Accounting Information for Business Decisions 2nd Edition by Billie Cunningham - Test Bank

Chapter 1 – Introduction to Business Accounting and the Role of Professional Skills COMPLETION 1. Information explosion, evolving forms of businesses, more complex business activities, increased regulations, globalisation and technological advances are all factors affecting the ______________of the business environment. ANS: complexity PTS: 1 DIF: Difficult TOP: The changing business environment 2. An __________ ___________ is a means by which accounting information about a business’ activity is identified, measured, recorded and summarised so it can be communicated in an accounting report. ANS: accountingsystem PTS: 1 DIF: Moderate TOP: The accounting system 3. A business financial statement is meant to convey information about the business to ________ and __________ users in order to help them make decisions about the business. ANS: internal;external PTS: 1 DIF: Difficult TOP: Ethics in business and accounting 4. __________ ___________ is a system in which individuals own businesses that produce and sell services and/or goods for a profit. ANS: Privateenterprise PTS: 1 DIF: Moderate TOP: Private enterprise 5. _________ ___________ perform services or activities that benefit individuals or business customers. ANS: Servicebusinesses PTS: 1 DIF: Easy Top: Service businesses 6. ____________________ businesses purchase goods for resale to their customers. ANS: Merchandising PTS: 1 DIF: Easy TOP: Merchandising business 7. ____________________ are merchandising businesses that sell their products directly to the final customer or consumers. ANS: Retailers PTS: 1 DIF: Easy TOP: Merchandising business 8. ____________________ are merchandising businesses that sell their goods to retailers or other commercial users. ANS: Wholesalers PTS: 1 DIF: Easy TOP: Merchandising business 9. ____________________ refers to the funds a business needs to operate or expand operations. ANS: Capital PTS: 1 DIF: Moderate TOP: Entrepreneurship and sources of capital 10. ____________________ businesses make their products and then sell these products to their customers. ANS: Manufacturing PTS: 1 DIF: Moderate TOP: Manufacturing business 11. ____________________ are businesses owned by two or more individuals. ANS: Partnerships PTS: 1 DIF: Easy TOP: Partnership 12. An ____________________ is an individual who is willing to risk the uncertainty of not knowing if customers will buy what their business provides, in exchange for the reward of a profit, along with the reward of seeing their business succeed. ANS: entrepreneur PTS: 1 DIF: Moderate TOP: Entrepreneurship 13. _________________________ are businesses owned by one person who is the sole investor of capital into the business. ANS: Soleproprietorshipsorsoletraders PTS: 1 DIF: Moderate TOP: Sole proprietorship 14. _________________________ are the most common type of business organisation. ANS: Soleproprietorshipsorsoletraders PTS: 1 DIF: Easy TOP: Sole proprietorship 15. A ____________________ is a business organisation that has a separate identity from its owners. ANS: Company/Corporation PTS: 1 DIF: Moderate TOP: Company/Corporation 16. _________________________ are issued to the owners of a company as evidence of their investment of capital in the business. ANS: Companyshares PTS: 1 DIF: Difficult TOP: Company/Corporation 17. _______________ ____________ ____________ __________ are the currently accepted principles, practices and standards that businesses use for financial accounting and reporting in Australia, New Zealand and all over the world. ANS: Generallyacceptedaccountingprinciples PTS: 1 DIF: Difficult TOP: Generally accepted accounting principles 18. _______________ is the difference between the cash and credit sales of a business (revenues) and its total costs (expenses). ANS: Profit PTS: 1 DIF: Easy TOP: Basic financial statements 19. An _______________ shows a business’ revenues, expenses and net income (or net loss) for a time period, usually one year. ANS: incomestatement PTS: 1 DIF: Moderate TOP: Income statement 20. The International Federation of Accountants (IFAC) is an independent, worldwide organisation. It has developed a ________ ___ ______ for accountants in each country to use as a basis for producing their own versions. ANS: codeofethics PTS: 1 DIF: Moderate TOP: Professional organisations’ code of ethics TRUE/FALSE 1. Accounting is an information tool which can help make good business decisions. ANS: T PTS:1 DIF:Easy TOP:Theaccountingsystem 2. Unless you are a business owner, you will not be making business decisions. ANS: F PTS:1 DIF:Easy TOP:Accountingsupportfor management activities 3. Many businesses have no need for accounting information and can actually exist without an accounting system. ANS: F PTS:1 DIF:Easy TOP:Theaccountingsystem 4. Accounting keeps track of a business’ economic