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1) The control environment in an internal control structure is the attitude and awareness of internal control by all employees. 2) When a new partner is admitted to a partnership, bonuses attributable to either the old partnership or to the […]

1) A business that requires all cash payments be made by check can not use a petty cash system. 2) The materials requisition serves as the source document for debiting the accounts in the materials ledger. Answer: FALSE 3) Many […]

1) At the end of a period (before adjustment), Allowance for Doubtful Accounts has a debit balance of $2,000. The Accounts Receivable balance is analyzed by aging the accounts and the amount estimated to be uncollectible is $15,000. The amount […]

1) In a process costing system, each process will have a work in process inventory account. 2) The form of the balance sheet in which assets, liabilities, and owner’s equity are presented in a downward sequence is called the report […]

1) A controlling account is used to record the details of the individual accounts. 2) Purchasing supplies on account increases liabilities and decreases equity. Answer: FALSE 3) One reason a dollar today is worth more than a dollar 1 year […]

1) To arrive at cash flows from operations, it is necessary to convert the income statement from an accrual basis to the cash basis of accounting. 2) Depositing all cash, checks, etc. in a bank and paying with checks is […]

1) Liability accounts are increased by debits. 2) The updating of accounts is called the adjusting process. Answer: TRUE 3) The recording of cash payments from the cash account is done by entering the amount as a credit. Answer: TRUE […]

1) An example of a general-purpose financial statement would be a report about projected price increases related to transportation costs. 2) The presence of a subsidiary ledger requires the presence of a summarizing controlling account. Answer: TRUE 3) The current […]

1) All costs of the processes in a process costing system ultimately pass through the Cost of Goods Sold account. 2) A chart of accounts is a listing of accounts that make up the journal. Answer: FALSE 3) After the […]

1) If a new partner is given a 20% interest in the firm then the new partner will receive a 20% interest in earnings. 2) The amount journalized showing the cost added to finished goods is taken from the cost […]

1) In horizontal analysis, the current year is the base year. 2) A voucher is a written authorization to make a cash payment. Answer: TRUE 3) If the bonds are purchased between interest dates, the purchase price includes accrued interest […]

1) If a firm has a quick ratio of 1, the subsequent payment of an account payable will cause the ratio to increase. 2) The underlying principle of allocating operating expenses to departments is to assign to each department an […]

1) Period costs are costs that are incurred for the production requirements of a certain period. 2) The cash account will always be debited. Answer: FALSE 3) The effective interest method produces a constant dollar amount of interest expense to […]

1) A deficit in Retained Earnings is reported in the stockholders’ equity section of the balance sheet. 2) The process of transferring the debits and credits from the journal entries to the accounts is known as updating the accounts. Answer: […]

1) Indirect labor and indirect materials would be part of factory overhead. 2) Property tax expense for a department store’s store equipment is an example of a direct expense. Answer: TRUE 3) If two companies have the same current ratio, […]

1) If fixed costs are $650,000 and the unit contribution margin is $30, the sales necessary to earn an operating income of $30,000 are 14,000 units. 2) The major advantage of residual income as a performance measure is that it […]

1) The doomsday ratio includes both cash and cash equivalents in the numerator. 2) The amount of depreciation expense for the first full year of use of a fixed asset costing $95,000, with an estimated residual value of $5,000 and […]

1) Liabilities are increased with debits and decreased with credits. 2) If fixed costs are $450,000 and the unit contribution margin is $50, the sales necessary to earn an operating income of $50,000 are 10,000 units. Answer: TRUE 3) If […]

1) A debit is abbreviated as Db and a credit is abbreviated as Cr. 2) The plant managers salary in a manufacturing business would be considered an indirect cost. Answer: TRUE 3) The two main sources of stockholders’ equity are […]

1) Transactions must first be recorded into the general journal before they can be entered into specialized journals. 2) Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system. Answer: FALSE 3) The present […]

1) An account has three parts to it; a title, an increase side, and a decrease side. 2) The principal ledger that contains all the balance sheet and income statement accounts is the general ledger. Answer: TRUE 3) The direct […]

1) The profit center income statement should include only revenues and expenses that are controlled by the manager. 2) Proprietorships are owned by one owner and provide only services to their customers. Answer: FALSE 3) When accounting for uncollectible receivables […]

1) The process by which management allocates available investment funds among competing capital investment proposals is termed present value analysis. 2) A company should only use nonfinancial performance measures when financial measures cannot be calculated. Answer: FALSE 3) The job […]

1) Conversion costs are generally added evenly throughout the process. 2) Cash flows from investing activities, as part of the statement of cash flows, include receipts from the issuance of bonds payable. Answer: FALSE 3) The controller’s staff consists of […]

