity each increased by $2,000.

113. Collection of a $500 Accounts Receivable
a. increases an asset $500; decreases an asset $500. b. increases an asset $500; decreases a liability $500.
c. decreases a liability $500; increases owner’s equity $500. d. decreases an asset $500; decreases a liability $500.

114. Revenues are
a. the cost of assets consumed during the period.
b. gross increases in owner’s equity resulting from business activities. c. the cost of services used during the period.
d. actual or expected cash outflows.

115. If an individual asset is increased, then
a. there must be an equal decrease in a specific liability. b. there must be an equal decrease in owner’s equity. c. there must be an equal decrease in another asset.
d. none of these is possible.

116. If services are rendered for credit, then a. assets will decrease.
b. liabilities will increase.
c. owner’s equity will increase. d. liabilities will decrease.

117. If expenses are paid in cash, then a. assets will increase.
b. liabilities will decrease.
c. owner’s equity will increase. d. assets will decrease.

118. If an owner makes a withdrawal of cash from a proprietorship, then a. there has been a violation of accounting principles.
b. owner’s equity will increase. c. owner’s equity will decrease.
d. there will be a new liability showing the owner owes money to the business.

119. If supplies that have been purchased are used in the course of business, then a. a liability will increase.
b. an asset will increase.
c. owner’s equity will decrease. d. owner’s equity will increase.

120. As of December 31, 2008, Anders Company has assets of $35,000 and owner’s equity of $20,000.What are the liabilities for Anders Company as of December 31, 2008?
a. $15,000 b. $10,000 c. $25,000 d. $20,000

121. Which of the following events is not a business transaction? a. Investment of cash by the owner
b. Hired employees
c. Incurred utility expenses for the month d. Earned revenue for services provided

122. Net income results when a. Assets > Liabilities.
b. Revenues = Expenses. c. Revenues > Expenses. d. Revenues < Expenses.

123. Owner’s capital at the end of the period is equal to
a. owner’s capital at the beginning of the period plus net income minus liabilities. b. owner’s capital at the beginning of the period plus net income minus drawings. c. net income.
d. assets plus liabilities.

124. A balance sheet shows
a. revenues, liabilities, and owner’s equity. b. expenses, drawings, and owner’s equity. c. revenues, expenses, and drawings.
d. assets, liabilities, and owner’s equity.

125. An income statement
a. summarizes the changes in owner’s equity for a specific period of time.
b. reports the changes in assets, liabilities, and owner’s equity over a period of time. c. reports the assets, liabilities, and owner’s equity at a specific date.
d. presents the revenues and expenses for a specific period of time.

126. If the owner’s equity account increases from the beginning of the year to the end of the year, then
a. net income is less than owner drawings. b. a net loss is less than owner drawings.
c. additional owner investments are less than net losses. d. net income is greater than owner drawings.

Use the following information for questions 127–129.

Jimmy’s Car Repair Shop started the year with total assets of $270,000 and total liabilities of $180,000. During the year, the business recorded $450,000 in car repair revenues, $255,000 in expenses, and Jimmy withdrew $45,000.

127. Jimmy’s Capital balance at the end of the year was a. $240,000.
b. $225,000. c. $285,000. d. $195,000.

128. The net income reported by Jimmy’s Car Repair Shop for the year was a. $150,000.
b. $195,000. c. $90,000. d. $405,000.

129. Jimmy’s Capital balance changed by what amount from the beginning of the year to the end of the year?
a. $45,000 b. $195,000 c. $90,000 d. $150,000

130. The balance sheet is frequently referred to as a. an operating statement.
b. the statement of financial position. c. the statement of cash flows.
d. the statement of owner’s equity.

131. The primary purpose of the statement of cash flows is to report a. a company’s investing transactions.
b. a company’sfinancing transactions.
c. information about cash receipts and cash payments of a company. d. the net increase or decrease in cash.

132. All of the financial statements are for a period of time except the a. income statement.
b. owner’s equity statement. c. balance sheet.
d. statement of cash flows.

133. The ending owner’s equity amount is shown on a. the balance sheet only.
b. the owner’s equity statement only.
c. both the income statement and the owner’s equity statement. d. both the balance sheet and the owner’s equity statement.

134. Benson Company began the year with owner’s equity of $175,000. During the year, the company recorded revenues of $250,000, expenses of $190,000, and had owner drawings of $20,000.What was Benson’s owner’s equity at the end of the year?
a. $255,000 b. $215,000 c. $405,000 d. $235,000

135. Ed Dexter began the Dexter Company by investing $20,000 of cash in the business. The company recorded revenues of $185,000, expenses of $160,000, and had owner drawings of $10,000.What was Dexter’s net income for the year?
a. $15,000 b. $35,000 c. $25,000 d. $45,000

136. Jenner Company began the year with owner’s equity of $15,000. During the year, Jenner received additional owner investments of $21,000, recorded expenses of $60,000, and had owner drawings of $4,000. If Jenner’s ending owner’s equity was $46,000, what was the company’s revenue for the year?
a. $70,000 b. $74,000 c. $91,000 d. $95,000

137. Janzen Company began the year with owner’s equity of $217,000. During the year, Janzen received additional owner investments of $294,000, recorded expenses of $840,000, and had owner drawings of $56,000. If Janzen’s ending owner’s equity was $531,000,what was the company’s revenue for the year?
a. $860,000 b. $916,000 c. $1,154,000 d. $1,210,000

Use the following information for questions 138-139.

Benny’s Repair Shop started the year with total assets of $100,000 and total liabilities of $80,000. During the year, the business recorded $210,000 in revenues, $110,000 in expenses, and owner drawings of $20,000.

138. Owner’s equity at the end of the year was a. $120,000.
b. $100,000. c. $80,000. d. $90,000.

139. The net income reported by Benny’s Repair Shop for the year was a. $80,000.
b. $100,000. c. $60,000. d. $190,000.

Use the following information for questions 140–141.

Berwick Company compiled the following financial information as of December 31, 2008:

Revenues
Berwick, Capital (1/1/08) Equipment
Expenses Cash
Berwick, Drawings Supplies Accountspayable Accountsreceivable
$140,000 105,000 40,000 125,000 35,000 10,000 5,000 20,000 15,000

140. Berwick’s assets on December 31, 2008 are a. $235,000.
b. $170,000. c. $80,000. d $95,000.

141. Berwick’s owner’s equity on December 31, 2008 is a. $105,000.
b. $110,000. c. $80,000. d. $120,000.

142. Ironton Company’s owner’s equity at the beginning of August 2008 was $300,000. During the month, the company earned net income of $60,000 and owner’s drawings were $20,000.At the end of August 2008, what is the balance in owner’s equity?
a. $260,000 b. $300,000 c. $340,000 d. $380,000

143. On January 1, 2008, Jackson Company reported owner’s equity of $470,000. During the year, the owner withdrew cash of $20,000. At December 31, 2008, the balance in owner’s equity was $500,000. What amount of net income or net loss would the company report for 2008?
a. Net income of $30,000 b. Net loss of $50,000
c. Net income of $10,000 d. Net income of $50,000

Use the following information for questions 144–146.

Jenkins Catering started the year with total assets of $20,000 and total liabilities of $5,000. During the year, the business recorded $16,000 in catering revenues and $8,000 in expenses. Jenkins made an additional investment of $3,000 and withdrew cash of $5,000 during the year.

144. The owner’s equity at the end of the year was a. $21,000.
b. $18,000. c. $8,000. d. $2,000.

145. The net income reported by Jenkins Catering for the year was a. $16,000.
b. $11,000. c. $8,000. d. $3,000.

146. Owner’s equity changed by what amount from the beginning of the year to the end of the year?
a. $15,000 b. $14,000 c. $6,000 d. $3,000

147. During the year 2008, Toronto Enterprises earned revenues of $45,000, had expenses of $25,000, purchased assets with a cost of $5,000 and had owner drawings of $3,000. Net income for the year is
a. $45,000. b. $20,000. c. $17,000. d. $15,000.

148. At October 1, Bennington Enterprises reported owner’s equity of $35,000. During October, no additional investments were made and the company earned net income of $4,000. If owner’s equity at October 31 totals $32,000, what amount of owner drawings were made during the month?
a. $0
b. $1,000 c. $3,000 d. $7,000

149. At October 1, Bennington Enterprises reported owner’s equity of $35,000. During October, no additional investments were made and the company posted a net loss of $3,000. If owner’s equity at October 31 totals $32,000, what amount of owner drawings were made during the month?
a. $0
b. $1,000 c. $3,000 d. $7,000

150. At October 1, Bennington Enterprises reported owner’s equity of $35,000. During October, the owner made additional investments of $2,000 and the company earned net income of $6,000. If owner’s equity at October 31 totals $40,000, what amount of owner drawings were made during the month?
a. $0
b. $3,000 c. $4,000 d. $5,000

151. At October 1, Bennington Enterprises reported owner’s equity of $35,000. During October, the owner made additional investments of $5,000 and the company posted a net loss of $3,000. If owner’s equity at October 31 totals $35,000, what amount of owner drawings were made during the month?
a. $0
b. $2,000 c. $3,000 d. $5,000

Additional Multiple Choice Questions

152. Which of the following is not part of the accounting process? a. Recording
b. Identifying
c. Financial decision making d. Communicating

153. The first part of the accounting process is a. communicating.
b. identifying. c. processing. d. recording.

154. Keeping a systematic, chronological diary of events that are measured in dollars and cents is called
a. communicating. b. identifying.
c. processing. d. recording.

155. Auditing is
a. the examination of financial statements by a CPA in order to express an opinion on their fairness.
b. a part of accounting that involves only recording of economic events.
c. an area of accounting that involves such activities as cost accounting, budgeting, and accounting information systems.
d. conducted by the Securities and Exchange Commission to ensure that registered financial statements are presentedfairly.

156. Internal users of accounting information include all of the following except a. company officers.
b. investors.
c. marketing managers. d. production supervisors.

157. The organization(s) primarily responsible for establishing generally accepted accounting principles is(are) the

FASB SEC a. no no b. yes no c. no yes d. yes yes

158. The primary accounting standard-setting body in the United States is the a. Financial Accounting Standards Board.
b. International Accounting Standards Board. c. Internal Revenue Service.
d. Securities and Exchange Commission.

159. A proprietorship is a business a. owned by one person.
b. owned by two or more persons.
c. organized as a separate legal entity under state corporation law. d. owned by a governmental agency.

160. A net loss will result during a time period when a. assets exceed liabilities.
b. assets exceed owner’s equity. c. expenses exceed revenues. d. revenues exceed expenses.

161. The Ryder’s Uptown Grill received a bill of $400 from the Erml Advertising Agency. The owner, John Ryder, is postponing payment of the bill until a later date. The effect on specific items in the basic accounting equation is
a. a decrease in Cash and an increase in Accounts Payable. b. a decrease in Cash and an increase in J. Ryder, Capital.
c. an increase in Accounts Payable and a decrease in J. Ryder, Capital. d. a decrease in Accounts Payable and an increase in J. Ryder, Capital.

162. James Company purchases $600 of equipment from Mundelein Inc. for cash. The effect on the components of the basic accounting equation of James Company is
a. an increase in assets and liabilities. b. a decrease in assets and liabilities. c. no change in total assets.
d. an increase in assets and a decrease in liabilities.

163. Morreale Beaver Company buys a $12,000 van on credit. The transaction will affect the a. income statement only.
b. balance sheet only.
c. income statement and owner’s equity statement only.
d. income statement, owner’s equity statement, and balance sheet.

Answers to Multiple Choice Questions

BRIEFEXERCISES

BE 164

Match the following external users of financial accounting information with the type of decision that user will make with the information.

a. Creditor b. Investor
c. Regulatory Agency
d Internal Revenue Service

(1) Is the company operating within prescribed guidelines?

(2) Is the company complying with tax laws?

(3) Is the company able to pay its debts?

(4) Is the company a good investment?
1 – 25

BE 165

Match the following terms and definitions.

a. Accounts receivable b. Creditor
c. Accounts payable d. Note payable

(1) (2) (3) (4)

BE 166

Indicatewhich of these items is an asset (A), liability (L) or owner’s equity (OE) account.

(1) (2) (3) (4) (5)

BE 167

Use the accounting equation to answer the following questions.
1. West Wind Sails Co. has total assets of $120,000 and total liabilities of $35,000. What is owner’s equity?
2. Mercy Family Center has total assets of $225,000 and owner’s equity of $105,000. What are total liabilities?
3. Cucina Med Restaurant has total liabilities of $40,000 and owner’s equity of $95,000. What are total assets?

BE 168

Determinethe missing items.

Assets = Liabilities + Owner’s Equity

$75,000 (b)
$84,000
$52,000 $28,000
(c)
(a) $34,000
$55,000

BE 169

Classifyeach of these items as an asset (A), liability (L), or owner’s equity (OE).

1. Accountsreceivable 2. Accountspayable 3. Bonds, Capital
4. Office supplies 5. Utilities expense 6. Cash
7. Note payable 8. Equipment

BE 170

Identifythe impact on the accounting equation of each of the following transactions. 1. Purchase office supplies on account.
2. Paid secretary weekly salary.
3. Purchased office furniture for cash.
4. Received monthly utility bill to be paid at later time.

BE 171

Balance sheet amounts as of December 31, 2008 for Lesley’s Tutoring Service are listed below. Prepare a balance sheet in good form.

AccountsPayable $ 200 AccountsReceivable 1,000 Cash 500 Lesley, Capital ?

BE 172

Identify whether the following items would be reported on the income statement (IS) or balance sheet (BS).

1. Cash
2. Service Revenue 3. Notes Payable 4. Interest Expense
5. Accounts Receivable

BE 173

Use the following information to calculate for the year ended December 31, 2008 (a) net income (net loss), (b) ending owner’s equity, and (c) total assets.

Supplies $ 1,000 Operatingexpenses 12,000 Accountspayable 9,000 Accountsreceivable 3,000 BeginningCapital 5,000
Revenues Cash Drawings Notes payable Equipment
$23,000 15,000 1,000 1,000 6,000

BE 174

Listed below in alphabetical order are the balance sheet items of Mowen Company at December 31, 2008. Prepare a balance sheet and include a complete heading.

Accountspayable Accountsreceivable Building
Cash
Mowen, Capital Office equipment
$ 6,000 15,000 96,000 11,000 121,000 5,000

EXERCISES
Ex. 175
Below is a list of important abbreviations widely used in business. For each abbreviation give the full designation.

1. CPA

2. IRS

3. FBI

4. FASB

5. GAAP

6. SEC

Ex. 176

Determinethe missing amount for each of the following.
Assets = Liabilities + Owner’s Equity 1. (a) $50,000 $95,000
2. $125,000 (b) $85,000 3. $140,000 $65,000 (c)

Ex. 177

For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability, or owner’s equity item.
Code Asset A Liability L Owner’s Equity OE

1. Rent Expense

2. Office Equipment

3. AccountsPayable

4. Dan Pine, Capital

5. InsuranceExpense
6. Cash

7. AccountsReceivable

8. Dan Pine, Drawing

9. Service Revenue

10. Notes Payable

Ex. 178

At the beginning of the year, Yates Company had total assets of $550,000 and total liabilities of $200,000. Answer the following questions viewing each situation as being independent of the others.
(1) If total assets increased $200,000 during the year, and total liabilities decreased $75,000, what is the amount of owner’s equity at the end of the year?

(2) During the year, total liabilities increased $230,000 and owner’s equity decreased $90,000. What is the amount of total assets at the end of the year?

(3) If total assets decreased $40,000 and owner’s equity increased $130,000 during the year, what is the amount of total liabilities at the end of the year?

Ex. 179

Jimmy’sCarpet Cleaning has the following balance sheet items:

Van AccountsPayable Cash
Cleaning Supplies Accounts Receivable

Identifywhich items are
Notes Payable J. Fine, Capital J. Fine, Drawing
Equipment

(1) Assets (2) Liabilities
(3) Owner’s Equity

Ex. 180

On June 1, 2008, Gore Company prepared a balance sheet that shows the following:

Assets(no cash)………………………………………………………. Liabilities…………………………………………………………………. Owner’sEquity………………………………………………………….
$100,000 70,000 30,000

Shortlythereafter, all of the assets were sold for cash. How would the balance sheet appear immediately after the sale of the assets for cash for each of the following cases?

Cash Received for Balances Immediately After Sale

the Assets Assets – Liabilities = Owner’s Equity

Cash A $110,000 $ $ $

Cash B

Cash C

Ex. 181

At the beginning of 2008, Clemens Company had total assets of $550,000 and total liabilities of $330,000.Answer each of the following questions.

1. If total assets increased $60,000 and owner’s equity decreased $90,000 during the year, determine the amount of total liabilities at the end of the year.

2. During the year, total liabilities decreased $75,000 and owner’s equity increased $50,000. Computethe amount of total assets at the end of the year.

3. If total assets decreased $100,000 and total liabilities increased $55,000 during the year, determine the amount of owner’s equity at the end of the year.

Ex. 182

Computethe missing amount in each category of the accounting equation.

Assets

(a) $349,000 (b) $223,000
(c) $ ?
Liabilities

$ ?

$ 79,000

$253,000
Owner’s Equity $143,000
$ ?

$325,000

Ex. 183

From the following list of selected accounts taken from the records of Grayson Clinic, identify those that would appear on the balance sheet.

a. Meg Grayson, Capital b. Patient Revenue
c. Land
d. Wages Expense e. Notes Payable
f. AccountsPayable g. Cash
h. Rent Expense
i. Medical Supplies j. Utilities Expense

Ex. 184

For each of the following, indicate whether the transaction affects revenue (R), expense (E), owner’s drawing (D), owner’s investment (I), or no effect on owner’s equity (NOE).

1. Made an investment to start the business. 2. Billed customers for services performed. 3. Purchased equipment on account.
4. Paid monthly rent.
5. Withdrew cash for personal use.

Ex. 185

Presentedbelow is a balance sheet for Jim Dixon Lawn Service at December 31, 2008.

JIM DIXON LAWN SERVICE Balance Sheet December 31, 2008

Assets

Cash Accountsreceivable Supplies Equipment

Total assets

$13,000 6,000 9,000 11,000

$39,000
Liabilities and Owner’s Equity

Liabilities Accountspayable Notes payable
Owner’sequity
Jim Dixon, Capital
Total liabilities & owner’s equity

$ 8,000 15,000

16,000 $39,000

The following additional data are available for the year which began on January 1: All expenses (excluding supplies expense) total $6,000. Supplies on January 1, were $11,000 and $5,000 of supplies were purchased during the year. Net income for the year was $8,000 and drawings were $6,000.

Instructions
Determinethe following: (Show all computations.) 1. Supplies used during the year.
2. Total expenses for the year. 3. Service revenues for the year.
4. Jim Dixon’s capital balance on January 1.

Ex. 186

Analyze the transactions of a business organized as a proprietorship described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate a decrease.

Assets = Liabilities + Owner’s Equity

1. Received cash for services rendered.

2. Purchased office equipment on credit.

3. Paid employees’ salaries.

4. Received cash from customer in payment on account.

5. Paid telephone bill for the month.

6. Paid for office equipment purchased in transaction 2.

7. Purchased office supplies on credit.

8. Owner withdrew cash for personal expenses.

9. Obtained a loan from the bank.

10. Billed customers for services rendered.

Ex. 187

For each of the following, indicate whether the transaction increased (+), decreased (-), or had no effect (NE) on assets, liabilities, and owner’s equity using the following format.

Assets= Liabilities + Owner’s Equity

1. Made an investment to start the business. 2. Billed customers for services performed. 3. Purchased equipment on account.
4. Withdrew cash for personal use.
5. Paid for equipment purchased in 3. above.

Ex. 188

Ron Benes decides to open a cleaning and laundry service near the local college campus that will operate as a sole proprietorship. Analyze the following transactions for the month of June in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded. It is not necessary to identify the cause of changes in owner’s equity.

Transactions

(1) Ron Benes invests $20,000 in cash to start a cleaning and laundry business on June 1.

(2) Purchased laundry equipment for $5,000 paying $3,000 in cash and the remainder due in 30 days.

(3) Purchased laundry supplies for $1,200 cash.

(4) Received a bill from Campus News for $300 for advertising in the campus newspaper. (5) Cash receipts from customers for cleaning and laundry amounted to $1,500.
(6) Paid salaries of $200 to student workers.

(7) Billed the Tiger Football Team $200 for cleaning and laundry services.

(8) Paid $300 to Campus News for advertising that was previously billed in Transaction 4. (9) Ron Benes withdrew $900 from the business for living expenses.
(10) Incurred utility expenses for month on account, $400.

Ex. 188 (cont.)

Trans- Accounts Laundry Laundry Accounts R. Benes action Cash + Receivable + Supplies + Equipment = Payable + Capital
(1) —————————————————————————————————————————— Balance
(2) —————————————————————————————————————————— Balance
(3) —————————————————————————————————————————— Balance
(4) —————————————————————————————————————————— Balance
(5) —————————————————————————————————————————— Balance
(6) —————————————————————————————————————————— Balance
(7) —————————————————————————————————————————— Balance
(8) —————————————————————————————————————————— Balance
(9) —————————————————————————————————————————— Balance
(10) —————————————————————————————————————————— Totals

Ex. 189

For each of the following, describe a transaction that will have the stated effect on the elements of the accounting equation.

(a) Increase one asset and decrease another asset. (b) Increase an asset and increase a liability.
(c) Decrease an asset and decrease a liability.

(d) Increase an asset and increase owner’s equity.

(e) Increase one asset, decrease one asset, and increase a liability.

Ex. 190

The following transactions represent part of the activities of Lyon Company for the first month of its existence. Indicate the effect of each transaction upon the total assets of the business by one of the following phrases: increased total assets, decreased total assets, or no change in total assets.
(a) The owner invested cash to start the business. (b) Purchased a computer for cash.
(c) Purchased office equipment with money borrowed from the bank. (d) Paid the first month’s utility bill.
(e) Collected an accounts receivable.
(f) Owner withdrew cash from the business.

Ex. 191

Selected transactions for Barden Company are listed below. List the number of the transaction and then describe the effect of each transaction on assets, liabilities, and owner’s equity.

Sample: Made initial cash investment in the business.
The answer would be—Increase in assets and increase in owner’s equity.

1. Paid monthly utility bill.
2. Purchased new display case for cash.
3. Paid cash for repair work on security system. 4. Billed customers for services performed.
5. Received cash from customers billed in 4. 6. Withdrew cash for owner’s personal use. 7. Incurred advertising expenses on account. 8. Paid monthly rent.
9. Received cash from customers when service was rendered.

Ex. 192

A service proprietorship shows five transactions summarized below. The effect of each transaction on the accounting equation is shown, and also the new balance of each item in the equation. For each transaction (a) to (e) write an explanation of the nature of the transaction.

Accounts Equip- Accounts
Cash + Rec. + ment + Land + Building = Payable + Capital ——————————————————————————————————————————
$5,000 $6,500 $10,000 $7,500 $50,000 $3,000 $76,000 a) –2,000 –2,000
3,000 6,500 10,000 7,500 50,000 1,000 76,000

b) +1,000 – 1,000 4,000 5,500

c)
4,000 5,500

d) +2,500
6,500 5,500

e) +3,000 $6,500 $8,500

10,000 7,500

+ 5,000
15,000 7,500

15,000 7,500

$15,000 $7,500

50,000

50,000

50,000

$50,000

1,000 76,000

+5,000
6,000 76,000

+ 2,500 6,000 78,500

+ 3,000 $6,000 $81,500

Ex. 193

There are ten transactions listed below. Match the transactions that have the identical effect on the accounting equation. You should end up with 5 matches.

a. Receive cash from customers on account. b. Initial cash contribution by an owner.
c. Pay cash to reduce an accounts payable. d. Purchase supplies for cash.
e. Pay cash to reduce a notes payable. f. Purchase supplies on account.
g. Additional cash contribution by an owner. h. Purchase equipment with a note payable. i. Pay utilities with cash.
j. Owner withdraws money from the business for personal use.

Ex. 194

Prepare an income statement, an owner’s equity statement, and a balance sheet for the dental practice of Ted Terner, DDS, from the items listed below for the month of September.

Ted Terner, Capital, September 1 $42,000 Accountspayable 7,000 Equipment 30,000 Service revenue 25,000 Ted Terner, Drawings 6,000 Dental supplies expense 3,500 Cash 6,000 Utilities expense 700 Dental supplies 2,800 Salaries expense 9,000 Accountsreceivable 14,000 Rent expense 2,000
TED TERNER, DDS IncomeStatement
For the Month Ended September 30, 2008 —————————————————————————————————————————— Revenues $

Expenses $ $

Total expenses $

Net income $

TED TERNER, DDS Owner’s Equity Statement
For the Month Ended September 30, 2008 —————————————————————————————————————————— Ted Terner, Capital, September 1 $
Add:

$

Less:

$

Ex. 194 (cont.)

TED TERNER, DDS Balance Sheet September 30, 2008
—————————————————————————————————————————— Assets
$

Total assets

$

Liabilities and Owner’s Equity

Liabilities

$

Owner’sEquity $

Total liabilities and owner’s equity $

Ex. 195

Indicatewhether the following items would appear on the balance sheet (BS), income statement (IS), or owner’s equity statement (OE).

1. Advertising expense 2. Accounts receivable 3. Jones, drawing
4. Rent revenue
5. Salaries payable 6. Supplies

Ex. 196

Listed below in alphabetical order are the balance sheet items of Hoyle Company at December 31, 2008. Prepare a balance sheet and include a complete heading.

AccountsPayable AccountsReceivable Building
Cash
Joe Hoyle, Capital Land
Office Equipment
$ 14,000 15,000 46,000 17,000 120,000 52,000 4,000

Ex. 197

One item is omitted in each of the following summaries of balance sheet and income statement data for three different sole proprietorships, X, Y, and Z. Determine the amounts of the missing items, identifying each proprietorshipby letter.
Proprietorship
X Y Z
Beginningof the Year:
Assets $380,000 $150,000 $199,000 Liabilities 250,000 105,000 168,000
End of the Year:
Assets 450,000 185,000 195,000 Liabilities 280,000 95,000 169,000
During the Year:
AdditionalInvestment by the owner ? 79,000 80,000

Withdrawalsby the owner Revenue
Expenses
90,000 195,000 170,000
83,000 ?
? 187,000 113,000 175,000

Ex. 198

Indicate in the space provided by each item whether it would appear on the Income Statement (IS), Balance Sheet (BS), or Owner’s Equity Statement (OE):

a. Service Revenue

b. Utilities Expense

c. Cash

d. AccountsPayable

e. Office Supplies

f. Wage Expense
g. AccountsReceivable

h. Gray, Capital (ending)

i. Equipment

j. AdvertisingExpense

k. Gray, Drawing

l. Notes Payable

Ex. 199

Don Harder was reviewing his business activities at the end of the year (2008) and decided to prepare an Owner’s Equity Statement. At the beginning of the year his assets were $500,000 and his liabilities were $200,000. At the end of the year the assets had grown to $950,000 but liabilities had also increased to $350,000. The net income for the year was $420,000. Don had withdrawn $120,000 during the year for his personal use.

Preparean Owner’s Equity Statement in good form.

Ex. 200

At September 1, the balance sheet accounts for Debbie’s Restaurant were as follows:

AccountsPayable AccountsReceivable Building
Cash Furniture
$ 3,800 Land
1,600 Debbie, Capital 68,000 Notes Payable 10,000 Supplies 18,700
$33,000 ?
48,000 6,600

The following transactions occurred during the next two days:

Debbie invested an additional $22,000 cash in the business. The accounts payable were paid in full. (No payment was made on the notes payable.)

Instructions
Preparea balance sheet at September 3, 2008.

Ex. 201

Presentedbelow are balance sheet items for Higgins Company at December 31, 2008.

Accountspayable Accountsreceivable Cash
Equipment Higgins, capital Notes payable
$35,000 36,000 27,000 52,000 30,000 50,000

Computeeach of the following: 1. Total assets.
2. Total liabilities.

COMPLETION STATEMENTS

202. Accounting is an information system that identifies, , and

the economic events of an organization.

203. The mere recording of economic events is called , and is just one part of the process.

204. The three major services rendered by a certified public accountant are ,

, and management .

205. Accountants who are employees of business enterprises are referred to as

accountants.

206. A common set of standards that provides guidelines to accountants and indicates how to report economic events is called .

207. The principle states that assets should be recorded at the value exchangedat the time the asset is acquired.

208. The assumption requires that the activities of an entity be kept separatefrom the activities of its owner.

209. The residual claim on total assets of a business is known as and is equal to total assets minus total liabilities.

210. Drawings owner’s equity but are not expenses.

211. The reports the assets, liabilities, and owner’s equity of a business enterprise at a specific date.

MATCHING

212. Match the items below by entering the appropriate code letter in the space provided.

A. CPA
B. Budgeting C. SEC
D. Proprietorship
E. EconomicEntity Assumption
F. Corporation G. Assets
H. Equities I. Expenses
J. Transaction

1. Activitiesof an entity must be kept separate from its owner’s activities.

2. Consumedassets or services.

3. Ownershipis limited to one person.

4. Offersexpert accounting service to the general public.

5. Creditor and ownership claims against the assets of the business.

6. A separate legal entity under state laws.

7. Government agency that can mandate accounting rules.

8. Quantifyinggoals and objectives.

9. Futureeconomic benefits.

10. Economicevents recorded by accountants.

SHORT-ANSWERESSAY QUESTIONS
S-AE 213
The accounting profession provides many career opportunities for individuals. Identify the major fields that exist in accounting and comment on the major functions performed by individuals in each of these areas.

S-AE 214

The framework used to record and summarize the economic activities of a business enterprise is referred to as the accounting equation. State the basic accounting equation and define its major components. How are business transactions and financial statements related to the accounting equation?

S-AE 215

Your friend, James, made this comment:

My major is biology and I plan to research for cures for major illnesses. Thus, I have no need to study accounting.

What is your response to James?

S-AE 216

The information needs of a specific user of financial accounting information depends upon the kinds of decisions that user makes. Identify the major users of accounting information and discuss what questionsfinancial accounting information answers for each group of users.

S-AE 217 (Ethics)

Sam Dryer owns and operates Sam’s Burgers, a small fast food store, located at the edge of City College campus in Newton, Ohio. After several very profitable years, Sam’s Burgers began to have problems. Most of the problems were related to Sam’s expansion of the eating area in the restaurant without corresponding increases in the food preparation area. Sam does not have the cash or financial backing to expand further. He has therefore decided to sell his business.

Jerry Finney is interested in purchasing the business. However, he is located in another city and is unfamiliar with Newton. He has asked Sam why he is selling Sam’s Burgers. Sam replies that his elderly mother requires extra care, and that his brother needs help in his manufacturing business. Both are true, but neither is his primary reason for selling. Sam reasons that Jerry should not have asked him anyway, since profitable businesses don’t come up for sale.

Required:
1. Identify the stakeholders in this situation.

2. Did Sam act ethically in not revealing fully his reasons for selling the business? Why or why not?

S-AE 218 (Communication)

Sue Havens is a friend of yours from high school. She decided to become a beautician after leaving high school, rather than to attend college. She recently opened her own shop, and has contracted her services to a local hospital. She is paid a monthly fee for her services, and receives a small gratuity from each of the patients.

She has just received her first set of financial statements from her accountant. She is quite upset. The statements show a cash balance of $3,600 at the end of the month, but a net income of only $500. She has written you a letter, asking you whether such a situation is possible, or whether she should find another accountant.
1 – 53

S-AE 218 (cont.)

Required:
Write a short letter to your friend. Use proper form. Answer her question completely, but briefly.

CHAPTER 2

THERECORDING PROCESS

CHAPTERSTUDY OBJECTIVES

1. Explain what an account is and how it helps in the recording process.

2. Define debits and credits and explain their use in recording business transactions.

3. Identify the basic steps in the recording process.

4. Explain what a journal is and how it helps in the recording process.

5. Explain what a ledger is and how it helps in the recording process.

6. Explain what posting is and how it helps in the recording process.

7. Prepare a trial balance and explain its purposes.

TRUE-FALSESTATEMENTS

1. A new account is opened for each transaction entered into by a business firm.

2. The recording process becomes more efficient and informative if all transactions are recorded in one account.

3. When the volume of transactions is large, recording them in tabular form is more efficient than using journals and ledgers.

4. An account is often referred to as a T-account because of the way it is constructed.

5. A debit to an account indicates an increase in that account.

6. If a revenue account is credited, the revenue account is increased.

7. The normal balance of all accounts is a debit.

8. Debit and credit can be interpreted to mean increase and decrease, respectively.

9. The double-entry system of accounting refers to the placement of a double line at the end of a column of figures.

10. A credit balance in a liability account indicates that an error in recording has occurred.

11. The drawing account is a subdivision of the owner’s capital account and appears as an expense on the income statement.

12. Revenues are a subdivision of owner’s capital.

13. Under the double-entry system, revenues must always equal expenses.

14. Transactions are entered in the ledger first and then they are analyzed in terms of their effect on the accounts.

15. Business documents can provide evidence that a transaction has occurred.

16. Each transaction must be analyzed in terms of its effect on the accounts before it can be recorded in a journal.

17. Transactions are entered in the ledger accounts and then transferred to journals.

18. All business transactions must be entered first in the general ledger.

19. A simple journal entry requires only one debit to an account and one credit to an account.

20. A compound journal entry requires several debits to one account and several credits to one account.

21. Transactions are recorded in alphabetic order in a journal.

22. A journal is also known as a book of original entry.

23. The complete effect of a transaction on the accounts is disclosed in the journal.

24. The account titles used in journalizing transactions need not be identical to the account titles in the ledger.

25. The chart of accounts is a special ledger used in accounting systems.

26. A general ledger should be arranged in the order in which accounts are presented in the financial statements, beginning with the balance sheet accounts.

27. The number and types of accounts used by different business enterprises are the same if generally accepted accounting principles are being followed by the enterprises.

28. Posting is the process of proving the equality of debits and credits in the trial balance.

29. After a transaction has been posted, the reference column in the journal should not be blank.

30. A trial balance does not prove that all transactions have been recorded or that the ledger is correct.

Additional True-False Questions

31. The double-entry system is a logical method for recording transactions and results in equal debits and credits for each transaction.

32. The normal balance of an expense is a credit.

33. The journal provides a chronologicalrecord of transactions.

34. The ledger is merely a bookkeeping device and therefore does not provide much useful data for management.

35. The chart of accounts is a listing of the accounts and the account numbers which identify their location in the ledger.

36. The primary purpose of a trial balance is to prove the mathematical equality of the debits and credits after posting.

37. The trial balance will not balance when incorrect account titles are used in journalizing or posting.

MULTIPLECHOICE QUESTIONS

38. An account consists of a. one part.
b. two parts. c. three parts. d. four parts.

39. The left side of an account is a. blank.
b. a description of the account. c. the debit side.
d. the balance of the account.

40. Which one of the following is not a part of an account? a. Credit side
b. Trial balance c. Debit side
d. Title

41. An account is a part of the financial information system and is described by all except which one of the following?
a. An account has a debit and credit side. b. An account is a source document.
c. An account may be part of a manual or a computerized accounting system. d. An account has a title.

42. The right side of an account a. is the correct side.
b. reflects all transactions for the accounting period.
c. shows all the balances of the accounts in the system. d. is the credit side.

43. An account consists of
a. a title, a debit balance, and a credit balance. b. a title, a left side, and a debit balance.
c. a title, a debit side, and a credit side.
d. a title, a right side, and a debit balance.

44. A T-account is
a. a way of depicting the basic form of an account.
b. what the computer uses to organize bytes of information. c. a special account used instead of a trial balance.
d. used for accounts that have both a debit and credit balance.

45. Credits
a. decrease both assets and liabilities.
b. decrease assets and increase liabilities. c. increase both assets and liabilities.
d. increase assets and decrease liabilities.
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46. A debit to an asset account indicates a. an error.
b. a credit was made to a liability account. c. a decrease in the asset.
d. an increase in the asset.

47. The normal balance of any account is the a. left side.
b. right side.
c. side which increasesthat account. d. side which decreases that account.

48. The double-entry system requires that each transaction must be recorded a. in at least two different accounts.
b. in two sets of books.
c. in a journal and in a ledger.
d. first as a revenue and then as an expense.

49. A credit is not the normal balance for which account listed below? a. Capital account
b. Revenue account c. Liability account d. Drawing account

50. Which one of the following represents the expanded basic accounting equation?
a. Assets = Liabilities + Owner’s Capital + Owner’s Drawings – Revenue – Expenses. b. Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenues. c. Assets – Liabilities – Owner’s Drawings = Owner’s Capital + Revenues – Expenses. d. Assets = Revenues + Expenses – Liabilities.

51. Which of the following correctly identifies normal balances of accounts? a. Assets Debit
Liabilities Credit Owner’s Equity Credit Revenues Debit Expenses Credit

b. Assets Debit Liabilities Credit Owner’s Equity Credit Revenues Credit Expenses Credit

c. Assets Credit Liabilities Debit Owner’s Equity Debit Revenues Credit Expenses Debit

d. Assets Debit Liabilities Credit Owner’s Equity Credit Revenues Credit Expenses Debit

52. The best interpretation of the word credit is the a. offset side of an account.
b. increase side of an account. c. right side of an account.
d. decrease side of an account.

53. In recording an accounting transaction in a double-entry system
a. the number of debit accounts must equal the number of credit accounts.
b. there must always be entries made on both sides of the accounting equation. c. the amount of the debits must equal the amount of the credits.
d. there must only be two accounts affected by any transaction.

54. An accounting convention is best described as a. an absolute truth.
b. an accounting custom. c. an optional rule.
d. something that cannot be changed.

55. A debit is not the normal balance for which account listed below? a. Drawing
b. Cash
c. Accounts Receivable d. Service Revenue

56. An accountant has debited an asset account for $1,000 and credited a liability account for $500.What can be done to complete the recording of the transaction?
a. Nothing further must be done.
b. Debit an owner’s equity account for $500. c. Debit another asset account for $500.
d. Credit a different asset account for $500.

57. An accountant has debited an asset account for $1,000 and credited a liability account for $500. Which of the following would be an incorrect way to complete the recording of the transaction?
a. Credit an asset account for $500.
b. Credit another liability account for $500.
c. Credit an owner’s equity account for $500. d. Debit an owner’s equity account for $500.

58. Which of the following is not true of the terms debit and credit? a. They can be abbreviated as Dr. and Cr.
b. They can be interpreted to mean increase and decrease. c. They can be used to describe the balance of an account. d. They can be interpreted to mean left and right.

59. An account will have a credit balance if the a. credits exceed the debits.
b. first transaction entered was a credit. c. debits exceed the credits.
d. last transaction entered was a credit.
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60. For the basic accounting equation to stay in balance, each transaction recorded must a. affect two or less accounts.
b. affect two or more accounts.
c. always affect exactly two accounts.
d. affect the same number of asset and liability accounts.

61. Which of the following statements is true?
a. Debits increase assets and increase liabilities. b. Credits decrease assets and decrease liabilities. c. Credits decrease assets and increase liabilities. d. Debits decrease liabilities and decrease assets.

62. Assets normally show a. credit balances. b. debit balances.
c. debit and credit balances. d. debit or credit balances.

63. An awareness of the normal balances of accounts would help you spot which of the following as an error in recording?
a. A debit balance in the drawing account b. A credit balance in an expense account c. A credit balance in a liabilities account d. A credit balance in a revenue account

64. If a company has overdrawn its bank balance, then a. its cash account will show a debit balance.
b. its cash account will show a credit balance.
c. the cash account debits will exceed the cash account credits.
d. it cannot be detected by observing the balance of the cash account.

65. Which account below is not a subdivision of owner’s equity? a. Drawing
b. Revenues c. Expenses d. Liabilities

66. When an owner makes a withdrawal
a. it doesn’t have to be cash, it could be another asset. b. the drawing account will be increased with a credit.
c. the capital account will be directly increased with a debit. d. the drawing account will be decreased with a debit.

67. The drawing account
a. appears on the income statement along with the expenses of the business. b. must show transactions every accounting period.
c. is increased with debits and decreased with credits. d. is not a proper subdivision of owner’s equity.

68. Which of the following statements is not true? a. Expenses increase owner’s equity.
b. Expenses have normal debit balances. c. Expenses decrease owner’s equity.
d. Expenses are a negative factor in the computation of net income.

69. A credit to a liability account
a. indicates an increase in the amount owed to creditors. b. indicates a decrease in the amount owed to creditors. c. is an error.
d. must be accompanied by a debit to an asset account.

70. In the first month of operations, the total of the debit entries to the cash account amounted to $900 and the total of the credit entries to the cash account amounted to $500. The cash account has a(n)
a. $500 credit balance. b. $800 debit balance. c. $400 debit balance. d. $400 credit balance.

71. Dawson’s Delivery Service purchased equipment for $2,500. Dawson paid $500 in cash and signed a note for the balance. Dawson debited the Equipment account, credited Cash and
a. nothing further must be done.
b. debited the Dawson, Capital account for $2,000. c. credited another asset account for $500.
d. credited a liability account for $2,000.

72. Grayton Industries purchased supplies for $1,000. They paid $500 in cash and agreed to pay the balance in 30 days. The journal entry to record this transaction would include a debit to an asset account for $1,000, a credit to a liability account for $500. Which of the following would be the correct way to complete the recording of the transaction?
a. Credit an asset account for $500.
b. Credit another liability account for $500.
c. Credit the Grayton, Capital account for $500. d. Debit the Grayton, Capital account for $500.

73. On January 14, Franco Industries purchased supplies of $500 on account. The entry to record the purchase will include
a. a debit to Supplies and a credit to Accounts Payable.
b. a debit to Supplies Expense and a credit to Accounts Receivable. c. a debit to Supplies and a credit to Cash.
d. a debit to Accounts Receivable and a credit to Supplies.

74. On June 1, 2008, Delbert Inc. reported a cash balance of $12,000. During June, Delbert made deposits of $3,000 and made disbursements totalling $16,000. What is the cash balance at the end of June?
a. $1,000 debit balance b. $15,000 debit balance c. $1,000 credit balance d. $4,000 credit balance
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75. At January 1, 2008, Burton Industries reported owner’s equity of $130,000. During 2008, Burton had a net loss of $30,000 and owner drawings of $20,000. At December 31, 2008, the amount of owner’s equity is
a. $130,000. b. $140,000. c. $100,000. d. $80,000.

76. Able Company pays its employees twice a month, on the 7th and the 21st. On June 21, Able Company paid employee salaries of $4,000. This transaction would
a. increase owner’s equity by $4,000.
b. decrease the balance in Salaries Expense by $4,000. c. decrease net income for the month by $4,000.
d. be recorded by a $4,000 debit to Salaries Payable and a $4,000 credit to Salaries Expense.

77. In the first month of operations for Pocket Industries, the total of the debit entries to the cash account amounted to $8,000 ($4,000 investment by the owner and revenues of $4,000). The total of the credit entries to the cash account amounted to $5,000 (purchase of equipment $2,000 and payment of expenses $3,000). At the end of the month, the cash account has a(n)
a. $2,000 credit balance. b. $2,000 debit balance. c. $3,000 debit balance. d. $3,000 credit balance.

78 Denton Company showed the following balances at the end of its first year:

Cash $ 7,000 Prepaid insurance 700 Accounts receivable 3,500 Accounts payable 2,800 Notes payable 4,200 Denton, Capital 1,400 Denton, Drawing 700 Revenues 21,000 Expenses 17,500

What did Denton Company show as total credits on its trial balance? a. $30,100
b. $29,400 c. $28,700 d. $30,800

79. Cerner Company showed the following balances at the end of its first year:

Cash $ 5,000 Prepaid insurance 500 Accounts receivable 2,500 Accounts payable 2,000 Notes payable 3,000 Cerner, Capital 1,000 Cerner, Drawing 500 Revenues 15,000 Expenses 12,500

What did Cerner Company show as total credits on its trial balance? a. $21,500
b. $21,000 c. $20,500 d. $22,000

80. During February 2008, its first month of operations, the owner of Rutwing Enterprises invested cash of $25,000. Rutwing had cash revenues of $4,000 and paid expenses of $7,000. Assuming no other transactions impacted the cash account, what is the balance in Cash at February 28?
a. $3,000 credit b. $22,000 debit c. $29,000 debit d. $18,000 credit

81. At January 31, 2008, the balance in Prieto Inc.’s supplies account was $250. During February, Prieto purchased supplies of $300 and used supplies of $400. At the end of February, the balance in the supplies account should be
a. $250 debit. b. $350 credit. c. $950 debit. d. $150 debit.

82. At December 1, 2008, Marco Company’s accounts receivable balance was $1,200. During December, Marco had credit revenues of $5,000 and collected accounts receivable of $4,000.At December 31, 2008, the accounts receivable balance is
a. $1,200 debit. b. $2,200 debit. c. $6,200 debit. d. $2,200 credit.

83. At October 1, 2008, Deet Industries had an accounts payable balance of $30,000. During the month, the company made purchases on account of $25,000 and made payments on account of $40,000. At October 31, 2008, the accounts payable balance is
a. $30,000. b. $10,000. c. $15,000. d. $40,000.

84. During 2008, its first year of operations, Jane’s Bakery had revenues of $60,000 and expenses of $33,000. The business had owner drawings of $18,000. What is the amount of owner’s equity at December 31, 2008?
a. $0
b. $18,000 debit c. $9,000 credit d. $27,000 credit

85. On July 7, 2008, Reethink Enterprises performed cash services of $1,400. The entry to record this transaction would include
a. a debit to Service Revenue of $1,400.
b. a credit to Accounts Receivable of $1,400. c. a debit to Cash of $1,400.
d. a credit to Accounts Payable of $1,400.

86. At September 1, 2008, Foli Co. reported owner’s equity of $136,000. During the month, Foli generated revenues of $20,000, incurred expenses of $12,000, purchased equipment for $5,000 and withdrew cash of $2,000. What is the amount of owner’s equity at September 30, 2008?
a. $136,000 b. $8,000 c. $137,000
d. $142,000

87. The final step in the recording process is to a. analyze each transaction.
b. enter the transaction in a journal. c. prepare a trial balance.
d. transfer journal information to ledger accounts.

88. The usual sequence of steps in the transactionrecording process is: a. journal Æ analyze Æ ledger.
b. analyze Æ journal Æ ledger. c. journal Æ ledger Æ analyze. d. ledger Æ journal Æ analyze.

89. In recording business transactions, evidence that an accounting transaction has taken place is obtained from
a. business documents.
b. the Internal Revenue Service. c. the public relations department. d. the SEC.

90. After a business transaction has been analyzed and entered in the book of original entry, the next step in the recording process is to transfer the information to
a. the company’s bank. b. owner’s equity.
c. ledger accounts.
d. financial statements.

91. The first step in the recording process is to a. prepare financial statements.
b. analyze each transaction for its effect on the accounts. c. post to a journal.
d. prepare a trial balance.

92. Evidence that would not help with determining the effects of a transaction on the accounts would be a(n)
a. cash register sales tape. b. bill.
c. advertising brochure. d. check.

93. After transaction information has been recorded in the journal, it is transferred to the a. trial balance.
b. income statement.
c. book of original entry. d. ledger.

94. The usual sequence of steps in the recording process is to analyze each transaction, enter the transaction in the
a. journal, and transfer the information to the ledger accounts. b. ledger, and transfer the information to the journal.
c. book of accounts, and transfer the information to the journal.
d. book of original entry, and transfer the information to the journal.

95. The final step in the recording process is to transfer the journal information to the a. trial balance.
b. financial statements. c. ledger.
d. file cabinets.

96. The recording process occurs a. once a year.
b. once a month.
c. repeatedly during the accounting period.
d. infrequently in a manual accounting system.

97. A compound journal entry involves a. two accounts.
b. three accounts.
c. three or more accounts. d. four or more accounts.

98. A journal provides
a. the balances for each account.
b. information about a transaction in several different places. c. a list of all accounts used in the business.
d. a chronological record of transactions.

99. When three or more accounts are required in one journal entry, the entry is referred to as a a. compound entry.
b. triple entry.
c. multiple entry. d. simple entry.

100. When two accounts are required in one journal entry, the entry is referred to as a a. balanced entry.
b. simple entry. c. posting.
d. nominal entry.

101. Another name for journal is a. listing.
b. book of original entry. c. book of accounts.
d. book of source documents.

102. The standard format of a journal would not include a. a reference column.
b. an account title column. c. a T-account.
d. a date column.

103 Transactions in a journal are initially recorded in a. account number order.
b. dollar amount order. c. alphabetical order. d. chronological order.

104 A journal is not useful for
a. disclosing in one place the complete effect of a transaction. b. preparing financial statements.
c. providing a record of transactions. d. locating and preventing errors.

105 A complete journal entry does not show a. the date of the transaction.
b. the new balance in the accounts affected by the transaction. c. a brief explanation of the transaction.
d. the accounts and amounts to be debited and credited.

106. The name given to entering transaction data in the journal is a. chronicling.
b. listing. c. posting.
d. journalizing.

107. The standard form of a journal entry has the a. debit account entered first and indented. b. credit account entered first and indented.
c. debit account entered first at the extreme left margin. d. credit account entered first at the extreme left margin.

108. When journalizing, the reference column is a. left blank.
b. used to reference the source document. c. used to reference the journal page.
d. used to reference the financial statements.

109. On June 1, 2008 Diane Leno buys a copier machine for her business and finances this purchase with cash and a note. When journalizing this transaction, she will
a. use two journal entries. b. make a compound entry. c. make a simple entry.
d. list the credit entries first, which is proper form for this type of transaction.

110. Which of the following journal entries is recordedcorrectly and in the standard format? a. Wages Expense ………………………………………………………… 600
Cash ………………………………………………………………….. 1,500 Advertising Expense ………………………………………………….. 900

b. Wages Expense ………………………………………………………… 600 AdvertisingExpense ………………………………………………….. 900
Cash ………………………………………………………………….. 1,500

c. Cash ……………………………………………………………………….. 1,500
Wages Expense …………………………………………………… 600 AdvertisingExpense …………………………………………….. 900

d. Wages Expense ………………………………………………………… 600 AdvertisingExpense ………………………………………………….. 900
Cash . …………………………………………………………………. 1,500

111. The ledger should be arranged in a. alphabetical order.
b. chronological order. c. dollar amount order.
d. financial statement order.

112. The entire group of accounts maintained by a company is called the a. chart of accounts.
b. general journal. c. general ledger. d. trial balance.

113. An accounting record of the balances of all assets, liabilities, and owner’s equity accounts is called a
a. compound entry. b. general journal. c. general ledger.
d. chart of accounts.

114. The usual ordering of accounts in the general ledger is
a. assets, liabilities, owner’s capital, drawings, revenues, and expenses. b. assets, liabilities, drawings, owner’s capital, expenses, and revenues. c. liabilities, assets, owner’s capital, revenues, expenses, and drawings. d. owner’s capital, assets, liabilities, drawings, expenses, and revenues.

115. Management could determine the amounts due from customers by examining which ledger account?
a. Service Revenue b. Accounts Payable
c. Accounts Receivable d. Supplies

116. The ledger accounts should be arranged in a. chronological order.
b. alphabetical order.
c. financial statement order.
d. order of appearance in the journal.

117. A three column form of account is so named because it has columns for a. debit, credit, and account name.
b. debit, credit, and reference. c. debit, credit, and balance. d. debit, credit, and date.

118. On August 13, 2008, Dudbury Enterprises purchased office equipment for $1,000 and office supplies of $200 on account. Which of the following journal entries is recorded correctly and in the standard format?
a. Office Equipment………………………………………………………… 1,000 AccountPayable …………………………………………………… 1,200
Office Supplies…………………………………………………………… 200

b. Office Equipment………………………………………………………… 1,000 Office Supplies…………………………………………………………… 200
AccountsPayable………………………………………………….. 1,200

c. AccountsPayable……………………………………………………….. 1,200
Office Equipment…………………………………………………… 1,000 Office Supplies……………………………………………………… 200

d. Office Equipment………………………………………………………… 1,000 Office Supplies…………………………………………………………… 200
AccountsPayable………………………………………………….. 1,200

119. Tritan Company received a cash advance of $500 from a customer. As a result of this event,
a. assets increased by $500.
b. owner’s equity increased by $500. c. liabilities decreased by $500.
d. both a and b.

120. Anderson Company purchased equipment for $1,800 cash. As a result of this event, a. owner’s equity decreased by $1,800.
b. total assets increased by $1,800. c. total assets remained unchanged. d. Both a and b.

121. Franklin Company provided consulting services and billed the client $2,500. As a result of this event,
a. assets remained unchanged. b. assets increased by $2,500.
c. owner’s equity increased by $2,500. d. Both b and c.

122. The first step in posting involves
a. entering in the appropriate ledger account the date, journal page, and debit amount shown in the journal.
b. writing in the journal the account number to which the debit amount was posted. c. writing in the journal the account number to which the credit amount was posted.
d. entering in the appropriate ledger account the date, journal page, and credit amount shown in the journal.

123. A chart of accounts usually starts with a. asset accounts.
b. expense accounts. c. liability accounts. d. revenue accounts.

124. The procedure of transferring journal entries to the ledger accounts is called a. journalizing.
b. analyzing. c. reporting. d. posting.

125. A number in the reference column in a general journal indicates a. that the entry has been posted to a particular account.
b. the page number of the journal.
c. the dollar amount of the transaction. d. the date of the transaction.

126. A chart of accounts for a business firm a. is a graph.
b. indicates the amount of profit or loss for the period.
c. lists the accounts and account numbers that identify their location in the ledger. d. shows the balance of each account in the general ledger.

127. Posting
a. should be performed in account number order.
b. accumulates the effects of journalized transactions in the individual accounts. c. involves transferring all debits and credits on a journal page to the trial balance.
d. is accomplished by examining ledger accounts and seeing which ones need updating.
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128. After journal entries are posted, the reference column a. of the general journal will be blank.
b. of the general ledger will show journal page numbers. c. of the general journal will show “Dr” or “Cr”.
d. of the general ledger will show account numbers.

129. The explanation column of the general ledger a. is completed without exception.
b. is nonexistent.
c. is used infrequently. d. shows account titles.

130. A numbering system for a chart of accounts a. is prescribed by GAAP.
b. is uniform for all businesses.
c. usually starts with income statement accounts. d. usually starts with balance sheet accounts.

131. The first step in designing a computerized accounting system is the creation of the a. general ledger.
b. general journal. c. trial balance.
d. chart of accounts.

132. The steps in preparing a trial balance include all of the following except a. listing the account titles and their balances.
b. totaling the debit and credit columns.
c. proving the equality of the two columns.
d. transferring journal amounts to ledger accounts.

133. A trial balance may balance even when each of the following occurs except when a. a transaction is not journalized.
b. a journal entry is posted twice.
c. incorrect accounts are used in journalizing. d. a transposition error is made.

134. A list of accounts and their balances at a given time is called a(n) a. journal.
b. posting.
c. trial balance.
d. income statement.

135. If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates
a. no errors have been made. b. no errors can be discovered.
c. that all accounts reflect correct balances.
d. the mathematical equality of the accounting equation.

136. A trial balance is a listing of a. transactions in a journal. b. the chart of accounts.
c. general ledger accounts and balances. d. the totals from the journal pages.

137. Customarily, a trial balance is prepared a. at the end of each day.
b. after each journal entry is posted. c. at the end of an accounting period.
d. only at the inception of the business.

138. A trial balance would only help in detecting which one of the following errors? a. A transaction that is not journalized
b. A journal entry that is posted twice
c. Offsetting errors are made in recording the transaction
d. A transposition error when transferring the debit side of journal entry to the ledger

Additional Multiple Choice Questions

139. An account is an individual accounting record of increases and decreases in specific a. liabilities.
b. assets.
c. expenses.
d. assets, liabilities, and owner’s equity items.

140. A debit is not the normal balance for which of the following? a. Asset account
b. Drawing account c. Expense account d. Capital account

141. Which of the following rules is incorrect? a. Credits decrease the drawing account. b. Debits increase the capital account.
c. Credits increase revenue accounts. d. Debits decrease liability accounts.

142. Which of the following statements is false? a. Revenues increase owner’s equity.
b. Revenues have normal credit balances.
c. Revenues are a positive factor in the computation of net income. d. Revenues are increased by debits.

143. Which of the following is the correct sequence of steps in the recording process? a. Posting, journalizing, analyzing
b. Journalizing, analyzing, posting c. Analyzing, posting, journalizing d. Analyzing, journalizing, posting

144. Which of the following is false about a journal?
a. It discloses in one place the complete effects of a transaction. b. It provides a chronological record of transactions.
c. It helps to prevent or locate errors because debit and credit amounts for each entry can be readily compared.
d. It keeps in one place all the information about changes in specific account balances.

145. Meenen Company purchases equipment for $1,200 and supplies for $400 from Sanders Co. for $1,600 cash. The entry for this transaction will include a
a. debit to Equipment $1,200 and a debit to Supplies Expense $400 for Sanders. b. credit to Cash for Sanders.
c. credit to Accounts Payable for Meenen.
d. debit to Equipment $1,200 and a debit to Supplies $400 for Meenen.