resources and activities, then reports the results and financial position to users who have an interest. ANS: T PTS: 1 DIF: Moderate TOP: The accounting system 5. The term ‘private enterprise’ means that businesses keep their accounting information private. ANS: F PTS: 1 DIF: Moderate 6. A dental surgery is an example of a service business. ANS: T PTS: 1 DIF: Moderate 7. A supermarket is an example of a retailing business. ANS: T PTS: 1 DIF: Moderate TOP: Private enterprise TOP: Service business TOP: Merchandising businesses 8. Sources of capital for a business include owner investments, and borrowing or seeking investments from outsiders. ANS: T PTS:1 DIF:Difficult TOP:Sourcesofcapital 9. Sole proprietorships are the most common form of business and as such, conduct more volume of business than partnerships and corporations put together. ANS: F PTS:1 10. A business’ accounting system ANS: T PTS: 1 11. An internal user would receive ANS: T PTS: 1 information 12. An external user would receive ANS: F PTS:1 DIF:Moderate TOP:Soleproprietorship would provide information for both external and internal users. DIF: Difficult TOP: The accounting system “tailor-made” information from the accounting system. DIF: Moderate TOP: Management accounting ‘tailor-made’ information from the accounting system. DIF:Moderate TOP:Financialaccounting 13. External users are assumed to possess the skills to extract the information they need for decisions from the accounting information of a business. ANS: T PTS: 1 DIF: Moderate TOP: Accounting support for external decision making 14. Feedback from operations can be effectively used in the planning, operating or evaluating stages of a business. ANS: T PTS: 1 DIF: Moderate TOP: Evaluating 15. Operating refers to the set of activities that the business engages in to conduct its business according to its plan. ANS: T PTS: 1 DIF: Easy TOP: Operating 16. Evaluating is the process of establishing the business’ goals and objectives. ANS: F PTS:1 DIF:Moderate TOP:Evaluating 17. A balance sheet lists the business’ assets, liabilities and owners’ equity at a given date. ANS: T PTS:1 DIF:Easy TOP:Balancesheet 18. Cost analysis tells a business owner the selling price of a product or service. ANS: F PTS:1 DIF:Moderate TOP:Costanalysis 19. Having a code of ethics will always provide you with the correct solution to an ethical dilemma. ANS: F PTS:1 DIF:Difficult TOP:Ethicsinbusinessand accounting 20. The modern day accountant generally works alone and therefore does not require teamwork skills. ANS: F PTS:1 DIF:Easy TOP:Communicationand teamwork skills. MULTIPLE CHOICE 1. Which of the following is false? a. Accounting keeps track of a business’ economic resources and activities, then reports the results and financial position to users who have an interest. b. Accounting is a mere numbers game. The information is only useful to a limited few. The reality is that few managers need accounting information to make quality operating decisions. c. Accounting focuses on the resources and activities of individual businesses. d. Products and services affect almost every minute of our lives. ANS: B PTS: 1 DIF: Difficult decision making 2. Which of the following is an example of a manufacturer? a. Dell Calculator b. Bob’s lawnmower services c. Air NZ d. Qantas ANS: A PTS: 1 DIF: Easy TOP: Accounting information and TOP: Manufacturing businesses 3. What is the primary difference between a manufacturer and a merchandiser? a. Merchandisers purchase finished goods ready to sell, whereas a manufacturer must create the goods. b. Manufacturers purchase finished goods ready to sell, whereas a merchandiser must create the goods. c. Merchandisers do not sell directly to the public, but rather only to manufacturers. d. Manufacturers buy the finished goods from a merchandiser then resell it, basically acting as a middle man. ANS: A PTS: 1 DIF: Moderate TOP: Merchandising business 4. Which type of business organisation generates the greatest volume of business? a. Proprietorships. b. Partnerships. c. Company/corporation. d. Each generates roughly the same amount of business. ANS: C PTS: 1 DIF: Easy TOP: Company/Corporation 5. Managerial accounting information: a. is a one size fits all approach to reporting business results. b. can be tailored to the needs of the internal user. c. follows GAAP in the reporting process. d. helps shareholders make decisions. ANS: B PTS: 1 DIF: Moderate TOP: Management accounting information 6. Financial accounting information: a. is a one size fits all approach to reporting business results. b. can be tailored to the needs of the internal user. c. follows statements on management accounting in the reporting process. d. helps only external users make decisions. ANS: A PTS: 1 DIF: Moderate TOP: Financial accounting information 7. Which of the following would a manager do as a part of planning activities? a. Compare estimates