1) We record gain contingencies when the gain is probable and can be reasonably
estimated.
2) An S Corporation allows a company to enjoy limited liability as a corporation, but
tax treatment as a partnership.
3) FICA taxes are paid only by the employee.
4) Growth stocks have high expectations of future earnings growth, and therefore,
usually trade at higher PE ratios.
5) For countries whose tax standards are closely tied to financial reporting standards
(Continental Europe and Japan), accounting earnings tend to be lower so companies can
minimize tax payments.
6) The Allowance for Uncollectible Accounts is a contra asset account representing the
amount of accounts receivable that we do not expect to collect.
7) When preparing a statement of cash flows, IFRS allows companies to report cash
outflows from interest payments as either operating or financing cash flows, while U.S.
GAAP requires these outflows to be reported as only operating activities.
8) We record dividends paid as a financing activity.
9) The adjusting entry for an accrued revenue always includes a debit to a liability
account and a credit to a revenue account.
10) Effective internal controls ensure a companys success and survival.
11) Dividends are considered an expense in running the business and reported in the
income statement.
12) A companys operating cash inflows less operating cash outflows generally equals
the reported amount of net income in the income statement.
13) Accrued interest on a note receivable is interest earned by the end of the year but
not yet received.
14) The net realizable value of accounts receivable is the full amount owed by
customers.
15) The process of transferring the debit and credit information from the journal to
individual accounts in the general ledger is called journalizing.
16) The amount of cash reported in a companys balance sheet includes the balance of
accounts receivable if cash collection is highly likely in the near future.
17) Common Stock increases with a credit and decreases with a debit.
18) What would be the impact on the accounting equation when a company purchases
treasury stock?
a. Increase assets and increase stockholders equity
b. Decrease assets and increase stockholders equity
c. Decrease assets and decrease stockholders equity
d. No effect on the accounting equation
19) After preparing a bank reconciliation, the service fee charged by the bank would be
recorded with a:
a. Credit to Service Fees Expense
b. Debit to Cash
c. Credit to Service Fees Revenue
d. Debit to Service Fees Expense
20) The rate quoted in the bond contract used to calculate the cash payments for interest
is called the:
a.Face rate
b.Yield rate
c.Market rate
d.Stated rate
21) Preferred stock is called preferred because it usually has two preferences over
common stock. These preferences relate to:
a.Dividends and voting rights
b.Par value and dividends
c.The preemptive right and voting rights
d.Dividends and distribution of assets if the corporation is dissolved
22) The percentage-of-credit-sales method for estimating uncollectible accounts is
sometimes described as:
a. The balance sheet method
b. The method most used by companies
c. The income statement method
d. The percentage-of-receivables method
23) On May 1, Ace Bonding Company purchased inventory costing $2,000 on account
with terms 2/10, n/30. On May 8, Ace pays for this inventory and records which of the
following using a periodic inventory system?
a. Accounts Payable 2,000
Cash 2,000
b. Accounts Payable 1,960
Purchase Discounts 40
Cash 2,000
c. Accounts Payable 2,000
Purchase Discounts 40
Cash 1,960
d. Cash 2,000
Accounts Payable 2,000
24) Davis Hardware Company uses a periodic inventory system. How should Davis
record the return of inventory previously purchased on account for $200?
a. Inventory 200
Accounts Payable 200
b. Accounts Payable 200
Inventory 200
c. Purchase Returns 200
Accounts Payable 200
d. Accounts Payable 200
Purchase Returns 200
25) Bricker Enterprises purchased a machine for $100,000 on October 1, 2015 . The
estimated service life is ten years with a $10,000 residual value. Bricker records
partial-year depreciation based on the number of months in service. Depreciation
expense for the year ended December 31, 2015, using straight-line depreciation, is:
a.$1,500
b.$7,500
c.$ 2,250
d.$ 2,500
26) Carol wants to invest money in a 6% CD that compounds semiannually. Carol
would like the account to have a balance of $50,000 five years from now. How much
must Carol deposit to accomplish her goal?
a. $35,069
b. $43,131
c. $37,205
d. $35,000
27) The Pita Pit borrowed $100,000 on November 1, 2015, and signed a six-month note
bearing interest at 12%. Principal and interest are payable in full at maturity on May 1,
2016 . In connection with this note, The Pita Pit should report interest expense at
December 31, 2015, in the amount of:
a.$0
b.$1,000
c.$2,000
d.$6,000
28) Cash flows from investing activities do not include:
a. Borrowing
b. The purchase of equipment
c. The sale of land
d. The purchase of a building
29) Sports Spectacular purchased 1,000 shares of stock in The Athletic Warehouse for
$30 per share. The investment is properly classified as a trading security. By the end of
the year, the stock price has increased to $32 per share. How would the change in stock
price affect Sports Spectaculars net income?
a. Increase net income by $32,000
b. Increase net income by $30,000
c. Increase net income by $2,000
d. No effect
30) On January 1, Gucci Brothers Inc. started the year with a $492,000 balance in
Retained Earnings and a $605,000 balance in Common Stock. During the year, the
company earned net income of $92,000, paid a dividend of $15,200, and issued more
common stock for $27,500. What is total stockholders’ equity at the end of the year?
a. $1,231,700
b. $1,097,000
c. $1,201,300
d. $1,588,300
31) Consider the following transactions:
1> The company uses supplies purchased in the previous period, $1,500.
2> The company pays cash for rent in advance, $6,000.
3> The company repays a loan to the bank, $10,000 (ignore any interest cost).
