1. Which is not one of the three forms of business organization?

A. Sole proprietorship.

B. Creditorship.

C. Partnership.

D. Corporation.

Correct!

2. Which is an advantage of corporations relative to partnerships and sole proprietorships?A.

B. Harder to transfer ownership.

C. Reduced legal liability for investors.

D. Most common form of organization.

Ownership is easier to transfer in a corporation than in a partnership or proprietorship.

3. Which statement about users of accounting information is incorrect?A.

B. Taxing authorities are considered external users.

C. Present creditors are considered external users.

D. Regulatory authorities are considered internal users.

Businesses or individuals to whom a firm owes money are considered external users of account information.

4. Which of the following did not result from the Sarbanes-Oxley Act?

A.

B. Penalties for fraudulent activity increased.

C. Independence of auditors increased.

D. Tax rates on corporations increased.

Correct!

5. Which is not one of the three primary business activities?

A.

B. Operating.

C. Advertising.

D. Investing.

Correct!

6. Which of the following is an example of a financing activity?A.

B. Selling goods on account.

C. Buying delivery equipment.

D. Buying inventory.

This is an operating activity.

7. Net income will result during a time period when:

A.

B. assets exceed revenues.

C. expenses exceed revenues.

D. revenues exceed expenses.

Correct!

8. The financial statements for Harold Corporation contained the following information.

What was Harold's net income?

A.

B. $15,000.

C. $65,000.

D. $45,000.

Correct!

9. What section of a cash flow statement indicates the cash spent on new equipment during the past accounting period?

A.

B. The operating section.

C. The financing section.

D. The cash flow statement does not give this information.

Correct!

10. Which statement presents information as of a specific point in time?A.

B. Balance sheet.

C. Statement of cash flows.

D. Retained earnings statement.

This statement covers a period of time.

11. Which financial statement reports assets, liabilities, and stockholders' equity?

A.

B. Retained earnings statement.

C. Balance sheet.

D. Statement of cash flows.

Correct!

12. Stockholders' equity represents:

A.

B. claims of employees.

C. The difference between revenues and expenses.

D. claims of owners.

Correct!

13. As of December 31, 2007, Stoneland Corporation has assets of $3,500 and stockholders' equity of $2,000. What are the liabilities for Stoneland Corporation as of December 31, 2007?

A.

B. $1,000.

C. $2,500.

D. $2,000.

Correct!

14. The segment of a corporation's annual report that describes the corporation's accounting methods is the:A.

B. management discussion and analysis.

C. auditor's report.

D. income statement.

The description of a firm's accounting methods is found in the notes to the financial statements, not in the auditor's report.

15. The segment of the annual report that presents an opinion regarding the fairness of the presentation of the financial position and results of operations is/are the:

A.

B. auditor's opinion.

C. balance sheet.

D. comparative statements.

Correct!1. Sole proprietorships and partnerships are taxable entities.

A.

B. False

While sole proprietorships and partnerships must file information returns with the IRS, their income is taxed on the individual's tax return (Forms of Business Organization).

2. Internal users of accounting information include a company's investors (or stockholders).

A.

B. False

Since stockholders are not normally officers, directors, or managers of the company they are considered external users of accounting information (Internal Users & External Users).

3. Interest expense would be classified under operating activities.A.

B. False

Since interest expense is the cost of obtaining operating capital it is properly classified as an expense under operating activities (Operating Activities).

4. The balance sheet reports assets and claims to those assets at a specific point in time.

A.

B. False

Assets and claims to those assets are reported on the balance sheet as of a specific point in time (Balance Sheet).

5. The notes to the financial statements are not required.A.

B. False

The notes to financial reports are required. The notes clarify and expand the numerical information contained in the financial statements (Notes to the Financial Statements).

6. The Statement of Cash Flows reports only cash flows from operations.A.

B. False

The Statement of Cash Flows is divided into cash flows from operating activities, cash flows from investing activities and cash flows from financing activities (Statement of Cash Flows).

7. Only Certified Public Accountants may perform audits.

A.

B. False

Only persons who obtain the CPA designation may audit a company's financial statements (Auditor's Report).

8. Easy transfer of ownership is a characteristic of which form of business organization?

A.

B. Partnership

C. Corporation

D. All of the above

Correct! The ownership of corporations through shares eases the transfer of ownership through sale, gift, or trading of the stock (Forms of Business Organization).

9. In which forms of business organization are the owners personally liable for all the debts of the business?A.

B. Sole proprietorship and partnerships

C. Partnership and corporation

D. All of them

Only sole proprietorships and partnerships introduce the risk of personal liability for the debts of the organization. The liability of a corporate shareholder is usually limited to his or her investment (Forms of Business Organization).

10. Internal users want answers to which of the following questions?

A.

B. Which product line is most profitable?

C. Is cash sufficient to pay dividends to stockholders?

D. All of the above.

Correct! Many items are important to internal users of accounting data. The requirement for valid information is not limited to product price, product profitability or availability of cash.

11. Which of the following is not an external user of accounting data?

A.

B. Customers

C. Economic planners

D. Finance directors

Correct! Since the finance director is within the organization and has access to information not released to the public, he or she is an internal user of accounting data (Internal Users & External Users).

12. Paying interest expense and receiving interest revenue are examples of:A.

B. Financing activities.

C. Investing activities.

D. Delivery activities.

Interest expense and interest revenue are included in operating activities. Delivery activities are a subset of operating activities (Operating Activities).

13. The payment of dividends is an example of a(n):A.

B. Financing activity.

C. Investing activity.

D. Delivery activity.

Dividends are the return on investment to stockholders and are classified as a financing activity, not a delivery activity (Financing Activities).

14. Cost of goods sold is classified as what type account?A.

B. Expense

C. Liability

D. Revenue

Revenue is the income stream from the sale of goods or services. Cost of goods sold is an expense of producing or providing those goods (Income Statement).

15. Which of the following would not appear on the income statement?

A.

B. Interest expense

C. Net income

D. Dividends paid

Correct! Dividends paid is an item shown on the retained earnings statement and the statement of cash flows because it relates to ownership rather than operations (Retained Earnings Statement).

16. Which of the following would not appear on the retained earnings statement?A.

B. Dividends

C. Service revenue

D. Net income

Net income is shown on the retained earnings statement as an addition (Retained Earnings Statement).

17. The financial statements are usually prepared in which of the following sequences?

A.

B. Balance sheet, retained earnings statement, statement of cash flows, and income statement

C. Balance sheet, statement of cash flows, income statement and retained earnings statement

D. Income statement, retained earnings statement, balance sheet, and statement of cash flows

Correct! This is the correct order. The financial statements must be prepared in the following order: income statement, retained earnings statement, balance sheet and statement of cash flows. This is because net income (from the income statement) is a required input for the retained earnings statement, ending retained earnings (from the retained earnings statement) is a required input for the balance sheet and the ending cash balance (from the balance sheet) is a required input for the statement of cash flows (Interrelationships of Statements).

18. Saira's Maid Service began the year with total assets of $120,000 and stockholders' equity of $40,000. During the year the company earned $90,000 in net income and paid $20,000 in dividends. Total assets at the end of the year were $215,000. Stockholders' equity at the end of the year was:A.

B. $110,000.

C. $150,000.

D. $135,000.

The sum of the beginning balance of stockholders' equity ($40,000) and net income ($90,000) must be reduced by the dividends paid ($20,000) during the period (Retained Earnings Statement).

19. Saira's Maid Service began the year with total assets of $120,000 and stockholders' equity of $40,000. During the year the company earned $90,000 in net income and paid $20,000 in dividends. Total assets at the end of the year were $215,000. Total liabilities at the end of the year were:

A.

B. $90,000.

C. $110,000.

D. $105,000.

Correct! This is the correct answer. The ending balance of stockholders' equity is the sum of the beginning balance of stockholders' equity ($40,000) and net income ($90,000) less the dividends paid ($20,000) during the period or $110,000. With the formula of Assets = Liabilities + Stockholders' Equity and known values of $215,000 = Unknown + $110,000, the liabilities must be $105,000 (Balance Sheet).

20. When the auditor is satisfied that the financial statements are presented in accordance with generally accepted accounting principles, a(n):A.

B. disclaimer of opinion is expressed.

C. unqualified opinion is expressed.

D. adverse opinion is expressed.

An adverse opinion is utilized by the auditor when he or she believes the financial statements are so materially misstated or misleading that they do not represent the company or comply with generally accepted accounting principles (Auditor's Report).

21. The ending retained earnings balance appears on:

A.

B. The balance sheet only.

C. The income statement and the retained earnings statement.

D. Both the retained earnings statement and the balance sheet.

Correct! This is the correct answer. The ending retained earnings balance is reported on both the retained earnings statement and the balance sheet (Interrelationships of Statements).

22. The issuance of common stock is reported on the statement of cash flows as a(n):A.

B. Investing activity.

C. Operating activity.

D. Marketing Activity.

On the statement of cash flows the issuance of common stock is reported as a financing activity (Statement of Cash Flows).

1. In a classified balance sheet, assets are usually classified as:

A.

B. current assets; long-term investments; property, plant, and equipment; and common stock.

C. current assets; long-term investments; tangible assets; and intangible assets.

D. current assets; long-term investments; property, plant, and equipment; and intangible assets.

Correct!