to benchmarks. b. Purchase inventory. c. Hire employees. d. Prepare cost estimates. ANS: D PTS: 1 DIF: Moderate TOP: Planning 8. Operating activities consist of: a. how products get made and sold. b. measuring actual operations and progress against a standard or benchmark. c. establishing business goals. d. establishing means of achieving business goals. ANS: A PTS: 1 DIF: Difficult TOP: Operating 9. Evaluating activities consist of: a. establishing business goals. b. establishing a means of achieving business goals. c. providing feedback to managers to correct deviations from standards. d. setting benchmarks or standards. . ANS: C PTS: 1 DIF: Difficult TOP: Evaluating 10. Statements on management accounting: a. are binding and contractual in nature. b. are general guidelines management accountants may turn to when faced with new situations to resolve. c. are developed primarily to guide the structure of reporting to external users. d. are issued by a governing body. ANS: B PTS: 1 DIF: Moderate TOP: Accounting support for external decision making 11. A budget: a. quantifies management’s plans. b. determines and evaluates the cost of specific products or activities in a business. c. compiles actual costs for a given period. d. is used to determine if a product should be continued or discontinued. ANS: A PTS: 1 DIF: Moderate TOP: Budgets 12. Which of the following summarises the results of a business’ operating activities for a specific time period? a. Income statement b. Cash flow statement c. Balance sheet d. Payables ledger ANS: A PTS: 1 DIF: Moderate TOP: Income statement 13. Which of the following summarises a business’ financial position on a given date? a. Income statement b. Cash flow statement c. Balance sheet d. Budget ANS: C PTS: 1 14. The business’ economic resources are: a. Revenues. b. Liabilities. c. Owners’ equity. d. Assets. ANS: D PTS: 1 DIF: Moderate DIF: Moderate TOP: Balance sheet TOP: Balance sheet TOP: Balance sheet 15. The business’ obligations to its creditors are: a. Liabilities. b. Expenses. c. Payments. d. Owners’ equity. ANS: A PTS: 1 DIF: Moderate 16. Which of the following do not cover a period of time? a. Income statement. b. Cash flow statement. c. Balance sheet. d. Accounts receivable ledger . ANS: C and D PTS: 1 17. A lack of solvency is demonstrated when: a. assets are greater than liabilities. b. liabilities are greater than assets. c. revenues are greater than expenses. d. expenses are greater than revenues. ANS: B PTS: 1 DIF: Moderate DIF: Difficult TOP: Balance sheet TOP: Basic financial statements 18. Financial position of a business can best be evaluated with which of the following? a. Net income. b. Assets, liabilities and owner’s equity. c. Cash received and paid. d. Owner investments. ANS: B PTS: 1 DIF: Moderate TOP: Balance sheet 19. Which of the following summarises a business’ receipts and payments? a. Budget. b. Income statement. c. Balance sheet. d. Cash flow statement. ANS: D PTS: 1 DIF: Moderate TOP: Cash flow statement 20. Which of the following is the first stage in solving a business problem? a. Knowing the possible outcomes. b. The recognition and definition of the problem. c. Understanding the available resources to solve the problem. d. Assessing the total cost and benefits of solving the problem. ANS: B PTS: 1 DIF: Easy TOP: Recognising and defining the problem SHORT ANSWER 1. What is private enterprise? ANS: Private enterprise is a system in which individuals own businesses that produce and sell services and/or goods for a profit. These businesses include service businesses, merchandising businesses, and manufacturing businesses. PTS: 1 DIF: Easy TOP: Private enterprise 2. What are the primary similarities and differences between service business and merchandising/manufacturing businesses? ANS: Service businesses and merchandising/manufacturing businesses are trying to earn a profit from selling to a customer. The difference is in what is sold. Service businesses provide a service to their customers, while merchandising and manufacturing businesses provide goods to their customers. PTS: 1 DIF: Easy TOP: Private enterprise 3. What is the role of accounting information in business? ANS: Accounting information helps decision makers. It aids managers by providing quantitative information about the business to help them in planning, operating, and evaluating the business’ activities. Accounting information helps external decision makers by providing them with financial statements containing economic information about the performance and state of the businesses. PTS: 1 DIF: Moderate TOP: The accounting system 4. Define entrepreneurship. ANS: Entrepreneurship is a combination of three factors: the entrepreneur’s ideas, the willingness of the entrepreneur to take risks, and the abilities of all of the business’ personnel to use capital to produce and sell goods or services. PTS: 1 DIF: