1) In general, if a companys net income is increasing, so will its stock price.
2) Adjusting entries should be prepared after financial statements are prepared.
3) We record interest expense in the period in which we pay it, rather than in the period
we incur it.
4) Under cash-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 following year.
5) We use vertical analysis to express each income statement item as a percentage of
sales.
6) Other things being equal, the higher the debt to equity ratio, the higher the risk of
bankruptcy.
7) A company credits Additional Paid-in Capital for the portion of the cash proceeds
above par value received for the issuance of stock.
8) Accounts receivable are reported at their net realizable value.
9) When customers pay for services with a check, the company should debit Accounts
Receivable and credit Service Revenue.
10) A gain or loss is recorded on bonds retired at maturity.
11) When a company collects sales taxes, the debit is to Cash and the credit is to Sales
Tax Payable.
12) The role of auditors is to help ensure that management has in fact appropriately
applied Generally Accepted Accounting Principles (GAAP) in preparing the companys
financial statements.
13) The direct write-off method is used for tax purposes but is generally not permitted
for financial reporting.
14) The accounts that represent resources owed to creditors are called:
a. Assets
b. Liabilities
c. Dividends
d. Stockholders equity
15) Childers Service Company provides services to customers totaling $3,000, for
which it billed the customers. How would the transaction be recorded?
a. Debit Cash $3,000, credit Service Revenue $3,000
b. Debit Accounts Receivable $3,000, credit Service Revenue $3,000
c. Debit Accounts Receivable $3,000, credit Cash $3,000
d. Debit Service Revenue $3,000, credit Accounts Receivable $3,000
16) Which of the following is not a liability?
a.Notes payable
b.Current portion of long-term debt
c.An unused line of credit
d.Unearned revenue
17) Cash flows from investing activities do not include cash flows from:
a.Lending
b.The sale of equipment
c.Borrowing
d.The purchase of land and buildings
18) Richards Sporting Goods reports net income of $100,000, net sales of $500,000,
and average assets of $1,000,000. The return on assets is:
a. 10%
b. 20%
c. 50%
d. 5 times
19) Which of the following is not a major section in the statement of cash flows?
a. Cash flows from operating activities
b. Cash flows from customers
c. Cash flows from financing activities
d. Cash flows from investing activities
20) A company receives a $700 utility bill for the current month but does not plan to
pay the bill until early next month. Record the receipt of the utility bill using (a)
accrual-basis accounting and (b) cash-basis accounting.
21) Listed below are five 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. Credit sales
b. Sales returns
c. Sales allowances
d. Sales discounts
e. Trade discounts
_____ Deducted from list price.
22) Which of the following intangible assets is not amortized?
a.Patents
b.Copyrights
c.Franchises
d.Goodwill
23) A contingent liability should be disclosed in a note to the financial statements rather
than being recorded if:
a.The likelihood of a loss is remote
b.The incurrence of a loss is reasonably possible
c.The incurrence of a loss is probable
d.The likelihood of a loss is eighty percent
24) At the end of 2015, Murray State Lenders had a balance in its Allowance for
Uncollectible Accounts of $4,500 (credit) before any adjustment. The company
estimated its future uncollectible accounts to be $12,000 using the
percentage-of-receivables method. Murray States adjustment on December 31, 2015, to
record its estimated uncollectible accounts included a:
a. Credit to Allowance for Uncollectible Accounts of $12,000
b. Debit to Bad Debt Expense of $7,500
c. Credit to Allowance for Uncollectible Accounts of $7,500
d. Both b and c
25) Which of the following accounts is(are) listed in a post-closing trial balance?
a. Prepaid Rent
b. Accounts Payable
c. Salaries Expense
d. Two of these three accounts would be included in a post-closing trial balance
26) The Sarbanes-Oxley Act (SOX) mandates which of the following?
a. Increased regulations related to auditor-client relations
b. Increased regulations related to internal control
c. Increased regulations related to corporate executive accountability
d. All of the above
27) 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. Ending inventory
b. Freight-in
c. Cost of goods sold
d. LIFO conformity rule
e. LIFO
f. Freight-out
g. LIFO reserve
h. Specific identification
i. FIFO
j. Average cost
_____ Cost flow assumption that assumes last units purchased are sold first.
28) Listed below are ten 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. Discount
b. Premium
c. Stated interest rate
d. Market interest rate
e. Amortization schedule
f. Capital lease
g. Operating lease
h. Sinking fund
i. Times interest earned ratio
j. Debt to equity ratio
Phrases:
_____ The rate quoted in the bond contract used to calculate the cash payments for
interest.