1) Journalizing transactions using the double-entry bookkeeping system will eliminate fraud. 2) All companies must use a calendar year as their fiscal year. Answer: FALSE 3) In computing the ratio of net sales to assets, long-term investments are excluded from […]

1) When the rate of return on total assets ratio is greater than the rate of return on common stockholders’ equity ratio, the management of the company has effectively used leverage. 2) The excess of the cash flowing in from […]

1) When preparing an income statement vertical analysis, each revenue and expense is expressed as a percent of net income. 2) Employees view budgeting more positively when goals are established for them by senior management. Answer: FALSE 3) Money market […]

1) Comparing dividends per share to earnings per share indicates the extent to which the corporation is retaining its earnings for use in operations. 2) If a fire destroys the merchandise inventory, the gross profit method can be used to […]

1) A compensating balance occurs when a bank may require a company to maintain a maximum cash balance. 2) During the closing process, some balance sheet accounts are closed and end the period with a zero balance. Answer: FALSE 3) […]

1) The FIFO method of process costing is simpler than the Average cost method. 2) If the adjustment for accrued salaries at the end of the period is inadvertently omitted, both liabilities and owner’s equity will be understated for the […]

1) Temporary investments are recorded at their cost which would include brokers commissions. 2) If the standard to produce a given amount of product is 600 direct labor hours at $15 and the actual was 600 hours at $17, the […]

1) Under the periodic inventory system, the cost of merchandise sold is recorded when sales are made. 2) The contribution margin ratio is the same as the profit-volume ratio. Answer: TRUE 3) Once an account has been closed for the […]

1) Depreciation expense on factory equipment is part of factory overhead cost. 2) The Limited Liability Company may elect to be manager managed rather than member managed which means that only authorized members may legally bind the corporation. Answer: TRUE […]

1) The concept of present value is that an amount of cash to be received at some date in the future is the equivalent of the same amount of cash held at an earlier date. 2) Under the perpetual inventory […]

1) The report on internal control required by the Sarbanes-Oxley Act of 2002 may be prepared by either management or the companys auditors. 2) If ending inventory for the year is overstated, owner’s equity reported on the balance sheet at […]

1) During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO cost method. 2) In a process costing […]

1) In order to choose the proper activity base for a cost, managerial accountants must be familiar with the operations of the entity. 2) An employee’s take home pay is equal to gross pay less all voluntary deductions. Answer: FALSE […]

1) At the end of the fiscal year, the variances from standard are usually transferred to the finished goods account. 2) The price of a bond is equal to the sum of the interest payments and the face amount of […]

1) The capital expenditures budget summarizes future plans for acquisition of fixed assets. 2) In preparing a bank reconciliation, the amount indicated by a credit memo for a note receivable collected by the bank is added to the balance per […]

1) The increase side of all accounts is the normal balance. 2) Manufacturers use labor, plant, and equipment to convert direct materials into finished products. Answer: TRUE 3) The amortization of a premium on bonds payable decreases bond interest expense. […]

1) The normal balance of a capital account is a debit. 2) Budget preparation is best determined in a top-down managerial approach. Answer: FALSE 3) The methods or procedures used to record and report financial data are called the accounting […]

1) The use of subsidiary ledgers is limited to Accounts Payable and Accounts Receivable. 2) An advantage of the current ratio is that it considers the makeup of the current assets. Answer: FALSE 3) Indirect costs can be specifically identified […]

1) The amount of capital paid in by the stockholders of the corporation is called legal capital. 2) The trial balance prepared after all the closing entries have been posted is called a pre-closing trial balance. Answer: FALSE 3) One […]

1) The acquisition costs of property, plant, and equipment should include all normal, reasonable and necessary costs to get the asset in place and ready for use. 2) The amount of the net income for a period appears on both […]

1) A qualitative characteristic that may impact upon capital investment analysis is manufacturing control. 2) Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are recorded. Answer: TRUE 3) When a […]

1) Average rate of return equals average investment divided by estimated average annual income. 2) The declaration and issuance of a stock dividend would be reported on the statement of cash flows. Answer: FALSE 3) The cost of replacing an […]

1) The adjusting entry to record inventory shrinkage would generally include a debit to Cost of Merchandise Sold. 2) If the totals of the Income Statement debit and credit columns of a work sheet are $27,000 and $29,000, respectively, after […]

1) Cash outflows from financing activities include the payment of cash dividends, the acquisition of treasury stock, and the repayment of amounts borrowed. 2) The average rate of return method of capital investment analysis gives consideration to the present value […]

1) The cash budget summarizes future plans for acquisition of fixed assets. 2) A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the […]

