Q: Which of the following best describes the Quick (Acid-Test) Ratio, and what does a higher ratio indicate?

It is calculated as $$\frac{\text{Cash} + \text{Short-term Investments} + \text{Receivables}}{\text{Current Liabilities}}$$; a higher ratio means greater liquidity.

Question 1

Which of the following best describes when revenue should be recognized under the revenue recognition principle?

Accepted Answer

When the performance obligation is satisfied, regardless of cash collection.

Question 2

A company sells goods FOB shipping point. When should the company recognize revenue?

Accepted Answer

When the goods are shipped from the seller's warehouse.

Question 3

A company made sales of $$100,000 during the month. It offered sales discounts of 2$$,000 and had sales returns and allowances of $3,000. What is the net revenue for the month?

Accepted Answer

$95,000

Question 4

Which of the following is NOT a trade receivable?

Accepted Answer

Interest receivable from investments.

Question 5

Under the allowance method, what is the effect on net realizable value (NRV) of accounts receivable when an account is written off?

Accepted Answer

NRV remains unchanged.

Question 6

A company estimates bad debts using the percent-of-sales method. If credit sales are $200,000 and the estimated uncollectible rate is 2%, what is the journal entry to record bad debt expense?

Accepted Answer

Debit Bad Debt Expense $$4,000; Credit Allowance for Doubtful Accounts 4$$,000

Question 7

A company uses the aging-of-receivables method to estimate uncollectible accounts. If the required ending balance in Allowance for Doubtful Accounts is $$8,000 and the current balance is a 2$$,000 credit, what amount should be recorded as Bad Debt Expense?

Accepted Answer

$6,000

Question 8

A company accepts a 90-day, 8% note receivable for $10,000. What is the interest revenue at maturity? Use a 360-day year.

Accepted Answer

$200

Question 9

Which of the following best describes the Quick (Acid-Test) Ratio, and what does a higher ratio indicate?

Accepted Answer

It is calculated as $$\frac{	ext{Cash} + 	ext{Short-term Investments} + 	ext{Receivables}}{	ext{Current Liabilities}}$$; a higher ratio means greater liquidity.

Question 10

Which of the following costs should NOT be capitalized as part of the cost of land?

Accepted Answer

Cost of paving a parking lot.

Question 11

A company purchases equipment for $$50,000, pays 2$$,000 for delivery, and $3,000 for installation. What is the total cost to be capitalized for the equipment?

Accepted Answer

$55,000

Question 12

Which of the following statements about depreciation is correct?

Accepted Answer

Depreciation allocates the cost of a plant asset to expense over its useful life.

Question 13

A machine costing $$40,000 has an estimated residual value of 4$$,000 and a useful life of 8 years. Using the straight-line method, what is the annual depreciation expense?

Accepted Answer

$4,500

Question 14

Which of the following is an example of an intangible asset that is amortized?

Accepted Answer

Patent

Question 15

A company purchases a group of assets (land, building, and equipment) for a lump-sum price of $1,000,000. What is the correct accounting treatment?

Accepted Answer

Allocate the purchase price to each asset based on their relative fair values.

Question 16

Which of the following best describes the Lower-of-Cost-or-Market (LCM) rule for inventory?

Accepted Answer

Inventory is reported at the lower of its historical cost or current market value.

Question 17

A company has net sales of $$500,000 and cost of goods sold of 350$$,000. What is the gross profit percentage?

Accepted Answer

$$\frac{500,000 - 350,000}{500,000} = 30\%$$

Question 18

Which inventory costing method will result in the highest net income during a period of rising prices?

Accepted Answer

FIFO

Question 19

Which of the following best describes the reporting basis for investments in equity securities with insignificant influence (less than 20% ownership) after the purchase date?

Accepted Answer

Fair value

Question 20

A company owns 30% of another company's voting stock. Which accounting method should be used for this investment?

Accepted Answer

Equity method

Financial Accounting Exam 2 Study Guide: Receivables, Inventory, Plant Assets, and Investments

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