1) Since it is an important financial statement, the trial balance must be prepared
according to specified accounting procedures.
2) The cost method of accounting is used for long-term investments in equity securities
with significant influence.
3) The payment of cash dividends to shareholders is classified as a financing activity.
4) The financial budgets of a business include the cash budget, the budgeted income
statement, and the budgeted balance sheet.
5) In a process cost accounting system, with the exception of the first department, each
department receives output from the prior department as a partially processed product.
6) Accounting information systems collect and process data from transactions and
events, organize them in useful reports, and communicate results to decision makers.
7) Capital budgeting is the process of analyzing alternative long-term investments and
deciding which assets to acquire or sell.
8) Investments in held-to-maturity debt securities are always current assets.
9) There is no simple rule for inventory turnover, except that a high ratio is preferable
provided inventory is adequate to meet demand.
10) The income statement displays revenues earned and expenses incurred over a
specified period of time due to earnings activities.
11) A company has sales of $350,000 and estimates that 0.7% of its sales are
uncollectible. The estimated amount of bad debts expense is $2,450.
12) The four basic financial statements include the balance sheet, income statement,
statement of owner’s equity, and statement of cash flows.
13) A debit balance in retained earnings is referred to as a retained earnings deficit.
14) Which of the following statements is incorrect?
A.Higher financial leverage involves higher risk
B.Risk is higher if a company has more liabilities
C.Risk is higher if a company has higher assets
D.The debt ratio is one measure of financial risk
E.Lower financial leverage involves lower risk
15) A company issued financial statements for the year ended December 31, but failed
to include the following adjusting entries:
A. Accrued service fees earned of $2,200.
B. Depreciation expense of $8,000.
C. Portion of office supplies (an asset) used $3,100.
D. Accrued salaries of $5,200.
E. Revenues of $7,200, originally recorded as unearned, have been earned by the end of
the year.
Determine the correct amounts for the December 31 financial statements by completing
the following table:
16) The following information is available for Crandall Company before closing the
accounts. What will be the amount in the Income Summary account that should be
closed to Crandall, Capital?
A.$80,000
B.$64,400
C.$43,000
D.$32,400
E.$42,400
17) Which of the following would not be used in preparing a cash budget for October?
A.Beginning cash balance on October 1
B.Budgeted sales and collections for October
C.Estimated depreciation expense for October
D.Budgeted salaries expense for October
E.Budgeted capital equipment purchases for October
18) A partnership agreement:
A.Is not binding unless it is in writing
B.Is the same as a limited liability partnership
C.Is binding even if it is not in writing
D.Does not generally address the issue of the rights and duties of the partners
E.Is also called the articles of incorporation
19) On January 1 a company purchased a five-year insurance policy for $1,800 with
coverage starting immediately. If the purchase was recorded in the Prepaid Insurance
account, and the company records adjustments only at year-end, the adjusting entry at
the end of the first year is:
A.Debit Prepaid Insurance, $1,800; credit Cash, $1,800
B.Debit Prepaid Insurance, $1,440; credit Insurance Expense, $1,440
C.Debit Prepaid Insurance, $360; credit Insurance Expense, $360
D.Debit Insurance Expense, $360; credit Prepaid Insurance, $360
E.Debit Insurance Expense, $360; credit Prepaid Insurance, $1,440
20) Epee Inc. frequently has accrued revenues at the end of its fiscal year that should be
recorded for proper financial statement presentation. Epee Inc.’s fiscal year ends on
September 30 of the current year. Epee Inc. has determined through an evaluation of
invoices and services rendered that $32,000 of services has been provided as of
September 30, but not yet billed. The total contract to be billed for services when
completed will be $60,000. Record the following entries:
(a) Accrual of the revenues on September 30.
(b) Receipt of payment from customers on October 9 for the services rendered,
assuming that Epee does not prepare reversing entries.
(c) Assuming that Epee prepares reversing entries, reverse the adjusting entry made on
September 30.
(d) Assuming that Epee prepares reversing entries, receipt of the payment for the total
contract amount on October 9.
