EXAM II PRACTICE QUESTIONS

DISCLAIMER - PLEASE READ:

These practice exam problems will serve as an excellent review for the actual exam. These questions should
give students a good idea of the format and rigor of problems to be encountered on the exams. The practice
exam questions; however, are NOT intended to be comprehensive in their coverage of the topics that
may be included on the exam. Simply learning the concepts reflected in these sample questions will
NOT be adequate for complete exam preparation. In order to be successful on the exam, students
must be comfortable with ALL concepts and problems covered in the online lectures.

1. Prices have been rising during recent years. Companies Able and Baker are identical in operations except that
Able accounts for its inventory using FIFO and Baker accounts for its inventory using LIFO. Regarding only
the effects of this difference in inventory choice, which of the following statements is true?

A. the inventory amount on Able’s balance sheet less closely approximates current costs than does the
inventory on Baker’s balance sheet
B. the cost of goods sold for Able more closely approximates current costs than does the cost of goods
sold for Baker
C. the total assets on Able’s balance sheet are more than Baker’s total assets
D. Baker’s net income is greater than Able’s net income
E. both (a) and (c) are correct

2. During May, XYZ Company paid its employees $36,000 cash as salaries. The salaries payable account at
May 1 had a balance of $4,000 while the salaries payable account at May 31 had a balance of $8,000. The
amount of salaries expense shown on the income statement for May was equal to:

A. $36,000
B. $44,000
C. $32,000
D. $28,000
E. $40,000

3. On January 1, 2019, Tremen Company acquired 40% of the outstanding stock of Delany Company. Tremen
paid $3,000,000 for the investment. Delany reported net income of $1,000,000 for 2019, and paid $150,000
quarterly dividends to its shareholders. At December 31, 2019, the balance in the investment in Delany
Company account would be equal to:

A. $3,250,000
B. $3,080,000
C. $3,160,000
D. $3,400,000
E. $3,340,000
4. XYZ Company received payment from a customer on a $1,000 balance that had been written off as
uncollectible six months ago. The proper journal entry to record the recovery would be:

A. Cash ........................................................... 1,000

Allowance for Doubtful Accounts ................ 1,000
B. Cash ........................................................... 1,000
Bad Debt Expense ........................................ 1,000
C. Allowance for Doubtful Accounts ............. 1,000
Bad Debt Expense ........................................ 1,000
D. Allowance for Doubtful Accounts ............. 1,000
Accounts Receivable ..................................... 1,000
E. Bad Debt Expense ....................................... 1,000
Accounts Receivable ..................................... 1,000

5. Chen Company’s financial statements show a net income of $184,000. The following items also appear
on Chen’s financial statements:

depreciation expense ……………… $40,000

accounts receivable decrease ……... 12,000
inventory increase ………………… 28,000
accounts payable increase ………… 8,000

Using the indirect method, Chen’s net cash flow from operating activities is equal to:

A. $232,000
B. $136,000
C. $216,000
D. $175,000
E. $272,000

6. During 2020, ABC Company reported ending inventory of $20,000; sales revenue of $90,000; and a gross
profit of $40,000. The cost of goods available for sale during 2020 totaled:

A. $110,000
B. $ 70,000
C. $ 60,000
D. $ 50,000
E. $ 40,000

7. In a statement of cash flows, payments of dividends to stockholders are classified as:

A. operating activities
B. investing activities
C. financing activities
D. none of the above as dividends are reported in the income statement, not the statement of
cash flows
E. both (a) and (c) are correct
 8. The Red River Company had credit sales of $800,000 during 2022. The accounts receivable balance at
the beginning and end of 2020 were $40,000 and $140,000 respectively. What was the amount of cash
collected from customers during the year?

A. $700,000
B. $800,000
C. $840,000
D. $850,000
E. $900,000

9. On January 1, 2019, Nana Company paid $100,000 to acquire 8,000 shares of Papa Company’s common
stock. The 8,000 shares represent 10% of the total outstanding stock of Papa Company. Papa Company
reported net income of $52,000 for 2019. The fair value of the Papa stock on December 31, 2019 was
$45 per share. What amount will be reported in the December 31, 2019 balance sheet of Nana Company
for its investment in Papa Company?