1) The internal rate of return method of analyzing capital investment proposals uses the present value concept to compute an internal rate of return expected from the proposals. 2) Supervisor salaries and indirect factory wages would normally appear in the […]

1) The statement of cost of goods manufactured is an extension of the income statement for a manufacturing company. 2) Since the adjustments are entered on the work sheet, it is not necessary to record them in the journal or […]

1) If direct materials cost per unit decreases, the amount of sales necessary to earn a desired amount of profit will decrease. 2) A staff department or unit is one that provides services, assistance, and advice to the departments with […]

1) It is not possible for one company to influence the operating policies of another company unless it owns more than 50% interest in that company. 2) In many retail businesses, inventory is the largest current asset. Answer: TRUE 3) […]

1) In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account. 2) The job order costing system is not used by service organizations. Answer: FALSE 3) Accruals are needed when an unrecorded expense has been incurred […]

1) A large public corporation normally uses registrars and transfer agents to maintain records of the stockholders. 2) Most companies who have several bank accounts, petty cash, and cash on hand, would list each separately on the balance sheet. Answer: […]

1) Sarbanes-Oxleys purpose is to improve financial reporting. 2) Accrued taxes payable are generally reported on the balance sheet as a current liability. Answer: TRUE 3) Direct costs can be specifically traced to a cost object. Answer: TRUE 4) The […]

1) At the end of the fiscal period, prepaid expenses are reported on the income statement as expenses. 2) If a business sells two products, it is not possible to estimate the break-even point. Answer: FALSE 3) Services provided on […]

1) When selling a piece of equipment for cash, a loss will result when the proceeds of the sale are less than the book value of the asset. 2) The process of transferring the data from the journal to the […]

1) The reduction in the par or stated value of common stock, accompanied by the issuance of a proportionate number of additional shares, is called a stock split. 2) If ending inventory for the year is understated, net income for […]

1) Inventory errors, if not discovered, will self-correct in two years. 2) Direct materials cost that varies with the number of units produced is an example of a fixed cost of production. Answer: FALSE 3) Medicare taxes are withheld from […]

1) The costs of materials and labor that do not enter directly into the finished product are classified as cost of goods sold. 2) The cost of production report reports the cost charged to production and the costs allocated to […]

1) Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 per pound and costs $42 per pound to produce. Product P would sell for $82 per pound and would require an […]

1) Cost of Merchandise Sold is often the largest expense on a merchandising company income statement. 2) Gains and losses on the redemption of bonds are reported as other income or other expense on the income statement. Answer: TRUE 3) […]

1) The erroneous arrangement of digits, such as writing $45 as $54, is called a slide. 2) If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination. Answer: FALSE 3) In […]

1) When compared to a corporation, one of the major disadvantages of the partnership is its limited life. 2) The accounting for defined benefit plans is usually very easy and straight forward. Answer: FALSE 3) Managerial information is for external […]

1) Twenty percent of all businesses in the United States are corporations and they account for 80% of the total business dollars generated. 2) Revenue recognition concept requires that the reporting of revenue be included in the period when cash […]

1) If employees accept a wage contract that decreases the unit contribution margin, the break-even point will decrease. 2) On the work sheet, the capital and drawing account balances are extended to the Balance Sheet columns. Answer: TRUE 3) A […]

1) After analyzing transactions, the next step would be to post the transactions in the ledger. 2) The market rate of interest is affected by a variety of factors, including investors’ assessment of current economic conditions. Answer: TRUE 3) It […]

1) If 10,000 units which were 40% completed are in process at November 1, 80,000 units were completed during November, and 12,000 were 20% completed at November 30, the number of equivalent units of production for November was 75,600. (Assume […]

1) The FIFO method separates work done on beginning inventory in the previous period from work done on it in the current period. 2) When a business receives a bill from the utility company, no entry should be made until […]

1) Generally accepted accounting principles require companies to use only one factory overhead rate for product costing. 2) Developing and retaining quality managers is an advantage of decentralization. Answer: TRUE 3) In preparing the cash flows from operating activities section […]

1) The stock dividends distributable account is listed in the current liability section of the balance sheet. 2) The cost of a patent with a remaining legal life of 10 years and an estimated useful life of 7 years is […]

1) The ratio of net sales to assets measures how effectively a business is using its assets to generate sales. 2) Receiving a bill or otherwise being notified that an amount is owed is not recorded until the amount is […]

1) Capital expenditures are costs that are charged to Stockholders’ Equity accounts. 2) The seller records the sales tax as part of the sales amount. Answer: FALSE 3) The closing process is sometimes referred to as closing the books. Answer: […]