2. Current assets are listed:A.

B. by importance.

C. by longevity.

D. alphabetically.

Current assets should be listed in order of liquidity, or in order of how quickly they are expected to be converted into cash.

3. The correct order of presentation is a classified balance sheet for the following current assets is:A.

B. cash, inventories, accounts receivable, prepaid insurance.

C. cash, accounts receivable, inventories, prepaid insurance.

D. inventories, cash, accounts receivable, prepaid insurance.

Current assets are listed in order of their liquidity; cash, accounts receivable, inventories, and then prepaid insurance.

4. A company has purchased a tract of land. It expects to build a production plant on the land in approximately 5 years. During the 5 years before construction the land will be idle. The land should be reported as:A.

B. land expense.

C. a long-term investment.

D. an intangible asset.

Land or a building which is currently not in operation is considered to be a long-term investment.

5. Which is an indicator of profitability?A.

B. Earnings per share.

C. Debt to total assets ratio.

D. Free cash flow.

Free cash flow is an indicator of the cash-generating capability of a company.

6. For 2010, Stoneland Corporation reported net income, $24,000; net sales, $400,000; and average shares outstanding, 6,000. There were no preferred stock dividends. What was the 2010 earnings per share?A.

B. $0.06

C. $16.67

D. $66.67

Earnings per share is computed by dividing net income (less preferred dividends) by the average shares outstanding. For Stoneland Corporation, 2007 earnings per share is $24,000/6,000 or $4.00.

7. The balance in retained earnings is not affected by:A.

B. net loss.

C. issuance of common stock.

D. dividends.

Dividends decrease retained earnings.

8. Which of these measures is an evaluation of a company's ability to pay current liabilities?A.

B. Current ratio.

C. Both a) and b).

D. None of the above.

Since answer b is correct, this answer cannot be correct.

9. The following ratios are available for Leer Inc. and Stable Inc.

Compared to Stable Inc., Leer Inc. has:

A.

B. lower liquidity, higher solvency, and higher profitablility.

C. higher liquidity, lower solvency, and higher profitability.

D. higher liquidity and lower solvency, but profitability cannot be compared based on information provided.

Correct!

10. Compaines can use free cash flow to:

A.

B. Acquire property, plant, and equipment.

C. Pay off debts.

D. All of the above.

Correct!

11. Generally accepted accounting principles are:A.

B. usually established by the Internal Revenue Service.

C. the guidelines used to resolve ethical dilemmas.

D. fundamental truths that can be derived from the laws of nature.

Unlike laws of nature, such as those in physics and chemistry, the fundamental principles used in accounting are created by people and can evolve over time.

12. What organization issues U.S. accounting standards?A.

B. International Accounting Standards Committee.

C. International Auditing Standards Committee.

D. None of the above.

This answer is incorrect since answer a is the correct response.

13. What is the primary criterion by which accounting information can be judged?A.

B. Predictive value.

C. Usefulness for decision making.

D. Comparability.

Comparability, or the use of the same accounting principles by two firms in the same period, helps make accounting information more useful, but it is not the primary criterion by which accounting information is judged.

14. Verifiability is an ingredient of: Reliability Relevance A.

B. No No

C. Yes No

D. No Yes

Verifiability is an element of reliability, but not relevance.

15. What accounting constraint refers to the tendency of accountants to resolve uncertainty in a way least likely to overstate assets and net income?A.

B. Materiality.

C. Conservatism.

D. Consistency.

Consistency relates to the usage of the same accounting principles by the same firm over a period of time.

1. In a classified balance sheet, assets are usually classified as:

A.

B. current assets; long-term investments; property, plant, and equipment; and common stock.

C. current assets; long-term investments; tangible assets; and intangible assets.

D. current assets; long-term investments; property, plant, and equipment; and intangible assets.

Correct!

2. Current assets are listed:A.

B. by importance.

C. by longevity.

D. alphabetically.

Current assets should be listed in order of liquidity, or in order of how quickly they are expected to be converted into cash.

3. The correct order of presentation is a classified balance sheet for the following current assets is:A.

B. cash, inventories, accounts receivable, prepaid insurance.

C. cash, accounts receivable, inventories, prepaid insurance.

D. inventories, cash, accounts receivable, prepaid insurance.

Current assets are listed in order of their liquidity; cash, accounts receivable, inventories, and then prepaid insurance.

4. A company has purchased a tract of land. It expects to build a production plant on the land in approximately 5 years. During the 5 years before construction the land will be idle. The land should be reported as:A.

B. land expense.

C. a long-term investment.

D. an intangible asset.

Land or a building which is currently not in operation is considered to be a long-term investment.

5. Which is an indicator of profitability?A.

B. Earnings per share.

C. Debt to total assets ratio.

D. Free cash flow.

Free cash flow is an indicator of the cash-generating capability of a company.

6. For 2010, Stoneland Corporation reported net income, $24,000; net sales, $400,000; and average shares outstanding, 6,000. There were no preferred stock dividends. What was the 2010 earnings per share?A.

B. $0.06

C. $16.67

D. $66.67

Earnings per share is computed by dividing net income (less preferred dividends) by the average shares outstanding. For Stoneland Corporation, 2007 earnings per share is $24,000/6,000 or $4.00.

7. The balance in retained earnings is not affected by:A.

B. net loss.

C. issuance of common stock.

D. dividends.

Dividends decrease retained earnings.

8. Which of these measures is an evaluation of a company's ability to pay current liabilities?A.

B. Current ratio.

C. Both a) and b).

D. None of the above.

Since answer b is correct, this answer cannot be correct.

9. The following ratios are available for Leer Inc. and Stable Inc.

Compared to Stable Inc., Leer Inc. has:

A.

B. lower liquidity, higher solvency, and higher profitablility.

C. higher liquidity, lower solvency, and higher profitability.

D. higher liquidity and lower solvency, but profitability cannot be compared based on information provided.

Correct!

10. Compaines can use free cash flow to:

A.

B. Acquire property, plant, and equipment.

C. Pay off debts.

D. All of the above.

Correct!

11. Generally accepted accounting principles are:A.

B. usually established by the Internal Revenue Service.

C. the guidelines used to resolve ethical dilemmas.

D. fundamental truths that can be derived from the laws of nature.

Unlike laws of nature, such as those in physics and chemistry, the fundamental principles used in accounting are created by people and can evolve over time.

12. What organization issues U.S. accounting standards?A.

B. International Accounting Standards Committee.

C. International Auditing Standards Committee.

D. None of the above.

This answer is incorrect since answer a is the correct response.

13. What is the primary criterion by which accounting information can be judged?A.

B. Predictive value.

C. Usefulness for decision making.

D. Comparability.

Comparability, or the use of the same accounting principles by two firms in the same period, helps make accounting information more useful, but it is not the primary criterion by which accounting information is judged.

14. Verifiability is an ingredient of: Reliability Relevance A.

B. No No

C. Yes No

D. No Yes

Verifiability is an element of reliability, but not relevance.

15. What accounting constraint refers to the tendency of accountants to resolve uncertainty in a way least likely to overstate assets and net income?A.

B. Materiality.

C. Conservatism.

D. Consistency.

Consistency relates to the usage of the same accounting principles by the same firm over a period of time.

1. Current assets are assets that are expected to be converted to cash or used up by the business within one year or the normal operating cycle, whichever is shorter.

A.

B. False

Current assets are expected to be converted to cash or consumed within the next year, or the operating cycle, whichever is longer (Current Assets).

2. The current ratio is a liquidity ratio that is computed as current assets divided by current liabilities.A.

B. False

One liquidity ratio is the current ratio, computed as current assets divided by current liabilities (Liquidity).

3. Conservatism in accounting means that small monetary items can be ignored.

A.

B. False

Materiality suggests that items that are not significant enough to make a difference to decision makers and users can be ignored (Materiality).

4. Comparability is the qualitative characteristic of accounting information that allows a statement reader to compare a company's performance from one year to the next.

A.

B. False

Comparability allows you to compare two companies that use the same accounting principles (Comparability).

5. Consistency means that a company uses the same accounting principles and methods as the other companies in the same industry.

A.

B. False

Comparability means that a company uses the same accounting principles and methods as the other companies in the same industry (Comparability).

6. The Monetary Unit Assumption assures that all important information needed by investors, creditors and managers is contained in the financial statements.

A.

B. False

The monetary unit assumption requires that only those things that can be expressed in monetary terms are included in the accounting records and therefore some important information needed by investors, creditors and managers is not included in the financial statements (Monetary Unit Assumption).

7. The cost principle requires that if a company buys a building for $2,000,000 in 2007 and that in 2009 the building is worth $2,900,000 the company would have to report the building at $2,000,000 in the Balance Sheet for 2009.A.

B. False

The cost principle requires that an asset continue to be reported at original cost over the life of the asset (Cost Principle).

8. Alternate means of expressing a ratio include all of the following except a:

A.

B. rate.

C. percentage.

D. dollar amount.

Correct! A dollar amount of $400 does not provide any comparison value. To be valid it must show both an X and a Y value such as 400 to 100 to be a ratio (Ratio Analysis).

9. Which of the following is not classified as a current asset?A.

B. Accounts receivable.

C. Patents.

D. Inventory.

Since inventory is expected to be sold during the next year (under normal conditions), it is classified as a current asset (Current Asset).

10. Which of the following is the correct order for listing current assets on the balance sheet?

A.

