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All corporations acquire financing by issuing stock for sale on public stock exchanges. Every transaction increases at least one account and decreases at least one account. Answer: False AICPA B: Resource Management Feedback: A transaction may have any combination of […]

A contra account is added to the account it offsets. The Sarbanes-Oxley Act (SOX) requires top management of companies to sign a report certifying that the financial statements are free of error. Answer: False Feedback: SOX requires top managers of […]

On July 1, Darin Company sold inventory costing $4,500 to Dee Company for $6,000, terms 2/10, n/30. Both companies use a perpetual inventory system. What journal entry will be recorded by Dee Company on July 1? A) Debit Purchases and […]

Flynn Company purchased a building for $400,000. At the end of the current year, the book value of the building is $220,000 and its fair value is $180,000. Assuming the building is rented to a tenant, the sum of future […]

Goods placed in inventory are initially recorded at: A) market value. B) the amount paid to acquire the asset. C) the amount paid to prepare the asset for sale to customers. D) the amount paid to acquire the asset and […]

Which of the following will occur when inventory costs are decreasing? A) FIFO will result in a lower net income but a higher ending inventory than will LIFO. B) FIFO will result in a higher net income but a lower […]

On December 31, 2015, a company had assets of $16 billion and stockholders’ equity of $8 billion. That same company had assets of $20 billion and stockholders’ equity of $9 billion as of December 31, 2016. During 2016, the company […]

Use the information above to answer the following question. What is the amount of retained earnings on the Balance Sheet at the end of Year 4? A) $7,725. B) $6,725. C) $4,800. D) $4,725. Answer: D Feedback: Total revenues = […]

Use the information above to answer the following question. Assuming that the company uses cash basis accounting, what is net income for May? Melody’s Piano School operations for the month of May were limited to the following transactions: – Provided […]

The gross earnings for all employees is credited to Salaries and Salaries and Wages Payable. A liability for dividends is recorded on the date of record. Answer: False Feedback: On the declaration date, the company’s board of directors formally approves […]

Inventory is reported on the balance sheet as a current asset. When a company pays its rent in advance, an asset is reported on the balance sheet. Answer: True Feedback: When a company pays its rent in advance, the expense […]

Which of the following statements best describes a contingent liability? A) The amount of a contingent liability is known and will definitely have to be paid in the future. B) A contingent liability is a potential liability that has arisen […]

The useful life of an asset is always measured in units of time, such as years or months. Net income is based on estimates. Answer: True Feedback: Proper counting is critical to income measurement, but estimation also plays a role. […]

Use the information above to answer the following question. What adjusting entry should Brickyard make on June 30 before preparing its annual financial statements? A) Debit Interest Expense and credit Interest Payable for $4,000 B) Debit Interest Expense and credit […]

Use the information above to answer the following question. What is the ending balance of the Cash account? Cash Beg. Bal. 123,900 (a) 14,700 6,000 (c) (b) 38,300 5,800 (d) 7,400 (e) 12,000 (f) 11,200 (g) A) $219,300 B) $113,300 […]

Assets reported on the balance sheet include: A) Accounts Receivable, Sales Revenue, and Cash. B) Equipment, Supplies Expense, and Cash. C) Accounts Payable, Retained Earnings, and Cash. D) Accounts Receivable, Equipment, and Cash. Which of the following would not be […]

Assume the periodic inventory method is used. When LIFO is used, costs are assigned to cost of goods sold using the most recent purchase at the time of the sale. In general, the cash flow from operating activities is considered […]

A dance studio accepts $1,500 to provide a series of dance lessons to a youth group during the month of July. The studio decides to record the revenue in July. The studio incurs rent, utilities, and salaries expenses in July. […]

If the Retained Earnings account is debited for $4,000 in the closing process, the company had a net income of $4,000. A merchandising company’s operating cycle begins with the sale of inventory and ends with the cash collection from sales. […]

A creditor might look at a company’s financial statements to determine if the: A) company is likely to have the resources to repay its debts. B) company’s stock price is likely to fall, signaling a good time to sell. C) […]