146. Jack Wiser withdraws $300 cash from his business for personal use. The entry for this transaction will include a debit of $300 to
a. Jack Wiser, Drawing. b. Jack Wiser, Capital.
c. Owner’s Salary Expense. d. Salaries Expense.

147. On October 3, Nick Carter, a carpenter, received a cash payment for services previously billed to a client. Nick paid his telephone bill, and he also bought equipment on credit. For the three transactions, at least one of the entries will include a
a. credit to Nick Carter, Capital. b. credit to Notes Payable.
c. debit to Accounts Receivable. d. credit to Accounts Payable.

148. Posting of journal entries should be done in a. account number order.
b. alphabetical order. c. chronological order. d. dollar amount order.

149. The chart of accounts is a
a. list of accounts and their balances at a given time.
b. device used to prove the mathematical accuracy of the ledger.
c. listing of the accounts and the account numbers which identify their location in the ledger.
d. required step in the recording process.

150. Which of the following is incorrect regarding a trial balance? a. It proves that the debits equal the credits after posting. b. It proves that the company has recorded all transactions.
c. A trial balance uncovers errors in journalizing and posting.
d. A trial balance is useful in the preparation of financial statements.

151. A trial balance will not balance if a. a journal entry is posted twice.
b. a wrong amount is used in journalizing.
c. incorrect account titles are used in journalizing. d. a journal entry is only partially posted.

Answers to Multiple Choice Questions

BRIEFEXERCISES

BE 152

At June 1, 2008, Groober Industries had an accounts receivable balance of $12,000. During the month, the company performed credit services of $25,000 and collected accounts receivable of $27,000.What is the balance in accounts receivable at June 30, 2008?

BE 153

For each of the following accounts indicate the effect of a debit or a credit on the account and the normal balance. Increase (+), Decrease (–).

Debit_ _Credit_ Normal Balance 1. Salary expense.
2. Accounts receivable. 3. Service revenue.
4. Smith, Capital. 5. Smith, Drawing.

BE 154

For each of the following transactions of Aggie Inc., identify the account to be debited and the account to be credited.
1. Purchased 18-month insurance policy for cash. 2. Paid weekly payroll.
3. Purchased supplies on account.
4. Received utility bill to be paid at later date.

BE 155

Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transaction.
1. John Amos invested $20,000 cash to start an appliance repair business. 2. Hired an employee to be paid $400 per week, starting tomorrow.
3. Paid two years’ rent in advance, $7,200. 4. Paid the worker’s weekly wage.
5. Recorded revenue earned and received for the week, $1,500.

BE 156

Identifythe impact on the accounting equation of the following transactions. 1. Purchased 36-month insurance policy for cash.
2. Purchased supplies on account.
3. Received utility bill to be paid at later date. 4. Paid utility bill previouslyaccrued.

BE 157

Journalize the following transactions for J.C. Tyme Company for June 2008, the company’s first month of operations. You may omit explanationsfor the transactions.
1. Purchased equipment on account for $3,000.
2. Billed customers $5,000 for services performed.
3. Made payment of $1,500 on account for equipment purchased earlier in month. 4. Collected $2,900 on customer accounts.

BE 158

Use the information in BE 157 to answer the following questions. 1. What is the balance in Accounts Payable at June 30, 2008?
2. What is the balance in Accounts Receivable at June 30, 2008?

BE 159

The transactions of the Got It Now Store are recorded in the general journal below. You are to post the journal entries to T-accounts.

General Journal

Date AccountTitles

2008
Aug. 5 AccountsReceivable Service Revenue
10 Cash
Service Revenue 19 Rent Expense
Cash 25 Cash
AccountsReceivable
Debit Credit

2,800
2,800 3,000
3,000 1,000
1,000 1,400
1,400

BE 159 (cont.)

General Ledger

Cash Accounts Receivable

Service Revenue Rent Expense

BE 160

Preparea trial balance from the ledger accounts of Quentin Company as of January 31, 2008.

AccountsPayable AccountsReceivable Cash Quentin,Capital Quentin,Drawing
$ 500 Rent Expense $ 500 2,000 Service Revenue 3,000 1,000 Supplies 200 2,200 Wages Expense 1,000 1,000

BE 161

Preparea corrected trial balance for Miller Company. All accounts should have a normal balance.

MILLER COMPANY Trial Balance
For the Quarter Ended 3/31/08

Cash AccountsReceivable Prepaid Insurance Equipment AccountsPayable UnearnedRevenue Notes Payable Miller, Capital
Miller, Drawing Service Revenue Salaries Expense Utilities Expense Rent Expense
Debit Credit
$ 25,000
$30,000 2,500
60,000
15,000 10,000
20,000 54,000 1,500 50,000
15,000 5,000
10,000
$127,500 $170,500

EXERCISES Ex. 162
The chart of accounts used by Kwick Copy Company is listed below. You are to indicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate boxes.

CHART OF ACCOUNTS

101 Cash 209 UnearnedRevenue 112 AccountsReceivable 301 T. Kwick, Capital 125 Paper Supplies 306 T. Kwick, Drawing 157 Copy Machines 400 PhotocopyRevenue 200 Note Payable 610 AdvertisingExpense 201 AccountsPayable 729 Rent Expense
——————————————————————————————————————————— Number(s) Number(s) of account(s) of account(s)
debited credited 1. Tom Kwick invests $90,000 cash to start the
business. ———————————————————————————————————————————
2. Purchased three photocopy machines for $200,000,paying $50,000 cash and signing a 5-year, 10% note for the remainder.
——————————————————————————————————————————— 3. Purchased $5,000 paper supplies on credit.
——————————————————————————————————————————— 4. Cash photocopy revenue amounted to $7,000.
——————————————————————————————————————————— 5. Paid $500 cash for radio advertising.
——————————————————————————————————————————— 6. Paid $800 on account for paper supplies
purchased in transaction 3. ———————————————————————————————————————————
7. Owner withdrew $1,500 from the business for personal expenses.
——————————————————————————————————————————— 8. Paid $1,200 cash for rent for the current month.
——————————————————————————————————————————— 9. Received $2,000 cash advance from a customer
for future copying. ———————————————————————————————————————————
10. Billed a customer for $450 for photocopy work done.
———————————————————————————————————————————

Ex. 163

Under a double-entry system, show how the entry in each statement is entered in the ledger by using debit or credit to indicate the increase or decrease in the affected account.

Debit or Credit

1. An increase in Salary Expense.

2. A decrease in Accounts Payable.

3. An increase in Prepaid Insurance.

4. An increase in Owner’s Capital.

5. A decrease in Office Supplies.

6. An increase in Owner’s Drawings.

7. An increase in Service Revenue.

8. A decrease in Accounts Receivable.

9. An increase in Rent Expense.

10. A decrease in Store Equipment.

Ex. 164

For the accounts listed below, indicate if the normal balance of the account is a debit or credit.

NormalBalance
Accounts Debit or Credit

1. Service Revenue

2. Rent Expense

3. Accounts Receivable

4. Accounts Payable

5. Owner’s Capital

6. Office Supplies

7. Insurance Expense

8. Owner’s Drawing

9. Office Building

10. Notes Payable

Ex. 165

For each of the following accounts, indicate the effects of (a) a debit and (b) the normal account balance.
1. Notes Payable
2. Prepaid Insurance 3. Salaries Expense 4. Repair Revenue 5. Equipment
6. D. Snider, Capital

Ex. 166

During an accounting period, a business has numerous transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries.

(1) AdvertisingExpense (2) Service Revenue (3) AccountsPayable
(4) AccountsReceivable (5) R. Minton, Capital
(6) R. Minton, Drawing (7) Cash
(8) Salaries Expense (9) Notes Payable
(10) InsuranceExpense

Ex. 167

Eight transactions are recorded in the following T-accounts:

CASH
(1) 35,000 (7) 22,500
(2) 3,500 (3) 1,950 (4) 2,225 (6) 8,000 (8) 4,500

SUPPLIES
(3) 1,950

KEN ORSON, CAPITAL

(1) 35,000

ACCOUNTS PAYABLE

(6) 8,000
(2) 10,000

SALARIES EXPENSE

(4) 2,225

ACCOUNTS RECEIVABLE
(5) 27,500
(7) 22,500

EQUIPMENT
(2) 13,500

SERVICE REVENUE

(5) 27,500

KEN ORSON, DRAWING

(8) 4,500

Indicate for each debit and each credit: (a) whether an asset, liability, capital, drawing, revenue, or expense account was affected and (b) whether the account was increased (+) or (–) decreased. Answers should be presented in the following chart form:

Transaction Account Debited Account Credited No. Type Effect Type Effect
——————————————————————————————————————————— (1) (Example) Asset + Capital +
——————————————————————————————————————————— (2)
——————————————————————————————————————————— (3)
——————————————————————————————————————————— (4)
——————————————————————————————————————————— (5)
——————————————————————————————————————————— (6)
——————————————————————————————————————————— (7)
——————————————————————————————————————————— (8)
———————————————————————————————————————————

Ex. 168

For each of the following accounts indicate (a) the type of account (Asset, Liability, Owner’s Equity, Revenue, Expense), (b) the debit and credit effects, and (c) the normal account balance.

Example 0. Cash

a. Asset account
b. Debit increases, credit decreases c. Normalbalance – debit

Accounts
1. AccountsPayable 5. Service Revenue 2. AccountsReceivable 6. InsuranceExpense 3. K. Brown, Capital 7. Notes Payable
4. K. Brown, Drawing 8. Equipment

Ex. 169

For each transaction given, enter in the tabulation given below a “D” for debit and a “C” for credit to reflect the increases and decreases of the assets, liabilities, and owner’s equity accounts. In some cases there may be a “D” and a “C” in the same box.

Transactions:

1. Owner invests cash in the business.
2. Pays insurance in advance for six months. 3. Pays secretary’s salary.
4. Purchases office supplies on account. 5. Pays electricity bill.
6. Borrows money from local bank. 7. Makes payment on account.
8. Receives cash due from customers. 9. Provides services on account.
10. Owner withdraws assets from the business.

Transaction#

1
2
3
4
5
6
7
8
9
10

Assets

Liabilities

Owner’s Capital Account

Owner’s Drawing

Revenues

Expenses

Ex. 170

Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions.
1. The owner, Mike Derby, invests $35,000 in cash in starting a real estate office operating as a sole proprietorship.
2. Purchased $400 of office supplies on credit.
3. Purchased office equipment for $8,000, paying $2,000 in cash and signed a 30-day, $6,000, note payable.
4. Real estate commissions billed to clients amount to $4,000. 5. Paid $700 in cash for the current month’s rent.
6. Paid $200 cash on account for office supplies purchased in transaction 2. 7. Received a bill for $600 for advertising for the current month.
8. Paid $2,200 cash for office salaries.
9. Derby withdrew $1,200 from the business for living expenses.
10. Received a check for $3,000 from a client in payment on account for commissions billed in transaction 4.

Ex. 171

Identifythe accounts to be debited and credited for each of the following transactions.

1. The owner, Don Smith, invested $10,000 cash in the business. 2. Purchased supplies on account for $1,000.
3. Billed customers $2,000 for services performed. 4. Paid salaries of $900.

Ex. 172

Transactions for Ed Petry Company for the month of October are presented below. Journalize each transaction and identify each transaction by number. You may omit journal explanations.

1. Invested an additional $40,000 cash in the business. 2. Purchased land costing $28,000 for cash.
3. Purchased equipment costing $12,000 for $3,000 cash and the remainder on credit. 4. Purchased supplies on account for $800.
5. Paid $1,000 for a one-year insurance policy. 6. Received $3,000 cash for services performed.
7. Received $4,000 for services previously performed on account. 8. Paid wages to employees for $2,500.
9. Petry withdrew $1,000 cash from the business.

Ex. 173

Match the basic step in the recording process described by each of the following statements.

A. Analyze each transaction
B. Enter each transaction in a journal
C. Transfer journal information to ledger accounts

1. This step is called posting.

2. Business documents are examined to determine the effects of transactions on the accounts.

3. This step is called journalizing.

Ex. 174

Preparejournal entries for each of the following transactions.

1. Performed services for customers on account $5,000. 2. Purchased $20,000 of equipment on account.
3. Received $3,000 from customers in transaction 1.
4. The owner, Bob Jones, withdrew $1,000 cash for personal use.

Ex. 175

Glynn Company is a newly organized business. The list of accounts to be opened in the general ledger is as follows:
AccountsPayable Prepaid Insurance Accounts Receivable Prepaid Rent Accumulated Depreciation Rent Expense Cash Salary Expense Depreciation Expense Salaries Payable Equipment Service Revenue InsuranceExpense Supplies
Matt Glynn, Capital Supplies Expense Matt Glynn, Drawing

Instructions

Organizethe accounts into the order in which they should appear in the ledger of Glynn Company and assign account numbers. Use the following system to assign account numbers.

1—199 200—299 300—399 400—499 500—599
Assets Liabilities Owner’s Equity Revenues Expenses

Ex. 176

The transactions of Nester Delivery Service are recorded in the general journal below. You are to post the journal entries to the accounts in the general ledger. After all entries have been posted, you are to prepare a trial balance on the form provided.

General Journal J1 ———————————————————————————————————————————
Date Account Titles and Explanation Ref. Debit Credit

——————————————————————————————————————————— 2008
Sept. 1 Cash 20,000
Nester, Capital 20,000 (Invested cash in business)

4 Delivery Trucks 30,000
Cash 10,000 Notes Payable 20,000
(Paid cash and issued 2-year, 9%, note for delivery trucks)

8 Rent Expense 1,000
Cash 1,000 (Paid September rent)

15 Prepaid Insurance 400
Cash 400 (Paid one-year liability insurance)

18 Cash 2,500
Delivery Revenue 2,500 (Received cash for delivery services)

20 Salaries Expense 500
Cash 500 (Paid salaries for current period)

25 Utility Expense 100 AccountsPayable 100
(Received a bill for September utilities)

30 Nester, Drawing 1,500
Cash 1,500 (Withdrew cash for personal use)

30 Accounts Receivable 2,000
Delivery Revenue 2,000 (Billed customer for delivery service)

Ex. 176 (cont.)

General Ledger

Cash Account No. 101 ———————————————————————————————————————————

Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

AccountsReceivable Account No. 112 ———————————————————————————————————————————

Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Prepaid Insurance Account No. 130 ———————————————————————————————————————————

Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

DeliveryTrucks Account No. 155 ———————————————————————————————————————————

Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
The Recording Process 2 – 43

Ex. 176 (cont.)

AccountsPayable Account No. 201 ———————————————————————————————————————————

Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Notes Payable Account No. 205 ———————————————————————————————————————————

Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Nester, Capital Account No. 301 ———————————————————————————————————————————

Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Nester, Drawing Account No. 306 ———————————————————————————————————————————

Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

DeliveryRevenue Account No. 400 ———————————————————————————————————————————

Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Ex. 176 (cont.)

Rent Expense Account No. 719 ———————————————————————————————————————————

Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

Salaries Expense Account No. 726 ———————————————————————————————————————————

Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

UtilityExpense Account No. 735 ———————————————————————————————————————————

Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————

NESTER DELIVERY SERVICE Trial Balance September 30, 2008
———————————————————————————————————————————

Accounts Debit Credit ———————————————————————————————————————————

Ex. 177

The bookkeeper for Reagan Lawn Mowing Service made a number of errors in journalizing and posting as described below:

1. A debit posting to accounts receivable for $500 was omitted.

2. A payment of accounts payable for $600 was credited to cash and debited to accounts receivable.

3. A credit to accounts receivable for $650 was posted as $65.

4. A cash purchase of equipment for $693 was journalized as a debit to equipment and a credit to notes payable. The credit posting was made for $639.

5. A debit posting of $300 for purchase of supplies was credited to supplies. 6. A debit to repairs expense for $491 was posted as $419.
7. A debit posting for wages expense for $900 was made twice.

8. A cash purchase of supplies for $700 was journalized and posted as a debit to supplies for $70 and a credit to cash for $70.

Ex. 177 (cont.)

Instructions
For each error, indicate (a) whether the trial balance will balance; if the trial balance will not balance, indicate (b) the amount of the difference, and (c) the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error (1) is given as an example.
(A) (B) (C)
Error In Balance Difference Larger Column 1 No $500 Credit

Ex. 178

Post the following transactions to T-accounts and determine each account’s ending balance.

1. Supplies………………………………………………………………………………. 2,500 AccountsPayable………………………………………………………….. 2,500

2. AccountsReceivable……………………………………………………………… 4,000

Service Revenue…………………………………………………………… 4,000

3. Cash …………………………………………………………………………………… 3,000 AccountsReceivable……………………………………………………… 3,000

4. AccountsPayable …………………………………………………………………. 1,000 Cash……………………………………………………………………………. 1,000

Ex. 179

The trial balance of Gagne Company shown below does not balance.

GAGNECOMPANY Trial Balance June 30, 2008
———————————————————————————————————————————
Debit Credit
Cash……………………………………………………………………………………. $ 2,600 AccountsReceivable……………………………………………………………… 7,600 Supplies……………………………………………………………………………….. 600 Equipment……………………………………………………………………………. 8,300 AccountsPayable………………………………………………………………….. $ 9,766 Gagne, Capital……………………………………………………………………… 1,952 Gagne, Drawing ……………………………………………………………………. 1,500
Service Revenue…………………………………………………………………… 15,200 Wages Expense……………………………………………………………………. 3,800
Repair Expense…………………………………………………………………….. 1,600 Totals…………………………………………………………………………… $26,000 $26,918

An examination of the ledger and journal reveals the following errors:

1. Each of the above listed accounts has a normal balance per the general ledger.

2. Cash of $360 received from a customer on account was debited to Cash $630 and credited to AccountsReceivable $630.

3. A withdrawal of $300 by the owner was posted as a credit to Gagne, Drawing, $300 and credit to Cash $300.

4. A debit of $300 was not posted to Wages Expense.

5. The purchase of equipment on account for $700 was recorded as a debit to Repair Expense and a credit to Accounts Payable for $700.

6. Services were performed on account for a customer, $510, for which Accounts Receivable was debited $510 and Service Revenue was credited $51.

7. A payment on account for $225 was credited to Cash for $225 and credited to Accounts Payable for $252.

Ex. 179 (cont.)

Instructions

Preparea correct trial balance.

Ex. 180

Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others.

1. A payment of $800 to a creditor was recorded by a debit to Accounts Payable of $80 and a credit to Cash of $800.

2. A $480 payment for a printer was recorded by a debit to Computer Equipment of $48 and a credit to Cash for $48.

3. An account receivable in the amount of $2,500 was collected in full. The collection was recorded by a debit to Cash for $2,500 and a debit to Accounts Payable for $2,500.

4. An account payable was paid by issuing a check for $800. The payment was recorded by debiting Accounts Payable $800 and crediting Accounts Receivable $800.

Ex. 181

Jane Carr and Associates is a financial planning service. The account balances at December 31, 2008 are shown by the following alphabetical list:

AccountsPayable AccountsReceivable Automobiles Building
Cash Computer
ComputerSoftware Land
Jane Carr, Capital Notes Payable Notes Receivable Office Furniture Office Supplies TechnicalLibrary
$ 5,000 19,000 27,500 120,000 18,500 22,000 4,200 42,000 179,700 95,000 8,100 15,400 800 2,200

Instructions

Preparea trial balance with the accounts arranged in financial statement order.

Ex. 182

The ledger accounts of the Oak Street Gym at June 30, 2008 are shown below:

AccountsPayable $ 9,100 AccountsReceivable 1,050 Building 51,400 Bob Green, Capital 63,100 Cash 15,000 ExerciseEquipment 18,900 Weight Equipment 22,000 Notes Payable 49,000 Office Supplies 350 Office Equipment 2,000 Bob Green, Drawing 10,500

Instructions
Prepare a trial balance with the ledger accounts arranged in the proper financial statement order. Include the appropriate heading.

Ex. 183

The ledger account balances for Jenkins Company are listed below.

AccountsPayable $ 8,000 AccountsReceivable 7,000 Cash 13,000 Jenkins, Capital 11,000 Jenkins, Drawing 4,000 Repair Revenue 40,000 Salaries Expense 25,000 UnearnedRevenue 2,000 Utilities Expense 12,000

Instructions

Preparea trial balance in proper form for Jenkins at December 31, 2008.

COMPLETION STATEMENTS

184. An is a record of increases and decreases in specific assets, liabilities, and owner’s equity items.

185. The process of entering an amount on the left side of an account is called

the account, and making an entry on the right side is called the account.

186. , , and have debit normal account balances whereas , , and
have credit normal account balances.

187. The four subdivisions of owner’s equity are: , ,

, and .

188. The basic steps in the recording process are: each transaction, enter the transaction in a , and transfer the information to appropriate accounts in the .

189. A sales slip, a check, and a cash register tape are examples of used as evidence that a transaction has taken place.

190. An accounting record where transactions are initially recorded in chronological order is called a .

191. When three or more accounts are required in one journal entry, the entry is referred to as a entry.

192. The entire group of accounts and their balances maintained by a company is called the

.

193. A two column list of all accounts and their balances at a given time is a .

MATCHING

194. Match the items below by entering the appropriate code letter in the space provided.

A. Account
B. Normalaccount balance C. Debit
D. Revenueaccount E. Compoundentry
F. Journal G. Posting
H. Chart of accounts I. Trial balance
J. Simple entry

1. An entry that involves three or more accounts.

2. Transferringjournal entries to ledger accounts.

3. The side which increases an account.

4. A list of all the accounts used by an enterprise.

5. A record of increases and decreases in specific assets, liabilities, and owner’s equity items.

6. Left side of an account.

7. An entry that involves only two accounts.

8. A book of original entry.

9. A list of accounts and their balances at a given time.

10. Has a credit normal balance

SHORT-ANSWERESSAY QUESTIONS
S-AE 195
An account is an important accounting record where financial information is stored until needed. Briefly explain (1) the nature of an account, (2) the different types of accounts, and (3) the manner in which an account is increased and decreased and its normal balance.

S-AE 196

Describe the process of preparing a trial balance. What is the purpose of preparing a trial balance? If a trial balance does not balance, identify what might be the reasons why it does not balance. If the trial balance does balance, does that insure that the ledger accounts are correct? Explain.

S-AE 197

During a study session, a classmate states that it is not necessary to make journal entries and then post them to the ledger. She states that it is sufficient to analyze the transaction and simply record the information in T-accounts.

What is your response to this statement? Be brief, yet concise.

S-AE 198 (Ethics)

Jim Coleman, Jr. was appointed the manager of Maris Properties, a recently formed company that manages residential rental properties. Linda Grider is the accountant. She prepared a chart of accounts based on an analysis of the expenditures of the company. One of the largest expense categories is Travel and Entertainment. Mr. Coleman believes that it is important to maintain a presence in the social life of the city. In this, he sharply differs from his father, Jim Coleman, Sr. The elder Mr. Coleman has set up Maris Properties in order to test his son’s management skills before allowing him to manage the more lucrative commercial property business. Mr. Coleman, Sr. provided the capital for Maris, and maintains close contact with the company. He allowed his son, however, to hire his own employees.

Mr. Coleman has asked Ms. Grider to change the name of the Travel and Entertainment account to Property Development. He hopes to deflect his father’s attention away from the amount he has spent on travel and entertainment until he has proven that his methods work. When Ms. Grider resisted, he reminded her that he, not his father, hired her. He also reminded her that she had been enthusiastic about his business plans when she was hired.

Required:
1. Who are the stakeholders in this situation?

2. Should Ms. Grider agree to the change in the Travel and Entertainment account to Property Development? Explain.

S-AE 199 (Communication)

A classmate is considering dropping his accounting class because he cannot understand the rules of debits and credits.

a. Can the student be successful in the course without an understanding of the rules of debits and credits?

b. Explain the rules of debits and credits in a way that will help him understand them.

CHAPTER 3

ADJUSTINGTHE ACCOUNTS

CHAPTERSTUDY OBJECTIVES

1. Explain the time period assumption.

2. Explain the accrual basis of accounting.

3. Explain the reasons for adjusting entries.

4. Identify the major types of adjusting entries.

5. Prepare adjusting entries for deferrals.

6. Prepare adjusting entries for accruals.

7. Describe the nature and purpose of an adjusted trial balance.

a8. Prepare adjusting entries for the alternative treatment of deferrals.

TRUE-FALSESTATEMENTS
1. Many business transactions affect more than one time period.

2. The time period assumption states that the economic life of a business entity can be divided into artificial time periods.

3. The time period assumption is often referred to as the matching principle.

4. A company’s calendar year and fiscal year are always the same.

5. Accounting time periods that are one year in length are referred to as interim periods.

6. Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.

7. The cash basis of accounting is not in accordance with generally accepted accounting principles.

8. The matching principle requires that efforts be matched with accomplishments.

9. Expense recognition is tied to revenue recognition.

10. The revenue recognition principle dictates that revenue be recognized in the accounting period in which cash is received.

11. Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal.

12. An adjusting entry always involves two balance sheet accounts.

13. Adjusting entries are often made because some business events are not recorded as they occur.

14. Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger.

15. Revenue received before it is earned and expenses paid before being used or consumed are both initially recorded as liabilities.

16. Accrued revenues are revenues which have been received but not yet earned.

17. The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.

18. AccumulatedDepreciation is a liability account and has a credit normal account balance.

19. A liability—revenue account relationship exists with an unearned rent revenue adjusting entry.

20. The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.

21. Unearned revenue is a prepayment that requires an adjusting entry when services are performed.

22. Asset prepayments become expenses when they expire.

23. A contra asset account is subtractedfrom a related account in the balance sheet.

24. If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future.

25. The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset.

26. Accrued revenues are revenues that have been earned and received before financial statements have been prepared.

27. Financial statements can be prepared from the information provided by an adjusted trial balance.

a28. The adjusting entry at the end of the period to record an expired cost may be different depending on whether the cost was initially recorded as an asset or an expense.

a29. Rent received in advance and credited to a rent revenue account which is still unearned at the end of the period, will require an adjusting entry crediting a liability account for the amount still unearned.

a30. An adjusting entry requiring a credit to Insurance Expense indicates that the initial transaction was charged to an asset account.

Additional True-False Questions

31. The matching principle requires that expenses be matched with revenues.

32. In general, adjusting entries are required each time financial statements are prepared.

33. Every adjusting entry affects one balance sheet account and one income statement account.

34. The Accumulated Depreciation account is a contra asset account that is reported on the balance sheet.

35. Accrued revenues are amounts recorded and received but not yet earned.

36. An adjusted trial balance should be prepared before the adjusting entries are made.

a37. When a prepaid expense is initially debited to an expense account, expenses and assets are both overstated prior to adjustment.

MULTIPLECHOICE QUESTIONS

38. Monthly and quarterly time periods are called a. calender periods.
b. fiscal periods. c. interim periods.
d. quarterly periods.

39. The time period assumption states that
a. a transaction can only affect one period of time.
b. estimates should not be made if a transaction affects more than one time period.
c. adjustments to the enterprise’s accounts can only be made in the time period when the business terminates its operations.
d. the economic life of a business can be divided into artificial time periods.

40. An accounting time period that is one year in length, but does not begin on January 1, is referred to as
a. a fiscal year.
b. an interim period.
c. the time period assumption. d. a reporting period.

41. Adjustments would not be necessary if financial statements were prepared to reflect net income from
a. monthly operations. b. fiscal year operations. c. interim operations.
d. lifetime operations.

42. Management usually desires financial statements and the IRS requires all businesses to file tax returns.
a. annual, annual b. monthly, annual
c. quarterly, monthly d. monthly, monthly

43. The time period assumption is also referred to as the a. calendar assumption.
b. cyclicity assumption. c. periodicity assumption. d. fiscal assumption.

44. In general, the shorter the time period, the difficulty of making the proper adjustments to accounts
a. is increased. b. is decreased. c. is unaffected.
d. depends on if there is a profit or loss.

45. Which of the following is not a common time period chosen by businesses as their accounting period?
a. Daily
b. Monthly c. Quarterly d. Annually

46. Which of the following time periods would not be referred to as an interim period? a. Monthly
b. Quarterly
c. Semi-annually d. Annually

47. The fiscal year of a business is usually determined by a. the IRS.
b. a lottery.
c. the business. d. the SEC.

48. Which of the following are in accordance with generally accepted accounting principles? a. Accrual basis accounting
b. Cash basis accounting
c. Both accrual basis and cash basis accounting d. Neither accrual basis nor cash basis accounting

49. The revenue recognition principle dictates that revenue should be recognized in the accounting records
a. when cash is received. b. when it is earned.
c. at the end of the month.
d. in the period that income taxes are paid.

50. In a service-type business, revenue is considered earned a. at the end of the month.
b. at the end of the year.
c. when the service is performed. d. when cash is received.

51. The matching principle matches a. customers with businesses. b. expenses with revenues.
c. assets with liabilities.
d. creditors with businesses.

52. Ken’s Tune-up Shop follows the revenue recognition principle. Ken services a car on July 31. The customer picks up the vehicle on August 1 and mails the payment to Ken on August 5. Ken receives the check in the mail on August 6. When should Ken show that the revenue was earned?
a. July 31 b. August 1 c. August 5 d. August 6

53. A company spends $10 million dollars for an office building. Over what period should the cost be written off?
a. When the $10 million is expended in cash b. All in the first year
c. Over the useful life of the building
d. After $10 million in revenue is earned

54. The matching principle states that expenses should be matched with revenues. Another way of stating the principle is to say that
a. assets should be matched with liabilities.
b. efforts should be matched with accomplishments.
c. owner withdrawals should be matched with owner contributions. d. cash payments should be matched with cash receipts.

55. A dress shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The dress shop follows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be earned?
a. December 5 b. December 10 c. November 30 d. December 1

56. A furniture factory’s employees work overtime to finish an order that is sold on February 28. The office sends a statement to the customer in early March and payment is received by mid-March. The overtime wages should be expensed in
a. February. b. March.
c. the period when the workers receive their checks.
d. either in February or March depending on when the pay period ends.

57. Expenses sometimes make their contribution to revenue in a different period than when the expense is paid. When wages are incurred in one period and paid in the next period, this often leads to which account appearing on the balance sheet at the end of the time period?
a. Due from Employees b. Due to Employer
c. Wages Payable d. Wages Expense

58. Under accrual-basisaccounting
a. cash must be received before revenue is recognized.
b. net income is calculated by matching cash outflows against cash inflows.
c. events that change a company’s financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
d. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

59. Adjusting entries are required a. yearly.
b. quarterly. c. monthly.
d. every time financial statements are prepared.

60. Which is not an application of revenue recognition?
a. Recording revenue as an adjusting entry on the last day of the accounting period.
b. Accepting cash from an established customer for services to be performed over the next three months.
c. Billing customers on June 30 for services completed during June. d. Receiving cash for services performed.

61. Which statement is correct?
a. As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use.
b. The use of the cash basis of accounting violates both the revenue recognition and matching principles.
c. The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received.
d. As long as management is ethical, there are no problems with using the cash basis of accounting.

62. The following is selected information from J Corporation for the fiscal year ending October 31, 2008.

Cash received from customers Revenueearned
Cash paid for expenses
Cash paid for computers on November 1, 2007 that will be used for 3 years (annual depreciation is $16,000)
Expensesincurred, not including any depreciation Proceedsfrom a bank loan, part of which was used to pay for
the computers
$300,000 350,000 170,000

48,000 200,000

100,000

Based on the accrual basis of accounting, what is J Corporation’s net income for the year ending October 31, 2008?
a. $114,000 b. $134,000 c. $82,000 d. $150,000

Use the following information for questions 63–64.

SheepskinCompany had the following transactions during 2008.

• Sales of $4,500 on account

• Collected $2,000 for services to be performed in 2009 • Paid $625 cash in salaries
• Purchased airline tickets for $250 in December for a trip to take place in 2009

63. What is Sheepskin’s 2008 net income using accrual accounting? a. $3,875
b. $5,875 c. $5,625 d. $3,625

64. What is Sheepskin’s 2008 net income using cash basis accounting? a. $5,875
b. $1,375 c. $5,625 d. $1,125

65. Adjusting entries are required
a. because some costs expire with the passage of time and have not yet been journalized.
b. when the company’s profits are below the budget.
c. when expenses are recorded in the period in which they are incurred. d. when revenues are recorded in the period in which they are earned.

66. A small company may be able to justify using a cash basis of accounting if they have a. sales under $1,000,000.
b. no accountants on staff.
c. few receivables and payables.
d. all sales and purchases on account.

67. Which one of the following is not a justification for adjusting entries?
a. Adjusting entries are necessary to ensure that revenue recognition principles are followed.
b. Adjusting entries are necessary to ensure that the matching principle is followed.
c. Adjusting entries are necessary to enable financial statements to be in conformity with GAAP.
d. Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

68. An adjusting entry
a. affects two balance sheet accounts.
b. affects two income statement accounts.
c. affects a balance sheet account and an income statement account. d. is always a compound entry.

69. The preparation of adjusting entries is
a. straight forward because the accounts that need adjustment will be out of balance. b. often an involved process requiring the skills of a professional.
c. only required for accounts that do not have a normal balance. d. optional when financial statements are prepared.

70. If a resource has been consumed but a bill has not been received at the end of the accounting period, then
a. an expense should be recorded when the bill is received. b. an expense should be recorded when the cash is paid out.
c. an adjusting entry should be made recognizing the expense.
d. it is optional whether to record the expense before the bill is received.

71. Accounts often need to be adjusted because
a. there are never enough accounts to record all the transactions. b. many transactions affect more than one time period.
c. there are always errors made in recording transactions. d. management can’t decide what they want to report.

72. Adjusting entries are
a. not necessary if the accounting system is operating properly. b. usually required before financial statements are prepared.
c. made whenever management desires to change an account balance. d. made to balance sheet accounts only.

73. Expenses incurred but not yet paid or recorded are called a. prepaid expenses.
b. accrued expenses. c. interim expenses.
d. unearned expenses.

74. A law firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Legal Fees. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause
a. expenses to be overstated. b. net income to be overstated. c. liabilities to be understated. d. revenues to be understated.

75. Adjusting entries can be classified as a. postponementsand advances. b. accruals and prepayments.
c. prepayments and postponements. d. accruals and advances.

76. Accrued revenues are
a. received and recorded as liabilities before they are earned. b. earned and recorded as liabilities before they are received. c. earned but not yet received or recorded.
d. earned and already received and recorded.

77. Prepaid expenses are
a. paid and recorded in an asset account before they are used or consumed. b. paid and recorded in an asset account after they are used or consumed. c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.

78. Accrued expenses are
a. paid and recorded in an asset account before they are used or consumed. b. paid and recorded in an asset account after they are used or consumed. c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.

79. Unearned revenues are
a. received and recorded as liabilities before they are earned. b. earned and recorded as liabilities before they are received. c. earned but not yet received or recorded.
d. earned and already received and recorded.

80. A liability—revenuerelationship exists with a. prepaid expense adjusting entries.
b. accrued expense adjusting entries. c. unearned revenue adjusting entries. d. accrued revenue adjusting entries.

81. Which of the following reflect the balances of prepayment accounts prior to adjustment?
a. Balance sheet accounts are understated and income statement accounts are understated. b. Balance sheet accounts are overstatedand income statement accounts are overstated.
c. Balancesheet accounts are overstatedand income statement accounts are understated. d. Balance sheet accounts are understated and income statement accounts are overstated.

82. An asset—expenserelationship exists with a. liability accounts.
b. revenue accounts.
c. prepaid expense adjusting entries. d. accrued expense adjusting entries.

83. Quirk Company purchased office supplies costing $6,000 and debited Office Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $2,400 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be
a. Debit Office Supplies Expense, $2,400; Credit Office Supplies, $2,400. b. Debit Office Supplies, $3,600; Credit Office Supplies Expense, $3,600. c. Debit Office Supplies Expense, $3,600; Credit Office Supplies, $3,600. d. Debit Office Supplies, $2,400; Credit Office Supplies Expense, $2,400.

84. If an adjustment is needed for unearned revenues, the
a. liability and related revenue are overstated before adjustment. b. liability and related revenue are understated before adjustment.
c. liability is overstated and the related revenue is understated before adjustment. d. liability is understated and the related revenue is overstated before adjustment.

85. If an adjustment is needed for prepaid expenses, the
a. asset and related expense are overstated before adjustment. b. asset and related expense are understated before adjustment.
c. asset is understated and the related expense is overstated before adjustment. d. asset is overstated and the related expense is understated before adjustment.

86. Depreciation expense for a period is computed by taking the a. original cost of an asset – accumulated depreciation.
b. depreciable cost ÷ depreciation rate. c. cost of the asset ÷ useful life.
d. market value of the asset ÷ useful life.

87. AccumulatedDepreciation is a. an expense account.
b. an owner’s equity account. c. a liability account.
d. a contra asset account.

88. Hardy Company purchased a computer for $4,800 on December 1. It is estimated that annual depreciation on the computer will be $960. If financial statements are to be prepared on December 31, the company should make the following adjusting entry:
a. Debit Depreciation Expense, $960; Credit Accumulated Depreciation, $960. b. Debit Depreciation Expense, $80; Credit Accumulated Depreciation,$80.
c. Debit Depreciation Expense, $3,840; Credit Accumulated Depreciation,$3,840. d. Debit Office Equipment, $4,800; Credit Accumulated Depreciation, $4,800.

89. Baden Realty Company received a check for $18,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent was credited for the full $18,000. Financial statements will be prepared on July 31. Baden Realty should make the following adjusting entry on July 31:
a. Debit Unearned Rent, $3,000; Credit Rental Revenue, $3,000. b. Debit Rental Revenue, $3,000; Credit Unearned Rent, $3,000.
c. Debit Unearned Rent, $18,000; Credit Rental Revenue, $18,000. d. Debit Cash, $18,000; Credit Rental Revenue, $18,000.

90. As prepaid expenses expire with the passage of time, the correct adjusting entry will be a a. debit to an asset account and a credit to an expense account.
b. debit to an expense account and a credit to an asset account. c. debit to an asset account and a credit to an asset account.
d. debit to an expense account and a credit to an expense account.

91. A company usually determines the amount of supplies used during a period by a. adding the supplies on hand to the balance of the Supplies account.
b. summing the amount of supplies purchased during the period.
c. taking the difference between the supplies purchased and the supplies paid for during the period.
d. taking the difference between the balance of the Supplies account and the cost of supplies on hand.

92. If a company fails to make an adjusting entry to record supplies expense, then a. owner’s equity will be understated.
b. expense will be understated. c. assets will be understated.
d. net income will be understated.

93. If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this have on that month’s financial statements?
a. Failure to make an adjustment does not affect the financial statements.
b. Expenses will be overstated and net income and owner’s equity will be understated. c. Assets will be overstated and net income and owner’s equity will be understated.
d. Assets will be overstated and net income and owner’s equity will be overstated.

94. At December 31, 2008, before any year-end adjustments, Karr Company’s Insurance Expense account had a balance of $1,450 and its Prepaid Insurance account had a balance of $3,800. It was determined that $3,000 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be
a. $3,000. b. $1,450. c. $4,450. d. $2,250.

95. Depreciation is the process of
a. valuing an asset at its fair market value.
b. increasing the value of an asset over its useful life in a rational and systematic manner.
c. allocating the cost of an asset to expense over its useful life in a rational and systematic manner.
d. writing down an asset to its real value each accounting period.

96. A new accountant working for Metcalf Company records $800 Depreciation Expense on store equipment as follows:

Dr. Depreciation Expense ……………………………………… 800

Cr. Cash ……………………………………………………… 800

The effect of this entry is to
a. adjust the accounts to their proper amounts on December 31.
b. understatetotal assets on the balance sheet as of December 31.
c. overstate the book value of the depreciable assets at December 31.
d. understatethe book value of the depreciable assets as of December 31.

97. From an accounting standpoint, the acquisition of productive facilities can be thought of as a long-term
a. accrual of expense. b. accrual of revenue.
c. accrual of unearned revenue. d. prepayment for services.

98. In computing depreciation, the number of years of useful life of the asset is a. known with certainty.
b. an estimate.
c. always fixed at 5 years. d. always fixed at 3 years.

99. An accumulateddepreciation account a. is a contra-liability account. b. increases on the debit side.
c. is offset against total assets on the balance sheet. d. has a normal credit balance.

100. The difference between the cost of a depreciable asset and its related accumulated depreciation is referred to as the
a. market value of the asset.
b. blue book value of the asset. c. book value of the asset.
d. depreciated difference of the asset.

101. If a business has several types of long-term assets such as equipment, buildings, and trucks,
a. there should be only one accumulated depreciation account.
b. there should be separate accumulated depreciation accounts for each type of asset. c. all the long-term asset accounts will be recorded in one general ledger account.
d. there won’t be a need for an accumulated depreciation account.

102. Which of the following would not result in unearned revenue? a. Rent collected in advance from tenants
b. Services performed on account
c. Sale of season tickets to football games d. Sale of two-year magazine subscriptions

103. If business pays rent in advance and debits a Prepaid Rent account, the company receiving the rent payment will credit
a. cash.
b. prepaid rent.
c. unearned rent revenue. d. accrued rent revenue.

104. Unearned revenue is classified as a. an asset account.
b. a revenue account.
c. a contra-revenueaccount. d. a liability.

105. If a business has received cash in advance of services performed and credits a liability account, the adjusting entry needed after the services are performed will be
a. debit Unearned Revenue and credit Cash.
b. debit Unearned Revenue and credit Service Revenue. c. debit Unearned Revenue and credit Prepaid Expense.
d. debit Unearned Revenue and credit Accounts Receivable.

106. White Laundry Company purchased $6,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $2,000 on hand. The adjusting entry that should be made by the company on June 30 is
a. Debit Laundry Supplies Expense, $2,000; Credit Laundry Supplies, $2,000. b. Debit Laundry Supplies, $2,000; Credit Laundry Supplies Expense, $2,000. c. Debit Laundry Supplies, $4,500; Credit Laundry Supplies Expense, $4,500. d. Debit Laundry Supplies Expense, $4,500; Credit Laundry Supplies, $4,500.

107. On July 1, Dexter Shoe Store paid $8,000 to Ace Realty for 4 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by Dexter Shoe Store is
a. Debit Rent Expense, $8,000; Credit Prepaid Rent, $2,000. b. Debit Prepaid Rent, $2,000; Credit Rent Expense, $2,000. c. Debit Rent Expense, $2,000; Credit Prepaid Rent, $2,000. d. Debit Rent Expense, $8,000; Credit Prepaid Rent, $8,000.

108. Southeastern Louisiana University sold season tickets for the 2008 football season for $160,000. A total of 8 games will be played during September, October and November. In September,three games were played. The adjusting journal entry at September 30
a. is not required. No adjusting entries will be made until the end of the season in November.
b. will include a debit to Cash and a credit to Ticket Revenue for $40,000.
c. will include a debit to Unearned Ticket Revenue and a credit to Ticket Revenue for $60,000.
d. will include a debit to Ticket Revenue and a credit to Unearned Ticket Revenue for $53,333.

109. Southeastern Louisiana University sold season tickets for the 2008 football season for $160,000. A total of 8 games will be played during September, October and November. In September, two games were played. In October, three games were played. The balance in Unearned Revenue at October 31 is
a. $0.
b. $40,000. c. $60,000. d. $100,000.

110. Southeastern Louisiana University sold season tickets for the 2008 football season for $160,000. A total of 8 games will be played during September, October and November. Assuming all the games are played, the Unearned Revenue balance that will be reported on the December 31 balance sheet will be
a. $0.
b. $60,000. c. $100,000. d. $160,000.

111. At March 1, 2008, Candy Inc. had supplies on hand of $500. During the month, Candy purchased supplies of $1,200 and used supplies of $1,500. The March 31 adjusting journal entry should include a
a. debit to the supplies account for $1,500. b. credit to the supplies account for $500. c. debit to the supplies account for $1,200. d. credit to the supplies account for $1,500.

112. Dorting Company purchased a computer system for $3,600 on January 1, 2008. The company expects to use the computer system for 3 years. It has no salvage value. Monthly depreciation expense on the asset is
a. $0. b. $100.
c. $1,200. d. $3,600.

113. Maple Tree Inc. purchased a 12-month insurance policy on March 1, 2008 for $900. At March 31, 2008, the adjusting journal entry to record expiration of this asset will include a a. debit to Prepaid Insurance and a credit to Cash for $900.
b. debit to Prepaid Insurance and a credit to Insurance Expense for $100. c. debit to Insurance Expense and a credit to Prepaid Insurance for $75 d. debit to Insurance Expense and a credit to Cash for $75.

114. Ogletree Enterprises purchased an 18-month insurance policy on May 31, 2008 for $3,600.The December 31, 2008 balance sheet would report Prepaid Insurance of
a. $0 because Prepaid Insurance is reported on the Income Statement. b. $1,400.
c. $2,200. d. $3,600.

115. At March 1, J.C. Retro Inc. reported a balance in Supplies of $200. During March, the company purchased supplies for $750 and consumed supplies of $800. If no adjusting entry is made for supplies
a. owner’s equity will be overstated by $800. b. expenses will be understated by $750.
c. assets will be understated by $150.
d. net income will be understated by $800.

116. FMI Inc. pays its rent of $120,000 annually on January 1. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following will be true?
a. Failure to make the adjustment does not affect the February financial statements.
b. Expenses will be overstated by $10,000 and net income and owner’s equity will be understated by $10,000.
c. Assets will be overstated by $20,000 and net income and owner’s equity will be understated by $20,000.
d. Assets will be overstated by $10,000 and net income and owner’s equity will be overstated by $10,000.

117. On January 1, 2007, P.T. Oracle Company purchased a computer system for $3,240. The company expects to use the system for 3 years. The asset has no salvage value. The book value of the system at December 31, 2008 is
a. $0.
b. $1,080. c. $2,160. d. $3,240.

118. On January 1, 2007, E.D. Reardon Inc. purchased equipment for $30,000. The company is depreciating the equipment at the rate of $400 per month. At January 31, 2008, the balance in Accumulated Depreciation is
a. $400. b. $4,800. c. $5,200.
d. $24,800.

119. On January 1, 2008, M. Johnson Company purchased equipment for $30,000. The company is depreciating the equipment at the rate of $700 per month. The book value of the equipment at December 31, 2008 is
a. $0.
b. $8,400. c. $21,600. d. $30,000.

120. Lawton Company collected $8,400 in May of 2008 for 4 months of service which would take place from October of 2008 through January of 2009. The revenue reported from this transaction during 2008 would be
a. 0.
b. $6,300. c. $8,400. d. $2,010.

121. Keypress Company collected $6,500 in May of 2008 for 5 months of service which would take place from October of 2008 through February of 2009. The revenue reported from this transaction during 2008 would be
a. $0.
b. $3,900. c. $6,500. d. $2,600.

122. Waterfalls Corporation purchased a one-year insurance policy in January 2008 for $66,000. The insurance policy is in effect from March 2008 through February 2009. If the company neglects to make the proper year-end adjustment for the expired insurance
a. Net income and assets will be understated by $55,000. b. Net income and assets will be overstated by $55,000. c. Net income and assets will be understated by $11,000. d. Net income and assets will be overstated by $11,000.

123. Younger Corporation purchased a one-year insurance policy in January 2008 for $48,000. The insurance policy is in effect from May 2008 through April 2009. If the company neglects to make the proper year-end adjustment for the expired insurance
a. Net income and assets will be understated by $32,000. b. Net income and assets will be overstated by $32,000. c. Net income and assets will be understated by $16,000. d. Net income and assets will be overstated by $16,000.

124. If an adjusting entry is not made for an accrued revenue, a. assets will be overstated.
b. expenses will be understated.
c. owner’s equity will be understated. d. revenues will be overstated.

125. If an adjusting entry is not made for an accrued expense, a. expenses will be overstated.
b. liabilities will be understated.
c. net income will be understated.
d. owner’s equity will be understated.

126. Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause
a. net income to be understated.
b. an overstatement of assets and an overstatement of liabilities.
c. an understatement of expenses and an understatement of liabilities. d. an overstatement of expenses and an overstatement of liabilities.

127. Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause
a. net income to be overstated.
b. an understatement of assets and an understatementof revenues. c. an understatement of revenues and an understatement of liabilities. d. an understatement of revenues and an overstatement of liabilities.

128. Sue Smiley has performed $500 of CPA services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Sue make?
a. Debit Cash and credit Unearned Revenue
b. Debit Accounts Receivable and credit Unearned Revenue c. Debit Accounts Receivable and credit Service Revenue d. Debit Unearned Revenue and credit Service Revenue

129. Sue Smiley, CPA, has billed her clients for services performed. She subsequently receives payments from her clients. What entry will Sue make upon receipt of the payments?
a. Debit Unearned Revenue and credit Service Revenue b. Debit Cash and credit Accounts Receivable
c. Debit Accounts Receivable and credit Service Revenue d. Debit Cash and credit Service Revenue

130. Clark Real Estate signed a four-month note payable in the amount of $8,000 on September 1. The note requires interest at an annual rate of 9%. The amount of interest to be accrued at the end of September is
a. $240. b. $60. c. $720. d. $80.

131. A gift shop signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $50,000 with annual interest of 12%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest?
a. Interest Expense………………………………………………………… 1,000
Interest Payable………………………………………………….. 1,000 b. Interest Expense………………………………………………………… 1,500
Interest Payable………………………………………………….. 1,500 c. Interest Expense………………………………………………………… 1,000
Cash…………………………………………………………………. 1,000 d. Interest Expense………………………………………………………… 1,000
Note Payable……………………………………………………… 1,000

132. Trent Tables paid employee wages on and through Friday, January 26, and the next payroll will be paid in February. There are three more working days in January (29–31). Employees work 5 days a week and the company pays $900 a day in wages. What will be the adjusting entry to accrue wages expense at the end of January?
a. Wages Expense…………………………………………………………. 900
Wages Payable………………………………………………….. 900 b. Wages Expense…………………………………………………………. 4,500
Wages Payable………………………………………………….. 4,500 c. Wages Expense…………………………………………………………. 2,700
Wages Payable………………………………………………….. 2,700 d. No adjusting entry is required.

133. A company shows a balance in Salaries Payable of $40,000 at the end of the month. The next payroll amounting to $45,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries?
a. Salaries Expense……………………………………………………….. 45,000
Salaries Payable…………………………………………………. 45,000 b. Salaries Expense……………………………………………………….. 45,000
Cash…………………………………………………………………. 45,000 c. Salaries Expense……………………………………………………….. 5,000
Cash…………………………………………………………………. 5,000 d. Salaries Expense……………………………………………………….. 5,000
Salaries Payable ………………………………………………………… 40,000 Cash…………………………………………………………………. 45,000

134. The accounts of a business before an adjusting entry is made to record an accrued revenue reflect an
a. understatedliability and an overstated owner’s capital. b. overstated asset and an understatedrevenue.
c. understatedexpense and an overstated revenue. d. understatedasset and an understated revenue.

135. Carter Guitar Company borrowed $12,000 from the bank signing a 9%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be

a. Debit Interest Expense, $1,080; Credit Interest Payable, $1,080. b. Debit Interest Expense, $90; Credit Interest Payable, $90.
c. Debit Note Payable, $1,080; Credit Cash, $1,080. d. Debit Cash, $270; Credit Interest Payable, $270.

136. Manning Corporation issued a one-year, 9%, $200,000 note on April 30, 2008. Interest expense for the year ended December 31, 2008 was
a. $18,000. b. $13,500. c. $12,000. d. $10,500.

137. Blue Corporation issued a one-year, 12%, $200,000 note on August 31, 2008. Interest expense for the year ended December 31, 2008 was
a. $24,000. b. $10,000. c. $8,000. d. $6,000.

138. Employees at B Corporation are paid $5,000 cash every Friday for working Monday through Friday. The calendar year accounting period ends on Wednesday, December 31. How much salary expense should be recorded two days later on January 2?
a. $5,000 b. $3,000
c. None, matching requires the weekly salary to be accrued on December 31. d. $2,000

139. Can financial statements be prepared directly from the adjusted trial balance? a. They cannot. The general ledger must be used.
b. Yes, adjusting entries have been recorded in the general journal and posted to the ledger accounts.
c. No, the adjusted trial balance merely proves the equality of the total debit and total credit balances in the ledger after adjustments are posted. It has no other purpose.
d. They can because that is the only reason that an adjusted trial balance is prepared.

140. The adjusted trial balance is prepared
a. after financial statements are prepared. b. before the trial balance.
c. to prove the equality of total assets and total liabilities.
d. after adjusting entries have been journalized and posted.

141. An adjusted trial balance
a. is prepared after the financial statements are completed.
b. proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made.
c. is a required financial statement under generally accepted accounting principles. d. cannot be used to prepare financial statements.

142. Which of the statements below is not true?
a. An adjusted trial balance should show ledger account balances.
b. An adjusted trial balance can be used to prepare financial statements.
c. An adjusted trial balance proves the mathematical equality of debits and credits in the ledger.
d. An adjusted trial balance is prepared before all transactions have been journalized.

a143. Al is a barber who does his own accounting for his shop. When he buys supplies he routinely debits Supplies Expense. Al purchased $1,500 of supplies in January and his inventory at the end of January shows $400 of supplies remaining. What adjusting entry should Al make on January 31?
a. SuppliesExpense……………………………………………………….. 400 Supplies…………………………………………………………….. 400
b. SuppliesExpense……………………………………………………….. 1,500 Cash…………………………………………………………………. 1,500
c. Supplies…………………………………………………………………….. 400 SuppliesExpense……………………………………………….. 400
d. SuppliesExpense……………………………………………………….. 1,100 Supplies…………………………………………………………….. 1,100

a144. Alternative adjusting entries do not apply to a. accrued revenues and accrued expenses. b. prepaid expenses.
c. unearned revenues.
d. prepaid expenses and unearned revenues.

a145. Jim is a lawyer who requires that his clients pay him in advance of legal services rendered. Jim routinely credits Legal Service Revenue when his clients pay him in advance. In June Jim collected $12,000 in advance fees and completed 75% of the work related to these fees. What adjusting entry is required by Jim’s firm at the end of June?
a. UnearnedRevenue ……………………………………………………. 9,000
Legal Service Revenue ………………………………………. 9,000 b. UnearnedRevenue ……………………………………………………. 3,000
Legal Service Revenue ………………………………………. 3,000 c. Cash ………………………………………………………………………… 12,000
Legal Service Revenue ………………………………………. 12,000 d. Legal Service Revenue ………………………………………………. 3,000
UnearnedRevenue ……………………………………………. 3,000

a146. If prepaid expenses are initially recorded in expense accounts and have not all been used at the end of the accounting period, then failure to make an adjusting entry will cause
a. assets to be understated. b. assets to be overstated.
c. expenses to be understated.
d. contra-expensesto be overstated.

a147. If unearned revenues are initially recorded in revenue accounts and have not all been earned at the end of the accounting period, then failure to make an adjusting entry will cause
a. liabilities to be overstated. b. revenues to be understated. c. revenues to be overstated.
d. accounts receivable to be overstated.

a148. On January 2, 2008, Federal Savings and Loan purchased a general liability insurance policy for $2,400 for coverage for the calendar year. The entire $2,400 was charged to Insurance Expense on January 2, 2008. If the firm prepares monthly financial statements, the proper adjusting entry on January 31, 2008, will be:
a. InsuranceExpense…………………………………………………….. 2,200
Prepaid Insurance………………………………………………. 2,200 b. Prepaid Insurance………………………………………………………. 2,200
InsuranceExpense…………………………………………….. 2,200 c. InsuranceExpense…………………………………………………….. 200
Prepaid Insurance………………………………………………. 200 d. Prepaid Insurance………………………………………………………. 200
InsuranceExpense…………………………………………….. 200

Additional Multiple Choice Questions

149. Which of the following statements concerning accrual-basisaccounting is incorrect? a. Accrual-basis accounting follows the revenue recognition principle.
b. Accrual-basis accounting is the method required by generally accepted accounting principles.
c. Accrual-basis accounting recognizes expenses when they are paid. d. Accrual-basis accounting follows the matching principle.

150. The revenue recognition principle dictates that revenue be recognized in the accounting period
a. before it is earned. b. after it is earned.
c. in which it is earned. d. in which it is collected.

151. An expense is recordedunder the cash basis only when a. services are performed.
b. it is earned. c. cash is paid. d. it is incurred.

152. For prepaid expense adjusting entries
a. an expense—liabilityaccount relationship exists.
b. prior to adjustment, expenses are overstated and assets are understated.
c. the adjusting entry results in a debit to an expense account and a credit to an asset account.
d. none of these.

153. Expenses paid and recorded as assets before they are used are called a. accrued expenses.
b. interim expenses. c. prepaid expenses.
d. unearned expenses.

154. Demaet Cruise Lines purchased a five-year insurance policy for its ships on April 1, 2008 for $100,000. Assuming that April 1 is the effective date of the policy, the adjusting entry on December 31, 2008 is
a. Prepaid Insurance………………………………………………………. 15,000 InsuranceExpense………………………………………………. 15,000
b. InsuranceExpense……………………………………………………… 15,000
Prepaid Insurance………………………………………………… 15,000 c. InsuranceExpense……………………………………………………… 20,000
Prepaid Insurance………………………………………………… 20,000 d. InsuranceExpense……………………………………………………… 5,000
Prepaid Insurance………………………………………………… 5,000

155. Gardner Company purchased a truck from Kutner Co. by issuing a 6-month, 8% note payable for $60,000 on November 1. On December 31, the accrued expense adjusting entry is
a. No entry is required.
b. Interest Expense………………………………………………………… 4,800
Interest Payable…………………………………………………… 4,800 c. Interest Expense………………………………………………………… 9,600
Interest Payable…………………………………………………… 9,600 d. Interest Expense………………………………………………………… 800
Interest Payable…………………………………………………… 800

156. If the adjusting entry for depreciation is not made, a. assets will be understated.
b. owner’s equity will be understated. c. net income will be understated.
d. expenses will be understated.

