For good internal control over cash payments, the company officer approving a
payment voucher should be the same as the person who ordered the goods. This ensures
that the correct amount of cash is paid.
An increase in the current ratio implies that the profitability of the company has
increased from the previous period.
When using the periodic inventory system, the process of recording the ending
Merchandise Inventory is completed by making an adjusting entry.
When a corporation sells 9,000 shares of $12 par value common stock for $159,000,
Common Stock is credited for $108,000.
Contingencies that are probable but cannot be estimated are recorded as liabilities and
disclosed in the notes to the financial statements.
Contra accounts have the same normal balance as the related account and are added to
the related account on the balance sheet.
Before signing a check, the controller or the treasurer should examine the purchase
order, the invoice, and the receiving report to determine that the company received the
goods and that the company is paying only for the goods received.
When a corporation issues stock at par value, the Cash account is debited and the
Common Stock account is credited for an amount equal to the number of shares issued
times the par value per share.
Discarding plant assets involves disposing of the asset for no cash.
A journal entry is prepared to reclassify the current portion of a note payable.
A company’s liquidity can be evaluated by analyzing the company’s current assets.
A company reports in its financial statements that it uses the FIFO method of inventory
costing. This is an example of the disclosure principle.
A chart of accounts is a detailed record of the changes in a particular asset, liability, or
equity account during a specified period.
With a stock dividend, the total number of shares issued and outstanding increases, and
the percentage of total ownership of individual stockholders also increases.
Net income is entered as the balancing amount on the debit side of the income
statement columns and the credit side of the balance sheet columns of the worksheet.
A chart of accounts provides more detail than a ledger.
The key differences between the cash basis and accrual basis of accounting are the
timing and recognition of assets and liabilities.
A trademark should not be amortized over its useful life.
Since cost is a reliable measure, the cost principle holds that the accounting records
should continue reporting an asset at its historical cost over its useful life.
The Other Accounts DR columns of a purchases journal are used for recording
merchandise inventory and office supplies.
Direct deposits decrease the efficiency of the payroll process because of cyber issues.
Stock dividends are distributed to stockholders in proportion to the number of shares
that stockholders already own.
The only time the Petty Cash account is used in a journal entry is when the account is
established, increased, or decreased.
Trading debt investments are debt securities which the investor intends to sell in the
very near future with the intent of generating a profit on the quick sale.
A transaction is any event that affects the financial position of the business and can be
easily estimated.
Accounting is the information system that measures business activities, processes the
information into reports, and communicates the results to decision makers.
A business maintains a separate Accounts Receivable account for each customer in
order to account for payments received from the customer and amounts still owed by
the customer.
In a bank reconciliation, a NSF check will be shown on the book side of the
reconciliation.
Interest on a $12,000 note at 6% for 4 months is $240.
Warranty Expense is shown on the income statement at the estimated amount.
Higher start-up costs and expensive government regulations are disadvantages of
corporations.
Benefits are extra compensation items that are not paid directly to an employee.
If a merchandiser uses the periodic inventory system, it is necessary to conduct a
physical count of inventory to determine the quantity of inventory on hand.
Statewide Computers purchased $280,000 of inventory. Goods of $20,000 were
returned. Statewide received an early discount of $15,000 and paid freight in of $1,000.
The net cost of inventory purchased is $245,000.
Credit terms of a merchandising company are 1/15, net 40. This means that the buyer
can receive a discount of 1% if the invoice is paid within 40 days of the invoice date.
An asset is considered to be obsolete ________.
A) only when it wears out
B) only at the end of its useful life
C) when it is fully depreciated
D) when a newer asset can perform the job more efficiently than the old asset can
To which of the following accounts should the balance in the Income Summary account
be closed?
A) Dividends
B) Net Income
C) Retained Earnings
D) Service Revenue
Which of the following statements is true?
A) Appropriations of retained earnings require journal entries, but restrictions on
retained earnings are usually reported in notes to the financial statements.