Which of the following statements about stock dividends is correct? A) Stock dividends are reported on the income statement. B) Stock dividends are reported on the Statement of Stockholders’ Equity. C) Stock dividends increase total stockholders’ equity. D) Stock dividends […]

Which is the first financial statement that should prepared after the adjusted trial balance has been prepared? A) Balance Sheet B) Income Statement C) Statement of Cash Flows D) Statement of Retained Earnings Choose the appropriate letter to match the […]

A company has positive cash flow from investing and financing activities, but negative cash flow from operating activities. The likely result is: A) investors may not buy the company’s stock because the receipt of dividends is unlikely. B) investors will […]

T. Powers Company’s financial statements on December 31, 2015, showed the following: Net Sales $275,000 Fixed Assets, January 1 $ 73,000 Fixed Assets, December 31 $ 67,000 Total Assets, January 1 $ 97,000 Total Assets, December 31 $100,000 What is […]

Gross profit is not a ledger account name. A company that pays no dividends is always a poor investment. Answer: False Feedback: Investors acquire common stock because they expect a return on their investment. This return can come in two […]

A company purchases a $300,000 building, paying $200,000 in cash and signing a $100,000 promissory note. What will be reported on the statement of cash flows as a result of this transaction? A) A $300,000 cash outflow from investing activities […]

The receipt of cash is one of the operating activities of: A) companies that sell goods but not companies that sell services. B) companies that sell to consumers but do not sell to other companies. C) merchandising, manufacturing, and service […]

Cash that is legally or contractually required to be set aside for a specific purpose cannot be reported with Cash and Cash Equivalents on the balance sheet. When costs per unit are increasing, the inventory costing method that results in […]

On December 31, 2015, Hoosier Inc. paid $10,000 to rent a storage facility from July 1, 2016 to July 1, 2017. Which of the following statements about the effect of this transaction on Hoosier’ financial statements is correct? A) Prepaid […]

LIFO and weighted average results will be the same using either a perpetual or periodic system. Stockholders are creditors of a corporation. Answer: False Feedback: Stockholders are the owners of a corporation. The periodic inventory system uses the Purchases account […]

Which of the following is the equation for cost of goods sold? A) Beginning inventory + Purchases – Ending inventory B) Beginning inventory + Purchases + Ending inventory C) Net purchases – Ending inventory D) Ending inventory + Purchases – […]

When originally purchased, a vehicle had an estimated useful life of 8 years. The vehicle cost $25,000 and its estimated residual value is $3,000. After 3 years of straight-line depreciation, the asset’s total estimated useful life was revised from 8 […]

The purpose of adjusting entries is to transfer net income and dividends to Retained Earnings. If a merchandiser offers a sales discount of 2/10, net/30 on a sale of $1,000, the amount due in 30 days is the net amount […]

A company makes a deferral adjustment that decreased a liability. This must mean that a(n): A) expense account was decreased by the same amount. B) expense account was increased by the same amount. C) revenue account was increased by the […]

When the lower of cost or market rule requires an inventory adjustment, the: A) adjustment usually, but not always, reduces the book value of inventory. B) write-down is usually reported as a part of cost of goods sold. C) inventory […]

Dividends in arrears are reported as current liabilities on the balance sheet. The higher the receivables turnover, the slower accounts receivable are being collected. Answer: False Receivable turnover = Net sales / Average net receivable The higher the receivables turnover, […]

Your company buys a computer server that it expects to use for eight years and then sell when it upgrades to a more powerful model. The server would probably be used by the business that buys it at that time […]

Income tax expense would be found on the income statement of a corporation, but not on the income statement of a sole proprietorship. A company does not need to record the receipt of a bill for utilities used during this […]

Current liabilities could include all of the following except: A) an accounts payable due in 30 days. B) a notes payable due in 9 months. C) a bank loan due in 18 months. D) any part of long-term debt due […]

GE buys back 300,000 shares of its stock from investors at $45 a share. Two years later it reissues this stock for $65 a share. The stock reissue would be recorded with a debit to Cash for: A) $19.5 million […]

Investors are often interested in the amount of net income distributed as dividends. Where would investors look for this information in the company’s annual report? A) Statement of retained earnings B) Balance sheet C) Notes to the financial statements D) […]