The amount of accrual-basis expense is _____ while the amount of cash-basis expense
is _____.
a. $6,000; 11,500
b. $6,000; $16,000
c. $1,500; 16,000
d. $1,500; $6,000
32) Listed below are five terms followed by a list of phrases that describe or
characterize the terms. Match each phrase with the best term placing the letter
designating the term in the space provided.
a. Gross profit
b. Net income
c. Inventory turnover ratio
d. Operating income
e. Income before income taxes
_____ Equals cost of goods sold divided by average inventory.
33) Ace Bonding Company purchased inventory on account. The inventory costs
$2,000 and is expected to sell for $3,000. How should Ace record the purchase using a
perpetual inventory system?
a. Inventory 2,000
Accounts Payable 2,000
b. Cost of Goods Sold 2,000
Unearned Revenue 1,000
Sales Revenue 3,000
c. Cost of Goods Sold 2,000
Accounts Payable 2,000
d. Cost of Goods Sold 2,000
Gain 1,000
Accounts Payable 3,000
34) Liabilities normally carry a _______ balance and are shown in the
______________.
a. Debit; Statement of stockholders equity
b. Debit; Income statement
c. Credit; Balance sheet
d. Debit; Balance Sheet
35) If the direct write-off method is used to account for uncollectible accounts, which of
the following statements is False?
a. An allowance account is not used
b. No adjustment is made at the end of the year to estimate future uncollectible accounts
c. Accounts receivable will be reported at its net realizable value
d. Bad debt expense is recorded at the time an actual bad debt is written-off
36) Large stock dividends and stock splits are issued primarily to:
a.Lower the trading price of the stock per share
b.Increase the number of authorized shares
c.Increase legal capital
d.Increase the number of outstanding shares
37) The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at
the beginning and end of the year, respectively. Sales revenues are $1.1 million ($0.8
million in the previous year), net income is $40,000, and net cash flows from operating
activities are $50,000. How does Tech Track’s cash flow to sales ratio compare to the
industry average of 5%?
a. Better
b. Worse
c. Same as
d. Cannot be determined with the data provided
38) Richard LLC accounts for possible bad debts using the allowance method. When an
actual bad debt occurs, what effect does it have on the accounting equation?
a. Increases assets and increases stockholders equity
b. Decreases assets and decreases stockholders equity
c. Decreases assets and decreases liabilities
d. No effect on the accounting equation
39) Which of the following is correct about the statement of cash flows?
a. A company with a net loss on the income statement will always have a net cash
outflow from operating activities
b. A purchase of equipment is classified as a cash inflow from investing activities
c. Cash dividends received on stock investments are classified as cash flows from
operating activities
d. Cash dividends paid are classified as cash flows from operating activities
40) Use the following appropriate amounts to calculate net income: Revenues, $12,000;
Liabilities, $5,000; Expenses, $4,000; Assets, $19,000; Dividends, $4,000.
a. $6,000
b. $8,000
c. $4,000
d. $14,000
41) Data Solutions reports operating expenses of $5 million. Operating expenses
include rent expense. Prepaid rent at the beginning and end of the year are $120,000
and $80,000, respectively. All other operating expenses were paid in cash as incurred.
What is the amount of cash paid for operating expenses?
a.$5,000,000
b.$5,040,000
c.$4,960,000
d.$5,080,000
42) Which of the following is a possible closing entry?
a. Debit Cash, credit Service Revenue
b. Debit Cash, credit Retained Earnings
c. Debit Service Revenue, credit Retained Earnings
d. Debit Dividends, credit Retained Earnings
43) Research and development costs should be:
a. Expensed in the period incurred
b. Expensed in the period they are determined to be unsuccessful
c. Deferred pending determination of success
d. Expensed if unsuccessful, capitalized if successful
44) The balance sheet of Purdys BBQ reports total equity of $400,000 and $450,000 at
the beginning and end of the year, respectively. Net income and sales for the year are
$85,000 and $1,700,000, respectively. What is Purdys return on equity?
a. 10%
b. 20%
c. 200%
d. 5%
45) Assume that cash is paid for rent to cover the next year. The appropriate debit and
credit are:
a. Debit Rent Expense, credit Cash
b. Debit Prepaid Rent, credit Rent Expense
c. Debit Prepaid Rent, credit Cash
d. Debit Cash, credit Prepaid Rent
46) On March 17, Jackal Lumber sold building materials to Fredo Limited for $15,000
with terms of 3/10, net 20 . What amount did Jackal record as revenue on March 25
when Fredo paid for the building materials?
a. $15,000
b. $14,550
c. $15,450
d. $0
47) Liabilities are shown in which of the following statements?
a. Income statement
b. Statement of cash flows
c. Balance sheet
d. Statement of stockholders equity
48) Wilson Electric reports income tax expense of $150,000. Income tax payable at the
beginning and end of the year are $20,000 and $25,000, respectively. What is the cash
paid for income taxes during the year?
49) The following selected transactions relate to liabilities of Food Emporium whose
fiscal year ends on December 31 .
Jan. 26 Negotiated a line of credit with City Bank that can be renewed annually upon
bank approval. The amount available under the line of credit is $1 million at the banks
prime rate.
March 1 Arranged a six-month bank loan of $400,000 with City Bank under the line of
credit agreement. Interest at the prime rate of 8% is payable at maturity.
September 1Paid the 8% note at maturity.
Record the appropriate entries, if any, on January 26, March 1, and September 1 .
50) A company pays $2,000 dividends to its stockholders. Record the transaction.
51) A company purchases a building for $100,000, paying $20,000 cash and signing a
note payable for the remainder. Record the transaction.
52) How does the value of an audit affect financial statements?
53) Magic Mountain retires its 8% bonds for $125,000 before their scheduled maturity.
At the time, the bonds have a carrying value of $118,000. Record the early retirement of
the bonds.
54) If you had an investment opportunity that promises to pay you $20,000 in three
years and you could earn a 10% annual return investing your money elsewhere, what is
the most you should be willing to invest today in this opportunity?