B) No journal entries are needed to appropriate or restrict retained earnings.
C) Both appropriations and restrictions of retained earnings require journal entries.
D) Restrictions on retained earnings must be journalized, but appropriations are usually
reported in notes to the financial statements.
For revenues, the category of account and its normal balance is ________.
A) equity and a credit balance
B) assets and a debit balance
C) assets and a credit balance
D) equity and a debit balance
Which of the following is true of a purchases journal?
A) For a periodic inventory system, the Merchandise Inventory DR column is replaced
with a column titled Cost of Goods Sold DR.
B) Cash purchases are recorded in the purchases journal.
C) For a perpetual inventory system, a column titled Purchases DR is needed.
D) The Other Accounts DR column is used for purchases on account of items other than
merchandise inventory and office supplies.
Which of the following is a disadvantage of enterprise resource planning (ERP)
systems?
A) It is not beneficial to large corporations.
B) It is not supported by cloud computing.
C) Its implementation requires a large commitment of time and people.
D) It uses separate software systems, such as sales and payroll.
Which of the following is an attribute of the internal control procedure—assignment of
responsibilities?
A) To validate their accounting records, a company should have an audit by an external
accountant.
B) The company should separate the custody of assets from accounting.
C) The external auditors will monitor internal controls.
D) Each position has clearly assigned responsibilities.
Jayson Enterprises uses the allowance method to account for uncollectible receivables.
When an uncollectible account is written off, ________.
A) the Bad Debt Expense account is debited
B) no entry is required because bad debt expense is estimated at the end of the
accounting period
C) the write off has no effect on net income
D) the Allowance for Bad Debts account is credited
A ________ ownership in the investee’s voting stock can significantly influence the
investee’s decisions.
A) 10 percent
B) 5 percent to 10 percent
C) 15 percent to 20 percent
D) 20 percent to 50 percent
A company issues a 120-day, 14% note for $16,000. What is the principal amount of the
note? (Round your answer to the nearest dollar.)
A) $18,240
B) $16,000
C) $15,253
D) $16,747
Which of the following should be classified as a long-term asset?
A) Interest Receivable
B) Accounts Receivable
C) Notes Receivable, due in 5 years
D) Cash Equivalents
Analysts look for red flags in financial statements that may signal financial trouble.
Which of the following is a red flag that suggests that a company may be in trouble?
A) a significant decrease in net income for several years in a row
B) a consistent movement in sales, merchandise inventory, and accounts receivable
C) a reduction in the debt ratio
D) operating activities are a major source of cash flows
On June 30, 2018, Padres, Inc. showed the following data on the equity section of their
balance sheet:
On July 1, 2018, the company declared and distributed a 10% stock dividend. The market
value of the stock at that time was $15 per share. Following this transaction, what is the
number of shares issued?
A) 86,500
B) 297,300
C) 160,600
D) 146,000
Which of the following is NOT an example of a security?
A) preferred stock
B) municipal bond
C) Treasury bills
D) All are examples of a security.
Which of the following accounts will be closed by debiting the Income Summary
account?
A) Depreciation Expense
B) Accounts Payable
C) Service Revenue
D) Accumulated Depreciation
When a previously declared dividend is paid, which of the following occurs?
A) Assets increase.
B) Stockholders’ equity increases.
C) Liabilities decrease.
D) Assets remain unchanged.
The current ratio measures a company’s ________.
A) overall ability to pay liabilities
B) ability to pay current liabilities from current assets
C) proportion of assets that are financed by debt
D) rate of cash flow
Which of the following is included in the entry to record the issuance of 14,000 shares
of $7 par value common stock at $21 per share for cash?
A) Cash is debited for $294,000.
B) Common Stock is debited for $98,000.
C) Common Stock is credited for $294,000.
D) Paid-In Capital in Excess of Par—Common is debited for $196,000.