157. Cathy Cline, an employee of Welker Company, will not receive her paycheck until April 2. Based on services performed from March 15 to March 30, her salary was $900. The adjusting entry for Welker Company on March 31 is
a. Salaries Expense………………………………………………………… 900
Salaries Payable…………………………………………………… 900 b. No entry is required.
c. Salaries Expense………………………………………………………… 900 Cash……………………………………………………………………. 900
d. Salaries Payable …………………………………………………………. 900 Cash……………………………………………………………………. 900

158. Which of the following statements related to the adjusted trial balance is incorrect? a. It shows the balances of all accounts at the end of the accounting period.
b. It is prepared before adjusting entries have been made.
c. It proves the equality of the total debit balances and the total credit balances in the ledger.
d. Financial statements can be prepared directly from the adjusted trial balance.

159. Financial statements are prepared directly from the a. general journal.
b. ledger.
c. trial balance.
d. adjusted trial balance.

BRIEFEXERCISES
BE 160
State whether each situation is a prepaid expense (PE), unearned revenue (UR), accrued revenue (AR) or an accrued expense (AE).
1. Unrecorded interest on savings bonds is $245.
2. Property taxes that have been incurred but that have not yet been paid or recorded amount to $300.
3. Legal fees of $1,000 were collected in advance. By year end 60 percent were still unearned. 4. Prepaid insurance had a $500 balance prior to adjustment. By year end, 40 percent was still
unexpired.

BE 161

Prepareadjusting entries for the following transactions. Omit explanations.

1. Depreciation on equipment is $800 for the accounting period.
2. There was no beginning balance of supplies and purchased $500 of office supplies during the period. At the end of the period $80 of supplies were on hand.
3. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $600 was unexpired.

BE 162

On June 1, during its first month of operations, Eggemeister Enterprises purchased supplies for $3,500 and debited the supplies account for that amount. At January 30, an inventory of supplies showed $1,200 of supplies on hand. What adjusting journal entry should be made for June?

Be. 163

On January 1, Biddle & Biddle, CPAs received a $9,000 cash retainer for legal services to be rendered ratably over the next 3 months. The full amount was credited to the liability account Unearned Revenue. Assuming that the revenue is earned ratably over the 3-month period, what adjusting journal entry should be made at January 31?

BE 164

On February 1, Acts Tax Service received a $2,000 cash retainer for tax preparation services to be rendered ratably over the next 4 months. The full amount was credited to the liability account Unearned Revenue. Assuming that the revenue is earned ratably over the 4-month period, what balance would be reported on the February 28 balance sheet for Unearned Revenue?

BE 165

Hans Albert Enterprises purchased computer equipment on May 1, 2008 for $4,500. The company expects to use the equipment for 3 years. It has no salvage value.
1. What adjusting journal entry should the company make at the end of each month if monthly financials are prepared (annual depreciation is $1,500)?
2. What is the book value of the equipment at May 31, 2008?

BE 166

Hampton International purchased software on October 1, 2008 for $10,800. The company expects to use the software for 3 years. It has no salvage value.
1. What adjusting journal entry should the company make at the end of each month if monthly financials are prepared? (annual depreciation is $3,600)
2. What balance will be reported on the December 31, 2008 balance sheet for Accumulated Depreciation?

BE 167

Better Publications. sold annual subscriptions to their magazine for $24,000 in December, 2007. The magazine is published monthly. The new subscribers received their first magazine in January, 2008.
1. What adjusting entry should be made in January if the subscriptions were originally recorded as a liability?
2. What amount will be reported on the January 2008 balance sheet for Unearned Revenue?

BE 168

On January 1, 2008, J.C. Cohen Company purchased a general liability insurance policy for $3,600to provide coverage for the calendar year.

1. If the company recorded the policy as an asset when purchased, what is the monthly adjusting journal entry that should be recorded at January 31, 2008?
*2. If the company expensed the cost of the policy on January 1, 2008, what is the monthly adjusting entry that should be recorded at January 31, 2008?

BE 169

Identify the impact on the balance sheet if the following information is not used to adjust the accounts.
1. Supplies consumed totalled $3,000.
2. Interest accrues on notes payable at the rate of $200 per month. 3. Insurance of $450 expired during the month.
4. Plant and equipment are depreciated at the rate of $1,200 per month.

BE 170

Determine the impact on the balance sheet accounts if the following information is not used to adjust the accounts of Lake Castle Company for the month of January, 2008. Round answers to the nearest dollar.
1. The company rents extra office space to Franz, CPAs. Franz pays the $12,000 rent annually on January 1.
2. The company has an outstanding loan to its President in the amount of $100,000. The loan accrues interest at the annual rate of 4%. Principal and interest are due January 1, 2012.
3. The company completed work on a project during January that was not yet billed to the client. The client will be charged $2,500.

BE 171

For each of the following oversights, state whether total assets will be understated (U), overstated (O), or no affect (NA).

1. Failure to record revenue earned but not yet received. 2. Failure to record expired prepaid rent.
3. Failure to record accrued interest on the bank savings account. 4. Failure to record depreciation.
5. Failure to record accrued wages.

6. Failure to recognize the earned portion of unearned revenues.

BE 172

River Ridge Music School borrowed $20,000 from the bank signing a 10%, 6-month note on November 1. Principal and interest are payable to the bank on May 1. If the company prepares monthly financial statements, what adjusting entry should the company make at November 30 with regard to the note (round answer to the nearest dollar)?

BE 173

The adjusted trial balance of Ninety-Six Inc. on December 31, 2008 includes the following accounts: Accumulated Depreciation, $6,000; Depreciation Expense, $2,000; Note Payable $7,500; Interest Expense $150; Utilities Expense, $300; Rent Expense, $500; Service Revenue, $19,600; Salaries Expense, $4,000; Supplies, $200; Supplies Expense, $1,200; Wages Payable, $600. Prepare an income statement for the month of December.

BE 174

The adjusted trial balance of Jesper Company at December 31,2008 includes the following accounts: L. Jesper, Capital $12,600; L. Jesper, Drawing $6,000; Service Revenue $35,000; Salaries Expense $13,000; Insurance Expense $2,000; Rent Expense $3,500; Supplies Expense $500; and DepreciationExpense $1,000. Prepare an owner’s equity statement for the year.

EXERCISES
Ex. 175
The balance sheets of Cole Company include the following:

Interest Receivable Supplies
Wages Payable UnearnedRevenue

The income statement for 2008 shows the following: Interest Revenue
Service Revenue SuppliesExpense Wages Expense

12/31/08 $6,300
5,000 3,600
-0-

$18,400 72,700 8,700 39,000

12/31/07 $ -0-
3,000 3,800 4,000

Instructions

Calculatethe following for 2008: 1. Cash received for interest. 2. Cash paid for supplies.
3. Cash paid for wages.
4. Cash received for revenue.

Ex. 176

Linder Company prepared the following income statement using the cash basis of accounting:

LINDER COMPANY Income Statement, Cash Basis
For the Year Ended December 31, 2008

Service revenue (does not include $20,000 of services rendered on account becausethe collection will not be until 2009)…………………………………………….
Expenses(does not include $20,000 of expenses on account because
payment will not be made until 2009)………………………………………………………. Net income………………………………………………………………………………………………..

$370,000

220,000 $150,000

Additionaldata:
1. Depreciation on a company automobile for the year amounted to $6,000. This amount is not included in the expenses above.
2. On January 1, 2008, paid for a two-year insurance policy on the automobile amounting to $1,800.This amount is included in the expenses above.

Instructions
(a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change.

(b) Explain which basis (cash or accrual) provides a better measure of income.

Ex. 177

Before month-end adjustments are made, the February 28 trial balance of Al’s Enterprise contains revenue of $9,000 and expenses of $4,400. Adjustments are necessary for the following items:
• Depreciation for February is $1,800.
• Revenue earned but not yet billed is $2,300. • Accrued interest expense is $700.
• Revenue collected in advance that is now earned is $3,500.
• Portion of prepaid insurance expired during February is $400.

Instructions

Calculatethe correct net income for Al’s Income Statement for February.

Ex. 178

On December 31, 2008, Gomez Company prepared an income statement and balance sheet and failed to take into account three adjusting entries. The incorrect income statement showed net income of $40,000. The balance sheet showed total assets, $120,000; total liabilities, $45,000; and owner’s equity, $75,000.

The data for the three adjusting entries were:
(1) Depreciation of $9,000 was not recorded on equipment.
(2) Wages amounting to $8,000 for the last two days in December were not paid and not recorded. The next payroll will be in January.
(3) Rent of $14,000 was paid for two months in advance on December 1. The entire amount was debited to Rent Expense when paid.

Instructions

Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parentheses):

Item Incorrectbalances Effects of:
Depreciation

Wages

Rent

Correct Balances
Net Income $ 40,000
Total Assets $120,000
Total Liabilities $ 45,000
Owner’s Equity $ 75,000

Ex. 179

Indicate (a) the type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense), and (b) the accounts before adjustment (overstated or understated) for each of the following:

1. Supplies of $200 have been used. 2. Salaries of $600 are unpaid.
3. Rent received in advance totaling $300 has been earned. 4. Services provided but not recorded total $500.

Ex. 180

Ellis Company accumulates the following adjustment data at December 31. 1. Revenue of $900 collected in advance has been earned.
2. Salaries of $600 are unpaid.
3. Prepaid rent totaling $450 has expired. 4. Supplies of $550 have been used.
5. Revenue earned but unbilled total $750. 6. Utility expenses of $200 are unpaid.
7. Interest of $250 has accrued on a note payable.

Instructions
(a) For each of the above items indicate:
1. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense).
2. The account relationship (asset/liability, liability/revenue, etc.).
3. The status of account balances before adjustment (understatement or overstatement). 4. The adjusting entry.

(b) Assume net income before the adjustments listed above was $14,500. What is the adjusted net income?

Prepareyour answer in the tabular form presented below.

Type of Adjustment

Account Relationship
AccountBalances Before Adjustment (Understatement
or Overstatement) Adjusting Entry

Ex. 181

The adjusted trial balance of the Nance Company includes the following balance sheet accounts that frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid expenses, unearned revenues, accrued revenues, or accrued expenses) and (b) the related account in the adjusting entry.
(a) (b) Balance Sheet Account Type of Adjusting Entry Related Account

1. Supplies

2. Accounts Receivable

3. Prepaid Insurance

4. Accumulated Depreciation— Equipment

5. Interest Payable 6. Salaries Payable
7. Unearned Revenue

Ex. 182

Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided.
TERMS:
A. Prepaid Expenses B. Unearned Revenues C. Accrued Revenues D. Accrued Expenses
STATEMENTS:

1. A revenue not yet earned; collected in advance.

2. Office supplies on hand that will be used in the next period.

Ex. 182 (cont.)

3. Interestrevenue collected; not yet earned.

4. Rent not yet collected; already earned.

5. An expense incurred; not yet paid or recorded.

6. A revenue earned; not yet collected or recorded.

7. An expense not yet incurred; paid in advance.

8. Interest expense incurred; not yet paid.

Ex. 183

The Astros, a semi-professional baseball team, prepare financial statements on a monthly basis. Their season begins in April, but in March the team engaged in the following transactions:

(a) Paid $120,000 to Wichita City as advance rent for use of Wichita City Stadium for the six month period April 1 through September 30.

(b) Collected $250,000 cash from sales of season tickets for the team’s 20 home games. This amount was credited to Unearned Ticket Revenue.

During the month of April, the Astros played four home games and five road games.

Instructions

Preparethe adjusting entries required at April 30 for the transactions above.

Ex. 184

On July 1, 2008, Sheeley Company pays $8,000 to its insurance company for a 2-year insurance policy.

Instructions

Preparethe necessary journal entries for Sheeley on July 1 and December 31.
Ex. 185

On July 1, 2008, Anderson Insurance Company received $10,000 from a client for a 2-year insurance policy.

Instructions
Preparethe necessary journal entries for Anderson on July 1 and December 31.

Ex. 186

Dane Coat Company purchased equipment on June 1 for $81,000, paying $18,000 cash and signing a 12%, 2-month note for the remaining balance. The equipment is expected to depreciate $18,000each year. Dane Coat Company prepares monthly financial statements.

Instructions
(a) Prepare the general journal entry to record the acquisition of the equipment on June lst. (b) Prepare any adjusting journal entries that should be made on June 30th.
(c) Show how the equipment will be reflected on Dane Coat Company’s balance sheet on June 30th.

Ex. 187

Welch Company prepares monthly financial statements. Below are listed some selected accounts and their balances in the September 30 trial balance before any adjustments have been made for the month of September.

WELCHCOMPANY
Trial Balance (Selected Accounts) September 30, 2008
———————————————————————————————————————————
Debit Credit
Office Supplies…………………………………………………………………………… $ 2,700 Prepaid Insurance………………………………………………………………………. 4,200 Office Equipment……………………………………………………………………….. 16,200
AccumulatedDepreciation—OfficeEquipment……………………………….. $1,000 UnearnedRent Revenue…………………………………………………………….. 1,200

(Note: Debit column does not equal credit column because this is a partial listing of selected account balances)

An analysis of the account balances by the company’s accountant provided the following additional information:
1. A physical count of office supplies revealed $1,000 on hand on September 30. 2. A two-year life insurance policy was purchased on June 1 for $4,800.
3. Office equipment depreciated $6,000 per year.
4. The amount of rent received in advance that remains unearned at September 30 is $500.

Instructions
Using the above additional information, prepare the adjusting entries that should be made by WelchCompany on September 30.

Ex. 188

Preparethe required end-of-period adjusting entries for each independent case listed below.

Case 1
Starr Company began the year with a $3,000 balance in the Office Supplies account. During the year, $8,500 worth of additional office supplies were purchased. A physical count of office supplies on hand at the end of the year revealed that $6,400 worth of office supplies had been used during the year. No adjusting entry has been made until year end.

Case 2
Eaton Company has a calendar year-end accounting period. On July 1, the company purchased office equipment for $30,000. It is estimated that the office equipment will depreciate $500 each month. No adjusting entry has been made until year end.

Case 3
Ward Realty is in the business of renting several apartment buildings and prepares monthly financial statements. It has been determined that 3 tenants in $700 per month apartments and one tenant in the $1,000 per month apartment had not paid their August rent as of August 31st.

Ex. 189

Moran Insurance Agency prepares monthly financial statements. Presented below is an income statement for the month of June that is correct on the basis of information considered.

MORANINSURANCE AGENCY Income Statement
For the Month Ended June 30 ——————————————————————————————————————————— Revenues
PremiumCommission Revenue……………………………………………. $35,000 Expenses
Salaryexpense ………………………………………………………………….. $6,000 Advertisingexpense……………………………………………………………. 800 Rent expense…………………………………………………………………….. 4,200 Depreciation expense…………………………………………………………. 2,800
Total expenses…………………………………………………………………… 13,800 Net income………………………………………………………………………………… $21,200

Additional Data: When the income statement was prepared, the company accountant neglected to take into consideration the following information:
1. A utility bill for $2,000 was received on the last day of the month for electric and gas service for the month of June.
2. A company insurance salesman sold a life insurance policy to a client for a premium of $35,000.The agency billed the client for the policy and is entitled to a commission of 20%.
3. Supplies on hand at the beginning of the month were $3,000. The agency purchased additional supplies during the month for $3,500 in cash and $2,200 of supplies were on hand at June 30.
4. The agency purchased a new car at the beginning of the month for $19,200 cash. The car will depreciate $4,800 per year.
5. Salaries owed to employees at the end of the month total $5,300. The salaries will be paid on July 5.

Instructions
Preparea correct income statement.

Ex. 190

One part of eight adjusting entries is given below.

Instructions
Indicatethe account title for the other part of each entry. 1. Unearned Revenue is debited.
2. Prepaid Rent is credited.
3. Accounts Receivable is debited. 4. Depreciation Expense is debited. 5. Utilities Expense is debited.
6. Interest Payable is credited.
7. Service Revenue is credited (give two possible debit accounts). 8. Interest Receivable is debited.

Ex. 191

For each of the following accounts, indicate (a) the type of adjusting entry (prepaid expense, accrued revenue, etc.) and (b) the related account in the adjusting entry.
1. Depreciation Expense 2. Salaries Payable
3. Service Revenue 4. Supplies
5. Unearned Revenue

Ex. 192

Preparethe necessary adjusting entry for each of the following: 1. Services provided but unrecorded totaled $900.
2. Accrued salaries at year-end are $1,000. 3. Depreciation for the year is $600.

Ex. 193

The following ledger accounts are used by the Ottawa Greyhound Park:

Accounts Receivable Prepaid Printing Prepaid Rent

UnearnedAdmissions Revenue

Printing Expense Rent Expense

AdmissionsRevenue Concessions Revenue

Instructions
For each of the following transactions below, prepare the journal entry (if one is required) to record the initial transaction and then prepare the adjusting entry, if any, required on September 30, the end of the fiscal year.
(a) On September 1, paid rent on the track facility for three months, $180,000.

Ex. 193 (cont.)

(b) On September 1, sold season tickets for admission to the racetrack. The racing season is year-round with 25 racing days each month. Season ticket sales totaled $840,000.
(c) On September 1, borrowed $300,000 from First National Bank by issuing a 9% note payable due in three months.
(d) On September 5, schedules for 20 racing days in September, 25 racing days in October, and 15 racing days in November were printed for $2,400.
(e) The accountant for the concessions company reported that gross receipts for September were $140,000. Ten percent is due to Ottawa and will be remitted by October 10.

Ex. 194

Fielder Company has an accounting fiscal year which ends on June 30. The company also has a policy of paying the weekly payroll on Friday. Payroll records indicate the following salary costs were incurred.
Date Amount Monday June 28 $3,000 Tuesday June 29 3,800 Wednesday June 30 2,800 Thursday July 1 3,000 Friday July 2 2,400

Instructions
(a) Prepare any necessary adjusting journal entries that should be made at year end on June 30.
(b) Prepare the journal entry to record the payment of the weekly payroll on July 2.

Ex. 195

On Friday of each week, Noble Company pays its factory personnel weekly wages amounting to $40,000for a five-day work week.

Instructions
(a) Prepare the necessary adjusting entry at year end, assuming December 31 falls on Wednesday.
(b) Prepare the journal entry for payment of the week’s wages on the payday which is Friday, January 2 of the next year.

Ex. 196

Presented below is the Trial Balance and Adjusted Trial Balance for Kimberly Company on December31.
KIMBERLY COMPANY Trial Balance December 31
——————————————————————————————————————————— Before Adjustment After Adjustment
Dr. Cr. Dr. Cr.
Cash $ 2,000 $ 2,000 AccountsReceivable 2,800 3,700 Prepaid Rent 2,100 1,500 Supplies 1,200 700 Automobileequipment 18,000 18,000 Accumulateddepreciation—
Automobileequipment $ 1,300 $ 1,500 AccountsPayable 2,700 3,000 Notes Payable 10,000 10,000 Interest Payable 120 Salaries Payable 800 UnearnedRevenue 4,460 4,060 Kimberly, Capital 7,200 7,200 Kimberly, Drawings 3,200 3,200
Service Revenue 8,000 9,300 Salaries Expense 2,060 2,860
Utilities Expense 1,800 2,100 Rent Expense 500 1,100 SuppliesExpense 500 Depreciation Expense—
AutomobileEquipment 200 Interest Expense 120
Totals $33,660 $33,660 $35,980 $35,980

Instructions
Prepare in journal form, with explanations, the adjusting entries that explain the changes in the balances from the trial balance to the adjusted trial balance.

Ex. 197

Compute the net income for 2008 based on the following amounts presented on the adjusted trial balance of Pryor Company.

AccumulatedDepreciation Depreciation Expense Salaries Expense
Service Revenue UnearnedRevenue
$20,000 10,000 15,000 40,000 8,000

Ex. 198

The Boulder Petting Zoo operates a drive through tourist attraction in Colorado. The company adjusts its accounts at the end of each month. The selected accounts appearing below reflect balances after adjusting entries were prepared on April 30. The adjusted trial balance shows the following:

Prepaid Rent Fencing
AccumulatedDepreciation—Fencing UnearnedTicket Revenue
$10,000 30,000 5,500 400

Other data:

1. Three months’ rent had been prepaid on April 1.

2. The fencing is being depreciated at $6,000 per year.

3. The unearned ticket revenue represents tickets sold for future zoo visits. The tickets were sold at $4.00 each on April 1. During April, twenty of the tickets were used by customers.

Instructions

(a) Calculate the following:
1. Monthly rent expense.
2. The age of the fencing in months.
3. The number of tickets sold on April 1.

(b) Prepare the adjusting entries that were made by the Boulder Petting Zoo on April 30.

Ex. 199

The adjusted trial balance of Pool Financial Planners appears below. Using the information from the adjusted trial balance, you are to prepare for the month ending December 31:
1. an income statement.
2. an owner’s equity statement. 3. a balance sheet.

POOLFINANCIAL PLANNERS Adjusted Trial Balance December 31, 2008
———————————————————————————————————————————
Debit Credit
Cash…………………………………………………………………………………………. $ 5,400 AccountsReceivable ………………………………………………………………….. 2,200 Office Supplies…………………………………………………………………………… 1,800 Office Equipment……………………………………………………………………….. 15,000
AccumulatedDepreciation—OfficeEquipment……………………………….. $ 4,000 AccountsPayable………………………………………………………………………. 3,300 UnearnedRevenue…………………………………………………………………….. 6,000 Pool, Capital………………………………………………………………………………. 14,400 Pool, Drawing…………………………………………………………………………….. 2,500
Service Revenue………………………………………………………………………… 4,200 Office Supplies Expense……………………………………………………………… 600 Depreciation Expense…………………………………………………………………. 2,500
Rent Expense ……………………………………………………………………………. 1,900
$31,900 $31,900

Ex. 200

1. Flynn Company prepares monthly financial statements. On July 1, the Office Supplies account had a balance of $3,000. During July, additional office supplies were purchased for $3,800 and that amount was debited to Office Supplies Expense. On July 31, a physical count of office supplies revealed that there was $2,400 on hand. Prepare the adjusting journal entry that Flynn Company should make on July 31.

2. Reese Rental Agency prepares monthly financial statements. On September 1, a check for $7,200 was received from a tenant for six months’ rent. The full amount was credited to Rent Revenue. Prepare the adjusting entry the company should make on September 30.

COMPLETION STATEMENTS

201. The assumption divides the economic life of a business into artificial time periods.

202. An accounting period that is one year in length is referred to as a year.

203. The principle gives accountants guidance as to when revenue is to be recorded.

204. In a service company, revenue is earned when the service is .

205. The matching principle attempts to match with .

206. Expenses paid and recorded in an asset account before they are used or consumed are called . Revenue received and recorded as a liability before it is earned is referred to as .

207. Failure to adjust a prepaid expense account for the amount expired will cause

to be understated and to be overstated.

208. Depreciation is a allocation process rather than a process of .

209. Depreciation expense for a period is an rather than a factual measurement of cost that has expired.

210. An adjusting entry recording accrued salaries for a period indicates that Salaries Expense has been but has not yet been or recorded.

211. An adjusted trial balance proves the of the total debit and credit balancesafter all entries have been made.

MATCHING

212. Match the items below by entering the appropriate code letter in the space provided.

A. Time period assumption B. Fiscal year
C. Revenuerecognition principle D. Prepaid expenses
E. Matching principle
F. Accruedrevenues G. Depreciation
H. Accumulateddepreciation I. Accruedexpenses
J. Book value

1. A twelve month accounting period

2. Expensespaid before they are incurred

3. Cost less accumulated depreciation

4. Divides the economic life of a business into artificial time periods

5. Effortsare related to accomplishments

6. A contra asset account

7. Recognitionof revenue when it is recorded when earned

8. Revenuesearned but not yet received

9. Expensesincurred but not yet paid

10. A cost allocation process

SHORT-ANSWERESSAY QUESTIONS
S-AE 213
The income statement is an important financial statement used by individuals who are interested in the operations of a business enterprise. Explain how the time period assumption and the revenue recognition and matching principles provide guidance to accountants in preparing an income statement.

S-AE 214

In developing an accounting information system, it is important to establish procedures whereby all transactions that affect the components of the accounting equation are recorded. Why then, is it often necessary to adjust the accounts before financial statements are prepared even in a properly designed accounting system? Identify the major types of adjustments that are frequently made and give a specific example of each.

S-AE 215

You are visiting with a friend, Mark Adams, who wants to start a new business. During discussions on forming the business, Mark makes this statement:

Our business will have accounts receivable and accounts payable. It will also acquire a substantial amount of computers and equipment. Will it be acceptable to use the cash basis of accounting?

Preparea response for Mark.

S-AE 216

The long-term liability section of A Company’s Balance Sheet includes the following accounts:

Notes Payable MortgagePayable Salaries Payable AccumulatedDepreciation Total Long-Term Liabilities
$100,000 250,000 75,000
125,000 $550,000

A Company is an established company and does not experience any financial difficulties or have any cash flow problems. Discuss at least two items that are questionableas long-term liabilities.

S-AE 217 (Ethics)

Marsh and Linton is a manufacturing company that specializes in writing instruments. The past year was a difficult one for the company, as it sought to retain its share in a market in which the largest competitors were also rapid innovators. Marsh and Linton introduced a new product late in the year, even though testing was not complete. It was a pen designed with two cartridges: one supplying ink and the other correction fluid. A person could then switch easily between writing and correcting errors. It was priced fairly high, and was never heavily advertised. Even so, the Correct-O-Pen, as the product was named, was an overwhelming success.

The success of the product has Fran Henley, the manager of the New Products division, worried, however. She was concerned that quality problems would begin occurring, since the longevity of the pen and stability of the correction fluid formulation had not been tested. She did not want sales personnel to get the bonuses that appeared to be indicated, since they might aggressively promote a product that would fail in use. She preferred to complete testing of the pen first, so that more confidence could be placed in the results.

Top management, however, declined the tests. Ms. Henley then instructed you, the accountant, not to prorate payroll taxes or rent expense for the rest of the year, but to show them as current expenses in total. In this way, the new product would appear to be only slightly profitable.

Required:

1. Describe the alternatives that you as an accountant would have in this situation. 2. Indicate which alternative is best.

S-AE 218 (Communication)

A new sales representative, Joel Goode, has just received his copy of the month-end financial reports. He is puzzled by the term “unearned revenue.” He left the following e-mail message for you on the company’s bulletin board system:

What is this??? Creative Accounting, or what??? Line item 12 on year-to-date financials shows over $25Gs in Unearned Revenue!!! Come on, guys! Either we earned it, or we didn’t … Right??! Is this how you guys lower our commissions? Reply to j.goode@sbd

Required:

Write a response to send to Joel.

CHAPTER 4

COMPLETINGTHE ACCOUNTING CYCLE

CHAPTERSTUDY OBJECTIVES

1. Prepare a worksheet.

2. Explain the process of closing the books.

3. Describe the content and purpose of a post-closing trial balance.

4. State the required steps in the accounting cycle.

5. Explain the approaches to preparing correcting entries.

6. Identify the sections of a classified balance sheet.

7. Prepare reversing entries.
TRUE-FALSESTATEMENTS

1. A worksheet is a mandatory form that must be prepared along with an income statement and balance sheet.

2. If a worksheet is used, financial statements can be prepared before adjusting entries are journalized.

3. If total credits in the income statement columns of a worksheet exceed total debits, the enterprise has net income.

4. It is not necessary to prepare formal financial statements if a worksheet has been prepared because financial position and net income are shown on the worksheet.

5. The adjustments on a worksheet can be posted directly to the accounts in the ledger from the worksheet.

6. The adjusted trial balance columns of a worksheet are obtained by subtracting the adjustment columns from the trial balance columns.

7. The balance of the depreciation expense account will appear in the income statement debit column of a worksheet.

8. Closing entries are unnecessary if the business plans to continue operating in the future and issue financial statements each year.

9. The owner’s drawing account is closed to the Income Summary account in order to properly determine net income (or loss) for the period.

10. After closing entries have been journalized and posted, all temporary accounts in the ledger should have zero balances.

11. Closing revenue and expense accounts to the Income Summary account is an optional bookkeeping procedure.

12. Closing the drawing account to Capital is not necessary if net income is greater than owner’s drawings during the period.
4 – 5

13. The owner’s drawing account is a permanent account whose balance is carried forward to the next accounting period.

14. Closing entries are journalized after adjusting entries have been journalized.

15. The amounts appearing on an income statement should agree with the amounts appearing on the post-closing trial balance.

16. The post-closing trial balance is entered in the first two columns of a worksheet.

17. A business entity has only one accounting cycle over its economic existence.

18. The accounting cycle begins at the start of a new accounting period.

19. Both correcting entries and adjusting entries always affect at least one balance sheet account and one income statement account.

20. Correcting entries are made any time an error is discovered even though it may not be at the end of an accounting period.

21. An incorrect debit to Accounts Receivable instead of the correct account Notes Receivabledoes not require a correcting entry because total assets will not be misstated.

22. In a corporation, Retained Earnings is a part of owners’ equity.

23. A company’s operating cycle and fiscal year are usually the same length of time.

24. Cash and office supplies are both classified as current assets.

25. Long-term investments would appear in the property, plant, and equipment section of the balance sheet.

26. A liability is classified as a current liability if the company is to pay it within the forthcoming year.

27. A company’s liquidity is concerned with the relationship between long-term investments and long-term debt.

28. Current assets are customarily the first items listed on a classified balance sheet.

29. The operating cycle of a company is determined by the number of years the company has been operating.

a30. Reversing entries are an optional bookkeeping procedure.

Additional True-False Questions

31. After a worksheet has been completed, the statement columns contain all data that are required for the preparation of financial statements.

32. To close net income to owner’s capital, Income Summary is debited and Owner’s Capital is credited.

33. In one closing entry, Owner’s Drawing is credited and Income Summary is debited.

34. The post-closing trial balance will contain only owner’s equity statement accounts and balance sheet accounts.

35. The operating cycle of a company is the average time required to collect the receivables resulting from producing revenues.

36. Current assets are listed in the order of liquidity.

37. Current liabilities are obligations that the company is to pay within the coming year.

MULTIPLECHOICE QUESTIONS

38. Preparing a worksheet involves a. two steps.
b. three steps. c. four steps. d. five steps.

39. The adjustments entered in the adjustments columns of a worksheet are a. not journalized.
b. posted to the ledger but not journalized.
c. not journalized until after the financial statements are prepared. d. journalized before the worksheet is completed.

40. The information for preparing a trial balance on a worksheet is obtained from a. financial statements.
b. general ledger accounts. c. general journal entries. d. business documents.

41. After the adjusting entries are journalized and posted to the accounts in the general ledger, the balance of each account should agree with the balance shown on the
a. adjusted trial balance.
b. post-closing trial balance. c. the general journal.
d. adjustmentscolumns of the worksheet.
4 – 7

42. If the total debit column exceeds the total credit column of the income statement columns on a worksheet, then the company has
a. earned net income for the period.
b. an error because debits do not equal credits. c. suffered a net loss for the period.
d. to make an adjusting entry.

43. A worksheet is a multiple column form that facilitates the a. identification of events.
b. measurement process.
c. preparation of financial statements. d. analysis process.

44. Which of the following companies would be least likely to use a worksheet to facilitate the adjustment process?
a. Large company with numerous accounts b. Small company with numerous accounts
c. All companies, since worksheets are required under generally accepted accounting principles
d. Small company with few accounts

45. A worksheet can be thought of as a(n) a. permanent accounting record.
b. optional device used by accountants. c. part of the general ledger.
d. part of the journal.

46. The account, Supplies, will appear in the following debit columns of the worksheet. a. Trial balance
b. Adjusted trial balance c. Balance sheet
d. All of these

47. When constructing a worksheet, accounts are often needed that are not listed in the trial balance already entered on the worksheet from the ledger. Where should these additional accounts be shown on the worksheet?
a. They should be inserted in alphabetical order into the trial balance accounts already given.
b. They should be inserted in chart of account order into the trial balance already given. c. They should be inserted on the lines immediatelybelow the trial balance totals.
d. They should not be inserted on the trial balance until the next accounting period.

48. When using a worksheet, adjusting entries are journalized
a. after the worksheet is completed and before financial statements are prepared. b. before the adjustments are entered on to the worksheet.
c. after the worksheet is completed and after financial statements have been prepared. d. before the adjusted trial balance is extended to the proper financial statement
columns.

49. Assuming that there is a net loss for the period, debits equal credits in all but which section of the worksheet?
a. Income statement columns b. Adjustments columns
c. Trial balance columns
d. Adjusted trial balance columns

50. Adjusting entries are prepared from a. source documents.
b. the adjustments columns of the worksheet. c. the general ledger.
d. last year’s worksheet.

51. The net income (or loss) for the period
a. is found by computing the difference between the income statement credit column and the balance sheet credit column on the worksheet.
b. cannot be found on the worksheet.
c. is found by computing the difference between the income statement columns of the worksheet.
d. is found by computing the difference between the trial balance totals and the adjusted trial balance totals.

52. The worksheet does not show
a. net income or loss for the period.
b. revenue and expense account balances.
c. the ending balance in the owner’s capital account. d. the trial balance before adjustments.

53. If the total debits exceed total credits in the balance sheet columns of the worksheet, owner’s equity
a. will increase because net income has occurred. b. will decrease because a net loss has occurred. c. is in error because a mistake has occurred.
d. will not be affected.

Use the following information for questions 54–55.

The income statement and balance sheet columns of Pine Company’s worksheet reflects the following totals:

Income Statement Balance Sheet
Dr. Cr. Dr. Cr.
Totals $58,000 $48,000 $34,000 $44,000

54. The net income (or loss) for the period is a. $48,000 income.
b. $10,000 income. c. $10,000 loss.
d. not determinable.
4 – 9

55. To enter the net income (or loss) for the period into the above worksheet requires an entry to the
a. income statement debit column and the balance sheet credit column. b. income statement credit column and the balance sheet debit column.
c. income statement debit column and the income statement credit column. d. balance sheet debit column and the balance sheet credit column.

56. Closing entries are necessary for a. permanent accounts only.
b. temporary accounts only.
c. both permanent and temporary accounts. d. permanent or real accounts only.

57. Each of the following accounts is closed to Income Summary except a. Expenses.
b. Owner’s Drawing. c. Revenues.
d. All of these are closed to Income Summary.

58. Closing entries are made
a. in order to terminate the business as an operating entity.
b. so that all assets, liabilities, and owner’s capital accounts will have zero balances when the next accounting period starts.
c. in order to transfer net income (or loss) and owner’s drawing to the owner’s capital account.
d. so that financial statements can be prepared.

59. Closing entries are
a. an optional step in the accounting cycle.
b. posted to the ledger accounts from the worksheet. c. made to close permanent or real accounts.
d. journalized in the general journal.

60. The income summary account a. is a permanent account.
b. appears on the balance sheet.
c. appears on the income statement. d. is a temporary account.

61. If Income Summary has a credit balance after revenues and expenses have been closed into it, the closing entry for Income Summary will include a
a. debit to the owner’s capital account. b. debit to the owner’s drawing account. c. credit to the owner’s capital account. d. credit to the owner’s drawing account.

62. Closing entries are journalized and posted
a. before the financial statements are prepared. b. after the financial statements are prepared. c. at management’s discretion.
d. at the end of each interim accounting period.
4 – 10

63. Closing entries
a. are prepared before the financial statements. b. reduce the number of permanent accounts.
c. cause the revenue and expense accounts to have zero balances. d. summarize the activity in every account.

64. Which of the following is a true statement about closing the books of a proprietorship? a. Expenses are closed to the Expense Summary account.
b. Only revenues are closed to the Income Summary account.
c. Revenues and expenses are closed to the Income Summary account.
d. Revenues, expenses, and the owner’s drawing account are closed to the Income Summaryaccount.

65. Closing entries may be prepared from all but which one of the following sources? a. Adjusted balances in the ledger
b. Income statement and balance sheet columns of the worksheet c. Balance sheet
d. Income and owner’s equity statements

66. In order to close the owner’s drawing account, the a. income summary account should be debited. b. income summary account should be credited. c. owner’s capital account should be credited.
d. owner’s capital account should be debited.

67. In preparing closing entries
a. each revenue account will be credited. b. each expense account will be credited.
c. the owner’s capital account will be debited if there is net income for the period. d. the owner’s drawing account will be debited.

68. The most efficient way to accomplish closing entries is to
a. credit the income summary account for each revenue account balance. b. debit the income summary account for each expense account balance.
c. credit the owner’s drawing balance directly to the income summary account.
d. credit the income summary account for total revenues and debit the income summary account for total expenses.

69. The closing entry process consists of closing a. all asset and liability accounts.
b. out the owner’s capital account. c. all permanent accounts.
d. all temporary accounts.

70. The final closing entry to be journalized is typically the entry that closes the a. revenue accounts.
b. owner’s drawing account. c. owner’s capital account. d. expense accounts.

71. An error has occurred in the closing entry process if
a. revenue and expense accounts have zero balances.
b. the owner’s capital account is credited for the amount of net income. c. the owner’s drawing account is closed to the owner’s capital account. d. the balance sheet accounts have zero balances.

72. The Income Summary account is an important account that is used a. during interim periods.
b. in preparing adjusting entries.
c. annually in preparing closing entries.
d. annually in preparing correcting entries.

73. The balance in the income summary account before it is closed will be equal to a. the net income or loss on the income statement.
b. the beginning balance in the owner’s capital account. c. the ending balance in the owner’s capital account.
d. zero.

74. After closing entries are posted, the balance in the owner’s capital account in the ledger will be equal to
a. the beginning owner’s capital reported on the owner’s equity statement. b. the amount of the owner’s capital reported on the balance sheet.
c. zero.
d. the net income for the period.

Use the following information for questions 75–79.

The income statement for the month of June, 2008 of Delgado Enterprises contains the following information:

Revenues $7,000 Expenses:
Wages Expense $2,000 Rent Expense 1,000 SuppliesExpense 300 AdvertisingExpense 200 InsuranceExpense 100
Total expenses 3,600 Net income $3,400

75. The entry to close the revenue account includes a a. debit to Income Summary for $3,400.
b. credit to Income Summary for $3,400. c. debit to Income Summary for $7,000. d. credit to Income Summary for $7,000.

76. The entry to close the expense accounts includes a a. debit to Income Summary for $3,400.
b. credit to Rent Expense for $1,000,
c. credit to Income Summary for $3,600. d. debit to Wages Expense for $2,000.

77. After the revenue and expense accounts have been closed, the balance in Income Summarywill be
a. $0.
b. a debit balance of $3,400. c. a credit balance of $3,400. d. a credit balance of $7,000.

78. The entry to close Income Summary to Delgado, Capital includes a. a debit to Revenue for $7,000.
b. credits to Expenses totalling $3,600.
c. a credit to Income Summaryfor $3,400 d. a credit to Delgado, Capital for $3,400.

79. At June 1, 2008, Delgado reported owner’s equity of $35,000. The company had no owner drawings during June. At June 30, 2008, the company will report owner’s equity of a. $35,000.
b. $42,000. c. $38,400. d. $31,600.

Use the following information for questions 80–86.

The income statement for the year 2008 of Nova Co. contains the following information:

Revenues Expenses:
Wages Expense Rent Expense AdvertisingExpense SuppliesExpense Utilities Expense InsuranceExpense
Total expenses Net income (loss)

$45,000 12,000 6,000 6,000 2,500
2,000
$70,000

73,500 $(3,500)

80. The entry to close the revenue account includes a a. debit to Income Summary for $3,500.
b. credit to Income Summary for $3,500. c. debit to Revenues for $70,000.
d. credit to Revenues for $70,000.

81. The entry to close the expense accounts includes a a. debit to Income Summary for $3,500.
b. credit to Income Summary for $3,500. c. debit to Income Summary for $73,500. d. debit to Wages Expense for $2,500.

82. After the revenue and expense accounts have been closed, the balance in Income Summarywill be
a. $0.
b. a debit balance of $3,500. c. a credit balance of $3,500. d. a credit balance of $70,000.

83. The entry to close Income Summary to Nova, Capital includes a. a debit to Revenue for $70,000.
b. credits to Expenses totalling $73,500. c. a credit to Income Summaryfor $3,500. d. a credit to Nova, Capital for $3,500.

84. At January 1, 2008, Nova reported owner’s equity of $50,000. Owner drawings for the year totalled $10,000. At December 31, 2008, the company will report owner’s equity of a. $13,500.
b. $36,500. c. $40,000. d. $43,500.

85. After all closing entries have been posted, the Income Summary account will have a balance of
a. $0.
b. $3,500 debit. c. $3,500 credit. d. $36,500 credit.

86. After all closing entries have been posted, the revenue account will have a balance of a. $0.
b. $70,000 credit. c. $70,000 debit. d. $3,500 credit.

87. A post-closing trial balance is prepared
a. after closing entries have been journalized and posted. b. before closing entries have been journalized and posted.
c. after closing entries have been journalized but before the entries are posted. d. before closing entries have been journalized but after the entries are posted.

88. All of the following statements about the post-closing trial balance are correct except it a. shows that the accounting equation is in balance.
b. provides evidence that the journalizing and posting of closing entries have been properly completed.
c. contains only permanent accounts.
d. proves that all transactions have been recorded.

89. A post-closing trial balance will show a. only permanent account balances. b. only temporary account balances. c. zero balances for all accounts.
d. the amount of net income (or loss) for the period.

90. A post-closing trial balance should be prepared
a. before closing entries are posted to the ledger accounts. b. after closing entries are posted to the ledger accounts.
c. before adjusting entries are posted to the ledger accounts. d. only if an error in the accounts is detected.

91. A post-closing trial balance will show a. zero balances for all accounts.
b. zero balances for balance sheet accounts. c. only balance sheet accounts.
d. only income statement accounts.

92. The purpose of the post-closing trial balance is to a. prove that no mistakes were made.
b. prove the equality of the balance sheet account balances that are carried forward into the next accounting period.
c. prove the equality of the income statement account balances that are carried forward into the next accounting period.
d. list all the balance sheet accounts in alphabetical order for easy reference.

93. The balances that appear on the post-closing trial balance will match the a. income statement account balances after adjustments.
b. balance sheet account balances after closing entries.
c. income statement account balances after closing entries. d. balance sheet account balances after adjustments.

94. Which account listed below would be double ruled in the ledger as part of the closing process?
a. Cash
b. Owner’s Capital c. Owner’s Drawing
d. Accumulated Depreciation

95. A double rule applied to accounts in the ledger during the closing process implies that a. the account is an income statement account.
b. the account is a balance sheet account. c. the account balance is not zero.
d. a mistake has been made, since double ruling is prescribed.

96. The heading for a post-closing trial balance has a date linethat is similar to the onefound on a. a balance sheet.
b. an income statement.
c. an owner’s equity statement. d. the worksheet.

97. Which one of the following is usually prepared only at the end of a company’s annual accounting period?
a. Preparing financial statements
b. Journalizing and posting adjusting entries c. Journalizing and posting closing entries d. Preparing an adjusted trial balance

98. The step in the accounting cycle that is performed on a periodic basis (i.e., monthly, quarterly) is
a. analyzing transactions.
b. journalizing and posting adjusting entries. c. preparing a post-closing trial balance.
d. posting to ledger accounts.

99. Which one of the following is an optional step in the accounting cycle of a business enterprise?
a. Analyze business transactions b. Prepare a worksheet
c. Prepare a trial balance
d. Post to the ledger accounts

100. The final step in the accounting cycle is to prepare a. closing entries.
b. financial statements.
c. a post-closing trial balance. d. adjusting entries.

101. Which of the following steps in the accounting cycle would not generally be performed daily?
a. Journalize transactions b. Post to ledger accounts c. Prepare adjusting entries
d. Analyze business transactions

102. Which of the following steps in the accounting cycle may be performed more frequently than annually?
a. Prepare a post-closing trial balance b. Journalize closing entries
c. Post closing entries
d. Prepare a trial balance

103. Which of the following depicts the proper sequence of steps in the accounting cycle? a. Journalize the transactions, analyze business transactions, prepare a trial balance b. Prepare a trial balance, prepare financial statements, prepare adjusting entries
c. Prepare a trial balance, prepare adjusting entries, prepare financial statements d. Prepare a trial balance, post to ledger accounts, post adjusting entries

104. The two optional steps in the accounting cycle are preparing a. a post-closing trial balance and reversing entries.
b. a worksheet and post-closing trial balances. c. reversing entries and a worksheet.
d. an adjusted trial balance and a post-closing trial balance.

105. The first required step in the accounting cycle is a. reversing entries.
b. journalizing transactions in the book of original entry. c. analyzing transactions.
d. posting transactions.

106. Correcting entries
a. always affect at least one balance sheet account and one income statement account. b. affect income statement accounts only.
c. affect balance sheet accounts only.
d. may involve any combination of accounts in need of correction.

107. Speedy Bike Company received a $940 check from a customer for the balance due. The transaction was erroneously recorded as a debit to Cash $490 and a credit to Service Revenue $490. The correcting entry is
a. debit Cash, $940; credit Accounts Receivable, $940.
b. debit Cash, $450 and Accounts Receivable, $490; credit Service Revenue, $940. c. debit Cash, $450 and Service Revenue, $490; credit Accounts Receivable, $940. d. debit Accounts Receivable, $940; credit Cash, $450 and Service Revenue, $490.

108. If errors occur in the recording process, they
a. should be corrected as adjustments at the end of the period. b. should be corrected as soon as they are discovered.
c. should be corrected when preparing closing entries. d. cannot be corrected until the next accounting period.

109. A correcting entry
a. must involve one balance sheet account and one income statement account. b. is another name for a closing entry.
c. may involve any combination of accounts. d. is a required step in the accounting cycle.

110. An unacceptable way to make a correcting entry is to a. reverse the incorrect entry.
b. erase the incorrect entry.
c. compare the incorrect entry with the correct entry and make a correcting entry to correct the accounts.
d. correct it immediately upon discovery.

111. Cole Company paid the weekly payroll on January 2 by debiting Wages Expense for $45,000. The accountant preparing the payroll entry overlooked the fact that Wages Expense of $27,000 had been accrued at year end on December 31. The correcting entry is
a. Wages Payable………………………………………………………….. 27,000 Cash………………………………………………………………. 27,000
b. Cash………………………………………………………………………… 18,000
Wages Expense………………………………………………. 18,000 c. Wages Payable………………………………………………………….. 27,000
Wages Expense………………………………………………. 27,000 d. Cash………………………………………………………………………… 27,000
Wages Expense………………………………………………. 27,000

112. Tyler Company paid $530 on account to a creditor. The transaction was erroneously recorded as a debit to Cash of $350 and a credit to Accounts Receivable, $350. The correcting entry is
a. AccountsPayable………………………………………………………. 530 Cash………………………………………………………………. 530
b. AccountsReceivable ………………………………………………….. 350 Cash………………………………………………………………. 350
c. AccountsReceivable ………………………………………………….. 350 AccountsPayable……………………………………………. 350
d. AccountsReceivable ………………………………………………….. 350 AccountsPayable………………………………………………………. 530
Cash………………………………………………………………. 880

113. A lawyer collected $830 of legal fees in advance. He erroneously debited Cash for $380 and credited Accounts Receivable for $380. The correcting entry is
a. Cash…………………………………………………………………………. 380 AccountsReceivable…………………………………………………… 450
UnearnedRevenue………………………………………….. 830 b. Cash…………………………………………………………………………. 830
Service Revenue……………………………………………… 830 c. Cash…………………………………………………………………………. 450
AccountsReceivable…………………………………………………… 380 UnearnedRevenue………………………………………….. 830
d. Cash…………………………………………………………………………. 450 AccountsReceivable………………………………………… 450

114. All of the following are property, plant, and equipment except a. supplies.
b. machinery. c. land.
d. buildings.

115. The first item listed under current liabilities is usually a. accounts payable.
b. notes payable. c. salaries payable. d. taxes payable.

116. Office Equipment is classified in the balance sheet as a. a current asset.
b. property, plant, and equipment. c. an intangible asset.
d. a long-term investment.

117. A current asset is
a. the last asset purchased by a business.
b. an asset which is currently being used to produce a product or service. c. usually found as a separate classification in the income statement.
d. an asset that a company expects to convert to cash or use up within one year.

118. An intangible asset
a. does not have physical substance, yet often is very valuable. b. is worthless because it has no physical substance.
c. is converted into a tangible asset during the operating cycle.
d. cannot be classified on the balance sheet because it lacks physical substance.

119. Liabilities are generally classified on a balance sheet as a. small liabilities and large liabilities.
b. present liabilities and future liabilities.
c. tangible liabilities and intangible liabilities. d. current liabilities and long-term liabilities.

120. Which of the following would not be classified a long-term liability? a. Current maturities of long-term debt
b. Bonds payable
c. Mortgage payable d. Lease liabilities

121. Which of the following liabilities are not related to the operating cycle? a. Wages payable
b. Accounts payable c. Utilities payable d. Bonds payable

122. Intangible assets include each of the following except a. copyrights.
b. goodwill.
c. land improvements. d. patents.

123. It is not true that current assets are assets that a company expects to a. realize in cash within one year.
b. sell within one year.
c. use up within one year. d. acquire within one year.

124. The operating cycle of a company is the average time that is required to go from cash to a. sales in producing revenues.
b. cash in producing revenues.
c. inventory in producing revenues.
d. accounts receivable in producing revenues.

125. On a classified balance sheet, current assets are customarily listed a. in alphabetical order.
b. with the largest dollar amounts first. c. in the order of liquidity.
d. in the order of acquisition.

126. Intangible assets are
a. listed under current assets on the balance sheet.
b. not listed on the balance sheet because they do not have physical substance. c. noncurrent resources.
d. listed as a long-term investment on the balance sheet.

127. The relationship between current assets and current liabilities is important in evaluating a company’s
a. profitability. b. liquidity.
c. market value.
d. accounting cycle.

128. The most important information needed to determine if companies can pay their current obligations is the
a. net income for this year.
b. projected net income for next year.
c. relationship between current assets and current liabilities. d. relationship between short-term and long-term liabilities.

Use the following information for questions 129–137.

The following items are taken from the financial statements of Cerner Company for the year ending December 31, 2008:

Accountspayable Accountsreceivable
Accumulateddepreciation – equipment Advertisingexpense
Cash
Cerner, Capital (1/1/08) Cerner, Drawing Depreciation expense Insuranceexpense
Note payable, due 6/30/09
Prepaid insurance (12-month policy) Rent expense
Salaries expense Service revenue Supplies Suppliesexpense Equipment
$ 18,000 11,000 28,000 21,000 15,000 102,000 14,000 12,000 3,000 70,000 6,000 17,000 32,000 133,000 4,000 6,000 210,000

129. What is the company’s net income for the year ending December 31, 2008? a. $133,000
b. $42,000 c. $28,000 d. $12,000

130. What is the balance that would be reported for owner’s equity at December 31, 2008? a. $102,000
b. $130,000 c. $144,000 d. $158,000

131. What are total current assets at December 31, 2008? a. $26,000
b. $32,000 c. $36,000 d. $218,000

132. What is the book value of the equipment at December 31, 2008? a. $238,000
b. $210,000 c. $182,000 d. $170,000

133. What are total current liabililites at December 31, 2008? a. $18,000
b. $70,000 c. $88,000 d. $0

134. What are total long-term liabilities at December 31, 2008? a. $0
b. $70,000 c. $88,000 d. $90,000

135. What is total liabilities and owner’s equity at December 31, 2008? a. $176,000
b. $190,000 c. $218,000 d. $232,000

136. The sub-classifications for assets on the company’s classified balance sheet would include all of the following except:
a. Current Assets.
b. Property, Plant, and Equipment. c. Intangible Assets.
d. Long-term Assets.

137. The current assets should be listed on Cerner’s balance sheet in the following order: a. cash, accounts receivable, prepaid insurance, equipment.
b. cash, prepaid insurance, supplies, accounts receivable. c. cash, accounts receivable, prepaid insurance, supplies.
d. equipment, supplies, prepaid insurance, accounts receivable, cash.

138. Which statement about long-term investments is not true? a. They will be held for more than one year.
b. They are not currently used in the operation of the business.
c. They include investments in stock of other companies and land held for future use. d. They can never include cash accounts.

139. What is the order in which assets are generally listed on a classified balance sheet? a. Current and long-term
b. Current; property, plant, and equipment; long-term investments; intangible assets c. Current; property, plant, and equipment; intangible assets; long-term investments d. Current; long-term investments; property, plant, and equipment; intangible assets

140. These are selected account balances on December 31, 2008.

Land (location of the corporation’s office building) Land (held for future use)
CorporateOffice Building Inventory
Equipment Office Furniture
AccumulatedDepreciation

$100,000 150,000 600,000 200,000 450,000 100,000 300,000

What is the total amount of property, plant, and equipment that will appear on the balance sheet?
a. $1,300,000 b. $1,100,000 c. $1,600,000 d. $950,000

141. The following selected account balances appear on the December 31, 2008 balance sheet of Ming Co.

Land (location of the corporation’s office building) Land (held for future use)
CorporateOffice Building Inventory
Equipment Office Furniture
AccumulatedDepreciation
$150,000 225,000 900,000 300,000 675,000 150,000 450,000

What is the total amount of property, plant, and equipment that will be reported on the balance sheet?
a. $1,950,000 b. $1,650,000 c. $2,400,000 d. $1,425,000

a142. A reversing entry
a. reverses entries that were made in error.
b. is the exact opposite of an adjusting entry made in a previous period. c. is made when a business disposes of an asset it previously purchased.
d. is made when a company sustains a loss in one period and reverses the effect with a profit in the next period.

a143. If a company utilizes reversing entries, they will
a. be made at the beginning of the next accounting period. b. not actually be posted to the general ledger accounts. c. be made before the post-closing trial balance.
d. be part of the adjusting entry process.

Additional Multiple Choice Questions

144. The steps in the preparation of a worksheet do not include a. analyzing documentary evidence.
b. preparing a trial balance on the worksheet.
c. entering the adjustments in the adjustment columns.
d. entering adjusted balances in the adjusted trial balance columns.

145. Balance sheet accounts are considered to be a. temporary owner’s equity accounts.
b. permanent accounts. c. capital accounts.
d. nominal accounts.

146. Income Summary has a credit balance of $12,000 in J. Sawyer Co. after closing revenues and expenses. The entry to close Income Summary is
a. credit Income Summary $12,000, debit J. Sawyer, Capital $12,000. b. credit Income Summary $12,000, debit J. Sawyer, Drawing $12,000. c. debit Income Summary $12,000, credit J. Sawyer, Drawing $12,000. d. debit Income Summary $12,000, credit J. Sawyer, Capital $12,000.

147. The post-closing trial balance contains only a. income statement accounts.
b. balance sheet accounts.
c. balance sheet and income statement accounts.
d. income statement, balance sheet, and owner’s equity statement accounts.

148. Which of the following is an optional step in the accounting cycle? a. Adjusting entries
b. Closing entries
c. Correcting entries d. Reversing entries

149. Which one of the following statements concerning the accounting cycle is incorrect?
a. The accounting cycle includes journalizing transactions and posting to ledger accounts.
b. The accounting cycle includes only one optional step.
c. The steps in the accounting cycle are performed in sequence.
d. The steps in the accounting cycle are repeated in each accounting period.

150. Correcting entries are made
a. at the beginning of an accounting period. b. at the end of an accounting period.
c. whenever an error is discovered. d. after closing entries.

151. On September 23, Pitts Company received a $350 check from Mike Moluf for services to be performed in the future. The bookkeeper for Pitts Company incorrectly debited Cash for $350 and credited Accounts Receivable for $350. The amounts have been posted to the ledger. To correct this entry, the bookkeeper should
a. debit Cash $350 and credit Unearned Service Revenue $350.
b. debit Accounts Receivable $350 and credit Unearned Service Revenue $350. c. debit Accounts Receivable $350 and credit Cash $350.
d. debit Accounts Receivable $350 and credit Service Revenue $350.

152. All of the following are owner’s equity accounts except a. the Capital account.
b. Capital Stock.
c. Investment in Stock. d. Retained Earnings.

153. Current liabilities
a. are obligations that the company is to pay within the forthcoming year. b. are listed in the balance sheet in order of their expected maturity.
c. are listed in the balance sheet, starting with accounts payable.
d. should not include long-term debt that is expected to be paid within the next year.

a154. The use of reversing entries
a. is a required step in the accounting cycle.
b. changes the amounts reported in the financial statements. c. simplifies the recording of subsequent transactions.
d. is required for all adjusting entries.

BRIEFEXERCISES

BE 155

Use the following income statement for the year 2008 for J. S. Caper Company to prepare entries to close the revenue and expense accounts for the company.

