, Question 1
A company uses the aging-of-receivables method. Before adjustment,
Allowance for Doubtful Accounts has a credit balance of $800. The aging
schedule estimates total uncollectible accounts at $7,500. What is the required
adjusting entry?
A. Debit Bad Debt Expense $6,700; credit Allowance for Doubtful
Accounts $6,700
B. Debit Bad Debt Expense $7,500; credit Allowance for Doubtful
Accounts $7,500
C. Debit Allowance for Doubtful Accounts $6,700; credit Bad Debt
Expense $6,700
D. Debit Bad Debt Expense $8,300; credit Allowance for Doubtful
Accounts $8,300
Correct Answer: A - Debit Bad Debt Expense $6,700; credit
Allowance for Doubtful Accounts $6,700
RATIONALE
Under the aging method, the adjusted Allowance balance must equal
the estimated uncollectible amount ($7,500). Since the account already
has an $800 credit balance, the adjusting entry is the difference:
$7,500 $800 = $6,700. Choice B ignores the existing balance, C
reverses the accounts, and D incorrectly adds the existing balance.
Question 2
A company has sales of $1,200,000, average accounts receivable of $150,000,
and a gross profit margin of 40%. What is the accounts receivable turnover
ratio, and what does it indicate?
A. 8.0 times; the company collects its receivables 8 times per year
B. 0.125 times; the company collects its receivables once every 8 years
C. 12.5 times; the company collects its receivables 12.5 times per year
D. 3.2 times; the company collects its receivables 3.2 times per year
Page 2
,Correct Answer: A - 8.0 times; the company collects its
receivables 8 times per year
RATIONALE
Accounts receivable turnover = Net credit sales / Average accounts
receivable = $1,200,000 / $150,000 = 8.0 times. This means the
company converts its receivables into cash 8 times annually,
indicating efficient collection. The gross profit margin is irrelevant to
this calculation.
Question 3
A company reports net income of $50,000, depreciation expense of $10,000, an
increase in accounts receivable of $5,000, and a decrease in accounts payable
of $3,000. Using the indirect method, what is net cash provided by operating
activities?
A. $52,000
B. $68,000
C. $48,000
D. $62,000
Correct Answer: A - $52,000
RATIONALE
Start with net income $50,000, add back non-cash depreciation
$10,000, subtract the increase in accounts receivable $5,000, and
subtract the decrease in accounts payable $3,000: $50,000 + $10,000
$5,000 $3,000 = $52,000. Increases in current assets use cash, and
decreases in current liabilities use cash.
Question 4
A company sells a product for $50 per unit. Variable costs are $30 per unit, and
fixed costs are $100,000. What is the break-even point in units, and what is the
margin of safety in units if actual sales are 8,000 units?
Page 3
, A. 5,000 units break-even; 3,000 units margin of safety
B. 3,333 units break-even; 4,667 units margin of safety
C. 2,000 units break-even; 6,000 units margin of safety
D. 5,000 units break-even; 8,000 units margin of safety
Correct Answer: A - 5,000 units break-even; 3,000 units margin
of safety
RATIONALE
Contribution margin per unit = $50 $30 = $20. Break-even units =
Fixed costs / Contribution margin = $100,000 / $20 = 5,000 units.
Margin of safety = Actual sales Break-even sales = 8,000 5,000 =
3,000 units.
Question 5
A company is considering a project with an initial investment of $200,000 and
annual cash inflows of $60,000 for 5 years. The company's required rate of
return is 10%. What is the net present value (NPV)? (PV annuity factor for
10%, 5 years = 3.7908)
A. $27,448
B. $100,000
C. $227,448
D. $37,908
Correct Answer: A - $27,448
RATIONALE
Present value of inflows = $60,000 × 3.7908 = $227,448. NPV =
$227,448 $200,000 = $27,448. A positive NPV indicates the project
should be accepted.
Page 4
A company uses the aging-of-receivables method. Before adjustment,
Allowance for Doubtful Accounts has a credit balance of $800. The aging
schedule estimates total uncollectible accounts at $7,500. What is the required
adjusting entry?
A. Debit Bad Debt Expense $6,700; credit Allowance for Doubtful
Accounts $6,700
B. Debit Bad Debt Expense $7,500; credit Allowance for Doubtful
Accounts $7,500
C. Debit Allowance for Doubtful Accounts $6,700; credit Bad Debt
Expense $6,700
D. Debit Bad Debt Expense $8,300; credit Allowance for Doubtful
Accounts $8,300
Correct Answer: A - Debit Bad Debt Expense $6,700; credit
Allowance for Doubtful Accounts $6,700
RATIONALE
Under the aging method, the adjusted Allowance balance must equal
the estimated uncollectible amount ($7,500). Since the account already
has an $800 credit balance, the adjusting entry is the difference:
$7,500 $800 = $6,700. Choice B ignores the existing balance, C
reverses the accounts, and D incorrectly adds the existing balance.
Question 2
A company has sales of $1,200,000, average accounts receivable of $150,000,
and a gross profit margin of 40%. What is the accounts receivable turnover
ratio, and what does it indicate?
A. 8.0 times; the company collects its receivables 8 times per year
B. 0.125 times; the company collects its receivables once every 8 years
C. 12.5 times; the company collects its receivables 12.5 times per year
D. 3.2 times; the company collects its receivables 3.2 times per year
Page 2
,Correct Answer: A - 8.0 times; the company collects its
receivables 8 times per year
RATIONALE
Accounts receivable turnover = Net credit sales / Average accounts
receivable = $1,200,000 / $150,000 = 8.0 times. This means the
company converts its receivables into cash 8 times annually,
indicating efficient collection. The gross profit margin is irrelevant to
this calculation.
Question 3
A company reports net income of $50,000, depreciation expense of $10,000, an
increase in accounts receivable of $5,000, and a decrease in accounts payable
of $3,000. Using the indirect method, what is net cash provided by operating
activities?
A. $52,000
B. $68,000
C. $48,000
D. $62,000
Correct Answer: A - $52,000
RATIONALE
Start with net income $50,000, add back non-cash depreciation
$10,000, subtract the increase in accounts receivable $5,000, and
subtract the decrease in accounts payable $3,000: $50,000 + $10,000
$5,000 $3,000 = $52,000. Increases in current assets use cash, and
decreases in current liabilities use cash.
Question 4
A company sells a product for $50 per unit. Variable costs are $30 per unit, and
fixed costs are $100,000. What is the break-even point in units, and what is the
margin of safety in units if actual sales are 8,000 units?
Page 3
, A. 5,000 units break-even; 3,000 units margin of safety
B. 3,333 units break-even; 4,667 units margin of safety
C. 2,000 units break-even; 6,000 units margin of safety
D. 5,000 units break-even; 8,000 units margin of safety
Correct Answer: A - 5,000 units break-even; 3,000 units margin
of safety
RATIONALE
Contribution margin per unit = $50 $30 = $20. Break-even units =
Fixed costs / Contribution margin = $100,000 / $20 = 5,000 units.
Margin of safety = Actual sales Break-even sales = 8,000 5,000 =
3,000 units.
Question 5
A company is considering a project with an initial investment of $200,000 and
annual cash inflows of $60,000 for 5 years. The company's required rate of
return is 10%. What is the net present value (NPV)? (PV annuity factor for
10%, 5 years = 3.7908)
A. $27,448
B. $100,000
C. $227,448
D. $37,908
Correct Answer: A - $27,448
RATIONALE
Present value of inflows = $60,000 × 3.7908 = $227,448. NPV =
$227,448 $200,000 = $27,448. A positive NPV indicates the project
should be accepted.
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