B. Cash, short-term investments, inventories, prepaid expenses, accounts receivable

C. Cash, accounts receivable, inventories, short-term investments, prepaid expenses

D. Cash, short-term investments, accounts receivable, inventories, prepaid expenses

Correct! The presentation of current assets is in the order in which they expect to turn them into cash. The order of cash, short-term investments, accounts receivable, inventories, and prepaid expenses represents the proper order in which a company expects to convert them into cash. (Current Assets).

11. Which of the following is an example of an intangible asset?A.

B. Trademarks.

C. Prepaid expenses.

D. Property, plant, and equipment.

Property, plant, and equipment are assets with physical substance and are therefore not intangible assets (Intangible Assets).

12. Which is the proper order for assets to appear on the balance sheet?

A.

B. Current Assets; Intangible Assets; Long-term Investments; Property, Plant, & Equipment.

C. Current Assets; Property, Plant, & Equipment; Intangible Assets; Long-term Investments.

D. Current Assets; Long-term Investments; Property, Plant, & Equipment; Intangible Assets.

Correct! The format of the balance sheet is intended to show all items in a specific order. This order is generally based on liquidity.

13. Earnings per share is computed by dividing net income:A.

B. by the ending common shares outstanding.

C. less preferred stock dividends by the average common shares outstanding.

D. less preferred stock dividends by the ending common shares outstanding.

Earnings per share is determined by dividing net income less preferred stock dividends by the average common shares outstanding (Earnings per Share).

14. The following balances and amounts were taken from the financial statements of Ortiz, Inc. The data are presented in alphabetical order.

Earnings per share is:

A.

B. $0.56.

C. $1.20.

D. $1.80.

Correct! Earnings per share is the result of net income being divided by the average common shares; $36,000/20,000 shares = $1.80 (Earnings per Share).

15. Current assets minus current liabilities is a measure of a company's:A.

B. working capital.

C. profitability.

D. cash flow.

Cash flow is the source and destination of cash as it moves through the organization during the time period (Working Capital).

16. The following balances and amounts were taken from the financial statements of Ortiz, Inc. The data are presented in alphabetical order.

The current ratio is:A.

B. 3.27.

C. 2.50.

D. 3.40.

The current ratio is total current assets divided by total current liabilities; ($300,000/$120,000) = 2.5 to 1 (Current Ratio).

17. Which of the following ratios measures the ability of the company to survive over a long period of time?

A.

B. Liquidity ratios.

C. Profitability ratios.

D. Solvency ratios.

Correct! Solvency ratios are good indicators of an organization's ability to survive over a period of time (Solvency).

18. The following balances and amounts were taken from the financial statements of Ortiz, Inc. The data are presented in alphabetical order.

The debt to total assets ratio is:A.

B. 40%.

C. 30%.

D. 20%.

The debt to total asset ratio is total liabilities divided by total assets; $360,000 (total assets of $600,000 less stockholders' equity of $240,000)/$600,000 = 60% (Debt to Total Assets Ratio).

19. The following balances and amounts were taken from the financial statements of Ortiz, Inc. The data are presented in alphabetical order.

Free cash flow is:A.

B. $15,000.

C. $35,000.

D. $5,000.

Free cash flow is computed by subtracting capital expenditures and cash dividends from cash provided by operations; $90,000 - $55,000 - $20,000 = $15,000 (Using the Statement of Cash Flows).

20. Which of the following is not a characteristic of relevance?A.

B. Timeliness.

C. Feedback value.

D. Predictive value.

Predictive value means that the information can help in predicting future events and it is an element of relevance (Relevance).

21. Which of the following is not a characteristic of reliable accounting information?A.

B. Timeliness.

C. Neutrality.

D. Representational faithfulness.

If information is representationally faithful, or factual, then it is reliable (Reliability).

22. Which of the following are constraints that allow a company to modify generally accepted accounting principles without jeopardizing the usefulness of the financial statements?

A.

B. Relevance and reliability.

C. Timeliness and neutrality.

D. Materiality and conservatism.

Correct! Materiality varies from firm to firm. To General Motors a loss of $25,000 may not be material and therefore not disclosed. To the corner store, this may represent a major loss. Conservatism means that when preparing financial statements, a company should choose the accounting method that will be least likely to overstate assets and income (Constraints in Accounting).

23. Which statement do most corporations use instead of the retained earnings statement?A.

B. Statement of Cash Flows.

C. Statement of Stockholders' Equity.

D. No one statement.

Most companies use a statement of stockholders' equity instead of the retained earnings statement, since the statement of stockholders' equity reports the changes in all of the stockholders' accounts.

1. The effects on the basic accounting equation of performing services for cash are to:A.

B. increase assets and increase stockholders' equity.

C. increase assets and increase liabilities.

D. increase liabilities and increase stockholders' equity.

When services are performed for cash, assets are increased and stockholders' equity is increased. Liabilities are not affected.

2. Genesis Company buys a $900 machine on credit. This transaction will affect the:A.

B. balance sheet only.

C. income statement and retained earnings statement only.

D. income statement, retained earnings statement, and balance sheet.

When equipment is purchased on credit, assets are increased and liabilities are increased. Since assets and liabilities are reported on the balance sheet, this transaction affects only the balance sheet. Neither the income statement nor the retained earnings statement is affected.

3. Which of the following events is not recorded in the accounting records?A.

B. An employee is terminated.

C. A cash investment is made into the business.

D. The owner withdraws cash for personal use.

In order to be recorded in the accounting records the event must be an economic event.

4. During 2010, Gibson Company assets decreased $50,000 and its liabilities decreased $90,000. Its stockholders' equity therefore:A.

B. decreased $140,000.

C. decreased $40,000.

D. increased $140,000.

Since assets only decreased $50,000, but Liabilities decreased by $90,000, Stockholders' equity has to increase by $40,000 to keep the accounting equation balanced.

5. Which statement about an account is true?A.

B. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders' equity items.

C. There are separate accounts for specific assets and liabilities but only one account for stockholders' equity items.

D. The left side of an account is the credit or decrease side.

The left side of the account is the debit side, not the credit side.

6. Debits:A.

B. decrease both assets and liabilities.

C. increase assets and decrease liabilities.

D. decrease assets and increase liabilities.

This statement is reversed. Debits increase assets and decrease liabilities.

7. A revenue account:

A.

B. is decreased by credits.

C. has a normal balance of a debit.

D. is increased by credits.

Correct!

8. Which accounts normally have debit balances?

A.

B. Assets, expenses, and retained earnings.

C. Assets, liabilities, and dividends.

D. Assets, dividends, and expenses.

Correct!

9. Paying an account payable with cash affects the components of the accounting equation in the following way.

A.

B. Increases assets and decreases liabilities.

C. Decreases assets and increases stockholders' equity.

D. Decreases assets and decreases liabilities.

Correct!

10. Which is not part of the recording process?A.

B. Preparing a trial balance.

C. Entering transactions in a journal.

D. Posting transactions.

Posting transactions is the last step in the recording process.

11. Which of these statements about a journal is false?A.

B. It provides a chronological record of transactions.

C. It helps to locate errors because the debit and credit amounts for each entry can be readily compared.

D. It discloses in one place the complete effect of a transaction.

The journal does disclose the complete effects of a transaction.

12. A ledger:A.

B. should show accounts in alphabetical order.

C. is a collection of the entire group of accounts maintained by a company.

D. provides a chronological record of transactions.

The journal, not the ledger provides a chronological record of transactions.

13. Posting:

A.

B. transfers ledger transaction data to the journal.

C. is an optional step in the recording process.

D. transfers journal entries to ledger accounts.

Correct!

14. A trial balance:A.

B. proves the mathematical accuracy of journalized transactions.

C. will not balance if a correct journal entry is posted twice.

D. proves that all transactions have been recorded.

A trial balance does NOT prove that all transactions have been recorded.

15. A trial balance will not balance if:A.

B. the purchase of supplies on account is debited to Supplies and credited to Cash.

C. a $100 cash dividend is debited to Dividends for $1,000 and credited to Cash for $100.

D. a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.

If a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45, the trial balance will still balance.

1. What is the time period assumption?A.

B. Companies should match expenses with revenues.

C. The economic life of a business can be divided into artificial time periods.

D. The fiscal year should correspond with the calendar year.

The time period assumption states that the life of a business can be divided into artificial time periods, not that the fiscal year and calendar year must coincide.

2. Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)?A.

B. Cost principle.

C. Periodicity principle.

D. Revenue recognition principle.

The revenue recognition principle states that revenue should be recorded in the period in which it is earned, not that efforts be recorded with accomplishments.

3. Which one of these statements about the accrual basis of accounting is false?

A.

B. Companies recognize revenue in the period in which it is earned.

C. This basis is in accord with generally accepted accounting principles.

D. Companies record revenue only when they receive cash, and record expense only when they pay out cash.

Correct!

4. Adjusting entries are made to ensure that:

A.

B. revenues are recorded in the period in which they are earned.

C. balance sheet and income statement accounts have correct balances at the end of an accounting period.

D. All of the above.

Correct!

5. Each of the following is a major type (or category) of adjusting entry except:

A.

B. accrued revenues.

C. accrued expenses.

D. earned expenses.

Correct!

6. The trial balance shows Supplies $1,350 and Supplies Expense $0. If $600 of supplies are on hand at the end of the period, the adjusting entry is:A.