A. $284,400
B. $300,000
C. $315,600
D. $360,000
E. $405,800

10. During an inflationary period, which inventory costing alternative will result in the lowest ending inventory
balance?

A. FIFO
B. LIFO
C. weighted average
D. all inventory costing alternatives will result in the same net income
E. none of the above are correct

11. Jackson Company had the following account balances:

purchases …………………. $40,000

freight-in ………………….. 500
purchase returns ………….. 1,200
beginning inventory ………. 20,000
ending inventory ………….. 15,000

Jackson Company would report cost of goods sold of:

A. $43,300
B. $43,800
C. $45,000
D. $44,300
E. $48,500
12. The cost of goods sold during the year was $90,000. Additional information is provided below:

January 1 December 31
Accounts payable $15,000 $10,000
Inventory $20,000 $60,000

What was the amount of cash paid to suppliers for purchases of inventory?

A. $ 75,000
B. $ 85,000
C. $ 95,000
D. $125,000
E. $135,000

13. On August 15, 2020, Hobson Company paid $980,000 to purchase 12% of the outstanding stock of Jacob
Company. In its 2020 income statement, Hobson reported an unrealized loss of $13,000 related to this
investment. The market value of the investment in Jacob Company at December 31, 2021 was $926,000.
The unrealized loss that Hobson should include in its 2021 income statement related to its investment in
Jacob Company would be equal to:

A. $41,000
B. $28,000
C. $0
D. $13,000
E. $54,000

14. XYZ Company purchased inventory for $3,450 on account. The credit terms were 4/15, n/30. XYZ returned
merchandise in the amount of $600 and paid the balance due within the discount period. How much cash did
XYZ Company pay?

A. $2,800
B. $2,736
C. $3,450
D. $2,739
E. $2,850

15. ZZ, Inc. reported accounts receivable of $60,000 at January 1, 2024 and accounts receivable of $80,000 at
December 31, 2024. During 2024, ZZ, Inc. reported sales revenue of $400,000 and net income of $100,000.
The accounts receivable turnover for 2024 was equal to:

A. 5.00
B. 1.43
C. 5.71
D. 1.25
E. 6.67
 Use the following information for questions 16 – 18.

Warren Clothing Store sells jeans. During January 2023, its inventory records of one brand of
designer jeans were as follows:

Units Unit Cost Total Cost

January 1 Beginning inventory 100 pairs $22 $2,200
January 6 Purchase 40 pairs $25 $1,000
January 10 Sale 30 pairs
January 15 Purchase 70 pairs $30 $2,100
January 20 Sale 100 pairs
January 25 Purchase 40 pairs $35 $1,400

16. Under FIFO, the cost of goods sold for January would be equal to:

A. $3,750
B. $2,700
C. $3,250
D. $2,950
E. $4,000

17. Under LIFO, the ending inventory at January 31 would be equal to:

A. $3,750
B. $2,700
C. $3,250
D. $2,950
E. $4,000

18. Assume the company sells each pair of jeans for $40. Under weighted average method, the gross profit for
January would be equal to:

A. $1,716
B. $1,984
C. $3,216
D. $3,484
E. $5,200

19. The account allowance for doubtful accounts is classified as a(n):

A. expense
B. contra revenue account
C. contra equity account
D. contra asset account
E. none of the above are correct
 Use the following information for questions 20 – 21.

Betty DeRose, Inc. prepared the following aging schedule for its accounts receivable at
December 31, 2023:

% estimated to
Category Amount be uncollectible
not past due $100,000 1%
1 – 30 days past due 50,000 3%
31 – 60 days past due 20,000 5%
61 – 90 days past due 10,000 20%
over 90 days past due 8,000 40%
total accounts receivable $188,000

The balance in the allowance for doubtful accounts was a credit balance of $500 before
the adjustment for bad debt expense.

