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Restrictions of retained earnings are also called appropriated retained earnings or reserves. Companies should always take advantage of cash discounts even if they have to borrow money from the bank to do so. Answer: FALSE If warranty obligations are material, […]

Expenses, such as utilities, whose benefit is consumed by the passage of time rather than by the level of sales, are known as period costs. The purchaser bears the transportation cost when the terms are FOB destination. Answer: FALSE When […]

Payment of dividends is a financing activity. In substance, there is absolutely no difference between the 100% stock dividend and the two-for-one stock split. Answer: TRUE Depreciation is recomputed starting in the period that a change in estimate is known. […]

The balance sheet equation is assets = liabilities – owner’s equity. Revenue is recorded when accounts receivable are collected under the cash basis of accounting. Answer: TRUE Corporations are the most important form of business ownership because they conduct the […]

Implicit transactions are events such as cash receipts and disbursements that trigger nearly all day-to-day routine entries. A cross-sectional evaluation of financial ratios involves comparing a company’s financial ratios with the ratios of other companies. Answer: TRUE The dividend-yield ratio […]

Under the market method, the investment in another company’s stock is recorded at acquisition cost and is adjusted for the investor’s share of dividends and for any earnings or losses experienced by the investee after the date of investment. Depreciation […]

Retailers accept bank cards such as VISA and Master Card in order to get cash immediately rather than waiting for the customers to pay in due course. Under the direct method, depreciation is ignored when calculating cash flows from operations. […]

The net liability of bonds will decrease each interest period if the bonds were issued at a premium. Cutoff errors are failures to record transactions in the correct time period. Answer: TRUE Managerial accounting serves external users while financial accounting […]

Stake, Inc., records the payment of $200 cash for a previously accrued expense and the accrual of $625 for another expense. The impact of these two entries is to decrease net income by $825. Purchases of inventory minus the increase […]

U.S. financial reporting follows the IASB framework for decision usefulness. Under the FIFO method, ending inventory is valued based on the oldest unit costs. Answer: FALSE The investing section of the Statement of Cash Flows includes the sale of fixed […]

Under the periodic inventory system, freight-in is an additional part of cost of goods sold. Under the market method, the investor recognizes revenue when dividends are received. Answer: TRUE The purchase of an intangible asset such as a trademark would […]

Accounting for changes in residual value must be prospective and retrospective. A comparison of a company’s financial ratios with its own historical ratios is referred to as a cross-sectional comparison. Answer: FALSE Net sales is always equal to total sales […]

A privilege granted by a manufacturer or distributor to sell a product or service in accordance with specified conditions is termed a franchise. The accountant uses adjusting entries to record implicit transactions at the end of each reporting period. Answer: […]

Debt security investments include short-term obligations of banks and short-term notes payable issued by large corporations with top credit ratings. Liabilities are known as contra assets. Answer: FALSE If land was acquired many years ago, and inflation has occurred over […]

When bad debts recoveries occur, the write-off should be reversed and the collection handled as a normal receipt on account. The accounts receivable turnover ratio indicates how rapidly customers pay their bills. Answer: TRUE Entries for the accrual of unrecorded […]

Increases in the market value of available-for-sale securities increase total stockholders’ equity, but increases in the market value of trading securities do not increase total stockholders’ equity. The auditor’s opinion is included with the annual report issued by the corporation. […]

The most important element of internal control is reliable personnel with clear responsibilities. A disadvantage of debt for long-term financing is that the interest expense incurred on debt reduces net income. Answer: TRUE Closing entries deal primarily with balance sheet […]

Oxhaven Company has determined that 2% of $50,000 credit sales are uncollectible. The Allowance for Uncollectible Accounts currently has a credit balance of $250. The adjusting entry amount for bad debts should be $1,000. Module Accounting Services receives $8,000 cash […]

A recoverability test is necessary to determine if an asset is impaired. Over time, the cost of processing accounting information has increased. Answer: FALSE The percentage of taxable income paid to the government by corporations is known as the tax […]

Posting is the transferring of amounts from the journal to the appropriate accounts in the ledger. The market interest rate is affected by general economic conditions. Answer: TRUE Outstanding checks should be added to the balance per bank when preparing […]

Trend analysis involves comparing data on one financial statement with other data on the same financial statement. Franchises and licenses are legal contracts that grant the buyer the right to sell a product or service. Answer: TRUE Accountants generally do […]

Preferred stock is like common stock in that dividends are not a legal obligation until the board of directors declares them. A trial balance proves the equality of the total debits and total credits of the accounts listed. Answer: TRUE […]

In a bank reconciliation, company errors are adjustments to ________. Bank errors are adjustments to ________. A) balance per bank; balance per bank B) balance per company; balance per company C) balance per bank; balance per company D) balance per […]

Depreciation is not intended to track the decreasing current market value of a tangible asset. Top management does not need to own a significant number of shares in order to have the authority to exert great influence on the actions […]

Simple interest is calculated by multiplying an interest rate by an unchanging principal amount. Earnings quality is a well-defined and well-understood concept. Answer: FALSE The purchase of office equipment on account would increase assets and decrease stockholders’ equity. Answer: FALSE […]

U.S. Treasury obligations are interest-bearing notes, bonds, and bills issued by the U.S. federal government. LIFO results in a more accurate valuation of ending inventory on the balance sheet than does FIFO. Answer: FALSE Coupon rate and nominal interest rate […]

