A Firm Sells Products Covered by a Three-Year Warranty

question 66

Multiple Choice

A firm sells products covered by a three-year warranty.From the past experience of the other firms in the industry,the firm expects to incur warranty costs equal to 1% of sales.Firm sales were $40,000 and $50,000 in 2013 and 2014 respectively.In 2014,the firm spent $200 to repair goods sold in 2013,and $300 to repair goods sold in 2014.The firm received no warranty servicing demands from customers in 2013,the firm's first year of operations.What is the balance in the warranty liability account on January 1,2014?

• A) $400
• B) $500
• C) $300
• D) $0

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Definitions:

Total Asset Turnover

A measure of how efficiently assets are employed by a company to generate revenue from sales.

Equity Multiplier

A financial ratio that measures a company's total assets financed by its shareholders' equity, indicating leverage level.

Return On Equity

A measure of a corporation's profitability, indicating how much profit a company generates with the money shareholders have invested.

Debt-Equity Ratio

A measure that indicates the balance between equity contributed by shareholders and debt employed to finance company assets.