The permanent accounts—assets, liabilities, and stockholders’ equity—are closed to the
Common Stock account.
When using a periodic inventory system, the Merchandise Inventory account will never
be used when recording purchases, purchase discounts, purchase returns, or sales of
inventory.
Significant influence equity investments are reported as current assets on the balance
sheet.
The heading of a balance sheet will show the same information for the date line as the
heading for a statement of retained earnings.
The expense associated with the cost of uncollectible accounts receivable is called bad
debts expense.
Preferred stockholders receive a dividend preference over common stockholders.
An amount that a business earns from selling merchandise inventory is known as sales
revenue or sales.
The cash payments journal has two debit columns – one for Accounts Payable and one
for Merchandise Inventory.
Debentures are backed only by the goodwill of the bond issuer.
There is a natural link between some expenses and revenues.
The employee federal and state income tax and Social Security tax are optional payroll
deductions.
Unearned Revenue is a liability account.
Greene Electric Company uses the direct method to prepare its statement of cash flows.
Greene has reported cost of goods sold of $85,000 on its income statement for 2018. If
the balance in Accounts Payable, for merchandise inventory suppliers only, has
decreased by $8,000 during the year, then $8,000 needs to be subtracted from $85,000
to calculate payments to suppliers for merchandise inventory purchases.
The dividend yield can be calculated for both common and preferred stockholders.
If the maker of the note fails to pay on the maturity date, the note is said to be
dishonored.
The Merchandise Inventory account is only used in a perpetual inventory system.
The balance in the Bonds Payable account is a credit of $92,000. The balance in the
Premium on Bonds Payable account is a credit of $1,990. The bond’s carrying amount
is $93,990.
The entry to close Sales Discounts Forfeited will include a debit to Income Summary.
A higher price/earnings ratio signifies a higher return on investment.
Generally accepted accounting principles require that interest expense be measured
using the effective-interest amortization method, unless the straight-line amounts are
similar.
The accounts payable subsidiary ledger lists each vendor along with amounts paid to
the vendors and the remaining amounts owed to them.
The steps of the accounting cycle are followed throughout the accounting period.
Alpine Enterprises estimates that it will pay a 5% bonus on annual net income after
deducting the bonus. The company reports net income of $500,000 before the
calculation of the bonus. Employee Bonus Expense will be debited for $25,000.
The main reason companies retire bonds prior to their maturity date is to relieve the
pressure of paying interest payments.
The unrealized holding gains and losses on available-for-sale debt investments are
reported on the income statement.
Debt securities represent a credit relationship with another company or governmental
entity.
The income statement is also called the statement of earnings.
An exchange of plant assets has commercial substance if the future cash flows change
as a result of the transaction.
When a business uses the straight-line method of depreciation, the amount of
depreciation is reduced from year to year.
According to Generally Accepted Accounting Principles, if the fair value of goodwill
decreases below its book value, an impairment loss must be recorded.
An accounting information system has three basic components: source documents and
input devices, processing and storage, and internal controls.
Debentures are bonds that mature in installments at regular intervals.
When stock is issued for assets other than cash, the transaction is recorded at the market
value of the stock issued or the market value of the assets received, whichever is more
clearly determinable.
A contra account’s normal balance is the opposite of the normal balance of the related
account.
The main computer where data is stored, which can be accessed from many different
computers is known as a(n) ________.
A) accounting information system
B) RAM
C) server
D) router
The matching principle is also called the ________.
A) adjusting entry concept
B) revenue recognition principle
C) expense recognition principle
D) time period concept
Which of the following statements is true of accrual basis accounting?
A) Accrual basis accounting is required by Generally Accepted Accounting Principles
(GAAP).
B) Accrual basis accounting records expenses only when cash has been paid for them.
C) Accrual basis accounting records revenue only when cash is received.
D) Accrual basis accounting always results in greater net income than cash basis
accounting.
Forever Jewelers uses the gross method and a perpetual inventory system. On April 2,
Forever sold merchandise with a cost of $1,900 for $6,300 to a customer on account
with terms of 1/15, n/30. Which of the following would be included in the journal entry
to record the cash receipt on April 30?
