Problems

1. ABX company manufactures electric products. It sells rechargeable lights for $180/unit. Total
fixed expenses related to rechargeable electric light are $270,000 per month and variable
expenses involved in manufacturing this product are $126 per unit. Monthly sales are 8,000
rechargeable lights.

Required:

a. Compute breakeven point of the company in dollars and units.

b. According to a research conducted by sales department, a 10% reduction in sales price will
result in 25% increase in unit sale. Prepare two income statements in contribution margin
format, one using the current price and one using proposed price (10% below the old sales
price).
c. Compute the number of rechargeable lights to be sold to earn a net operating income of
$189,000 per month

2. ABC company manufactures small batteries to be used in clocks, toys and some other
electronic devices. The company's Income statement is given below:

Required: Prepare Aladin’s new income statement under each of the following conditions:
a. The sales volume increases by 15%.
b. The selling price decreases by 20% per unit, and the sales volume increases by 30%.
c. The selling price increases by 50% per unit, fixed expenses increase by $20,000 and the
sales volume decreases by 5%.
d. Variable expenses increase by 20% per unit, the selling price increases by 12%, and the
sales volume decreases by 10%.
e. Calculate the breakeven point for the company?

MCQ

1. Which of these statements is not one of the financial statements?

income statement

balance sheet

statement of cash flows

statement of owner investments

2. Stakeholders are less likely to include which of the following groups?

owners

employees

community leaders

competitors

3. Identify the correct components of the income statement.

revenues, losses, expenses, and gains

assets, liabilities, and owner’s equity

revenues, expenses, investments by owners, distributions to owners

assets, liabilities, and dividends

4. The balance sheet lists which of the following?

assets, liabilities, and owners’ equity

revenues, expenses, gains, and losses

assets, liabilities, and investments by owners

revenues, expenses, gains, and distributions to owners

5. Assume a company has a $350 credit (not cash) sale. How would the transaction appear if the
business uses accrual accounting?

$350 would show up on the balance sheet as a sale.

$350 would show up on the income statement as a sale.

$350 would show up on the statement of cash flows as a cash outflow.

The transaction would not be reported because the cash was not exchanged.

6. Which of the following statements is true?

Tangible assets lack physical substance.

Tangible assets will be consumed in a year or less.

Tangible assets have physical substance.

Tangible assets will be consumed in over a year.

7. Owners have no personal liability under which legal business structure?

a corporation

a partnership

a sole proprietorship

There is liability in every legal business structure.

8. The accounting equation is expressed as ________.

Assets + Liabilities = Owner’s Equity

Assets – Noncurrent Assets = Liabilities

Assets = Liabilities + Investments by Owners

Assets = Liabilities + Owner’s Equity

9. Which of the following decreases owner’s equity?

investments by owners
losses

gains

short-term loans

10. Exchanges of assets for assets have what effect on equity?

increase equity

no impact on equity

decrease equity

There is no relationship between assets and equity.

11. All of the following increase owner’s equity except for which one?

gains

investments by owners

revenues

acquisitions of assets by incurring liabilities

12. Which of the following is not an element of the financial statements?

future potential sales price of inventory

assets

liabilities

equity

13. Which of the following is the correct order of preparing the financial statements?

income statement, statement of cash flows, balance sheet, statement of owner’s equity

income statement, statement of owner’s equity, balance sheet, statement of cash flows

income statement, balance sheet, statement of owner’s equity, statement of cash flows

income statement, balance sheet, statement of cash flows, statement of owner’s equity

14. The three heading lines of financial statements typically include which of the following?

company, statement title, time period of report

company headquarters, statement title, name of preparer

statement title, time period of report, name of preparer

name of auditor, statement title, fiscal year end

15. Which financial statement shows the financial performance of the company on a cash basis?

balance sheet

statement of owner’s equity

statement of cash flows

income statement

16. Which financial statement shows the financial position of the company?

balance sheet

statement of owner’s equity

statement of cash flows

income statement

17. Working capital is an indication of the firm’s ________.

asset utilization

amount of noncurrent liabilities

liquidity

amount of noncurrent assets

18. Which of the following statements is false?

Noncash activities should be reported in accrual basis financial statements.

Net cash flow from operating activities relates to normal business operations.

Net income usually equals net cash flow from operating activities.

The statement of cash flows is an essential part of the basic financial statements.

19. Which of these transactions would not be part of the cash flows from the operating activities
section of the statement of cash flows?

credit purchase of inventory

sales of product, for cash

cash paid for purchase of equipment

salary payments to employees

20. Which is the proper order of the sections of the statement of cash flows?

financing, investing, operating

operating, investing, financing

investing, operating, financing

operating, financing, investing

21. Which of these transactions would be part of the financing section?

inventory purchased for cash

sales of product, for cash

cash paid for purchase of equipment

dividend payments to shareholders, paid in cash

22. Which of these transactions would be part of the operating section?

land purchased, with note payable

sales of product, for cash

cash paid for purchase of equipment

dividend payments to shareholders, paid in cash

23. Which of these transactions would be part of the investing section?

land purchased, with note payable

sales of product, for cash

cash paid for purchase of equipment

dividend payments to shareholders, paid in cash

24. What is the effect on cash when current noncash operating assets increase?

Cash increases by the same amount.

Cash decreases by the same amount.

Cash decreases by twice as much.

Cash does not change.

25. What is the effect on cash when current liabilities increase?

Cash increases by the same amount.

Cash decreases by the same amount.

Cash decreases by twice as much.

Cash does not change.

26. What is the effect on cash when current noncash operating assets decrease?

Cash increases by the same amount.

Cash decreases by the same amount.

Cash decreases by twice as much.

Cash does not change.

27. What is the effect on cash when current liabilities decrease?

Cash increases by the same amount.

Cash decreases by the same amount.

Cash decreases by twice as much.

Cash does not change.

28. Which of the following would trigger a subtraction in the indirect operating section?

gain on sale of investments

depreciation expense

decrease in accounts receivable

decrease in bonds payable

29. Which of the following represents a source of cash in the investing section?

sale of investments

depreciation expense

decrease in accounts receivable

decrease in bonds payable

30. Which of the following would be included in the financing section?

loss on sale of investments

depreciation expense

increase in notes receivable

decrease in notes payable

31. If beginning cash equaled $10,000 and ending cash equals $19,000, which is true?

Operating cash flow 9,000; Investing cash flow (3,500); Financing cash flow (2,500)

Operating cash flow 4,500; Investing cash flow 9,000; Financing cash flow (4,500)

Operating cash flow 2,000; Investing cash flow (13,000); Financing cash flow 2,000

none of the above