ERP is a means of organizing computer accounting information. Gains on disposal of plant assets are generally shown as “other income” on the income statement. Answer: TRUE The rate of return on investment is equal to invested capital divided by […]

When shareholders are entitled to stock dividends in amounts equal to fractional units, corporations issue additional shares for whole units plus cash equal to the market value of the fractional units. A line of credit is a written promise to […]

Under the direct method, dividends from investments are included when calculating cash flows from operations. Failure to adjust for accrued revenue will understate stockholders’ equity. Answer: TRUE Historically, periodic inventory systems have been used for low value, high volume items, […]

The adjusting entry to record $650 of expired insurance would include a debit to Unearned Insurance. When computing an impairment loss for a tangible asset, the market price shall be the fair value unless no active market exists for the […]

The American Institute of Certified Public Accountants is responsible for establishing GAAP in the United States A compound entry is when two or more journal entries are made. Answer: FALSE The operating cycle is the time it takes for a […]

Negative numbers are never used in the journal or the ledger; the effect on the account is conveyed by the side on which the number appears. Another name for the P-E ratio is the earnings multiple. Answer: TRUE The major […]

There are two types of leases: capital leases and financial leases. With respect to dividends, the record date comes first and is always followed by the declaration date, which is then always followed by the payment date. Answer: FALSE A […]

Net cash provided by operating activities is always equal to net income. Dividends received from a subsidiary would be classified as an investing activity on a statement of cash flows. Answer: FALSE A T-account is an analysis of an account. […]

If ending inventory is overstated by $3,000 in 20X3, retained earnings at the end of 20X4 will be correctly stated. Long-lived assets include accounts receivable and inventory. Answer: FALSE Common-size statements aid in comparing companies of different sizes. Answer: TRUE […]

Under the cash method, revenue is recorded when cash is collected. The adjusting entry to record $675 of earned revenue received in advance would include a debit to Unearned Revenue. Answer: TRUE An affiliated company is one that has 20% […]

Audit committees perform the internal audits of a company. Examples of assets include cash, inventory, and capital stock. Answer: FALSE[/cpmembership] Implicit interest is a form of interest expense that is not explicitly recognized in a loan agreement. Answer: TRUE A […]

The credit terms 2/4, n/30 means that the customers may take a 4% cash discount if they pay within 30 days. Some explicit transactions (e.g., the loss of assets due to fire) do not involve actual exchanges of goods and […]

The primary purpose of financial accounting is to A) supply information for external users’ decision making. B) provide data for internal users’ decision making. C) produce data for income taxes. D) create an audit report. E) organize the data for […]

A leasehold is the right to use a fixed asset for a specified period of time beyond one year. The accrual basis of accounting provides a better measure of economic performance than the cash basis. Answer: TRUE Goodwill occurs when […]

Costs that are linked with revenues and are charged as expenses when the related revenue is recognized are known as product costs. The MACRS of depreciation is used for income tax purposes and financial reporting purposes. Answer: FALSE The normal […]

Debits are always journalized after credits. Public accountants are those whose services are offered to the general public on a fee basis. Answer: TRUE Both the direct and indirect methods yield the same net cash flow from operations. Answer: TRUE […]

A decrease in accounts receivable is added to the financing activities when preparing a statement of cash flows using the indirect method. Recorded goodwill is considered to exist unless impaired. Answer: TRUE Journalizing is the analysis of the effects of […]

The accounts used in the journal entry for the estimation of bad debts is the same whether a firm uses the percentage of sales, percentage of accounts receivable, or the aging method to estimate bad debts expense. The allowance method […]

Total accounts receivable are one of the denominators for the debt ratios. Cash received from customers is equal to sales plus the increase in accounts receivable. Answer: FALSE Once a company begins to make revaluation adjustments for plant assets, it […]

The date the board of directors declares a dividend is known as the record date. Investors purchase capital stock expecting to receive dividends and an increase in the value of the stock. Answer: TRUE An income statement without any intermediate […]

Both stock dividends and stock splits involve a reduction in the par value of the stock. A trial balance is similar to a balance sheet in that it only includes balance sheet accounts. Answer: FALSE Assuming inflation, FIFO will result […]

The sale of a plant asset may result in a gain but not a loss. A compensating balance is the required minimum cash balance on deposit when money is borrowed from the bank. Answer: TRUE A lease is a contract […]

Interest expense that is not explicitly recognized in a loan agreement is referred to as coupon or nominal interest. Financial management is concerned with where a company gets cash and how it uses that cash to its benefit. Answer: TRUE […]

The cost of merchandise acquired is the invoice price of the goods plus directly identifiable inbound transportation costs less any cash or quantity discounts and less any returns or allowances. The denominator in the basic earnings per share ratio is […]

Revenue is generally recognized at the point of sale. The interest coverage ratio measures the firm’s ability to meet its interest obligation. Answer: TRUE According to accounting rules, fiscal years are required to be established over calendar years. Answer: FALSE […]

Revenue is recognized when a customer’s promise to pay exists, even if the company is not relatively certain that they will receive payment. An aging schedule reveals $6,500 of uncollectible accounts. The Allowance for Uncollectible Accounts currently has a credit […]

Adjusting entries are journalized after the financial statements are prepared. Corporations are perpetual entities created in accordance with federal laws. Answer: FALSE Comprehensive income includes both net income and the change in market value of available-for-sale securities. Answer: TRUE The […]