QUIZ

What are the main financial representations of a business?1

1. Financial accounting is an information system that:

a. assigns a share price to every company.
b. tracks and records an organization's business transactions.
c. provides information about the company's executives.
d. predicts the financial survival of a company.

2. The Balance Sheet is so named because:

a. in a balance sheet, cash in is always equal to cash out.
b. it presents a fair and balanced description of the business.
c. it presents the balances of the various asset, liability, and owner's equity accounts.
d. it must balance the need for detail and the need for brevity.

3. Asset or not?
Expected
Acquired at Past
Obtained or future
Asset measurable transaction
controlled? economic
cost? or event?
benefits?
€50,000 cash
raised from
short-term
bank loan
Worldwide
reputation of
the BCC
Group
Employee
signs a
contract to
work for
€2,000 per
month
Merchandise
purchased
for €18,000;
paid €8,000
in cash,
remainder
on credit
Merchandise
purchased
for €5,000,
now past its
sell-by date

1 Exercises 1-8 and 10-15; adapted from Financial Accounting, Online Tutorial, Harvard Business for Educators.

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 4. Liability or not?

The obligation is
The obligation is
a present
The entity has an to transfer an
Liability? obligation that
obligation? economic
exists as a result
resource?
of past events?
€15,000 owed to
trade creditors
€50,000 short-
term debt
(amount owed to
bank)
You, BCC
Group’s owner,
got a parking
ticket for illegally
parking your
family car in the
front of the
company
€25,000 mortgage
payable (amount
owed to bank)

5. On August 30, 2021, BCC Group has total assets of €12,500,000. It has total
liabilities of €10,500,000. What is the amount of BCC owners' equity on
August 30, 2017?

a. €23,000,000
b. €10,500,000
c. €2,000,000
d. none of the above

6. A consultancy mission is sold for €400. The customer paid €150 in cash and
put €250 on a credit account with BCC Group. Which one of the following
choices correctly describes the effect on the balance sheet of the revenue
recognized from this sale?

a. Cash + €400....Retained earnings + €400

b. Cash + €400....Accounts receivable - €250...Retained earnings + €150
c. Cash + €150....Accounts receivable - €150
d. Cash + €150....Accounts receivable + €250....Retained earnings + €400

7. On September 28, your parents, thrilled at BCC Group’s early success, invest
€30,000 in the business and in return receive common stock. How will this
transaction affect BCC’s financial condition?

a. Increase cash €30,000....increase liabilities €30,000

b. Increase cash €30,000....decrease liabilities €30,000
c. Increase cash €30,000....decrease common stock €30,000
d. Increase cash €30,000....increase common stock €30,000

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Key Performance Indicators

8. Choose the expression that best completes this sentence: The total debt to
equity ratio is useful for judging ___________________.

a. the entity's ability to meet obligations that are due in the coming year.
b. the entity's long-term financial viability.
c. how efficiently the entity has used its bank loans.
d. the market value of its equity.

9. Choose the expression that best completes this sentence: The rationale for
the Return on Equity ratio having Equity in the denominator is that _______.

a. higher equity implies a lower income.

b. the lower the shareholders’ total investment to fund the company assets, the higher
their relative remuneration will be.
c. shareholders should invest more in companies to enable them to increase their income
in the future.
d. companies should have no equity.

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 How can we increase our performance?

10. Cost classification

Classify the following types of costs that incur in a car manufacturing company. Decide whether
the costs are product costs (direct material, direct labour or manufacturing overhead) or period
costs (sales and distribution costs, administrative expenses, other period expenses):

Cost type Classification

Wages of production
workers
Costs for a consulting
project
Costs of transport of
cars to retailers
Salary of production
manager
Costs of tires

11. Cost traceability and cost behaviour

a. A consulting company is organized into 2 divisions: industry and

government & public sector. Within each division, the company has
several clients and projects. Decide whether the given cost item represents
a direct cost (= cost can be easily traced) or an indirect cost (= cost has to
be allocated somehow) with respect to the different cost objects:

One consulting project

Company Industry division
in the industry division
Salary of head of
industry division
Travel expenses of
consultants
Energy costs in
corporate
headquarters
Consultants’ salaries

b. An automotive company produces cars in different product variants.

Decide whether the given cost item is a variable or fixed cost with respect
to the number of cars produced.

a. salary of production manager

b. workers’ wages
c. depreciation of production machines
d. costs of electricity
e. material costs for production
f. costs of tires
g. costs of development of new engine

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 12. Solve the following problem: 5,000 units are sold. What is their total cost if
the variable cost per unit is €0.12 and the fixed cost is €950?

a. €1,300
b. €1,550
c. €1,500
d. €1,450

13. Fixed costs are €60,000. Contribution margin per unit is €2. What is the
break-even point?

a. 60,000 units
b. 120,000 units
c. 60,002 units
d. 30,000 units

14. Which of the following statements is false?

a. Based on their total cost-volume relationship, total variable costs change as volume
changes.
b. Total fixed costs do not change as volume changes.
c. Assuming sales price and variable cost per unit remain the same, the contribution per
unit remains the same as volume increases.
d. Total profit is equal to total revenue less the difference between total fixed costs and
total variable costs.

15. Break-Even-Analysis
You just started a company that produces designer handbags which seeks to sell to affluent
customers. The strategy to make the brand known is to have pop-up stands in expensive hotels
and beach clubs at selected islands in the Caribbean, the French Riviera, Mykonos, Dubai and
Shanghai. You therefore hired a number of salespeople who explain the brand and products and
try to convince people to buy.
In your factory in Tuscany, the variable production costs of one handbag have been calculated to
be € 550. This mainly includes material costs, wages and energy costs. In addition, the monthly
fixed costs of the company amount to € 60,000. These costs include mainly rent, depreciation,
distribution and administrative expenses, and other operating expenses.
Assume that sales reps are currently paid a fixed salary (which is part of the distribution costs).
There are 6 sales reps in total. The monthly labour costs amount to € 3,000 per salesperson.
Handbags are sold for € 1,800 each.

a) Calculate the break-even point for Argentibe S.A. in terms of required monthly sales units.
b) Assume that your company currently sells 56 units per month. What is the margin of safety?
c) You decide to change salespeoples’ remuneration: In the future, they will be paid a fixed
amount of € 1,000 (including all labor costs) and a commission of 5% of generated revenues.
How does this affect the break-even point? Is this a good decision?