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Your Best Advisors, a service company, uses reversing entries. On March 31, 2016, they journalized and posted the following adjusting entry to accrue Utilities Expense: Which of the following entries is the correct reversing entry to be prepared on April […]

A company changes its inventory costing method each period in order to maximize net income. This is a violation of the consistency principle. Ordinary repairs to plant assets are referred to as revenue expenditures. Answer: TRUE The trial balance verifies […]

The rate of return on total assets measures a company’s success in using its assets to earn a profit. Investors who want to know the amount of cash a company has available for new opportunities, such as expanding into a […]

Only permanent accounts appear on the post-closing trial balance. Freight out is an addition to the Merchandise Inventory account if the seller uses the perpetual inventory system. Answer: FALSE Consolidated statements combine the balance sheets, income statements, and statements of […]

In a multi-step income statement, which of the following items is excluded from the calculation of operating income? A) sales revenue B) interest expense C) selling expense D) administrative expense Which of the following is true of source documents in […]

Preferred stockholders receive a dividend preference over common stockholders. Sales on account are recorded in a cash receipts journal. Answer: FALSE The income from continuing operations helps investors make predictions about the company’s past performance. Answer: FALSE Metro Auto Parts […]

GAAP refer to guidelines for accounting information in the United States. The acronym GAAP in this statement refers to ________. A) Globally Accepted and Accurate Policies B) Global Accommodation Accounting Principles C) Generally Accredited Accounting Policies D) Generally Accepted Accounting […]

In the case of a deferred expense, the adjusting entry required at the end of a period will consist of a debit to the Prepaid Expense account. Assume the deferred expense was initially recorded as an asset. Laramie, Inc. signed […]

Two or more people working together to circumvent internal controls and defraud a company is known as ________. A) encryption B) firewall C) collusion D) separation of duties When applying the rules of the equity method, the Long-term Investments account […]

The Cash account is a temporary account. A payment of an expense in advance is called a prepaid expense. Answer: TRUE When a business collects cash, the Cash account is debited. Answer: TRUE The rate of return on total assets […]

The operating cycle is the time span required for a business to repay its long-term liabilities. The stockholders’ claim to the assets of a business is called equity or stockholders’ equity. Answer: TRUE If a debt security is purchased at […]

The face value of a bond payable minus the current balance of the discount account or plus the current balance of the premium account is the bond’s carrying amount. The direct method starts with net income and adjusts it to […]

A high rate of inventory turnover indicates difficulty in selling inventory. The issue price of a bond-whether it is issued at par, premium, or discount-has an effect on the principal repayment at maturity. Answer: FALSE Unearned revenue is a liability […]

Under the perpetual inventory system, when a purchaser makes payment within the discount period, the amount of discount will be credited to the Merchandise Inventory account. The Salaries Payable account is a permanent account. Answer: TRUE The system of accounting […]

A payment of an expense in advance is called a prepaid expense. When using a periodic inventory system, the Merchandise Inventory DR column, in the purchases journal, is replaced with a column titled Cost of Goods Sold DR. Answer: FALSE […]

The current ratio is calculated as total current assets divided by total current liabilities. When a business records an accrued utility liability, the Utilities Expense account is credited. Answer: FALSE The Accumulated Depreciation account is a permanent account. Answer: TRUE […]

Depending on the maturity date, held-to-maturity investments are categorized as current assets or long-term assets on the balance sheet. The beginning balance in the Retained Earnings account of a company was $11,000. The revenues and expenses were $220,000 and $170,000, […]

In a period of rising costs, the last-in, first-out (LIFO) method results in lower cost of goods sold and higher net income than the first-in, first-out (FIFO) method. If treasury shares are sold for less than their cost, the difference […]

Net pay is the total amount of compensation that an employee takes home after the deductions are made. When a corporation retires its shares of treasury stock, the stock certificates are canceled. Answer: TRUE Debit refers to the right side […]

The Social Security system is funded by contributions from both the employer and employee. Held-to-maturity investments are categorized as long-term assets on the balance sheet, regardless of the maturity date. Answer: FALSE The current portion of notes payable is the […]