A) Credit to Cash for $6,237
B) Credit to Sales Discounts for $63
C) Debit to Cash for $6,300
D) Debit to Sales Discounts for $63
Which of the following is true of a network?
A) It connects a computer’s hardware to the software.
B) It does not link computers.
C) It is the same as software.
D) It allows different computers to share the same information.
A coal mine cost $1,003,000 and is estimated to hold 54,000 tons of coal. There is no
residual value. During the first year of operations, 11,000 tons are extracted and sold.
Calculate depletion expense for the first year. (Round any intermediate calculations to
the nearest cent.)
A) $100,300
B) $150,450
C) $200,600
D) $204,270
Which of the following is NOT recorded as the cost of a building?
A) building permits
B) fencing
C) architectural fees
D) contractor charges
Southeastern Corporation sold merchandise for $4,450 to Northern, Inc. on account.
The cost of goods sold was $1,185. Southeastern Corporation uses a perpetual
inventory system and special journals. The $4,450 is recorded as ________.
A) an entry in the general journal
B) Accounts Receivable DR, Sales Revenue CR column of the sales journal
C) Merchandise Inventory DR column of the purchases journal
D) Accounts Receivable CR column of cash receipts journal
Which of the following statements is correct?
A) A bank statement is a document from the bank that reports the activity in the
customer’s account.
B) A bank statement must be mailed to customers each month.
C) The bank statement does not include an ending balance of the customer’s account
because the bank cannot determine which checks have been cashed during the
statement period.
D) Physical copies of canceled checks must be included in the monthly bank statement.
A reversing entry is ________.
A) a journal entry used to close the temporary accounts after preparation of financial
statements
B) a special journal entry used to make the adjustments that took place after preparing
the trial balance
C) a special journal entry that eases the burden of accounting for transactions in the
next period
D) a journal entry prepared at the end of an accounting period to match assets with
liabilities
Which of the following statements is true of a corporation?
A) Shareholders can be required to pay debts of the corporation.
B) Shares of stock cannot be readily purchased and sold by investors on an organized
stock exchange.
C) Shareholders are authorized to sign contracts or make business commitments on
behalf of the corporation.
D) Corporations pay income tax on corporate earnings, and shareholders pay income
tax on the dividends received.
A depreciable asset’s cost minus accumulated depreciation is called ________.
A) book value
B) residual value
C) depreciable value
D) accrued expense
Dakota Company has four customers: A, B, C, and D. The accounts receivable balance
in the general ledger is $8683 and the accounts receivable subsidiary ledger of
customers A, C, and D have $1346, $3296, and $3340, respectively. Calculate the
amount in the accounts receivable subsidiary ledger account of customer B.
A) $7982
B) $2047
C) $1291
D) $701
Which of the following statements is true of a good merchandise inventory control
system?
A) It eliminates the need for authorization of merchandise purchases.
B) It ensures that a physical count of inventory is not required.
C) It often prevents the company from a stockout.
D) It eliminates the need to examine inventory purchases for damage.
If there is an unrealized holding gain on available-for-sale debt investments, it is
reported ________.
A) as an adjustment to stockholders’ equity on the balance sheet
B) as a debit to the long-term liabilities
C) as a separate line item on the income statement
D) as a credit to the short-term assets
The employees of Sinclair Services, Inc. worked the last two weeks of December. They
received their paychecks on January 2. Which of the following accounts should appear
on the balance sheet as of December 31?
A) Accounts Payable
B) Salaries Payable
C) Salaries Expense
D) Prepaid Expense
A company has a cash ratio of 2.3. What does this imply?
A) The company has an unnecessarily large amount of cash and cash equivalents.
B) The company does not have enough cash supply.
C) The company is not in a position to pay off its long-term liabilities.
D) The company is not in a position to pay off its current liabilities.
Merchandise Inventory increased $28,000 and Accounts Payable decreased $19,700
during the year. Accounts Payable relates only to the acquisition of merchandise
inventory. Sales were $795,600 and Cost of Goods Sold was $549,700. Compute the
payment made to the suppliers for inventory.