B. Supplies 750 Supplies Expense 750

C. Supplies Expense 750 Supplies 750

D. Supplies Expense 600 Supplies 600

This entry has the correct account debited and credited, but the amount is incorrect. If this entry were posted, the ending balance in the Supplies account would be $750 and the amount of expense recorded would be $600. These balances do not accurately reflect the situation at the end of the period.

7. Adjustments for unearned revenues:A.

B. increase liabilities and increase revenues.

C. increase assets and increase revenues.

D. decrease revenues and decrease assets.

When unearned revenue accounts are adjusted, asset accounts are not involved. The unearned revenue account, a liability account, is decreased and the related revenue account is increased, not decreased. This adjustment reflects that the firm with the obligation to provide the product or service has fully or partially fulfilled their obligation.

8. Adjustments for prepaid expenses:A.

B. decrease expenses and increase assets.

C. decrease assets and increase expenses.

D. decrease revenues and increase assets.

When an adustment for prepaid expenses is made, and expense is increased and an asset is decreased.

9. Queenan Company computes depreciation on delivery equipment at $1,000 for the month of June. The adjusting entry to record this depreciation is as follows:A.

B. Depreciation Expense Delivery Equipment

C. Depreciation Expense Accumulated Depreciation- Delivery Equipment

D. Delivery Equipment Expense Accumulated Depreciation- Delivery Equipment

Recording the adjusting entry for depreciation requires a debit to Depreciation Expense and a credit to Accumulated Depreciation-Delivery Equipment.

10. Adjustments for accrued revenues:A.

B. increase assets and increase revenues.

C. decrease assets and decrease revenues.

D. decrease liabilities and increase revenues.

When the adjustment is made for accrued revenues, no liability account is involved. An asset account (usually Accounts Receivable) is increased and a revenue account is also increased. This adjusting entry records revenue that has been earned, but that has not yet been entered in the accounting records.

11. Colleen Mooney earned a salary of $400 for the last week of September. She will be paid on October 1. The adjusting entry for Colleen's employer at September 30 is:A.

B. Salaries Expense 400 Salaries Payable

C. Salaries Expense 400 Cash

D. Salaries Payable 400 Cash

This is the entry the employer would make when payment is made on October 1. The adjusting entry needs to record expense and a liability, as shown in answer b.

12. Which statement is incorrect concerning the adjusted trial balance?A.

B. The adjusted trial balance provides the primary basis for the preparation of financial statements.

C. The adjusted trial balance lists the account balances segregated by assets and liabilities.

D. The company prepares the adjusted trial balance after it has journalized and posted the adjusting entries.

This is an accurate statement about the adjusted trial balance.

13. Which account will have a zero balance after a company has journalized and posted closing entries?A.

B. Advertising Supplies.

C. Prepaid Insurance.

D. Accumulated Depreciation.

Accumulated Depreciation is a contra-asset account. Contra-asset accounts are permanent accounts and are not closed at the end of the year.

14. Which types of accounts will appear in the post-closing trial balance?A.

B. Temporary accounts.

C. Accounts shown in the income statement columns of a work sheet.

D. None of the above.

Because answer a is correct, this answer cannot be correct.

15. All of the following are required steps in the accounting cycle except:

A.

B. preparing an adjusted trial balance.

C. preparing a post-closing trial balance.

D. preparing a work sheet.

Correct!1. Which of the following statements about a periodic inventory

system is true?

15. All of the following are required steps in the accounting cycle except:

A.

B. preparing an adjusted trial balance.

C. preparing a post-closing trial balance.

D. preparing a work sheet.

Correct!A.

B. Companies continously maintain detailed records of the cost of each inventory purchase and sale.

C. The periodic system provides better control over inventories than a perpetual system.

D. The increased use of computerized systems has increased the use of the periodic system.

The increased use of computerized systems has increased the use of the perpetual, not the periodic inventory system.

2. Which of the following items does not result in an adjustment in the merchandise inventory account under a perpetual system?A.

B. A return of merchandise inventory to the supplier.

C. Payment of freight costs for goods shipped to a customer.

D. Payment of freight costs for goods received from a supplier.

When using a perpetual inventory system, payment of freight costs for goods received from a supplier is recorded by a debit to the Merchandise Inventory account.

3. Which sales accounts normally have a debit balance?A.

B. Sales returns and allowances.

C. Both a) and b).

D. Neither a) nor b).

Because answer c is correct, this answer cannot be correct.

4. A credit sale of $750 is made on June 13, terms 2/10, n/30, on which a return of $50 is granted on June 16. What amount is received as payment in full on June 23?A.

B. $686.

C. $685.

D. $650.

The amount to be received as payment in full on June 23 is $686. Because payment is made within the discount period of 10 days, the amount received as payment in full is $700 ($750 – return of $50) minus the discount of $14 ($700 X 2%), or $686.

5. To record the sale of goods for cash in a perpetual inventory system:A.

B. only one journal entry is necessary to record the receipt of cash and the sales revenue.

C. two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and reduction of inventory.

D. two journal entries are ncessary: one to record the receipt of cash and reduction of inventory, and one to reord the the cost of goods sold and sales revenue.

Two entries are required. One to record the sale; debit cash and credit sales revenue. The second entry is to reduce the inventory; debit cost of goods sold and credit inventory.

6. Gross profit will result if:A.

B. sales revenues are greater than operating expenses.

C. sales revenues are greater than cost of goods sold.

D. operating expenses are greater than cost of goods sold.

When a firm's sales revenue is greater than its cost of goods sold, the firm has gross profit to report.

7. If sales revenues are $400,000, cost of goods sold is $310,000, and operating expenses are $60,000, what is the gross profit?A.

B. $90,000.

C. $340,000.

D. $400,000.

Gross profit is equal to sales revenue minus cost of goods sold and given the data above, gross profit is $400,000 - $310,000 or $90,000.

8. The income statement for a merchandising company shows each of these features except:

A.

B. cost of goods sold.

C. a sales revenue section.

D. All of these are present.

Correct!

9. If beginning inventory is $60,000, cost of goods purchased is $380,000, and ending inventory is $50,000, what is cost of goods sold under a periodic system?A.

B. $370,000.

C. $330,000.

D. $420,000.

Cost of goods sold is computed by adding beginning inventory and cost of goods purchased and then subtracting ending inventory, or $60,000 + $380,000 - $50,000 = $390,000.

10. Arbor Corporation had reported the following amounts at December 31, 2010: Sales $184,000; ending inventory $11,600; beginning inventory $17,200; purchases $60,400; purchases discounts $3,000; purchase returns and allowances $1,100; freight-in $600; freight-out $900. Calculate the cost of goods available for sale.A.

B. $74,100.

C. $56,900.

D. $197,700.

Cost of goods available for sale equal the beginning inventory plus purchases minus purchases discounts and purchases returns and allowances plus freight-in: $17,200 + $60,400 - $3,000 - $1,100 + $600 = $74,100.

11. Which of the following would affect the gross profit rate? (Assume sales remain constant.)A.

B. A decrease in depreciation expense.

C. An increase in cost of goods sold.

D. A decrease in insurance expense.

Since insurance expense is an operating expense, and since operating expenses are subtracted from gross profit to arrive at income from operations, an increase in insurance expense will not have any effect on the gross profit rate.

12. The gross profit rate is equal to:A.

B. cost of goods sold divided by sales.

C. net sales minus cost of goods sold, divided by net sales.

D. sales minus cost of goods sold, divided by cost of goods sold.

The formula for computing the gross profit rate is net sales minus cost of goods sold divided by net sales.

13. Which factor would not affect the gross profit rate?A.

B. An increase in the sale of luxury items.

C. An increase in the use of “discount pricing” to sell merchandise.

D. An increase in the price of inventory items.

An increase in the price of inventory items would cause cost of goods sold to be higher and assuming sales prices were not increased at the same time, the gross profit rate would be lower.

14. During the year ended December 31, 2010, State Street Corporation had the following results: Sales $267,000; cost of goods sold $107,000; net income $92,400; operating expenses $55,400; net cash provided by operating activities $108,950. What was the company's profit margin ratio?

A.

B. 60%.

C. 20.5%.

D. 34.6%.

Correct!

15. When goods are purchased for resale by a company using a periodic inventory system:A.

B. purchases on account are debited to Purchases.

C. purchase returns are debited to Purchase Returns and Allowances.

D. freight costs are debited to Purchases.

Under a periodic inventory system, freight costs are debited to Freight-in.

1. When is a physical inventory usually taken?

A.

B. When goods are not being sold or received.

C. At the end of the company's fiscal year.

D. Both b) and c).

Correct!

2. Which of the following should not be included in the physical inventory of a company?A.

B. Goods shipped on consignment to another company.

C. Goods in transit from another company shipped FOB shipping point.

D. All of the above should be included.

Because answer a is correct, this answer cannot be correct.

3. As a result of a thorough physical inventory, Railway Company determined that it had inventory worth $180,000 at December 31, 2010. This count did not take into consideration the following facts: Rogers Consignment store currently has goods worth $35,000 on its sales floor that belong to Railway but are being sold on consignment by Rogers. The selling price of these goods is $50,000. Railway purchased $13,000 of goods that were shipped on December 27, FOB destination, that will be received by Railway on January 3. Determine the correct amount of inventory that Railway should report.A.