Steve is an employee of Panache, Inc. Panache pays a portion of his health insurance premium and also contributes to a retirement plan in his name. The company’s share of the health insurance premium is $600, and the company’s contribution […]

Normally, companies with low gross profit percentages will have low asset turnover. The relative proportion of economic resources and obligations would be shown by the balance sheet. Answer: TRUE The Salaries Expense account is a temporary account. Answer: TRUE No […]

Companies are required to report plant assets as a single amount, with a note to the financial statements that provides detailed information. Financial leverage occurs when a company earns less income on borrowed money than the related interest expense. Answer: […]

Any person or business to whom a business owes money is called the business’s creditor. Under the perpetual inventory system, purchase returns or allowances are debited to the Merchandise Inventory account by the purchaser. Answer: FALSE The journal entry to […]

Both common and preferred stock carry the same degree of investment risk for the stockholder. The only time the Petty Cash account is used in a journal entry is when the account is established, increased, or decreased. Answer: TRUE The […]

Generally, all transactions are recorded in a special journal as well as the general journal. A creditor is a person who owes money to the business. Answer: FALSE As a part of the closing process, revenues and expenses may be […]

The balance in the Bonds Payable account is a credit of $16,500. The balance in the Premium on Bonds Payable account is a credit of $1,000. The balance sheet will report the bond balance as $15,500. A source document provides […]

The aging-of-receivables method is a balance sheet approach of estimating uncollectible accounts. Credit terms of a merchandising company are 1/15, net 40. This means that the buyer can receive a discount of 1% if the invoice is paid within 40 […]

Dollar value bias is the bias one sees from comparing number in relative (dollars) rather than absolute (percentage) terms. The percent-of-sales method calculates bad debts expense as a percentage of net credit sales. Answer: TRUE The financing activities section of […]

The system of accounting in which every transaction affects at least two accounts is called the double-entry system. Interest is generally stated as a monthly rate. Answer: FALSE The net realizable value of Accounts Receivable is calculated by subtracting Bad […]

Critical thinking and judgment skills are not necessary for accountants because technology has made the activities routine. Securities are represented by a certificate and are commonly traded on an exchange. Answer: TRUE When a company invests in equity securities with […]

When preparing the statement of cash flows, the amount of net cash flow from operating activities differs between the direct and indirect methods. The collection of time records is an accounting information system activity that is classified as a business […]

An equity security represents a credit relationship with another company or governmental entity. When a business makes a cash payment, the Cash account is debited. Answer: FALSE In a vertical analysis of the income statement, each line item is shown […]

Dividends is a(n) ________ account that has a normal ________ balance. A) liability; credit B) equity; debit C) liability; debit D) equity; credit For Expenses, the category of account and its normal balance is ________. A) equity and a credit […]

A control account ________. A) does not appear on the balance sheet B) has a balance that equals the sum of the balances in a group of related accounts in a subsidiary ledger C) is equivalent to a contra account […]

In a bank reconciliation, outstanding checks will be shown on the bank side of the reconciliation. In reviewing the T-account for Accounts Receivable, you find that the beginning balance is zero, the total increases are $5,400 and the total decreases […]

The T-account is a summary device that is shaped like a capital T with debits posted on the right side of the vertical line and credits posted on the left side of the vertical line. Accountants assume that the dollar’s […]

Journal entries are required if the bank reconciliation includes a book error. The creation of a corporation begins when its incorporators obtain a charter from the state. Answer: TRUE The major difference between a cash basis accounting system and an […]

John contributed $6,000 to the business by opening a bank account in the name of the business, United Internists. The corporation issued common stock to John. This transaction results in an increase in the assets of the business. Most corporations […]

Weighted average cost per unit is determined by dividing the cost of goods available for sale by the number of units available. The Common Stock account is a permanent account. Answer: TRUE Income taxes are withheld from the employee’s paycheck. […]

A receiving report should be matched with the supplier invoice before a payment to the supplier is approved. The trial balance is one of the three basic financial statements that are issued to external users of the business. Answer: FALSE […]

Gross profit is the extra amount the company receives from the customer for merchandise sold over what the company paid to the vendor. A natural resource is an asset that comes from the earth and is consumed. Answer: TRUE When […]