A) $577,700
B) $569,400
C) $597,400
D) $47,700
The financial statements for Silver Service Company include the following items:
Compute the acid-test ratio for 2018. (Round your answer to two decimal places)
A) 0.87
B) 0.73
C) 0.82
D) 0.63
The following information is from the 2020 records of R & S Commercial Plumbing
Company:
Bad debts expense is estimated by the percent-of-sales method. Management estimates that
3% of net credit sales will be uncollectible. Calculate the amount of bad debts expense for
2020.
A) $5,400
B) $4,050
C) $6,180
D) $4,100
Landings Glassware Company issues $1,150,000 of 15%, 10-year bonds at 95 on
February 28, 2019. The bonds pay interest on February 28 and August 31. The journal
entry to record the issuance includes a ________.
A) debit to Cash for $1,150,000
B) credit to Bonds Payable for $1,092,500
C) credit to Discount on Bonds Payable for $57,500
D) debit to Cash for $1,092,500
Delaware Coatings Company uses the indirect method to prepare its statement of cash
flows. Refer to the following information for the year 2019:
Net cash provided by operating activities: $45,000
Net cash used for investing activities: $(29,000)
Net cash provided by financing activities: $2000
What is the net change in cash during the year?
A) $(18,000)
B) $43,000
C) $18,000
D) $(16,000)
Which of the following describes the financing activities section of the statement of
cash flows?
A) It includes increases and decreases in long-term assets.
B) It includes cash inflows and outflows related to long-term liabilities and equity.
C) It includes interest and dividend income and cash payments for interest expense.
D) It reports on activities that create revenue or expenses for the entity’s business.
McArthur, Inc. plans to develop a shopping center. In the first quarter, the following
amounts were spent:
What amount should be recorded as the land improvements cost?
A) $3100
B) $4000
C) $16,060
D) $2000
A coal mine cost $1,001,000 and is estimated to hold 58,000 tons of coal. There is no
residual value. During the first year of operations, 5000 tons are extracted and sold.
Calculate depletion per unit. (Round your answer to the nearest cent.)
A) $8.63
B) $4.32
C) $17.26
D) $12.94
Amy’s gross pay for the week is $870.00. Her deduction for federal income tax is based
on a rate of 25%. She has voluntary deductions of $245.00. Her year-to-date pay is
under the limit for OASDI. What is her net pay? (Assume a FICA—OASDI Tax of
6.2% and FICA—Medicare Tax of 1.45%. (Round all calculations to the nearest cent.)
A) $407.50
B) $652.50
C) $585.94
D) $340.94
Sunset, Inc. has a policy of accruing $2300 for every employee as a vacation benefit.
Sarah, an employee, took a vacation. Which of the following is the correct journal entry
for the vacation benefit paid?
A)
B)
C)
D)
Salaries are $5,000 per week for five working days and are paid weekly at the end of
the day on Fridays. The end of the month falls on a Thursday. The accountant for
Sunset, Inc. made the appropriate accrual adjustment and posted it to the ledger. The
balance of Salaries Payable, as shown on the adjusted trial balance, will be a ________.
(Assume that there was no beginning balance in the Salaries Payable account.)
A) credit balance of $4,000
B) debit balance of $1,000
C) debit balance of $4,000
D) credit balance of $1,000
The Merchandise Inventory account of a company shows a balance of $30,000, but a
physical count of inventory shows $29,000. Which of the following entries is required
to record the shrinkage? (Assume a perpetual inventory system.)
A)
B)
C)
D)
Everyday Wear Retail had the following balances and transactions during 2018:
The company maintains its records of inventory on a perpetual basis using the first-in,
first-out inventory costing method. Calculate the amount of ending Merchandise Inventory
on December 31, 2018 using the lower-of-cost-or-market rule.
A) $2,010
B) $1,675
C) $1,800
D) $1,080
The ending merchandise inventory for the current year is overstated by $20,000. What
effect will this error have on the following year’s net income?
A) The net income will be overstated by $40,000.
B) The net income will be overstated by $20,000.
C) The net income will be understated by $20,000.
D) The net income will be understated by $40,000.
Which of the following statements is true if a bond is issued for an amount equal to its
face value?
A) The bond’s stated interest rate is less than the prevailing market interest rate at time
of sale.
B) The bond’s stated interest rate is the same as the prevailing market interest rate at
time of sale.
C) The bond’s stated interest rate is more than the prevailing market interest rate at time
of sale.