20. Betty’s 2023 bad debt expense is equal to:

A. $8,200
B. $8,500
C. $8,700
D. $9,000
E. $9,200

21. The net realizable value at December 31, 2023 is:

A. $179,300
B. $179,800
C. $179,000
D. $179,500
E. $178,800

22. Hawk Corporation purchased 10,000 shares (8%) of Diamond Corporation stock in 2028 for $50 per share.
Diamond's market value was $60 per share on December 31, 2028 and $65 on December 31, 2029. During
2030, Hawk sold all of its Diamond stock for $70 per share. In its 2030 income statement, Hawk would
report:

A. a realized gain of $50,000

B. a realized gain of $100,000
C. a realized gain of $150,000
D. a realized gain of $200,000
E. a realized gain of $300,000
23. Baxter Company reported the following information at December 10,
:

Accounts Receivable ..……………………… $ 34,600

Allowance for Doubtful Accounts …………. 3,100

On December 11, 2019, Baxter Company wrote-off an account receivable of $2,000 that had been
determined to be uncollectible. The net realizable value after the write-off is equal to:

A. $29,500
B. $33,500
C. $31,500
D. $35,500
E. $37,700

24. During a deflationary period, which inventory costing alternative will result in a firm paying the lowest
income taxes?

A. FIFO
B. LIFO
C. weighted average
D. all inventory costing alternatives will result in the same income tax expense
E. none of the above are correct

25. A negative net cash flow from operating activities indicates that:

A. the company is selling its assets for more than it cost to purchase them which is a good sign for
cash flows
B. the company is paying more money to owners and creditors than it is receiving from them
C. the company is re-investing in itself in order to grow and expand
D. the company had a net loss using the cash basis of accounting
E. the company is selling off its long-term assets which is not a good sign for financial health

26. In the statement of cash flows, inflows and outflows of cash from buying and selling investments are
classified as:

A. operating activities
B. investing activities
C. financing activities
D. either (a) or (b) depending on the amount spent
E. either (b) or (c) depending on the amount spent

27. XYZ Company wrote off as uncollectible an account receivable from a bankrupt customer. This action will:

A. have no effect on total current assets

B. reduce total current assets
C. reduce net income for the period
D. reduce the amount of owner’s equity
E. both (c) and (d) are correct
28. Jamestown Manufacturing produces farm machinery. Its 2022 statement of cash flows included the
following items, among others:

Dividends paid $ 23,000

Purchases of stock of other companies 14,500
Purchases of equipment 75,000
Depreciation on equipment 22,500
Sale of common stock 124,250
Paid off long term note payable 45,000
Net income 36,234

What is the amount of net cash flows from financing activities for 2022?

A. $41,750
B. $92,484
C. $79,250
D. $56,250
E. $68,580

29. An adjustment at the end of an accounting period for uncollectible accounts receivable is necessary under
GAAP to comply with the:

A. historical cost concept

B. matching concept
C. consistency principle
D. realization principle
E. none of the above are correct

30. During 2024, ABC Company had cost of goods sold of $720,000 and an inventory turnover ratio of 2.5. ABC
had inventory of $260,000 at January 1, 2024. The inventory at December 31, 2024 was equal to:

A. $288,000
B. $650,000
C. $274,000
D. $460,000
E. $316,000

31. Using the indirect method, if equipment is sold at a gain, the:

A. sale proceeds received are deducted in the operating activities section

B. sale proceeds received are added in the operating activities section
C. amount of the gain is added in the operating activities section
D. amount of the gain is deducted in the operating activities section
E. more than one of the above would be correct
 Use the following information for questions 32 – 33.

Jefferson Company had the following account balances at December 31, 2022 before the adjustment
for bad debt expense:

accounts receivable ………………… $ 100,000

allowance for doubtful accounts …… 2,000 (credit balance)

During 2022, Jefferson Company reported net credit sales of $1,000,000. Jefferson Company uses
the net credit sales method of estimating bad debts, and has estimated bad debt expense to be 2%
of net credit sales.