B. $215,000.

C. $228,000.

D. $193,000.

The correct amount of inventory that should be reported by Railway should be the $180,000 in their possession plus $35,000, the cost of their goods that are on consignment. The title to the goods in shipment does not go to Railway until January 3 and should not be reported on December 31, 2010. $180,000 + $35,000 =

4. Kam Company has the following units and costs:

If 9,000 units are on hand at December 31, what is the cost of the ending inventory under FIFO?A.

B. $108,000.

C. $113,000.

D. $117,000.

This figure comes from multiplying 9,000 units times the most recent cost of $13 per unit. Ending inventory under FIFO uses the most recent costs in computing ending inventory. It is computed as follows: $65,000 (5,000 X $13) + $48,000 (4,000 X $12) = $113,000 (First-In, First-out, FIFO).

5. From the data in question 4, what is the cost of the ending inventory under LIFO?

A.

B. $108,000.

C. $99,000.

D. $100,000.

Correct!

6. Davidson Electronics has the following:

If Davidson has 7,000 units on hand at December 31, the cost of ending inventory under the average-cost method is:

A.

B. $70,000.

C. $56,000.

D. $75,250.

Correct!

7. In periods of rising prices, LIFO will produce:A.

B. the same net income as FIFO.

C. lower net income than FIFO.

D. higher net income than average costing.

In periods of rising prices, LIFO produces the lowest net income of all cost flow methods because cost of goods sold includes the higher, more recent costs. Because cost of goods sold under LIFO is higher than all the other cost flow methods, net income under LIFO will be lower (Income Statement Effects).

8. Considerations that affect the selection of an inventory costing method do not include:

A.

B. balance sheet effects.

C. income statement effects.

D. perpetual versus periodic inventory system.

Correct!

9. The lower of cost or market rule for inventory is an example of the application of:A.

B. the historical cost principle.

C. the materiality constraint.

D. the economic entity assumption.

The use of the lower of cost or market rule for inventory is an example of the application of the conservatism constraint, not the economic entity assumption (Valuing Inventory at the Lower of Cost or Market).

10. Which of these would cause the inventory turnover ratio to increase the most?

A.

B. Keeping the amount of inventory on hand constant but increasing sales.

C. Keeping the amount of inventory on hand constant but decreasing sales.

D. Decreasing the amount of inventory on hand and increasing sales.

Correct!

11. Carlos Company had beginning inventory of $80,000, ending inventory of $110,000, cost of goods sold of $285,000, and sales of $475,000. Carlos days in inventory is:A.

B. 121.7 days.

C. 102.5 days.

D. 84.5 days.

Days in inventory equals 365 days ÷ (cost of goods sold ÷ average inventory). 365 ÷ ($285,000 ÷ [($80,000 + $110,000) ÷ 2]) = 365 days ÷ ($285,000 ÷ $95,000) = 365 ÷ 3 = 121.7 days.

12. The LIFO reserve is:A.

B. an amount used to adjust inventory to the lower of cost or market.

C. the difference between the value of the inventory under LIFO and the value under average cost.

D. an amount used to adjust inventory to historical cost.

The LIFO reserve is the amount of difference in ending inventory if the firm had been using FIFO instead of LIFO, not the amount used to adjust to historical cost (Analysts' Adjustment for LIFO Reserve).

13. In a perpetual inventory system,

A.

B. average costs are based entirely on unit-cost simple averages.

C. a new average is computed under the average cost method after each sale.

D. FIFO cost of goods sold will be the same as in a periodic inventory system.

Correct!

14. Fran Company's ending inventory is understated by $4,000. The effects of this error on the current year's cost of goods sold and net income, respectively, are:A.

B. overstated and understated.

C. overstated and overstated.

D. understated and understated.

If ending inventory is understated by $4,000, the amount subtracted from goods available for sale is understated. This causes cost of goods to be overstated. This in turn causes net income to be understated (Inventory Errors, Income Statement Effects).

15. Harold Company overstated its inventory by $15,000 at December 31, 2010. It did not correct the error in 2010 or 2011. As a result, Harold's owner's equity was:A.

B. overstated at December 31, 2010, and properly stated at December 31, 2011.

C. understated at December 31, 2010, and understated at December 31, 2011.

D. overstated at December 31, 2010, and overstated at December 31, 2011.

If the ending Inventory is overstated, the Stockholders' equity for that period will be overstated since the cost of goods sold will be lower than it should be thus making the net income higher than it should be. If the error is not corrected, the combined total net income for the two periods will be correct thus making the stockholders' equity at the end of the two periods correct.

1. Expenses decrease retained earnings.A.

B. False

The costs that a firm incurs when operating its business (expenses) cause retained earnings to decrease (Event 6,

15. Harold Company overstated its inventory by $15,000 at December 31, 2010. It did not correct the error in 2010 or 2011. As a result, Harold's owner's equity was:A.

B. overstated at December 31, 2010, and properly stated at December 31, 2011.

C. understated at December 31, 2010, and understated at December 31, 2011.

D. overstated at December 31, 2010, and overstated at December 31, 2011.

If the ending Inventory is overstated, the Stockholders' equity for that period will be overstated since the cost of goods sold will be lower than it should be thus making the net income higher than it should be. If the error is not corrected, the combined total net income for the two periods will be correct thus making the stockholders' equity at the end of the two periods correct.

Payment of Rent).

2. Every account has a left or credit side and a right or debit side.

A.

B. False

The left side is the debit side while the right side is the credit side (The Account).

3. Every transaction affects at least two accounts.A.

B. False

This is correct. There must be at least one debit and one credit account (Debit and Credit Procedures).

4. Assets are increased with credits.

A.

B. False

Assets are increased by debits, or additions to the left side of the account(Dr. / Cr. Procedures for Assets and Liabilities).

5. Transactions are recorded in chronological order in the general journal.A.

B. False

The general journal is an original entry document that establishes the sequence of events within the organization (The Journal).

6. The entire group of accounts maintained by a company is referred to collectively as the Journal.

A.

B. False

The entire group of accounts maintained by a company is referred to collectively as the ledger (The Ledger)

7. Issuance of Stock is an investing activity.

A.

B. False

Issuance of Stock is a financing activity (Keeping An Eye On Cash).

8. Retained Earnings is decreased by:A.

B. assets.

C. expenses.

D. owner's investments.

Owner's investments are additions to the common stock account and increase an associated asset such as cash, inventory or equipment (Event 1, Investment of Cash by Stockholders).

9. If an expense is paid with cash:A.

B. retained earnings will increase.

C. liabilities will increase.

D. expenses will decrease.

Expenses will increase when cash is paid for an expense (Event 6, Payment of Rent).

10. If cash is received in advance from a customer:A.

B. retained earnings will increase.

C. liabilities will increase.

D. stockholders' equity will decrease.

Stockholders' equity will increase when the event for which the prepayment is received is completed (Event 4, Receipt of Cash in Advance from Customer).

11. Receipt of an unearned revenue:A.

B. increases an asset; increases a revenue.

C. decreases a liability; increases stockholders' equity.

D. decreases a revenue; increase stockholders' equity.

This event increases cash and increases an associated liability such as unearned revenue. The revenue will increase when the service or product is provided and stockholders' equity will increase through net income into retained earnings (Event 4, Receipt of Cash in Advance from Customer).

12. Payment of a dividend:A.

B. decreases cash; increases stockholders' equity.

C. decreases cash; decreases retained earnings.

D. increases retained earnings; increases expenses.

Dividends are not an expense since they are distributions of retained earnings to the stockholders. When paid, they will reduce retained earnings, which is a component of stockholders' equity (Event 10, Payment of Dividend).

13. Accounts with normal debit balances include:

A.

B. liabilities and expenses.

C. stockholders' equity and revenues.

D. expenses and assets.

Correct! Expenses and assets both have debit balances.

14. Accounts with normal credit balances include:A.

B. revenues and expenses.

C. liabilities and stockholders' equity.

D. revenues and assets.

Revenue accounts have normal credit balances while asset accounts have normal debit balances.

15. Which of the following is not a part of a complete journal entry?A.

B. The accounts and amounts to be debited and credited.

C. The date of the transaction.

D. A brief explanation of the transaction.

A brief explanation clarifies the reason the journal entry was made (The Journal).

16. The first place every transaction is recorded is the:

A.

B. account.

C. basic accounting equation.

D. journal.

Correct! The first place entries are recorded is the journal. It is sometimes referred to as the book of original entry (The Journal).

17. Issuing stock to investors for cash would result in:A.

B. a debit to Cash and a credit to Common Stock.

C. a debit to Cash and a credit to Retained Earnings.

D. a credit to Cash and a debit to Retained Earnings.

This event is recorded by debiting Cash and crediting Common Stock.

18. The entire group of accounts maintained by a company is collectively referred to as the:A.

B. journal.

C. financial statements.

D. basic accounting equation.

The basic accounting equation is assets = liabilities + stockholders' equity but the equation does not maintain the accounts to which the journal entries are posted (The Ledger).

19. What is the appropriate order for a company's chart of accounts?

A.

B. assets, revenues, expenses, liabilities, stockholders' equity.

C. assets, liabilities, stockholders' equity, expenses, revenue.

D. assets, liabilities, stockholders' equity, revenues, expenses.

Correct! The order of the accounts in the chart of accounts follows the order of the sections of the balance sheet and income statement, namely assets, liabilities, stockholders' equity, revenues, and expenses (Chart of Accounts).