Moderate TOP: Entrepreneurship 5. What sources of capital are available to an entrepreneur? How do these sources of capital differ? ANS: The two primary sources of capital are the owner’s investment and borrowing. The owner hopes to get a return on his/her investment greater than the amount that would be obtained from a different investment. Borrowings require repayments, along with interest payments. If the borrowed money cannot be repaid, then the business may become insolvent and cease operations. PTS: 1 DI: Moderate TOP: Sources of capital 6. What are the primary differences between companies/corporations and partnerships/sole proprietorships? ANS: Company/corporations are legally established as entities separate from their owners. The company/corporation issues capital stock to its owners as evidence of their ownership. The stock is readily transferable to other owners. Sole proprietorships and partnerships are not legally organised separately from their owners. PTS: 1 DIF: Moderate TOP: The forms that businesses take 7. Suppose that you are the manager of a business that manufactures various types of athletic shoes for sale primarily in your own country. Discuss the pros and cons of locating your manufacturing plants abroad versus in your own country. ANS: The regulatory environments might be very different between Your country and the international location. The tax structures might differ considerably. This might lead to substantial tax saving. Minimum wage laws and working condition standards are present in your country and might be non- existent abroad. This could lead to substantial labour savings abroad. If the plant were located abroad, restrictions on the flow of cash might make it difficult to bring your profits home. Some countries restrict foreign ownership of assets. The supply lines might be much longer, and burdened by import/export regulations. This might cause difficulties in delivering the product on a timely basis. PTS: 1 DIF: Difficult TOP: The regulatory environment of business 8. Describe the planning function of management. ANS: This is the start of management. The plan lays out the organisation of and provides direction to the operating and evaluating activities. Planning establishes the business’ goals and the means of achieving those goals. Planning identifies the resources and employees necessary to achieve the business’ goals. It also sets standards against which to measure achievement. This allows management to adjust future strategy. PTS: 1 DIF: Moderate TOP: Planning 9. What activities contribute to the operations of a business? ANS: Managers set goals, make decisions, and commit the business’ resources in an attempt to achieve those goals. Planning provides organisation and direction for the business. Operating involves gathering the necessary resources and employees and implementing the plans. Evaluating measures the actual progress against standards or benchmarks so problems can be corrected. PTS: 1 DIF: Moderate TOP: Operating 10. Describe the evaluating function of management. ANS: Evaluation measures the actual operations and progress against standards and then acts to correct deviations from the standards. It is a continuous process that attempts to prevent problems from occurring and to minimise their effect if they do occur. PTS: 1 DIF: Moderate TOP: Evaluating 11. Describe the operating function of management. ANS: This set of activities allows the business to conduct its business according to plan. They include gathering the necessary resources and employees to achieve the business’ goals. Day-to-day decisions are made about how to best achieve the goals. PTS: 1 DIF: Difficult TOP: Operating 12. What is the role of the budget in management? ANS: The budget is the result of quantifying management plans and showing the impact of these plans on the business’ operations. Once the planned activities have occurred, managers can evaluate the results against the budget to make sure that the actual operations have achieved the desired results. PTS: 1 DIF: Easy TOP: Budgets 13. What is the role of cost analysis in management? ANS: Cost analysis is the process of determining and evaluating the costs of specific products or activities within a business. Cost analysis is used when making decisions about these products or activities. Such a decision might include whether to continue a particular product line. PTS: 1 DIF: Moderate TOP: Cost analysis 14. What is the role of manufacturing cost reports in management? ANS: Manufacturing cost reports are used to monitor and evaluate a business’ operations. The manufacturing cost report can highlight variances of actual costs from budgeted costs. This might allow the manager to take corrective action. PTS: 1 DIF: Moderate TOP: Cost reports for products and services 15. Define generally accepted accounting principles. ANS: Accounting principles are the set