32. The amount of bad debt expense recorded by Jefferson Company for 2022 is equal to:

A. $20,000
B. $18,000
C. $ 2,000
D. $22,000
E. $24,000

33. The net realizable value of the accounts receivable at December 31, 2022 would be equal to:

A. $80,000
B. $82,000
C. $98,000
D. $78,000
E. $76,000

34. During inflationary time periods, which of the following inventory valuation methods would result in the least
working capital, assuming all other factors remain constant?

A. FIFO
B. LIFO
C. weighted average
D. all inventory costing alternatives will result in the same working capital
E. none of the above are correct

35. If Pop Company owns 15% of the common stock of Son Company, then Pop Company typically:

A. would record 15% of the net income of Son Company as investment revenue each year
B. would record dividends received from Son Company as dividend revenue
C. would increase its investment account by 15% of Son Company income each year
D. more than one of the above is correct
E. none of the above are correct
36. At the beginning of the year, Jones Company had a $50,000 balance in accounts receivable. During the year,
total credit sales amounted to $210,000 and total cash collections from credit customers were $199,000. In
addition, $3,000 in uncollectible accounts receivable were written-off. The balance in accounts receivable
at the end of the year was equal to:

A. $61,000
B. $36,000
C. $58,000
D. $64,000
E. $52,000

For questions 37 – 43, no choices are given. Simply write your answer on the lines provided.

Use the following information for questions 37 – 38.

Jackson Company reported the following information for 2027:

Sales revenue $427,000

Freight-in 11,700
Purchase returns 16,500
Salaries expense 72,000
Beginning inventory 55,000
Purchases 329,800
Freight-out 10,900
Sales returns & allowances 15,000
Purchase discounts ?
Inventory turnover ratio 4.12
Gross margin rate 30%

37. Calculate the amount of purchase discounts reported by Jackson Company during 2027

$ ____________

38. Calculate the amount of net income reported by Jackson Company during 2027

$ ____________
 Use the following information for questions 39 – 41.

The following selected account balances were taken from XYZ Company's general ledger at January 1, 2025
and December 31, 2025:

January 1, 2025 December 31, 2025

Accounts payable 41,000 28,000
Accounts receivable 75,000 60,000
Income taxes payable ? 12,000
Inventory 81,000 92,000
Land 57,000 39,000
Unearned revenue 12,000 19,000

The following information was taken from XYZ Company's 2025 income statement:

Sales revenue 970,000

Cost of goods sold ?
Other expenses ?
Depreciation expense 60,000
Gain on sale of land 16,000
Income tax expense ?
Net income 66,000

XYZ Company's 2025 statement of cash flows included cash paid to purchase inventory of $428,000; cash
paid to purchase land of $63,000; cash paid for income taxes of $28,000; and a net cash inflow from operating
activities totaling $104,000.

39. Calculate the amount of cash collections from customers reported in XYZ Company’s 2025
statement of cash flows
$ ____________

40. Calculate the amount of cost of goods sold reported in XYZ Company’s 2025 income statement

$ ____________

41. Calculate the amount of cash XYZ Company received from selling land during 2025

$ ____________
 Use the following information for questions 42 – 43.

At December 31, 2022, XYZ Company had $450,000 of accounts receivable. Total credit sales for 2022 were
$840,000. At January 1, 2022, the allowance for doubtful accounts had a credit balance of $850. During
2022, accounts receivable totaling $710 were written-off as being uncollectible.

42. Assume that XYZ Company uses the aging method of estimating bad debt expense. The following aging
schedule was prepared at December 31, 2022:

% estimated to be
Category Amount uncollectible
Current $ 280,000 3%
1 – 45 days past due 80,000 4%
46 – 120 days past due 60,000 9%
Over 120 days past due 30,000 20%

Calculate the bad debt expense reported by XYZ Company for 2022 $ ____________

43. Assume that XYZ Company uses the net credit sales method in estimating bad debt expense and bad debt
expense is estimated to be 2% of net credit sales.

Calculate the net realizable value of XYZ Company’s accounts receivable

at December 31, 2022 $ ____________