1. The accounting period is the time
a. the Controller decides to close the books.
b. between selling a product to a customer and collecting the cash from the customer.
c. that it usually takes to journalize and post events to the ledger.
d. covered by the income, cash flow, and shareholders’ equity statements.
2. An event that affects assets, liabilities, or shareholders’ equity is considered to be
a. timely.
b. objectively measured.
c. relevant.
d. capitalized.
3. An event for which an appropriate monetary measure can be derived is considered to be
a. objectively measured.
b. economically viable.
c. relevant.
d. capitalized.
4. If an event is considered to change assets, liabilities, or shareholders’ equity with an
appropriate monetary measure, then it is
a. considered a financial changing event.
b. listed on the U.S. stock exchange.
c. considered a debt or payable of a company.
d. recorded in the books of a company.
5. If assets are $1,100, liabilities are $600, and contributed capital is $200, then
shareholders’ equity is
a. $500.
b. $1,700.
c. $800.
d. $900.
6. Alberto Company paid its insurance premiums for a two-year insurance policy on May 1,
2015, and recorded them in a prepaid insurance account. The adjusting entry required at
May 31, 2015, to recognize the one-month portion for the month of May will
a. increase an expense account and increase a liability account.
b. increase an expense account and decrease an asset account.
c. increase an asset account and decrease an expense account.
d. increase a revenue account and decrease an asset account.
7. Vera Company acquired a new forklift in exchange for signing a 6-month, 10%, $20,000
note dated May 1, 2015. Vera agreed to repay the entire principal at the end of the 6–
month period. Vera should:
a. record one month of interest expense only if the forklift runs as intended.
b. record all 6 months of expense when the interest is paid.
c. accrue one month of interest expense at May 31, 2015.
d. record the interest payments as prepaid interest when paid.
8. On May 31, 2015, the physical count of office supplies was $2,400. During June,
supplies were acquired at a cost of $1,600 and the company debited the Office Supplies
Expense account. At June 30, actual supplies on hand totaled $500. The credit part of
the adjusting entry required at the end of June is
a. Office Supplies Expense of $1,900.
b. Office Supplies of $1,900.
c. Office Supplies Expense of $2,400.
d. Office Supplies of $500.
9. Liabilities are $3,000, retained earnings are $1,000, and contributed capital is $4,000.
Assets must be
a. $4,000.
b. $8,000.
c. $5,000.
d. $6,000.
10. Which one of the following changes describes the receipt of $3,000 from the issuance of
common stock?
a. Assets and shareholders’ equity increase by $3,000.
b. Assets and shareholders’ equity decrease by $3,000.
c. Assets and liabilities increase by $3,000.
d. Assets increase and shareholders’ equity decreases by $3,000.
11. A revenue account
a. is increased with a debit.
b. is not considered to be an item on the income statement.
c. is reported on the balance sheet at the end of the accounting period.
d. when offset with expenses ultimately leads to net income and an increase to retained
earnings.
12. The declaration of dividends
a. increases with a credit.
b. decreases retained earnings.
c. is necessary for proprietorships.
d. is an expense account on the income statement.
13. Which one of the following changes describes the receipt of $4,000 from the issuance of
a long-term note payable?
a. Assets and shareholders’ equity increase by $4,000.
b. Assets and shareholders’ equity decrease by $4,000.
c. Assets and liabilities increase by $4,000.
d. Assets and liabilities decrease by $4,000.
4-4 Test Bank – Chapter 4 – The Mechanics of Financial Accounting
14. Which of the following changes describes the purchase of $3,000 of inventory through
payment on credit?
a. Assets and shareholders’ equity increase by $3,000.
b. Assets and shareholders’ equity decrease by $3,000.
c. Assets and liabilities increase by $3,000.
d. Assets and liabilities decrease by $3,000.
15. Providing $5,000 of services to customers on account causes
a. assets and shareholders’ equity to decrease by $5,000.
b. assets and shareholders’ equity to increase by $5,000.
c. assets and liabilities to increase by $5,000.
d. assets and liabilities to decrease by $5,000.