Service revenues Expenses:
Wages Expense Rent Expense AdvertisingExpense
Total expenses Net income (loss)

$40,000 12,500
5,700
$100,000

58,200 $ 41,800

BE 156
T. Price Company earned net income of $43,000 during 2008. The company had owner drawings totalling $30,000 during the period. Prepare the entries to close Income Summary and the Price, Drawing account.

BE 157

At April 1, 2008, Clinton Company reported a balance of $22,000 in the Clinton, Capital account. Clinton Company earned revenues of $50,000 and incurred expenses of $32,000 during April 2008. The company had owner drawings of $10,000 during the month.

(a) Prepare the entries to close Income Summary and the Clinton, Drawing acccount at April 30, 2008.
(b) What is the balance in Clinton, Capital on the April 30, 2008 post-closing trial balance?

BE 158

Identifywhich of the following are temporary accounts of Renfro Company. (1) Renfro, Capital
(2) Renfro, Drawing (3) Equipment
(4) AccumulatedDepreciation (5) Depreciation Expense

BE 159

Identifywhich of the following accounts would have balances on a post-closing trial balance. (1) Service Revenue
(2) Income Summary (3) Notes Payable (4) Interest Expense (5) Cash

BE 160

Preparethe necessary correcting entry for each of the following.
a. A payment on account of $500 was debited to Accounts Payable $550 and credited to Cash $550.
b. The collection of Accounts Receivable of $660 was recorded as a debit to Cash $660 and a credit to Service Revenue $660.

BE 161

Preparethe necessary correcting entry for each of the following.
a. A payment of $5,000 for salaries was recorded as a debit to Supplies Expense and a credit to Cash.
b. A purchase of supplies on account for $1,000 was recorded as a debit to Equipment and a credit to Accounts Payable.

BE 162

The following accounts were included on Stacy’s Style Consultants post-closing trial balance at December31, 2008:

Accountspayable $ 2,000 Accountsreceivable 5,500 Cash 11,000 Stacy, Capital 40,000 Stacy, Drawing 10,000 Interest expense 3,000 Note payable, due 8/31/11 60,000 Supplies 1,000 Service revenue 39,000 Equipment 5,000

(a) What are total current assets? (b) What are total current liabilities?

BE 163

The following items are taken from the adjusted trial balance of Salon Company for the month ending July 31, 2008:

Accountspayable $ 2,000 Accountsreceivable 3,000 Accumulateddepreciation – equipment 8,000 Cash 2,200 Depreciation expense 2,000 Equipment 54,000 Salon, Capital 7/1/08 52,000 Service revenue 33,000 Supplies 1,200

Preparethe current assets section of Salon’s classified balance sheet.

BE 164

The following information is available for Juxton Company for the year ended December 31, 2008:

Accountspayable $ 2,700 Accumulateddepreciation, equipment 4,000 Juxton, Capital 7,800 Intangibleassets 2,500 Notes payable (due in 5 years) 7,500 Accountsreceivable 1,500 Cash 2,600 Short-terminvestments 1,000 Equipment 7,500 Long-terminvestments 6,900

Instructions
Use the above information to prepare a classified balance sheet for the year ended December 31, 2008.

BE 165

The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent accounts found on balance sheets. In the blank next to each account, write the letter indicating to which category it belongs.

A. Current assets
B. Long-term investments
C. Property, plant, and equipment D. Intangible assets
E. Current liabilities
F. Long-term liabilities G. Owner’s equity
H. Not on the balance sheet

1. AccumulatedDepreciation 2. Jones, Capital
3. Interest Expense 4. SalaryPayable
5. Jones, Drawing
6. Inventory 7. Patents
8. Prepaid Rent

9. MortgagePayable

10. Land Held for Investment

BE 166

J. Bishop Company prepared the following adjusting entries at year end on December 31, 2008: (a) Interest Expense………………………………………………………………… 100
Interest Payable…………………………………………………………. 100

(d) Interest Receivable…………………………………………………………….. 250
Interest Revenue………………………………………………………… 250

(c) SalaryExpense………………………………………………………………….. 4,000 SalaryPayable…………………………………………………………… 4,000

In an effort to minimize errors in recording transactions, J. Bishop Company utilizes reversing entries. Prepare reversing entries on January 1, 2009.

EXERCISES
Ex. 167
The worksheet for Kiner Company has been completed through the adjusted trial balance. You are ready to extend each amount to the appropriate financial statement column. Indicate for each account, the financial statement column to which the account should be extended by placing a check mark (√) in the appropriate column. ———————————————————————————————————————————
Income Statement Balance Sheet
Account Title Dr. Cr. Dr. Cr. ———————————————————————————————————————————
(1) Cash ———————————————————————————————————————————
(2) Kiner, Capital ———————————————————————————————————————————
(3) Mortgage Payable ———————————————————————————————————————————
(4) Interest Receivable ———————————————————————————————————————————
(5) Supplies ———————————————————————————————————————————
(6) Accounts Payable ———————————————————————————————————————————
(7) Short-term Investments ———————————————————————————————————————————
(8) Repair Expense ———————————————————————————————————————————
(9) Unearned Service Revenue ——————————————————————————————————————————— (10) Equipment ——————————————————————————————————————————— (11) Depreciation Expense ——————————————————————————————————————————— (12) Interest Revenue ——————————————————————————————————————————— (13) Salaries Expense ——————————————————————————————————————————— (14) Kiner, Drawing ——————————————————————————————————————————— (15) Accum. Deprec.—Equipment ——————————————————————————————————————————— (16) Utilities Expense ——————————————————————————————————————————— (17) Salaries Payable ——————————————————————————————————————————— (18) Accounts Receivable ——————————————————————————————————————————— (19) Notes Payable ——————————————————————————————————————————— (20) Service Revenue ———————————————————————————————————————————
Completingthe Accounting Cycle 4 – 31

Ex. 168

Indicatethe worksheet column (income statement Dr., balance sheet Cr., etc.) to which each of the following accounts would be extended.

Account Worksheet Column

a. AccountsReceivable

b. AccumulatedDepreciation

c. CommissionRevenue

d. Interest Expense

e. Smith, Drawing

f. UnearnedRevenue

Ex. 169

The worksheet for Vietti Rental Company appears below. Using the adjustment data below, complete the worksheet. Add any accounts that are necessary.

Adjustment data:

(a) Prepaid rent expired during August, $2.
(b) Depreciation expense on office equipment for the month of August, $8. (c) Supplies on hand on August 31 amounted to $6.
(d) Salaries expense incurred at August 31 but not yet paid amounted to $10.

VIETTIRENTALCOMPANY Worksheet
FortheMonth EndedAugust31, 2008

AccountTitles

TrialBalance

Adjustments
Adjusted TrialBalance
Income Statement

BalanceSheet

Debit Credit
Debit Credit
Debit Credit
Debit Credit
Debit Credit

Cash AccountsReceivable Prepaid Rent Supplies OfficeEquipment
Accum. Depreciation— Equipment
AccountsPayable Vietti, Capital Vietti, Drawing Rent Revenue
Depreciation Expense Rent Expense SalariesExpense Totals SuppliesExpense SalariesPayable Totals
NetIncome
Totals
20 12 8 10 50

10 20 25
2
77 6
4
20
132 132

Ex. 170

The account balances appearing on the trial balance (below) were taken from the general ledger of Mann’s Copy Shop at September 30.

Additional information for the month of September which has not yet been recorded in the accounts is as follows:

(a) A physical count of supplies indicates $300 on hand at September 30.
(b) The amount of insurance that expired in the month of September was $200. (c) Depreciation on equipment for September was $400.
(d) Rent owed on the copy shop for the month of September was $600 but will not be paid until October.

Instructions
Using the above information, complete the worksheet on the following page for Mann’s Copy Shopfor the month of September.

MANN’SCOPY SHOP Worksheet
FortheMonth EndedSeptember 30,2008

AccountTitles

TrialBalance

Adjustments
Adjusted TrialBalance
Income Statement

BalanceSheet

Debit Credit
Debit Credit
Debit Credit
Debit Credit
Debit Credit

Cash Supplies
PrepaidInsurance Equipment
Accum. Depreciation— Equipment
AccountsPayable Notes Payable Mann, Capital Mann, Drawing Copy Revenue Utilities Expense Totals SuppliesExpense InsuranceExpense
Depreciation Expense Rent Expense
Rent Payable Totals NetIncome
Totals
1,000 1,100 2,200 24,000

4,500 2,400 4,000 15,300
2,400
4,900
400
31,100 31,100

Ex. 171

Preparethe necessary closing entries based on the following selected accounts.

AccumulatedDepreciation Depreciation Expense Kline, Capital
Kline, Drawing Salaries Expense Service Revenue
$10,000 5,000 20,000 12,000 18,000 30,000

Ex. 172

All revenue and expense accounts have been closed at the end of the calendar year for Staley Company. The Income Summary account has total debits of $520,000 and total credits of $600,000. As of the same date, Ron Staley, Capital has a balance of $115,000, and Ron Staley, Drawing has a balance of $48,000.

Instructions
(a) Journalize the entries required to complete the closing of the accounts.
(b) Prepare an owner’s equity statement for the year ended December 31, 2008.

Ex. 173

At March 31, account balances after adjustmentsfor Norton Cinema are as follows:

Accounts Cash
ConcessionSupplies TheatreEquipment
AccumulatedDepreciation—TheatreEquipment AccountsPayable
Norton, Capital Norton, Drawing
AdmissionTicket Revenues PopcornRevenues CandyRevenues AdvertisingExpense ConcessionSupplies Expense Depreciation Expense
Film Rental Expense Rent Expense Salaries Expense Utilities Expense
Account Balances (After Adjustment)
$ 6,000 4,000 50,000 12,000 5,000 20,000 12,000 60,000 32,000 19,000 12,000 19,000 4,000 16,000 12,000 18,000 5,000

Instructions

Preparethe closing journal entries for Norton Cinema.

Ex. 174

Presentedbelow is an adjusted trial balance for Trent Company, at December 31, 2008.

Cash Accountsreceivable Prepaid insurance Equipment Depreciation expense M. Trent, Drawing Advertisingexpense Rent expense Salaryexpense Insuranceexpense
$12,700 20,000 15,000 35,000 7,000 1,500 1,400 800 3,000
1,600 $98,000
Accountspayable Notes payable
AccumulatedDepreciation— Equipment
Service revenue M. Trent, Capital Unearnedrevenue
$10,000 9,000

14,000 25,000 24,000 16,000

$98,000

Instructions

(a) Prepare closing entries for December 31, 2008.

(b) Determine the balance in M. Trent’s capital account after the entries have been posted.

Ex. 175

The adjusted account balances of the Fitness Center at July 31 are as follows:

Accounts Account Balances Cash $11,000 AccountsReceivable 15,000 Supplies 4,000 Prepaid Insurance 8,000 Buildings 300,000 AccumulatedDepreciation—
Buildings 120,000 AccountsPayable 19,000 Utley, Capital 195,000 Utley, Drawing 15,000
Accounts Service Revenue Interest Revenue
Depreciation Expense InsuranceExpense SalaryExpense SuppliesExpense Utilities Expense
Account Balances $100,000
8,000 27,000 6,000 35,000 9,000 12,000

Instructions

Preparethe end of the period closing entries for the Fitness Center.
Completingthe Accounting Cycle 4 – 41

Ex. 176

The income statement of Gentry’s Shoe Repair is as follows:

GENTRY’S SHOE REPAIR Income Statement
For the Month Ended April 30, 2008

Revenue
Shoe Repair Revenue…………………………………………………………. $7,500 Expenses
Salaries Expense……………………………………………………………….. $3,400 Depreciation Expense…………………………………………………………. 350 Utilities Expense…………………………………………………………………. 400 Rent Expense…………………………………………………………………….. 600 SuppliesExpense………………………………………………………………. 1,050
Total Expenses……………………………………………………………. 5,800 Net Income………………………………………………………………………………… $1,700

On April 1, the owner, Lee Gentry, had a capital balance of $12,900. During April, Gentry withdrew $3,000 cash for personal use.

Instructions
(a) Prepare closing entries at April 30.
(b) Prepare an owner’s equity statement for the month of April.

Ex. 177

Identifywhich of the following accounts would appear in a post- closing trial balance.

Accumulated Depreciation Depreciation Expense Interest Payable
Jackson, Drawing Service Revenue Store Equipment

Ex. 178

The trial balances of Foley Company follow with the accounts arranged in alphabetic order. Analyze the data and prepare (a) the adjusting entries and (b) the closing entries made by Foley Company.
Trial Balances
Unadjusted Adjusted Post-Closing AccountsPayable $10,000 $10,000 $10,000 AccountsReceivable 2,200 3,200 3,200 AccumulatedDepreciation 13,000 17,000 17,000 AdvertisingExpense 0 16,300 0 Cash 60,000 60,000 60,000 Depreciation Expense 0 4,000 0 Equipment 75,000 75,000 75,000 Foley, Capital 82,200 82,200 102,400 Foley, Drawing 11,000 11,000 0 Prepaid Advertising 17,800 1,500 1,500 Prepaid Rent 15,000 11,000 11,000 Rent Expense 0 4,000 0 Service Revenue 96,000 105,000 0 Supplies 3,200 700 700 SuppliesExpense 2,000 4,500 0 UnearnedRevenue 23,000 15,000 15,000 Wages Expense 38,000 45,000 0 Wages Payable 0 7,000 7,000

Ex. 179

Indicatethe proper sequence of the steps in the accounting cycle by placing numbers 1-8 in the blank spaces.

a. Analyze business transactions.

b. Journalize and post adjusting entries.

c. Journalize and post closing entries.

d. Journalize the transactions.

e. Prepare a post-closing trial balance.

f. Prepare a worksheet.

g. Prepare financial statements.

h. Post to ledger accounts.

Ex. 180

Preparethe necessary correcting entry for each of the following.

a. A collection on account of $370 from a customer was credited to Accounts Receivable $730 and debited to Cash $730.

b. The purchase of supplies on account for $250 was recorded as a debit to Equipment $250 and a credit to Accounts Payable $250.

Ex. 181

An examination of the accounts of Shaw Company for the month of June revealed the following errors after the transactions were journalized and posted.
1. A check for $750 from R. Linton, a customer on account, was debited to Cash $750 and credited to Service Revenue, $750.
2. A payment for Advertising Expense costing $420 was debited to Utilities Expense, $240 and credited to Cash $240.
3. A bill for $840 for Office Supplies purchased on account was debited to Office Equipment, $480 and credited to Accounts Payable $480.

Instructions
Prepare correcting entries for each of the above assuming the erroneous entries are not reversed. Explain how the transaction as originally recorded affected net income for the month of June.

Ex. 182

As Jeff Wills was doing his year-end accounting, he noticed that the bookkeeper had made errors in recording several transactions. The erroneous transactions are as follows:

(a) A check for $700 was issued for goods previously purchased on account. The bookkeeper debited Accounts Receivable and credited Cash for $700.

(b) A check for $380 was received as payment on account. The bookkeeper debited Accounts Payable for $830 and credited Accounts Receivable for $830.

(c) When making the entry to record the year’s depreciation expense, the bookkeeper debited AccumulatedDepreciationfor $1,000 and credited Cash for $1,000.

(d) When accruing interest on a note payable, the bookkeeper debited Interest Receivable for $200 and credited Interest Payable for $200.

Instructions
Preparethe appropriatecorrecting entries. (Do not reverse the original entries.)

Ex. 183

Jon Scott, CPA, was asked by Jeff Pine to review the accounting records and prepare the financial statements for his upholstering shop. Jon reviewed the records and found three errors. 1. Cash paid on accounts payable for $930 was recorded as a debit to Accounts Payable $390
and a credit to Cash $390.
2. The purchase of supplies on account for $500 was debited to Equipment $500 and credited to AccountsPayable $500.
3. Jeff withdrew $1,200 of cash and the bookkeeper debited Accounts Receivable for $120 and credited Cash $120.

Instructions
Preparean analysis of each error showing the (a) incorrect entry.
(b) correct entry. (c) correcting entry.

Ex. 184

Computethe dollar amount of current assets based on the following account balances.

AccountsReceivable AccumulatedDepreciation Cash
Equipment Prepaid Rent
Short-termInvestments
$16,000 27,000 24,000 93,000 7,000 15,000

Ex. 185

The financial statement columns of the worksheet for Audio Concepts at December 31, 2008, are as follows:
AUDIO CONCEPTS Worksheet
For the Year Ended December 31, 2008

Accounts Cash AccountsReceivable Supplies
Prepaid Insurance Audio Equipment
AccumulatedDepreciation—AudioEquipment AccountsPayable
Note Payable Salaries Payable J. Green, Capital J. Green, Drawing Audio Revenue
AdvertisingExpense Depreciation Expense InsuranceExpense Rent Expense Salaries Expense SuppliesExpense
Totals Net Income

Instructions
Income Statement
Debit Credit

123,000 21,000
12,000 3,000 17,000 42,000
6,000
101,000 123,000
22,000
123,000 123,000
Balance Sheet
Debit Credit
15,000 7,000 4,000 6,000 209,000
29,000 19,000 70,000 3,000 112,000
14,000

255,000 233,000
22,000 255,000 255,000

(a) Calculate the balance of J. Green, Capital that would appear on a balance sheet at December31, 2008.

(b) Prepare a classified balance sheet for Audio Concepts at December 31, 2008 assuming the note payable is a long-term liability.

Ex. 186

The financial statement columns of the worksheet for Melton Company as of December 31, 2008 are as follows:
MELTON COMPANY Worksheet
For the Year Ended December 31, 2008

Accounts Cash
AccountsReceivable Supplies
Prepaid Insurance Equipment AccumulatedDepreciation Patents AccountsPayable
Bonds Payable (due 2012) Melton, Capital
Melton, Drawing Service Revenue Salaries Expense Depreciation Expense InsuranceExpense Interest Expense
Totals Net Income
Income Statement Balance Sheet
Debit Credit Debit Credit
20,000 6,000 4,500 7,000 50,000
4,800 7,500
23,500 18,000 46,000
4,200 25,400
5,200 4,800 5,000
3,500
18,500 25,400 99,200 92,300
6,900 6,900 25,400 25,400 99,200 99,200

Instructions

Preparea classified balance sheet for Melton Company.

Ex. 187

Reisner Company prepared the following adjusting entries at year end on December 31, 2007: (a) Interest Expense………………………………………………………………… 200
Interest Payable…………………………………………………………. 200

(b) UnearnedRevenue…………………………………………………………….. 1,500
Service Revenue………………………………………………………… 1,500

(c) InsuranceExpense …………………………………………………………….. 1,200
Prepaid Insurance………………………………………………………. 1,200

(d) Interest Receivable…………………………………………………………….. 100
Interest Revenue………………………………………………………… 100

(e) SuppliesExpense………………………………………………………………. 250 Supplies…………………………………………………………………….. 250

(f) Wages Expense…………………………………………………………………. 3,000

Wages Payable………………………………………………………….. 3,000

In an effort to minimize errors in recording transactions, Reisner Company utilizes reversing entries.

Instructions

Preparereversing entries on January 1, 2008, for the adjusting entries given where appropriate.

Ex. 188

On December 31, 2008 the adjusted trial balance of the Dixon Personnel Agency shows the following selected data:

CommissionReceivable, $7,000 CommissionRevenue, $70,000 Interest Expense, $10,500 Interest Payable, $2,500 Utilities Expense, $4,800 AccountsPayable, $2,400

Analysis indicates that adjusting entries were made for (a) $7,000 of employment commission revenue earned but not billed, (b) $2,500 of accrued but unpaid interest, and (c) $2,400 of utilities expense accrued but not paid.

Instructions
(a) Prepare the closing entries at December 31, 2008. (b) Prepare the reversing entries on January 1, 2009.
(c) Enter the adjusted trial balance data in T-accounts. Post the entries in (a) and (b) and rule and balance the accounts.
(d) Prepare the entries to record (1) the collection of the accrued commission on January 8, (2) payment of the utility bill on January 10, and (3) payment of all the interest due ($3,000) on January 15.
(e) Post the entries in (d) to the temporary accounts.
(f) What is the interest expense for the month of January 2009?

Ex. 189

Transactionand adjustment data for Gore Company for the calendar year end is as follows:

1. December 24 (initial salary entry): $12,000 of salaries earned between December 1 and December24 are paid.

2. December 31 (adjusting entry): Salaries earned between December 25 and December 31 are $2,000.These will be paid in the January 8 payroll.

3. January 8 (subsequent salary entry): Total salary payroll amounting to $7,000 was paid.

Instructions
Prepare two sets of journal entries as specified below. The first set of journal entries should assume that the company does not use reversing entries, and the second set should assume that reversingentries are utilized by the company.

Assumeno reversing entries Assume reversing entries

(a) Initial Salary Entry

Dec. 24

(b) Adjusting Entry

Dec. 31

(c) Closing Entry

Dec. 31

(d) Reversing Entry

Jan. 1

(e) Subsequent Salary Entry

Jan. 8

COMPLETION STATEMENTS

190. The first step in preparing a worksheet is to prepare a from the general ledger accounts.

191. The account balances appearing in the adjusted trial balance columns are extended to the

columns and the columns.

192. The process of transferring net income (or loss) for the period to Owner’s Capital is accomplished by making entries.

193. At the end of an accounting period, all revenue and expense accounts are closed to a temporary account called .

194. The Owner’s Drawing account is closed to the account at the end of the accounting period.

195. After all closing entries have been journalized and posted, the final step in the accounting cycle is to prepare a trial balance.

196. The preparation of a and entries are two optional steps in the accounting cycle.

197. Two permanent accounts that are part of the stockholder’s equity in a corporation are

and .

198. The four major classifications of assets in a classified balance sheet are:

, , and .

199. The of a company is the average time that it takes to purchase inventory, selll it on account, and then collect cash from customers.

200. Assets that do not have a physical substance yet often are very valuable are called

assets.

201. Liabilities are generally classified as either or on a classified balance sheet.

MATCHING

202. Match the items below by entering the appropriate code letter in the space provided.

A. Worksheet Permanent accounts
C. Closing entries D. Income Summary E. Reversing entry
F. Capital Stock B. G. Current assets H. Operating cycle
I. Long-term liabilities J. Correcting entries

1. Obligationsthat a company expects to pay after one year.

2. A part of owners’ equity in a corporation.

3. An optional tool which facilitates the preparation of financial statements.

4. A temporary account used in the closing process.

5. Balance sheet accounts whose balances are carried forward to the next period.

6. The average time that it takes to go from cash to cash in producing revenues.

7. Entries to correct errors made in recording transactions.

8. The exact opposite of an adjusting entry made in a previous period.

9. Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent owner’s equity account.

10. Assets that a company expects to pay or convert to cash or use up within one year.

SHORT-ANSWERESSAY QUESTIONS
S-AE 203
A worksheet is an optional working tool used by accountants to facilitate the preparation of financial statements. Consider the steps followed in preparing a worksheet. How does the use of a worksheet assist the accountant. Could financial statements be prepared without a worksheet? Evaluate how the process would differ. Consider factors such as timeliness, accuracy, and efficiency in your evaluation.

S-AE 204

Journalizing and posting closing entries is a required step in the accounting cycle. Discuss why it is necessary to close the books at the end of an accounting period. If closing entries were not made, how would the preparation of financial statements be affected?

S-AE 205

Give the definition of current assets and current liabilities and provide two examples of each.

S-AE 206 (Ethics)

Under Protection provides underground storage facilities for companies desiring off-site storage of sensitive documents, computer records, and other items. They have developed a sophisticated surveillance and security system which they initially used in their own facilities, and have recently started to market elsewhere as well.

The underground storage facilities are made from natural caves in some instances (reinforced and modified as appropriate) and from excavations of natural rock formations in others. The land was purchased over ten years ago for a total of $2.5 million. The modifications have cost approximately $15 million more. The company has never depreciated its storage facilities because the market value of the property has continued to rise. Presently, the market price is between $30 and $40 million.

Tom Carr, a new accounting manager, questioned this depreciation policy. Ken Hines, the controller, has told him that he needn’t worry about it. For one thing, he says, this is really a special form of Land account, which should not be depreciated at all. For another, this is a privately held company, and so they don’t need to worry about misleading investors. All the owners know about and approve the depreciation policy.

Required:

What are the ethical issues in this situation?

S-AE 207 (Communication)

You have recently started to work for Trent Holmes, manufacturers of cemetery markers and monuments. During your first month at work, you inadvertently recorded as revenue, about $3,000 of prepayments from Wynn Company. The financial statements had been released within the company when you discovered your error. The month-end closing had not been completed, however, and you were able to correct the accounts without incident.

Required:
Preparea short note to accompany the re-released financial statements explaining the mistake.

CHAPTER 5

ACCOUNTINGFOR MERCHANDISING OPERATIONS

CHAPTERSTUDY OBJECTIVES

1. Identify the differences between service and merchandising companies.

2. Explain the recording of purchases under a perpetual inventory system.

3. Explain the recording of sales revenues under a perpetual inventory system.

4. Explain the steps in the accounting cycle for a merchandising company.

5. Distinguish between a multiple-step and a single-step income statement.

6. Explain the computation and importance of gross profit.

7. Determine cost of goods sold under a periodic inventory system.

8. Explain the recording of purchases and sales of inventory under a periodic inventory system.

9. Prepare a worksheet for a merchandising company.

TRUE-FALSESTATEMENTS
1. Retailers and wholesalers are both considered merchandisers.

2. The steps in the accounting cycle are different for a merchandising company than for a service company.

3. Sales minus operating expenses equals gross profit.

4. Under a perpetual inventory system, the cost of goods sold is determinedeach time a sale occurs.

5. A periodic inventory system requires a detailed inventory record of inventory items.

6. Freight terms of FOB Destination means that the seller pays the freight costs.

7. Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

8. Sales revenues are earned during the period cash is collected from the buyer.

9. The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.

10. The revenue recognition principle applies to merchandisers by recognizing sales revenues when they are earned.

11. Sales Allowances and Sales Discounts are both designed to encourage customers to pay their accounts promptly.

12. To grant a customer a sales return, the seller credits Sales Returns and Allowances.

13. A company’s unadjusted balance in Merchandise Inventory will usually not agree with the actual amount of inventory on hand at year-end.

14. For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.

15. A merchandising company has different types of adjusting entries than a service company.

16. Nonoperating activities exclude revenues and expenses that result from secondary or auxiliary operations.

17. Selling expenses relate to general operating activities such as personnel management.

18. Net sales appears on both the multiple-step and single-step forms of an income statement.

19. A multiple-step income statement provides users with more information about a company’s income performance.

20. The multiple-stepform of income statement is easier to read than the single-step form.

21. Merchandise inventory is classified as a current asset in a classified balance sheet.

22. Gain on sale of equipment and interest expense are reported under other revenues and gains in a multiple-step income statement.

23. The gross profit section for a merchandising company appears on both the multiple-step and single-stepforms of an income statement.

24. In a multiple-step income statement, income from operations excludes other revenues and gains and other expenses and losses.

25. A single-step income statement reports all revenues, both operating and other revenues and gains, at the top of the statement.

26. If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.

27. Gross profit represents the merchandising profit of a company.

28. Gross profit is a measure of the overall profitability of a company.

29. Gross profit rate is computed by dividing cost of goods sold by net sales.

30. Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchasesto produce net purchases.

31. Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.

32. Under a periodic inventory system, the acquisition of inventory is charged to the Purchasesaccount.

33. Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.

34. In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.

Additional True-False Questions

35. Merchandise inventory is reported as a long-term asset on the balance sheet.

36. Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.

37. The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.

38. Sales should be recorded in accordance with the matching principle.

39. Sales returns and allowances and sales discounts are subtracted from sales in reporting net sales in the income statement.

40. A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.

41. If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.

42. The major difference between the balance sheets of a service company and a merchandising company is inventory.

MULTIPLECHOICE QUESTIONS

43. Income from operations is gross profit less a. administrative expenses.
b. operating expenses.
c. other expenses and losses. d. selling expenses.

44. An enterprise which sells goods to customers is known as a a. proprietorship.
b. corporation. c. retailer.
d. service firm.

45. Which of the following would not be considered a merchandising company? a. Retailer
b. Wholesaler c. Service firm d. Dot Com firm

46. A merchandising company that sells directly to consumers is a a. retailer.
b. wholesaler. c. broker.
d. service company.

47. Two categories of expenses for merchandising companies are a. cost of goods sold and financing expenses.
b. operating expenses and financing expenses. c. cost of goods sold and operating expenses. d. sales and cost of goods sold.

48. The primary source of revenue for a wholesaler is a. investment income.
b. service fees.
c. the sale of merchandise.
d. the sale of fixed assets the company owns.

49. Sales revenue less cost of goods sold is called a. gross profit.
b. net profit. c. net income.
d. marginal income.

50. After gross profit is calculated, operating expenses are deducted to determine a. gross margin.
b. net income.
c. gross profit on sales. d. net margin.

51. Cost of goods sold is determined only at the end of the accounting period in a. a perpetual inventory system.
b. a periodic inventory system.
c. both a perpetual and a periodic inventory system. d. neither a perpetual nor a periodic inventory system.

52. Which of the following expressions is incorrect?
a. Gross profit – operating expenses = net income
b. Sales – cost of goods sold – operating expenses = net income c. Net income + operating expenses = gross profit
d. Operating expenses – cost of goods sold = gross profit

53. Detailed records of goods held for resale are not maintained under a a. perpetual inventory system.
b. periodic inventory system.
c. double entry accounting system. d. single entry accounting system.

54. A perpetual inventory system would likely be used by a(n) a. automobile dealership.
b. hardware store. c. drugstore.
d. convenience store.

55. Which of the following is a true statement about inventory systems?
a. Periodic inventory systems require more detailed inventory records. b. Perpetual inventory systems require more detailed inventory records.
c. A periodic system requires cost of goods sold be determined after each sale.
d. A perpetual system determines cost of goods sold only at the end of the accounting period.

56. In a perpetual inventory system, cost of goods sold is recorded a. on a daily basis.
b. on a monthly basis. c. on an annual basis. d. with each sale.

57. If a company determines cost of goods sold each time a sale occurs, it a. must have a computer accounting system.
b. uses a combination of the perpetual and periodic inventory systems. c. uses a periodic inventory system.
d. uses a perpetual inventory system.

58. Under a perpetual inventory system, acquisition of merchandise for resale is debited to the
a. Merchandise Inventory account. b. Purchases account.
c. Supplies account.
d. Cost of Goods Sold account.

59. The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit
a. Accounts Payable.
b. Purchase Returns and Allowances. c. Sales.
d. Merchandise Inventory.

60. The Merchandise Inventory account is used in each of the following except the entry to record
a. goods purchased on account. b. the return of goods purchased.
c. payment of freight on goods sold. d. payment within the discount period.

61. A buyer would record a payment within the discount period under a perpetual inventory system by crediting
a. Accounts Payable.
b. Merchandise Inventory. c. Purchase Discounts. d. Sales Discounts.

62. If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the
a. Merchandise Inventory account will be increased. b. Merchandise Inventory account will not be affected. c. seller will bear the freight cost.
d. carrier will bear the freight cost.

63. Freight costs paid by a seller on merchandisesold to customers will cause an increase a. in the selling expense of the buyer.
b. in operating expenses for the seller. c. to the cost of goods sold of the seller.
d. to a contra-revenue account of the seller.

64. Bryan Company purchased merchandise from Cates Company with freight terms of FOB shipping point. The freight costs will be paid by the
a. seller. b. buyer.
c. transportation company. d. buyer and the seller.

65. Flynn Company purchased merchandise inventory with an invoice price of $5,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Flynn Company pays within the discount period?
a. $5,000 b. $4,900 c. $4,500 d. $4,600

66. Stine Company purchased merchandise with an invoice price of $2,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?
a. 20% b. 24% c. 36% d. 72%

67. If a company is given credit terms of 2/10, n/30, it should
a. hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.
b. pay within the discount period and recognize a savings.
c. pay within the credit period but don’t take the trouble to invest the cash while waiting to pay the bill.
d. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.

68. In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited to
a. Merchandise Inventory. b. Purchase Discounts.
c. Purchase Allowance. d. Sales Discounts.

69. Zach’s Market recorded the following events involving a recent purchase of merchandise:

Received goods for $50,000, terms 2/10, n/30. Returned$1,000 of the shipment for credit. Paid $250 freight on the shipment.
Paid the invoice within the discount period.

As a result of these events, the company’s merchandise inventory

a. increased by $48,020. b. increased by $49,250. c. increased by $48,265. d. increased by $48,270.

70. Jake’s Market recorded the following events involving a recent purchase of merchandise: Received goods for $20,000, terms 2/10, n/30.
Returned$400 of the shipment for credit. Paid $100 freight on the shipment.
Paid the invoice within the discount period.

As a result of these events, the company’s merchandise inventory a. increased by $19,208.
b. increased by $19,700. c. increased by $19,306. d. increased by $19,308.

71. A credit sale of $800 is made on April 25, terms 2/10, n/30, on which a return of $50 is granted on April 28. What amount is received as payment in full on May 4?
a. $735 b. $784 c. $800 d $750

72. The entry to record the receipt of payment within the discount period on a sale of $750 with terms of 2/10, n/30 will include a credit to
a. Sales Discounts for $15. b. Cash for $735.
c. Accounts Receivable for $750. d. Sales for $750.

73. The collection of a $600 account within the 2 percent discount period will result in a a. debit to Sales Discounts for $12.
b. debit to Accounts Receivable for $588. c. credit to Cash for $588.
d. credit to Accounts Receivable for $588.

74. Company X sells $400 of merchandise on account to Company Y with credit terms of 2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is the amount of CompanyY’s check?
a. $280 b. $392 c. $360 d. $320

75. Holt Company sells merchandise on account for $2,000 to Jones Company with credit terms of 2/10, n/30. Jones Company returns $400 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
a. $1,960 b. $1,968 c. $1,600 d. $1,568

76. The collection of a $900 account after the 2 percent discount period will result in a a. debit to Cash for $882.
b. debit to Accounts Receivable for $900. c. debit to Cash for $900.
d. debit to Sales Discounts for $18.

77. The collection of a $600 account after the 2 percent discount period will result in a a. debit to Cash for $588.
b. credit to Accounts Receivable for $600. c. credit to Cash for $600.
d. debit to Sales Discounts for $12.

78. In a perpetual inventory system, the Cost of Goods Sold account is used a. only when a cash sale of merchandise occurs.
b. only when a credit sale of merchandise occurs. c. only when a sale of merchandiseoccurs.
d. whenever there is a sale of merchandise or a return of merchandise sold.

79. Sales revenues are usually considered earned when a. cash is received from credit sales.
b. an order is received.
c. goods have been transferred from the seller to the buyer. d. adjusting entries are made.

80. A sales invoice is a source document that
a. provides support for goods purchased for resale. b. provides evidence of incurred operating expenses. c. provides evidence of credit sales.
d. serves only as a customer receipt.

81. Sales revenue
a. may be recorded before cash is collected.
b. will always equal cash collections in a month. c. only results from credit sales.
d. is only recorded after cash is collected.

82. The journal entry to record a credit sale is a. Cash
Sales b. Cash
Service Revenue c. Accounts Receivable
Service Revenue d. Accounts Receivable
Sales

83. A credit memorandum is prepared when a. an employee does a good job.
b. goods are sold on credit.
c. goods that were sold on credit are returned. d. customers refuse to pay their accounts.

84. The Sales Returns and Allowances account is classified as a(n) a. asset account.
b. contra asset account. c. expense account.
d. contra revenue account.

85. A credit memorandum is used as documentation for a journal entry that requires a debit to a. Sales and a credit to Cash.
b. Sales Returns and Allowances and a credit to Accounts Receivable. c. Accounts Receivable and a credit to a contra-revenue account.
d. Cash and a credit to Sales Returns and Allowances.

86. If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales
a. discount. b. return.
c. contra asset. d. allowance.

87. A credit sale of $900 is made on July 15, terms 2/10, n/30, on which a return of $50 is granted on July 18. What amount is received as payment in full on July 24?
a. $900 b. $833 c. $850 d $882

88. When goods are returned that relate to a prior cash sale,
a. the Sales Returns and Allowances account should not be used. b. the cash account will be credited.
c. Sales Returns and Allowances will be credited. d. Accounts Receivable will be credited.

89. The Sales Returns and Allowances account does not provide information to management about
a. possible inferior merchandise.
b. the percentage of credit sales versus cash sales. c. inefficiencies in filling orders.
d. errors in overbilling customers.

90. A Sales Returns and Allowances account is not debited if a customer a. returns defective merchandise.
b. receives a credit for merchandise of inferior quality. c. utilizes a prompt payment incentive.
d. returns goods that are not in accordance with specifications.

91. As an incentive for customers to pay their accounts promptly, a business may offer its customers
a. a sales discount. b. free delivery.
c. a sales allowance. d. a sales return.

92. The credit terms offered to a customer by a business firm are 2/10, n/30, which means that a. the customer must pay the bill within 10 days.
b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date.
c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.
d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.

93. A sales discount does not
a. provide the purchaser with a cash saving.
b. reduce the amount of cash received from a credit sale. c. increase a contra-revenue account.
d. increase an operating expense account.

94. Company A sells $500 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is the amount of CompanyB’s check?
a. $350 b. $490 c. $450 d. $400

95. Hale Company sells merchandise on account for $1,500 to Kear Company with credit terms of 2/10, n/30. Kear Company returns $300 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
a. $1,470 b. $1,476 c. $1,200 d. $1,176

96. Feine Company sells merchandise on account for $2,000 to Tang Company with credit terms of 2/10, n/30. Tang Company returns $300 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Feine Company make upon receipt of the check?
a. Cash………………………………………………………………………… 1,700 AccountsReceivable………………………………………….. 1,700

b. Cash………………………………………………………………………… 1,666 Sales Returns and Allowances…………………………………….. 334
AccountsReceivable………………………………………….. 2,000

c. Cash………………………………………………………………………… 1,666 Sales Returns and Allowances…………………………………….. 300 Sales Discounts…………………………………………………………. 34
AccountsReceivable………………………………………….. 2,000

d. Cash………………………………………………………………………… 1,960 Sales Discounts…………………………………………………………. 40
Sales Returns and Allowances…………………………….. 300 AccountsReceivable………………………………………….. 1,700

97. Which of the following would not be classified as a contra account? a. Sales
b. Sales Returns and Allowances c. Accumulated Depreciation
d. Sales Discounts

98. Which of the following accounts has a normal credit balance? a. Sales Returns and Allowances
b. Sales Discounts c. Sales
d. Selling Expense

99. With respect to the income statement,
a. contra-revenue accounts do not appear on the income statement. b. sales discounts increase the amount of sales.
c. contra-revenue accounts increase the amount of operating expenses. d. sales discounts are included in the calculation of gross profit.

100. When a seller grants credit for returned goods, the account that is credited is a. Sales.
b. Sales Returns and Allowances. c. Merchandise Inventory.
d. Accounts Receivable.

101. The respective normal account balances of Sales, Sales Returns and Allowances, and Sales Discounts are
a. credit, credit, credit. b. debit, credit, debit. c. credit, debit, debit. d. credit, debit, credit.

102. All of the following are contra revenue accounts except a. sales.
b. sales allowances. c. sales discounts. d. sales returns.

103. A merchandising company using a perpetual system will make
a. the same number of adjusting entries as a service company does. b. one more adjusting entry than a service company does.
c. one less adjusting entry than a service company does.
d. different types of adjusting entries compared to a service company.

104. In preparing closing entries for a merchandising company, the Income Summary account will be credited for the balance of
a. sales.
b. merchandise inventory. c. sales discounts.
d. freight-out.

105. A merchandising company using a perpetual system may record an adjusting entry by a. debiting Income Summary.
b. crediting Income Summary. c. debiting Cost of Goods Sold. d. debiting Sales.

106. The operating cycle of a merchandiser is a. always one year in length.
b. generally longer than it is for a service company. c. about the same as for a service company.
d. generally shorter than it is for a service company.

107. The sales revenue section of an income statement for a retailer would not include a. Sales discounts.
b. Sales.
c. Net sales.
d. Cost of goods sold.

108. The operating expense section of an income statement for a wholesaler would not include a. freight-out.
b. utilities expense. c. cost of goods sold.
d. insurance expense.

109. Income from operations will always result if
a. the cost of goods sold exceeds operating expenses. b. revenues exceed cost of goods sold.
c. revenues exceed operating expenses.
d. gross profit exceeds operating expenses.

110. Indicate which one of the following would appear on the income statement of both a merchandising company and a service company.
a. Gross profit
b. Operating expenses c. Sales revenues
d. Cost of goods sold

111. Thelman Company reported the following balances at June 30, 2008:

Sales
Sales Returns and Allowances Sales Discounts
Cost of Goods Sold

Net sales for the month is a. $10,800.
b. $10,400. c. $10,200. d. $5,200.
$10,800 400 200
5,000
112. Income from operations appears on
a. both a multiple-step and a single-step income statement. b. neither a multiple-step nor a single-step income statement. c. a single-step income statement.
d. a multiple-step income statement.

113. Gross profit does not appear
a. on a multiple-step income statement. b. on a single-step income statement.
c. to be relevant in analyzing the operation of a merchandiser.
d. on the income statement if the periodic inventory system is used because it cannot be calculated.

114. Which of the following is not a true statement about a multiple-step income statement? a. Operating expenses are often classified as selling and administrative expenses.
b. There may be a section for nonoperating activities. c. There may be a section for operating assets.
d. There is a section for cost of goods sold.

115. Which one of the following is shown on a multiple-step but not on a single-step income statement?
a. Net sales b. Net income c. Gross profit
d. Cost of goods sold

116. All of the following items would be reported as other expenses and losses except a. freight-out.
b. casualty losses. c. interest expense.
d. loss from employees’ strikes.

117. If a company has net sales of $500,000 and cost of goods sold of $350,000, the gross profit percentage is
a. 70%. b. 30%. c. 15%. d. 100%.

118. A company shows the following balances:

Sales
Sales Returns and Allowances Sales Discounts
Cost of Goods Sold

What is the gross profit percentage? a. 56%
b. 70% c. 44% d. 30%
$1,000,000 180,000 20,000 560,000

119. The gross profit rate is computed by dividing gross profit by a. cost of goods sold.
b. net income. c. net sales. d. sales.

120. In terms of liquidity, merchandise inventory is a. more liquid than cash.
b. more liquid than accounts receivable. c. more liquid than prepaid expenses. d. less liquid than store equipment.

121. On a classified balance sheet, merchandise inventory is classified as a. an intangible asset.
b. property, plant, and equipment. c. a current asset.
d. a long-term investment.

122. Gross profit for a merchandiser is net sales minus a. operating expenses.
b. cost of goods sold. c. sales discounts.
d. cost of goods available for sale.

Use the following information for questions 123–125.

During 2008, Salon Enterprises generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $30,000, operating expenses of $12,000 and a loss on the sale of equipment of $2,000.

123. Salon’s gross profit is a. $60,000.
b. $30,000. c. $18,000. d. $16,000.

124. Salon’s income from operations is a. $60,000.
b. $30,000. c. $18,000. d. $12,000.

125. Salon’s net income is a. $60,000.
b. $30,000. c. $18,000. d. $16,000.

Use the following information for questions 126–127.

Financialinformation is presented below: OperatingExpenses
Sales
Cost of Goods Sold

$ 45,000 150,000 77,000

126. Gross profit would be a. $105,000.
b. $28,000. c. $73,000. d. $150,000.

127. The gross profit rate would be a. .700.
b. .187. c. .300. d. .487.

Use the following information for questions 128–129.

Financialinformation is presented below: OperatingExpenses
Sales Returns and Allowances Sales Discounts
Sales
Cost of Goods Sold

$ 45,000 13,000 6,000 150,000 67,000

128. Gross profit would be a. $77,000.
b. $64,000. c. $70,000. d. $83,000.

129. The gross profit rate would be a. .535.
b. .489. c. .511. d. .553.

Use the following information for questions 130–132.

Financial information is presented below: OperatingExpenses
Sales Returns and Allowances Sales Discounts
Sales
Cost of Goods Sold

$ 45,000 13,000 6,000 160,000 77,000

130. The amount of net sales on the income statement would be a. $154,000.
b. $141,000. c. $160,000. d. $166,000.

131. Gross profit would be a. $77,000.
b. $70,000. c. $64,000. d. $83,000.

132. The gross profit rate would be a. .454.
b. .546. c. .500. d. .538.

133. If a company has sales of $420,000, net sales of $400,000, and cost of goods sold of $260,000,the gross profit rate is
a. 67%. b. 65% c. 35%. d. 33%.

134. Ingrid’s Fashions sold merchandise for $38,000 cash during the month of July. Returns that month totaled $800. If the company’s gross profit rate is 40%, Ingrid’s will report monthly net sales revenue and cost of goods sold of
a. $38,000 and $22,800. b. $37,200 and $14,880. c. $37,200 and $22,320. d. $38,000 and $22,320.

Use the following information for questions 135–138.

During August, 2008, Sal’s Supply Store generated revenues of $30,000. The company’s expenses were as follows: cost of goods sold of $12,000 and operating expenses of $2,000. The company also had rent revenue of $500 and a gain on the sale of a delivery truck of $1,000.

135. Sal’s gross profit for August, 2008 is a. $30,000.
b. $19,000. c. $18,000. d. $16,000.

136. Sal’s nonoperating income (loss) for the month of August, 2008 is a. $0.
b. $500. c. $1,000. d. $1,500.

137. Sal’s operating income for the month of August, 2008 is a. $30,000.
b. $19,500. c. $18,500. d. $16,000.

138. Sal’s net income for August, 2008 is a. $18,000.
b. $17,500. c. $16,500. d. $16,000.

139. At the beginning of September, 2008, RFI Company reported Merchandise Inventory of $4,000. During the month, the company made purchases of $7,800. At September 31, 2008, a physical count of inventory reported $3,200 on hand. Cost of goods sold for the month is
a. $600.
b. $7,800. c. $8,600. d. $11,800.

140. At the beginning of the year, Midtown Athletic had an inventory of $400,000. During the year, the company purchased goods costing $1,600,000. If Midtown Athletic reported ending inventory of $600,000 and sales of $2,000,000, the company’s cost of goods sold and gross profit rate must be
a. $1,000,000 and 50%. b. $1,400,000 and 30%. c. $1,000,000 and 30%. d. $1,400,000 and 70%.

141. During the year, Darla’s Pet Shop’s merchandise inventory decreased by $20,000. If the company’s cost of goods sold for the year was $300,000, purchases must have been
a. $320,000. b. $280,000. c. $260,000.
d. Unable to determine.

142. Cost of goods available for sale is computed by adding a. beginning inventory to net purchases.
b. beginning inventory to the cost of goods purchased. c. net purchases and freight-in.
d. purchases to beginning inventory.

143. The Freight-in account
a. increases the cost of merchandisepurchased. b. is contra to the Purchases account.
c. is a permanent account.
d. has a normal credit balance.

144. Net purchases plus freight-in determines a. cost of goods sold.
b. cost of goods available for sale. c. cost of goods purchased.
d. total goods available for sale.

145. West Company has the following account balances:

Purchases
Sales Returns and Allowances PurchaseDiscounts
Freight-in DeliveryExpense
$48,000 6,400 4,000 3,000 4,000

The cost of goods purchased for the period is a. $52,000.
b. $47,000. c. $51,000. d. $44,600.

146. Baden Shoe Store has a beginning merchandise inventory of $30,000. During the period, purchases were $140,000; purchase returns, $4,000; and freight-in $10,000. A physical count of inventory at the end of the period revealed that $20,000 was still on hand. The cost of goods available for sale was
a. $164,000. b. $156,000. c. $176,000. d. $184,000.

147. In a periodic inventory system, a return of defective merchandise by a customer is recorded by crediting
a. Accounts Payable.
b. Merchandise Inventory. c. Purchases.
d. Purchase Returns and Allowances.

148. Which one of the following transactions is recorded with the same entry in a perpetual and a periodic inventory system?
a. Cash received on account with a discount b. Payment of freight costs on a purchase c. Return of merchandise sold
d. Sale of merchandiseon credit

149. The journal entry to record a return of merchandise purchased on account under a periodic inventory system would be
a. Accounts Payable
PurchaseReturns and Allowances

b. Purchase Returns and Allowances AccountsPayable

c. Accounts Payable Inventory

d. Inventory AccountsPayable
a150. Under a periodic inventory system, acquisition of merchandise is debited to the a. Merchandise Inventory account.
b. Cost of Goods Sold account. c. Purchases account.
d. Accounts Payable account.

a151. Which of the following accounts has a normal credit balance? a. Purchases
b. Sales Returns and Allowances c. Freight-in
d. Purchase Discounts

a152. The respective normal account balances of Purchases, Purchase Discounts, and Freight-in are
a. credit, credit, debit. b. debit, credit, credit. c. debit, credit, debit. d. debit, debit, debit.

a153. In a worksheet for a merchandising company, MerchandiseInventory would appear in the a. trial balance and adjusted trial balance columns only.
b. trial balance and balance sheet columns only.
c. trial balance, adjusted trial balance, and balance sheet columns.
d. trial balance, adjusted trial balance, and income statement columns.

a154. The Merchandise Inventory account balance appearing in a worksheet represents the a. ending inventory.
b. beginning inventory.
c. cost of merchandisepurchased. d. cost of merchandisesold.

Additional Multiple Choice Questions

155. Cole Company has sales revenue of $39,000, cost of goods sold of $24,000 and operating expenses of $9,000 for the year ended December 31. Cole’s gross profit is
a. $30,000. b. $15,000. c. $6,000. d. $0.

156. Logan Company made a purchase of merchandise on credit from Claude Corporation on August 3, for $6,000, terms 2/10, n/45. On August 10, Logan makes the appropriate payment to Claude. The entry on August 10 for Logan Company is
a. AccountsPayable……………………………………………………….. 6,000 Cash…………………………………………………………………… 6,000
b. AccountsPayable……………………………………………………….. 5,880 Cash…………………………………………………………………… 5,880
c. AccountsPayable……………………………………………………….. 6,000 PurchaseReturns and Allowances…………………………. 120 Cash…………………………………………………………………… 5,880
d. AccountsPayable……………………………………………………….. 6,000 MerchandiseInventory………………………………………….. 120 Cash…………………………………………………………………… 5,880

157. Cartier Company purchased inventory from Pissaro Company. The shipping costs were $400 and the terms of the shipment were FOB shipping point. Cartier would have the following entry regarding the shipping charges:
a. There is no entry on Cartier’s books for this transaction.
b. Freight Expense…………………………………………………………. 400
Cash ………………………………………………………………… 400 c. Freight-out………………………………………………………………… 400
Cash ………………………………………………………………… 400 d. MerchandiseInventory……………………………………………….. 400
Cash ………………………………………………………………… 400

158. In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting
a. Purchases.
b. Purchase Returns. c. Purchase Allowance.
d. Merchandise Inventory.

159. On October 4, 2008, Terry Corporation had credit sales transactions of $2,800 from merchandise having cost $1,900. The entries to record the day’s credit transactions include a
a. debit of $2,800 to Merchandise Inventory. b. credit of $2,800 to Sales.
c. debit of $1,900 to Merchandise Inventory. d. credit of $1,900 to Cost of Goods Sold.

160. Which of the following accounts is not closed to Income Summary? a. Cost of Goods Sold
b. Merchandise Inventory c. Sales
d. Sales Discounts

161. In the Clark Company, sales were $480,000, sales returns and allowances were $30,000, and cost of goods sold was $288,000. The gross profit rate was
a. 64%. b. 36%. c. 40%. d. 60%.

162. Net sales is sales less a. sales discounts. b. sales returns.
c. sales returns and allowances.
d. sales discounts and sales returns and allowances.

163. In the balance sheet, ending merchandise inventory is reported a. in current assets immediately following accounts receivable. b. in current assets immediatelyfollowing prepaid expenses.
c. in current assets immediatelyfollowing cash. d. under property, plant, and equipment.

164. Cost of goods available for sale is computed by adding a. freight-in to net purchases.
b. beginning inventory to net purchases.
c. beginning inventory to purchases and freight-in. d. beginning inventory to cost of goods purchased.

BRIEFEXERCISES

BE 165

Presented here are the components in Sanders Company’s income statement. Determine the missing amounts.

_Sales_ $75,000 (c)
Cost of Goods Sold (a) $56,000
Gross
_Profit
$40,000 $64,000
Operating Expenses (b) $48,000
Net Income $17,000 (d)

BE 166

Prepare the necessary journal entries on the books of Tri-State Carpet Company to record the following transactions, assuming a perpetual inventory system (you may omit explanations):
(a) Tri-State purchased $40,000 of merchandise on account, terms 2/10, n/30. (b) Returned $4,000 of damaged merchandisefor credit.
(c) Paid for the merchandisepurchased within 10 days.

BE 167
Erving Company sold goods on account to Farley Enterprises with terms of 2/10, n/30. The goods had a cost of $600 and a selling price of $900. Both Erving and Farley use a perpetual inventory system. Record the sale on the books of Erving and the purchase on the books of Farley.

BE 168

Manning Company sells merchandise on account for $2,000 to Tiger Company with credit terms of 3/10, n/60. Tiger Company returns $200 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Manning Company make upon receipt of the check and the damaged merchandise?

BE 169

Ord Company uses a perpetual inventory system. During May, the following transactions and events occurred.

May 13 Sold 6 motors at a cost of $44 each to Waller Brothers Supply Company, terms 1/10, n/30. The motors cost Ord $25 each.

May 16 One defective motor was returned to Ord.

May 23 Receivedpayment in full from Waller Brothers.

Instructions

Journalize the May transactions for Ord Company (seller) assuming that Ord uses a perpetual inventory system. You may omit explanations.

BE 170

The income statement for Avery Company for the year ended December 31, 2008 is as follows:

AVERY COMPANY Income Statement
For the Year Ended December 31, 2008 Revenues
Sales……………………………………………………………………………… Interestrevenue………………………………………………………………. Total revenues……………………………………………………………

Expenses
Cost of goods sold…………………………………………………………… Selling expenses…………………………………………………………….. Administrativeexpenses…………………………………………………… Interest expense……………………………………………………………… Total expenses…………………………………………………………..

Net income………………………………………………………………………………..

$36,000 7,000 5,000
1,000

$55,000
3,000 58,000

49,000

$ 9,000

Prepare the entries to close the revenue and expense accounts at December 31, 2008. You may omit explanationsfor the transactions.

BE 171

Milton Company provides this information for the month of November, 2008: sales on credit $150,000;cash sales $50,000; sales discounts $2,000; and sales returns and allowances $8,000. Prepare the sales revenues section of the income statement based on this information.

BE 172

During October, 2008, Katie’s Catering Company generated revenues of $13,000. Sales discounts totalled $200 for the month. Expenses were as follows: Cost of goods sold of $7,000 and operating expenses of $2,000.

Calculate(1) gross profit and (2) income from operations for the month.

BE 173

For each of the following, determine the missing amounts.

Beginning Inventory

1. $20,000

2.

Purchases

$220,000
Goods Available

for Sale

$ 40,000

$250,000
Cost of Goods Sold

$25,000
Ending Inventory

$40,000

BE 174

Assume that Guardian Company uses a periodic inventory system and has these account balances: Purchases $500,000; Purchase Returns and Allowances $14,000; Purchase Discounts $9,000;and Freight-in $15,000. Determine net purchases and cost of goods purchased.

BE 175
Assume that Guardian Company uses a periodic inventory system and has these account balances: Purchases $600,000; Purchase Returns and Allowances $25,000; Purchase Discounts $11,000; and Freight-in $19,000; beginning inventory of $45,000; ending inventory of $55,000; and net sales of $750,000. Determine the cost of goods sold.

BE 176
Waller Brothers Supply uses a periodic inventory system. During May, the following transactions and events occurred.

May 13 Purchased 6 motors at a cost of $44 each from Ord Company, terms 1/10, n/30. The motors cost Ord Company $25 each.

May 16 Returned1 defective motor to Ord.

May 23 Paid Ord Company in full.

Instructions
Journalizethe May transactions for Waller Brothers. You may omit explanations.

EXERCISES
Ex. 177
For each of the following, determine the missing amounts.

Sales
1. $100,000
Cost of Goods Sold
Operating Gross Profit Expenses
$25,000

Net Income $10,000

2. $95,000 $120,000 $80,000

Ex. 178

On October 1, Taylor Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $200 each. During the month of October, the following transactions occurred.

Oct. 4 Purchased 30 bicycles at a cost of $200 each from Mann Bicycle Company, terms 2/10, n/30.

6 Sold 18 bicycles to Team America for $300 each, terms 2/10, n/30.

7 Received credit from Mann Bicycle Company for the return of 2 defective bicycles. 13 Issued a credit memo to Team America for the return of a defective bicycle.
14 Paid Mann Bicycle Company in full, less discount.

Instructions

Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system.

Ex. 179

On September 1, Snow Supply had an inventory of 15 backpacks at a cost of $25 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred.

Sept. 4

Sept. 6

Sept. 9

Sept. 13

Sept. 14
Purchased70 backpacks at $25 each from Jenks, terms 2/10, n/30.

Received credit of $150 for the return of 6 backpacks purchased on Sept. 4 that were defective.

Sold 40 backpacks for $35 each to McGill Books, terms 2/10, n/30.