D) The bond is not secured by specific assets of the issuer.
California Corporation sold a product for $7,150 to Alliance Enterprises on credit. The
cost of goods sold is $5,650. Assuming the firm is following a perpetual inventory
system and using a sales journal, it will record $5,650 in the ________.
A) Accounts Receivable DR, Sales Revenue CR column
B) Cost of Goods Sold DR, Merchandise Inventory CR column
C) Merchandise Inventory DR, Cost of Goods Sold CR column
D) Sales Revenue DR, Accounts Receivable CR column
Lone Star Hat Company uses the direct method for its statement of cash flow. Assume
Accrued Liabilities relate to Operating Expenses. It reports the following information
regarding the year ending December 31, 2018:
Lone Star Hat Company
Income Statement
For the Year Ended December 31, 2018
Lone Star Hat Company
Partial Balance Sheet
December 31, 2018 and 2017
Assume that there were no sales of long-term assets, no interest revenue, and no expenses
other than the expenses shown above. Also, assume that Accounts Payable is for purchases
of merchandise inventory only. Prepare the operating activities section of the statement of
cash flows.
The following is the adjusted trial balance as of December 31, 2019 of Wilson Repair
Services, Inc., after the first year of operations:
Prepare the closing entry for the Income Summary account. Omit explanation.
Home Gallery, Inc. had beginning retained earnings of $125,000 on January 1, 2019.
During the year, Home Gallery declared and paid $40,000 of cash dividends and earned
$55,000 of net income. Prepare a statement of retained earnings for Home Gallery, Inc.
for the year ending December 31, 2019.
James Sales sold 450 units of product to a customer on account. The company uses the
perpetual inventory system and the FIFO inventory costing method. The selling price
was $28 per unit, and the cost, according to the company’s inventory records, was $12
per unit. Prepare the journal entries to record the sale. Omit explanations.
The ending inventory of a company was $552,000 as per the perpetual inventory
records. The current replacement cost for the ending inventory is $547,000. Prepare the
journal entry to adjust inventory. Omit explanation.
At December 31, 2018, Micro Instruments owes $47,000 on Accounts Payable. The
balance of Salaries Payable is $14,000 and the balance of Income Tax Payable is
$8,000. Micro also has $250,000 of Bonds Payable that were issued at face value. These
bonds require payment of a $25,000 installment next year and payment of the
remainder in later years. The bonds payable require an annual interest payment of
$7,500. Micro still owes this for the current year.
Requirement:
Report Micro Instruments’ liabilities on its classified balance sheet on December 31,
2018.
Abe’s Printing Supply Company uses a perpetual inventory system. The company had
the following transactions during August 2019:
Aug. 5: Purchased $2,900 of merchandise on account. Freight and credit terms were
FOB shipping point, 3/15, n/60.
Aug. 9: Paid transportation costs of $440 for the Aug. 5 purchase.
Aug. 10: Returned $600 of defective merchandise that had been purchased on Aug. 5.
Aug. 15: Paid for the merchandise purchased on Aug. 5.
Prepare journal entries for August 10 and 15. Omit explanations.
Fleet Transportation is a new business. During its first year of operations, credit sales
were $40,000 and collections of credit sales were $36,000. One account, $650, was
written off. Management uses the percent-of-sales method to account for bad debts
expense and estimates 2% of credit sales to be uncollectible. Prepare the entry to record
bad debts expense. Omit explanation.
Provide a brief definition of each of the following terms.
The income statement and a partial balance sheet of Hart Alloy Company for the year
ended December 31, 2018 is presented below. Prepare the operating activities section of
the statement of cash flows using the direct method. Accrued Liabilities relate to
miscellaneous operating expenses.
Hart Alloy Company
Income Statement
For the Year Ended December 31, 2018
Hart Alloy Company
Partial Balance Sheet
December 31, 2018 and 2017
List and describe two features of an effective accounting information system.
Briefly discuss what gross profit represents and how it affects the net earnings of a
merchandiser.
What does inventory turnover measure? What does a low rate of inventory turnover
indicate?
Define the following dividend dates for a cash dividend. For each date, state whether a
journal entry should be recorded. In addition, if a journal entry should be record, state
the effect on assets, liabilities or equity.