The trial balance is an internal document used only by employees of the company. The direct method restates the income statements in terms of cash. Answer: TRUE The third section presented on the statement of cash flows is the non-cash […]

A company purchased machinery by issuing a long-term note payable. This is an example of a non-cash investing and financing activity for the statement of cash flows. Enterprise resource planning systems are software systems that can integrate all of a […]

When using the effective-interest amortization method, the amount of the interest payment is calculated using the face value of the bonds and the stated interest rate. The Dividends account is increased by a debit. Answer: TRUE The current period earnings […]

Which of the following statements is true? A) The indirect method and the direct method will produce a different amount of net cash flow from investing activities. B) The indirect method starts with net income and adjusts it to cash […]

Generally accepted accounting principles require that interest expense be measured using the effective-interest amortization method, unless the straight-line amounts are similar. The Sarbanes-Oxley Act requires all private companies in the United States to maintain an internal control system. Answer: FALSE […]

The indirect and direct methods use different computations but produce the same amount of net cash flow from operating activities. Warranty Expense is shown on the income statement at the estimated amount. Answer: TRUE The Other Accounts DR columns of […]

Current liabilities must be paid either in cash or with goods and services within one year or within the entity’s operating cycle, if the cycle is longer than a year. The accounts payable subsidiary ledger lists each vendor along with […]

When preparing the statement of cash flows using the indirect method, a decrease in current liabilities is added to the net income to arrive at net cash flow from operating activities. Source documents provide the evidence and data for accounting […]

The asset turnover ratio measures the amount of net sales generated for each average dollar of total assets invested. The operating cycle is the process by which companies produce their financial statements for a specific period. Answer: FALSE The stockholders’ […]

Accrued revenue represents the receipt of cash before the revenue has been earned. When a corporation sells 9,000 shares of $12 par value common stock for $159,000, Common Stock is credited for $108,000. Answer: TRUE When using a four-column account, […]

Compound interest means that interest is calculated only on the principal amount. An accounting firm collected cash on account. As a result of this transaction, assets and revenues increase. Answer: FALSE Explanation: The asset Cash increases and the asset Accounts […]

Which of the following organizations requires publicly owned companies to be audited by independent accountants (CPAs)? A) Securities and Exchange Commission (SEC) B) Public Company Accounting Oversight Board (PCAOB) C) Financial Accounting Standards Board (FASB) D) American Institute of Certified […]

For good controls over cash payments, the company officer approving a payment voucher should be the same as the person who ordered the goods, to ensure that the correct amount of cash is paid. Tuesday Electric Company uses the direct […]

If the merchandise inventory’s market value is greater than its cost, then it must be adjusted for the difference. If a bank reconciliation includes interest revenue, a journal entry is required which credits Cash and debits Interest Revenue. Answer: FALSE […]

The main reason companies retire bonds prior to their maturity date is to relieve the pressure of paying interest payments. Electronic funds transfer is a system that transfers cash by using paper documents. Answer: FALSE A creditor is any person […]

When determining the date of maturity of a note, omit the date the note was issued. A reduction in the amount of cash received from a customer for early payment is known as a sales discount. Answer: TRUE Medicare is […]

A debtor of Adams Company owes $500,000 but does not have enough cash to repay the debt. Following lengthy negotiations, the parties agreed that the debtor will issue 200,000 shares of common stock to settle the debt. This transaction will […]

Reversing entries are dated on the first day of the new accounting period. A transaction is any event that affects the financial position of the business and can be easily estimated. Answer: FALSE Explanation: A transaction is any event that […]

In a periodic inventory system, a sale of inventory involves two entries, one to record Sales Revenue and one to record Cost of Goods Sold. If the maker of the note fails to pay on the maturity date, the note […]

An expenditure that increases the capacity or efficiency of a plant asset that extends the asset’s life is known as a revenue expenditure. The main computer where data are stored, which can be accessed from many different computers, is known […]

Maintaining good controls over merchandise inventory ensures that inventory purchases are properly authorized and accounted for by the accounting system. Purchase discounts are calculated on the amount of the merchandise purchased including freight costs. Answer: FALSE Worksheet procedures for a […]