16. Which of the following changes describes the payment of $2,000 for cash dividends?
a. Assets and shareholders’ equity increase by $2,000.
b. Assets and shareholders’ equity decrease by $2,000.
c. Assets and liabilities increase by $2,000.
d. Assets and liabilities do not change.
17. The balance sheet reported supplies of $1,900 at December 31, 2015. On December 31,
2015, the actual supplies on hand amounted to $1,400. The adjusting entry required at
the end of December 31, 2015 is
a.
Supplies
1,900
Supplies Expense
1400
Cash
3,300
b.
Supplies Expense
1,900
Supplies
1,900
c.
Supplies
1,400
Supplies Expense
1,400
d.
Supplies Expense
500
Test Bank – Chapter 4 – The Mechanics of Financial Accounting 4-5
Supplies
500
18. Which of the following changes describes the purchase of $4,000 of equipment financed
by the issuance of a long-term note payable?
a. Assets and shareholders’ equity increase by $4,000.
b. Assets and shareholders’ equity decrease by $4,000.
c. Assets and liabilities decrease by $4,000.
d. Assets and liabilities increase by $4,000.
19. Acacia Company provided landscaping services and received $3,000 from customers
immediately. Which of the following occurred?
a. Assets and shareholders’ equity increase by $3,000.
b. Assets and shareholders’ equity decrease by $3,000.
c. Assets and liabilities increase by $3,000.
d. Assets and liabilities decrease by $3,000.
20. Lakesha Corp. purchased $3,000 of supplies on account. The supplies will be used over
the next few months. This event causes
a. assets and shareholders’ equity to increase by $3,000.
b. assets and shareholders’ equity to decrease by $3,000.
c. assets and expenses to decrease by $3,000.
d. assets and liabilities to increase by $3,000.
21. Which one of the following changes describes the payment of $900 for utilities for the
current month?
a. Assets and shareholders’ equity decrease by $900.
b. Assets and shareholders’ equity don’t change.
c. Assets and liabilities increase by $900.
d. Assets and liabilities decrease by $900.
22. Which of the following changes describes the payment of $30,000 for a new bulldozer?
a. Assets and shareholders’ equity decrease by $30,000.
b. Assets decrease and shareholders’ equity increases by $30,000.
c. No net change in total assets.
d. Assets decrease by $30,000.
23. Which of the following changes describes the collection of $7,000 from customers who
had charged on account for services preformed during a previous accounting period?
a. Assets and shareholders’ equity increase by $7,000.
b. Assets and liabilities increase by $7,000.
c. Assets and liabilities decrease by $7,000.
d. No changes in total assets, liabilities, or shareholders’ equity.
24. Employees were paid $10,000 on June 9, 2015 for five days work through Friday, June
3. What adjusting entry was necessary at the company’s year-end, Tuesday, May 31,
2015, as a result of this?
a. Debit Wages Expense and credit Cash for $10,000
b. Debit Wages Expense and credit Shareholders’ equity for $6,000.
c. Debit Wages Payable and credit Wages Expense for $6,000.
d. Debit Wages Expense and credit Wages Payable for $4,000.
25. Which of the following changes describes the distribution of $1,000 of dividends to
owners?
a. Assets and net income decrease by $1,000.
b. Assets decreases and net income increases by $1,000.
c. Assets and shareholders’ equity decrease by $1,000.
d. Assets and liabilities decrease by $1,000.
26. An expense account
a. is increased with a credit.
b. ultimately decreases shareholders’ equity.
c. appears on the balance sheet at the end of the accounting period.
d. is not an income statement account.
27. In a trial balance, if total debits do not equal total credits when the accounts are totaled,
a. the bookkeeper must have made an error.
b. the expected inequality is corrected during the normal adjusting process.
c. no change is made because the amount of assets will typically exceed the amount of
liabilities.
4-8 Test Bank – Chapter 4 – The Mechanics of Financial Accounting
d. the company will report a loss on its income statement because expenses are
greater than revenues.
