1) In a classified balance sheet, we categorize all liabilities as current.
2) When bonds are issued at a premium (above face amount), the carrying value and the
corresponding interest expense increase over time.
3) Most companies use straight-line amortization for intangibles and credit the amount
of amortization to the intangible asset account itself rather than to Accumulated
Amortization.
4) The number of shares outstanding is equal to the number of shares issued minus the
number of shares bought back.
5) Generally, when a companys net income and free cash flows trend in the same
direction over time, earnings are believed to have higher quality.
6) Using the weighted-average cost method, the average cost of inventory is calculated
as the average unit cost of inventory purchased during the year.
7) The amount of cash reported in a companys balance sheet does not include cash
equivalents, defined as short-term investments that have a maturity date no longer than
three months from the date of purchase.
8) Advertising costs that increase the value of trademarks are recorded to the asset
account entitled Trademarks.
9) A credit to an account balance always results in the balance decreasing.
10) International accounting standards allow firms to record development costs that
benefit future periods as an intangible asset.
11) Earnings per share is useful in comparing earnings performance across companies.
12) According to the concept of expense recognition under accrual-basis accounting, if
costs associated with producing revenue in the current year are not paid in cash until the
following year, the costs should be expensed in the current year.
13) Long-term assets are assets that provide a benefit to a company for more than one
year.
14) Bahama Catering purchased a commercial dishwasher by paying cash of $5,000.
The dishwashers fair value on the date of the purchase was $5,600. The company
incurred $400 in transportation costs, $300 installation fees, and paid a $200 fine for
illegal parking while the dishwasher was being delivered. For what amount will
Bahama record the dishwasher?
a. $5,600
b. $5,700
c. $5,900
d. $6,300
15) Listed below are ten terms followed by a list of phrases that describe or characterize
five of the terms. Match each phrase with the best term by placing the letter designating
the term in the space.
a. Assets
b. Debit
c. Journal entry
d. Liabilities
e. Revenues
f. Expenses
g. Credit
h. General ledger
i. Trial balance
j. Dividends
____ Asset and expense accounts normally have this type of balance.
16) The sale or disposal of a significant component of a companys operations is referred
to as:
a. A discontinued operation
b. An extraordinary item
c. Other revenues and expenses
d. Gain or loss on sale of assets
17) Bond X and Bond Y are both issued by the same company. Each of the bonds has a
face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while
Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the
following is correct?
a.Both bonds will sell for the same amount
b.Bond X will sell for more than Bond Y
c.Bond Y will sell for more than Bond X
d.Both bonds will sell at a premium
18) Which of the following is not a balance sheet item?
a. Assets
b. Common stock
c. Retained earnings
d. Revenues
19) Ending inventory is equal to the cost of items on hand plus:
a. Items in transit sold FOB shipping point
b. Sales discounts
c. Items in transit sold FOB destination
d. Advertising expense
20) Action Travel has 10 employees each working 40 hours per week and earning $20
an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA
taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per
employee. What is the total payroll tax expense for the first week of January?
a. $612
b. $1,224
c. $916
d. $304
21) Which of the following is considered a contra account?
a. Unearned Revenue
b. Goodwill
c. Accumulated Depreciation
d. Costs of Good Sold
22) We calculate cash return on assets as
a. The change in cash divided by average total assets
b. Net cash flows from operating activities divided by average total assets
c. The change in cash divided by ending total assets
d. Net cash flows from operating activities divided by ending total assets
23) What effect would an adjustment to record inventory at the lower-of-cost-or-market
have on the companys financial statements?
a. An increase to assets
b. An increase to stockholders equity
c. A decrease to revenue
d. An increase to expense
24) Shane wants to invest money in a 6% CD that compounds semiannually. Shane
would like the account to have a balance of $100,000 four years from now. How much
must Shane deposit to accomplish his goal?