Sold 15 backpacks for $35 each to Calvin Office Supply, terms n/30.

Paid Jenks in full, less discount.

Instructions
Journalizethe September transactions for Snow Supply.

Ex. 180

Tim Stark is a new accountant with Watts Company. Watts purchased merchandise on account for $9,000. The credit terms are 2/10, n/30. Tim has talked with the company’s banker and knows that he could earn 8% on any money invested in the company’s savings account.

Instructions
(a) Should Tim pay the invoice within the discount period or should he keep the $9,000 in the savings account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best.

(b) If Tim forgoes the discount, it may be viewed as paying an interest rate of 2% for the use of $9,000for 20 days. Calculate the annual rate of interest that this is equivalent to.

Ex. 181

(a) Boden Company purchased merchandise on account from Office Suppliers for $86,000, with terms of 2/10, n/30. During the discount period, Boden returned some merchandise and paid $78,400 as payment in full. Boden uses a perpetual inventory system. Prepare the journal entries that Boden Company made to record:
(1) the purchase of merchandise. (2) the return of merchandise. (3) the payment on account.

(b) Boggs Company sold merchandise to Wilsey Company on account for $73,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $43,800. During the discount period, Wilsey Company returned $3,000 of merchandise and paid its account in full (minus the discount) by remitting $69,300 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Boggs Company made to record:
(1) the sale of merchandise. (2) the return of merchandise. (3) the collection on account.

Ex. 182

Prepare the necessary journal entries to record the following transactions, assuming Barone Company uses a perpetual inventory system.
(a) Purchased $30,000 of merchandise on account, terms 2/10, n/30. (b) Returned $500 of damaged merchandisefor credit.
(c) Paid for the merchandise purchased within 10 days.

Ex. 183

Prepare the necessary journal entries to record the following transactions, assuming Moran Company uses a perpetual inventory system.

(a) Moran sells $50,000 of merchandise, terms 1/10, n/30. The merchandise cost $30,000.

(b) The customer in (a) returned $5,000 of merchandise to Moran. The merchandise returned cost $3,000.

(c) Moran received the balance due within the discount period.

Ex. 184

Rosen Company completed the following transactions in October:

Credit Sales Sales Returns Date of
Date Amount Terms Date Amount Collection Oct. 3 $ 600 2/10, n/30 Oct. 8 Oct. 11 1,200 3/10, n/30 Oct. 14 $ 400 Oct. 16 Oct. 17 5,000 1/10, n/30 Oct. 20 1,000 Oct. 29 Oct. 21 1,400 2/10, n/60 Oct. 23 200 Oct. 27 Oct. 23 1,800 2/10, n/30 Oct. 27 400 Oct. 28

Instructions
(a) Indicate the cash received for each collection. Show your calculations. (b) Prepare the journal entry for the
(1) Oct. 17 sale. The merchandise sold had a cost of $3,500.
(2) Oct. 23 sales return. The merchandisereturned had a cost of $140. (3) Oct. 28 collection.
Rosen uses a perpetual inventory system.

Ex. 185

The following information is available for Siler Company:

Debit Credit

Siler, Capital Siler, Drawing Sales
Sales Returns and Allowances Sales Discounts
Cost of Goods Sold Freight-out AdvertisingExpense Interest Expense
Store Salaries Expense Utilities Expense Depreciation Expense Interest Revenue

$ 32,000

20,000 7,000 347,000 2,000 15,000 19,000 45,000 18,000 7,000
$ 50,000

510,000

25,000

Instructions
Using the above information, prepare the closing entries for Siler Company.

Ex. 186

The adjusted trial balance of Unruh Book Company appears below.

UNRUH BOOK COMPANY Adjusted Trial Balance December 31, 2008

Cash AccountsReceivable MerchandiseInventory Building
AccumulatedDepreciation— Building
AccountsPayable Unruh, Capital Unruh, Drawing Sales
Sales Discounts
Sales Returns & Allowances Cost of Goods Sold
Selling Expenses AdministrativeExpenses
Debit

32,000 25,000 35,000 150,000

20,000

6,000 8,000 173,000 18,000
19,000 486,000
Credit

20,000 12,000 149,000

305,000

486,000

Instructions

Using the information given, prepare the year-end closing entries.

Ex. 187

DeloyCompany gathered the following condensed data for the year ended December 31, 2008:

Cost of goods sold Net sales
Administrativeexpenses Interest expense Dividendrevenue
Loss from employee strike Selling expenses
$ 690,000 1,250,000 234,000 58,000 38,000 233,000 45,000

Instructions

1. Prepare a single-step income statement for the year ended December 31, 2008. 2. Prepare a multiple-step income statement for the year ended December 31, 2008.

Ex. 188

Instructions
Statethe missing items identified by ?.

1. Gross profit – Operating expenses = ? 2. ? + ? = Operating expenses
3. Sales – (? + ?) = Net sales

4. Income from operations + ? – ? = Net income 5. Net sales – Cost of goods sold = ?
6. Cost of goods sold + Gross profit on sales = ?

Ex. 189

The adjusted trial balance of Notson Company contained the following information:

Sales
Sales Returns and Allowances Sales Discounts
Cost of Goods Sold Freight-out AdvertisingExpense Interest Expense
Store Salaries Expense Utilities Expense Depreciation Expense Interest Revenue
Debit

$ 20,000 7,000 386,000 2,000 15,000 18,000 55,000 28,000 7,000
Credit
$560,000

30,000

Instructions
1. Use the above information to prepare a multiple-step income statement for the year ended December31, 2008.

2. Prepare a single-step income statement for the year ended December 31, 2008.

Ex. 190

The following information is available for Miley Company:

Administrativeexpenses Cost of goods sold Sales
Sales returns and allowances Selling expenses
$ 30,000 245,000 350,000 15,000 50,000

Instructions
Computeeach of the following: (a) Net sales
(b) Gross profit
(c) Income from operations

Ex. 191

The income statement of Miller, Inc. includes the items listed below:

Net sales Gross profit
Beginninginventory Purchasediscounts Purchasereturns and allowances Freight-in
Operatingexpenses Purchases
$900,000 320,000 80,000 15,000 8,000 10,000 300,000 540,000

Instructions
Use the appropriate items listed above as a basis for determining: (a) Cost of goods sold.
(b) Cost of goods available for sale. (c) Ending inventory.

Ex. 192

Three items are missing in each of the following columns and are identified by letter.

Sales
Sales returns and allowances Sales discounts
Net sales Beginninginventory Cost of goods purchased Ending inventory
Cost of goods sold Gross profit
$ (a) 25,000 10,000 420,000 (b) 220,000 170,000 260,000 (c)
$840,000 20,000 15,000 (d) 300,000 (e) 303,000 555,000 (f)

Instructions
Calculatethe missing amounts and identify them by letter.

Ex. 193

Morton Supply Company uses a periodic inventory system. During September, the following transactions and events occurred.

Sept. 3 Sept. 6

Sept. 9

Sept. 13
Purchased80 backpacks at $20 each from Cole Company, terms 2/10, n/30.

Received credit of $100 for the return of 5 backpacks purchased on Sept. 3 that were defective.

Sold 15 backpacks for $40 each to Starr Books, terms 2/10, n/30.

Paid Cole Company in full.

Instructions

Journalizethe September transactions for Morton Supply Company.

Ex. 194

The following information is available for Olson Company:

Beginninginventory Ending inventory Freight-in Purchases
Purchasereturns and allowances
$ 45,000 70,000 10,000 270,000 8,000

Instructions
Computeeach of the following: (a) Net purchases
(b) Cost of goods purchased (c) Cost of goods sold

Ex. 195

The adjusted trial balance of Gorman Music Company appears below. Gorman Music Company prepares monthly financial statements and uses the perpetual inventory method.

Instructions

Completethe worksheet below.

GORMAN MUSIC COMPANY Worksheet
For the Month Ended April 30, 2008

Adjusted

Trial Balance

Debit Credit

Income Statement

Debit Credit

Balance Sheet

Debit Credit

Cash MerchandiseInventory Supplies
Equipment
Accum. Depreciation— Equipment
AccountsPayable Gorman,Capital Gorman,Drawing Sales
Sales Discounts Cost of Goods Sold AdvertisingExpense SuppliesExpense
Depreciation Expense Rent Expense UtilityExpense
11,000 21,000 3,500 80,000

8,000

2,000 23,000 7,000 6,000 1,000 2,500
1,000 166,000

15,000 20,000 92,000

39,000

166,000

Ex. 196

Prepare the necessary journal entries to record the following transactions, assuming a periodic inventory system:
(a) Purchased $400,000 of merchandise on account, terms 2/10, n/30. (b) Returned $40,000 of damaged merchandise for credit.
(c) Paid for the merchandisepurchased within 10 days.

COMPLETION STATEMENTS

197. A buys and sells goods rather than performing services to earn a profit.

198. Cost of goods sold is deducted from net sales revenue for the period in order to arrive at

.

199. Merchandise Inventory on hand can be obtained from detailed inventory records when a

inventory system is maintained.

200. The acquisition of merchandise inventory is debited to the account when a perpetual inventory system is used.

201. The freight cost incurred by a seller to deliver goods sold to a customer is called

.

202. When a customer returns merchandise previously purchased on credit, the entry to record the return requires a debit to the account and a credit to the
account.

203. Sales Returns and Allowances and Sales Discounts are both accounts and have normal balances.

204. Every sales transaction should be supported by a that provides written evidence of the sale.

205. Gross profit is obtained by subtracting from .

206. Income from operations is determined by subtracting total operating expenses from

.

MATCHING

207. Match the items below by entering the appropriate code letter in the space provided.

A. Net Sales
B. Sales discounts C. Purchaseinvoice
D. Periodic inventory system E. FOB destination
F. FOB shipping point G. Freight-out
H. Gross profit
I. Selling expenses
J. Incomefrom operations

1. An incentive to encourage customers to pay their accounts early.

2. Expensesassociated with making sales.

3. Freight terms that require the seller to pay the freight cost.

4. Sales less sales returns and allowances and sales discounts.

5. A document that supports each credit purchase.

6. Net sales less cost of goods sold.

7. Freight cost to deliver goods to customers reported as a selling expense.

8. Requiresa physical count of goods on hand to compute cost of goods sold.

9. Gross profit less total operating expenses.

10. Freight terms that require the buyer to pay the freight cost.

SHORT-ANSWERESSAY QUESTIONS
S-AE 208
A merchandiser frequently has a need to use contra accounts related to the sale of goods. Identify the contra accounts that have normal debit balances and explain why they are not considered expenses.

S-AE 209

In a single-step income statement, all data are classified under two categories: (1) Revenues, or (2) Expenses. If the income statement is recast in a multiple-step format, what additional information or intermediate components of income would be presented?

S-A-E 210

You are at a company picnic and the company president starts a conversation with you. The president says ―Since we use the perpetual inventory system, there is no reason to take a physical count of our inventory.‖ What is your response to the president’s remarks?

S-AE 211

The income statement for a merchandising company presents five amounts not shown on a service company’s income statement. Identify and briefly explain the five unique amounts.

S-AE 212 (Ethics)

Feeney Corporation manufactures electronic components for use in many consumer products. Their raw materials are purchased literally from all over the world. Depending on the country involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods.

Because of this situation, Feeney never closes its books until at least ten days after month end. In this way, it can sort out ownership of goods in transit, and document which goods were received by month end, and which were not.

Deb Rush, a new accountant, was asked to record about $50,000 in inventory as having been received before month end. She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. Her boss, busy with month-end reports, curtly tells Deb to check the shipping terms. She did so, and found the notation “FOB shipper’s dock” on the document. She hadn’t seen that particular notation before, but she reasoned that if the selling company considered it shipped when it reached their dock, Feeney should consider it received when it reached Feeney’s dock. She did not record the sale until after month end.

Required:

1. Why are accountantsconcerned with the timing in the recording of purchases? 2. Was there a violation of ethical standards here? Explain.

S-AE 213 (Communication)

Anne Stine and Rita Lott, two salespersons in adjoining territories, regularly compete for bonuses. During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal. On the last day of the month, both made a large sale. Both orders were shipped on the last day of the month and both were received by the customer on the fifth of the following month. Anne’s sale was FOB shipping point, and Rita’s was FOB destination. The company “counts” sales for purposes of calculating bonuses on the date that ownership passes to the purchaser. Anne’s sale was therefore counted in her monthly total of sales, Rita’s was not. Rita is quite upset. She has asked you to just include it, or to take Anne’s off as well. She also has told you that you are being unethical for allowing Anne to get a bonus just for choosing a particular shipping method.

Write a memo to Rita. Explain your position.

CHAPTER 6

INVENTORIES

CHAPTERSTUDY OBJECTIVES

1. Describe the steps in determining inventory quantities.

2. Explain the accounting for inventories, and apply the inventory cost flow methods.

3. Explain the financial effects of the inventory cost flow assumptions.

4. Explain the lower-of-cost-or-market basis of accounting for inventories.

5. Indicate the effects of inventory errors on the financial statements.

6. Compute and interpret the inventory turnover ratio.

7. Apply the inventory cost flow methods to perpetual inventory records.

8. Describe the two methods of estimating inventories.

TRUE-FALSESTATEMENTS

1. Transactions that affect inventories on hand have an effect on both the balance sheet and the income statement.

2. The more inventory a company has in stock, the greater the company’s profit.

3. Raw materials inventories are the goods that a manufacturer has completed and are ready to be sold to customers.

4. Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods.

5. Goods out on consignment should be included in the inventory of the consignor.

6. The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.

7. Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.

8. The first-in, first-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.

9. The matching principle requires that the cost of goods sold be matched against the ending merchandise inventory in order to determine income.

10. The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items.

11. If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions.

12. If the unit price of inventory is increasing during a period, a company using the LIFO inventory method will show less gross profit for the period, than if it had used the FIFO inventory method.

13. If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods.

14. A company may use more than one inventory costing method concurrently.

15. Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.

16. If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.

17. Under the lower-of-cost-or-marketbasis, market is defined as current replacement cost.

18. Accountants believe that the write down from cost to market should not be made in the period in which the price decline occurs.

19. An error that overstates the ending inventory will also cause net income for the period to be overstated.

20. If inventories are valued using the LIFO cost assumption, they should not be classified as a current asset on the balance sheet.

21. Inventory turnover is calculated as cost of goods sold divided by ending inventory.

22. If a company uses the FIFO cost assumption, the cost of goods sold for the period will be the same under a perpetual or periodic inventory system.

23. In applying the LIFO assumption in a perpetual inventory system, the cost of the units most recently purchased prior to sale is allocated first to the units sold.

24. Under generally accepted accounting principles, management has the choice of physically counting inventory on hand at the end of the year or using the gross profit method to estimate the ending inventory.

25. The retail inventory method requires a company to value its inventory on the balance sheet at retail prices.

Additional True-False Questions

26. Finished goods are a classification of inventory for a manufacturer that are completed and ready for sale.

27. Under the FIFO method, the costs of the earliest units purchased are the first charged to cost of goods sold.

28. The pool of inventory costs consists of the beginning inventory plus the cost of goods purchased.

29. In a period of falling prices, the LIFO method results in a lower cost of goods sold than the FIFO method.

30. The lower-of-cost-or-market basis is an example of the accounting concept of conservatism.

31. Inventories are reported in the current assets section of the balance sheet immediately below receivables.

32. In a perpetual inventory system, the cost of goods sold under the FIFO method is based on the cost of the latest goods on hand during the period.

33. The gross profit method is based on the assumption that the rate of gross profit remains constant from one year to the next.

MULTIPLECHOICE QUESTIONS

34. Inventories affect
a. only the balance sheet.
b. only the income statement.
c. both the balance sheet and the income statement. d. neither the balance sheet nor the income statement.

35. Merchandise inventory is
a. reported under the classification of Property, Plant, and Equipment on the balance sheet.
b. often reported as a miscellaneousexpense on the income statement. c. reported as a current asset on the balance sheet.
d. generally valued at the price for which the goods can be sold.

36. Items waiting to be used in production are considered to be a. raw materials.
b. work in progress. c. finished goods.
d. merchandise inventory.

37. In a manufacturing business, inventory that is ready for sale is called a. raw materials inventory.
b. work in process inventory. c. finished goods inventory. d. store supplies inventory.

38. The factor which determines whether or not goods should be included in a physical count of inventory is
a. physical possession. b. legal title.
c. management’sjudgment.
d. whether or not the purchase price has been paid.

39. If goods in transit are shipped FOB destination
a. the seller has legal title to the goods until they are delivered. b. the buyer has legal title to the goods until they are delivered.
c. the transportation company has legal title to the goods while the goods are in transit. d. no one has legal title to the goods until they are delivered.

40. An auto manufacturer would classify vehicles in various stages of production as a. finished goods.
b. merchandise inventory. c. raw materials.
d. work in process.

41. Independent internal verification of the physical inventory process occurs when a. the employee is required to count all items twice for sake of verification.
b. the items counted are compared to the inventory account balance.
c. a second employee counts the inventory and compares the result to the count made by the first employee.
d. all prenumbered inventory tags are accountedfor.

42. An employee assigned to counting computer monitors in boxes should a. estimate the number if there is a large quantity to be counted.
b. read each box and rely on the box descriptionfor the contents. c. determine that the box contains a monitor.
d. rely on the warehouse records of the number of computer monitors.

43. After the physical inventory is completed,
a. quantities are listed on inventory summary sheets.
b. quantities are entered into various general ledger inventory accounts.
c. the accuracy of the inventory summary sheets is checked by the person listing the quantities on the sheets.
d. unit costs are determined by dividing the quantities on the summary sheets by the total inventory costs.

44. A recommended internal control procedure for taking physical inventories is that the counting should be done by employees who do not have custodial responsibility for the inventory. This is an example of what type of internal control procedure?
a. Establishment of responsibility b. Documentationprocedure
c. Independent internal verification d. Segregation of duties

45. Westcoe Company’s goods in transit at December 31 include:

sales made
(1) FOB destination (2) FOB shipping point
purchases made
(3) FOB destination (4) FOB shipping point

Whichitems should be included in Westcoe’s inventory at December 31? a. (2) and (3)
b. (1) and (4) c. (1) and (3) d. (2) and (4)

46. The term “FOB” denotes a. free on board.
b. freight on board.
c. free only (to) buyer.
d. freight charge on buyer.

47. Under a consignment arrangement, the
a. consignor has ownership until goods are sold to a customer.
b. consignor has ownership until goods are shipped to the consignee.
c. consignee has ownership when the goods are in the consignee’s possession. d. consigned goods are included in the inventory of the consignee.

48. Inventoriable costs include all of the following except the a. freight costs incurred when buying inventory.
b. costs of the purchasing and warehousing departments. c. cost of the beginning inventory.
d. cost of goods purchased.

49. Beginning inventory plus the cost of goods purchased equals a. cost of goods sold.
b. cost of goods available for sale. c. net purchases.
d. total goods purchased.

50. Cost of goods sold is computed from the following equation:
a. beginning inventory – cost of goods purchased + ending inventory.
b. sales – cost of goods purchased + beginning inventory – ending inventory. c. sales + gross profit – ending inventory + beginning inventory.
d. beginning inventory + cost of goods purchased – ending inventory

51. A company just starting in business purchased three merchandise inventory items at the following prices. First purchase $80; Second purchase $95; Third purchase $85. If the company sold two units for a total of $240 and used FIFO costing, the gross profit for the period would be
a. $65. b. $75. c. $60. d. $50.

52. The LIFO inventory method assumes that the cost of the latest units purchased are a. the last to be allocated to cost of goods sold.
b. the first to be allocated to ending inventory. c. the first to be allocated to cost of goods sold.
d. not allocated to cost of goods sold or ending inventory.

Use the following information for questions 53–56.

A company just starting business made the following four inventory purchases in June:

June 1 150 units $ 390 June 10 200 units 585 June 15 200 units 630 June 28 150 units 495 $2,100

A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand.

53. Using the LIFO inventory method, the value of the ending inventory on June 30 is a. $536.
b. $653. c. $1,447. d. $1,564.

54. Using the FIFO inventory method, the amount allocated to cost of goods sold for June is a. $653.
b. $1,272. c. $1,447. d. $1,564.

55. Using the average-cost method, the amount allocated to the ending inventory on June 30 is
a. $2,100. b. $1,500. c. $575. d. $600.

56. The inventory method which results in the highest gross profit for June is a. the FIFO method.
b. the LIFO method.
c. the weighted average unit cost method. d. not determinable.

57. A company purchased inventory as follows:

200 units at $10 300 units at $12

The average unit cost for inventory is a. $10.00.
b. $11.00. c. $11.20. d. $12.00.

58. Which of the following items will increase inventoriable costs for the buyer of goods? a. Purchase returns and allowances granted by the seller
b. Purchase discounts taken by the purchaser c. Freight charges paid by the seller
d. Freight charges paid by the purchaser

59. Inventoriable costs may be thought of as a pool of costs consisting of which two elements?
a. The cost of beginning inventory and the cost of ending inventory
b. The cost of ending inventory and the cost of goods purchased during the year
c. The cost of beginning inventory and the cost of goods purchased during the year
d. The difference between the costs of goods purchased and the cost of goods sold during the year

60. The cost of goods available for sale is allocated between a. beginning inventory and ending inventory.
b. beginning inventory and cost of goods on hand. c. ending inventory and cost of goods sold.
d. beginning inventory and cost of goods purchased.

61. Sam’s Used Cars uses the specific identification method of costing inventory. During March, Sam purchased three cars for $6,000, $7,500, and $9,750, respectively. During March, two cars are sold for $9,000 each. Sam determines that at March 31, the $9,750 car is still on hand. What is Sam’s gross profit for March?
a. $5,250. b. $4,500. c. $750. d. $8,250.

62. Of the following companies, which one would not likely employ the specific identification method for inventory costing?
a. Music store specializing in organ sales b. Farm implement dealership
c. Antique shop d. Hardware store

63. A problem with the specific identification method is that a. inventories can be reported at actual costs.
b. management can manipulate income. c. matching is not achieved.
d. the lower-of-cost-or-marketbasis cannot be applied.

64. The selection of an appropriate inventory cost flow assumption for an individual company is made by
a. the external auditors. b. the SEC.
c. the internal auditors. d. management.

65. Which one of the following inventory methods is often impractical to use? a. Specific identification
b. LIFO c. FIFO
d. Average cost

66. Which of the following is not a common cost flow assumption used in costing inventory? a. First-in, first-out
b. Middle-in, first-out c. Last-in, first-out d. Average cost

67. The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is
a. called the matching principle.
b. called the consistency principle.
c. nonexistent; that is, there is no accounting requirement. d. called the physical flow assumption.

68. Which of the following statements is true regarding inventory cost flow assumptions? a. A company may use more than one costing method concurrently.
b. A company must comply with the method specified by industry standards.
c. A company must use the same method for domestic and foreign operations.
d. A company may never change its inventory costing method once it has chosen a method.

69. Which of the following statements is correct with respect to inventories?
a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold.
b. It is generally good business management to sell the most recently acquired goods first.
c. Under FIFO, the ending inventory is based on the latest units purchased. d. FIFO seldom coincides with the actual physical flow of inventory.

70. The cost of goods available for sale is allocated to the cost of goods sold and the a. beginning inventory.
b. ending inventory.
c. cost of goods purchased. d. gross profit.

Use the following information for questions 71–73.

At May 1, 2008, Treeline Company had beginning inventory consisting of 100 units with a unit cost of $7. During May, the company purchased inventory as follows:

200 units at $7 300 units at $8

The company sold 500 units during the month for $12 per unit. Treeline uses the average cost method.

71. The average cost per unit for May is a. $7.00.
b. $7.50. c. $7.60. d. $8.00.

72. The value of Treeline’s inventory at May 31, 2008 is a. $700.
b. $750. c. $800. d. $4,500.

73. Treeline’s gross profit for the month of May is a. $2,250.
b. $3,750. c. $4,500. d. $6,000.

Use the following information for questions 74–77.

Tier II Company uses a periodic inventory system. Details for the inventory account for the month of January, 2008 are as follows:

Balance,1/1/08 Purchase,1/15/08 Purchase,1/28/08
Units Per unit price Total 200 $5.00 $1,000 100 5.30 530 100 5.50 550

An end of the month (1/31/08) inventory showed that 120 units were on hand.

74. How many units did the company sell during January, 2008? a. 80
b. 120 c. 200 d. 280

75. If the company uses FIFO, what is the value of the ending inventory? a. $520
b. $600 c. $656 d. $1,424

76. If the company uses LIFO, what is the value of the ending inventory? a. $520
b. $600 c. $656 d. $1,480

77. If the company uses FIFO and sells the units for $10 each, what is the gross profit for the month?
a. $1,376 b. $1,424 c. $2,800 d. $3,000

Use the following information for questions 78-83.

W.B. Reindeer Company’s inventory records show the following data:

Inventory,January 1 Purchases: June 18
November 8
Units Unit Cost 5,000 $9.00 4,500 8.00 3,000 7.00

A physical inventory on December 31 shows 2,000 units on hand. W.B. Reindeer sells the units for $12 each. The company has an effective tax rate of 20%. Reindeer uses the periodic inventory method.

78. Under the FIFO method, the December 31 inventory is valued at a. $14,000.
b. $14,500. c. $15,000. d. $18,000.

79. What is the cost of goods available for sale? a. $21,000
b. $36,000 c. $45,000 d. $102,000

80. Under the LIFO method, cost of goods sold is a. $10,500.
b. $18,000. c. $84,000. d. $88,000.

81. The weighted-averagecost per unit is a. $7.50.
b. $8.00. c. $8.16. d. $8.75.

82. If the company uses FIFO, what is the gross profit for the period? a. $2,000
b. $10,000 c. $21,000 d. $38,000

83. What is the difference in taxes if LIFO rather than FIFO is used? a. $800 additional taxes
b. $3,200 tax savings c. $4,000 tax savings
d. $4,000 additional taxes

Use the following inventory information for questions 84–86.

July 1 BeginningInventory 7 Purchases
22 Purchases
20 units at $19 $ 380 70 units at $20 1,400 10 units at $22 220 $2,000

A physical count of merchandise inventory on July 31 reveals that there are 30 units on hand.

84. Using the average-costmethod, the value of ending inventory is a. $580.
b. $600. c. $610. d. $620.

85. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is a. $580.
b. $620. c. $1,380. d. $1,420.

86. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is a. $580.
b. $620. c. $1,380. d. $1,420.

Use the following information for questions 87–88.

July 1 BeginningInventory 5 Purchases
14 Sale
21 Purchases 30 Sale
10 units at $120 60 units at $112 40 units
30 units at $115 28 units

87. Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis?
a. $3,664 b. $3,674 c. $7,696 d. $7,706

88. Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis?
a. $3,644 b. $3,674 c. $7,696 d. $7,706

Use the following information for questions 89–92.

Nov. 1 Inventory 8 Purchase
17 Purchase 25 Purchase
15 units @$8.00 60 units @$8.60 30 units @$8.40 45 units @$8.80

A physical count of merchandise inventory on November 30 reveals that there are 50 units on hand. Assume a periodic inventory system is used.

89. Cost of goods sold under the average-cost method is a. $860.
b. $856. c. $845. d. $800.

90. Ending inventory under FIFO is a. $438.
b. $846. c. $421. d. $863.

91. Ending inventory under LIFO is a. $438.
b. $421. c. $846. d. $863.

92. Assuming that the specific identification method is used and that ending inventory consists of 15 units from each of the three purchases and 5 units from the November 1 inventory, cost of goods sold is
a. $427. b. $857. c. $854. d. $836.

Use the following information for questions 93–96.

Ace Industries had the following inventory transactions occur during 2008:

2/1/08 3/14/08 5/1/08
Units Purchase 18 Purchase 31 Purchase 22
Cost/unit $45 $47 $49

The company sold 51 units at $63 each and has a tax rate of 30%.

93. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars)
a. $2,441 b. $2,365 c. $848 d. $772

94. Assuming that a periodic inventory system is used, what is the company’s after-tax income using LIFO? (rounded to whole dollars)
a. $772 b. $848 c. $594 d. $540

95. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to whole dollars)
a. $2,441 b. $2,365 c. $848 d. $772

96. Assuming that a periodic inventory system is used, what is the company’s after-tax income using FIFO? (rounded to whole dollars)
a. $772 b. $848 c. $594 d. $540

97. Companies adopt different cost flow methods for each of the following reasons except a. balance sheet effects.
b. cash flow effects.
c. income statements effects. d. tax effects.

98. In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the
a. FIFO method. b. LIFO method.
c. average-costmethod. d. tax method.

99. Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using
a. LIFO will have the highest ending inventory. b. FIFO will have the highest cost of good sold. c. FIFO will have the highest ending inventory. d. LIFO will have the lowest cost of goods sold.

100. If companies have identical inventoriable costs but use different inventory flow assumptions when the price of goods have not been constant, then the
a. cost of goods sold of the companies will be identical.
b. cost of goods available for sale of the companies will be identical. c. ending inventory of the companies will be identical.
d. net income of the companies will be identical.

101. In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense?
a. FIFO b. LIFO
c. Average Cost
d. Income tax expense for the period will be the same under all assumptions.

102. The specific identification method of costing inventories is used when the a. physical flow of units cannot be determined.
b. company sells large quantities of relatively low cost homogeneousitems. c. company sells large quantities of relatively low cost heterogeneous items. d. company sells a limited quantity of high-unit cost items.

103. The specific identification method of inventory costing a. always maximizes a company’s net income.
b. always minimizes a company’s net income. c. has no effect on a company’s net income.
d. may enable management to manipulate net income.

104. The managers of Teng Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices?
a. LIFO
b. Average Cost c. FIFO
d. Physical inventory method

105. In periods of inflation, phantom or paper profits may be reported as a result of using the a. perpetual inventory method.
b. FIFO costing assumption. c. LIFO costing assumption. d. periodic inventory method.

106. Selection of an inventory costing method by management does not usually depend on a. the fiscal year end.
b. income statement effects. c. balance sheet effects.
d. tax effects.

107. In a period of rising prices, the costs allocated to ending inventory may be understated in the
a. average-cost method. b. FIFO method.
c. gross profit method. d. LIFO method.

108. The accountant at Kline Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The tax rate is 30% and the FIFO method will result in income before taxes of $5,460. The LIFO method will result in income before taxes of $4,935. What is the difference in tax that would be paid between the two methods?
a. $525. b. $225. c. $158.
d. Cannot be determined from the information provided.

109. The accountant at Carey Company has determined that income before income taxes amounted to $6,750 using the FIFO costing assumption. If the income tax rate is 30% and the amount of income taxes paid would be $225 greater if the LIFO assumption were used, what would be the amount of income before taxes under the LIFO assumption?
a. $6,975 b. $7,500 c. $6,090 d. $6,525

110. The manager of Wyatt Company is given a bonus based on income before income taxes. Net income, after taxes, is $5,600 for FIFO and $5,040 for LIFO. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager’s bonus if FIFO is adopted instead of LIFO?
a. $200 b. $300 c. $160 d. $560

111. The consistent application of an inventory costing method is essential for a. conservatism.
b. accuracy.
c. comparability. d. efficiency.

112. Which costing method cannot be used to determine the cost of inventory items before lower-of-cost-or-market is applied?
a. Specific identification b. FIFO
c. LIFO
d. All of these methods can be used.

113. Inventory is reported in the financial statements at a. cost.
b. market.
c. the higher-of-cost-or-market. d. the lower-of-cost-or-market.

114. The lower-of-cost-or-marketbasis of valuing inventories is an example of a. comparability.
b. the cost principle. c. conservatism.
d. consistency.

115. Under the lower-of-cost-or-marketbasis in valuing inventory, market is defined as a. current replacment cost.
b. selling price.
c. historical cost plus 10%. d. selling price less markup.

116. The lower-of-cost-or-market(LCM) basis may be be used with all of the following methods except
a. average cost. b. FIFO.
c. LIFO.
d. The LCM basis may be used with all of these.

117. Isaac Company developed the following information about its inventories in applying the lower-of-cost-or-market (LCM) basis in valuing inventories:

Product A
B C
Cost
$110,000 80,000 160,000
Market
$120,000 76,000 162,000

If Isaac applies the LCM basis, the value of the inventory reported on the balance sheet would be
a. $350,000. b. $342,000. c. $346,000. d. $362,000.

118. Understating beginning inventory will understate a. assets.
b. cost of goods sold. c. net income.
d. owner’s equity.

119. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is

Cost of Goods Sold a. Understated
b. Overstated c. Understated d. Overstated
Net Income Understated Overstated Overstated Understated

120. If beginning inventory is understated by $10,000, the effect of this error in the current period is

Cost of Goods Sold a. Understated
b. Overstated c. Understated d. Overstated
Net Income Understated Overstated Overstated Understated

121. A company uses the periodic inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000. The amounts reflected in the current end of the period balance sheet are

Assets Owner’s Equity a. Overstated Overstated b. Correct Correct
c. Understated Understated d. Overstated Correct

122. Overstating ending inventory will overstate all of the following except a. assets.
b. cost of goods sold. c. net income.
d. owner’s equity.

123. Disclosures about inventory should include each of the following except the a. basis of accounting.
b. costing method.
c. quantity of inventory.
d. major inventory classifications.

124. Inventory turnover is calculated by dividing cost of goods sold by a. beginning inventory.
b. ending inventory. c. average inventory. d. 365 days.

125. The following information is available for Knot Company at December 31, 2008: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $900,000; and sales $1,200,000.Knot’s inventory turnover in 2008 is
a. 12 times. b. 11.3 times. c. 9 times.
d. 7.5 times.

Use the following information for questions 126–127.

The following information was available for Carton Company at December 31, 2008: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $660,000; and sales $900,000.

126. Carton’s inventory turnover ratio in 2008 was a. 9.4 times.
b. 8.3 times. c. 7.3 times. d. 6.0 times.

127. Carton’s days in inventory in 2008 was a 38.8 days.
b. 44.0 days. c. 50.0 days. d. 60.8 days.

Use the following inventory information for questions 128–130.

July 1 BeginningInventory 5 Purchases
14 Sale
21 Purchases 30 Sale
10 units at $90 60 units at $84 40 units
30 units at $87 28 units

a128. Assuming that a perpetual inventory system is used, what is the ending inventory on a FIFO basis?
a. $2,748 b. $2,754 c. $2,778 d. $5,796

129 Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis?
a. $2,748 b. $2,754 c. $2,772 d. $5,796

a130. Assuming that a perpetual inventory system is used, what is the ending inventory (rounded) under the average-costmethod?
a. $2,750 b. $2,784 c. $2,406 d. $2,772

131. A new average cost is computed each time a purchase is made in the a. average-cost method.
b. moving-average cost method. c. weighted-averagecost method. d. all of these methods.

a132. When valuing ending inventory under a perpetual inventory system, the
a. valuation using the LIFO assumption is the same as the valuation using the LIFO assumptionunder the periodic inventory system.
b. moving average requires that a new average be computed after every sale.
c. valuation using the FIFO assumption is the same as under the periodic inventory system.
d. earliest units purchased during the period using the LIFO assumption are allocated to the cost of goods sold when units are sold.

a133. Jansen Company uses the perpetual inventory system and the moving-average method to value inventories. On August 1, there were 10,000 units valued at $40,000 in the beginning inventory. On August 10, 20,000 units were purchased for $8 per unit. On August 15, 24,000 units were sold for $16 per unit. The amount charged to cost of goods sold on August 15 was
a. $40,000. b. $160,000. c. $192,000. d. $144,000.

a134. Under the gross profit method, each of the following items are estimated except for the a. cost of ending inventory.
b. cost of goods sold.
c. cost of goods purchased. d. gross profit.

a135. Under the retail inventory method, the estimated cost of ending inventory is computed by multiplying the cost-to-retail ratio by
a. net sales.
b. goods available for sale at retail. c. goods purchased at retail.
d. ending inventory at retail.
a136. Inventories are estimated
a. more frequently under a periodic inventory system than a perpetual inventory system. b. using the wholesale inventory method.
c. more frequently under a perpetual inventory system than the periodic inventory system.
d. using the net method.

a137. Nolan Department Store estimates inventory by using the retail inventory method. The following information was developed:

Beginninginventory Goods purchased Net sales
At Cost
$318,000 900,000
At Retail
$ 750,000 1,350,000 1,200,000

The estimated cost of the ending inventory is a. $696,000.
b. $522,000. c. $882,000. d. $900,000.

a138. Watson Department Store utilizes the retail inventory method to estimate its inventories. It calculated its cost to retail ratio during the period at 75%. Goods available for sale at retail amounted to $400,000 and goods were sold during the period for $250,000. The estimated cost of the ending inventory is
a. $150,000. b. $300,000. c. $112,500. d. $200,000.

a139. Gore Company prepares monthly financial statements and uses the gross profit method to estimate ending inventories. Historically, the company has had a 40% gross profit rate. During June, net sales amounted to $60,000; the beginning inventory on June 1 was $18,000; and the cost of goods purchased during June amounted to $27,000. The estimated cost of Gore Company’s inventory on June 30 is
a. $9,000. b. $36,000. c. $15,000. d. $24,000.

Additional Multiple Choice Questions

140. Goods in transit should be included in the inventory of the buyer when the a. public carrier accepts the goods from the seller.
b. goods reach the buyer.
c. terms of sale are FOB destination.
d. terms of sale are FOB shipping point.

141. Inventory items on an assembly line in various stages of production are classified as a. Finished goods.
b. Work in process. c. Raw materials.
d. Merchandise inventory.

142. The cost flow method that often parallels the actual physical flow of merchandise is the a. FIFO method.
b. LIFO method.
c. average-costmethod. d. gross profit method.

143. Rudolf Diesel Company’s inventory records show the following data:

Inventory,January 1 Purchases: June 18
November 8
Units Unit Cost 5,000 $9.00 4,500 8.00 3,000 7.00

A physical inventory on December 31 shows 3,000 units on hand. Under the FIFO method, the December 31 inventory is
a. $21,000. b. $21,750. c. $24,000. d. $27,000.

144. In a period of inflation, the cost flow method that results in the lowest income taxes is the a. FIFO method.
b. LIFO method.
c. average-costmethod. d. gross profit method.

145. In a period of rising prices, FIFO will have a. lower net income than LIFO.
b. lower cost of goods sold than LIFO. c. lower income tax expense than LIFO. d. lower net purchases than LIFO.

146. Under the LCM approach, the market value is defined as a. FIFO cost.
b. LIFO cost.
c. current replacement cost. d. selling price.

147. Euler Company made an inventory count on December 31, 2008. During the count, one of the clerks made the error of counting an inventory item twice. For the balance sheet at December 31, 2008, the effects of this error are

Assets
a. overstated b. understated c. overstated d. overstated
Liabilities understated no effect
no effect overstated
Owner’s Equity overstated understated overstated understated

148. The inventory turnover ratio is computed by dividing cost of goods sold by a. beginning inventory.
b. ending inventory. c. average inventory. d. 365 days.

a149. Quigley Company’s records indicate the following information for the year:

Merchandiseinventory, 1/1 Purchases
Net Sales
$ 550,000 2,250,000 3,000,000

On December 31, a physical inventory determined that ending inventory of $600,000 was in the warehouse. Quigley’s gross profit on sales has remained constant at 30%. Quigley suspects some of the inventory may have been taken by some new employees. At December 31, what is the estimated cost of missing inventory?
a. $100,000 b. $200,000 c. $300,000 d. $700,000

BRIEFEXERCISES

BE 150

Michelle Lee Company identifies the following items for possible inclusion in the physical inventory. Indicate whether each item should be included or excluded from the inventory taking. 1. Goods shipped on consignment by Michelle Lee to another company.
2. Goods in transit from a supplier shipped FOB destination.
3. Goods shipped via common carrier to a customer with terms FOB shipping point. 4. Goods held on consignment from another company.

BE 151

In the first month of operations, Barton Company made three purchases of merchandise in the following sequence: (1) 200 units at $6, (2) 300 units at $7, and (3) 400 units at $8. Assuming there are 300 units on hand, compute the cost of the ending inventory under (1) the FIFO method and (2) the LIFO method. Barton uses a periodic inventory system.

BE 152

Pembrook Company had beginning inventory on May 1 of $12,000. During the month, the company made purchases of $30,000 but returned $2,000 of goods because they were defective. At the end of the month, the inventory on hand was valued at $9,500.

Calculatecost of goods available for sale and cost of goods sold for the month.

BE 153

Opti Company’s inventory records show the following data for the month of September:

Units Inventory, September 1 100 Purchases: September 8 450
September 18 300
Unit Cost $3.00
3.50 3.70

A physical inventory on September 30 shows 200 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses FIFO inventory costing and a periodic inventory system.

BE 154

Use the information in BE 153 to calculate the value of ending inventory and cost of goods sold if the company uses LIFO inventory costing and a periodic inventory system.

BE 155

Use the information in BE 153 to calculate the value of the ending inventory and cost of goods sold if the company uses weighted average inventory costing and a periodic inventory system. Round cost per unit to 2 decimal places and ending inventory and cost of goods sold to the nearest dollar.

BE 156

The following accounts are included in the ledger of Able Company:

Advertisingexpense Freight-in
Inventory Purchases
Purchasereturns and allowances Sales
Sales returns and allowances

Whichof the accounts would be included in calculating cost of goods sold?

BE 157

The Entertainment Center accumulates the following cost and market data at December 31.

Inventory Categories Camera Camcorders
DVDs
Cost Data $11,000
8,000 14,000
Market Data $10,200
8,500 12,000

What is the lower-of-cost-or-marketvalue of the inventory?

BE 158

Shelby Supply Company reports net income of $120,000 in 2008. The ending inventory did not include goods valued at $5,000 that Shelby had consigned to Felicia’s Gift Shop.

(1) What is the correct net income for 2008?
(2) What impact will this error have on the balance sheet at 12/31/08?

BE 159

At December 31, 2008, the following information was available for Rich Company: ending inventory $22,600; beginning inventory $21,400; cost of goods sold $171,000; and sales revenue $430,000.

Calculatethe inventory turnover ratio and days in inventory for Rich.

EXERCISES
Ex. 160
The following information is available for Harold Company:

Beginning inventory First purchase Second purchase
600 units at $5 900 units at $6 500 units at $7

Assume that Harold uses a periodic inventory system and that there are 700 units left at the end of the month.

Instructions
Computethe cost of ending inventory under the (a) FIFO method.
(b) LIFO method.

Ex. 161

Using the information in Ex. 160 above, compute each of the following under the average-cost method:

(a) Cost of ending inventory. (b) Cost of goods sold.

Ex. 162

Morton Company uses the periodic inventory method and had the following inventory information available:
Units Unit Cost Total Cost 1/1 BeginningInventory 100 $4 $ 400 1/20 Purchase 400 $5 2,000 7/25 Purchase 200 $7 1,400 10/20 Purchase 300 $8 2,400
1,000 $6,200

A physical count of inventory on December 31 revealed that there were 400 units on hand.

Instructions
Answer the following independent questions and show computations supporting your answers.

1. Assume that the company uses the FIFO method. The value of the ending inventory at December31 is $ .

2. Assume that the company uses the Average-Cost method. The value of the ending inventory on December 31 is $ .

3. Assume that the company uses the LIFO method. The value of the ending inventory on December31 is $ .

4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less?

Ex. 163

Dixen Company sells many products. Whamo is one of its popular items. Below is an analysis of the inventory purchases and sales of Whamo for the month of March. Dixen Company uses the periodic inventory system.
Purchases Sales
Units Unit Cost Units Selling Price/Unit 3/1 Beginninginventory 100 $40
3/3 Purchase 60 $50
3/4 Sales 70 $80 3/10 Purchase 200 $55
3/16 Sales 80 $90 3/19 Sales 60 $90 3/25 Sales 40 $90 3/30 Purchase 40 $60

Instructions
(a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)
(b) Using the weighted average method, calculate the amount assigned to the inventory on hand on March 31. (Show computations)
(c) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

Ex. 164

Yenn Company uses the periodic inventory system to account for inventories. Information related to Yenn Company’s inventory at October 31 is given below:

October 1 8
16 24
Beginninginventory Purchase Purchase Purchase
Total units and cost
400 units @ $10.00 = 800 units @ $10.40 = 600 units @ $10.80 =
200 units @ $11.60 = 2,000 units
$ 4,000 8,320 6,480
2,320 $21,120

Instructions
1. Show computations to value the ending inventory using the FIFO cost assumption if 550 units remain on hand at October 31.

2. Show computations to value the ending inventory using the weighted-average cost method if 550 units remain on hand at October 31.

3. Show computations to value the ending inventory using the LIFO cost assumption if 550 units remain on hand at October 31.

Ex. 165

Sims Company is in the electronics industry and the price it pays for inventory is decreasing.

Instructions
Indicatewhich inventory method will:
a. provide the highest ending inventory. b. provide the highest cost of goods sold. c. result in the highest net income.
d. result in the lowest income tax expense.
e. produce the most stable earnings over several years.

Ex. 166

UtleyCompany reported the following summarized annual data at the end of 2008:

Sales revenue Cost of goods sold* Gross margin
Operatingexpenses Incomebefore income taxes

*Based on an ending FIFO inventory of $250,000.
$1,000,000
600,000 400,000
250,000 $ 150,000

The income tax rate is 30%. The controller of the company is considering a switch from FIFO to LIFO. He has determined that on a LIFO basis, the ending inventory would have been $200,000.

Instructions

(a) Restate the summary information on a LIFO basis.

(b) What effect, if any, would the proposed change have on Utley’s income tax expense, net income, and cash flows?

(c) If you were an owner of this business, what would your reaction be to this proposed change?

Ex. 167

Compute the lower-of-cost-or-market valuation for Howe Company’s total inventory based on the following:
Inventory Categories Cost Data Market Data A $18,000 $17,200
B 14,000 14,600 C 21,000 20,500

Ex. 168

The controller of Lawn-Pro Company is applying the lower-of-cost-or-market basis of valuing its ending inventory. The following information is available:

Lawnmowers:
Self-propelled Push type
Total

Snowblowers: Manual Self-start
Total
Total inventory
Cost

$15,000

19,000

34,000

30,000
19,000
49,000 $83,000
Market

$17,000

18,000

35,000

31,000
21,000
52,000 $87,000

Instructions
Computethe value of the ending inventory by applying the lower-of-cost-or-market basis.

Ex. 169

Wert Company is preparing the annual financial statements dated December 31, 2008. Information about inventory stocked for regular sale follows:

Quantity Item on Hand
A 50 B 100 C 20 D 40
Unit Cost When Acquired
$20 45 60 40
ReplacementCost (market) at year end
$19 45 62 37

Instructions

Compute the valuation for the December 31, 2008, inventory using the lower-of-cost-or-market basis.

Ex. 170

Dryer Company reported net income of $60,000 in 2008 and $80,000 in 2009. However, ending inventory was overstated by $5,000 in 2008.

Instructions
Computethe correct net income for Dryer Company for 2008 and 2009.

Ex. 171

For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item.

Code: O = item is overstated U = item is understated NA = item is not affected

Events
Items

Assets
Owner’s Equity
Cost of Goods Sold
Net Income

1. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice.

2. The ending inventory in the previous period was overstated.

3. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.

4. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.

5. The internal auditors discovered that the ending inventory in the previous period was understated $15,000 and that the ending inventory in the current period was overstated $25,000.

Ex. 172

Nolan’s Hardware Store prepared the following analysis of cost of goods sold for the previous three years:
2007 2008 2009
Beginninginventory 1/1 $40,000 $18,000 $25,000 Cost of goods purchased 50,000 55,000 70,000 Cost of goods available for sale 90,000 73,000 95,000 Ending inventory 12/31 18,000 25,000 40,000 Cost of goods sold $72,000 $48,000 $55,000

Net income for the years 2007, 2008, and 2009 was $70,000, $60,000, and $55,000, respectively. Since net income was consistently declining, Mr. Nolan hired a new accountant to investigate the cause(s) for the declines.

The accountant determined the following:

1. Purchases of $25,000 were not recorded in 2007.

2. The 2007 December 31 inventory should have been $24,000.

3. The 2008 ending inventory included inventory costing $5,000 that was purchased FOB destinationand in transit at year end.

4. The 2009 ending inventory did not include goods costing $4,000 that were shipped on December 29 to Sampson Plumbing Company, FOB shipping point. The goods were still in transit at the end of the year.

Instructions
Determinethe correct net income for each year. (Show all computations.)

Ex. 173

Hill Pharmacy reported cost of goods sold as follows:

Beginninginventory Cost of goods purchased
Cost of goods available for sale Ending inventory
Cost of goods sold
2008
$ 54,000
847,000 901,000
64,000 $837,000
2009
$ 64,000
891,000 955,000
55,000 $900,000

Hill made two errors:
(1) 2008 ending inventory was overstated by $6,000. (2) 2009 ending inventory was understated by $15,000.

Instructions
Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also indicate if the amounts are overstated(O) or understated (U).
2008 2009 Overstated/ Overstated/
Amount Understated Amount Understated

Total assets $ $

Owner’sequity $ $

Cost of goods sold $ $

Net income $ $

Ex. 174

The following information is available for Manning Company:

Beginninginventory Cost of goods sold Ending inventory Sales

Instructions
Computeeach of the following: (a) Inventory turnover.
(b) Days in inventory.
$ 60,000 600,000 100,000 750,000

$600,000 $600,000

Ex. 175

Vaughn Company uses the perpetual inventory system and the LIFO method. The following information is available for the month of May:

May 1 Beginninginventory 10 Purchase
15 Sales
18 Purchase 21 Sales
30 Purchase
20 units @ $5 20 units @ $8 15 units
10 units @ $9 15 units
10 units @ $10

Instructions

Prepare a schedule to show cost of goods sold and the value of the ending inventory for the month of May.

Ex. 176

Romano Company uses the perpetual inventory system and had the following purchases and sales during March.

3/1 Beginninginventory 3/3 Purchase
3/4 Sales 3/10 Purchase 3/16 Sales 3/19 Purchase 3/25 Sales
Purchases Sales
Units Unit Cost Units Selling Price/Unit 100 $40
60 $50
70 $80 200 $55
80 $90 40 $60
120 $90

Instructions
Using the inventory and sales data above, calculate the value assigned to cost of goods sold in March and to the ending inventory at March 31 using (a) FIFO and (b) LIFO.

Ex. 177

Adler Department Store prepares monthly financial statements but only takes a physical count of merchandise inventory at the end of the year. The following information has been developed for the month of July:
At Cost At Retail Beginninginventory $ 35,000 $ 50,000 Merchandisepurchases 115,000 150,000

The net sales for July amounted to $140,000.

Instructions
Use the retail inventory method to estimate the ending inventory at cost for July. Show all computations to support your answer.

Ex. 178

Horne Company suffered a loss of its inventory on March 28 due to a fire in its warehouse. As a basis for filing a claim with its insurance company, Horne Company developed the following information:

March net sales through March 28 BeginningInventory, March 1 Merchandisepurchases through March 28
$360,000 150,000 180,000

The company has experienced an average gross profit rate of 35% in the past and this rate appears to be appropriate in the current period.

Instructions

Using the gross profit method, prepare an estimate of the cost of the inventory destroyed by fire on March 28. Show all computations in good form.

Ex. 179

The inventory of Snider Company was destroyed by fire on April 1. From an examination of the accounting records, the following data for the first three months of the year are obtained:

Sales
Sales Returns and Allowances Purchases
Freight-In
PurchaseReturns and Allowances
$185,000 5,000 90,000 3,500 4,000

Instructions
Determine the merchandise lost by fire, assuming a beginning inventory of $60,000 and a gross profit rate of 40% on net sales.

Ex. 180

Hyland Company reports goods available for sale at cost, $90,000. Beginning inventory at retail is $40,000 and goods purchased during the period at retail were $80,000. Sales for the period amounted to $88,000.

Instructions
Determinethe estimatedcost of the ending inventory using the retail inventory method.

COMPLETION STATEMENTS

181. Accounting for inventories is important because inventories affect the

section of the balance sheet and the section on the income statement.

182. In a manufacturing company, goods that are ready to be sold to customers are referred to as , whereas in a merchandising company they are generally referred to as .

183. The cost of goods purchased during a period plus the beginning inventory is the amount of goods during the period.

184. Inventoriable costs are allocated to and cost of goods .

185. It is generally recognized that a major objective of accounting for inventory is the proper determination of .

186. The method tracks the actual physical flow of each unit of inventory available for sale; however, management may be able to manipulate by using this method.

187. If the unit cost of inventory has continuously increased, the , first-out inventory valuation method will result in a higher valued ending inventory than if the
, first-out method had been used.

188. The lower-of-cost-or-market basis of accounting for inventories should be applied when the cost of the goods is lower than its cost.

189. is calculated as cost of goods sold divided by average inventory.

a190. Two widely used methods of estimating inventories are the method and the method.

MATCHING

191. Match the items below by entering the appropriate code letter in the space provided.

A. MerchandiseInventory B. Work in process
C. FOB shipping point D. FOB destination
E. Specificidentification method
F. First-in,first-out (FIFO) method G. Last-in,first-out (LIFO) method H. Average-costmethod
I. Inventoryturnover
J. Currentreplacement cost

1. Measuresthe number of times the inventory sold during the period.

2. Tracksthe actual physical flow for each inventory item available for sale.

3. Goodsthat are only partially completed in a manufacturing company.

4. Cost of goods sold consists of the most recent inventory purchases.

5. Goodsready for sale to customers by retailers and wholesalers.

6. Title to the goods transfers when the public carrier accepts the goods from the seller.

7. Ending inventory valuation consists of the most recent inventory purchases.

8. The same unit cost is used to value ending inventory and cost of goods sold.

9. Title to goods transfers when the goods are delivered to the buyer.

10. The amount that would be paid at the present time to acquire an identical item.

SHORT-ANSWERESSAY QUESTIONS
S-AE 192
FIFO and LIFO are the two most common cost flow assumptions made in costing inventories. The amounts assigned to the same inventory items on hand may be different under each cost flow assumption. If a company has no beginning inventory, explain the difference in ending inventory values under the FIFO and LIFO cost bases when the price of inventory items purchased during the period have been (1) increasing, (2) decreasing, and (3) remained constant.

S-AE 193

Errors occasionally occur when physically counting inventory items on hand. Identify the financial statement effects of an overstatement of the ending inventory in the current period. If the error is not corrected, how does it affect the financial statements for the following year?

S-AE 194

A survey of major U.S. companies revealed that 77% of those companies used either LIFO or FIFO cost flow methods, while 19% used average cost, and only 4% used other methods.

Required:
Provide brief, yet concise responses to the following questions.

a. Why are LIFO and FIFO so popular?

b. Since computers and inventory management software are readily available, why aren’t more companies using specific identification?

S-AE 195

Your former college roommate is opening a new retail store and asks you ―Which inventory costing method should I use?‖

What is your response? Include a comparison of the tax effect, balance sheet effect, and income statement effect for FIFO versus LIFO.

S-AE 196 (Ethics)

Suzy Cole and Joe Lane are department managers in the housewares and shoe departments, respectively, for Newmans, a large department store. Joe has observed Suzy taking inventory from her own department home, apparently without paying for it. He hesitates confronting Suzy because he is due to be promoted, and needs Suzy’s recommendation. He also does not want to notify the company management directly, because he doesn’t want an ethics investigation on his record, believing that it will give him a ―goody-goody‖ image. This week, Suzy tried on several pairs of expensive running shoes in his department before finding a pair that suited her. She did not, however, buy them. That very pair was missing this morning.

Newmans recently replaced its old periodic inventory system with a perpetual inventory system using scanners and bar codes. In addition, the annual inventory is to be replaced by a monthly inventory conducted by an independent firm. On hearing the news of the changes, Joe relaxes. “The system will catch Suzy now,” he says to himself.

Required:
1. Is Joe’s attitude justified? Why or why not? 2. What, if any, action should Joe take now?

S-AE 197 (Communication)

Sam Wertz, a new employee of Nance Company, recorded $1,000 in consigned goods received as part of the firm’s inventory. The goods were received one day after the end of the fiscal period, but Sam reasoned that the goods should be included in inventory sooner because Nance paid the freight. The mistake was brought to his attention by the purchasing department who said the goods should not have been recorded as Nance’s inventory at all. Sam told Lisa Gomez, the purchasing supervisor, that nobody needed to worry, because the mistake would cancel itself out the following month. In Sam’s opinion, there was no reason to get everyone excited over nothing, especially since it was monthly, and not annual, financial statements that were affected. Lisa Gomez has reported the problem to the accounting department.

Required:

You are Sam’s supervisor. Write a memo to Sam explaining why the error should have been corrected.

CHAPTER 7

ACCOUNTINGINFORMATION SYSTEMS

CHAPTERSTUDY OBJECTIVES

1. Identify the basic concepts of an accounting information system.

2. Describe the nature and purpose of a subsidiary ledger.

3. Explain how companies use special journals in journalizing.

4. Indicate how companies post a multi-column journal.

TRUE-FALSESTATEMENTS

1. An accounting information system should be cost effective; that is, the benefits of the information must outweigh the cost of providing it.

2. An accounting system has flexibility if it is able to be used by many different companies at the same time.

3. General ledger accounting systems are software programs that integrate the various accounting functions related to sales, purchases, cash receipts and disbursements, and payroll.