of currently accepted principles, procedures, and practices that are used for financial reporting in Australia and New Zealand and all over the world. The principles must be followed in the external reports of all businesses that sell stock to the public in Australia, New Zealand and some other parts of the world, as well as many other businesses. PTS: 1 DIF: Moderate TOP: Guidelines for reporting to people outside the business 16. Briefly describe what information is contained in an Income Statement. ANS: A business’ income statement summarises the results of its operating activities for a specific time period and shows the business’ profit for that period. An income statement summarises the business’ revenues which is what the business charged its customers for services or goods provided to them. It also summarises the business’ expenses which is the cost to the business of providing those goods and services. Net income is the difference between revenues and expenses. PTS: 1 DIF: Moderate TOP: Income statement 17. What is the purpose of a code of ethics? ANS: Many situations and decisions are conducted in an environment in which there is not a clear right or wrong. Many situations fall between the two extremes. A code of ethics is designed to provide guidance to various people in maintaining high ethical standards when faced with difficult decisions. PTS: 1 DIF: Moderate TOP: Ethics in business and accounting PROBLEM 1. Your friend has been provided with the most recent financial statements for a business that she is interested in buying. She is familiar with the income statement and cashflow statement but is unsure about the contents of the balance sheet. Briefly describe the information contained in a balance sheet. ANS: The assets section lists the business’ economic resources, such as cash, inventories, and equipment. The liabilities section lists the business’ obligations to its creditors, such as banks, suppliers, and employees. The owners’ equity section shows the owner’s current investment in the assets of the business (the contributions of the owner plus the cumulative retained earnings of the business). PTS: 1 DIF: Moderate TOP: Balance sheet 2. You really like the topic of accounting and are considering it as a possible career opportunity. You are aware that professional accountants are bound by a code of ethics. Discuss some of the issues that are addressed by having a code of ethics. ANS: The International Federation of Accountants’ (IFAC) and CAANZ’s (Chartered Accountants Australia and New Zealand) code of ethics considers issues such as self-discipline, honourable behaviour, moral judgements, the public interest, professionalism, integrity, and technical and ethical standards. The different codes of ethics address competence, confidentiality, integrity, objectivity, and resolution of ethical conduct. They also address objectivity, resolution of conflicts, professional competence, confidentiality, tax practice, cross-border activities, publicity, independence, fees, and activities incompatible with the practice of accounting, advertising and soliciting. PTS: 1 DIF: Moderate TOP: Professional organisations’ codes of ethics Chapter 2 – Developing a Business Plan: Cost–Volume–Profit Analysis COMPLETION 1. Instead of rushing into a business right away, it is wise to develop a ____________________. ANS: businessplan PTS: 1 DIF: Easy TOP: Planning in a new business 2. A ____________________ describes a business’ goals and its plans for achieving those goals. ANS: businessplan PTS: 1 DIF: Easy TOP: Planning in a new business 3. ____________________ refers to the uncertainty about the future operations of a business. ANS: Risk PTS: 1 DIF: Easy TOP: Planning in a new business 4. The ____________________ is money that investors will receive back from their investment and credit decisions. ANS: return PTS: 1 DIF: Easy TOP: Planning in a new business 5. The ____________________ shows how the business will make sales and how it will influence and respond to market conditions. ANS: marketingplan PTS: 1 DIF: Easy TOP: Marketing plan 6. The _________________________ describes how the business will promote, price and distribute the product. ANS: marketingstrategy PTS: 1 DIF: Easy TOP: Marketing plan 7. The ____________________ describes the predicted growth, market share and sales of the business’ products by period. ANS: salesforecast PTS: 1 DIF: Easy TOP: Marketing plan 8. The _________________________ section of a business plan includes a description of the relationships between the business, its suppliers, its customers, as well as a description of how the business will develop, service, protect and support its products or services. ANS: businessoperations PTS: 1 DIF: Easy TOP: Operating plan 9. The ____________________ section of a business plan identifies the business’ capital requirements and sources of capital, as well as describing