Midwest Enterprises uses special journals. The company borrowed $10,000 from First
State Bank. This transaction is recorded in the ________.
A) general journal
B) debt journal
C) cash receipts journal
D) cash payments journal
Jackson Electric Services incurred $800 as a repair expense and paid for it in cash. This
transaction will ________.
A) decrease the stockholders’ equity
B) increase the assets of the business
C) increase the liabilities of the business
D) decrease the liabilities of the business
The accounting process of transferring data from the journal to the ledger is called
________.
A) journalizing
B) posting
C) compounding
D) sourcing
After making a sale, a seller may have customers that return goods. The seller uses the
perpetual inventory system. This requires the seller to ________.
A) use historical data to record sales revenue in the amount that is expected to be
received
B) record two adjusting entries to account for the estimated returns
C) reduce sales and cost of goods sold for the period
D) All of the statements are correct.
Regarding Electronic Data Interchange (EDI), which of the following statements is
incorrect?
A) A manager approves the invoice, and then an electronic fund transfer sends the
retailer’s payment to the supplier.
B) The retailer electronically sends an invoice to the supplier.
C) EDI procedures are used for both cash payments and cash receipts in many
companies.
D) When a retailer’s inventory reaches a low level, the computer creates and sends an
electronic purchase order to the supplier.
Martin Inc. has a cash ratio of 0.3. This implies that the company ________.
A) has an unnecessarily large amount of cash supply
B) is not sending a strong message to investors and creditors that it has the ability to
repay its short-term debt
C) is not in a position to meet its long-term obligations
D) has no liquidity issues
Fallingstar, Inc. has 110,000 shares of common stock issued and outstanding, with a par
value of $0.03 per share. It declared a 17% common stock dividend; market value is
$14 per share. Which of the following is the correct journal entry to record the
transaction? (Round your answers to the nearest whole dollar.)
A) debit Stock Dividends $261,800 and credit Paid-In Capital in Excess of Par—
Common $261,800
B) debit Stock Dividends $261,800, credit Common Stock Dividend Distributable
$561, and credit Paid-In Capital in Excess of Par—Common $261,239
C) debit Stock Dividends $261,800 and credit Cash $261,800
D) debit Common Stock Dividend Distributable $561, debit Paid-In Capital in Excess
of Par—Common $261,239, and credit Retained Earnings $261,800
Preferred stock is stock ________.
A) that sells for a high price
B) that is distributed to employees as annual bonuses
C) that is distributed by corporations to avoid liquidation
D) that gives its owners certain advantages over common stockholders
Arkansas Corp. is preparing its statement of cash flows using the indirect method. It
provides the following information about transactions for the year:
Plant assets, net—beginning balance: $111,000
Plant assets, net—ending balance: $145,000
Equipment was purchased for $65,000 with cash.
Equipment with a net asset value of $12,000 was sold for $19,000.
Depreciation Expense of $19,000 was recorded during the year.
What was the amount of net cash provided by (used for) investing activities?
A) $(46,000)
B) $46,000
C) $(65,000)
D) $(34,000)
A business performs services for a customer for $26,000 on account. Which of the
following accounts is credited?
A) Cash
B) Accounts Receivable
C) Service Revenue
D) Accounts Payable
Ralwins, Inc. had the following balances and transactions during 2018, from January 1
to December 31:
What would be reported for ending Merchandise Inventory on the balance sheet at
December 31, 2018 if the perpetual inventory system and the weighted-average inventory
costing method are used? (Round unit costs to two decimal places and total costs to nearest
dollar.)
A) $16,520
B) $8,100
C) $16,200
D) $24,300
Which of the following is the last step in the daily control over cash receipts by mail?
A) A mailroom employee sends all customer checks to the treasurer who has the cashier
make the bank deposit.
B) The controller opens the mail and sends the remittance advices to the accounting
department.