4. Enterprise resource planning systems integrate all aspects of the organization, including accounting, sales, human resource management, and manufacturing.

5. A subsidiary ledger is a group of control accounts which provides information to the managers for controlling the operation of the company.

6. An accounts receivable subsidiary ledger has all the detailed information about the cash sales to individual customers.

7. The accounts payable subsidiary ledger provides detailed information about amounts owed to creditors.

8. The total of the individual account balances in the accounts receivable subsidiary ledger should agree with the total of the individual account balances in the accounts payable subsidiary ledger.

9. Control accounts are always located in the general ledger.

10. A control account and subsidiary ledger can be established for inventory.

11. A subsidiary ledger provides up-to-date information on specific account balances.

12. An advantage of using a subsidiary ledger is that one employee must post to both the subsidiary ledger and the general ledger.

13. Special journals are used to record unique transactions which do not occur very often.

14. A cash receipts journal can be used to record all transactions involving cash coming into the business, regardless of the source.

15. The cash payments journal only has one column because all entries recorded in this journal require a credit to the Cash account.

16. A cash payments journal should not be used to record transactions which require payment by check.

17. If a transaction cannot be recorded in a special journal, it indicates that the company should adopt an electronic accounting system.

18. A debit column for Sales Returns and Allowances may be found in the cash payments journal.

19. A one-column purchases journal is used to record purchases of merchandise on account.

20. Using special journals can save time in posting because column totals are often posted rather than individual entries.

21. The reference column in a sales journal is used to indicate the general ledger account number when the entry is posted.

22. Postings are generally made more frequently to the general ledger control accounts than to the individual accounts in the subsidiary ledgers.

23. The amounts appearing in the Merchandise Inventory column of the cash payments journal are posted individually to the accounts in the accounts payable subsidiary ledger.

24. Transaction amounts recorded in the general journal are never posted to accounts in the subsidiary ledger.

25. When control and subsidiary accounts are involved, there must be a dual posting.

Additional True-False Questions

26. An accounting information system involves data collection, data processing, and informa-tion dissemination.

27. The basic principles of an accounting information system are cost awareness, usefulness, and fixed structure.

28. Each general ledger control account balance must equal the composite balance of the individual accounts in the related subsidiary ledger at the end of an accounting period.

29. When special journals are employed, all postings must be monthly or daily but cannot be both.

30. Totaling the columns of a journal and proving the equality of the totals is called footing and cross-footing a journal.

31. Only transactions that cannot be entered in a special journal are recorded in the general journal.

MULTIPLECHOICE QUESTIONS

32. The principle of an efficient accounting system that states that an accounting system should accommodate a variety of users is
a. cost effectiveness. b. flexibility.
c. useful output. d. implementation.

33. Which of the following is not a basic principle of designing and developing an effective accounting information system?
a. Approval by the SEC b. Usefulness
c. Flexibility
d. Cost effectiveness

34. A company will usually replace a manual accounting information system with an electronic system as the operations increase in
a. efficiency. b. complexity. c. simplicity. d. productivity.

35. In developing an accounting system, cost effectiveness does not imply that a. the benefits obtained from the system outweigh the costs.
b. an electronic system must be cheaper than the system it is replacing. c. the system should be cost effective.
d. the value of an accounting report should be at least equal to the cost of producing it.

36. To be useful, the information outputs of a system should be a. relevant, reliable, timely, and accurate.
b. reliable, flexible, understandable and timeless.
c. such that one report meets all different users needs. d. distributed only to management personnel.

37. The accounting environment does not change as a result of a. technological advances.
b. government regulation. c. the double entry system. d. organizational growth.

38. The principles of developing an accounting information system do not include a. usefulness.
b. flexibility.
c. cost effectiveness.
d. elimination of human involvement.

39. A student should recognize a need to study manual accounting systems because a. the structure of electronic systems differs greatly from manual systems.
b. all small companies only use manual accounting systems.
c. the software and hardware of electronic systems vary greatly, which makes manual procedures more practical to study.
d. companiesthat use manual systems hire more accountants.

40. Which of the following is a true statement about manual and electronic accounting systems?
a. Few small companies begin with manual systems.
b. The design and structure of manual and electronic systems are essentially the same. c. Many companies convert from electronic to manual systems.
d. The design and structure of manual and electronic systems are fundamentally different.

41. Postings to the control accounts in the general ledger are made a. annually.
b. daily.
c. monthly. d. weekly.

42. The balance of a control account in the general ledger a. must always be zero.
b. must equal the amount of total assets.
c. is always greater than the composite balance of individual accounts in a related subsidiary ledger.
d. must equal the composite balance of individual accounts in a related subsidiary ledger.

43. A subsidiary ledger is
a. used in place of the general ledger if the general ledger is destroyed or stolen. b. a group of accounts used by branches and subsidiaries of a corporate business.
c. a group of accounts with a common characteristic that provides detailed information about a control account in the general ledger.
d. used to post excess transactions if a general ledger account becomes full during an accounting period.

44. Postings are made daily to the
a. Accounts Receivable control account. b. Accounts Payable control account.
c. Accounts Receivable subsidiary ledger. d. control accounts in the general ledger.

45. A subsidiary ledger frees the general ledger from details of a. individual balances.
b. external transactions. c. internal transactions. d. the control account.

46. A company would not likely use subsidiary ledgers for a. inventory.
b. owner’s capital. c. equipment.
d. accounts receivable.

47. Postings are made daily to subsidiary ledgers so that a. employees are kept busy.
b. debits equal credits.
c. individual account information is kept current.
d. the control account will balance to the subsidiary ledger.

48. The individual amounts in the sales journal are posted to the accounts receivable subsidiary ledger
a. daily. b. weekly.
c. monthly. d. yearly.

49. A sales journal is used to record
a. only cash sales of merchandise.
b. sales of all assets on credit and for cash. c. only credit sales of merchandise.
d. credit sales of merchandise, sales returns and allowances, and sales discounts.

50. If a transaction cannot be recorded in a special journal
a. the company must refuse to enter into the transaction. b. it is recorded in the general journal.
c. it is recorded directly in the accounts in the general ledger. d. it is recorded as an adjustment on the work sheet.

51. The one characteristic that all entries recorded in a cash receipts journal have in common is
a. a credit to the Cash account.
b. that they all represent collections from customers. c. that they originate from the sales of merchandise. d. a debit to the Cash account.

52. A one column purchases journal indicates that
a. only purchases of merchandise on account can be recorded. b. all purchases of merchandise can be recorded.
c. all acquisitions on account can be recorded.
d. another column must be added so that debits and credits can be recorded.

53. The one characteristic that all entries recorded in a multi-column purchases journal have in common is a
a. credit to the Cash account. b. debit to the Cash account.
c. debit to the Accounts Payable account. d. credit to the Accounts Payable account.

54. A company which uses special journals should record a transaction involving the purchase of merchandisefor cash in a
a. one column purchases journal. b. multi-column purchases journal. c. cash payments journal.
d. general journal.

55. If merchandise from a cash sale is returned by a customer for a refund, the sales return is recorded in the
a. general journal.
b. cash receipts journal. c. cash payments journal. d. sales journal.

56. Which of the following is not a special journal? a. Sales journal
b. Purchases journal c. General journal
d. Cash receipts journal

57. Correcting entries are journalized in a. a special journal.
b. the general journal. c. the general ledger. d. a correcting journal.

58. Adjusting entries are recorded a. only on the worksheet.
b. only in the general ledger. c. in the general journal.
d. in the special journals.

59. All of the column totals in the cash receipts journal are posted to general ledger accounts exceptthe
a. Accounts Receivable column total. b. Cash column total.
c. Sales column total.
d. Other Accounts column total.

60. If a transaction cannot be recorded in a special journal, it is a. not recorded.
b. a correcting entry.
c. recorded in the general journal. d. an error.

61. A company uses a sales journal, cash receipts journal, purchases journal, cash payments journal, and a general journal. A cash sales return would be recorded in the
a. sales journal.
b. cash receipts journal. c. cash payments journal. d. general journal.

62. The entries in a sales journal will show a. all sales of merchandise.
b. the cash sales of the company. c. the credit sales of merchandise. d. all sales of the company.

63. Entries in a sales journal
a. are made from sales invoices.
b. will indicate the invoice number in the reference column of the sales journal. c. will occupy two lines of the sales journal.
d. indicate either a cash debit or accounts receivable debit.

64. Journalizing in a sales journal will not
a. require a debit to Accounts Receivable. b. show a sales invoice number.
c. affect the reference column of the journal. d. include a credit to the Sales account.

65. If an owner withdraws cash for personal use, the transaction should be recorded in the a. sales journal.
b. cash receipts journal. c. general journal.
d. cash payments journal.

66. If a company purchasesmerchandisefor cash, the transaction should be recorded in the a. purchases journal.
b. general journal.
c. cash payments journal. d. sales journal.

67. Cash from sales of merchandise will be recorded in the a. purchases journal.
b. sales journal.
c. cash receipts journal. d. general journal.

68. Postings from the purchases journal to the general ledger are made a. daily.
b. monthly. c. weekly. d. yearly.

69. The individual amounts in the Accounts Payable column in the cash payments journal are posted to the subsidiary ledger
a. daily.
b. monthly. c. weekly. d. yearly.
70. Debit postings to the individual accounts in an accounts receivable subsidiary ledger generally come from the
a. sales journal.
b. cash receipts journal. c. purchases journal.
d. cash payments journal.

71. Entries in a sales journal are
a. posted only to accounts in an accounts receivable subsidiary ledger. b. posted only to accounts in the general ledger.
c. posted to accounts in an accounts receivable subsidiary ledger and to accounts in the general ledger.
d. never posted.

72. Which one of the following columns in a cash receipts journal is not posted in total to an account in the general ledger?
a. Cash column
b. Sales Discount column
c. Accounts Receivable column d. Other Accounts column

73. The use of special journals to record transactions a. eliminates the need for a general ledger.
b. can save time in the posting process.
c. eliminates the need for a general journal.
d. should only be used if the volume of transactions is small.

74. Posting a sales journal to the accounts in the general ledger requires a a. debit to Cash and a credit to Sales.
b. debit to Sales and a credit to Inventory.
c. debit to Accounts Receivable and a credit to Inventory. d. debit to Accounts Receivable and a credit to Sales.

75. The entries recorded in the Other Accounts column of a cash payments journal a. are posted to the accounts payable subsidiary ledger daily.
b. are posted individually to accounts in the general ledger.
c. are not posted individually but are posted as a column total to the general ledger. d. do not require posting.

76. The entry to record the granting of credit to a customer for a sales return is posted to a. the accounts receivable subsidiary ledger only.
b. the general ledger only.
c. both the accounts receivable subsidiary ledger and the general ledger. d. both the accounts payable subsidiary ledger and the general ledger.

77. Proving the equality of the totals in the columns of multiple-column special journals is called
a. posting to the subsidiary. b. debiting and crediting.
c. footing and crossfooting. d. updating the master file.

78. If a company records merchandise it returns to suppliers in the general journal, then a. a posting must be made only to the accounts payable control account.
b. a posting must be made only to the accounts payable subsidiary ledger account. c. a dual posting must be made.
d. there will be a debit to Merchandise Inventory.

79. Thompson’sWholesale uses a sales journal. An entry in this journal represents a a. debit to Cash; credit to Sales.
b. debit to Accounts Receivable; credit to Sales. c. debit to Sales Discounts; credit to Cash.
d. debit to Accounts Payable; credit to Sales Returns and Allowances.

80. Which accounts in the general ledger are affected when the monthly posting is made from the sales journal?
a. Accounts Receivable; accounts receivable subsidiary accounts b. Accounts receivable subsidiary accounts; Sales
c. Accounts Receivable; Sales
d. Accounts Receivable; Purchases

81. Which of the following is not a true statement about the daily posting of the sales journal? a. There is a debit posting to accounts in the accounts receivable subsidiary ledger.
b. There is no credit posting.
c. The reference column in the sales journal is checked when the posting is complete for each entry in the journal.
d. The invoice number supporting the sales transaction is posted to the reference column in the subsidiary ledger.

82. Evidence that the monthly posting of the sales journal total has been accomplished is indicated by
a. a signature of the accountant doing the posting. b. a date under the double-line total.
c. the general ledger account numbers under the double-lined total. d. inspecting the postings in the accounts payable subsidiary ledger.

83. Which of the following economic events would not be recorded in the cash receipts journal? a. Cash sales of merchandise
b. Collections of accounts receivable c. Cash from sale of land
d. Cash purchases of merchandise

84. The “Other Accounts” column in a cash receipts journal is also referred to as the a. miscellaneous column.
b. excess column.
c. sundry accounts column. d. compound-entrycolumn.

85. An entry in the “Other Accounts” column in a cash receipts journal could occur when the credit is to
a. owner’s drawing. b. Accounts Payable. c. owner’s capital.
d. Merchandise Inventory.

86. The process of totaling the columns of a journal is termed a. ruling.
b. columnizing. c. sizing.
d. footing.

87. An (x) below the “Other Accounts” column in a cash receipts journal indicates the a. total has been posted to the general ledger.
b. total is not posted to the general ledger. c. column has been footed.
d. column has been cross-footed.

88. Cross-footing a cash receipts journal means
a. the equality of debits and credits in the journal have been proved. b. each line of the journal has a horizontal total.
c. the columns of the journal have been cross-referenced. d. all necessary postings have been completed.

89. Which of the following would not be an appropriate heading for a column in the cash receipts journal?
a. Cash
b. Accounts Payable c. Sales Discounts d. Sales

90. Entries in the purchases journal are made a. from sales invoices.
b. from the general journal.
c. without supporting documentation. d. from purchase invoices.

91. Proving the postings of a one-column purchases journal would involve comparing the
a. general ledger posting to Accounts Payable to the debit postings of the accounts receivable subsidiary ledger.
b. general ledger debit posting to Accounts Payable to the general ledger credit posting to Merchandise Inventory.
c. general ledger credit posting to Accounts Payable to the general ledger debit posting to Merchandise Inventory.
d. debit postings to the accounts receivable subsidiary ledger to the credit postings to the accounts payable subsidiary ledger.

92. If a company uses a multi-column purchases journal, which of the following possible headings for debit columns of the journal would not be appropriate?
a. Accounts Payable
b. Merchandise Inventory c. Store Supplies
d. Office Supplies

93. The reference column of a multi-columncash payments journal after posting a. will only contain check marks.
b. will be blank.
c. will only contain account numbers.
d. may contain either account numbers or check marks.

94. The reference column of the accounts in the accounts payable subsidiary ledger after posting may show
a. only P references.
b. CP, P, or G references. c. G, P, or S references. d. only CP references.

Additional Multiple Choice Questions

95. Principles of an efficient and effective accounting information system include all of the following except
a. cost effectiveness. b. flexibility.
c. useful output.
d. All of these options are principles.

96. Which of the following statements is incorrect?
a. A major consideration in developing an accounting system is cost effectiveness.
b. When an accounting system is designed, no consideration needs to be given to the needs and knowledge of the various users.
c. The accounting system should be able to accommodate a variety of users and changing information needs.
d. To be useful, information must be understandable, relevant, reliable, timely, and accurate.

97. All of the following are advantages of using subsidiary ledgers except they a. eliminate errors in individual accounts.
b. free the general ledger of excessive details.
c. show, in a single account, transactions affecting one customer or one creditor. d. make possible a division of labor.

98. Which of the following is not an advantage of a subsidiary ledger?
a. Shows transactions affecting one customer or one creditor in a single account. b. Helps locate errors in individual accounts.
c. Puts greater detail in the general ledger. d. Makes possible a division of labor.

99. Credit sales of assets other than merchandise are recorded in the a. cash payments journal.
b. cash receipts journal. c. general journal.
d. sales journal.

100. When the totals of the sales journal are posted at the end of the month, there will be credits to
a. Sales and Merchandise Inventory and debits to Accounts Receivable and Cost of Goods Sold.
b. Accounts Receivable and Cost of Goods Sold and debits to Sales and Merchandise Inventory.
c. Sales and debits to each individual customer account. d. the Sales account only, and no debits.

101. The Other Accounts column of a multi-column journal is often referred to as the a. Sundry Accounts column.
b. Controlling Account column. c. Credit Account column.
d. Debit Account column.

102. Companies record credit purchases of equipment or supplies in the a. cash payments journal.
b. cash receipts journal. c. general journal.
d. one-column purchases journal.

103. In the expanded purchases journal, debits are made in which columns? a. Accounts Payable, Merchandise Inventory, and Office Supplies
b. Merchandise Inventory, Office Supplies, and Store Supplies c. Cash, Office Supplies, and Store Supplies
d. Accounts Payable, Cash, and Merchandise Inventory

104. If a customer takes a sales discount, an entry is made in the a. cash receipts journal.
b. sales journal.
c. cash payments journal. d. general journal.

BRIEFEXERCISES
BE 105
Match each of the principles and phases in the development of an accounting system with the statement that best describes them.

a. Cost effectiveness b. Flexibility
c. Useful output

1. Information must be understandable,relevant, reliable, timely, and accurate.

2. Benefits of information must outweigh the cost of providing it.

3. The system should accommodate a variety of users and changing information needs.

4. The accounting system must consider the needs and knowledge of various users.

5. The system should be capable of meeting the changes in the demands made upon it.

BE 106

Indicate whether each of the following accounts would be shown in the general ledger or subsidiary ledger.

1. Cash

2. AccountsReceivable—Jones

3. Equipment

4. AccountsPayable—Smith

5. CommonStock

6. Sales

BE 107

Dexter Company maintains four special journals and a general journal to record its transactions. Using the code below, indicate in the space provided the appropriate journal for recording the transactions listed.

Code Journals
S Sales journal
CR Cash receipts journal CP Cash payments journal
P Single-column purchases journal G General journal

1. Mr. Dexter invested cash in the business.

2. Purchased store supplies on account.

3. Sold merchandise to customer on account.

4. Purchased a 2-year fire insurance policy for cash.

5. Received a check from a customer as payment on account.

6. Paid for store supplies purchased in transaction 2.

7. Purchased merchandise on account.

8. Issued a credit memorandum to a customer who returned defective merchandise previously sold on account.

9. Purchased office equipment for cash.

10. Made an adjusting entry for store supplies used during the period.

BE 108

Indicatein which journal each of the following transactions is recorded.

1. Cash purchase of merchandise.

2. Owner investment of cash.

3. Sale of merchandise on account.

4. Purchaseof supplies for cash.

5. Credit purchase of merchandise.

6. Collectionon account from customers.

BE 109

Indicatethe special journal(s) in which the following column headings appear. 1. Cash Cr.

2. Cost of Goods Sold Dr.

3. AccountsReceivable Dr.

4. AccountsPayable Cr.

5. MerchandiseInventory Cr.

6. Sales Discounts Dr.

BE 110

Indicate which of the following cash payments journal columns are posted only in total, only daily, or both in total and daily.

1. Other Accounts

2. AccountsPayable

3. MerchandiseInventory 4. Cash

EXERCISES
Ex. 111
After Shaw Company had completed all posting for the month of December, the sum of the balances in the following accounts payable subsidiary ledger did not agree with the balance of the control account in the general ledger.

Name Austin’s
Address 286 Buck Avenue ——————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance ——————————————————————————————————————————— Dec. 2 P25 2,400 2,400

Name Beeman Company Address 818 Western Avenue
——————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance ——————————————————————————————————————————— Dec. 1 Balance 7,600
10 CP23 7,600 — 20 P32 3,300 3,300 29 J15 500 3,800

Name Fryar Company Address 90210 Baker Boulevard
——————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance ——————————————————————————————————————————— Dec. 1 Balance 9,900
18 CP28 9,900 — 29 P34 10,600 700

Ex. 111 (cont.)

Name Maria Lopez
Address 2720 Sommers Avenue ——————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance ——————————————————————————————————————————— Dec. 8 P27 6,000 6,000
27 P33 8,000 14,000

Name Reed Supplies Address 1560 Puckett Street
——————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance ——————————————————————————————————————————— Dec. 1 Balance 8,200
7 P26 5,600 13,800 12 J11 420 12,380 20 CP29 6,000 18,380

The balance in the Accounts Payable control account of $37,180 has been verified as correct. Also assume that the journals references in the Post Ref. columns of the accounts payable subsidiary ledger have been verified as correct.

Instructions

Determine the errors in the preceding accounts payable subsidiary accounts and prepare a corrected schedule of accounts payable.

Ex. 112

On December 1, the accounts receivable control account balance in the general ledger of the Titus Company was $9,000. The accounts receivable subsidiary ledger contained the following detailed customer balances: Abel $1,500, Dole $2,100, Fabb $2,600, and Hall $2,800. The following information is available from the company’s special journals for the month of December:

Cash Receipts Journal: Cash received from Fabb $1,900, from Abel $1,600, from Reese $1,700, and from Dole $1,800.

Sales Journal: Sales to Reese $4,300, to Fabb $1,700, to Abel $2,300, and to Hall $2,400.

Additionally, Fabb returned defective merchandise for credit for $900. Abel returned defective merchandise for $600 which he had purchased for cash.

Instructions
(a) Using T-accounts for Accounts Receivable Control and the detail customer accounts, post the activity for the month of December.
(b) Reconcile the accounts receivable control account with the subsidiary ledger by preparing a detail list of customer balances at December 31.

Ex. 113

Lowry Company uses a sales journal, a cash receipts journal, and a general journal to record transactions with its customers. Record the following transactions in the appropriate journals. The cost of all merchandisesold was 70% of the sales price.

July 2 Sold merchandise for $15,000 to B. Rice on account. Credit terms 2/10, n/30. Sales invoice No. 100.

July 5 Receiveda check for $800 from R. Hyatt in payment of his account. July 8 Sold merchandise to F. Wenger for $900 cash.
July 10 Received a check in payment of Sales invoice No. 100 from B. Rice minus the 2% discount.

July 15 Sold merchandise for $9,000 to J. Mays on account. Credit terms 2/10, n/30. Sales invoice No. 101.

July 18 Borrowed$25,000 cash from United Bank signing a 6-month, 10% note.

July 20 Sold merchandise for $12,000 to C. Kane on account. Credit terms 2/10, n/30. Sales invoice No. 102.

July 25 Issued a credit (reduction) of $600 to C. Kane as an allowance for damaged merchandise previously sold on account.

July 31 Receiveda check from J. Mays for $5,000 as payment on account.

LOWRYCOMPANY Sales Journal
S1 ———————————————————————————————————————————
Invoice Acct. Rec. Dr. C. of G. S. Dr. Date Account Debited No. Ref. Sales Cr. Mer. Inv. Cr.
———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

LOWRYCOMPANY General Journal
G1 ——————————————————————————————————————————— Date Explanations Ref. Debit Credit ———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————
AccountingInformation Systems 7 – 23

Ex. 113 (cont.)

LOWRYCOMPANY Cash Receipts Journal
CR1 ———————————————————————————————————————————
Sales Accounts Other C. of G. S. Dr. Accounts Cash Discounts Rec. Sales Accounts Mer. Inv. Cr.
Date Credited Ref. Dr. Dr. Cr. Cr. Cr. ———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

Ex. 114

Goren Company uses a single-column purchases journal, a cash payments journal, and a general journal to record transactions with its suppliers and others. Record the following transactions in the appropriate journals.

Transactions

Oct. 5 Purchased merchandise on account for $20,000 from Hendry Company. Terms: 2/10, n/30; FOB shipping point.

Oct. 6 Paid $7,200 to Federated Insurance Company for a two-year fire insurance policy.

Oct. 8 Purchased store supplies on account for $700 from Flint Supply Company. Terms: 2/10, n/30.

Oct. 11 Purchased merchandise on account for $14,000 from Adler Corporation. Terms: 2/10, n/30; FOB shipping point.

Oct. 13 Granted a reduction of $3,000 to Adler Corporation for merchandise purchased on October 11 and returned because of damage.

Oct. 15 Paid Hendry Company for merchandise purchased on October 5, less discount.

Oct. 16 Purchasedmerchandisefor $8,000 cash from Clifford Company.

Oct. 21 Paid Adler Corporationfor merchandise purchased on October 11, less merchandise returned on October 13, less discount.

Oct. 25 Purchasedmerchandiseon account for $22,000 from Eaton Company. Terms: 2/10, n/30; FOB shipping point.

Oct. 31 Purchasedoffice equipment for $30,000 cash from Pate Office Supply Company.
AccountingInformation Systems 7 – 25

Ex. 114 (cont.)

GORENCOMPANY Purchases Journal
P1 ———————————————————————————————————————————
Merchandise Inventory Dr. Date Account Credited Ref. Accounts Payable Cr.
———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

GORENCOMPANY General Journal
G1 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit ———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

GORENCOMPANY Cash Payments Journal
CP1 ———————————————————————————————————————————
Other Accounts Merchandise Accounts Accounts Payable Inventory Cash
Date Debited Ref. Dr. Dr. Cr. Cr. ———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————

———————————————————————————————————————————
Ex. 115

Handy Company uses both special journals and a general journal. The company accountant made the following errors during July.

1. Incorrectly added the credit entries in a customer’s account in the accounts receivable subsidiary ledger. The total was listed as $2,690; it should have been $2,790.

2. A remittance of $400 from Dan Lang was correctly recorded in the cash receipts journal, but the amount was posted incorrectly to the account of customer Bill Lang in the subsidiary ledger.

3. A purchase of merchandise on account from Gagne Company for $1,000 was incorrectly entered in the purchases journal at $10,000.

4. In the sales journal, the entries were incorrectly added for the month. The monthly total was listed as $24,820; it should have been $24,280.

Instructions

Indicatehow each of the above errors might be discovered.

Ex. 116

Beloware some typical transactions incurred by Farley Company. 1. Purchaseof merchandise on account.
2. Collectionon account from customers. 3. Payment of employee’s wages.
4. Sales of merchandisefor cash.

5. Close Income Summary to owner’s capital.

6. Adjustingentry for depreciation on machinery. 7. Payment of creditors on account.
8. Purchaseof office equipment on credit.

9. Sales discount taken on goods sold on credit.

Ex. 116 (cont.)

10. Sales of merchandise on account. 11. Purchaseof a delivery truck for cash.
12. Return of merchandise purchased on credit. 13. Payment of rent in advance.
14. Adjustingentry for accrued interest expense. 15. Purchaseof office supplies for cash.

For each transaction, indicate by the code letter the appropriate journal where the transaction would be journalized.

CR — Cash Receipts Journal CP — Cash Payments Journal
S — Sales Journal
P — Single-ColumnPurchases Journal G —General Journal

Ex. 117

Circle the correct answer to each situation.

(a) A sales journal will be used for:

Credit Sales Cash Sales Sales Discounts Yes No Yes No Yes No

(b) A single-column purchases journal will be used for:

Cash Purchases Purchases on Account

PurchaseReturns and Allowances

Yes No Yes No Yes No

(c) A multi-column purchases journal will be used for:

SuppliesPurchased Cash Purchases on Account
Equipment Purchases on Account

Yes No Yes No Yes No
AccountingInformation Systems 7 – 29

Ex. 117 (cont.)

(d) A cash payments journal will be used for:

Paymentsto Creditors
Purchases Discounts
Owner Cash Investment

Yes No Yes No Yes No

(e) A cash receipts journal will be used for:

Owner Cash
Withdrawals Purchases Discounts Cash Sales

Yes No Yes No Yes No

Ex. 118

Listed below are various column headings that may appear in special journals. Using the following code letters, identify for each column heading (1) the special journal where the column heading would appear, and (2) whether the amounts entered under the column heading would be posted in total, individually, or both in total and individually. (Note: column headings may appear in more than one special journal)

Code: Special Journals Code: Posting

S = Sales journal
P = Single-column purchases journal CR = Cash receipts journal
CP = Cash payments journal
I = Individualposting T = Total posting
B = Both individual and total posting

Heading Special Journal Posting 1. Accounts Payable—Cr.
2. Sales—Cr.

3. Sales Discounts—Dr.

4. Merchandise Inventory—Dr. 5. Cash—Cr.
6. Accounts Receivable—Dr. 7. Other Accounts—Cr.
8. Merchandise Inventory—Cr. 9. Accounts Receivable—Cr.
10. Accounts Payable—Dr.

Ex. 119

Kiner Company uses four special journals, (cash receipts, cash payments, sales, and purchases journal) in addition to a general journal. On November 1, 2008, the control accounts in the general ledger had the following balances: Cash $12,000, Accounts Receivable $200,000 and Accounts Payable $42,000. Selected information on the final line of the special journals for the month of November is presented below:

Cash Receipts Journal:

Sales Cash Discount
Dr. Dr.
? $600
Accounts Receivable
Cr.
$5,400

Sales
Cr.
$29,000
Other Accounts Cr.
Acct. Ref. Amount (X) $1,000

C. of G. S. Dr. Mer. Inv. Cr.
$17,400

Cash Payments Journal:

Other Accounts Dr.
Acct. Ref. Amount (X) $1,600

Accounts Payable
Dr.
?

Office Supplies
Dr.
$1,300

Store Supplies
Dr.
$1,100

Merchandise Inventory
Cr.
$700

Cash
Cr.
$17,600

Purchases Journal:

Accounts Merchandise Office Store Other Accounts Payable Inventory Supplies Supplies Dr.
Cr. Dr. Dr. Dr. Acct. Ref. Amount ? $35,000 $800 $650 (X) $3,300

AdditionalData:
The Sales Journal totaled $41,000. A customer returned merchandise for credit for $360 and Kiner Company returned store supplies to a supplier for credit for $400.

Instructions

(a) Determine the missing amounts in the special journals.

(b) Determine the balances in the general ledger accounts (Cash, Accounts Receivable, and AccountsPayable) at the end of November.

Ex. 120

Gaston Company began business on October 1. The partial sales journal, as it appeared at the end of the month, follows:
SALES JOURNAL Page 1 ———————————————————————————————————————————
Invoice Post.
Date Account Debited Number Ref. Amount ——————————————————————————————————————————— Oct. 5 Donna Pratt 1001 575
11 Mike Ace 1002 335 16 Donna Pratt 1003 818 19 Laura Carr 1004 147 26 Mary Trear 1005 1,184 3,059

1. Open general ledger T-accounts for Accounts Receivable (No. 112) and Sales (No. 401) and an accounts receivable subsidiary T-account ledger with an account for each customer. Make the appropriate postings from the sales journal. Fill in the appropriate posting references in the sales journal above.

2. Prove the accounts receivable subsidiary ledger by preparing a schedule of accounts receivable.

Ex. 121

CASH PAYMENTS JOURNAL Page 45 ———————————————————————————————————————————
Other Accounts Merchandise
Ck. Account Post. Accounts Payable Inventory Cash Date No. Debited Ref. Dr. Dr. Cr. Cr.
——————————————————————————————————————————— 20—
Jan. 4 659 N. Miles (a) 4,000 40 3,960 11 660 Prepaid Rent (b) 1,000 1,000 13 661 Merch. Inventory (c) 565 565 14 662 Smith, Drawing (d) 2,000 2,000 18 663 Welch (e) 1,300 1,300 20 664 Merch. Inventory (f) 450 450 29 665 Equipment (g) 3,400 3,400
7,415 5,300 40 12,675 (h) (i) (j) (k)

Using the cash payments journal above, identify each of the posting references indicated by a letter, as representing:
(1) a posting to a general ledger account. (2) a posting to a subsidiaryledger account. (3) that no posting is required.

Ex. 122

Shown below is a page from a special journal. 1. What is the name of this journal?
2. Give an explanation for each of the transactions in this journal. 3. Explain the following:
(a) the numbers under the bottom lines.
(b) the checks entered into the Post. Ref. column.
(c) the numbers 113 and 416 in the Post. Ref. column. (d) the (x) below the Other Accounts column.

Ex. 122 (cont.)

——————————————————————————————————————————— Sales Accounts Other C. of G. S. Dr.
Accounts Post Cash Discounts Receivable Sales Accounts Mer. Inv. Cr. Date Credited Ref. Dr. Dr. Cr. Cr. Cr. ——————————————————————————————————————————— May 27 Don Ritz √ 980 20 1,000
28 Notes Receivable 113 3,000 Interest Revenue 416 3,360 360
29 Cash Sale 370 370 260
31 Bob Eaton √ 400 5,110
(101)
400 20 1,400
(414) (112)

370 3,360 (401) (x)

260 (505)(120)

Ex. 123

On September 30, after all monthly postings had been completed, the Accounts Receivable control account in the general ledger had a debit balance of $240,000; the Accounts Payable control account had a credit balance of $65,000.

The October transactions recorded in the special journals are presented below.

Special Journals Sales journal Purchasesjournal Cash receipts journal
Cash payments journal
October Transactions Total sales
Total purchases Accountsreceivable column total Accountspayable column total

$140,000 45,000 105,000 30,000

Instructions
Computethe balances of the (1) Accounts Receivable and (2) Accounts Payable control accounts after the monthly postings on October 31.

COMPLETION STATEMENTS

124. The basic principles in the development of an accounting information system are (1) , (2) , and (3) .

125. The accounts receivable provides detailed information about customer accounts which is summarized in one account in the general ledger.

126. If a certain type of transaction occurs with great frequency, it is more efficient to create a

to record that type of transaction.

127. If a company maintains special journals, sales of merchandise on credit should be recorded in a whereas sales of merchandise for cash should be recordedin the .

128. The use of special journals often saves time in the process.

129. The entries in the Accounts Receivable Credit column of the cash receipts journal must be posted to the accounts in the accounts receivable subsidiary ledger and in to the control account in the general ledger.

130. Transactions that cannot be entered in a special journal are recorded in the

, and if control and subsidiary accounts are involved, there must be a

posting.

131. Only transactions that cannot be entered in a journal are recorded in the journal.

MATCHING

132. Match the items below by entering the appropriate code letter in the space provided.

A. Cost effectiveness
B. Enterpriseresource planning systems C. Generalledger accounting system
D. Manual accounting system E. Special journals
F. Subsidiaryledger G. Control account
H. Accountsreceivable ledger
I. Accountinginformation system J. Flexibility

1. A general ledger account which summarizes detailed information in a subsidiary ledger.

2. Benefitsof information must exceed the cost of providing it.

3. The accounting system should accommodate a variety of users.

4. Softwareprograms that integrate various accounting functions.

5. Groupof accounts with a common characteristicwhich provides detailed information.

6. Collects and processes transaction data and communicatesfinancial information.

7. Integrate all aspects of the organization, including accounting, sales, and manu-facturing.

8. Used to record high volume, similar type transactions.

9. Transactions are journalized and posted by hand.

10. A subsidiary ledger that contains individual customer accounts.

SHORT-ANSWERESSAY QUESTIONS
S-AE 133
Tom Snead operates a small business and uses a manual system of accounting. Transactions are entered in the general journal and posted to accounts in the general ledger at the end of the month. Although the volume of transactions has increased significantly in the past year, Mr. Snead does not feel that it would be cost-effective to install an electronic accounting system. He hires you as a consultant to make recommendations about how to record transactions more efficiently. Briefly describe the principles that you would consider in making recommendations to Mr. Snead.

S-AE 134

At the end of the month, the accountant for Goltra Company prepared a schedule of accounts receivable from the accounts receivable subsidiary ledger. Its total did not agree with the balance in the Accounts Receivable control account in the general ledger. Briefly describe the procedure that should be followed in reconciling the two balances.

S-AE 135 (Ethics)

Maria Lopez has been a manager at EarthSat, a large telecommunications company, for ten years. She has worked very hard, but she had to take two unpaid leaves of absence to assist her sick mother, and then later, she took unpaid leave when her children needed care. As a result, she has received only two promotions during that time. She realizes that she probably will not receive any more promotions, since the company views her as somewhat unstable.

S-AE 135 (cont.)

Last week, a newly promoted manager bragged that he could just “sniff out” accounting errors. Maria, angered at his arrogance, deliberately recorded sales salaries as rent expense. Other accountants were present when she did so. The dollar amounts of her changes were not significant.

Required:
Has there been a violation of ethical standards? Explain.

S-AE 136 (Communication)

You are a supervisor in the accounting department of a large manufacturing company. Two weeks ago, you were anxious to leave for your vacation, and so you hurriedly recorded a whole stack of journal entries so that the others would not have as much to do while you were gone. When you returned, you realized that you had entered a payment on account of a customer, Norton, as payment on another customer’s account, Nolten. Even worse, you realized that Norton’s payment had been on an overdue account, and that Nolten had received a refund for overpayment.

Required:

Write a memo to Carl Klugman, your boss, explaining your mistake.

CHAPTER 8

INTERNALCONTROL AND CASH

CHAPTERSTUDY OBJECTIVES

1. Define internal control.

2. Identify the principles of internal control.

3. Explain the applications of internal control principles to cash receipts.

4. Explain the applications of internal control principles to cash disbursements.

5. Describe the operation of a petty cash fund.

6. Indicate the control features of a bank account.

7. Prepare a bank reconciliation.

8. Explain the reporting of cash.

TRUE-FALSESTATEMENTS

1. Internal control is mainly concerned with the amount of authority a supervisor exercises over a subordinate.

2. A highly automated computerized system of accounting eliminates the need for internal control.

3. The safeguarding of assets is an objective of a company’s system of internal control.

4. Management is responsible for establishing a system of internal control.

5. Internal control is most effective when several people are responsible for a given task.

6. The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.

7. Requiring employees to take vacations is a weakness in the system of internal controls because it does not promote operational efficiency.

8. The extent of internal control features adopted by a company must be evaluated in terms of cost-benefit.

9. An effective system of internal control requires that at least two individuals be assigned to one cash drawer so that each can serve as check on the other.

10. Only large companies need to be concerned with a system of internal control.

11. The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals.

12. In order to prevent a transaction from being recorded more than once, a company should maintain only one book of original entry.

13. Firms use physical, mechanical, and electronic controls primarily to safeguard their assets.

14. A segregation of duties among employees eliminates the possibility of collusion.

15. For efficiency of operations and better control over cash, a company should maintain only one bank account.

16. Cash registers are an important internal control device used in controlling over-the-counter receipts.

17. Checks received in the mail should be immediately stamped “NSF” to prevent unauthorized cashing of the check.

18. Control over cash disbursements is improved if major expenditures are paid by check.

19. In a voucher system, vouchers are prepared in the accounts receivable department.

20. Electronic Funds Transfer (EFT) is a disbursement system that uses telephone or computer to transfer cash from one location to another.

21. A voucher system is used by many large companies as a means of controlling cash receipts.

22. The petty cash fund eliminates the need for a bank checking account.

23. Cash register overages are deposited in the petty cash fund and cash shortages are made-up from the petty cash fund.

24. A deposit ticket is a negotiable instrument that can be transferred to another party by endorsement.

25. If a company deposits all its receipts in the bank and pays all its bills by check, then the monthly bank statement balance will always agree with the company’s record of its checking account balance.

26. Checks from customers who pay their accounts promptly are called outstanding checks.

27. All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting journal entries to the Cash account.

28. A bank reconciliation is generally prepared by the bank and sent to the depositor along with cancelled checks.

29. Cash equivalents are highly liquid investments that can be converted into a specific amount of cash.

30. Cash which is restricted for a specific use should be separately reported.

Additional True-False Questions

31. Internal control consists of the plan of organization and all of the related methods and measures adopted within a business to (a) safeguard its assets, and (b) enhance the accuracy and reliability of its accounting records.

32. In general, documents should be prenumbered and all documents should be accounted for.

33. Collusion may result when one individual circumvents prescribed controls and may significantly impair the effectiveness of a system.

34. Personnel who handle cash receipts should have the option of taking a vacation or not.

35. The duties of approving an item for payment and paying the item should be done by different departments or individuals.

36. The custodian of the petty cash fund has the responsibility of recording a journal entry every time cash is used from the fund.

37. A debit memorandum could show the collection of a note receivable by the bank.

38. To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash.

MULTIPLECHOICE QUESTIONS

39. Which one of the following is not an objective of a system of internal controls? a. Safeguard company assets
b. Overstate liabilities in order to be conservative
c. Enhance the accuracy and reliability of accounting records d. Reduce the risks of errors

40. Internal controls are concerned with
a. only manual systems of accounting. b. the extent of government regulations. c. safeguarding assets.
d. preparing income tax returns.

41. The Foreign Corrupt Practices Act requires that all U.S. corporations under the juris-diction of the Securities and Exchange Commission
a. have at least one foreign subsidiary.
b. maintain accounting records of foreign branches and subsidiaries in the local foreign currency.
c. maintain an adequate system of internal control.
d. must file reports with the National Commissionon Fraudulent Financial Reporting.

42. Internal control is defined, in part, as a plan that safeguards a. all balance sheet accounts.
b. assets. c. liabilities.
d. capital stock.

43. The importance of a good system of internal controls was recognized with the passage of a. the Securities and Exchange Act of 1933.
b. the Securities and Exchange Act of 1994. c. the Blue Sky Laws.
d. the Foreign Corrupt Practices Act of 1977.

44. Companies that are subject to, but fail to comply with, the Foreign Corrupt Practices Act of 1977
a. may do so legally by obtaining an exemption. b. will be automatically dissolved.
c. may be subject to fines and officer imprisonment. d. may be forced to sell their foreign subsidiaries.

45. Internal controls are not designed to safeguard assets from a. natural disasters.
b. employee theft. c. robbery.
d. unauthorized use.

46. Having one person post entries to accounts receivable subsidiary ledger and a different person post to the Accounts Receivable Control account in the general ledger is an example of
a. inadequate internal control. b. duplication of effort.
c. external verification. d. segregation of duties.

47. Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them
a. increases the potential for errors and fraud. b. decreases the potential for errors and fraud. c. is an example of good internal control.
d. is a good example of safeguarding the company’s assets.

48. The custodian of a company asset should
a. have access to the accounting records for that asset. b. be someone outside the company.
c. not have access to the accounting records for that asset. d. be an accountant.

49. Internal auditors
a. are hired by CPA firms to audit business firms.
b. are employees of the IRS who evaluate the internal controls of companies filing tax returns.
c. evaluate the system of internal controls for the companies that employ them.
d. cannot evaluate the system of internal controls of the company that employs them because they are not independent.

50. When two or more people get together for the purpose of circumventing prescribed controls, it is called
a. a fraud committee. b. collusion.
c. a division of duties.
d. bonding of employees.

51. From an internal control standpoint, the asset most susceptible to improper diversion and use is
a. prepaid insurance. b. cash.
c. buildings. d. land.

52. The principle of establishing responsibility does not include a. one person being responsible for one task.
b. authorization of transactions.
c. independent internal verification. d. approval of transactions.

53. The control principle related to not having the same person authorize and pay for goods is known as
a. establishment of responsibility. b. independent internal verification. c. segregation of duties.
d. rotation of duties.

54. Two individuals at a retail store work the same cash register. You evaluate this situation as
a. a violation of establishment of responsibility. b. a violation of segregation of duties.
c. supporting the establishment of responsibility. d. supporting internal independent verification.

55. An accounts payable clerk also has access to the approved supplier master file for purchases. The control principle of
a. establishment of responsibility is violated. b. independent internal verification is violated. c. documentation procedures is violated.
d. segregation of duties is violated.

56. Controls that enhance the accuracy and reliability of the accounting records are a. automated controls.
b. external controls.
c. mechanical and electronic controls. d. physical controls.

57. Related selling activities do not include a. ordering the merchandise.
b. making a sale.
c. shipping the goods. d. billing the customer.

58. The independent internal verification principle involves each of the following except the
of data prepared by other employees. a. comparison
b. reconciliation c. review
d. segregation

59. Related buying activities include a. ordering, receiving, paying. b. ordering, selling, paying.
c. ordering, shipping, billing. d. selling, shipping, paying.

60. Joe is warehouse custodian and also maintains the accounting record of the inventory held at the warehouse. An assessment of this situation indicates
a. documentation procedures are violated.
b. independent internal verification is violated. c. segregation of duties is violated.
d. establishment of responsibility is violated.

61. Physical controls to safeguard assets do not include a. cashier department supervisors.
b. vaults.
c. employee identification badges. d. security guards.

62. In large companies, the independent internal verification procedure is often assigned to a. computer operators.
b. management.
c. internal auditors. d. outside CPAs.
63. Maximum benefit from independent internal verification is obtained when a. it is made on a pre-announced basis.
b. it is done by the employee possessing custody of the asset. c. discrepanciesare reported to management.
d. it is done at the time of the audit.

64. If employees are bonded
a. it means that they are not allowed to handle cash.
b. they have worked for the company for at least 10 years.
c. they have been insured against misappropriation of assets. d. it is impossible for them to steal from the company.

65. Mrs. Smith has worked for Arcco Inc., for 20 years without taking a vacation. An internal control feature that would address this situation would be
a. other controls.
b. establishment of responsibility. c. physical controls.
d. documentation procedures.

66. A system of internal control a. is infallible.
b. can be rendered ineffective by employee collusion. c. invariably will have costs exceeding benefits.
d. is premised on the concept of absolute assurance.

67. For accounting purposes, postdated checks (checks payable in the future) are considered to be
a. money orders. b. cash.
c. petty cash.
d. accounts receivable.

68. Postage stamps on hand are considered to be a. cash.
b. petty cash.
c. cash equivalents. d. a prepaid expense.

69. Which one of the following items would not be considered cash? a. Coins
b. Money orders c. Currency
d. Postdated checks

70. Checks received through the mail should
a. immediatelybe endorsed “For Deposit Only.”
b. be sent to the accounts receivable subsidiary ledger clerk for immediate posting to the customer’s account.
c. be cashed at the bank as soon as possible. d. be “rung up” on a cash register immediately.

71. Proper control for over-the-countercash receipts includes a. a cash register with totals visible to the customer.
b. using electronic cash registers with no tapes.
c. cash count sheets requiring only the supervisor’s signature. d. cash count sheets requiring only the cashier’s signature.

72. A company stamps checks received in the mail with the words “For Deposit Only”. This endorsement is called a(n)
a. blank endorsement. b. rubber stamp.
c. restrictive endorsement. d. operational endorsement.

73. The daily cash count of cash register receipts made by department supervisors is an example of
a. other controls.
b. independent internal verification. c. establishment of responsibility. d. segregation of duties.

74. The use of remittance advices for mail receipts is an example of a. documentation procedures.
b. other controls.
c. physical controls.
d. independent internal verification.

75. Allowing only designated personnel to handle cash receipts is an example of a. establishment of responsibility.
b. segregation of duties.
c. documentation procedures.
d. independent internal verification.

76. Control over cash disbursements is generally more effective when a. all bills are paid in cash.
b. disbursementsare made by the accounts payable subsidiary clerk. c. payments are made by check.
d. all purchases are made on credit.

77. Reconciling the bank statement monthly is an example of a. segregation of duties.
b. independent internal verification. c. establishment of responsibility. d. documentation procedures.

78. An exception to disbursements being made by check is acceptable when cash is paid a. to an owner.
b. to employees as wages. c. from petty cash.
d. to employees as loans.

79. Allowing only the treasurer to sign checks is an example of a. documentation procedures.
b. segregation of duties. c. other controls.
d. establishment of responsibility.

80. Blank checks
a. should be safeguarded. b. should be pre-signed.
c. do not need to be safeguarded since they must be signed to be valid. d. should not be prenumbered.

81. An employee authorized to sign checks should not record a. owner cash contributions.
b. mail receipts.
c. cash disbursement transactions. d. sales transactions.

82. A voucher system is a series of prescribed control procedures a. to check the credit worthiness of customers.
b. designed to assure that disbursementsby check are proper. c. which eliminates the need for a sales journal.
d. specificallydesigned for small firms who may not have checking accounts.

83. Under a voucher system, a prenumberedvoucher is prepared for every a. cash receipt, regardless of source.
b. transaction entered into by the business.
c. expenditure except those made from petty cash. d. journal entry.

84. A credit balance in Cash Over and Short is reported as a(n) a. asset.
b. liability.
c. miscellaneous expense. d. miscellaneous revenue.

85. The entry to replenish a petty cash fund includes a credit to a. Petty Cash.
b. Cash.
c. Freight-in.
d. Postage Expense.

86. A debit balance in Cash Over and Short is reported as a a. contra asset.
b. miscellaneous asset.
c. miscellaneous expense. d. miscellaneous revenue.

87. A petty cash fund of $100 is replenished when the fund contains $3 in cash and receipts for $93. The entry to replenish the fund would
a. credit Cash Over and Short for $4.
b. credit Miscellaneous Revenue for $4. c. debit Cash Over and Short for $4.
d. debit Miscellaneous Expense for $4.

88. A petty cash fund is generally established in order to a. pay for all merchandise purchased on account. b. pay employees’ wages.
c. make loans internally to employees. d. pay relatively small expenditures.

89. A petty cash fund should be replenished a. every day.
b. at the end of every accounting period. c. once a year.
d. as soon as an expense is paid from the fund.

90. A petty cash fund should not be used for a. postage due.
b. loans to the petty cash custodian. c. taxi fares.
d. customer lunches.

91. The size of the petty cash fund is dependent on a. the wishes of the custodian of the fund.
b. anticipated disbursementsfor the year.
c. anticipated disbursementsfor a three- to four-week period. d. the size of the regular cash account.

92. Replenishing the petty cash fund requires a. a debit to Cash.
b. a credit to Petty Cash.
c. a debit to various expense accounts. d. no accounting entry.

93. Entries are made to the Petty Cash account when a. establishing the fund.
b. making payments out of the fund. c. recording shortages in the fund. d. replenishing the fund.

94. A $100 petty cash fund has cash of $15 and receipts of $80. The journal entry to replenish the account would include a credit to
a. Cash for $85.
b. Petty Cash for $85.
c. Cash Over and Short for $5. d. Cash for $80.

95. A $100 petty cash fund has cash of $17 and receipts of $80. The journal entry to replenish the account would include a
a. debit to Cash for $80.
b. credit to Petty Cash for $83.
c. debit to Cash Over and Short for $3. d. credit to Cash for $80.

96. A $100 petty cash fund has cash of $18 and receipts of $86. The journal entry to replenish the account would include a
a. debit to Cash for $86.
b. credit to Petty Cash for $86.
c. credit to Cash Over and Short for $4. d. credit to Cash for $86.

97. All of the following are parties to a check except the a. bank.
b. Federal Reserve. c. maker.
d. payee.

98. When opening a bank checking account, a signature card a. indicates to whom money is to be paid.
b. indicates each person authorized to sign checks on the account. c. is attached to all pre-printed checks.
d. is required only when dealing with an out-of-state bank.

99. Which one of the following is not necessarily a party to a check? a. Maker
b. Buyer c. Payee d. Payer

100. A bank statement
a. lets a depositor know the financial position of the bank as of a certain date. b. is a credit reference letter written by the depositor’s bank.
c. is a bill from the bank for services rendered.
d. shows the activity which increased or decreased the depositor’s account balance.

101. Which one of the following would not cause a bank to debit a depositor’s account? a. Bank service charge
b. Collection of a note receivable
c. Wiring of funds to other locations d. Checks marked NSF

102. A company maintains the asset account, Cash in Bank, on its books, while the bank maintains a reciprocal account which is
a. a contra-asset account. b. a liability account.
c. also an asset account.
d. an owner’s equity account.

103. A remittance advice attached to a company check provides
a. details about the running cash balance in the checking account. b. the magnetic bank routing numbers.
c. the explanation of the purpose of the check. d. the signature space for the maker.

104. A deposit made by a company will appear on the bank statement as a a. debit.
b. credit.
c. debit memorandum. d. credit memorandum.

105. A check returned by the bank marked “NSF” means a. no service fee.
b. no signature found.
c. not satisfactorily filled-out. d. not sufficient funds.

106. A debit memorandum would not be issued by the bank for a. a bank service charge.
b. the issuance of traveler’s checks. c. the wiring of funds.
d. the collection of a notes receivable.

107. On a bank reconciliation, deposits in transit are a. added to the bank balance.
b. deducted from the bank balance. c. added to the book balance.
d. deducted from the book balance.

108. A bank reconciliation should be prepared
a. whenever the bank refuses to lend the company money. b. when an employee is suspected of fraud.
c. to explain any difference between the depositor’s balance per books and the balance per bank.
d. by the person who is authorized to sign checks.

109. Deposits in transit
a. have been recorded on the company’s books but not yet by the bank. b. have been recorded by the bank but not yet by the company.
c. have not been recorded by the bank or the company.
d. are checks from customers which have not yet been received by the company.

110. In preparing a bank reconciliation, outstanding checks are a. added to the balance per bank.
b. deducted from the balance per books. c. added to the balance per books.
d. deducted from the balance per bank.

111. If a check correctly written and paid by the bank for $428 is incorrectly recorded on the company’s books for $482, the appropriate treatment on the bank reconciliation would be to a. add $54 to the bank’s balance.
b. add $54 to the book’s balance.
c. deduct $54 from the bank’s balance. d. deduct $428 from the book’s balance.

112. Notification by the bank that a deposited customer check was returned NSF requires that the company make the following adjusting entry:
a. Accounts Receivable Cash

b. Cash AccountsReceivable

c. Miscellaneous Expense AccountsReceivable

d. No adjusting entry is necessary.

113. Tolan Company had checks outstanding totaling $5,400 on its June bank reconciliation. In July, Tolan Company issued checks totaling $38,900. The July bank statement shows that $24,300 in checks cleared the bank in July. A check from one of Tolan Company’s customers in the amount of $300 was also returned marked “NSF.” The amount of outstanding checks on Tolan Company’s July bank reconciliation should be
a. $14,600. b. $20,000. c. $19,700. d. $9,200.

114. Each of the following items affect the cash balance per books except a. bank service charges.
b. notes collected by the bank. c. NSF checks.
d. outstanding checks.

115. Grant Company gathered the following reconciling information in preparing its July bank reconciliation:

Cash balance per books, 7/31 $5,500 Deposits in transit 150 Notes receivable and interest collected by bank 850 Bank charge for check printing 20 Outstandingchecks 2,000 NSF check 170

The adjusted cash balance per books on July 31 is a. $6,160.
b. $6,010. c. $4,310. d. $4,460.

116. Yenn Company developed the following reconciling information in preparing its September bank reconciliation:

Cash balance per bank, 9/30 Note receivable collected by bank Outstandingchecks
Deposits in transit Bank service charge NSF check
$15,000 6,000 9,000 4,500 75 1,200

Determinethe cash balance per books (before adjustments) for Yenn Company. a. $11,775.
b. $19,500. c. $5,775. d. $15,000.

117. Bank errors
a. occur because of time lags. b. must be corrected by debits. c. are infrequent in occurrence.
d. are corrected by making an adjusting entry on the depositor’s books.

118. An adjusting entry is not required for a. outstanding checks.
b. collection of a note by the bank. c. NSF checks.
d. bank service charges.

119. Jones Company had checks outstanding totaling $6,400 on its May bank reconciliation. In June, Jones Company issued checks totaling $39,900. The July bank statement shows that $29,700 in checks cleared the bank in July. A check from one of Jones Company’s customers in the amount of $300 was also returned marked “NSF.” The amount of outstanding checks on Jones Company’s July bank reconciliation should be
a. $19,600. b. $10,200. c. $16,600. d. $3,800.

120. Wilson Company gathered the following reconciling information in preparing its August bank reconciliation:

Cash balance per books, 8/31 $7,000 Deposits in transit 300 Notes receivable and interest collected by bank 1,700 Bank charge for check printing 40 Outstandingchecks 4,000 NSF check 340

The adjusted cash balance per books on August 31 is a. $8,320.
b. $8,020. c. $4,620. d. $4,920.

121. Jansen Company gathered the following reconciling information in preparing its April bank reconciliation:

Cash balance per books, 4/30 $6,600 Deposits in transit 900 Notes receivable and interest collected by bank 2,220 Bank charge for check printing 75 Outstandingchecks 4,500 NSF check 420

The adjusted cash balance per books on April 30 is a. $9,225.
b. $8,820. c. $8,325. d. $9,165.

122. Barns Company developed the following reconciling information in preparing its September bank reconciliation:

Cash balance per bank, 9/30 Note receivable collected by bank Outstandingchecks
Deposits in transit Bank service charge NSF check
$15,400 8,400 12,600 6,300 105 1,680

Using the above information, determine the cash balance per books (before adjustments) for the Barns Company.
a. $13,685 b. $21,700 c. $2,485 d. $21,000

123. In the month of November, Joles Company Inc. wrote checks in the amount of $9,250. In December, checks in the amount of $12,658 were written. In November, $8,468 of these checks were presented to the bank for payment, and $10,883 were presented in December. What is the amount of outstanding checks at the end of November?
a. $1,775 b. $782 c. $2,557 d. $3,550

124. In the month of November, Joles Company Inc. wrote checks in the amount of $9,250. In December, checks in the amount of $12,658 were written. In November, $8,468 of these checks were presented to the bank for payment, and $10,883 were presented in December. What is the amount of outstanding checks at the end of December?
a. $1,775 b. $782 c. $2,557 d. $3,550

125. At April 30, Beckett Company has the following bank information: cash balance per bank $4,600; outstanding checks $280; deposits in transit $550; credit memo for interest $10; bank service charge $20. What is Beckett’s adjusted cash balance on April 30?
a. $4,860 b. $4,880 c. $4,330 d. $4,870

126. At June 30, Coulsen Company has the following bank information: cash balance per bank $3,600; outstanding checks $280; deposits in transit $550; credit memo for interest $10; bank service charge $20. What is Coulsen’s adjusted cash balance on June 30?
a. $3,860 b. $3,880 c. $3,330 d. $3,870

127. Pierce Company wrote checks totaling $8,540 during October and $9,325 during November. $8,120 of these checks cleared the bank in October, and $9,110 cleared the bank in November.What was the amount of outstanding checks on November 30?
a. $635 b. $115 c. $305 d. $990

128. Rhoden Company wrote checks totaling $17,080 during October and $18,650 during November. $16,240 of these checks cleared the bank in October, and $18,220 cleared the bank in November.What was the amount of outstanding checks on November 30?
a. $1,270 b. $230 c. $610 d. $1,980

129. Perkins Company assembled the following information in completing its March bank reconciliation: balance per bank $3,820; outstanding checks $775; deposits in transit $1,250; NSF check $80; bank service charge $25; cash balance per books $4,400. As a result of this reconciliation, Perkins will
a. reduce its cash account by $475. b. reduce its cash account by $25. c. increase its cash account by $55. d. reduce its cash account by $105.