a. $88,848
b. $78,941
c. $25,336
d. $22,510
25) On November 1, 2015, The Bagel Factory signed a $100,000, 6%, six-month note
payable with the amount borrowed plus accrued interest due six months later on May 1,
2016 . The Bagel Factory should report interest payable at December 31, 2015, in the
amount of:
a.$0
b.$1,000
c.$2,000
d.$3,000
26) Limited liability means:
a. Stockholders of a corporation are not obligated to pay the corporations debts out of
their own pocket
b. Liabilities of a company cannot exceed its assets
c. Companies are not allowed to borrow unless they are profitable
d. Companies are less likely to be sued if they are formed as a corporation
27) Excerpts from Stealth Company’s December 31, 2015 and 2014, financial
statements are presented below:
Stealth Companys 2015 debt to equity ratio is:
a.77.1%
b.80.0%
c.40.0%
d.60.0%
28) Expenses are shown in which of the following statements?
a. Income statement
b. Statement of cash flows
c. Balance sheet
d. Statement of stockholders equity
29) Outstanding common stock refers to the total number of shares:
a.Issued
b.Issued plus treasury stock
c.Issued less treasury stock
d.Authorized
30) The closing process includes which of the following?
a. Closing the balance of the retained earnings account to zero
b. Closing the balance of only the dividends account to zero
c. Closing the balances of only revenue and expense accounts to zero
d. Closing the balances of revenue, expense and dividend accounts to zero
31) South Beach Apparel issued 10,000 shares of $1 par value stock for $5 per share.
What is True about the journal entry to record the issuance?
a. Debit Common Stock $10,000
b. Credit Cash $50,000
c. Credit Common Stock $50,000
d. Credit Additional Paid-In Capital $40,000
32) On April 1, a $4,800 premium on a one-year insurance policy on equipment was
paid and charged to Prepaid Insurance. At the end of the year, the financial statements
would report:
a. Insurance Expense, $4,800; Prepaid Insurance $0
b. Insurance Expense, $3,600; Prepaid Insurance $1,200
c. Insurance Expense, $3,650; Prepaid Insurance $4,800
d. Insurance Expense, $1,200; Prepaid Insurance $3,600
33) Listed below are six terms followed by a list of phrases that describe or characterize
the terms. Match each phrase with the best term by placing the letter designating the
term in the space provided.
a. Bank service fees
b. Deposits outstanding
c. Interest earned
d. NSF checks
e. Company error
f. Checks outstanding
____ Money earned on the average daily balance of the checking account.
34) A company provides services on account. Indicate how this transaction would affect
the following five financial statement items:
Stockholders
Assets Liabilities Equity Revenues Expenses
a.Increase Decrease Increase Decrease No effect
b.Increase No effect Increase Increase Decrease
c.Increase No effect Increase Increase No effect
d.No effectNo effectNo effectNo effectNo effect
35) Assuming a current ratio of 1.0, how will the purchase of inventory with cash affect
the ratio?
a. Increase the current ratio
b. No change to the current ratio
c. Decrease the current ratio
d. Could either increase or decrease the current ratio
36) When a company collects sales tax from a customer, the event is recorded by:
a.A debit to Sales Tax Expense and a credit to Sales Tax Payable
b.A debit to Cash and a credit to Sales Tax Payable
c.A debit to Sales Tax Payable and a credit to Sales Tax Expense
d.A debit to Sales Tax Payable and a credit to Cash
37) Which of the following subsequent expenditures would be capitalized?
a. Ordinary repair
b. Costs that increase the service life of an asset
c. Routine maintenance
d. Both a and c
38) On July 31, ALOE Inc. received $5,000 cash from a customer who previously
purchased ALOEs products on account. What entry should ALOE Inc. record at the
time it receives cash?
a. Debit Accounts Receivable, $5,000; credit Cash, $5,000
b. Debit Cash, $5,000; credit Accounts Receivable, $5,000
c. Debit Cash, $5,000; credit Accounts Payable, $5,000
d. Debit Cash, $5,000; credit Service Revenue, $5,000
39) Megginson, Inc. issued a five-year corporate bond of $300,000 with a 5% interest
rate for $290,000. What effect would the bond issuance have on Megginson, Inc.s
accounting equation?
a. Increase assets and liabilities
b. Increase and decrease assets
c. Increase assets and stockholders equity
d. Increase and decrease liabilities
40) Laser World’s income statement reported total revenues, $850,000 and total
expenses (including $40,000 depreciation) of $720,000. The balance sheet reported the
following: Accounts Receivablebeginning balance, $50,000 and ending balance,
$60,000; Accounts Payablebeginning balance, $22,000 and ending balance, $28,000.