C) The controller compares the records of the day’s bank deposit amount from the
treasurer and the debit to Cash from the accounting department.
D) The accounting department prepares journal entries to cash and the customers’
accounts.
Which of the following is NOT recorded in a modern perpetual inventory system?
A) units purchased and cost amounts
B) units sold and sales and cost amounts
C) timeliness of vendor deliveries
D) the quantity of merchandise inventory on hand and its cost
For the following situation, state whether it represents a strength or weakness in internal
control and give the reason for your answer.
The bookkeeper opens the mail, makes the deposit, and makes the journal entries to
record receipt of the cash and checks.
Sherry, Inc. had 140,000 shares of $5 par value common stock issued and outstanding
as of December 15, 2018. The company is authorized to issue 1,000,000 common
shares. On December 15, 2018, Sherry declared a 40% stock dividend when the market
value for its common stock was $9 per share. The stock was issued on Dec. 30.
Prepare the journal entries to record the declaration and distribution of the stock
dividend. Explanations are not required. Compute the total shares after the dividend.
List and discuss three ways in which the statement of cash flows helps financial
statement users.
List the three ways to analyze financial statements. State what each of these ways
provides to investors and creditors.
Use the following information to calculate the free cash flow of Jarvis, Inc.
Net cash provided by operating activities, $25,000
Net cash provided by financing activities, $35,000
Net cash used for planned investment in long-term assets, $12,000
Net cash used for investing activities, $20,000
Cash dividends paid, $10,000.
On April 1, Beta, Inc. purchased office supplies for $1,500. At the end of April, Beta’s
employees took a count of the remaining supplies and found that there was $500 of
supplies left. Provide the adjusting entry needed at the end of April. (Ignore
explanation). Assume the office supplies were initially recorded as an asset. Assume
there were no office supplies on hand prior to the purchase on April 1.
Michigan Auto Parts Company uses the indirect method to prepare its statement of cash
flows. Refer to the following portion of the comparative balance sheet:
Michigan Auto Parts Company
Comparative Balance Sheet
December 31, 2018 and 2017
Additional information provided by the company includes the following:
Equipment costing $104,000 was purchased for cash.
Equipment with a net book value of $20,000 was sold for $28,000.
Depreciation expense of $24,000 was recorded during the year.
Prepare the investing activities section of the statement of cash flows.
Equipment was purchased for $24,000 on January 1, 2018. The equipment’s estimated
useful life was five years, and its residual value was $4,000. The straight-line method of
depreciation was used. Calculate the gain or loss on sale if the equipment is sold for
$18,000 on December 31, 2018, the end of the accounting period. Prepare the journal
entry to record the sale of equipment. Omit explanation.
List and briefly discuss the three basic components of an accounting information
system.
Selected information for Uptown Spa Services and Downtown Spa Services follows:
The total assets and total stockholders’ equity balances are at December 31, 2018. Total
revenues and net income are for the year ended December 31, 2018. No dividends were
paid. Average net assets are $128,000 for Uptown and $178,000 for Downtown.
Provide answers for the following questions. Show your work and explain your answer.
1. Which business owes more to creditors?
2. Which business has more stockholders’ equity at the end of the year?
3. Which business had more expenses?
4. What is the ROA for each business? (Show this as a percentage and round to one
decimal place) Based on ROA, which company is more profitable?
Complete the following table to show how FOB terms apply to merchandise inventory
purchased by a merchandiser.
List the steps of the accounting cycle that take place at the end of the period.
Use the balance sheet of Chicago, Inc. to calculate the current ratio for 2019 and 2018
Chicago, Inc.
Comparative Balance Sheet
December 31, 2019 and 2018
On July 1, 2018, Sanchez, Inc. purchased merchandise inventory for $350,000 by
signing a note payable. The note is for 6 months and bears interest at a rate of 8%.
Prepare the journal entry for this transaction, using a perpetual inventory system. Omit
explanation.