the business’ projected financial performance. ANS: financialplan PTS: 1 DIF: Moderate TOP: Financial plan 10. The ____________________ section of a business plan describes the social and environmental impact of the organisation. ANS: environmentalmanagementplan PTS: 1 DIF: Moderate TOP: Environmental management plan 11. ____________________ is the business’ funding. ANS: Capital PTS: 1 DIF: Moderate TOP: Sources of capital 12. ____________________ is the business’ funding that will be repaid within a year or less. ANS: Short-termcapital PTS: 1 DIF: Moderate TOP: Sources of capital 13. Credit from suppliers is a source of____________________ for the business. ANS: Short-termcapital PTS: 1 DIF: Moderate TOP: Sources of capital 14. ____________________ is the business’ funding that will be repaid after more than a year. ANS: Long-termcapital PTS: 1 DIF: Moderate TOP: Sources of capital 15. The financial performance section of the financial plan includes projected financial statements supported by ____________________ and ____________. ANS: cost–volume–profitanalysis;budgets PTS: 1 DIF: Moderate TOP: Projected financial performance 16. ______________________________ shows how profit is affected by changes in sales volume, selling price of products and the various costs of the business. ANS: Cost–volume–profitanalysis PTS: 1 DIF: Difficult TOP: Cost–volume–profit analysis 17. The ______________________________ is the difference between the total sales revenue and total variable costs. ANS: totalcontributionmargin PTS: 1 DIF: Difficult TOP: Contribution margin 18. The ______________________________ is the difference between the sales revenue per unit and the variable costs per unit. ANS: contributionmarginperunit PTS: 1 DIF: Moderate TOP: Contribution margin 19. [Selling price per unit – variable cost per unit] x volume = ___________________. ANS: totalcontributionmargin PTS: 1 DIF: Moderate TOP: Contribution margin 20. A desired level of overall profit for a business is called _________________. ANS: targetprofit PTS: 1 DIF: Moderate TOP: Target profit TRUE/FALSE 1. The first step in starting a business is to develop a business plan. ANS: T PTS: 1 DIF: Easy 2. The first step in starting a business is to set up a corporation. ANS: F PTS: 1 DIF: Easy TOP: Planning in a new business TOP: Planning in a new business 3. A business plan is a static document. Once created it should not need to be updated. ANS: F PTS: 1 DIF: Easy TOP: Planning in a new business 4. A business plan typically includes a description of the business, a marketing plan, an operating plan, an environmental management plan and a financial plan. ANS: T PTS: 1 DIF: Moderate TOP: Planning in a new business 5. A business plan should be viewed as an opportunity to identify mistakes before they could happen. ANS: T PTS: 1 DIF: Moderate 6. In cost behaviour, activity affects the way costs behave. ANS: T PTS: 1 DIF: Moderate 7. In cost behaviour, profit affects the way costs behave. ANS: F PTS: 1 DIF: Moderate 8. Fixed costs per unit will remain constant as activity changes. ANS: F PTS: 1 DIF: Moderate 9. A fixed cost does not respond to changes in an activity such as sales volume. ANS: T PTS: 1 DIF: Moderate TOP: Fixed costs 10. A fixed cost responds directly to changes in an activity such as sales volume. ANS: F PTS: 1 DIF: Moderate TOP: Fixed costs 11. Fixed costs per unit will change as activity changes. TOP: Planning in a new business TOP: Cost behaviour TOP: Cost behaviour TOP: Fixed costs ANS: T PTS: 1 DIF: Moderate 12. Variable costs will remain constant per unit as activity changes. ANS: T PTS: 1 DIF: Moderate 13. Variable costs per unit will change as activity changes. ANS: F PTS: 1 DIF: Moderate TOP: Fixed costs TOP: Variable costs TOP: Variable costs 14. A variable cost responds directly to changes in an activity such as sales volume. ANS: T PTS: 1 DIF: Moderate TOP: Variable costs 15. Total costs are the sum of the fixed costs and variable costs. ANS: T PTS: 1 DIF: Moderate TOP: Total costs 16. Contribution margin is the amount left over after a sale to cover the fixed costs, which then contributes toward profit. ANS: T PTS: 1 DIF: Moderate 17. Sales less fixed costs equal contribution margin. ANS: F PTS: 1 DIF: Moderate 18. Sales less variable costs equal contribution margin. ANS: T PTS: 1 DIF: Moderate 19. All contribution margin created past the break-even point will contribute towards profit. ANS: T PTS: 1 DIF: Moderate TOP: Contribution margin 20. All contribution margin created prior to the break-even point will contribute towards covering fixed costs. ANS: T PTS: 1 DIF: Moderate TOP: Contribution margin 21. All contribution margin created prior to the break-even point will contribute towards profit. ANS: F PTS: 1 DIF: Moderate TOP: Contribution margin 22. Only fixed costs are deducted from the selling price per unit, with the result then taken times sales volume in the profit equation for determination of profit. ANS: F PTS: 1 DIF: Moderate TOP: Finding the unit sales volume to achieve a target profit 23. The break-even point is the point that total revenues equal total costs. TOP: Contribution margin TOP: Contribution margin TOP: Contribution margin ANS: T PTS: 1 DIF: Moderate TOP: Finding the break-even point 24. The break-even point is the ANS: F PTS: 1 DIF: Moderate TOP: Finding the break-even point PTS: 1 DIF: Moderate TOP: Planning in a new business point that total revenues exceed total costs. 