Question

1. For a journal entry with only two lines, the following entry is valid: Decrease in Revenue, Decrease in Expense.
   1. True                                                                      B) False

2. Can a firm earn 36% risk free
   1. Yes, by paying after the sales discount period
   2. Yes, by paying within the sales discount period
   3. No
   4. Yes, by offering sales discounts

3. Under the principle of lower of cost and net realizable value, when a company has 10 units of inventory A with net realizable value of $50 and a cost of $60, what is the adjustment?
   1. Debit Cost of Goods Sold $500; credit Inventory $500.
   2. Debit Inventory $100; credit Cost of Goods Sold $100.
   3. Debit Inventory $500; credit Cost of Goods Sold $500.
   4. Debit Cost of Goods Sold $100; credit Inventory $100.

4. Which of the following is a sign that a company can quickly turn its receivables into cash?
   1. Both a low receivables turnover ratio and a high average collection period.
   2. A high receivables turnover ratio.
   3. A high average collection period.
   4. A low receivables turnover ratio.

5. The balance sheet of ABC reports total equity of $500,000 and $650,000 at the beginning and end of the year, respectively. The return on equity for the year is 20%. What is ABC's net income for the year?

A) $115,000.                    B) $2,875,000.                 C) $100,000.                    D) $130,000.

Answer 1

1) True, adjustment entry for the term end to transfer expenses to Profit and loss account.

2) C earning risk free cannot be assured until payment is recovered.

3) D as we have to reduce the balance of inventory balance by $100.

4) Answer is A as low receivable turnover ratio results in quick recovery.

5) A because ROE is calculated on Average Capital Employed ( 500000+650000)/2 = 575000.