The collection period of accounts receivable is usually long: therefore, it is classified as a long-term asset on the balance sheet. If the bank reconciliation includes a bank service charge, a journal entry is required, which debits Bank Expense and […]

An accounting information system collects, records, stores, and processes accounting data to produce information that is useful for decision makers. Benchmarking often compares a company against a key competitor or the industry average. Answer: TRUE The income statement also is […]

The investing activities section of the statement of cash flows reports cash receipts and payments that increase or decrease long-term liabilities. The guidelines for accounting information are called Generally Accepted Accounting Principles (GAAP). Answer: TRUE A common-size statement reports the […]

The cash payments journal is a special journal used to record cash payments by currency but not by check. The journal entry for the purchase of treasury stock includes a credit to Cash. Answer: TRUE If the total debits equal […]

The three sections of the statement of cash flows report only activities that involve cash. Using the effective-interest amortization method, the calculation for the amount of premium amortization is the difference between the cash paid and the calculated interest expense. […]

Which of the following statements is true of the direct and indirect methods of preparing the statement of cash flows? A) The indirect method and the direct method will produce the same amount of net cash flow from operating activities. […]

A merchandiser’s statement of retained earnings looks exactly like that of a service business. Johnson Company purchased land for $30,000. The president of Johnson Company believes that the land is actually worth $35,000. The land can be recorded at $35,000. […]

An accounts receivable requires the business to pay cash in the future. Benchmarking is the practice of comparing a company with other leading companies. Answer: TRUE When bonds are retired at maturity, assuming the last interest payment has already been […]

Regarding gross and net pay, which of the following statements is correct? A) Gross pay minus all deductions such as income tax withheld equals net pay. B) Net pay represents the total salaries and wages expense to the employer. C) […]

A petty cash fund was established with a $575 balance. It currently has cash of $45 and petty cash tickets as shown below: Which of the following would be included in the journal entry to replenish the Petty Cash fund? […]

Working capital measures a business’s ability to meet its long-term obligations with its current assets. The consistency principle states that businesses should report the same amount of ending merchandise inventory from period to period. Answer: FALSE The Common Stock account […]

An asset is considered to be obsolete when a newer asset can perform the job more efficiently. Inventory turnover measures the number of times a company sells its average level of merchandise inventory during a period. Answer: TRUE The disposal […]

Electronic funds transfer moves cash by electronic communications. A preferred stock is an example of a debt security. Answer: FALSE In a computerized environment, the posting process is completed automatically when the user enters the journal entry. Answer: TRUE A […]

The consistency principle states that a business should use the same accounting methods and procedures from period to period. Under both the allowance method and the direct-write off method of accounting for uncollectible accounts, the amount of bad debts expense […]

The advance cash receipts of future revenues are called ________. A) accrued revenues B) deferred expenses C) deferred revenues D) accrued expenses Days’ sales in receivables measures ________. A) how many days it takes to order and receive inventory B) […]

A trial balance is a list of all of the accounts of a company with their balances at a point in time. The balance in the Bonds Payable account is a credit of $77,000. The balance in the Discount on […]

In a multi-step income statement, interest revenue and interest expense are included in operating income. An amount that a merchandiser earns by selling its inventory is known as sales revenue or sales. Answer: TRUE Warranties pose an accounting challenge because […]

Which of the following organizations is responsible for the creation and governance of accounting standards in the United States? A) Financial Accounting Standards Board B) Institute of Management Accountants C) American Institute of Certified Public Accountants D) Securities and Exchange […]

Since a company usually does not know the amount of the year-end bonus at year-end, the company estimates the amount of the bonus based on a percentage. Sales through credit cards and debit cards are journalized in the same way […]

Internal control is an organizational plan that ensures that the financial statements are prepared and submitted on time. The specific identification method of inventory costing is recommended when a business deals in unique and high-priced inventory items. Answer: TRUE A […]

The operating cycle of a merchandiser begins when the company purchases inventory from a vendor and ends when the company then sells the inventory to a customer. When using the periodic inventory system, there is no need to record an […]