_____ The lessor owns the asset and the lessee simply uses the asset temporarily.
_____ Total liabilities divided by total stockholders equity; measure a companys risk.
_____ The True interest rate used by investors to value a bond.
_____ The issue price is below its face amount.
_____ Provides a summary of the cash interest payments, interest expense, and changes
in carrying value for debt instruments.
_____ The lessee essentially buys an asset and borrows the money through a lease to
pay for the asset.
_____ The issue price is above its face amount.
_____ Ratio that compares interest expense with income available to pay those charges.
_____ An investment fund used to set aside money to be used to pay debts as they come
due.
29) Using the information below from the accounting records of Thomas Corporation,
owners claims to the companys resources amount to:
a. $1,200,000
b. $800,000
c. $250,000
d. $400,000
30) Universal Travel, Inc. borrowed $500,000 on November 1, 2015, and signed a
twelve-month note bearing interest at 6%. Principal and interest are payable in full at
maturity on October 31, 2016 . In connection with this note, Universal Travel, Inc.
should report interest payable at December 31, 2015, in the amount of:
a.$8,000
b.$30,000
c.$5,000
d.$25,000
31) Bill Inc.s correct ending balance for the inventory account at the end of 2015 should
be $5,000, but the company incorrectly stated it as $3,000. In 2016, Bill correctly
recorded its ending balance of the inventory account. Which one of the following is
True?
a. Gross profit is overstated by $2,000 in 2015
b. Retained earnings are understated by $2,000 in 2016
c. Gross profit is overstated by $2,000 in 2016
d. Cost of goods sold is understated by $2,000 in 2015
32) When a company pays utilities of $1,800 in cash, the transaction is recorded as:
a. Debit Utilities Expense $1,800, credit Utilities Payable $1,800
b. Debit Utilities Payable $1,800, credit Cash $1,800
c. Debit Cash $1,800, credit Utilities Expense $1,800
d. Debit Utilities Expense $1,800, credit Cash $1,800
33) When a payment is made on an account payable:
a. Assets and stockholders equity decrease
b. Assets and liabilities decrease
c. Liabilities and revenues decrease
d. Assets and expenses decrease
34) On July 1, 2015, Rents-A-Lot Inc. paid $72,000 for 36 months of advance rent on
its warehouse. What would be the amount of rent expense in the 2016 financial
statements for Rents-A-Lot under both cash-basis and accrual-basis accounting?
a. Cash-basis = $24,000; Accrual-basis = $24,000
b. Cash-basis = $72,000; Accrual-basis = $12,000
c. Cash-basis = $0; Accrual-basis = $24,000
d. Cash-basis = $0; Accrual-basis = $12,000
35) Which of the following transactions causes a decrease in stockholders equity?
a. Pay dividends to stockholders
b. Obtain cash by borrowing from a local bank
c. Provide services to customers on account
d. Purchase office equipment for cash
36) Which of the following investment securities held by Zoogle Inc. may be classified
as held-to-maturity securities in its balance sheet?
a.Debt securities
b.Equity securities
c.Common stock
d.All of these are correct
37) Creditors claims to a corporations resources are referred to as:
a. Dividends
b. Assets
c. Liabilities
d. Stockholders equity
38) The adjusting entry required when amounts previously recorded as unearned
revenues are earned includes:
a. A debit to a liability
b. A debit to an asset
c. A credit to a liability
d. A credit to an asset
39) Productive assets that are physically used up, or depleted are:
a. Equipment
b. Land
c. Land improvements
d. Natural resources
40) When a magazine sells subscriptions to customers, it is an example of:
a. An accrued expense
b. An accrued revenue
c. A prepaid expense
d. An unearned revenue
41) Which of the following is True regarding FICA taxes?
a.FICA taxes are paid only by the employee
b.FICA taxes are paid only by the employer
c.FICA taxes are paid in equal amounts by the employee and the employer
d.FICA taxes are paid in different amounts by the employee and the employer
42) General Investment Co. (GIC) purchased bonds on January 1, 2015. GIC’s
accountant has projected the following amortization schedule from purchase until
maturity:
What is the annual market interest rate on the bonds?
a. 4%
b. 3.5%
c. 7%
d. 8%
43) Below are incomplete financial statements for Beasley, Incorporated. Calculate the
missing amounts.