Therefore, based only on this information, the net cash inflows from operating activities
were:
a. $126,000
b. $166,000
c. $174,000
d. $186,000
41) Which of the following is not a reason why some companies lease rather than buy?
a. Leasing may allow you to borrow with little or no down payment
b. Leasing can improve the balance sheet by reducing long-term debt
c. Leasing can lower income taxes
d. Leasing transfers the title to the lessee at the beginning of the lease
42) At the beginning of 2015, Angel Corporation began offering a 1-year warranty on
its products. The warranty program was expected to cost Angel 4% of net sales. Net
sales made under warranty in 2015 were $180 million. Five percent of the units sold
were returned in 2015 and repaired or replaced at a cost of $5.3 million. The amount of
warranty expense on Angel’s 2015 income statement is:
a.$ 5.3 million
b.$ 7.2 million
c.$ 9.0 million
d.$27.0 million
43) Listed below are ten terms followed by a list of phrases that describe or characterize
five of the terms. Match each phrase with the best term placing the letter designating
the term in the space provided.
a. Accounts receivable
b. Allowance method
c. No effect
d. Direct write-off method
e. Net realizable value
f. Aging method
g. Bad debt expense
h. Receivables written off
i. Decrease assets and increase expenses
j. Allowance for uncollectible accounts
_____ The effect of writing off an account receivable as a bad debt under the
allowance method.
44) Transactions of a company involving external sources of funding are referred to as:
a. Investing activities
b. Financing activities
c. External activities
d. Operating activities
45) On September 1, 2015, Middleton Corp. lends cash and accepts a $1,000 note
receivable that offers 12% interest and is due in six months. How much interest revenue
will Middleton Corp report during 2016?
a. $20
b. $40
c. $30
d. $60
46) In a perpetual inventory system, at the time of a sale the cost of inventory sold is:
a. Debited to Accounts Receivable
b. Credited to Cost of Goods Sold
c. Debited to Cost of Goods Sold
d. Not recorded at the time
47) Under the allowance method, which of the following does not change the balance in
the
Accounts Receivable account?
a. Returns on credit sales
b. Collections on customer accounts
c. Bad debt expense adjustment
d. Write-offs
48) Yummy Foods purchased a one-year hazard insurance policy on August 1 and
recorded the $4,200 premium to prepaid insurance. At its December 31 year-end,
Yummy Foods would record which of the following adjusting entries?
a. Insurance Expense 1,750
Prepaid Insurance 1,750
b. Prepaid Insurance 1,750
Insurance Expense 1,750
c. Insurance Expense 1,750
Prepaid Insurance 2,450
Accounts Payable 4,200
d. Insurance Expense 2,450
Prepaid Insurance 2,450
49) When customers purchase products on account, Spitz Manufacturing offers them a
2% reduction in the amount owed if they pay within 10 days. This is an example of a:
a. Bad debt
b. Sales discount
c. Sales return
d. Sales allowances
50) Davenport Inc. offers a new employee a lump-sum signing bonus at the date of
employment. Alternatively, the employee can take $30,000 at the date of employment
and another $50,000 two years later. Assuming the employee’s time value of money is
8% annually, what lump-sum at employment date would make her indifferent between
the two options?
a. $60,000
b. $62,867
c. $72,867
d. $80,000
51) A company understated its ending inventory balance by $5,000 in 2015 . What
impact will this error have on total assets and retained earnings in 2015 and 2016
(ignoring tax effects)?
52) How can an investor benefit from an equity investment that does not pay dividends?
53) Paul Pierce Enterprises reports net income of $800,000, average total assets of
$2,400,000, and average total liabilities of $400,000. Calculate the return on assets and
return on equity ratios.
54) Klein Interiors has the following account balances at the end of the year. Use only
the appropriate accounts to prepare a balance sheet.
55) A company sells common stock for $20,000 cash. Record the transaction.
56) Explain the difference between authorized, issued, and outstanding shares.
57) For each of the following five transactions, indicate by letter whether the cash effect
of each transaction is reported in a statement of cash flows as an operating (O),
investing (I), financing (F), or noncash (NC) activity.