Hummel Inc

question 10

Multiple Choice

Hummel Inc. and Nadia Co. have experienced identical economic performances for the last several years of growing sales. Each uses identical accounting measurement rules except that Hummel uses the allowance method and Nadia uses the direct write-off method of accounting for bad debts. Both companies have experienced a gradual increase in uncollectible accounts. Which one of the following statements is true in the first year of operations for both companies?

• A) Hummel 's net income is less than Nadia's net income.
• B) Hummel 's net income is greater than Nadia's net income.
• C) Hummel 's current ratio is greater than Nadia's current ratio.
• D) Hummel will appear more solvent than Nadia will.

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Definitions:

Absorption Costing

An accounting tactic where the entirety of manufacturing costs—direct materials, direct labor, and manufacturing overhead, both variable and fixed—are included in calculating a product’s cost.

Unit Product Cost

The total expense incurred to produce and deliver one unit of a product, including both direct and indirect costs.

Variable Costing

An accounting technique that entails including only the variable costs of production, like direct materials, labor directly involved in manufacturing, and variable factory overhead, into the pricing of products.

Unit Product Cost

The total cost (fixed and variable) incurred to produce, store, and sell one unit of a product.