Which of the following would be included in cash flows from operating activities? A) Cash received from customers B) Cash received from an issuance of bonds C) Cash dividends paid to stockholders D) Cash used for purchases of equipment Use […]

On October 1, Angelica Inc. signs a note for $200,000 to provide the funds needed to build a new facility. The note is due in 10 years, includes an annual interest rate at 7%, and requires semiannual interest payments each […]

A company’s trial balance included the following account balances at year-end: The amount of net sales reported on the income statement would be: A) $114,400. B) $128,400. C) $112,000. D) $111,400. Which of the following will happen if the accrual […]

Langley Company uses the allowance method. During January 2016, Langley writes off a $500 customer account balance when it becomes clear that the customer will never pay. The entry to record the write-off will: A) decrease total assets by $500. […]

The following information was summarized from the adjusted trial balance of Reliance Yacht Repair, Inc. as of September 30, 2015, the end of the company’s fiscal year. Required: Part a. Prepare the closing entry for the company for the year […]

The closing process includes a transfer of the Dividends account balance to the Retained Earnings account. One reason why a company may choose a stock split over a stock dividend is that the stock split does not reduce Retained Earnings. […]

Which of the following statements about financing activities is not correct? A) Cash dividends paid to a company’s stockholders are reported as cash outflows from financing activities. B) When a company issues stock for cash, it reports a cash inflow […]

Which of the following is calculated by dividing net sales revenue by average net receivables? A) Days to sell ratio B) Current ratio C) Profit margin D) Receivables turnover ratio A deposit in transit on last month’s bank reconciliation is […]

On June 12, because management knew with near certainty that it had no chance of collection, Sheave Company wrote off a customer’s account balance in the amount of $350. On November 3, the customer mailed a payment for $350 to […]

Your company issues $500,000 in bonds at a price of 98. The journal entry used to record the issuance will include a debit to: A) Cash for $490,000, a debit to Discount on Bonds Payable for $10,000, and a credit […]

The asset, liability, and stockholders’ equity accounts are referred to as permanent accounts. Adjusting entries often involve cash. Answer: False Feedback: Adjusting entries never involve the Cash account. Transactions involving cash are recorded as regular journal entries. Company X issues […]

Segregation of duties means that a company assigns responsibilities so that: A) sufficient workers are available to cover all necessary jobs. B) responsibilities for related activities are assigned to two or more people. C) employees are restricted to jobs for […]

A decrease in receivables turnover ratio is indicative of: A) an increase in sales revenue. B) slower-selling inventory. C) an increase in accounts receivable. D) a decline in cost of goods sold. Which of the following ratios is a solvency […]

Use the information above to answer the following question. Which line items would be classified as noncurrent on a classified balance sheet? A) Cash; Supplies; Accounts Payable B) Equipment; Other Assets; Notes Payable C) Supplies; Equipment; Notes Payable D) Accounts […]

When preparing this month’s bank reconciliation, you find that you failed to record a $95 deposit for a payment you received from a customer. You immediately prepare a journal entry to record the deposit. Which of the following describes the […]

If a company receives $20,000 cash from its customers on account and uses the cash to pay $20,000 to its suppliers on accounts, the net result is that: A) assets would increase by $20,000 while liabilities would decrease by $20,000. […]

Langston Company updates its inventory periodically. The company’s cost of goods sold was $2,700 and purchases were $5,600 during the year. The company’s ending inventory count was $5,000. What was the amount of beginning inventory? A) $3,300 B) $13,300 C) […]

If total liabilities decreased by $25,000 and stockholders’ equity increased by $5,000 during a period of time, then total assets must change by what amount and direction during the same time period? A) $20,000 increase B) $20,000 decrease C) $30,000 […]

Chino Company reported net income of $20,000 for the current year. During the year, Inventory decreased by $7,000, Accounts Payable decreased by $8,000, Depreciation Expense was $10,000, and Accounts Receivable increased by $6,500. If the indirect method is used, what […]