28. Marks Corp. purchased supplies at a cost of $2,600 during 2015. At January 1, 2015,
supplies on hand amounted to $800. At December 31, 2015, supplies on hand are $400.
Supplies expense for 2015 are
a. $1,200.
b. $2,200.
c. $1,600.
d. $3,000.
29. On December 13, 2015, Michael Company received $10,000 in cash as a payment in
advance from a customer and credited Unearned Service Revenue. The balance in the
Unearned Service Revenue account was $2,000 at the beginning of December. At the
end of December, all but $600 had been earned. What adjusting entry is necessary at
the end of December?
a.
Cash
Unearned Service Revenue
Service Revenue
11,500
b.
Unearned Service Revenue
Service Revenue
10,600
c.
Unearned Service Revenue
Service Revenue
11,400
d.
Service Revenue
Unearned Service Revenue
10,000
30. Which of the following describes the receipt of $6,000 from the issuance of common
stock?
a. No entry
b. Debit shareholders’ equity and credit assets for $6,000
c. Debit assets and credit shareholders’ equity for $6,000
d. Debit liabilities and credit assets for $6,000
31. Which of the following debits and credits describes the payment of interest and principal
on a loan?
a. Debit an asset and credit a liability
b. Debit an asset, debit an expense, and debit a liability
c. Credit an asset, debit an expense, and debit a liability
d. Credit an asset and debit a liability
32. Favre Company paid for insurance in advance. Which transaction will Favre record?
a. Debit Cash and credit Insurance Expense.
b. Debit Prepaid Insurance and credit Cash.
c. Debit Prepaid Insurance and credit Accounts Payable.
d. Debit Cash and Credit Prepaid Insurance.
33. A company has a 4-month, 11%, $20,000 Notes Payable account in its general ledger at
the end of the year. The note matures two months after the end of the accounting period.
Which statement is true?
a. Interest revenue must be accrued at the end of the accounting period.
b. The notes payable could generate a gain if the note is paid off early.
c. The interest was paid when the cash was borrowed.
d. Interest expense must be accrued at the end of the accounting period.
34. Gilbert Company purchased equipment financed by the issuance of a 4-year note
payable. To record this, Gilbert will
a. debit assets and credit shareholders’ equity.
b. debit shareholders’ equity and credit liabilities.
c. debit assets and credit liabilities.
d. debit liabilities and credit assets.
35. Goodyear Co. purchased $5,000 of equipment with a $5,000 cash payment. Goodyear
Co. should
a. debit one asset and credit another asset for $5,000.
b. debit shareholders’ equity and credit assets for $5,000.
c. debit assets and credit liabilities for $5,000.
d. no entry
36. Buckeye Company received $2,000 from customers for services provided during the
current month. Buckeye will
a. debit liabilities and credit revenue for $2,000.
b. debit revenue and credit assets for $2,000.
c. debit assets and credit revenue for $2,000.
d. debit liabilities and credit assets for $2,000.
Test Bank – Chapter 4 – The Mechanics of Financial Accounting 4-11
37. When an adjusting entry for depreciation expense for the accounting period is recorded,
a. assets and shareholders’ equity increase.
b. the amount of depreciation expense is subtracted from accumulated depreciation.
c. assets and shareholders’ equity decrease.
d. assets increase and shareholders’ equity decreases.
38. An asset account
a. has a debit balance.
b. is increased with a credit.
c. is a shareholders’ equity account because it has a book value.
d. will have a negative balance if the company’s expenses exceed revenues for the
period.
39. When making adjustments to plant asset accounts,
a. the total dollar amount in the accumulated depreciation account will determine the
amount of depreciation expense for the current accounting period.
b. depreciation expense is added to the plant asset account.
c. depreciation expense reduces net income.
d. the current market value of the long-lived asset determines the amount of
depreciation expense.
e. the accrual system is ignored.
40. During April, Tempe Corp. paid $5,000 on account for supplies that were purchased,
recorded, and used during March. In recording this transaction, Tempe will
a. debit Accounts Payable and credit Cash.
b. debit Shareholders’ equity and credit Accounts Payable.
c. debit Supplies Expense and credit Accounts Payable.
d. accrue an expense of $5,000.