20. The process of transferring entries from the journal to the ledger is called:A.

B. transferring.

C. posting.

D. balancing.

Balancing is the process of ensuring that all of the debits and credits are equal (Posting).

21. When a trial balance balances, it is an indication that:A.

B. the account balances are correct.

C. debits equal credits.

D. all transactions have been journalized.

Only a comparison of source documents and a review for appropriate accrued entries will verify that all of the transactions have been journalized. When the trial balance balances it simply means that all of the debits equal all of the credits (Limitations of a Trial Balance).

22. Accounts are listed on the trial balance in:A.

B. the order that they appear in the ledger.

C. alphabetical order.

D. the order in which they are posted.

The journals are posted to the ledger sequentially. The accounts will appear in the trial balance in the same order that they appear in the ledger (The Trial Balance).

23. On. Jan. 10, Novis Company purchased manufacturing equipment for $80,000 cash. This is an example of a (an) ______.A.

B. financing activity

C. investing activity

D. accrual activity

The purchase of Equipment for cash is a cash flow activity and not an accrual activity (Keeping an Eye on Cash).

24. What is the evidence that a transaction has occurred?A.

B. Ledger.

C. Source document.

D. Anyone of the three above can be the evidence.

A source document is the evidence that a transaction has occurred. A journal is where the accounts that are affected by a transaction are first entered, and a ledger is the summary of each account.

1. The revenue recognition principle dictates that revenue is recognized in the period in which the cash is received.

A.

B. False

Revenue should be recognized in the accounting period in which it is earned (The Revenue Recognition Principle).

2. The matching principle requires that expenses be recognized in the same period that they are paid.

A.

B. False

The matching principle requires expenses to be included in the accounting period in which they are incurred to earn revenues (The Matching Principle).

3. The cash basis of accounting is in accordance with generally accepted accounting principles.

A.

B. False

Because cash basis accounting does not match revenues and expenses in the proper accounting period, cash basis accounting does not meet GAAP requirements (Accrual Versus Cash Basis of Accounting).

4. Book value is equal to cost minus accumulated depreciation.A.

B. False

The formula for computing book value is cost minus accumulated depreciation. This is the value shown in the financial statements (Depreciation - Statement Presentation).

5. Accrued expenses are expenses that have already been paid.

A.

B. False

Accrued expenses are expenses that have been incurred in the period but which have not yet been entered into the financial records. Accruals are done to follow the concept of matching revenues and expenses (Accrued Expenses).

6. Closing entries produce a zero balance in each temporary account.A.

B. False

Closing entries zero out temporary accounts so they are ready to accumulate data about revenues, expenses and dividends in the next accounting period (Preparing Financial Statements).

7. Cash received in advance from a customer would not cause a difference between net income and cash provided by operating activities.

A.

B. False

Cash received in advance from a customer would affect cash provided by operating activities but would not affect Net Income in the period received (Keeping an Eye On Cash).

8. A company receives their electricity bill on May 20, closes its books on May 31, sends a check in payment of the bill on June 5, and verifies the electric company received the check on June 11. Under the matching principle, the expense should be recognized on:A.

B. May 31

C. June 5

D. June 11

While the check may clear the bank on June 11th, the expense should be recognized on May 20th, the date the organization received the bill (The Matching Principle).

9. If revenues are recognized only when a customer pays, what method of accounting is being used?A.

B. Recognition basis

C. Cash basis

D. Matching basis

The matching concept includes the revenue and the related expenses in the same period. Cash basis does not recognize revenues until the payment is received (Accrual Versus Cash Basis of Accounting).

10. Which of the following is not a type of adjusting entry?A.

B. Earned revenues

C. Accrued revenues

D. Accrued expenses

Accrued expenses require an adjusting entry to record known expenses not otherwise entered for the period (Types of Adjusting Entries).

11. Which of the following is not a typical example of a prepaid expense?

A.

B. Insurance

C. Rent

D. Wages

Correct! Wages are seldom prepaid since employees may not fulfill their obligations if they receive their wages before doing their work (Prepaid Expenses).

12. The difference between an asset's cost and its accumulated depreciation is called:A.

B. fair value.

C. book value.

D. real value.

“Real value” does not have a specific meaning in the context of accounting (Depreciation - Statement Presentation).

13. Payments received in advance of services provided are recorded as

A.

B. equity.

C. expenses.

D. liabilities.

Correct! An advance payment for services should be recorded as a liability because it represents a future obligation for the organization (Unearned Revenues).

14. Which of the following is not a typical example of an accrued expense?A.

B. Wages

C. Interest

D. Taxes

Because numerous tax periods do not coincide with the end of the fiscal periods, taxes are a routine accrual (Accrued Expenses).

15. If the adjusting entry is not made for unearned revenues the result will be to:A.

B. overstate liabilities and understate revenues.

C. understate net income and overstate retained earnings.

D. understate retained earnings and overstate revenues.

Retained earnings would be understated because the understatement of the revenue account would be closed to retained earnings. The missing entry would reduce a liability through a debit entry and increase revenues through a credit entry (Unearned Revenues).

16. Medina Company purchased office supplies costing $5,000 and debited Office Supplies for the full amount. Supplies on hand at the end of the accounting period were $1,300. The appropriate adjusting journal entry to be made would be:A.

B. debit Office Supplies Expense $1,300; credit Office Supplies $1,300.

C. debit Office Supplies Expense $3,700; credit Office Supplies $3,700.

D. debit Office Supplies $1,300; credit Office Supplies Expense $4,000.

The debits and credits of the entry must balance. The Office Supplies Expense account must be debited for $3,700 while the Office Supplies account must be credited for $3,700 (Prepaid Expenses - Supplies).

17. On September 1 the Mini-Mite Store paid $12,000 to the Maxi-Mall Co. for 3 months rent beginning September 1. Prepaid Rent was debited for the payment. If financial statements are prepared on September 30, the appropriate adjusting journal entry to make on September 30 would be:A.

B. debit Prepaid Rent $8,000; credit Rent Expense $8,000.

C. debit Rent Expense $8,000; credit Prepaid Rent $8,000.

D. debit Prepaid Rent $4,000; credit Rent Expense $4,000.

This entry will increase the Prepaid Rent account by $4,000. Expense accounts are debited, not credited, to indicate the recognition of the expense (Prepaid Expenses).

18. On August 1 the Hwang Co. purchased a photocopy machine for $8,000. The estimated annual depreciation on the machine is $1,680. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 would be:A.

B. debit Depreciation Expense $1,680; credit Accumulated Depreciation $1,680.

C. debit Depreciation Expense $700; credit Accumulated Depreciation $700.

D. debit Depreciation Expense $700; credit Office Equipment $700.

While the debit side is correct, the credit should be made to Accumulated Depreciation, a contra account to the Office Equipment account (Depreciation).

19. Redlands Property Management Co. received a check for $30,000 on October 1, which represents a one year advance payment of rent on an office it rents to a client. Unearned Rental Revenue was credited for the full $30,000. Financial statements are prepared on December 31. The appropriate adjusting journal entry to make on December 31 would be:A.

B. debit Unearned Rental Revenue $7,500; credit Rental Revenue $7,500.

C. debit Unearned Rental Revenue $22,500; credit Rental Revenue $22,500.

D. debit Rental Revenue $22,500; credit Unearned Rental Revenue $22,500.

The recognition of revenue is done through a credit entry to a revenue account. A debit to an unearned revenue account will reduce the liability when earned. The amount of this transaction is for nine months, not the three months consumed (Unearned Revenues).

20. On July 1, East Lake, Inc. purchased a 3-year insurance policy for $12,600. Prepaid Insurance was debited for the entire amount. On December 31, when the annual financial statements are prepared, the appropriate adjusting journal entry would be:

A.

B. debit Insurance Expense $10,500; credit Prepaid Insurance $10,500.

C. debit Prepaid Insurance $10,500; credit Insurance Expense $10,500.

D. debit Insurance Expense $2,100; credit Prepaid Insurance $2,100.

Correct! This entry correctly adjusts the accounts and the amount which is six months of the 36 month policy (Prepaid Expenses - Insurance).

21. On August 1, Hacienda Corporation signed a $30,000, 14%, 2-year note to help finance some renovations they were making to the corporation headquarters. Assuming interest is accrued only when the year ends on December 31, the appropriate journal entry would be:A.

B. debit Interest Expense $4,200; credit Notes Payable $4,200.

C. debit Interest Expense $1,750; credit Notes Payable $1,750.

D. debit Interest Expense $4,200; credit Interest Payable $4,200.

While the debit and credit accounts are correct, the amount reflects a full year not the five months elapsed from August 1 to year end (Accrued Interest).

22. Employees at the Topanga Taco House were paid on Friday, December 27 for the five days ending on December 27. The next payday is Friday, January 3. Employees work 5 days a week. The weekly payroll amounts to $3,800. The appropriate adjusting journal entry on December 31 would be to credit Wages Payable for:A.

B. $1,520.

C. $2,280.

D. $3,800.

This amount represents the entire weekly payroll while the days of December 30th and 31st must be properly accrued in the fiscal period ending December 31st (Accrued Salaries).

23. Which of the following transactions will not cause a difference between net cash provided by operations and net income?

A.

B. Services are provided on account.

C. Periodic depreciation is recorded.

D. Salaries paid equal salaries incurred.

Correct! If salaries paid equal salaries incurred there will be no difference between the cash outflow and the expense incurred (Keeping An Eye On Cash).