The assignment of costs to cost of goods sold and to inventory using the weighted average method usually yields different results depending on whether a perpetual or a periodic system is used. A company can use different methods for inventories […]

Cary Inc. reported net credit sales of $300,000 for the current year. The unadjusted credit balance in its Allowance for Doubtful Accounts is $500. The company has experienced bad debt losses of 1% of credit sales in prior periods. Using […]

Suppose a company generally records revenues and expenses before receiving or making cash payments. Which of the following statements is not correct? A) If revenues are falling, a net loss could result even though the company reports a net cash […]

A company purchased equipment by issuing a $200,000, one-year, 8% note payable. The transaction would be recorded in the accounting records with a credit to Notes Payable for: A) $200,000. B) $216,000. C) $184,000. D) $208,000. Which of the following […]

Use the information above to answer the following question. Which of the following would be shown on B. Darin’s horizontal analysis when calculating percentage changes from the prior year to the current year? A) An increase in sales revenue of […]

Corporate income taxes cannot be calculated until all other adjustments are made. If a company uses $100 million of its cash to pay off debt, its stockholders’ equity will increase $100 million. Answer: False Feedback: Assets and liabilities would each […]

Which of the following statements about the par value of common stock is not correct? A) The par value is not the same as the market value of the stock. B) The par value is a nominal amount identified in […]

A one-time error in the application of the lower of cost or market (LCM) rule in the current period distorts financial results for the current accounting period: A) only. B) and the period before. C) and the period after. D) […]

Match the term with its definition. (There are more definitions than terms.) TERM _____ (1) Duality Of Effects _____ (2) Journal Entry _____ (3) Posting _____ (4) Debit _____ (5) Chart Of Accounts _____ (6) T-Account _____ (7) Credit _____ […]

To determine whether generally accepted accounting principles (GAAP) were followed in the preparation of financial statements, an examination of: A) tax documents would be performed by the IRS. B) the company’s accounting records would be performed by the SEC. C) […]

Which of the following statements about equity and debt financing is correct? A) Equity financing is always better than debt financing. B) Equity financing requires dividends to be paid. C) Dividends are tax deductible. D) Equity financing can change stockholder […]

Which of the following are used to determine cash flows from financing activities? A) Short-term debt, Accrued Liabilities, Common Stock, and Notes Payable B) Long-term debt, Common Stock, and Retained Earnings C) Short-term debt, Accrued Liabilities, Retained Earnings, and Bonds […]

Which of the following statements regarding periodic and perpetual inventory systems is correct? A) Perpetual inventory systems are inferior for determining optimal times to reorder inventory. B) Periodic inventory systems require a greater investment in technology. C) Perpetual inventory systems […]

Which of the following statements about an auto manufacturer’s inventory is not correct? A) Tires, batteries, glass, paint, headlamp bulbs, and electric wiring would be included in raw materials inventory. B) Incomplete cars that are still being processed would be […]

Benchmarks are required to evaluate a company’s performance. If the total dollar value of credits to an account exceeds the total dollar value of debits to that account, the ending balance of the account will be a debit balance. Answer: […]

A toy store with a calendar year-end is likely to have: A) unpredictable fluctuations in cash flow from quarter to quarter. B) the largest cash inflow from operating activities in the second and third quarters (April – September). C) a […]

A corporation does not have a legal obligation to pay dividends. A deferral adjustment may involve one asset and one expense account. Answer: True AICPB BB: Critical thinking Feedback: Deferrals commonly involve (1) an asset and an expense or (2) […]

The normal balance of an account is on the same side that increases the account. The effective-interest method of amortization is considered a conceptually superior method of accounting for bonds. Answer: True Feedback: The effective-interest method of amortization is considered […]

On December 16, 2015, B. Darin Company received $3,600 from S. Dee Company for rent of an office owned by B. Darin Company. The payment covers the period from December 16, 2015 through February 15, 2016. B. Darin Company recorded […]

Wiggly Pet Store had $6,000 of supplies at the end of October. During November, the company bought $2,000 of supplies. At the end of November, the company had $1,000 of supplies remaining. Which of the following statements is not correct? […]