130. Reisner Company assembled the following information in completing its July bank reconciliation: balance per bank $11,460; outstanding checks $2,325; deposits in transit $3,750; NSF check $240; bank service charge $75; cash balance per books $13,200. As a result of this reconciliation, Reisner will
a. reduce its cash account by $1,425. b. reduce its cash account by $75.
c. increase its cash account by $165. d. reduce its cash account by $315.

131. If a check correctly written and paid by the bank for $491 is incorrectly recorded on the company’s books for $419, the appropriate treatment on the bank reconciliation would be to
a. add $72 to the book’s balance.
b. subtract $72 from the book’s balance. c. deduct $72 from the bank’s balance. d. deduct $491 from the book’s balance.

132. In the month of May, Klein Company Inc. wrote checks in the amount of $27,750. In June, checks in the amount of $37,974 were written. In May, $25,404 of these checks were presented to the bank for payment, and $32,649 in June. What is the amount of outstanding checks at the end of May?
a. $5,325 b. $2,346 c. $7,671 d. $10,650

133. In the month of May, Klein Company Inc. wrote checks in the amount of $27,750. In June, checks in the amount of $37,974 were written. In May, $25,404 of these checks were presented to the bank for payment, and $32,649 in June. What is the amount of outstanding checks at the end of June?
a. $5,325 b. $2,346 c. $7,671 d. $10,650

134. Cash equivalents include each of the following except a. bank certificates of deposit.
b. money market funds. c. petty cash.
d. U.S. Treasury bills.

135. Which of the following would not be reported on the balance sheet as a cash equivalent? a. Money market fund
b. Sixty-day certificate of deposit c. Six-month Treasury bill
d. Money market savings certificate

136. Compensating balances are a restriction on the use of a company’s cash and should be a. reported as a current asset.
b. reported as a noncurrent asset.
c. disclosed in the financial statements. d. reported as a reduction of cash.

Additional Multiple Choice Questions

137. The principles of internal control include all of the following except a. establishment of responsibility.
b. combining of duties.
c. physical, mechanical, and electronic controls. d. independent internal verification.

138. An example of poor internal control is
a. The accountant should not have physical custody of the asset nor access to it.
b. The custodian of an asset should not maintain or have access to the accounting records.
c. One person should be responsible for handling related transactions. d. A salespersonmakes the sale, and a different person ships the goods.

139. Having different individuals receive cash, record cash receipts, and hold the cash is an example of
a. establishment of responsibility. b. segregation of duties.
c. documentation procedures.
d. independent internal verification.

140. Storing cash in a company safe is an application of which internal control principle? a. Segregation of duties
b. Documentationprocedures c. Physical controls
d. Establishment of responsibility

141. Using prenumbered checks and having an approved invoice for each check is an example of
a. establishment of responsibility. b. segregation of duties.
c. documentation procedures.
d. independent internal verification.

142. An application of good internal control over cash disbursementsis
a. following payment, the approved invoice should be stamped PAID. b. blank checks should be stored in the treasurer’s desk.
c. each check should be compared with the approved invoice after the check is issued. d. check signers should record the cash disbursements.

143. When making a payment from the petty cash fund for postage stamps, the following journal entry is made.
a. Office Supplies……………………. XXXX
PettyCash …………………… XXXX b. PostageExpense………………… XXXX
PettyCash …………………… XXXX c. MiscellaneousExpense………… XXXX
PettyCash …………………… XXXX d. No entry is made.

144. All of the following would involve a debit memorandum except a. a bank service charge.
b. an NSF check.
c. the cost of printing checks. d. interest earned.

145. A bank may issue a credit memorandum for a. a bank service charge.
b. an NSF (not sufficient funds) check from a customer.
c. the collection of a note receivable for the depositor by the bank. d. the cost of printing checks.

146. Journal entries are required by the depositor for all of the following except a. collection of a note receivable.
b. bank errors.
c. bank service charges. d. an NSF check.

147. Cash equivalents are highly liquid investments that can be converted into a specific amount of cash with maturities of
a. 1 month or less when purchased. b. 3 months or less when purchased. c. 6 months or less when purchased. d. 1 year or less when purchased.

BRIEFEXERCISES

BE 148

Match the principle of internal control to each of the following cases.

a) Establishment of responsibility b) Segregation of duties
c) Accountabilityfor assets
d) Documentation procedures
e) Physical, mechanical and electronic controls

1. Employees’ time is tracked using a time clock.

2. Employees who receive shipments of goods do not have access to the accounting records for merchandise.

3. Shipping documents are prenumbered.

4. The bookkeeper does not have physical custody of assets.

5. Only the treasurer of the company can sign checks.

BE 149

Identifywhich principle of internal control is being followed in each of the following cases. 1. Warehouse employees do not have access to the accounting records.
2. Prenumbered shipping documents are prepared for each shipment of goods. 3. The locked warehouse is accessible only by warehouse employees with keys.

BE 150

Identify the internal control procedures applicable to cash receipts for Colorado Company in each of the following cases.
1. All cashiers are bonded.
2. The treasurer compares the total cash receipts to the bank deposit daily. 3. The bookkeeper records cash receipts which are held by the treasurer. 4. Only the treasurer holds cash receipts.
5. Deposit slips are completed for each deposit.

BE 151

Identify the internal control procedures applicable to cash disbursements followed by Kerry Company in each of the following cases.
1. Company checks are prenumbered.
2. Only the treasurer is authorized to sign checks. 3. Invoices are stamped PAID.
4. Blank checks are stored in a locked safe.
5. The bookkeeper, not the treasurer, records cash disbursements.

BE 152
On October 1, Grayson Company’s petty cash fund of $120 is replenished. The fund contains cash of $40, and receipts for supplies of $55 and postage of $25. Prepare the journal entry to record the replenishment of the petty cash fund.

BE 153

Identify whether each of the following items would be (a) added to the book balance, or (b) deductedfrom the book balance in a bank reconciliation.
1. EFT transfer to a supplier 2. Bank service charge
3. Check printing charge
4. Error recording check # 214 which was written for $230 but recorded for $320 5. Collection of note and interest by bank on company’s behalf

BE 154

Identify whether each of the following items would be (a) added to the book balance, (b) deducted from the book balance in a bank reconciliation, (c) added to the bank balance, or (d) deducted from the bank balance.
1. Deposits in transit 2. Bank service charge
3. Collection of note and interest by bank on company’s behalf 4. NSF check
5. Outstanding checks

BE 155

Identify which of the following reconciling items would require an adjusting entry to be made by BeutronCompany.
1. Deposits in transit totaled $2,000.
2. A check written to the company for $350 by Taxton Company was returned NSF. 3. The bank charged the company $46 for printing checks.
4. Outstanding checks totaled $1,667
5. A debit memorandum reported an EFT of $178 to Paco Utilities

BE 156

Acton Company needs to make adjusting entries for each of the following reconciling items. Identify the account to be debited and the account to be credited in each case.
1. A check for $59 written to the company by J. Neutron was returned NSF. 2. The monthly service charge by the bank was $34.
3. The bank collected a $1,000 note plus interest of $97 on the company’s behalf. The company had not accrued the interest.

BE 157

The following reconciling items are applicable to the bank reconciliation for the Motley Crew Company. Indicate how each item should be shown on a bank reconciliation.

a. Outstanding checks.
b. Bank credit memorandum for collecting a note for the depositor. c. Bank debit memorandum for service charge.
d. Deposit in transit.

BE 158

At August 31, Jones Company has this bank information: cash balance per bank $6,950; outstanding checks $762; deposits in transit $1,700; and a bank service charge $20. Determine the adjusted cash balance per bank at August 31, 2008.

BE 159

Given the following information, determine the adjusted cash balance per books from the following information:

a. Balance per books as of June 30, $9,300. b. Outstanding checks, $600.
c. NSF check returned with bank statement, $130. d. Deposit mailed the afternoon of June 30, $300. e. Check printing charges, $30.
f. Interest earned on checking account, $40.

EXERCISES
Ex. 160
Match each of the following principles of internal control with the appropriate description below.

A. Establishment of responsibility B. Segregation of duties
C. Documentation procedures
D. Physical, mechanical, and electronic controls E. Independent internal verification
F. Other controls

1. Involves the review, comparison, and reconciliation of data prepared by other employees.

2. Provide evidence that transactions and events have occurred.

3. Includes the authorization and approval of transactions.

4. Rotating employees’ duties and requiring employees to take vacations.

5. Related activities should be assigned to different individuals.

6. Using garment sensors to deter theft.

Ex. 161

Below are descriptions of internal control problems. In the space to the left of each item, enter the code letter of the one best internal control principle that is related to the problem described.

Internal Control Principles

A. Establishment of responsibility B. Segregation of duties
C. Physical, mechanical, and electronic control devices D. Documentation procedures
E. Independent internal verification F. Other controls

1. The same person opens incoming mail and posts the accounts receivable subsidiary ledger.

2. Three people handle cash sales from the same cash register drawer.

3. A clothing store is experiencing a high level of inventory shortages because people try on clothing and walk out of the store without paying for the merchandise.

4. The person who is authorized to sign checks approves purchase orders for payment.

5. Some cash payments are not recorded because checks are not prenumbered.

6. Cash shortages are not discovered because there are no daily cash counts by supervisors.

7. The treasurer of the company has not taken a vacation for over 20 years.

Ex. 162

Dan Howe has worked for Dr. Pat Dorsey for several years. Dan demonstrates a loyalty that is rare among employees. He hasn’t taken a vacation in the last three years. One of Dan’s primary duties at the medical office is to open the mail and list the checks received. He also takes cash from patients at the cashier window as patients leave. At times it is so hectic that Dan doesn’t bother with giving each patient a receipt for the cash paid on their accounts. He assures them he will see to it that they receive the proper credit. When the traffic is slow in the office, Dan offers to help Eve post the payments to the patients’ accounts receivable. She is always happy to receive his help, because he is a very conscientious worker.

Instructions

Identifyany principles of internal control that may be violated in this medical office situation.

Ex. 163

Listed below are seven errors or problems which might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write “None.” If you think more than one principle is appropriate, list all principles that apply.

Possible Errors or Problems

1. An employee steals the cash collected from a customer for an account receivable and conceals this theft by issuing a credit memorandum indicating that the customer returned the merchandise.

2. A small fire destroys 3 days of cash receipts.

3. The official designated to sign checks is able to steal blank checks and issue them without fear of detection.

4. A salesclerk in serving customers often rings up a sale for less than the actual amount and then keeps the additional cash collected from the customer.

5. Three cashiers use one cash register drawer and the cash in the drawer is often short of the balance kept on hand.

6. Each cashier counts his own register drawer each day and verbally reports the results to the supervisor.

7. Cashiers with over 5 years’ experience are not bonded.

Internal Control Principles

a. Establishment of responsibility b. Segregation of duties
c. Physical, mechanical, and electronic control devices d. Documentationprocedures
e. Independent internal verification f. Other controls

Ex. 164

Match the internal control principle below with the appropriate cash receipts procedure described.

a. Documentationprocedures
b. Establishment of responsibility c. Independent internal verification d. Other controls
e. Physical, mechanical,and electronic controls f. Segregation of duties

1. Only designated personnel are authorized to handle cash receipts.

2. Different individuals receive cash and record cash receipts.

3. Use remittance advice and cash register tapes.

4. Store cash in safes and bank vaults.

5. Treasurer compares total receipts to bank deposits daily.

6. Deposit all cash in bank daily.

Ex. 165

Match the internal control principle below with the appropriate cash disbursements procedure described.
a. Establishment of responsibility b. Segregation of duties
c. Documentationprocedures
d. Physical, mechanical, and electronic controls e. Independent internal verification
f. Other controls

1. Compare checks to invoices.

2. Different individuals approve and make payments.

3. Print check amounts by machine with indelible ink.

4. Only designated personnel are authorized to sign checks.

5. Each check must have approved invoice.

6. Stamp invoices PAID.

Ex. 166

The petty cash fund of $200 for Walsh Companyappeared as follows on December 31, 2008:

Cash $93.60 Pettycash vouchers
Freight in $21.40 Postage 40.00 Balloonsfor a special occasion 18.00 Meals 25.00

Instructions

1. Briefly describe when the petty cash fund should be replenished. Because there is cash on hand, is there a need to replenish the fund at year end on December 31? Explain.

2. Prepare in general journal form the entry to replenish the fund.

3. On December 31, the office manager gives instructions to increase the petty cash fund by $100. Make the appropriate journal entry.

Ex. 167

Prepare the entry to replenish the $200 petty cash fund of Warner Company, assuming the fund has receipts for: freight-out $60, postage $105, and miscellaneous expense $20. The fund contains $10 in cash.

Ex. 168

On October 1, 2008, Foster Company establishes an imprest petty cash fund by issuing a check for $200 to Mary Mann, the custodian of the petty cash fund. On October 31, 2008, Mary Mann submitted the following paid petty cash receipts for replenishment of the petty cash fund when there is $55 cash in the fund:
Freight-in $27 Office Supplies Expense 35 Entertainmentof Clients 60 PostageExpense 20

Instructions

Prepare the journal entries required to establish the petty cash fund on October 1 and the replenishment of the fund on October 31.

Ex. 169

Ogleby Boat Company’s bank statement for the month of September showed a balance per bank of $7,000. The company’s Cash account in the general ledger had a balance of $5,459 at September 30. Other information is as follows:

(1) Cash receipts for September 30 recorded on the company’s books were $5,700 but this amount does not appear on the bank statement.

(2) The bank statement shows a debit memorandum for $40 for check printing charges.

Ex. 169 (cont.)

(3) Check No. 119 payable to Lann Company was recorded in the cash payments journal and cleared the bank for $248. A review of the accounts payable subsidiary ledger shows a $36 credit balance in the account of Lann Company and that the payment to them should have been for $284.

(4) The total amount of checks still outstanding at September 30 amounted to $6,000.

(5) Check No. 138 was correctly written and paid by the bank for $409. The cash payment journal reflects an entry for Check No. 138 as a debit to Accounts Payable and a credit to Cash in Bank for $490.

(6) The bank returned an NSF check from a customer for $360.

(7) The bank included a credit memorandum for $1,560 which represents collection of a customer’s note by the bank for the company; principal amount of the note was $1,500 and interest was $60. Interest has not been accrued.

Instructions
(a) Prepare a bank reconciliationfor Ogleby Boat Company at September 30.
(b) Prepare any adjusting entries necessary as a result of the bank reconciliation.

Ex. 170

ReeblesFood Store developed the following information in recording its bank statement for the month of March.
Balance per books March 31 $ 2,905 Balance per bank statement March 31 $10,900
———————————————————————————————————————————

(1) Checks written in March but still outstanding $7,000. (2) Checks written in February but still outstanding $2,800.
(3) Deposits of March 30 and 31 not yet recorded by bank $5,200. (4) NSF check of customer returned by bank $1,200.
(5) Check No. 210 for $594 was correctly issued and paid by bank but incorrectly entered in the cash payments journal as payment on account for $549.

(6) Bank service charge for March was $50.

(7) A payment on account was incorrectly entered in the cash payments journal and posted to the accounts payable subsidiary ledger for $824 when Check No. 318 was correctly prepared for $284. The check cleared the bank in March.

(8) The bank collected a note receivable for the company for $4,000 plus $150 interest revenue.

Instructions

Preparea bank reconciliation at March 31.

Ex. 171

Using the code letters below, indicate how each of the items listed would be handled in preparing a bank reconciliation. Enter the appropriate code letter in the space to the left of each item.

Code
A Add to cash balance per books
B Deduct from cash balance per books C Add to cash balance per bank
D Deduct from cash balance per bank
E Does not affect the bank reconciliation

Items:

1. Outstanding checks.

2. Bank service charge.

3. Check for $320 correctly written and paid by the bank but incorrectly entered in the cash payments journal for $230.

4. Deposit in transit.

5. Bank returns deposited check marked NSF.

6. Bank collects notes receivable and interest for depositor.

7. Bank debit memorandum for check printing fees.

8. Petty cash custodian has $86 in paid petty cash vouchers that have not been reimbursed.

9. Bank charged a check against the company which should have been charged to another company.

10. A check for $236 was correctly paid by the bank but was incorrectly entered in the cash payments journal for $263.

Ex. 172

The following adjusting entries for Rush Company were prepared after completing a bank reconciliation. For each of the following adjustments, prepare a probable explanation for the adjusting entry.

1. Supplies………………………………………………………………………………. 150 Cash…………………………………………………………………………… 150

2. AccountsReceivable—B. Lowe……………………………………………… 420 Cash…………………………………………………………………………… 420

3. Cash…………………………………………………………………………………… 2,200
Notes Receivable …………………………………………………………. 2,000 Interest Revenue………………………………………………………….. 200

4. Sales………………………………………………………………………………….. 81 Cash…………………………………………………………………………… 81

5. Miscellaneous Expense…………………………………………………………. 20 Cash…………………………………………………………………………… 20

Ex. 173

The cash balance per books for Dexter Company on September 30, 2008 is $10,740.93. The following checks and receipts were recorded for the month of October, 2008:

Checks Receipts
No. Amount No. Amount Amount Date 17 $372.96 22 $ 578.84 $843.86 10/ 5 18 $780.62 23 $1,687.50 $941.54 10/21 19 $157.00 24 $ 921.30 $808.58 10/27 20 $587.50 25 $ 246.03 $967.00 10/30 21 $234.15
Internal Control and Cash 8 – 37

Ex. 173 (cont.)

In addition, the bank statement for the month of October is presented below:

Balance Deposits and Credits Checks and Debits Balance Last Statement No. Total Amount No. Total Amount This Statement
———————————————————————————————————————— $5,404.84 5 $9,178.36 10 $3,632.19 $10,951.01 ———————————————————————————————————————— Checks and other debits Deposits Date Balance ———————————————————————
No. Amount No. Amount No. Amount ———————————————————————————————————————— 14 148.29 17 372.96 22 578.84 5,484.38 10/ 1 $9,875.31 18 708.62 24 921.30 843.86 10/ 8 $9,219.03 19 157.00 25 246.03 941.54 10/23 $9,541.58 21 234.15 25.00 SC 808.58 10/29 $10,101.01
240.00 NSF 1,100.00 CM 10/31 $10,951.01 ———————————————————————————————————————— Symbols: NSF (Not sufficient funds) SC (Service charge) CM (Credit Memo) ————————————————————————————————————————

Check No. 18 was correctly written for $708.62 for a payment on account. The NSF check was from S. King, a customer, in settlement of an accounts receivable. An entry had not been made for the NSF check. The credit memo is for the collection of a note receivable including interest of $60 which has not been accrued. The bank service charge is $25.00.

Instructions
(a) Prepare a bank reconciliation at October 31.
(b) Prepare the adjusting journal entries required by the bank reconciliation.

Ex. 174

Simon Company received a notice with its bank statement that the bank had collected a note receivable for $6,000 plus $300 of interest. The bank had credited these amounts to Simon’s account less a collection fee of $10. Simon Company had already accrued the interest for this note on its books.

(a) How will these items affect Simon Company’s bank reconciliation?

(b) Prepare the journal entry that Simon Company will make to record this information on its books.

Ex. 175

The cash records of Norris Company show the following:

1. The June 30 bank reconciliation indicated that deposits in transit totaled $390. During July the general ledger account Cash shows deposits of $9,800, but the bank statement indicates that only $9,240 in deposits were received during the month.

2. The June 30 bank reconciliation also reported outstanding checks of $800. During the month of July, Norris Company books show that $11,070 of checks were issued, yet the bank statement showed that $11,100 of checks cleared the bank in July.

There were no bank debit or credit memoranda and no errors were made by either the bank or Norris Company.

Answer the following questions:
(a) What were the deposits in transit at July 31? (b) What were the outstanding checks at July 31?

Ex. 176

Indicatehow each of the following items would be shown on a bank reconciliation.

1. Bank error (The bank charged our account with another company’s check) 2. Check printing charge
3. Deposits in transit
4. Note collected by the bank 5. NSF checks
6. Outstanding checks

Ex. 177

The cash records of Pine Company show the following:

1. In September, deposits per the bank statement totaled $37,600; deposits per books $39,000; and deposits in transit at September 30 were $4,300.

2. In September, cash disbursements per books were $36,500; checks clearing the bank were $37,800;and outstanding checks at September 30 were $2,500.

There were no bank debit or credit memoranda and no errors were made by either the bank or Pine Company.

Answer the following questions:
(a) What were the deposits in transit at August 31? (b) What were the outstanding checks at August 31?

Ex. 178

Listed below are items that may be useful in preparing the March 2008, bank reconciliation for Korman Machine Works.

Using the following code, insert in the space before each item the letter where the amount would be located or otherwise treated in the bank reconciliation process.

Code Located or Treated
A Add to the cash balance per books
B Deduct from the cash balance per books C Add to the cash balance per bank
D Deduct from the cash balance per bank E Does not affect the bank reconciliation

1. Included with the bank statement materials was a check from Joe Terrell for $40 stamped “account closed.”

2. A personal deposit by Tim Korman to his personal account in the amount of $300 for dividends on his General Electric common stock was credited to the company account.

3. The bank statement included a debit memorandum for $22.00 for two books of blank checks for Korman Machine Works.

4. The bank statement contains a credit memorandum for $24.75 interest on the average checking account balance.

5. The daily deposits of March 30 and March 31, for $3,362 and $3,125 respectively, were not included in the bank statement postings.

6. Two checks totaling $316.86, which were outstanding at the end of February, cleared in March and were returned with the March statement.

7. The bank statement included a credit memorandum dated March 28, 2008, for $45.00 for the monthly interest on a 6-month, $15,000 certificate of deposit that the company owns.

8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369.65, did not clear the bank during March.

9. On March 24, 2008, Korman Machine Works delivered to the bank for collection a $4,500, 3-month note from Tom Jacobs. A credit memorandum dated March 29, 2008, indicated the collection of the note and $90.00 of interest.

10. The bank statement included a debit memorandum for $25.00 for the collection service on the above note and interest.

Ex. 179

The following information was used to prepare the March 2008, bank reconciliation for Korman Machine Works. Identify the items that require adjustment to the cash balance per books and prepare the appropriateadjusting entries.

1. Included with the bank statement materials was a check from Joe Terrell for $40 stamped “NSF.”

2. A personal deposit by Tim Korman to his personal account in the amount of $300 for dividends on his General Electric common stock was credited to the company account.

3. The bank statement included a debit memorandum for $22.00 for two books of blank checks for Korman Machine Works.

4. The bank statement contains a credit memorandum for $24.75 interest on the average checking account balance.

5. The daily deposits of March 30 and March 31, for $3,362 and $3,125 respectively, were not included in the bank statement postings.

6. Two checks totaling $316.86, which were outstanding at the end of February, cleared in March and were returned with the March statement.

7. The bank statement included a credit memorandum dated March 28, 2008, for $45.00 for the monthly interest on a 6-month, $15,000 certificate of deposit that the company owns.

8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369.65, did not clear the bank during March.

9. On March 24, 2008, Korman Machine Works delivered to the bank for collection a $4,500, 3-month note from Tom Jacobs. A credit memorandum dated March 29, 2008, indicated the collection of the note and $90.00 of interest.

10. The bank statement included a debit memorandum for $25.00 for the collection service on the above note and interest.

Ex. 180

ComputeNance Company’s adjusted cash balance per books based on the following information:

Beginningcash balance per books $4,500 Deposit in transit 800 Check printing charge 20 Note collected by bank for Nance 1,500

COMPLETION STATEMENTS

181. Internal control consists of the related methods and measures adopted to

its assets and enhance the and of its accounting records.

182. The principle of internal control that prevents one individual from being responsible for all the related activities of a given task is .

183. Maintaining an adequate system of internal control is required by the

Act of 1977.

184. The of an asset should not have access to the accounting records of that asset.

185. Employees of a company who evaluate the effectiveness of the company’s system of internal controls on a year-round basis are called .

186. Using documents is a control measure which helps in accounting for all documents in a series and also prevents a document from being recorded more than once.

187. Employees who handle cash should be in order to protect against misappropriationof assets by dishonest employees.

188. Two limitations of systems of internal control are the concept of and the

.

189. Internal control over cash disbursements is more effective when payments are made by

, rather than by .

190. A disbursement system that uses wire, telephone, computers, etc., to transfer cash from one location to another is referred to as .

191. A voucher is recorded in the and filed according to the date on which it is to be paid.

192. A fund is used to pay relatively small expenditures.

193. A debit memorandum issued by the bank the cash balance in the depositor’saccount.

194. There are three parties to a check: (1) , (2) , and the (3) .

195. The difference between the cash in bank balance shown on the company’s books and the cash balance shown on the bank statement may be caused by and by
in recording transactions by either party.

196. In preparing a bank reconciliation, outstanding checks are from the cash balance per .

197. A check correctly written for $270 was incorrectly entered in the cash payments journal for $720. In preparing a bank reconciliation, $ must be the cash balance per .

MATCHING

198. Match the items below by entering the appropriate code letter in the space provided.

A. Prenumbered documents
B. Custodyof an asset should be kept separatefrom the record-keeping for that asset
C. Cash registers, garment sensors and burglar alarms are examples
D. Bonding employees E. Collusion
F. Cash
G. Bank signature card H. Payee
I. Maker
J. Canceledchecks K. NSF checks
L. Outstandingchecks M. Pettycash receipt N. Cash equivalents O. Vouchersystem

1. Segregationof duties.

2. One to whom a check is payable.

3. Two or more employees circumventing prescribed procedures.

4. Prevent a transaction from being recorded more than once.

5. Checkswhich have been returned by the maker’s bank for lack of funds.

6. Checkswhich have been paid by the depositor’s bank.

7. Indicatesthose people authorized to sign checks.

8. Anything that a bank will accept for deposit.

9. Mechanicaland electronic control devices.

10. One who issues a check.

11. Insuranceprotection against misappropriation of assets.

12. An extensive network of approvals by authorized individuals.

13. Documentindicating the purpose of a petty cash expenditure.

14. Issuedchecks that have not been paid by the bank.

15. Highlyliquid investments.

SHORT-ANSWERESSAY QUESTIONS
S-AE 199
Important objectives of a system of internal controls are to safeguard assets and to enhance the accuracy and reliability of the accounting records. Briefly discuss how (1) cost-benefit considerations, (2) the human element, and (3) the size of the business, affect the implementa-tion of a system of internal controls.

S-AE 200

Your friend, Mark, has opened a movie theater. Mark states that he does not have time to develop and implement a system of internal controls.

a. Provide Mark with the objectives of a system of internal controls.

b. Explain to Mark why he should develop a system of internal controls.

S-AE 201

The preparation of a bank reconciliation is an important cash control procedure. If a company deposits cash receipts daily and makes all cash disbursements by check, explain why the cash balance per books might not agree with the cash balance shown on the bank statement. Identify specific examples that may cause differences between the cash balance per books and the cash balance per bank.

S-AE 202 (Ethics)

Tyler Instruments is a rapidly growing manufacturer of medical devices. As a result of its growth, the company’s management recently modified several of its procedures and practices to improve internal control. Some employees are upset with the changes. They have complained that all these changes just show that the company no longer trusts them.

Required:

“Internalcontrols exist because most people can’t be trusted.” Is this true? Explain.

S-AE 203 (Communication)

Medaid is a medical office management franchise. There are currently twenty-five medical offices managed by a Medaid franchisee. One of the services provided to franchisees is assistance in training various staff members.

Medaid is preparing a manual for the front office staff to use as a reference guide. It will be used in training new employees as well. One of the reasons the manual is being prepared is to stress the importance of strong internal controls.

Required:

Prepare a short paragraph, to be included in the training materials, describing the benefits of sound internal control, from the viewpoint of the employee.

CHAPTER 9

ACCOUNTINGFOR RECEIVABLES

CHAPTERSTUDY OBJECTIVES

1. Identify the different types of receivables.

2. Explain how companies recognize accounts receivable in the accounts.

3. Distinguish between the methods and bases companies use to value accounts receivable.

4. Describe the entries to record the disposition of accounts receivable.

5. Compute the maturity date of and interest on notes receivable.

6. Explain how companies recognize notes receivable in the accounts.

7. Describe how companies value notes receivable.

8. Describe the entries to record the disposition of notes receivable.

9. Explain the statement presentation and analysis of receivables.

TRUE-FALSESTATEMENTS

1. Trade receivables occur when two companies trade or exchange notes receivables.

2. Other receivables include nontrade receivables such as loans to company officers.

3. Both accounts receivable and notes receivable represent claims that are expected to be collected in cash.

4. Receivables are valued and reported in the balance sheet at their gross amount less any sales returns and allowances and less any cash discounts.

5. The three primary accounting problems with accounts receivable are: (1) recognizing, (2) depreciating, and (3) disposing.

6. Accounts receivable are the result of cash and credit sales.

7. If a retailer assesses a finance charge on the amount owed by a customer, Accounts Receivableis debited for the amount of the interest.

8. If a company uses the allowance method to account for uncollectible accounts, the entry to write off an uncollectible account only involves balance sheet accounts.

9. The percentage of receivables basis of estimating expected uncollectible accounts emphasizes income statement relationships.

10. Under the direct write-off method, no attempt is made to match bad debts expense to sales revenues in the same accounting period.

11. Allowance for Doubtful Accounts is debited under the direct write-off method when an account is determined to be uncollectible.

12. Allowance for Doubtful Accounts is a contra asset account.

13. Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from Net Sales.

14. Generally accepted accounting principles require that the direct write-off method be used for financial reporting purposes if it is also used for tax purposes.

15. Under the allowance method, Bad Debts Expense is debited when an account is deemed uncollectible and must be written off.

16. Under the allowance method, the cash realizable value of receivables is the same both before and after an account has been written off.

17. The percentage of sales basis for estimating uncollectible accounts always results in more Bad Debts Expense being recognized than the percentage of receivables basis.

18. An aging schedule is prepared only for old accounts receivables that have been past due for more than one year.

19. An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.

20. Sales resulting from the use of VISA and MasterCard are considered credit sales by the retailer.

21. A factor purchases receivables from businesses for a fee and collects the remittances directly from customers.

22. A major advantage of national credit cards to retailers is that there is no charge to the retailer by the credit card companiesfor their services.

23. Receivables may be sold because they may be the only reasonable source of cash.

24. If a retailer accepts a national credit card such as VISA, the retailer must maintain detailed records of customer accounts.

25. A note receivable is a written promise by the maker to the payee to pay a specified amount of money at a definite time.

26. The maturity date of a 1-month note receivable dated June 30 is July 30.

27. The two key parties to a note are the maker and the payee.

28. When the due date of a note is stated in months, the time factor in computing interest is the number of months divided by 360 days.

29. The accounts receivable turnover ratio is computed by dividing total sales by the average net receivables during the year.

30. Both the gross amount of receivables and the allowance for doubtful accounts should be reported in the financial statements.

Additional True-False Questions

31. Notes receivable represent claims for which formal instruments of credit are issued as evidence of debt.

32. The two methods of accounting for uncollectible accounts are (a) percentage of sales and (b) percentage of receivables.

33. The account Allowance for Doubtful Accounts is closed out at the end of the year.

34. In order to accelerate the receipt of cash from receivables, owners may sell the receivables to another company for cash.

35. When counting the exact number of days to determine the maturity date of a note, the date of issue is included but the due date is omitted.

36. A note is dishonored when it is not fully paid at maturity.

37. Short-term receivables are reported in the current assets section before temporary investments.

MULTIPLECHOICE QUESTIONS

38. Claims for which formal instruments of credit are issued as proof of the debt are a. accounts receivable.
b. interest receivable. c. notes receivable. d. other receivables.

39. Interest is usually associated with a. accounts receivable.
b. notes receivable. c. doubtful accounts. d. bad debts.

40. The receivable that is usually evidenced by a formal instrument of credit is a(n) a. trade receivable.
b. note receivable.
c. accounts receivable. d. income tax receivable.

41. Which of the following receivables would not be classified as an “other receivable”? a. Advance to an employee
b. Refundable income tax c. Notes receivable
d. Interest receivable

42. Notes or accounts receivables that result from sales transactions are often called a. sales receivables.
b. non-trade receivables. c. trade receivables.
d. merchandise receivables.

43. The term “receivables” refers to
a. amounts due from individuals or companies.
b. merchandise to be collected from individuals or companies. c. cash to be paid to creditors.
d. cash to be paid to debtors.

44. A cash discount is usually granted to all of the following except a. retail customers.
b. retailers.
c. wholesalers.
d. All of these are granted discounts.

45. Which one of the following is not a primary problem associated with accounts receivable? a. Depreciating accounts receivable
b. Recognizing accounts receivable c. Valuing accounts receivable
d. Disposing of accounts receivable

46. Trade accounts receivable are valued and reported on the balance sheet a. in the investment section.
b. at gross amounts less sales returns and allowances. c. at net realizable value.
d. only if they are not past due.

47. Three accounting issues associated with accounts receivable are a. depreciating, returns, and valuing.
b. depreciating, valuing, and collecting. c. recognizing, valuing, and disposing. d. accrual, bad debts, and disposing.
9 – 8

48. Which of the following would require a compound journal entry?
a. To record merchandise returned that was previously purchased on account. b. To record sales on account.
c. To record purchases of inventory when a discount is offered for prompt payment. d. To record collection of accounts receivable when a cash discount is taken.

49. Which of the following would be considered as an unlikely occurrence? a. Manufacturer offers a cash discount to a wholesaler.
b. Wholesaler offers a cash discount to a retailer. c. Retailer offers a cash discount to a customer. d. All of these are standard practices.

Use the following information for questions 50–51.

A customer charges a treadmill at Hank’s Sport Shop. The price is $2,000 and the financing charge is 9% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and a finance charge is added to the customer’s account.

50. What is the amount of the finance charge? a. $60
b. $15 c. $180 d. $6

51. The accounts affected by the journal entry made by Hank’s Sport Shop to record the finance charge are
a. Accounts Receivable Cash
b. Cash
Finance Receivable c. Accounts Receivable
Interest Payable d. Accounts Receivable
Interest Revenue

52. Which of the following practices by a credit card company results in lower interest charges to the cardholder?
a. The card company states interest as a monthly percentage rather than an annual percentage.
b. The card company allows a grace period before interest is accrued.
c. The card company allows cardholders to skip payments on their cards.
d. The card company calculates finance charges from the date of purchase to the date the amount is paid.

53. If a department store fails to make the entry to accrue the finance charges due from customers,
a. accounts receivable will be overstated. b. interest revenue will be understated. c. interest expense will be overstated.
d. interest expense will be understated.

54. Under the allowance method, writing off an uncollectible account a. affects only balance sheet accounts.
b. affects both balance sheet and income statement accounts. c. affects only income statement accounts.
d. is not acceptable practice.

55. The net amount expected to be received in cash from receivables is termed the a. cash realizable value.
b. cash-good value. c. gross cash value.
d. cash-equivalent value.

56. If a company fails to record estimated bad debts expense, a. cash realizable value is understated.
b. expenses are understated. c. revenues are understated. d. receivables are understated.

57. Janway sells softball equipment. On November 14, they shipped $1,000 worth of softball uniforms to Chris Middle School, terms 2/10, n/30. On November 21, they received an order from Douglas High School for $600 worth of custom printed bats to be produced in December. On November 30, Chris Middle School returned $100 of defective merchandise. Janway has received no payments from either school as of month end. What amount will be recognized as net accounts receivable on the Balance Sheet as of November 30?
a. $1,600 b. $1,500 c. $1,000 d. $900

58. Larson Company on July 15 sells merchandise on account to Stuart Co. for $1,000, terms 2/10, n/30. On July 20 Stuart Co. returns merchandise worth $400 to Larson Company. On July 24 payment is received from Stuart Co. for the balance due. What is the amount of cash received?
a. $600 b. $588 c. $580 d. $1,000

59. The existing balance in Allowance for Doubtful Accounts is considered in computing bad debts expense in the
a. direct write-off method.
b. percentage of receivables basis. c. percentage of sales basis.
d. percentage of receivables and percentage of sales basis.

60. When the allowance method is used to account for uncollectible accounts, Bad Debts Expenseis debited when
a. a sale is made.
b. an account becomes bad and is written off.
c. management estimates the amount of uncollectibles. d. a customer’s account becomes past-due.

61. When an account becomes uncollectible and must be written off, a. Allowance for Doubtful Accounts should be credited.
b. Accounts Receivable should be credited. c. Bad Debts Expense should be credited. d. Sales should be debited.

62. The collection of an account that had been previously written off under the allowance method of accounting for uncollectibles
a. will increase income in the period it is collected. b. will decrease income in the period it is collected.
c. requires a correcting entry for the period in which the account was written off. d. does not affect income in the period it is collected.

63. The percentage of sales basis of estimating expected uncollectibles a. emphasizes the matching of expenses with revenues.
b. emphasizes balance sheet relationships. c. emphasizes cash realizable value.
d. is not generally accepted as a basis for estimating bad debts.

64. An aging of a company’s accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,100 credit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debts Expense for $9,000.
b. debit to Allowance for Doubtful Accounts for $7,900. c. debit to Bad Debts Expense for $7,900.
d. credit to Allowance for Doubtful Accounts for $9,000.

65. A debit balance in the Allowance for Doubtful Accounts a. is the normal balance for that account.
b. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts.
c. indicates that actual bad debt write-offs have been less than what was estimated. d. cannot occur if the percentage of sales method of estimating bad debts is used.

66. Under the direct write-off method of accounting for uncollectible accounts, Bad Debts Expenseis debited
a. when a credit sale is past due.
b. at the end of each accounting period.
c. whenever a pre-determinedamount of credit sales have been made. d. when an account is determined to be uncollectible.

67. An alternative name for Bad Debts Expense is a. Deadbeat Expense.
b. Uncollectible Accounts Expense. c. Collection Expense.
d. Credit Loss Expense.

68. A reasonable amount of uncollectible accounts is evidence a. that the credit policy is too strict.
b. that the credit policy is too lenient. c. of a sound credit policy.
d. of poor judgments on the part of the credit manager.
Accountingfor Receivables 9 – 11

69. Bad Debts Expense is considered
a. an avoidable cost in doing business on a credit basis. b. an internal control weakness.
c. a necessaryrisk of doing business on a credit basis. d. avoidable unless there is a recession.

70. The best managed companies will have a. no uncollectible accounts.
b. a very strict credit policy. c. a very lenient credit policy.
d. some accounts that will prove to be uncollectible.

71. Two methods of accounting for uncollectible accounts are the a. allowance method and the accrual method.
b. allowance method and the net realizable method. c. direct write-off method and the accrual method.
d. direct write-off method and the allowance method.

72. The allowance method of accounting for uncollectible accounts is required if a. the company makes any credit sales.
b. bad debts are significant in amount. c. the company is a retailer.
d. the company charges interest on accounts receivable.

73. Bad Debts Expense is reported on the income statement as a. part of cost of goods sold.
b. reducing gross profit. c. an operating expense.
d. a contra-revenue account.

74. When the allowance method of accounting for uncollectible accounts is used, Bad Debts Expenseis recorded
a. in the year after the credit sale is made. b. in the same year as the credit sale.
c. as each credit sale is made.
d. when an account is written off as uncollectible.

75. The method of accounting for uncollectible accounts that results in a better matching of expenses with revenues is the
a. aging accounts receivable method. b. direct write-off method.
c. percentage of receivables method. d. percentage of sales method.

76. To record estimated uncollectible accounts using the allowance method, the adjusting entry would be a
a. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts. b. debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts. c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. d. debit to Loss on Credit Sales and a credit to Accounts Receivable.

77. Under the allowance method of accounting for uncollectible accounts,
a. the cash realizable value of accounts receivable is greater before an account is written off than after it is written off.
b. Bad Debts Expense is debited when a specific account is written off as uncollectible. c. the cash realizable value of accounts receivable in the balance sheet is the same
before and after an account is written off.
d. Allowance for Doubtful Accounts is closed each year to Income Summary.

78. Allowance for Doubtful Accounts on the balance sheet a. is offset against total current assets.
b. increases the cash realizable value of accounts receivable. c. appears under the heading “Other Assets.”
d. is offset against accounts receivable.

79. When an account is written off using the allowance method, the
a. cash realizable value of total accounts receivable will increase. b. total accounts receivable will decrease.
c. allowance account will increase.
d. total accounts receivable will stay the same.

80. If an account is collected after having been previously written off, a. the allowance account should be debited.
b. only the control account needs to be credited.
c. both income statement and balance sheet accounts will be affected. d. there will be both a debit and a credit to accounts receivable.

81. When an account is written off using the allowance method, accounts receivable a. is unchanged and the allowance account increases.
b. increases and the allowance account increases. c. decreases and the allowance account decreases. d. decreases and the allowance account increases.

82. Two bases for estimating uncollectible accounts are: a. percentage of assets and percentage of sales.
b. percentage of receivables and percentage of total revenue. c. percentage of current assets and percentage of sales.
d. percentage of receivables and percentage of sales.

83. The percentage of receivables basis for estimating uncollectible accounts emphasizes a. cash realizable value.
b. the relationship between accounts receivable and bad debts expense. c. income statement relationships.
d. the relationship between sales and accounts receivable.

84. Long Company uses the percentage of sales method for recording bad debts expense. For the year, cash sales are $500,000 and credit sales are $2,000,000. Management estimates that 1% is the sales percentage to use. What adjusting entry will Long Company make to record the bad debts expense?
Accountingfor Receivables 9 – 13

a. Bad Debts Expense ………………………………………………. 25,000 Allowancefor Doubtful Accounts …………………….. 25,000
b. Bad Debts Expense ………………………………………………. 20,000 Allowancefor Doubtful Accounts …………………….. 20,000
c. Bad Debts Expense ………………………………………………. 20,000 AccountsReceivable …………………………………….. 20,000
d. Bad Debts Expense ………………………………………………. 25,000 AccountsReceivable …………………………………….. 25,000

85. The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to record estimated uncollectible accounts
a. is relevant when using the percentage of receivables basis. b. is relevant when using the percentage of sales basis.
c. is relevant to both bases of adjusting for uncollectible accounts.
d. will never show a debit balance at this stage in the accounting cycle.

86. The direct write-off method of accounting for bad debts a. uses an allowance account.
b. uses a contra-asset account.
c. does not require estimates of bad debt losses.
d. is the preferred method under generally accepted accounting principles.

87. Under the direct write-off method of accounting for uncollectible accounts
a. the allowance account is increased for the actual amount of bad debt at the time of write-off.
b. a specific account receivable is decreased for the actual amount of bad debt at the time of write-off.
c. balance sheet relationships are emphasized.
d. bad debts expense is always recorded in the period in which the revenue was recorded.

88. An aging of a company’s accounts receivable indicates that $4,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debts Expense for $4,000.
b. debit to Allowance for Doubtful Accounts for $2,800. c. debit to Bad Debts Expense for $2,800.
d. credit to Allowance for Doubtful Accounts for $4,000.

89. An aging of a company’s accounts receivable indicates that $3,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 debit balance, the adjustment to record bad debts for the period will require a
a. debit to Bad Debts Expense for $3,000. b. debit to Bad Debts Expense for $4,200. c. debit to Bad Debts Expense for $1,800.
d. credit to Allowance for Doubtful Accounts for $4,000.

90. Using the percentage of receivables method for recording bad debts expense, estimated uncollectible accounts are $25,000. If the balance of the Allowance for Doubtful Accounts is $8,000 debit before adjustment, what is the amount of bad debts expense for that period?

a. $25,000 b. $8,000 c. $33,000 d. $17,000

91. Using the percentage of receivables method for recording bad debts expense, estimated uncollectible accounts are $10,000. If the balance of the Allowance for Doubtful Accounts is $2,000 credit before adjustment, what is the amount of bad debts expense for that period?
a. $10,000 b. $8,000 c. $12,000 d. $2,000

92. Using the percentage of receivables method for recording bad debts expense, estimated uncollectible accounts are $10,000. If the balance of the Allowance for Doubtful Accounts is $2,000 debit before adjustment, what is the balance after adjustment?
a. $10,000 b. $12,000 c. $8,000 d. $2,000

93. Using the allowance method, the uncollectible accounts for the year is estimated to be $28,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 credit before adjustment, what is the amount of bad debts expense for the period?
a. $7,000 b. $21,000 c. $28,000 d. $35,000

94. Using the allowance method, the uncollectible accounts for the year is estimated to be $28,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 debit before adjustment, what is the amount of bad debts expense for the period?
a. $7,000 b. $21,000 c. $28,000 d. $35,000

95. In reviewing the accounts receivable, the cash realizable value is $16,000 before the write-off of a $1,500 account. What is the cash realizable value after the write-off?
a. $16,000 b. $1,500 c. $17,500 d. $14,500

96. In 2008, the Fitzu Co. had net credit sales of $750,000. On January 1, 2008, Allowance for Doubtful Accounts had a credit balance of $16,000. During 2008, $30,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivable basis). If the accounts receivable balance at December 31 was $200,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2008?

a. $20,000 b. $34,000 c. $36,000 d. $30,000

97. A company has net credit sales of $900,000 for the year and it estimates that uncollectible accounts will be 2% of sales. If Allowance for Doubtful Accounts has a credit balance of $1,000 prior to adjustment, its balance after adjustment will be a credit of
a. $18,000. b. $19,000. c. $17,980. d. $17,000.

98. In 2008, Carpenter Company had net credit sales of 1,125,000. On January 1, 2008, Allowance for Doubtful Accounts had a credit balance of $27,000. During 2008, $45,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivables basis). If the accounts receivable balance at December 31 was $300,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2008?
a. $30,000 b. $112,500 c. $48,000 d. $45,000

Use the following information for questions 99–100.

Accountsreceivable Allowance
Cash realizable value

12/31/07 $525,000
(45,000) $480,000

During 2008, sales on account were $145,000 and collections on account were $86,000. Also during 2008, the company wrote off $8,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $54,000.

99. The change in the cash realizable value from the balance at 12/31/07 to 12/31/08 was a a. $50,000 increase.
b. $59,000 increase. c. $42,000 increase. d. $51,000 increase.

100. Bad debts expense for 2008 is a. $17,000.
b. $9,000. c. $54,000 d. $1,000.

101. During 2008, Carbondale Inc. had sales on account of $132,000, cash sales of $54,000, and collections on account of $84,000. In addition, they collected $1,450 which had been written off as uncollectible in 2007. As a result of these transactions, the change in the accounts receivable balance indicates a
9 – 16

a. $100,550 increase. b. $48,000 increase. c. $46,550 increase. d. $102,000 increase.

102. Brother Bear Corporation’s unadjusted trial balance includes the following balances (assumenormal balances):

AccountsReceivable Allowancefor Doubtful Accounts
$746,000 14,200

Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debts expense will the company record?
a. $44,760 b. $30,560 c. $29,708 d. $45,612

103. Manning Retailers accepted $75,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by Manning Retailers will include a credit to Sales of $75,000 and a debit(s) to a. Cash $72,000 and Service Charge Expense $3,000.
b. Accounts Receivable $72,000 and Service Charge Expense $3,000. c. Cash $72,000 and Interest Expense $3,000.
d. Accounts Receivable $75,000.

104. ABC Company accepted a national credit card for a $3,000 purchase. The cost of the goods sold is $2,400. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income?
a. Increase by $582 b. Increase by $600 c. Increase by $510 d. Increase by $2,910

105. Major advantages of credit cards to the retailer include all of the following except the a. issuer does the credit investigation of customers.
b. issuer undertakes the collection process.
c. retailer receives more cash from the credit card issuer. d. All of these are advantages.

106. The sale of receivables by a business
a. indicates that the business is in financial difficulty.
b. is generally the major revenue item on its income statement. c. is an indication that the business is owned by a factor.
d. can be a quick way to generate cash for operating needs.

107. If a retailer regularly sells its receivables to a factor, the service charge of the factor should be classified as a(n)
a. selling expense. b. interest expense. c. other expense. d. contra asset.

108. If a company sells its accounts receivables to a factor, a. the seller pays a commission to the factor.
b. the factor pays a commission to the seller.
c. there is a gain on the sale of the receivables.
d. the seller defers recognition of sales revenue until the account is collected.

109. Retailers generally consider sales from the use of national credit card sales as a a. credit sale.
b. collection of an accounts receivable. c. cash sale.
d. collection of a note receivable.

110. Receivables might be sold to
a. lengthen the cash-to-cash operating cycle.
b. take advantage of deep discounts on the cash realizable value of receivables. c. generate cash quickly.
d. finance companies at an amount greater than cash realizable value.

111. A company regularly sells its receivables to a factor who assesses a 2% service charge on the amount of receivables purchased. Which of the following statements is true for the seller of the receivables?
a. The loss section of the income statement will increase each time receivables are sold. b. The credit to Accounts Receivable is less than the debit to Cash when the accounts
are sold.
c. Selling expenses will increase each time accounts are sold.
d. The other expense section of the income statement will increase each time accounts are sold.

112. Winsor Furniture factors $800,000 of receivables to Fast Factors, Inc. Fast Factors assesses a 2% service charge on the amount of receivables sold. Winsor Furniture factors its receivables regularly with Fast Factors. What journal entry does Winsor make when factoring these receivables?
a. Cash……………………………………………………………………. 784,000 Loss on Sale of Receivables…………………………………… 16,000
AccountsReceivable……………………………………… 800,000 b. Cash……………………………………………………………………. 784,000
AccountsReceivable……………………………………… 784,000 c. Cash……………………………………………………………………. 800,000
AccountsReceivable……………………………………… 784,000 Gain on Sale of Receivables…………………………… 16,000
d. Cash……………………………………………………………………. 784,000 Service Charge Expense………………………………………… 16,000
AccountsReceivable……………………………………… 800,000

113. When customers make purchases with a national credit card, the retailer a. is responsible for maintaining customer accounts.
b. is not involved in the collection process.
c. absorbs any losses from uncollectible accounts.
d. receives cash equal to the full price of the merchandise sold from the credit card company.

114. The retailer considers VISA and MasterCard sales as a. cash sales.
b. promissory sales. c. credit sales.
d. contingent sales.

115. The basic issues in accounting for notes receivable include each of the following except a. analyzing notes receivable.
b. disposing of notes receivable. c. recognizing notes receivable. d. valuing notes receivable.

116. A 60-day note receivable dated June 13 has a maturity date of a. August 13.
b. August 12. c. August 11. d. August 10.

117. The maturity value of a $90,000, 10%, 60-day note receivable dated July 3 is a. $90,000.
b. $99,000. c. $105,000. d. $91,500.

118. A 90-day note dated June 14 has a maturity date of a. September 14.
b. September 12. c. September 13. d. September 15.

119. A 30-day note dated May 18 has a maturity date of a. June 18.
b. June 17. c. June 19. d. June 16.

120. A promissory note
a. is not a formal credit instrument.
b. may be used to settle an accounts receivable.
c. has the party to whom the money is due as the maker. d. cannot be factored to another party.

121. Which of the following is not true regarding a promissory note?
a. Promissory notes may not be transferred to another party by endorsement. b. Promissory notes may be sold to another party.
c. Promissory notes give a stronger legal claim to the holder than accounts receivable. d. Promissory notes may be bearer notes and not specifically identify the payee by
name.

122. The two key parties to a promissory note are the a. maker and a bank.
b. debtor and the payee. c. maker and the payee. d. sender and the receiver.

123. When calculating interest on a promissory note with the maturity date stated in terms of days, the
a. maker pays more interest if 365 days are used instead of 360.
b. maker pays the same interest regardless if 365 or 360 days are used. c. payee receives more interest if 360 days are used instead of 365.
d. payee receives less interest if 360 days are used instead of 365.

124. The maturity value of a $4,000, 9%, 60-day note receivable dated February 10th is a. $4,060.
b. $4,030. c. $4,000. c. $4,360.

125. The interest on a $5,000, 10%, 1-year note receivable is a. $5,000.
b. $500. c. $5,050. d. $5,500.

126. The maturity value of a $30,000, 8%, 3-month note receivable is a. $30,600.
b. $30,240. c. $32,400. d. $30,200.

127. The interest on a $4,000, 6%, 60-day note receivable is a. $240.
b. $40. c. $80. d. $120.

128. The interest on a $2,000, 6%, 90-day note receivable is a. $120.
b. $60 c. $30. d. $90.

129. Notes receivable are recognized in the accounts at a. cash (net) realizable value.
b. face value.
c. gross realizable value. d. maturity value.

130. A note receivable is a negotiable instrument which a. eliminates the need for a bad debts allowance.
b. can be transferred to another party by endorsement. c. takes the place of checks in a business firm.
d. can only be collected by a bank.

131. A company that receives an interest bearing note receivable will a. debit Notes Receivable for the maturity value of the note.
b. credit Notes Receivable for the maturity value of the note. c. debit Notes Receivable for the face value of the note.
d. credit Notes Receivable for the face value of the note.

132. The face value of a note refers to the amount a. that can be received if sold to a factor.
b. borrowed plus interest received at maturity from the maker. c. that is identified on the formal instrument of credit.
d. remaining after a service charge has been deducted.

133. Risen Company receives a $5,000, 3-month, 8% promissory note from Dodd Company in settlement of an open accounts receivable. What entry will Risen Company make upon receiving the note?

a. Notes Receivable…………………………………………………… 5,100 AccountsReceivable—Dodd Company…………….. 5,100

b. Notes Receivable…………………………………………………… 5,100 AccountsReceivable—Dodd Company…………….. 5,000 Interest Revenue …………………………………………… 100

c. Notes Receivable…………………………………………………… 5,000 Interest Receivable………………………………………… 100
AccountsReceivable—Dodd Company…………….. 5,000 Interest Revenue …………………………………………… 100

d. Notes Receivable…………………………………………………… 5,000 AccountsReceivable—Dodd Company…………….. 5,000

134. When a note is accepted to settle an open account, Notes Receivable is debited for the note’s
a. net realizable value. b. maturity value.
c. face value.
d. face value plus interest.

135. Short-term notes receivable are reported at a. cash (net) realizable value.
b. face value.
c. gross realizable value. d. maturity value.

136. Short-term notes receivables
a. have a related allowance account called Allowance for Doubtful Notes Receivable. b. are reported at their gross realizable value.
c. use the same estimations and computations as accounts receivable to determine cash realizable value.
d. present the same valuation problems as long-term notes receivables.

137. When a note receivable is dishonored, a. interest revenue is never recorded. b. bad debts expense is recorded.
c. the maturity value of the note is written off.
d. Accounts Receivable is debited if eventual collection is expected.

138. Herbert Company lends Newton Company $30,000 on April 1, accepting a four-month, 9% interest note. Herbert Company prepares financial statements on April 30. What adjusting entry should be made before the financial statements can be prepared?
a. Note Receivable …………………………………………………… 30,000
Cash …………………………………………………………… 30,000 b. Interest Receivable ……………………………………………….. 225
Interest Revenue ………………………………………….. 225 c. Cash …………………………………………………………………… 225
Interest Revenue ………………………………………….. 225 d. Interest Receivable ……………………………………………….. 900
Interest Revenue ………………………………………….. 900

139. When a note receivable is honored, Cash is debited for the note’s a. net realizable value.
b. maturity value.
c. gross realizable value. d. face value.

140. The average collection period for receivables is computed by dividing 365 days by a. net credit sales.
b. average accounts receivable. c. ending accounts receivable.
d. accounts receivable turnover ratio.

141. The average collection period is computed by dividing
a. net credit sales by average gross accounts receivable. b. net credit sales by ending gross accounts receivable. c. the accounts receivable turnover ratio by 365 days.
d. 365 days by the accounts receivable turnover ratio.

Use the following information for questions 142–143.

The financial statements of Bolton Manufacturing Company report net sales of $500,000 and accounts receivable of $50,000 and $30,000 at the beginning and end of the year, respectively.

142. What is the receivables turnover ratio for Bolton? a. 7 times
b. 10 times c. 16.7 times d. 12.5 times

143. What is the average collection period for accounts receivable in days? a. 52.1
b. 29.2 c. 21.9 d. 36.5

Use the following information for questions 144–145.

The financial statements of Colter Manufacturing Company report net sales of $400,000 and accounts receivable of $80,000 and $40,000 at the beginning and end of the year, respectively.