24. Which is the primary basis for the preparation of the financial statements?A.

B. The adjusted trial balance.

C. The post closing trial balance.

D. The journal entries.

The adjusted trial balance is the primary basis for the preparation of the financial statements.

25. A worksheet is:A.

B. a part of the journal.

C. a part of the ledger.

D. a financial statement.

The worksheet is a working tool for the accountant. It is not a permanent accounting record.

1. The operating cycle of a merchandising company is ordinarily shorter than that of a service company.

25. A worksheet is:A.

B. a part of the journal.

C. a part of the ledger.

D. a financial statement.

The worksheet is a working tool for the accountant. It is not a permanent accounting record.

A.

B. False

A service company does not have the additional time involved in the inventory cycle (Operating Cycles).

2. Discount terms of 2/10, n/30 mean that a 10% cash discount is available if payment is made within 30 days.

A.

B. False

These discount terms mean a 2% discount may be taken if paid within 10 days of the invoice date and the entire invoice is due in 30 days (Purchase Discounts).

3. Sales Returns and Allowances is a contrarevenue account.A.

B. False

Sales Returns and Allowances is a contra revenue account (Sales Returns and Allowances).

4. Gross profit is the difference between net sales and cost of goods sold.A.

B. False

Gross profit is calculated by subtracting cost of goods sold from net sales (Gross Profit).

5. If the profit margin ratio is 5% and total expenses are $1,330,000, the net sales are $1,400,000.A.

B. False

Net income divided by net sales gives the profit margin ratio. This formula verifies that the statement is true (Profit Margin Ratio).

6. Sales Discounts is a contra asset account.

A.

B. False

Like Sales Returns and Allowance, Sales Discounts is a contra revenue account to Sales (Sales Discounts).

7. If a company's Net Cash Provided by Operating Activities is $4,250,000 and its Net Income is $3,465,000 then its Quality of Earnings Ratio is 1.2.A.

B. False

Quality of Earnings ratio is Net Cash Provided by Operating Activities divided by Net Income (Keeping an Eye On Cash).

8. Cost of goods sold is determined at the end of an accounting period under the:A.

B. periodic inventory system.

C. double entry inventory system.

D. perpetual inventory system.

Under the perpetual inventory system the cost of goods sold is calculated with each sales transaction. When the cost of goods sold is only calculated at the end of the fiscal period the organization is using a periodic inventory system (Periodic System).

9. A company with merchandise that has a high unit value would probably use a:A.

B. double entry inventory system.

C. periodic inventory system.

D. single entry inventory system.

The term “single entry inventory system” is not a term typically used in accounting.

10. Beginning inventory is $12,000; purchases are $34,000; sales are $60,000; and cost of goods sold is $31,000. Ending inventory is:A.

B. $31,000.

C. $46,000.

D. $14,000.

The sum of $14,000 is derived by subtracting beginning inventory and purchases from the sales. The formula to calculate ending inventory is beginning inventory plus purchases less returns less cost of goods sold (Determining Cost of Goods Sold Under a Periodic System).

11. When credit terms of 1/10, n/30 are offered, the discount period is:A.

B. 10 days.

C. 20 days.

D. 30 days.

The total invoice is due in 30 days. The discount period is the first 10 days (Purchase Discounts).

12. Freight-in costs incurred by the seller on outgoing merchandise are recorded in the:

A.

B. Cost of Goods Sold account.

C. Freight-in account.

D. Freight-out account.

Correct! Freight-out should be recorded in a separate account from freight-in since the cost of freight-in is added to cost of goods sold while freight-out is an operating expense and should not be added to cost of goods sold (Freight Costs).

13. Martin Company purchases $4,200 of merchandise on March 1, with credit terms of 3/10, n/30. If Martin pays on March 11, what is the cost of this purchase?A.

B. $3,780

C. $4,074

D. $3,864

This payment represents an 8% discount while the terms provide for a 3% discount if paid within 10 days (Purchase Discounts).

14. Which of the following would be classified in an income statement as a nonoperating activity?A.

B. Interest expense

C. Freight-out

D. Cost of goods sold

Cost of goods sold is an operating expense (Nonoperating Activities).

15. Which of the following would be classified in an income statement as a nonoperating activity?A.

B. Returning merchandise

C. Receiving an allowance for merchandise damaged in shipment

D. Paying for a purchase of inventory

Since the payment is for inventory, this transaction is an operating activity (Nonoperating Activities).

16. A sales discount is based on:

A.

B. invoice less discount.

C. invoice price plus freight-out.

D. invoice price less returns and allowances.

Correct! The buyer is permitted to take the discount on the invoice price less any returns and/ allowances because this amount represents his current obligation (Sales Discounts).

17. Myers and Company sold $1,800 of merchandise on account to Oscar, Inc. on March 1 with credit terms of 2/10, n/30. Oscar returned $500 of the merchandise due to poor quality on March 3. If Oscar pays for the purchase on March 11, what entry does Myers make to record receipt of the payment?A.

B. Cash 1,800 Sales Returns and Allowances Accounts Receivable

C. Cash 1,274Sales Discounts Accounts Receivable

D. Cash 1,800 Sales Discounts Accounts Receivable

Myers should be recording the payment as a debit entry to Cash, the returned merchandise should have been processed on March 3rd, and the accounts receivable and sales discounts are overstated due to the non-processed returns (Sales Discounts).

18. In a perpetual inventory system what accounts are credited when merchandise is returned by a customer to the seller?A.

B. Accounts Receivable and Cost of Goods Sold

C. Merchandise Inventory and Cost of Goods Sold

D. Sales Returns and Allowances and Merchandise Inventory

Sales Returns and Allowances and Merchandise Inventory are both debited, not credited when merchandise is returned (Sales Returns and Allowances).

19. Assume that sales are $450,000, sales discounts are $10,000, net income is $35,000, and cost of goods sold is $320,000. Gross profit and operating expenses are, respectively:

A.

B. $120,000 and $95,000.

C. $130,000 and $85,000.

D. $120,000 and $85,000.

Correct! This is the correct answer. The formula of sales less sales returns and allowances less cost of goods sold results in gross profit. Gross profit less operating expenses plus or minus other revenues or expenses results in net income (Gross Profit and Operating Expenses).

20. Which of the following would appear on both a single-step and a multiple-step income statement?A.

B. Income from operations

C. Cost of goods sold

D. Other expenses and losses

Other expenses and losses are reported only in a multiple-step income statement (Income Statement Presentation).

21. A company has the following accounts balances: Sales $2,000,000; Sales Returns and Allowances $250,000; Sales Discounts $50,000; and Cost of Goods Sold $1,275,000. The gross profit rate is:A.

B. 36%.

C. 51%.

D. 64%.

Gross profit ($1,700K - $1,275K = $425K) divided by net sales ($2,000K - $250K - $50K = $1,700K) results in the ratio of $425K/$1,700K or a gross profit rate of 25% (Gross Profit Rate).

22. A company has the following balances: Sales $312,000; Sales Returns and Allowances $24,000; Sales Discounts $48,000; Cost of Goods Sold $144,000; Operating Expenses $84,000. The profit margin ratio is:

A.

B. 3%.

C. 4%.

D. 5%.

Correct! Net income ($240K - $144K - $84K = $12K) divided by net sales ($312K - $24K - $48K = $240K) results in a ratio of $12K/$240K or a profit margin ratio of 5% (Profit Margin Ratio).

23. A merchandiser that sells directly to consumers is a:A.

B. wholesaler.

C. customer.

D. service enterprise.

A service enterprise is a business that provides services such as automotive repairs or landscaping. A merchandiser that sells directly to consumers is called a retailer (Merchandising Operations).

24. A company that is a wholesaler would be a business that:A.

B. conducts large sales for consumers on a recurring basis.

C. sells to another business which will sell to a consuming customer.

D. provides automotive repairs.

A business that provides services such as automotive repairs or landscaping is a service enterprise. A wholesaler is the intermediary – it buys from one business and sells to another that will resell to customers (Merchandising Operations).

25. Select the one correct response for the seller from the following four choices.

A.

B. Sales Discounts would be debited for defective merchandise returned by a customer.

C. Sales Returns and Allowances would be credited for defective merchandise returned by a customer.

D. Sales Returns and Allowances would be debited for defective merchandise returned by a customer.

Correct! The seller of defective merchandise returned by a customer would debit Sales Returns and Allowances (Sales Returns and Allowances).

26. A retailer makes a $100 sale with terms of 2/10, n/30 on the first of the month. The customer returns $20 of merchandise for credit on account. Select the correct journal entry for the retailer for full payment within the discount period.A.

B. Accounts Payable 80.00 Cash Purchases Discounts

C. Cash 98.00Sales Discounts 2.00 Accounts Receivable

D. Cash 78.40Purchases Discounts 1.60 Accounts Payable

This journal entry debits Purchases Discounts not Sales Discounts and credits Accounts Payable not Accounts Receivable. The original sale is reduced from $100 to $80 as a balance due with the $20 return. Then the 2% discount is applied to the balance - $1.60 – debit to Sales Discounts resulting in $78.40 for the Cash debit and $80 as a credit to Accounts Receivable (Sales Discounts).

27. Given the following Quality of Earnings Ratios, which suggests the company may be using the most conservative accounting techniques?A.