25. The break-even point is the ANS: F PTS: 1 DIF: Moderate TOP: Finding the break-even point point that total revenues are less than total costs. 26. The break-even point is the ANS: F PTS: 1 DIF: Moderate TOP: Finding the break-even point 27. If a business were concerned about raising the price of their goods, CVP analysis would help determine the impact on profits and the resulting changes in costs. ANS: T PTS: 1 DIF: Difficult TOP: Cost–volume–profit analysis 28. CVP can be an absolute decision-making tool. Faced with a change in costs or prices, one need look only to the CVP results to make a complete decision. ANS: F PTS: 1 DIF: Difficult TOP: Cost–volume–profit analysis 29. CVP is not an absolute decision-making tool. Faced with a change in costs or prices, one should also consider the impact on customers as well as the CVP results to make a complete decision. ANS: T PTS: 1 DIF: Difficult TOP: Cost–volume–profit analysis 30. When analysing an alternative set of plans, CVP is but one tool. The impact on customers should also be considered. ANS: T PTS: 1 DIF: Difficult TOP: Cost–volume–profit analysis MULTIPLE CHOICE 1. I. The first step in starting a business is to develop a business plan. II. The first step in starting a business is to set up a corporation. III. A business plan is a static document that if done right will not need updating. IV. A business plan should be viewed as an opportunity to identify mistakes before they occur. Which of the above is correct? a. I. only. b. I. and II only. c. II and III only. d. I and IV only. e. I, II, III and IV . ANS: D 2. Which of the following would NOT be included in a typical business plan: point that total revenues equal target profit. a. The marketing plan. b. The financial plan. c. The weekly sales plan. d. The operating plan. ANS: C PTS: 1 DIF: Easy 3. The primary concern of creditors and investors is: a. risk. b. return. c. both of the options given. ANS: C PTS: 1 DIF: Easy 4. Fixed costs: a. In the short term do not respond to changes in volume. b. respond in the opposite direction of changes in volume. c. change in proportion with changes in volume. d. will always be the same from one period to the next. ANS: A PTS: 1 DIF: Moderate TOP: Planning in a new business TOP: Planning in a new business TOP: Fixed costs 5. Barney’s Brick Co. has high fixed costs such as building, machinery and salaries. Barney desires to minimise the impact of these fixed costs. A strategy for Barney would be? a. To produce and sell as many units as possible. b. To downsize. c. Sell the business to someone else. d. Lay off the salary employees. ANS: A PTS: 1 DIF: Moderate TOP: Planning in a new business 6. Which of the following best represents an example of a fixed cost? a. Equipment. b. Cost of products sold to customers. c. Salary plus commission employees. d. Telephone usage. ANS: A PTS: 1 DIF: Difficult TOP: Fixed costs TOP: Variable costs 7. Total variable costs: a. do not respond to changes in volume. b. respond in the opposite direction to changes in volume. c. change in proportion with changes in volume. d. will always be the same from one period to the next. ANS: C PTS: 1 DIF: Moderate 8. Which of the following best represents an example of a variable cost? a. Equipment. b. Cost of products sold to customers. c. Salary plus commission employees. d. Telephone usage. ANS: B PTS: 1 DIF: Difficult TOP: Variable costs 9. Which of the following costs change is in direct proportion to the volume? a. Fixed costs and variable costs. b. Total variable costs. c. None of the options given. d. Fixed costs. ANS: B PTS: 1 DIF: Moderate 10. The definition of contribution margin per unit is: a. Selling price per unit – variable cost per unit. b. Selling price per unit – fixed costs. c. Selling price per unit – total costs. d. None of the above. ANS: A PTS: 1 DIF: Easy TOP: Variable costs TOP: Contribution margin 11. The unit sales volume at which a business earns zero profit is called: a. Zero-profit point. b. Total costs. c. Contribution margin per unit. d. Break-even point. ANS: D PTS: 1 DIF: Easy TOP: Break-even point 12. The profit equation for a given sales volume is: a. [Selling price per unit x volume] + [variable cost per unit x volume] – total fixed costs. b. [Selling price per unit x volume] – [break even point] – total fixed costs. c. [Selling price per