41. When an adjusting entry that recognizes accrued interest revenue is recorded,
a. assets increase and liabilities increase.
b. shareholders’ equity increases and liabilities decrease.
c. assets decrease and liabilities decrease.
d. shareholders’ equity and assets increase.
Test Bank – Chapter 4 – The Mechanics of Financial Accounting 4-13
42. All of the following statements are true except:
a. All economic events recorded in financial statements must be relevant.
b. All economic events recorded in financial statements must affect liabilities.
c. All economic events recorded in financial statements must be objectively measurable
in monetary terms.
d. All economic events recorded in financial statements must maintain the equality of
the accounting equation.
43. If the balance sheet is in balance,
a. assets must equal liabilities.
b. assets must exceed liabilities.
c. transactions recorded must be right.
d. errors may still exist.
44. Items and rights that a company acquires through objectively measurable transactions
that can be used in the future to generate economic benefits are
a. liabilities.
b. assets.
c. contributing capital.
d. revenues.
45. Scottsdale Corp. received several invoices in the mail for oil changes performed on its
company trucks during the last week of April. The total of the invoices was $900 and all
are due on May 13. What entry should Scottsdale make at April 30 as a result of
receiving the invoices?
a. Debit Accounts Receivable and credit Cash for $900.
b. Debit Maintenance Expense and credit Accounts Payable for $900.
c. Debit Maintenance Expense and credit Cash for $900.
d. Debit Prepaid Maintenance and credit Cash for $900.
46. Shareholders’ equity increases because of two primary reasons, which are the
a. sale of stock and the earning of income.
b. earning of income and the payment of dividends.
c. payment of dividends and payment of expenses.
d. collection of cash from customers and the payment of expenses to creditors.
47. Dobson Company sold stock for cash and received cash for services performed during
the current month. Which of the following summarizes the income statement impact of
these transactions for the current month?
a. Both the sale of stock and the performance of services increased revenues for the
company.
b. Only the performance of services caused an increase in revenues.
c. Only the performance of services caused a decrease in revenues.
d. Only the sale of stock caused revenues to increase.
48. Subdivisions of assets, liabilities, and shareholders’ equity are called
a. revenues.
b. accounts.
c. contributed capital.
d. journals.
49. Which of the following sets of accounts is closed at the end of an accounting period?
a. Interest Expense, Interest Payable, Interest Receivable
b. Unearned Revenue, Sales Revenue, Interest Revenue
c. Interest Expense, Rent Revenue, Dividends
d. Retained Earnings, Sales Revenue, Unearned Revenue
50. The statement of cash flows provides information about
a. operating activities.
b. financing activities.
c. investing activities.
d. all of the above.
4-16 Test Bank – Chapter 4 – The Mechanics of Financial Accounting
51. Phoenix Corp. paid rent of $15,000 per month for 3 months in advance on November 1,
2015. Phoenix accounting period ends on December 31, 2015. Which amount will be
reported at December 31, 2015?
a. Prepaid Rent of $5,000 on its December 31, 2015 balance sheet
b. Rent Payable of $15,000 on its December 31, 2015 balance sheet
c. Rent Expense of $15,000 on its income statement for the year ending December 31,
2015
d. Rent Expense of $5,000 on its income statement for the year ending December 31,
2015
52. Which one of the following is a characteristic of the double entry system?
a. For every debit in every account, there must be a corresponding credit of the same
dollar amount in the same account.
b. The total dollar value of debits must equal the total dollar amount of the credits in
most of the accounts.
c. For every asset recorded in the accounting records, there must be a corresponding
liability of the same dollar amount.
d. The total dollar amount of debits must equal the total dollar amount of the credits.
53. The statement of shareholders’ equity is a record of activity over a period of time of the
a. contributed capital accounts.
b. retained earnings account.
c. dividends account.
d. both a and b.