B. 1.3.

C. 1.8.

D. 1.5.

A measure significantly greater than 1 suggests that a company is using conservative accounting techniques.

28. In a periodic inventory system when is the cost of the merchandise sold determined?A.

B. At the end of the period.

C. Periodically during the period.

D. Any one of the above can be used.

Unlike the perpetual system, companies do not attempt on the date of the sale to record the cost of merchandise sold. At the end of the period they take a physical inventory to determine the cost of merchandise sold.

1. When the terms of a sale are FOB destination, legal title to the goods passes to the buyer when they reach the buyer's place of business.A.

B. False

Sales terms of FOB destination indicate that the seller holds title until the goods reach the destination (Goods in Transit).

2. Merchandising firms usually classify their inventory into raw materials, work in process and finished goods.

A.

B. False

Manufacturers, not merchandisers usually classify their inventory as raw materials, workinprocess and finished goods (Classifying Inventory).

3. Under FIFO, cost of goods sold consists of the units with the oldest costs.A.

B. False

Under first-in, first-out, the cost of the oldest unit on hand is used to determine the cost of the next unit sold (First-In, First-Out).

4. In a period of inflation, LIFO produces a higher net income than FIFO.

A.

B. False

Since LIFO utilizes the higher market price of the last units purchased, the cost of goods sold will be higher, thus reducing the net income (Financial Statement and Tax Effects of Cost Flow Methods - Income Statement Effects).

5. The days in inventory is calculated by dividing the inventory turnover ratio by 365.

A.

B. False

This ratio is calculated by dividing 365 by the inventory turnover ratio (Inventory Turnover Ratio).

6. LIFO reserve is necessary for companies using the FIFO inventory method.

A.

B. False

LIFO reserve is necessary for companies using the LIFO method of inventory (Analysts' Adjustment For LIFO Reserve).

7. If Inventory in 2006 is $30,000 and 2007 is $40,000 and Cost of Goods Sold is $276,000 and $290,000 respectively, the Inventory Turnover Ratio for 2007 is 8.3 times.A.

B. False

Inventory Turnover Ratio is computed by dividing cost of goods sold by average inventory (Inventory Turnover Ratio).

8. Which of the following is not an inventory account?A.

B. Finished Goods.

C. Equipment.

D. Raw Materials.

Raw materials is an inventory account that contains the cost of materials that have not yet been started into the production process (Classifying Inventory).

9. Which of the following is not a legitimate business reason for taking a physical inventory?

A.

B. To determine cost of goods sold.

C. To determine if any inventory has been lost from waste, shoplifting or employee theft.

D. To keep the employees busy during a slow time in the business.

Correct! This is not a legitimate business reason for taking a physical inventory (Determining Inventory Quantities).

10. Ownership passes to the buyer when the goods are received from the public carrier if the goods are shipped:

A.

B. FOB buyer.

C. FOB shipper.

D. FOB destination.

Correct! Under these terms, title transfers when the buyer receives the goods from the public carrier, not when the public carrier accepts them from the seller (Goods in Transit).

11. Ownership passes to the buyer when the public carrier accepts the goods if the goods are shipped:A.

B. FOB buyer.

C. FOB shipper.

D. FOB destination.

Under these terms, title transfers when the public carrier delivers the goods to the buyer, not when the public carrier accepts the goods from the seller (Goods in Transit).

12. Which of the following is an acceptable inventory costing method?

A.

B. Last-in, first-out.

C. First-in, first-out.

D. All of the above.

Correct! All of the cost flow assumptions mentioned above are acceptable (Cost Flow Assumptions).

13. The FIFO inventory method assumes that the cost of the earliest units purchased are the

A.

B. last to be allocated to the cost of goods sold.

C. last to be allocated to the beginning inventory.

D. first to be allocated to the cost of goods sold.

Correct! FIFO assumes the cost of the earliest units purchased are the first to be allocated to cost of goods sold (First-In, First-Out).

14. A company just starting business made the following purchases in August:

A physical count of the inventory on August 31 reveals that there are 500 units on hand. Using the FIFO inventory method, the value of the ending inventory on August 31 is:

A.

B. $5,670.

C. $5,160.

D. $3,240.

Correct! This value correctly identifies the units as 300 from August 30th worth $1,980 and 200 from August 24th worth $1,260 for a total of $3,240 (First-In, First-Out).

15. A company just starting business made the following purchases in August:

A physical count of the inventory on August 31 reveals that there are 500 units on hand. Using the LIFO inventory method, the cost of goods sold for August is:A.

B. $2,730.

C. $5,670.

D. $5,160.

This represents cost of goods sold under FIFO, $1,560 + $2,340 + $1,260 = $5,160 (First-In, First-Out).

16. A company just starting business made the following purchases in August:

A physical count of the inventory on August 31 reveals that there are 500 units on hand. Using the average cost method, the cost of goods sold for August is:A.

B. $8,400.

C. $2,300.

D. $3,000.

This is the ending inventory value of 500 units at an average cost of $6 ($8,400/1,400 units) (Average Cost).

17. A company just starting business made the following purchases in August:

A physical count of the inventory on August 31 reveals that there are 500 units on hand. The inventory method that produces the lowest gross profit for August is:A.

B. the LIFO method.

C. the FIFO method.

D. not determinable.

While the amount of gross profit cannot be calculated since sales information is not available, the relative size of the gross profit can be determined by using the information about cost of goods sold to determine which method will produce the highest or lowest gross profit (Income Statement Effects).

18. Which of the following would most likely employ the specific identification method of inventory costing?

A.

B. Hardware store.

C. Gasoline station.

D. Jewelry store.

Correct! Jewelry stores use the specific identification method because of the high value and uniqueness of the inventory items (Specific Identification).

19. In a period of rising prices which inventory method will result in the greatest amount of income tax expense?A.

B. Specific identification.

C. FIFO.

D. Average cost.

Average cost will smooth out the rising costs against earlier, lower costs. This action will raise the cost of goods sold, reduce net income and thereby reduce income tax expense (Financial Statement and Tax Effects of Cost Flow Methods - Tax Effects).

20. S. Hagger Sounds has accumulated the following cost and market data on March 31:

Using the lower of cost or market, the value of the ending inventory is:A.

B. $64,000.

C. $65,000.

D. $70,000.

This amount is the sum of the cost values, not the sum of the lower of cost or market values (Lower of Cost or Market).

21. The following information came from the income statement of the Wilkens Company at December 31, 2010: sales $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. Wilkens' inventory turnover ratio for 2010 is:

A.

B. 2.5 times.

C. 3.75 times.

D. 6.0 times.

Correct! Since the cost of goods sold is the difference between sales and gross profit, it is equal to $1,200,000. The formula of cost of goods sold divided by average inventory (beginning inventory plus ending inventory divided by 2) results in an inventory turnover of 6 (Inventory Turnover Ratio).

22. The following information came from the income statement of the Wilkens Company at December 31, 2010: sales $1,800,000; beginning inventory $160,000; ending inventory $240,000; and gross profit $600,000. Wilkens' days in inventory for 2010 is:A.

B. 121.7 days.

C. 146 days.

D. 97.3 days.

When the incorrect answer from question 21 of 3.75 times is used, the result is 97.33 days in inventory. The correct answer to question 21 is 6 times, making the average days in inventory 60.8 (Inventory Turnover Ratio).

23. From the choices below, select the one correct response.A.

B. A manufacturing company would normally have raw materials, work in process, and merchandise inventory as inventory account classifications.

C. A manufacturing company would normally have raw materials, work in process, and finished goods as inventory account classifications.

D. A merchandising company would normally have raw materials, work in process, and finished goods as inventory account classifications.

Manufacturers utilize raw materials, work in process, and finished goods as inventory account classifications not merchandisers which use merchandise inventory (Classifying Inventory).

24. From the choices below, select the one correct response.A.

B. FIFO inventory valuation requires physical flow of goods to be representative of the cost flow.

C. Specific identification method inventory valuation requires physical flow of goods to be representative of the cost flow.

D. All of the above statements are correct.

While there is no requirement for the physical flow of goods under the LIFO or FIFO inventory valuation concepts to match cost flow, the principles of the specific identification method do have this constraint (Inventory Costing).

25. From the choices below, select the one correct response.

A.

B. The IRS dictates the method – FIFO, LIFO, or specific identification method, of inventory valuation a company must use.

C. The SEC dictates the method – FIFO, LIFO, or specific identification method, of inventory valuation a company must use.

D. Company management selects the method – FIFO, LIFO, or specific identification method, of inventory valuation a company will use.

Correct! The company management decides what inventory valuation method it wants to use (Inventory Costing).

26. With the assumption of costs and prices generally rising, select the correct statement from the following.

A.

B. FIFO provides the closest cost of goods sold to replacement cost.

C. Specific identification method provides the closest cost of goods sold to replacement cost on the income statement.

D. LIFO provides the closest valuation of cost of goods sold to replacement cost of inventory sold.

Correct! LIFO provides the closest relationship of replacement cost to cost of goods sold on the income statement (Financial Statement and Tax Effects of Cost Flow Methods).

27. If the ending inventory is overstated then:A.

B. assets are overstated and the cost of goods sold is overstated.

C. assets are overstated and the net income is understated.

D. assets are overstated and the liabilities are understated.

If the ending inventory is overstated, assets, net income, and stockholders' equity will be overstated, while the cost of goods sold will be understated.