144. What is the receivables turnover ratio for Colter? a. 6.7 times
b. 10 times c. 5 times d. 8 times

145. What is the average collection period for accounts receivable in days? a. 40 times
b. 80 times c. 54.7 times d. 50 times

Additional Multiple Choice Questions

146. Which of the following are also called trade receivables? a. Accounts receivable
b. Other receivables
c. Advances to employees d. Income taxes refundable

147. On February 1, 2008, Cogwell Company sells merchandise on account to Livingston Company for $5,000. The entry to record this transaction by Cogwell Company is

a. Sales………………………………………………………………………… 5,000 AccountsPayable………………………………………………… 5,000

b. Cash………………………………………………………………………… 5,000 Sales…………………………………………………………………. 5,000

c. AccountsReceivable………………………………………………….. 5,000 Sales…………………………………………………………………. 5,000

d. Notes Receivable……………………………………………………….. 5,000 AccountsReceivable……………………………………………. 5,000

148. Writing off an uncollectible account under the allowance method requires a debit to a. Accounts Receivable.
b. Allowance for Doubtful Accounts. c. Bad Debts Expense.
d. Uncollectible Accounts Expense.

149. When the allowance method of recognizing bad debts expense is used, the entry to recognize that expense
a. increases net income.
b. decreases current assets.
c. has no effect on current assets. d. has no effect on net income.

150. The direct write-off method
a. is acceptable for financial reporting purposes.
b. debits Allowance for Doubtful Accounts to record write-offs of accounts. c. shows only actual losses from uncollectible accounts receivable.
d. estimates bad debt losses.

151. Voight Company’s account balances at December 31 for Accounts Receivable and Allowance for Doubtful Accounts were $2,100,000 and $105,000 (Cr.), respectively. An aging of accounts receivable indicated that $192,000 are expected to become uncollectible. The amount of the adjusting entry for bad debts at December 31 is
a. $192,000. b. $87,000. c. $297,000. d. $105,000.

152. In recording the sale of accounts receivable, the commission charged by a factor is recorded as
a. Bad Debts Expense. b. Commission Expense.
c. Loss on Sale of Receivables. d. Service Charge Expense.

153. Gudenas Co., makes a credit card sale to a customer for $600. The credit card sale has a grace period of 30 days and then an interest charge of 18% per year or 1.5% per month is added to the balance. If the unpaid balance on the above sale is $360 at the end of the grace period, the interest charge is
a. $9.00. b. $6.00. c. $3.60. d. $5.40.

154. The interest rate specified on any note is for a a. day.
b. month. c. week. d. year.
9 – 24

155. On February 1, Maris Company received a $9,000, 10%, four-month note receivable. The cash to be received by Maris Company when the note becomes due is
a. $300. b. $9,000. c. $9,300. d. $9,900.

156. The entry to record the dishonor of a note receivable assuming the payee expects eventual collection includes a debit to
a. Notes Receivable. b. Cash.
c. Allowance for Doubtful Accounts. d. Accounts Receivable.

157. Which of the following statements concerning receivables is incorrect? a. Notes receivable are often listed last under receivables.
b. The contingent liability from selling notes receivable should be disclosed.
c. Both the gross amount of receivables and the allowance for doubtful accounts should be reported.
d. Interest revenue and gain on sale of notes receivable are shown under other revenues and gains.

158. The accounts receivable turnover ratio is computed by dividing a. total sales by average net accounts receivable.
b. net credit sales by average net accounts receivable. c. total sales by ending net accounts receivable.
d. net credit sales by ending net accounts receivable.

BRIEFEXERCISES
BE 159
Recordthe following transactions for Verbatim Company.

1. On August 4, Verbatim sold merchandise on account to Reedy Company for $450, terms 2/10, n/30.

2. On August 7, Verbatim granted Reedy a sales allowance and reduced the cost of the merchandise by $50 because some of the goods were slightly damaged.

3. On August 12, Reedy paid the account in full.

BE 160

At December 31, 2008, Attwood Company reported Accounts Receivable of $34,000 and Allowance for Doubtful Accounts of $3,500. On January 7, 2009, Brady Enterprises declares bankruptcy and it is determined that the receivable of $1,200 from Brady is not collectible.

1. What is the cash realizable value of Accounts Receivable at December 31, 2008? 2. What entry would Attwood make to write off the Brady account?
3. What is the cash realizable value of Accounts Receivable after the Brady account is written off?

BE 161

Portillo Company’s ledger at the end of the current year shows Accounts Receivable of $150,000.

Instructions
a. If Allowance for Doubtful Accounts has a credit balance of $3,000 in the trial balance and bad debts are expected to be 10% of accounts receivable, journalize the adjusting entry for the end of the period.

b. If Allowance for Doubtful Accounts has a debit balance of $3,000 in the trial balance and bad debts are expected to be 10% of accounts receivable, journalize the adjusting entry for the end of the period.

BE 162

Noell Co. sells Christmas angels. Noell determines that at the end of December, it has the following aging schedule of Accounts Receivable:

Customer

Total

Not Yet Due
Number of Days Past Due

1–30
31–60
61–90
Over 90

DV Farmer
$500
$300
$200

JJ Joysen
300
100
200

NJ Bell
150
50
100

JC Net
200
200

?
300
300
250
200
100

% uncollectible
1%
5%
10%
20%
50%

Total Estimated Uncollectible Amounts
?
?
?
?
?
?

Compute the net receivables based on the above information at the end of December. (There was no beginning balance in the Allowance for Doubtful Accounts).

BE 163

Mickey Company has the following accounts in its general ledger at July 31: Accounts Receivable $40,000 and Allowance for Doubtful Accounts $2,500. During August, the following transactions occurred.

Oct. 15 Sold $20,000 of accounts receivable to Good Factors, Inc. who assesses a 3% financecharge.

25 Made sales of $900 on VISA credit cards. The credit card service charge is 2%.

Instructions Journalizethe transactions.

BE 164

Determinethe interest on the following notes:

(a) $2,000 at 6% for 90 days. (b) $900 at 9% for 5 months. (c) $3,000 at 8% for 60 days (d) $1,600 at 7% for 6 months

BE 165

Brama Distributors has the following transactions related to notes receivable during the last two months of the year.

Dec. 1 Loaned $12,000 cash to E. Hoffer on a 1-year, 6% note.

16 Sold goods to J. Smith, receiving a $2,400, 60-day, 7% note. 31 Accrued interest revenue on all notes receivable.

Instructions

Journalizethe transactionsfor Brama Distributors.

BE 166

Computethe maturity value for each of the following notes receivable.

1. A $5,000, 6%, 3-month note dated July 20.

Maturity value $ .

2. A $12,000, 9%, 150-day note dated August 5.

Maturity value $ .

BE 167

On February 7, Able Company sold goods on account to Charlene Enterprises for $3,200, terms 2/10, n/30. On March 9, Charlene gave Able a 60-day, 12% promissory note in settlement of the account. Record the sale and the acceptance of the promissory note on the books of Able Company.

BE 168

On March 9, Charlene gave Able Company a 60-day, 12% promissory note for $3,200. Charlene honors the note on May 9. Record the collection of the note and interest by Able assuming that no interest has been accrued.

BE 169

On March 9, Charlene gave Able Company a 60-day, 12% promissory note for $3,200. Charlene dishonors the note on May 9. Record the entry that Able would make when the note is dishonored, assuming that no interest has been accrued.

BE 170

The following data exists for Curran Company.

AccountsReceivable Net Sales
2008 $ 80,000
500,000
2007 $ 70,000
410,000

Calculate the receivables turnover ratio and the average collection period for accounts receivable in days for 2008.

EXERCISES
Ex. 171
Presented below are various receivable transactions entered into by Brewer Tool Company. Indicate whether the receivables are reported as accounts receivable, notes receivable, or other receivables on the balance sheet.

a. Loaned a company officer $4,000.
b. Accepted a $2,000 promissory note from a customer as payment on account. c. Determined that a $10,000 income tax refund is due from the IRS.
d. Sold goods to a customer on account for $5,000.
e. Recorded $500 accrued interest on a note receivable due next year. f. Made an American Express credit card sale for $3,000.
g. Advanced $1,000 to a trusted employee.

Ex. 172

Prepare journal entries to record the following transactions entered into by Elway Company:

2008

June 1 Received a $20,000, 12%, 1-year note from Sue Gold as full payment on her account.

Nov. 1 Sold merchandise on account to Peyson, Inc. for $10,000, terms 2/10, n/30.

Nov. 5 Peyson, Inc. returned merchandise worth $500.

Nov. 9 Received payment in full from Peyson, Inc.

Dec. 31 Accrued interest on Gold’s note.

2009
June 1 Sue Gold honored her promissory note by sending the face amount plus interest. No interest has been accrued in 2009.

Ex. 173

Record the following transactions for Wheeler Company.
1. On April 12, sold $12,000 of merchandise to Finney Inc., terms 2/10, n/30. 2. On April 15, Finney returned $2,000 of merchandise.
3. On April 22, Finney paid for the merchandise.

Ex. 174

The Dent Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 1% of net credit sales will eventually be uncollectible. Selected account balances at December 31, 2007, and December 31, 2008, appear below:

Net Credit Sales Accounts Receivable
Allowance for Doubtful Accounts
12/31/07 $400,000
75,000 5,000
12/31/08 $500,000
100,000 ?

Instructions
(a) Record the following events in 2008.
Aug. 10 Determined that the account of Ann Koch for $1,000 is uncollectible. Sept. 12 Determined that the account of Joe Yates for $4,000 is uncollectible.
Oct. 10 Received a check for $550 as payment on account from Ann Koch, whose account had previously been written off as uncollectible. She indicated the remainder of her account would be paid in November.
Nov. 15 Received a check for $450 from Ann Koch as payment on her account.

(b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2008.

(c) What is the balance of Allowance for Doubtful Accounts at December 31, 2008?

Ex. 175

Kiley Company had a $700 credit balance in Allowance for Doubtful Accounts at December 31, 2008, before the current year’s provision for uncollectible accounts. An aging of the accounts receivable revealed the following:
Estimated Percentage
Uncollectible
Current Accounts $120,000 1% 1–30 days past due 12,000 3% 31–60 days past due 10,000 6% 61–90 days past due 5,000 12% Over 90 days past due 8,000 30% Total Accounts Receivable $155,000

Instructions
(a) Prepare the adjusting entry on December 31, 2008, to recognize bad debts expense.

(b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had a $500 debit balance before the current year’s provision for uncollectible accounts. Prepare the adjusting entry for the current year’s provision for uncollectible accounts.

(c) Assume that the company has a policy of providing for bad debts at the rate of 1% of sales, that sales for 2008 were $550,000, and that Allowance for Doubtful Accounts had a $650 credit balance before adjustment. Prepare the adjusting entry for the current year’s provision for bad debts.

Ex. 176

Compute bad debts expense based on the following information:

(a) Taylor Company estimates that 1% of net credit sales will become uncollectible. Sales are $600,000, sales returns and allowances are $30,000, and the allowance for doubtful accounts has a $6,000 credit balance.

(b) Taylor Company estimates that 3% of accounts receivable will become uncollectible. Accounts receivable are $100,000 at the end of the year, and the allowance for doubtful accounts has a $500 debit balance.

Ex. 177

The December 31, 2007 balance sheet of Quayle Company had Accounts Receivable of $500,000 and a credit balance in Allowance for Doubtful Accounts of $33,000. During 2008, the following transactions occurred: sales on account $1,400,000; sales returns and allowances, $50,000; collections from customers, $1,150,000; accounts written off $35,000; previously written off accounts of $5,000 were collected.

Instructions
(a) Journalize the 2008 transactions.

(b) If the company uses the percentage of sales basis to estimate bad debts expense and anticipates 2% of net sales to be uncollectible, what is the adjusting entry at December 31, 2008?

(c) If the company uses the percentage of receivables basis to estimate bad debts expense and determines that uncollectible accounts are expected to be 4% of accounts receivable, what is the adjusting entry at December 31, 2008?

(d) Which basis would produce a higher net income for 2008 and by how much?

Ex. 178

Lloyd Products is undecided about which base to use in estimating uncollectible accounts. On December 31, 2008, the balance in Accounts Receivable was $680,000 and net credit sales amounted to $3,500,000 during 2008. An aging analysis of the accounts receivable indicated that $36,000 in accounts are expected to be uncollectible. Past experience has shown that about 1% of net credit sales eventually are uncollectible.

Instructions
Prepare the adjusting entries to record estimated bad debts expense using the (1) percentage of sales basis and (2) the percentage of receivables basis under each of the following independent assumptions:

(a) Allowance for Doubtful Accounts has a credit balance of $3,200 before adjustment. (b) Allowance for Doubtful Accounts has a debit balance of $730 before adjustment.

Ex. 179

The income statement approach to estimating uncollectible accounts expense is used by Dodson Company. On February 28, the firm had accounts receivable in the amount of $437,000 and Allowance for Doubtful Accounts had a credit balance of $2,140 before adjustment. Net credit sales for February amounted to $3,000,000. The credit manager estimated that uncollectible accounts expense would amount to 1% of net credit sales made during February. On March 10, an accounts receivable from Marie Green for $6,100 was determined to be uncollectible and written off. However, on March 31, Green received an inheritance and immediately paid her past due account in full.
Accountingfor Receivables 9 – 37

Ex. 179 (cont.)

Instructions
(a) Prepare the journal entries made by Dodson Company on the following dates: 1. February 28
2. March 10 3. March 31

(b) Assume no other transactions occurred that affected the allowance account during March. Determine the balance of Allowance for Doubtful Accounts at March 31.

Ex. 180

Elder Company uses the allowance method for estimating uncollectible accounts. Prepare journal entries to record the following transactions:

January 5 Sold merchandise to Mary Cerner for $1,000, terms n/15.

April 15 Received $200 from Mary Cerner on account.

August 21 Wrote off as uncollectible the balance of the Mary Cerner account when she declared bankruptcy.

October 5 Unexpectedly received a check for $250 from Mary Cerner.

Ex. 181

Stone Furniture Store has credit sales of $400,000 in 2008 and a debit balance of $600 in the Allowance for Doubtful Accounts at year end. As of December 31, 2008, $130,000 of accounts receivable remain uncollected. The credit manager prepared an aging schedule of accounts receivable and estimates that $3,000 will prove to be uncollectible.

On March 4, 2009, the credit manager authorizes a write-off of the $1,000 balance owed by A. Lowell.

Instructions

(a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2008.

(b) Show the balance sheet presentation of accounts receivable on December 31, 2008.

(c) On March 4, before the write-off, assume the balance of Accounts Receivable account is $160,000 and the balance of Allowance for Doubtful Accounts is a credit of $2,000. Make the appropriate entry to record the write-off of the Lowell account. Also show the balance sheet presentation of accounts receivable before and after the write-off.

Ex. 182

An inexperienced accountant made the following entries. In each case, the explanation to the entry is correct.

Dec. 17 Cash……………………………………………………………………………. 2,940 Sales Discounts…………………………………………………………….. 60
Accounts Receivable……………………………………………… 3,000 (To record collection of 12/4 sales, terms 2/10, n/30)

20 Cash……………………………………………………………………………. 18,360
Notes Receivable …………………………………………………. 18,000 Interest Revenue ………………………………………………….. 360
(Collection of $18,000, 8%, 90 day note dated Sept. 21. Interest had been accrued through Nov. 30.)

27 Cash……………………………………………………………………………. 1,000
Bad Debts Expense……………………………………………….. 1,000 (Collection of account previously written off as
uncollectible under allowance method)

31 Bad Debts Expense……………………………………………………….. 600
Allowance for Doubtful Accounts……………………………… 600 (To recognize estimated bad debts based on 1% of
net sales of $600,000)

Instructions
Prepare the correcting entries.

Ex. 183

Prepare the necessary journal entry for the following transaction.

Carlson Company sold $200,000 of its accounts receivables to a factor. The factor charges a 3% fee.

Ex. 184

Morton Company has the following accounts receivable in its general ledger at July 31: Accounts Receivable $32,000. During August, the following transactions occurred.

Aug. 1 Added 1% finance charges to $12,000 of credit card balances for not paying within the 30 day grace period.

15 Sold $20,000 of accounts receivable to Rush Factors Inc. who charge a 2% commission.

28 Collected $7,000 from Morton credit card customers including $350 of finance charges previously billed.

Instructions

(a) Journalize the transactions.

(b) Indicate the statement presentation of finance and service charges.

Ex. 185

Listed below are two independent situations involving the disposition of receivables.

1. Dylan Company sells $300,000 of its receivables to Speedy Factors, Inc. Speedy Factors assesses a finance charge of 2% of the amount of receivables sold.

Instructions
Prepare the journal entry to record the sale of the receivables on Dylan Company’s books.

2. A restaurant is the site for a large company party. The bill totals $3,000 and is charged by the patron on a Visa credit card.

Instructions

Assume a 3% service fee is charged by Visa. Record the entry for the transaction on the restaurant’s books.

Ex. 186

Compute the maturity date and the maturity value associated with each of the following notes receivables.

1. A $15,000, 6%, 3-month note dated April 20.

Maturity date , Maturity value $ .

2. A $25,000, 8%, 72-day note dated June 10.

Maturity date , Maturity value $ .

3. An $8,000, 9%, 30-day note dated September 20.

Maturity date , Maturity value $ .

Ex. 187

Compute the maturity date and interest for the following notes.

Dates of Notes (a) April 17
(b) August 11
Terms 60 days 3 months
Principal $60,000
80,000
Interest Rate 6%
8%

Ex. 188

Compute the missing amount for each of the following notes:

Principal Annual Interest Rate Time Total Interest ——————————————————————————————————————— (a) $40,000 10% 2.5 years ? ——————————————————————————————————————— (b) $120,000 ? 9 months $7,200 ——————————————————————————————————————— (c) ? 10% 90 days $1,500 ——————————————————————————————————————— (d) $40,000 9% ? $1,200 ———————————————————————————————————————

Ex. 189

Prepare the necessary journal entries for the following transactions for Presley Co.

May 25 Presley Co. received a $25,000, 2-month, 6% note from Durler Company in settlement of an account receivable.

June 25 Presley Co. received payment on the Durler note.

Ex. 190

Record the following transactions in general journal form for Klein Company.

July 1 Received a $10,000, 8%, 3-month note, dated July 1, from Ann Howe in payment of her open account.

Oct. 1 Received notification from Ann Howe that she was unable to honor her note at this time. It is expected that Howe will pay at a later date.

Nov. 15 Received full payment from Ann Howe for her note receivable previously dishonored.

Ex. 191

Rowe Boat Company often requires customers to sign promissory notes for major credit purchases. Journalize the following transactions for Rowe Boat Company.

Feb. 12

April 14

May 26

June 10
Accepted a $25,000, 6%, 60-day note from Jim Stone for a 24-foot motorboat built to his specifications.

Received notification from Jim Stone that he was unable to honor his promissory note but that he expects to pay the amount owed in May.

Received a check from Jim Stone for the total amount owed.

Received notification by the bank that Jim Stone’s check was being returned “NSF” and that Mr. Stone had declared personal bankruptcy.

Ex. 192

The following information is available for Wenger Company.

Beginning accounts receivable Ending accounts receivable Net sales
$ 80,000 120,000 1,000,000

Instructions
Compute the receivables turnover ratio and the average collection period.

COMPLETION STATEMENTS

193. Accounts receivable, which are also referred to as receivables, are amounts owed by customers on account.

194. The three primary accounting problems associated with accounts receivable are (1)

, (2) , and (3) of accounts receivable.

195. In order to encourage prompt payment of a trade receivable, companies often offer a

to customers.

196. When credit sales are made, Expense is considered a normal and necessary risk of doing business on a credit basis.

197. The two methods of accounting for uncollectible accounts are the method and the method.

198. Allowance for Doubtful Accounts is a account which is

from Accounts Receivable on the balance sheet.

199. When the allowance method is used to account for uncollectible accounts, the

is credited when an account is determined to be uncollectible.

200. The basis of estimating uncollectibles provides a better

of bad debt expense with sales revenue and therefore emphasizes income statement relationships.

201. The basis of estimating uncollectibles normally results in the best approximation of value and therefore emphasizes balance sheet relationships.

202. Sales resulting from the use of VISA and MasterCard are considered by the retailer.

203. A finance company or bank that purchases receivables from businesses is known as a

.

204. A 75-day note receivable dated June 10 would mature on .

205. Collection of a note receivable will result in a credit to for the face value of the note and a credit to .

206. A note which is not paid on the maturity date is said to be .

MATCHING

207. Match the items below by entering the appropriate code letter in the space provided.

A. Aging of receivables B. Direct write-off method C. Promissory note
D. Trade receivables
E. Percentage of sales basis
F. Percentage of receivables basis G. Factoring
H. Dishonored note
I. Average collection period J. Credit card sales

1. A written promise to pay a specified amount on demand or at a definite time.

2. Sales that involve the customer, the retailer, and the credit card issuer.

3. Emphasizes the matching of costs and revenues in the same period.

4. Amounts owed by customers from the sale of goods and services.

5. A note which is not paid in full at maturity.

6. Analysis of customer account balances by length of time they have been unpaid.

7. Emphasizes expected cash realizable value of accounts receivable.

8. Generally not acceptable for financial reporting purposes.

9. The amount of time that a receivable is outstanding.

10. Sale of accounts receivable to a factor.

SHORT-ANSWERESSAY QUESTIONS
S-AE 208
Management can choose between two bases in calculating the estimated uncollectible accounts under the allowance method. One basis emphasizes an income statement viewpoint whereas the other emphasizes a balance sheet viewpoint. Identify the two bases and contrast the two approaches. How do the different points of view affect the amount recognized as Bad Debts Expense during the accounting period?

S-AE 209

Customer purchases using credit cards are a significant source of revenue for many retailers. From the standpoint of a retailer, briefly discuss some advantages and disadvantages of a retail store having its own credit card as opposed to accepting one of the national credit cards (e.g., VISA, MasterCard).

S-AE 210

Your friend Mark has opened an office supply store. He will extend open credit to local businesses and is concerned about potential bad debts. What can Mark do to reduce potential bad debts?

S-AE 211

Banks that issue credit cards generally charge retailers a fee of 2 to 4% of the amount of sale. List reasons why companies are willing to pay these fees.

S-AE 212 (Ethics)

Linder Books, a small book publishing company, wrote off the debt of The Learning Center, and the Academy of Basic Education, both small private schools, after it determined that the schools were facing serious financial difficulty. No notice of the action was sent to the schools; Linder Books simply stopped sending bills. Nearly a year later, The Learning Center was given a large endowment and a government grant. The resulting publicity brought the school to the attention of Linder Books, which immediately reinstated the account, and sent a new bill to the school, including interest for the entire time the debt was outstanding. No further action was taken regarding the Academy of Basic Education, which was still operational.

Required:
Did Linder Books act ethically in reinstating the debt of one client, and not the other? Explain.

S-AE 213 (Communication)

Grenwood Company received a letter from Jane Gambel, a customer. Jane had purchased $425 worth of clothing from Grenwood on credit. She has made two payments of $50 each. She has missed the last two payments, and has received a collection letter from Grenwood. Her total debt presently, with interest and late fees, is $351.13.

Jane sent a letter to Grenwood in which she asked for her debt to be forgiven. She said she had heard that companies make allowances for accounts they are doubtful about collecting, and that Grenwood certainly should have been doubtful about her—that as a college student she had changed her major three times. She also said that she could not enjoy a high quality of life when making such high payments, but that she didn’t want to be embarrassed by bill collectors, either. She especially didn’t want her parents to find out that she had not paid her debts. Having Grenwood write off her account seemed to her the best solution in the circumstances. She added that the clothes she bought at Grenwood were among the best she had ever owned, and that she “told everybody” that Grenwood was definitely the best place to get clothes.

Required:

You are the accounting manager for Grenwood. Write a short letter to Jane explaining why her debt cannot be written off.

CHAPTER 10

PLANTASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS

CHAPTERSTUDY OBJECTIVES

1. Describe how the cost principle applies to plant assets.

2. Explain the concept of depreciation..

3. Compute periodic depreciation using different methods.

4. Describe the procedure for revising periodic depreciation.

5. Distinguish between revenue and capital expenditures, and explain the entries for each.

6. Explain how to account for the disposal of a plant asset.

7. Compute periodic depletion of natural resources.

8. Explain the basic issues related to accounting for intangible assets.

9. Indicate how plant assets, natural resources, and intangible assets are reported.

10. Explain how to account for the exchange of plant assets.

TRUE-FALSESTATEMENTS

1. All plant assets (fixed assets) must be depreciated for accounting purposes.

2. When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.

3. When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged to Delivery Equipment.

4. Land improvementsare generally charged to the Land account.

5. Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, market value becomes the basis for accountability.

6. The book value of a plant asset is always equal to its fair market value.

7. Recording depreciation on plant assets affects the balance sheet and the income statement.

8. The depreciable cost of a plant asset is its original cost minus obsolescence.

9. Recording depreciationeach period is an application of the matching principle.

10. The Accumulated Depreciation account represents a cash fund available to replace plant assets.

11. In calculating depreciation, both plant asset cost and useful life are based on estimates.

12. Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used.

13. Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.

14. The declining-balance method of depreciation is called an accelerated depreciation method because it depreciates an asset in a shorter period of time than the asset’s useful life.

15. Under the double-declining-balance method, the depreciation rate used each year remains constant.

16. The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.

17. A change in the estimated useful life of a plant asset may cause a change in the amount of depreciation recognized in the current and future periods, but not to prior periods.

18. A change in the estimated salvage value of a plant asset requires a restatement of prior years’ depreciation.

19. To determine a new depreciation amount after a change in estimate of a plant asset’s useful life, the asset’s remaining depreciable cost is divided by its remaining useful life.

20. Additions and improvements to a plant asset that increase the asset’s operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred.

21. Capital expenditures are expenditures that increase the company’s investment in productive facilities.

22. Ordinary repairs should be recognized when incurred as revenue expenditures.

23. A characteristic of capital expenditures is that the expenditures occur frequently during the period of ownership.

24. Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business.

25. The fair market value of a plant asset is always the same as its book value.

26. If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs.

27. A loss on disposal of a plant asset can only occur if the cash proceeds received from the asset sale is less than the asset’s book value.

28. The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value.

29. A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way.

30. A plant asset must be fully depreciated before it can be removed from the books.

31. If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement.

32. Depletion cost per unit is computed by dividing the total cost of a natural resource by the estimated number of units in the resource.

33. The Accumulated Depletion account is deducted from the cost of the natural resource in the balance sheet.

34. Depletion expense for a period is only recognized on natural resources that have been extracted and sold during the period.

35. Natural resources are long-lived productive assets that are extracted in operations and are replaceable only by an act of nature.

36. The cost of natural resources is not allocated to expense because the natural resources are replaceable only by an act of nature.

37. Conceptually, the cost allocation procedures for natural resources parallels that of plant assets.

38. Natural resources include standing timber and underground deposits of oil, gas, and minerals.

39. If an acquired franchise or license has an indefinite life, the cost of the asset is not amortized.

40. When an entire business is purchased, goodwill is the excess of cost over the book value of the net assets acquired.

41. Research and development costs which result in a successful product which is patentable are charged to the Patent account.

42. The cost of a patent must be amortized over a 20-year period.

43. The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.

44. The balances of the major classes of plant assets and accumulated depreciation by major classes should be disclosed in the balance sheet or notes.

45. The asset turnover ratio is calculated as total sales divided by ending total assets.

46. Research and development costs can be classified as a property, plant, and equipment item or as an intangible asset.

a47. An exchange of plant assets has commercial substance if the future cash flows change as a result of the exchange.

a48. Companies record a gain or loss on the exchange of plant assets because most exchanges have commercial substance.

a49. When plant assets are exchanged, the cost of the new asset is the book value of the old asset plus any cash paid.

Additional True-False Questions

50. When constructing a building, a company is permitted to include the acquisition cost and certain interest costs incurred in financing the project.

51. Recognition of depreciation permits the accumulation of cash for the replacement of the asset.

52. When an asset is purchased during the year, it is not necessary to record depreciation expense in the first year under the declining-balance depreciation method.

53. Depletion expense is reported in the income statement as an operating expense.

54. Goodwill is not recognized in accounting unless it is acquired from another business enterprise.

55. Research and development costs should be charged to expense when incurred.

56. A loss on the exchange of plant assets occurs when the fair market value of the old asset is less than its book value.

MULTIPLECHOICE QUESTIONS

57. The cost of a purchasedbuilding includes all of the following except a. closing costs.
b. real estate broker’s commission. c. remodeling costs.
d. All of these are included.

58. A company purchased land for $90,000 cash. Real estate brokers’ commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the cost principle, the cost of land would be recorded at
a. $97,000. b. $90,000. c. $95,000. d. $102,000.

59. Which one of the following items is not considered a part of the cost of a truck purchased for business use?
a. Sales tax
b. Truck license c. Freight charges
d. Cost of lettering on side of truck

60. Which of the following assets does not decline in service potential over the course of its useful life?
a. Equipment b. Furnishings c. Land
d. Fixtures

61. The four subdivisions for plant assets are
a. land, land improvements, buildings, and equipment. b. intangibles, land, buildings, and equipment.
c. furnishings and fixtures, land, buildings, and equipment. d. property, plant, equipment, and land.

62. The cost of land does not include
a. real estate brokers’ commission. b. annual property taxes.
c. accrued property taxes assumed by the purchaser. d. title fees.

63. Feeney Clinic purchases land for $130,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Feeney Clinic record as the cost for the land?
a. $132,200 b. $130,000 c. $134,700 d. $132,500

64. Belle Company buys land for $50,000 on 12/31/07. As of 3/31/08, the land has appreciated in value to $50,700. On 12/31/08, the land has an appraised value of $51,800.By what amount should the Land account be increased in 2008?
a. $0 b. $700
c. $1,100 d. $1,800

65. Pine Company acquires land for $86,000 cash. Additional costs are as follows:

Removal of shed $ 300 Filling and grading 1,500 Salvage value of lumber of shed 120 Broker commission 1,130 Paving of parking lot 10,000 Closing costs 560

Pine will record the acquisition cost of the land as a. $86,000.
b. $87,690. c. $89,610. d. $89,370.

66. Shawnee Hospital installs a new parking lot. The paving cost $30,000 and the lights to illuminate the new parking area cost $15,000. Which of the following statements is true with respect to these additions?
a. $30,000 should be debited to the Land account.
b. $15,000 should be debited to Land Improvements. c. $45,000 should be debited to the Land account. d. $45,000 should be debited to Land Improvements.
10 – 10

67. Land improvementsshould be depreciated over the useful life of the a. land.
b. buildings on the land.
c. land or land improvements, whichever is longer. d. land improvements.

68. General Molding is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true?
a. Excavation fees are capitalized but building permit fees are not. b. Architect fees are capitalized but building permit fees are not.
c. Interest is capitalized during the construction as part of the cost of the building.
d. The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds.

69. A company purchases a remote site building for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true?
a. The cost of the building will not include the repainting and recarpeting costs. b. The cost of the building will include the cost of replacing the roof.
c. The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements.
d. The wiring is part of the computer costs, not the building cost.

70. Carley Company purchases a new delivery truck for $45,000. The sales taxes are $3,000. The logo of the company is painted on the side of the truck for $1,200. The truck license is $120. The truck undergoes safety testing for $220. What does Carley record as the cost of the new truck?
a. $49,540 b. $49,420 c. $48,000 d. $47,420

71. All of the following factors in computing depreciation are estimates except a. cost.
b. residual value. c. salvage value. d. useful life.

72. Stories Company purchased equipment and these costs were incurred:

Cash price Sales taxes
Insuranceduring transit Installationand testing Total costs
$22,500 1,800 320
430 $25,050
Plant Assets, Natural Resources, and Intangible Assets 10 – 11

Stories will record the acquisition cost of the equipment as a. $22,500.
b. $24,300. c. $24,620. d. $25,050.

73. Becky’s Blooms purchased a delivery van for $20,000. The company was given a $2,000 cash discount by the dealer, and paid $1,000 sales tax. Annual insurance on the van is $500. As a result of the purchase, by how much will Becky’s Blooms increase its van account?
a. $20,000 b. $18,000 c. $19,500 d. $19,000

74. Upton Company purchased equipment on January 1 at a list price of $50,000, with credit terms 2/10, n/30. Payment was made within the discount period and Upton was given a $1,000 cash discount. Upton paid $2,500 sales tax on the equipment, and paid installation charges of $880. Prior to installation, Upton paid $2,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment?
a. $52,380 b. $54,380 c. $55,380 d. $50,500

75. Interest may be included in the acquisition cost of a plant asset a. during the construction period of a self-constructed asset. b. if the asset is purchased on credit.
c. if the asset acquisition is financed by a long-term note payable. d. if it is a part of a lump-sum purchase.

76. The balance in the Accumulated Depreciationaccount represents the a. cash fund to be used to replace plant assets.
b. amount to be deducted from the cost of the plant asset to arrive at its fair market value.
c. amount charged to expense in the current period.
d. amount charged to expense since the acquisition of the plant asset.

77. Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets?
a. Salvage value
b. Estimated useful life
c. Cash needed to replace the plant asset d. Cost

78. Depreciation is the process of allocating the cost of a plant asset over its service life in a. an equal and equitable manner.
b. an accelerated and accurate manner. c. a systematic and rational manner.
d. a conservative market-based manner.
10 – 12

79. The book value of an asset is equal to the
a. asset’s market value less its historical cost.
b. blue book value relied on by secondarymarkets. c. replacement cost of the asset.
d. asset’s cost less accumulated depreciation.

80. Accountants do not attempt to measure the change in a plant asset’s market value during ownership because
a. the assets are not held for resale. b. plant assets cannot be sold.
c. losses would have to be recognized.
d. it is management’s responsibilityto determine fair values.

81. Depreciation is a process of a. asset devaluation.
b. cost accumulation. c. cost allocation.
d. asset valuation.

82. Recording depreciationeach period is necessary in accordance with the a. going concern principle.
b. cost principle.
c. matching principle.
d. asset valuation principle.

83. In computing depreciation, salvage value is
a. the fair market value of a plant asset on the date of acquisition.
b. subtracted from accumulated depreciation to determine the plant asset’s depreciable cost.
c. an estimate of a plant asset’s value at the end of its useful life. d. ignored in all the depreciation methods.

84. When estimating the useful life of an asset, accountants do not consider a. the cost to replace the asset at the end of its useful life.
b. obsolescence factors.
c. expected repairs and maintenance. d. the intended use of the asset.

85. Useful life is expressed in terms of use expected from the asset under the a. declining-balance method.
b. straight-line method.
c. units-of-activitymethod. d. none of these.

86. Equipment was purchased for $75,000. Freight charges amounted to $3,500 and there was a cost of $10,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $15,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be
a. $17,700. b. $14,700. c. $12,300. d. $12,000.
Plant Assets, Natural Resources, and Intangible Assets 10 – 13

87. A truck was purchased for $120,000 and it was estimated to have a $24,000 salvage value at the end of its useful life. Monthly depreciation expense of $2,000 was recorded using the straight-line method. The annual depreciation rate is
a. 20%. b. 2%. c. 8%. d. 25%.

88. A company purchased factory equipment on April 1, 2008 for $64,000. It is estimated that the equipment will have an $8,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2008 is
a. $6,400. b. $5,600. c. $4,200. d. $4,800.

89. A company purchased office equipment for $40,000 and estimated a salvage value of $8,000 at the end of its 5-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance method is used is
a. 20%. b. 25%. c. 40%. d. 4%.

90. The declining-balance method of depreciation produces a. a decreasing depreciation expense each period.
b. an increasing depreciation expense each period. c. a declining percentage rate each period.
d. a constant amount of depreciation expense each period.

91. A company purchased factory equipment for $250,000. It is estimated that the equipment will have a $25,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be
a. $100,000. b. $60,000. c. $90,000. d. $43,200.

92. The units-of-activity method is generally not suitable for a. airplanes.
b. buildings.
c. delivery equipment. d. factory machinery.

93. A plant asset cost $144,000 and is estimated to have an $18,000 salvage value at the end of its 8-year useful life. The annual depreciation expense recorded for the third year using the double-declining-balance method would be
a. $12,060. b. $20,250. c. $17,718. d. $13,785.
10 – 14

94. A factory machine was purchased for $75,000 on January 1, 2008. It was estimated that it would have a $15,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. The company ran the machine for 4,000 actual hours in 2008. If the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2008 would be
a. $7,500. b. $12,000. c. $15,000. d. $6,000.

95. The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method which
a. is used for tax purposes.
b. must be used for financial statement purposes. c. is required by the SEC.
d. expenses an asset over a single year because capital acquisitions must be expensed in the year purchased.

96. Which of the following methods of computing depreciation is production based? a. Straight-line
b. Declining-balance c. Units-of-activity d. None of these

97. Management should select the depreciation method that a. is easiest to apply.
b. best measures the plant asset’s market value over its useful life.
c. best measures the plant asset’s contribution to revenue over its useful life. d. has been used most often in the past by the company.

98. The depreciation method that applies a constant percentage to depreciable cost in calculating depreciation is
a. straight-line.
b. units-of-activity.
c. declining-balance. d. none of these.

Use the following information for questions 99–100.

On October 1, 2008, Dole Company places a new asset into service. The cost of the asset is $60,000with an estimated 5-year life and $15,000 salvage value at the end of its useful life.

99. What is the depreciation expense for 2008 if Dole Company uses the straight-line method of depreciation?
a. $2,250 b. $12,000 c. $3,000 d. $6,000
Plant Assets, Natural Resources, and Intangible Assets 10 – 15

100. What is the book value of the plant asset on the December 31, 2008, balance sheet assuming that Dole Company uses the double-declining-balance method of depreciation? a. $39,000
b. $45,000 c. $54,000 d. $57,000

101. Which depreciation method is most frequently used in businesses today? a. Straight-line
b. Declining-balance c. Units-of-activity
d. Double-declining-balance

102. Wine Company uses the units-of-activity method in computing depreciation. A new plant asset is purchased for $24,000 that will produce an estimated 100,000 units over its useful life. Estimated salvage value at the end of its useful life is $2,000. What is the depreciation cost per unit?
a. $2.20 b. $2.40 c. $.22 d. $.24

103. Units-of-activityis an appropriate depreciation method to use when a. it is impossible to determine the productivity of the asset.
b. the asset’s use will be constant over its useful life.
c. the productivity of the asset varies significantly from one period to another. d. the company is a manufacturingcompany.

104. The calculation of depreciation using the declining balance method,
a. ignores salvage value in determining the amount to which a constant rate is applied. b. multiplies a constant percentage times the previous year’s depreciationexpense.
c. yields an increasing depreciation expense each period.
d. multiplies a declining percentage times a constant book value.

Use the following information for questions 105–106.

Grey Company purchased a new van for floral deliveries on January 1, 2008. The van cost $36,000 with an estimated life of 5 years and $9,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used.

105. What is the depreciationexpense for 2008? a. $7,200
b. $5,400 c. $10,800 d. $14,400

106. What is the balance of the AccumulatedDepreciation account at the end of 2009? a. $5,760
b. $17,280 c. $23,040 d. $8,640
10 – 16

107. Porter Company purchased equipment for $450,000 on January 1, 2007, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 3-year life and a $20,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2009 will be
a. $50,000. b. $30,000. c. $54,440. d. $34,440.

108. A plant asset was purchased on January 1 for $50,000 with an estimated salvage value of $10,000 at the end of its useful life. The current year’s Depreciation Expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $25,000. The remaining useful life of the plant asset is
a. 10 years. b. 8 years. c. 5 years. d. 3 years.

109. Equipment was purchased for $60,000. Freight charges amounted to $2,800 and there was a cost of $8,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $12,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be
a. $14,160. b. $11,760. c. $9,840. d. $9,600.

110. Equipment was purchased for $17,000 on January 1, 2008. Freight charges amounted to $700 and there was a cost of $2,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $3,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2009, if the straight-line method of depreciation is used?
a. $6,680 b. $3,340 c. $2,860 d. $5,720

111. A company purchased factory equipment on June 1, 2008, for $48,000. It is estimated that the equipment will have a $3,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2008, is
a. $4,500. b. $2,625. c. $2,250. d. $1,875.

112. A plant asset was purchased on January 1 for $40,000 with an estimated salvage value of $8,000 at the end of its useful life. The current year’s Depreciation Expense is $4,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $20,000. The remaining useful life of the plant asset is
Plant Assets, Natural Resources, and Intangible Assets 10 – 17

a. 10 years. b. 8 years. c. 5 years. d. 3 years.

Use the following information for questions 113–115.

Brinkman Corporation bought equipment on January 1, 2008. The equipment cost $90,000 and had an expected salvage value of $15,000. The life of the equipment was estimated to be 6 years.

113. The depreciable cost of the equipment is a. $90,000.
b. $75,000. c. $50,000. d. $12,500.

114. The depreciation expense using the straight-line method of depreciation is a. $17,500.
b. $18,000. c. $12,500.
d. none of the above.

115. The book value of the equipment at the beginning of the third year would be a. $90,000.
b. $75,000. c. $65,000. d. $25,000.

116. Baden Company purchased machinery with a list price of $32,000. They were given a 10% discount by the manufacturer. They paid $200 for shipping and sales tax of $1,500. Baden estimates that the machinery will have a useful life of 10 years and a residual value of $10,000. If Baden uses straight-line depreciation, annual depreciationwill be
a. $2,050. b. $2,036. d. $3,050. d. $1,880.

117. Bates Company purchased equipment on January 1, 2008, at a total invoice cost of $600,000. The equipment has an estimated salvage value of $15,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2009, if the straight-line method of depreciation is used?
a. $120,000 b. $240,000 c. $117,000 d. $234,000
10 – 18

118. On January 1, a machine with a useful life of five years and a residual value of $15,000 was purchased for $45,000. What is the depreciation expense for year 2 under the double-declining-balance method of depreciation?
a. $10,800 b. $18,000 c. $14,400 d. $8,640

119. A machine with a cost of $160,000 has an estimated salvage value of $10,000 and an estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-of-activity method of depreciation. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours?
a. $50,000 b. $30,000 c. $43,333 d. $53,333

120. Equipment with a cost of $240,000 has an estimated salvage value of $15,000 and an estimated life of 4 years or 15,000 hours. It is to be depreciated using the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours?
a. $60,000 b. $67,800 c. $49,500 d. $56,250

121. Larime Company purchased equipment for $40,000 on January 1, 2007, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 5-year life and a $2,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2009 will be
a. $5,760. b. $9,120. c. $9,600. d. $5,472.

122. Interline Trucking purchased a tractor trailer for $98,000. Interline uses the units-of-activity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Salvage value is estimated to be $14,000. If the truck is driven 90,000 miles in its first year, how much depreciation expense should Interline record?
a. $7,000 b. $8,820 c. $7,560 d. $8,167

123. An asset was purchased for $150,000. It had an estimated salvage value of $30,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $24,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in year 6 would be
a. $18,000. b. $13,200. c. $9,000. d. $12,600.
Plant Assets, Natural Resources, and Intangible Assets 10 – 19

124. Equipment costing $30,000 with a salvage value of $6,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 5 years and no change in the salvage value, the depreciation expense for year 3 would be
a. $3,600. b. $8,000. c. $6,000. d. $4,800.

125. Joe’s Quik Shop bought machinery for $25,000 on January 1, 2008. Joe estimated the useful life to be 5 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2009, Joe decides that the business will use the machinery for a total of 6 years. What is the revised depreciation expense for 2009?
a. $4,000 b. $2,000 c. $3,333 d $5,000

126. Each of the following is used in computing revised annual depreciation for a change in estimate except
a. book value. b. cost.
c. depreciable cost.
d. remaining useful life.

127. A change in the estimated useful life of equipment requires
a. a retroactive change in the amount of periodic depreciation recognized in previous years.
b. that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset.
c. that the amount of periodic depreciation be changed in the current year and in future years.
d. that income for the current year be increased.

128. Hunt Company has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate?
a. Revisions in useful life are permitted if approved by the IRS.
b. Retroactive changes must be made to correct previously recorded depreciation. c. Only future years will be affected by the revision.
d. Both current and future years will be affected by the revision.

129. Jim’s Copy Shop bought equipment for $90,000 on January 1, 2007. Jim estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2008, Jim decides that the business will use the equipment for 5 years. What is the revised depreciation expense for 2008?
a. $30,000 b. $12,000 c. $15,000 d. $22,500
10 – 20

130. Costs incurred to increase the operating efficiency or useful life of a plant asset are referred to as
a. capital expenditures. b. expense expenditures. c. ordinary repairs.
d. revenue expenditures.

131. Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally
a. expensed when incurred.
b. capitalized as a part of the cost of the asset.
c. debited to the Accumulated Depreciation account. d. not recorded until they become material in amount.

132. Which of the following is not true of ordinary repairs?
a. They primarily benefit the current accounting period. b. They can be referred to as revenue expenditures.
c. They maintain the expected productive life of the asset. d. They increase the productive capacity of the asset.

133. The paneling of the body of an open pickup truck would be classified as a(n) a. revenue expenditure.
b. addition.
c. improvement. d. ordinary repair.

134. Additions and improvements
a. occur frequently during the ownership of a plant asset. b. normally involve immaterial expenditures.
c. increase the book value of plant assets when incurred. d. typically only benefit the current accounting period.

135. If a plant asset is retired before it is fully depreciated and no salvage value is received, a. a gain on disposal occurs.
b. a loss on disposal occurs.
c. either a gain or a loss can occur. d. neither a gain nor a loss occurs.

136. A gain or loss on disposal of a plant asset is determined by comparing the a. replacement cost of the asset with the asset’s original cost.
b. book value of the asset with the asset’s original cost.
c. original cost of the asset with the proceeds received from its sale. d. book value of the asset with the proceeds received from its sale.

137. The book value of a plant asset is the difference between the a. replacement cost of the asset and its historical cost.
b. cost of the asset and the amount of depreciation expense for the year. c. cost of the asset and the accumulated depreciation to date.
d. proceeds received from the sale of the asset and its original cost.
Plant Assets, Natural Resources, and Intangible Assets 10 – 21

138. If a plant asset is sold before it is fully depreciated, a. only a gain on disposal can occur.
b. only a loss on disposal can occur. c. either a gain or a loss can occur. d. neither a gain nor a loss can occur.

139. If a plant asset is retired before it is fully depreciated, and the salvage value received is less than the asset’s book value,
a. a gain on disposal occurs. b. a loss on disposal occurs.
c. there is no gain or loss on disposal.
d. additional depreciation expense must be recorded.

140 A company sells a plant asset which originally cost $180,000 for $60,000 on December 31, 2008. The Accumulated Depreciation account had a balance of $72,000 after the current year’s depreciation of $18,000 had been recorded. The company should recognize a
a. $120,000 loss on disposal. b. $48,000 gain on disposal. c. $48,000 loss on disposal. d. $30,000 loss on disposal.

141. If disposal of a plant asset occurs during the year, depreciation is a. not recorded for the year.
b. recorded for the whole year.
c. recorded for the fraction of the year to the date of the disposal. d. not recorded if the asset is scrapped.

142. If a fully depreciated plant asset is still used by a company, the
a. estimated remaining useful life must be revised to calculate the correct revised depreciation.
b. asset is removed from the books.
c. accumulated depreciation account is removed from the books but the asset account remains.
d. asset and the accumulated depreciation continue to be reported on the balance sheet without adjustment until the asset is retired.

143. Which of the following statements is not true when a fully depreciated plant asset is retired?
a. The plant asset’s book value is equal to its estimated salvage value. b. The accumulated depreciation account is debited.
c. The asset account is credited.
d. The plant asset’s original cost equals its book value.

144. If a plant asset is retired before it is fully depreciated, and no salvage or scrap value is received,
a. a gain on disposal will be recorded.
b. phantom depreciation must be taken as though the asset were still on the books. c. a loss on disposal will be recorded.
d. no gain or loss on disposal will be recorded.
10 – 22

145. The book value of an asset will equal its fair market value at the date of sale if a. a gain on disposal is recorded.
b. no gain or loss on disposal is recorded. c. the plant asset is fully depreciated.
d. a loss on disposal is recorded.

146. A truck costing $110,000 was destroyed when its engine caught fire. At the date of the fire, the accumulated depreciation on the truck was $50,000. An insurance check for $125,000 was received based on the replacement cost of the truck. The entry to record the insurance proceeds and the disposition of the truck will include a
a. Gain on Disposal of $15,000.
b. credit to the Truck account of $60,000.
c. credit to the Accumulated Depreciation account for $50,000. d. Gain on Disposal of $65,000.

147. On July 1, 2008, Meed Kennels sells equipment for $66,000. The equipment originally cost $180,000, had an estimated 5-year life and an expected salvage value of $30,000. The accumulated depreciation account had a balance of $105,000 on January 1, 2008, using the straight-line method. The gain or loss on disposal is
a. $9,000 gain. b. $6,000 loss. c. $9,000 loss. d. $6,000 gain.

148. A loss on disposal of a plant asset is reported in the financial statements a. in the Other Revenues and Gains section of the income statement. b. in the Other Expenses and Losses section of the income statement. c. as a direct increase to the capital account on the balance sheet.
d. as a direct decrease to the capital account on the balance sheet.

149. Wells Company’s delivery truck, which originally cost $70,000, was destroyed by fire. At the time of the fire, the balance of the Accumulated Depreciation account amounted to $47,500.The company received $40,000 reimbursementfrom its insurance company. The gain or loss as a result of the fire was
a. $30,000 loss. b. $17,500 loss. c. $30,000 gain. d. $17,500 gain.

150. A truck that cost $21,000 and on which $10,000 of accumulated depreciation has been recorded was disposed of for $9,000 cash. The entry to record this event would include a a. gain of $2,000.
b. loss of $2,000.
c. credit to the Truck account for $11,000.
d. credit to AccumulatedDepreciationfor $10,000.

151. A truck that cost $36,000 and on which $30,000 of accumulated depreciation has been recorded was disposed of for $9,000 cash. The entry to record this event would include a a. gain of $3,000.
b. loss of $3,000.
c. credit to the Truck account for $6,000.
d. credit to AccumulatedDepreciationfor $30,000.
Plant Assets, Natural Resources, and Intangible Assets 10 – 23

152. Ace Corporation sold equipment for $12,000. The equipment had an original cost of $36,000and accumulated depreciation of $18,000. As a result of the sale,
a. net income will increase $12,000. b. net income will increase $6,000. c. net income will decrease $6,000. d. net income will decrease $12,000.

153. Jarman’s Courier Service recorded a loss of $3,000 when it sold a van that originally cost $28,000for $5,000. Accumulated depreciation on the van must have been
a. $26,000. b. $8,000. c. $25,000. d. $20,000.

154. On a balance sheet, natural resources may be described more specifically as all of the following except
a. land improvements. b. mineral deposits.
c. oil reserves. d. timberlands.

155. Natural resources are
a. depreciated using the units-of-activity method.
b. physically extracted in operations and are replaceable only by an act of nature. c. reported at their market value.
d. amortized over a period no longer than 40 years.

156. Depletion is
a. a decrease in market value of natural resources.
b. the amount of spoilage that occurs when natural resources are extracted. c. the allocation of the cost of natural resources to expense.
d. the method used to record unsuccessful patents.

157. To qualify as natural resources in the accounting sense, assets must be a. underground.
b. replaceable.
c. of a mineral nature.
d. physically extracted in operations.

158. The method most commonly used to compute depletion is the a. straight-linemethod.
b. double-declining-balancemethod. c. units-of-activity method.
d. effective interest method.

159. In computing depletion, salvage value is a. always immaterial.
b. ignored.
c. impossible to estimate.
d. included in the calculation.
10 – 24

160. If a mining company extracts 1,500,000 tons in a period but only sells 1,200,000 tons, a. total depletion on the mine is based on the 1,200,000 tons.
b. depletion expense is recognized on the 1,500,000 tons extracted.
c. depletion expense is recognized on the 1,200,000 tons extracted and sold.
d. a separate accumulated depletion account is set up to record depletion on the 300,000tons extracted but not sold.

161. A coal company invests $16 million in a mine estimated to have 20 million tons of coal and no salvage value. It is expected that the mine will be in operation for 5 years. In the first year, 1,000,000 tons of coal are extracted and sold. What is the depletion expense for the first year?
a. $800,000 b. $320,000 c. $80,000
d. Cannot be determined from the information provided.

162. AccumulatedDepletion
a. is used by all companies with natural resources. b. has a normal debit balance.
c. is a contra-asset account.
d. is never shown on the balance sheet.

163. On July 4, 2008, Montana Mining Company purchased the mineral rights to a granite deposit for $800,000. It is estimated that the recoverable granite will be 400,000 tons. During 2008, 100,000 tons of granite was extracted and 60,000 tons were sold. The amount of the Depletion Expense recognized for 2008 would be
a. $100,000. b. $60,000. c. $120,000. d. $200,000.

164. Depletion expense is computed by multiplying the depletion cost per unit by the a. total estimated units.
b. total actual units.
c. number of units extracted. d. number of units sold.

165. Intangible assets are the rights and privileges that result from ownership of long-lived assets that
a. must be generated internally.
b. are depletable natural resources. c. have been exchanged at a gain. d. do not have physical substance.

166. Identify the item below where the terms are not related. a. Equipment—depreciation
b. Franchise—depreciation c. Copyright—amortization d. Oil well—depletion
Plant Assets, Natural Resources, and Intangible Assets 10 – 25

167. A patent should
a. be amortized over a period of 20 years. b. not be amortized if it has an indefinite life.
c. be amortized over its useful life or 20 years, whichever is longer. d. be amortized over its useful life or 20 years, whichever is shorter.

168. The entry to record patent amortization usually includes a credit to a. Amortization Expense.
b. Accumulated Amortization. c. Accumulated Depreciation. d. Patents.

169. The cost of successfully defending a patent in an infringement suit should be a. charged to Legal Expenses.
b. deducted from the book value of the patent. c. added to the cost of the patent.
d. recognized as a loss in the current period.

170. An asset that cannot be sold individually in the market place is a. a patent.
b. goodwill.
c. a copyright. d. a trade name.

171. Goodwill can be recorded
a. when customers keep returning because they are satisfied with the company’s products.
b. when the company acquires a good location for its business. c. when the company has exceptional management.
d. only when there is an exchange transaction involving the purchase of an entire business.

172. On July 1, 2008, Marsh Company purchased the copyright to Parsons Computer tutorials for $162,000. It is estimated that the copyright will have a useful life of 5 years with an estimated salvage value of $12,000. The amount of Amortization Expense recognized for the year 2008 would be
a. $32,400. b. $15,000. c. $30,000. d. $16,200.

173. All of the following intangible assets are amortized except a. copyrights.
b. limited-life franchises. c. patents.
d. trademarks.

174. Which of the following is not an intangible asset arising from a government grant? a. Goodwill
b. Patent
c. Trademark d. Trade name
10 – 26

175. The amortization period for a patent cannot exceed a. 50 years.
b. 40 years. c. 20 years. d. 10 years.

176. Cost allocation of an intangible asset is referred to as a. amortization.
b. depletion. c. accretion.
d. capitalization.

177. A patent
a. has a legal life of 40 years. b. is nonrenewable.
c. can be renewed indefinitely.
d. is rarely subject to litigation because it is an exclusive right.

178. If a company incurs legal costs in successfully defending its patent, these costs are recorded by debiting
a. Legal Expense.
b. an Intangible Loss account. c. the Patent account.
d. a revenue expenditure account.

179. Copyrights are granted by the federal government
a. for the life of the creator or 70 years, whichever is longer. b. for the life of the creator plus 70 years.
c. for the life of the creator or 70 years, whichever is shorter. d. and therefore cannot be amortized.

180. Goodwill
a. is only recorded when generated internally. b. can be subdivided and sold in parts.
c. can only be identified with the business as a whole.
d. can be defined as normal earnings less accumulated amortization.

181. In recording the acquisition cost of an entire business,
a. goodwill is recorded as the excess of cost over the fair value of identifiable net assets. b. assets are recorded at the seller’s book values.
c. goodwill, if it exists, is never recorded.
d. goodwill is recorded as the excess of cost over the book value of identifiable net assets.

182. Research and development costs
a. are classified as intangible assets.
b. must be expensed when incurred under generally accepted accounting principles. c. should be included in the cost of the patent they relate to.
d. are capitalized and then amortized over a period not to exceed 40 years.
Plant Assets, Natural Resources, and Intangible Assets 10 – 27

183. A computer company has $2,000,000 in research and development costs. Before accounting for these costs, the net income of the company is $1,600,000. What is the amount of net income or loss after these R & D costs are accounted for?
a. $400,000 loss
b. $1,600,000 net income c. $0
d. Cannot be determined from the information provided.

184. Denton Company incurred $300,000 of research and development costs in its laboratory to develop a new product. It spent $40,000 in legal fees for a patent granted on January 2, 2008. On July 31, 2008, Denton paid $30,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2008? a. $300,000
b. $70,000 c. $370,000
d. Some other amount

185. Given the following account balances at year end, compute the total intangible assets on the balance sheet of Anisha Enterprises.

Cash AccountsReceivable Trademarks Goodwill
Research& Development Costs

a. $11,500,000 b. $7,500,000 c. $5,500,000 d. $9,500,000
$1,500,000 4,000,000 1,000,000 4,500,000 2,000,000

186. During 2008, Sitter Corporation reported net s