21) The length of time covered by a set of periodic financial statements is referred to as
the:
A.Fiscal cycle
B.Natural business year
C.Accounting period
D.Business cycle
E.Operating cycle
22) Dart had net sales of $35,404 million. Its average total assets for the period were
$14,502 million. Dart’s total asset turnover equals:
A.0.40
B.0.35
C.1.45
D.2.44
E.3.50
23) The accounting principle that requires revenue to be recorded when earned is the:
A.Matching principle
B.Revenue recognition principle
C.Time period assumption
D.Accrual reporting principle
E.Going-concern assumption
24) A corporation’s distribution of additional shares of its own stock to its stockholders
without the receipt of any payment in return is called a:
A.Stock dividend
B.Stock subscription
C.Premium on stock
D.Discount on stock
E.Treasury stock
25) Using the following accounts and an overhead rate of 90% of direct labor cost,
determine the amount of applied overhead.
A.$79,200
B.$167,200
C.$34,320
D.$88,000
E.$35,376
26) A company’s flexible budget for 10,000 units of production reflects sales of
$200,000; variable costs of $40,000; and fixed costs of $75,000. Calculate the expected
level of operating income if the company produces and sells 13,000 units.
A.$110,500
B.$85,000
C.$133,000
D.$100,000
E.$50,500
27) Interim statements:
A.Are required by the Congress
B.Are necessary to achieve full disclosure about a business’s operations
C.Are usually monthly or quarterly statements prepared for periods of less than one
year
D.Require the use of the perpetual method for inventories
E.Cannot be prepared if the company follows the conservatism principle
28) In which of the following situations would the trial balance not balance?
A.A $1,000 collection of an account receivable was erroneously posted as a debit to
Accounts Receivable and a credit to Cash
B.The purchase of office supplies on account for $3,250 was erroneously recorded in
the journal as $2,350 debit to Office Supplies and credit to Accounts Payable
C.A $50 cash receipt for the performance of a service was not recorded at all
D.The purchase of office equipment for $1,200 was posted as a debit to Office Supplies
and a credit to Cash for $1,200
E.The cash payment of a $750 account payable was posted as a debit to Accounts
Payable and a debit to Cash for $750
29) Match the following terms with the definitions.
1>Number of units that would be completed if all effort during a period had been
applied to units that were started and finished. A. Equivalent units of production.
2>Report of costs charged to a department, its equivalent units of production achieved,
even the costs B. Job order cost accounting system
3>Document that summarizes the materials a department uses during a reporting
period; replaces materials requisition. C. Hybrid manufacturing system
4>System of assigning direct materials, direct labor, and overhead to specific processes;
total costs associated with each process are then divided by the number of units passing
through that process to determine cost per equivalent unit. D. Process manufacturing
system
5>Process of products in a continuous flow of steps. E. Process cost accounting system
6>Costing system to determine the cost of producing each job or job lot F. Materials
consumption report
7>A manufacturing system that contains features of both process and job order systems.
G. Process cost summary
30) When all of the authorized shares have the same rights and characteristics, the stock
is called
A.Preferred stock
B.Common stock
C.Par value stock
D.Stated value stock
E.No-par value stock
31) Mach Co. operates three production departments as profit centers. The following
information is available for its most recent year. Department 1’s contribution to
overhead as a percent of sales is:
A.8%
B.40%
C.20%
D.30%
E.12%
32) On January 1, a company issues bonds dated January 1 with a par value of
$300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid
semiannually on June 30 and December 31. The market rate is 8% and the bonds are
sold for $312,177. The journal entry to record the issuance of the bond is:
A.Debit Cash $312,177; credit Discount on Bonds Payable $12,177; credit Bonds
Payable $300,000
B.Debit Cash $300,000; debit Premium on Bonds Payable $12,177; credit Bonds
Payable $312,177
C.Debit Bonds Payable $300,000; debit Interest Expense $12,177; credit Cash
$312,177
D.Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds
Payable $300,000
E.Debit Cash $312,177; credit Bonds Payable $312,177
33) A set of procedures and approvals designed to control cash disbursements and the
acceptance of obligations is referred to as a(n):
A.Internal cash system.