An increase in revenue always: A) increases stockholders’ equity. B) increases assets. C) decreases stockholders’ equity. D) decreases assets. Transactions include which two types of events? A) Direct events, indirect events B) Monetary events, production events C) External exchanges, internal […]

In the U.S., Generally Accepted Accounting Principles (GAAP) are established by the: A) International Accounting Standards Board (IASB). B) Public Company Accounting Oversight Board (PCAOB). C) Financial Accounting Standards Board (FASB). D) American Institute of Certified Public Accountants (AICPA). A […]

Company A uses an accelerated depreciation method while Company B uses the straight-line method for an asset of the same cost and useful life. Which of the following statements is correct? A) Company A will have higher depreciation expense in […]

Which of the following is a financing activity? A) The business receives land and gives a check for $1,000. B) The business receives $1,000 cash and in exchange gives a promissory note. C) The business promises to hire an employee […]

The combined effect of the declaration and payment of a cash dividend on a company’s financial statements is to: A) increase total liabilities and decrease stockholders’ equity. B) increase total expenses and decrease assets. C) increase total assets and increase […]

Tyler Corporation was organized in 2015. Its corporate charter authorized the issuance of 50,000 shares of common stock, par value $5 per share, and 10,000 shares of 8% preferred stock, par value $25 per share. The following transactions took place […]

Which of the following factors would cause the least amount of concern about a company’s ability to continue as a going-concern? A) Excessive reliance on debt financing B) Loss of key personnel without comparable replacement C) Inadequate maintenance of long-lived […]

When the amount of a contingent liability can be reasonably estimated and its likelihood is possible but not probable, the company should: A) include a description in the notes to the financial statements. B) record the amount of the liability […]

Stock dividends and stock splits are similar in all of the following ways except: A) they both involve a pro rata distribution of shares to existing stockholders. B) they both reduce the stock price. C) they both decrease Retained Earnings. […]

Which of the following statements about transaction analysis is correct? A) Transactions are analyzed from the standpoint of the owners. B) All business activities are considered to be accounting transactions. C) The transaction amount is determined for each exchange based […]

Interest revenue from notes receivable is typically reported on a multiple step income statement as a part of Income from Operations. Because it is easier to use, the direct write-off method for uncollectible accounts is typically used instead of the […]

Use the information above to answer the following question. What journal entry will Brickyard make when paying the note at maturity? A) Debit Cash and credit Notes Payable for $200,000 B) Debit Cash and credit Notes Payable for $206,000 C) […]

Cost of goods sold = Beginning inventory + Purchases – Ending inventory You are pleasantly surprised to discover that a popular actress appears on The Tonight Show wearing your company’s jeans. Later, your company’s sales increase by $500,000 as a […]

A company had been selling its product for $20 per unit, but recently lowered the selling price to $15 per unit. The company’s current inventory consists of 200 units purchased at $16 per unit. The market value of this inventory […]

Which number is potentially the largest? A) The number of shares authorized. B) The number of shares issued. C) The number of shares outstanding. D) The number of shares certified. Use the information above to answer the following question. What […]

Which of the following statements about the income statement of a company that was formed 10 years ago is correct? A) Reports a Net Loss for the year if expenses are more than revenues. B) Reports the financial effects of […]

Which of the following is not an amount that is needed to calculate straight-line depreciation? A) The cost of the asset B) An estimate of the asset’s useful economic life to the company C) The estimated amount that the company […]

Assume that accrual basis accounting is used. Which of the following errors would most likely lead to an overstatement of net income in the current year? A) Recording revenue when the cash is collected next year although it is earned […]

Stockholders’ equity is: A) a liability of the business. B) an economic resource controlled by the business. C) the owners’ claims on the business. D) the profit generated by the business. On December 31, 2016, Ditka Inc. had Retained Earnings […]

Which of the following statements about cash flows from investing activities is correct? A) The proceeds from sales of investments are reported as cash inflows from investing activities. B) Cash flows from investing activities are calculated by making adjustments to […]

The use of internal controls guarantees protection against losses due to fraud, errors, and inefficiencies. The daily activities involved in running a business, such as buying supplies and paying salaries and wages, are classified as operating activities on the statement […]