Income Statement Statement of Stockholders Equity
Revenues $ (a) Common Stock Retained Earnings
Expenses: Beginning $25,000 $12,000
Salaries 8,000 Issuances (c)
Delivery 7,000 Net income 5,000
Utilities 5,000 Dividends (d)
Net income (b) Ending $30,000 $15,000
Balance Sheet
Assets: Liabilities:
Cash $15,000 Accounts payable 15,000
Supplies 7,000 Stockholders Equity:
Prepaid rent (e) Common stock (g)
Equipment 35,000 Retained earnings (h)
Total assets (f) Total liabilities and stockholders equity (i)
44) Receiving assets from customers before services are performed results in:
a. Prepaid Assets
b. Service Revenue
c. Unearned Revenues
d. Accounts Receivable
45) When the amount of interest receivable decreases during an accounting period:
a. Accrual-basis revenues exceed cash collections from borrowers
b. Accrual-basis net income exceeds cash-basis net income
c. Accrual-basis revenues are less than cash collections from borrowers
d. Accrual-basis expenses are less than cash payments to borrowers
46) Large, highly-rated firms sometimes sell commercial paper:
a.To borrow funds at a lower rate than through a bank
b.To borrow funds when they cannot obtain a loan from a bank
c.Because they can’t borrow anywhere else
d.To improve their credit rating
47) Consider the following account balances of the Shattuck Law Firm at the end of the
year:
Accounts Payable$ 4,400
Salaries Expense 12,800
Cash 1,700
Common Stock 2,400
Service Revenue 8,300
Supplies 4,300
Retained Earnings 1,100
Utilities Expense 5,000
How many of these accounts would appear in Shattucks year-end income statement?
a. Five
b. Four
c. Three
d. Two
48) Accounts receivable are normally reported at the:
a. Present value of future cash receipts
b. Current value plus accrued interest
c. Expected amount to be received
d. Current value less expected collection costs
49) During 2015, a company sells 20 units of inventory. The company has the following
inventory purchase transactions for 2015:
Calculate ending inventory and cost of goods sold for 2015 assuming the company uses
FIFO with a periodic inventory system.
50) A company establishes a $300 petty cash fund on August 3 to pay for minor cash
expenditures. The fund is replenished at the end of each month. At the end of August,
the fund contains $40 in cash and the following receipts:
Record the establishment of the petty cash fund on August 3, the
expenditures of the fund, and replenishment on August 31 .
51) Describe the six steps in the FN Measurement process of external transactions.
52) Explain the difference in the calculation of return on assets and cash return on
assets. How can cash-based ratios supplement the analysis of ratios based on income
statement and balance sheet information?
53) A company reports the following amounts at the end of the year (before any
year-end adjustment).
Record the adjustment for uncollectible accounts (1) using the
percentage-of-receivables method, assuming the company estimates 10% of receivables
will not be collected, and (2) using the percentage-of-credit-sales method, assuming the
company estimates 2% of credit sales will not be collected.
54) Beasley, Inc. reports the following amounts in its December 31, 2015, income
statement.
Sales revenue$300,000Income tax expense$ 38,000
Interest expense 12,000Cost of goods sold 125,000
Salaries expense 35,000Advertising expense 24,000
Utilities expense 41,000
Prepare a multiple-step income statement.
55) In preparing a statement of cash flows under the indirect method, an increase in
accounts payable would be reported as a(n):
56) Valentinos Pizza issues $40 million of 3% convertible bonds that mature in ten
years. Each $1,000 bond is convertible into twenty-five shares of common stock. The
current market price of Valentinos stock is $35 per share.
1>Explain why Valentinos might choose to issue convertible bonds.
2>Explain why investors might choose to purchase Valentinos convertible bonds.