Q: A company has sales of $$500,000, cost of goods sold of 300$$,000, and operating expenses of $$100,000. What is the gross profit percentage? $$\text{Gross Profit Percentage} = \frac{\text{Gross Profit}}{\text{Sales}} \times 100$$ $$\text{Gross Profit} = \text{Sales} - \text{COGS}$

$$\frac{500,000 - 300,000}{500,000} \times 100 = 40\%$$

Question 1

A company uses the periodic inventory system. At the end of the year, the following data is available: Beginning inventory = $$10,000, Purchases = 50$$,000, Ending inventory = $$8,000. What is the cost of goods sold (COGS)?

$$COGS = 	ext{Beginning Inventory} + 	ext{Purchases} - 	ext{Ending Inventory}$

Accepted Answer

$$COGS = 10,000 + 50,000 - 8,000 = 52,000$$

Question 2

Which inventory costing method results in the highest cost of goods sold during a period of rising prices?

Accepted Answer

LIFO (Last-In, First-Out)

Question 3

A company purchased equipment for $$50,000 with an estimated useful life of 10 years and a residual value of 5$$,000. Using the straight-line method, what is the annual depreciation expense?

$$	ext{Depreciation Expense} = \frac{	ext{Cost} - 	ext{Residual Value}}{	ext{Useful Life}}$$

Accepted Answer

$$\frac{50,000 - 5,000}{10} = 4,500$$

Question 4

Which of the following is NOT considered a tangible asset?

Accepted Answer

Patent

Question 5

A company issues bonds at a premium. Which of the following statements is TRUE?

Accepted Answer

The bond's stated interest rate is higher than the market rate.

Question 6

If ending inventory is overstated, what is the effect on gross profit for the period?

$$	ext{Gross Profit} = 	ext{Sales} - 	ext{COGS}$$

Accepted Answer

Gross profit is overstated.

Question 7

Which depreciation method results in higher depreciation expense in the early years of an asset's useful life?

Accepted Answer

Double Declining Balance Method

Question 8

A company has net income of $$120,000, average total assets of 800$$,000, and average common shareholders' equity of $$500,000. What is the return on assets (ROA)?

$$	ext{ROA} = \frac{	ext{Net Income}}{	ext{Average Total Assets}}$

Accepted Answer

$$\frac{120,000}{800,000} = 0.15 or 15$$%

Question 9

Which of the following best describes the 'lower of cost and net realizable value' rule for inventory?

Accepted Answer

Inventory must be reported at the lower of its historical cost or its net realizable value.

Question 10

A company has total liabilities of $$300,000 and total assets of 1$$,000,000. What is the debt ratio?

$$	ext{Debt Ratio} = \frac{	ext{Total Liabilities}}{	ext{Total Assets}}$$

Accepted Answer

$$\frac{300,000}{1,000,000} = 0.3 or 30$$%

Question 11

Which of the following is a characteristic of preferred shares?

Accepted Answer

They receive dividends before common shareholders.

Question 12

A company has sales of $$500,000, cost of goods sold of 300$$,000, and operating expenses of $$100,000. What is the gross profit percentage?

$$	ext{Gross Profit Percentage} = \frac{	ext{Gross Profit}}{	ext{Sales}} 	imes 100$$
$$	ext{Gross Profit} = 	ext{Sales} - 	ext{COGS}$

Accepted Answer

$$\frac{500,000 - 300,000}{500,000} 	imes 100 = 40\%$$

Question 13

Which of the following transactions would increase both assets and liabilities?

Accepted Answer

Purchasing inventory on credit

Question 14

A company has net income of $$80,000, preferred dividends of 10$$,000, and average common shareholders' equity of $$350,000. What is the return on common shareholders' equity (ROE)?

$$	ext{ROE} = \frac{	ext{Net Income} - 	ext{Preferred Dividends}}{	ext{Average Common Shareholders' Equity}}$

Accepted Answer

$$\frac{80,000 - 10,000}{350,000} = 0.2 or 20$$%

Question 15

Which of the following best describes the effect of a purchase allowance on the accounting records?

Accepted Answer

It decreases the cost of inventory purchased.

Question 16

A company uses the units of production method for depreciation. If an asset cost $$40,000, has a residual value of 4$$,000, and is expected to produce 18,000 units over its life, what is the depreciation expense per unit?

$$	ext{Depreciation per unit} = \frac{	ext{Cost} - 	ext{Residual Value}}{	ext{Total Units}}$$

Accepted Answer

$$\frac{40,000 - 4,000}{18,000} = 2$$

Question 17

Which of the following is a reason why a company might issue shares instead of taking on more debt?

Accepted Answer

To avoid increasing financial risk and interest expense

Question 18

A company has current assets of $$150,000 and current liabilities of 100$$,000. What is the current ratio?

$$	ext{Current Ratio} = \frac{	ext{Current Assets}}{	ext{Current Liabilities}}$$

Accepted Answer

$$\frac{150,000}{100,000} = 1.5$$

Question 19

Which of the following is NOT a component of the cash conversion cycle?

Accepted Answer

Depreciation expense

Comprehensive Study Notes for Financial Accounting: Inventory, Assets, Liabilities, Equity, and Financial Statement Analysis

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