unit x volume] + [break even point] + total fixed costs. d. [Selling price per unit x volume] – [variable cost per unit x volume] – total fixed costs. ANS: D PTS: 1 DIF: Moderate TOP: Profit equation 13. Barb’s Best Pies sells a meat pie for $5.00. Variable costs are $3.00 per unit and fixed costs for the period are $4000. The profit on the 2001st pie sold is: a. $2.00. b. $5.00. c. $3.00. d. $-0-. ANS: A PTS: 1 DIF: Difficult TOP: Profit calculation 14. Widget World makes a widget that is sells for $10 per unit. The variable costs are $7 per unit. Assuming the business has normal fixed costs, and the break-even point is 350 units, what are the total costs at break even? a. $4500. b. $3500. c. $12 000. d. $7500. ANS: B Example 2.1 PTS: 1 DIF: Difficult TOP: Finding the break-even point The information below is used for the following problems. Leslie’s Soccer Balls sells soccer balls for $20 each and incurs variable costs of $15 per ball. Leslie’s break-even point is 40 000 units. 15. Refer to Example 2.1. What is a. $2000. b. $8000. c. $200 000. d. None of the options given. ANS: C PTS: 1 16. Refer to Example 2.1. What is a. $50 000. b. $250 000. c. $1 000 000. d. None of the options given. ANS: A PTS: 1 to achieve a target profit 17. Refer to Example 2.1. What is a. $500 000. b. $125 000. c. $75 000 loss. d. None of the options given. ANS: C PTS: 1 to achieve a target profit Example 2.2 The information below is used the total of Leslie’s fixed costs? DIF: Difficult Leslie’s profit when 50 000 units are sold? a. 33 333 units. b. 46 667 units. c. 20 000 units. d. 28 000 units. ANS: B to achieve a target profit DIF: Moderate TOP: Finding the unit sales volume PTS: 1 DIF: Moderate Leslie’s profit when 25 000 units are sold? DIF: Easy for the following problems. TOP: Finding the unit sales volume Garrison’s Gaskets has variable costs of $2 per unit and fixed costs of $40 000. Garrison’s selling price is $5 per unit. 18. Refer to Example 2.2. What is Garrison’s break-even point? a. 8000 units. b. 20 000 units. c. 13 334 units. d. None of the options given. ANS: C PTS: 1 DIF: Moderate TOP: Finding the break-even point 19. Refer to Example 2.2. How many units will Garrison’s have to sell in order to earn a profit of $100 000? 20. Refer to Example 2.2. How much profit will Garrison’s earn if it cuts its selling price to $3 per unit, and sells 100 000 units? a. $300 000. TOP: Fixed costs TOP: Finding the unit sales volume b. $100 000. c. $60 000. d. None of the options given. ANS: C PTS: 1 to achieve a target profit SHORT ANSWER DIF: Moderate TOP: Finding the unit sales volume 1. What are the three main purposes of a business plan? Discuss each of the three purposes. ANS: First, the business plan helps the entrepreneur visualise and organise the business and its operations. It helps to evaluate the plan, develop new ideas, and refine the plan. Mistakes may be identified and corrected prior to implementing the plan. Second, the business plan serves as a ‘benchmark’ for measuring the actual performance of the business. Plans for future activities can then be modified. Third, the business plan helps the business obtain financing. The business plan helps creditors and investors assess the expected risk and return associated with the business. PTS: 1 DIF: Moderate TOP: Planning in a new business 2. What are the two primary concerns of investors? Discuss each. ANS: One concern is the level of risk associated with the investment. Risk refers to the uncertainty existing about the future operations of the business. The other concern is return. Return refers to the money that the investor will receive back from their investment and credit decisions. PTS: 1 DIF: Moderate TOP: Planning in a new business 3. What are the five parts of the business plan? Discuss each. ANS: The five parts of the business plan are a description of the business, a marketing plan, an operating plan, an environmental management plan and a financial plan. The description of the business discloses the type of business and product. It describes how the business is organised. It discloses where the business is located. The objectives of the business are listed, along with potential customers. The marketing plan shows how the business will influence and respond to market conditions. It provides evidence of the demand for the business’ product or services. It describes the current and expected competition in the market and relevant government regulations. The operating plan includes a description of the relationships between the business, its suppliers, and its customers, along with a description of how the business will develop, service, protect and support its products or services. It also includes any other influences on the operations of the business. responsibility accounting test banks, basic accounting test banks, accounting test banks and solution manuals, accounting test banks,