54. Journal entries are used to indicate how
a. much profit was earned during the accounting period.
b. events affect the retained earnings account.
c. events affect the accounting equation.
d. much dividends were paid to shareholders.
55. The accounting concepts that underlie the accrual system of accounting are
a. debits and credits.
b. revenue recognition and matching.
c. revenue recognition and debits equal credits.
d. matching and deferrals.
56. Recognition of a gain or loss may result from
a. the sale of goods to customers on account.
b. the sale of a company’s common stock to an investor.
c. the sale of a non-current asset.
d. the revenue recognition process associated with selling products to customers.
57. Which one of the following transactions will ultimately cause a decrease in retained
earnings?
a. Payment of the current month’s telephone bill
b. Collection of cash from a customer for services provided in the current month
c. Payment of the prior month’s account payable balance
d. Receipt of interest on a note receivable
58. What effect does recognizing accrued wages expense at the end of the accounting
period have on the accounting equation?
a. Assets decrease and shareholders’ equity decreases.
b. Liabilities increase and shareholders’ equity decreases.
c. Assets decrease and liabilities decrease.
d. Liabilities decrease and shareholders’ equity decreases.
59. A company sold vacant land that it had owned for three years. The difference between
the amount of cash receipts and the original cost of land owned by the company
a. is reported as a revenue or expense on the income statement.
b. represents the amount of gain or loss associated with the asset sold.
c. represents the amount of cash associated with the asset sold.
d. should be debited or credited directly to retained earnings.
Test Bank – Chapter 4 – The Mechanics of Financial Accounting 4-19
60. What effect does recognizing revenue at the end of the accounting period for rent
received in advance have on the accounting equation?
a. Revenues increase and liabilities decrease.
b. Assets increase and shareholders’ equity increases.
c. Revenues decrease and liabilities decrease.
d. Liabilities increase and revenues decrease.
61. Which one of the following statements is true?
a. Accruals are adjustments that are recorded prior to the associated cash flow taking
place.
b. Cash is used in the accrual process.
c. Accrual accounting recognizes revenues and expenses based on current period
cash flows.
d. Accrual accounting may use either two asset or two liability accounts.
62. Which one of the following is a required characteristic of accruals and deferrals?
a. An asset or a liability will always be affected.
b. Cash is either increased or decreased as a result of recording an accrual or deferral.
c. Accruals record revenues, and expenses record deferrals.
d. An asset and an expense item will always be affected.
63. The main purpose of the adjusting process is
a. to remove the effects of all transactions recorded during the accounting period.
b. to make the account balances reflect the company’s true position according to the
guidelines of accrual accounting.
c. to get the accounting records ready for a new accounting period.
d. to identify the amount of cash available for dividends to be paid.
64. The biggest distinction between accruals and deferrals is
a. one emphasizes conservatism while the other promotes aggressive accounting
positions.
b. how long a company must wait until the collection of cash occurs.
c. with accruals, no record of the activity has been made prior to the adjustment
process, and with deferrals, the activity has already been recorded in the accounting
records, but the proper amount of revenue or expense has not been recognized.
d. adjustments are necessary for accruals, whereas, adjustments are not necessary for
deferrals.
65. Closing entries result in net income being transferred to
a. a revenue account.
b. the cash account.
b. the contributed capital account.
d. the retained earnings account.
66. A multinational is
a. a company that prepares accruals and deferrals throughout the year as well as
yearend.
b. a corporation that has no home country due to operations in several countries.
c. a corporation that has its home in one country but operates under the laws of other
countries as well.
d. a type of adjusting entry necessary for companies that trade with corporations in
other countries.
67. On December 31, 2015, immediately after all the adjustments were made to Kingman
Corp’s accounting records for the 2015 fiscal year, but before the books were closed, the
retained earnings account reflected a balance of $60,000. Kingman Corp’s net income
for 2015 was $12,000. Kingman paid no dividends during 2015. On the balance sheet for
January 1, 2016, the beginning balance in the retained earnings account will be
a. $0
b. $72,000
c. $38,000
d. $60,000