On January 1, 2017, Everlight Corp. has the following account balances:Accounts Receivable Allowance for Bad Debts Bad Debts ExpenseDuring the year, Everlight has $155,000 of credit sales, collections of credit sales of $143,000, and write-offs of $3,300. It records bad […]

A fully depreciated asset that is still in service is not reported as an asset on the balance sheet. The total amount of assets a business possesses may or may not be equal to the total of liabilities and equity […]

The percent-of-sales method calculates bad debts expense based on a percentage of net cash sales. Financial accounting focuses on information for decision makers outside of the business, such as creditors and taxing authorities. Answer: TRUE An overstatement of ending merchandise […]

The expense associated with the cost of uncollectible accounts receivable is known as bad debts expense. A purchase discount is the amount offered to the purchaser for delaying the payment to the seller. Answer: FALSE For the year ended December […]

If a merchandiser uses the periodic inventory system, it is necessary to conduct a physical count of inventory to determine the quantity of inventory on hand. To complete the statement of cash flows, the net change in cash and cash […]

Adjusting entries may involve any account, including Cash. In a corporation, the board of directors is elected by the chairperson of the company. Answer: FALSE Asset and liability accounts are closed to the Income Summary account. Answer: FALSE Brookside Market […]

The cash balance in a company’s general ledger and the bank’s balance on the bank statement will always be the same. The balance in the Bonds Payable account is a credit of $92,000. The balance in the Premium on Bonds […]

An overstatement of ending merchandise inventory in the current period results in an understatement of net income in the current period. Cash dividends cause a decrease in both assets and stockholders’ equity of the corporation. Answer: TRUE The lump-sum amount […]

Corporations may not retire preferred stock in order to avoid paying the preferred dividends. The asset turnover ratio is calculated by dividing cost of goods sold by average total assets. Answer: FALSE The revenue recognition principle is the basis for […]

Petty cash is a fund containing a small amount of cash that is used to pay for minor expenditures. The process by which businesses allocate a natural resource’s cost over its usage is known as depreciation. Answer: FALSE Data from […]

In reviewing the T-account for Accounts Receivable, you find that the beginning balance is zero, the total increases are $5,400 and the total decreases are $2,100. This means that the ending balance of the account is a credit balance of […]

Money earns income over time, a fact called the time value of money. Debits in the journal are always posted as debits in the ledger. Answer: TRUE All items on the book side of the bank reconciliation require journal entries. […]

The use of MACRS is acceptable for financial reporting under GAAP. The Common Stock account is increased by a debit. Answer: FALSE A company is uncertain whether a complex transaction should result in an asset being recorded at $100,000 or […]

Under cash basis accounting, an expense is recorded only when cash is paid. The operating activities section of the statement of cash flows includes activities that create revenue or expenses for the entity’s business. Answer: TRUE When a company uses […]

The trial balance is an internal document used only by employees of the company. Prepaid Rent is always classified as a long-term asset. Answer: FALSE The market rate is the rate used to calculate the actual cash payments made to […]

A balance sheet prepared in the account form lists the assets at the top and the liabilities and stockholders’ equity below. A trial balance is a list of all of the accounts of a company with their balances at a […]

A method of accounting for uncollectible receivables in which the company estimates bad debts expense instead of waiting to see from which customers the company will not be able to collect is known as the allowance method. Estimated Warranty Payable […]

Markus Company maintains a separate accounts receivable account for each customer. On June 18, Markus sells $6,400 services on account to customer Anthony and $1,000 services on account to customer Walker. How will these two transactions affect the control and […]

The issue price is the price the stock initially sells for the first time it is sold. A high current ratio indicates that current liabilities are greater than current assets. Answer: FALSE A vertical analysis would be used if an […]

After posting the journal entries from the journal to the ledger, the accounting equation should be in balance. The last two columns generally found on the right side of the worksheet are the income statement columns. Answer: FALSE Liabilities are […]

Under the last-in, first-out (LIFO) method, the cost of goods sold is based on the oldest purchases. The maturity value of a note is the sum of the principal minus interest due at maturity. Answer: FALSE For the vertical analysis […]