1) Planning is the process of developing the companys objectives or goals and translating these objectives into courses of action. 2) A company pays $36,000 for twelve month’s rent on October 1. The adjusting entry on December 31 is debit […]

1) A bond is simply a form of an interest bearing note. 2) At year-end, the balance in the prepaid insurance account, prior to any adjustments, is $6,000. The amount of the journal entry required to record insurance expense will […]

1) Preferred stockholders must receive their current year dividends before the common stockholders can receive any dividends. 2) If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 5. […]

1) Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 per pound and costs $42 per pound to produce. Product P would sell for $82 per pound and would require an […]

1) The lower-of-cost-or-market method of determining the value of ending inventory can be applied on an item by item, by major classification of inventory, or by the total inventory. 2) Under the periodic inventory system, the merchandise inventory account continuously […]

1) The desired selling price for a product will be the same under both variable and total cost. 2) The equity method is usually more appropriate for accounting for investments where the purchaser does not have significant influence over the […]

1) Under a periodic inventory system, the merchandise on hand at the end of the year is determined by a physical count of the inventory. 2) An adjusting entry to accrue an incurred expense will affect total liabilities. Answer: TRUE […]

1) Most large companies will use only one inventory costing methods for all of its different segments. 2) When a new partner is admitted by making an investment in the partnership, the old partners’ capital accounts are always credited. Answer: […]

1) When the effective interest method of amortization is used, the amount of interest expense for a given period is calculated by multiplying the face rate of interest by the bonds carrying value at the beginning of the given period. […]

1) The trial balance may be listed on the work sheet instead of being prepared separately. 2) When a partnership dissolves, a new partnership is formed and a new partnership agreement should be prepared. Answer: TRUE 3) Direct materials and […]

1) Under the cost method, when treasury stock is purchased by the corporation, the par value and the price at which the stock was originally issued are important. 2) The post-closing trial balance will generally have fewer accounts than the […]

1) Free cash flow is the measure of operating cash flow available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity and dividends. 2) An example of deferred revenue is Unearned Rent. Answer: TRUE 3) […]

1) One way to report revenue earned by a company is to present it by the different segments of business. 2) If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the annual interest […]

1) If Division Q’s income from operations was $30,000 on invested assets of $200,000, the rate of return on investment is 15%. 2) The usual presentation of the statement of owner’s equity is (1) Beginning capital, (2) Net income or […]

1) The most effective means of presenting standard factory overhead cost variance data is through a factory overhead cost variance report. 2) In a company’s annual report, the section called management discussion and analysis provides critical information in interpreting the […]

1) The cash payback method of capital investment analysis is one of the methods referred to as a present value method. 2) When a corporation issues stock at a premium, it reports the premium as an other income item on […]

1) An accounting system is the methods and procedures used to collect, classify, summarize, and report the businesses financial information 2) On the income statement, miscellaneous expenses are usually presented as the last item without regard to the dollar amount. […]

1) Purchasing equipment by issuing a six-month note should be shown on the statement of cash flows under the investing activities section. 2) If the liabilities owed by a business total $300,000 and owners equity is equal to $300,000, then […]

1) Job order cost accounting systems may be used for planning and controlling a service business. 2) When merchandise inventory is shown on the balance sheet, both the method of determining the cost of the inventory and the method of […]

1) Average rate of return equals estimated average annual income divided by average investment. 2) Nonmanufacturing costs are classified into two categories: selling and administrative. Answer: TRUE 3) A check for $342 was erroneously charged by the bank as $4 […]

1) Average inventory is computed by adding the inventory at the beginning of the period to the inventory at the end of the period and dividing by two. 2) The statement of cash flows reports a firm’s major sources of […]

1) About 90% of the businesses in the United States are organized as corporations. 2) The process of recording a transaction in the journal is called journalizing. Answer: TRUE 3) A notation in the post reference column of the general […]

1) The statement of cash flows is an optional financial statement. 2) The percentage analysis of increases and decreases in corresponding items in comparative financial statements is referred to as horizontal analysis. Answer: TRUE 3) Bonds may be purchased directly […]

1) When old equipment is traded in for a new equipment, the difference between the list price and the trade in allowance is called boot. 2) In a computerized accounting system, a work sheet may not be necessary because the […]

1) Gross profit minus selling expenses equals net income. 2) The double-entry accounting system records each transaction twice. Answer: FALSE 3) Accounting systems evolve through a three-step process: analysis, design and feedback. Answer: FALSE 4) The master budget of a […]

1) A cost object indicates how costs are related or identified. 2) Unearned Revenues account is an example of a liability. Answer: TRUE 3) Form W-2 is called the Wage and Tax Statement. Answer: TRUE 4) Even when a trial […]