B.Petty cash system
C.Cash disbursement system
D.Voucher system
E.Cash control system
34) Embark produces mulch for landscaping use. The following information
summarizes production operations and sales activities for June. The journal entry to
record June sales is:
A.Debit Accounts Receivable $810,000; credit Cost of Goods Sold $810,000
B.Debit Accounts Receivable $810,000; credit Sales $366,000; credit Finished Goods
Inventory $444,000
C.Debit Cost of Goods Sold $444,000; credit Sales $444,000
D.Debit Finished Goods Inventory $444,000; debit Sales $810,000; credit Accounts
Receivable $810,000; credit Cost of Goods Sold $444,000
E.Debit Accounts Receivable $810,000; credit Sales $810,000; debit Cost of Goods
Sold $444,000; credit Finished Goods Inventory $444,000
35) The accounting concept that requires financial statement information to be
supported by independent, unbiased evidence other than someone’s belief or opinion is:
A.Business entity assumption
B.Monetary unit assumption
C.Going-concern assumption
D.Time-period assumption
E.Objectivity
36) Which of the following statements is incorrect?
A.An unadjusted trial balance is a list of accounts and balances prepared before
adjustments are recorded
B.An adjusted trial balance is a list of accounts and balances prepared after adjusting
entries have been recorded and posted to the ledger
C.Each trial balance amount is used in preparing the financial statements
D.Financial statements should be prepared directly from information in the unadjusted
trial balance
E.Financial statements can be prepared directly from information in the adjusted trial
balance
37) The time period assumption assumes that an organization’s activities can be divided
into specific time periods including all of the following except:
A.Months
B.Quarters
C.Fiscal years
D.Calendar years
E.Days
38) A promissory note:
A.Is a short-term investment for the maker
B.Is a written promise to pay a specified amount of money at a certain date
C.Is a liability to the payee
D.Is another name for an installment receivable
E.Cannot be used in payment of an account receivable
39) The statement of cash flows helps address questions such as
A.How is the increase in investments financed?
B.What is the source of cash for new plant assets?
C.How much cash is generated from or used in operations?
D.Why is cash flow from operations different from income?
E.All of these
40) Dunkin Company manufactures and sells a single product that sells for $480 per
unit; variable costs are $300. Annual fixed costs are $990,000. Current sales volume is
$4,200,000. Dunkin company management targets an annual after-tax income of
$843,750. The company is subject to a 25% income tax rate. Compute the unit sales to
earn the target after-tax net income.
A.12,000
B.10,188
C.6,672
D.11,750
E.14,688
41) A department that incurs costs without directly generating revenues is a:
A.Service center
B.Production center
C.Profit center
D.Cost center
E.Performance center
42) Technology
A.Has replaced accounting
B.Has not changed the work that accountants do
C.Has closely linked accounting with consulting, planning, and other financial services
D.In accounting has replaced the need for decision makers
E.In accounting is only available to large corporations
43) The price of one currency stated in terms of another currency is called a(n):
A.Foreign exchange rate
B.Currency transaction
C.Historical exchange rate
D.International conversion rate
E.Currency rate
44) Investing activities include the:
A.Purchase of plant assets
B.Lending and collecting on notes receivable
C.Sale of short-term investments other than cash equivalents
D.Sale of plant assets
E.All of these
45) An expense resulting from failing to take advantage of cash discounts on purchases
is called:
A.Sales discounts
B.Trade discounts
C.Purchases discounts
D.Discounts lost
E.Discounts earned
46) A company made no adjusting entry for accrued and unpaid employee wages of
$28,000 on December 31. This oversight would:
A.Understate net income by $28,000
B.Overstate net income by $28,000
C.Have no effect on net income
D.Overstate assets by $28,000
E.Understate assets by $28,000
47) A decrease in the fair value of a security that has not yet been realized through an
actual sale of the security is called a(n):
A.Contingent loss
B.Realizable loss
C.Unrealized loss
D.Capitalized loss
E.Market loss
48) The potential benefit lost by taking a specific action from two or more choices is an
__________________________.
49) Describe the flow of overhead costs in a process cost accounting system, including
accounts used.
50) ___________________________ implies that each partner in a partnership can be
called on to pay a partnership’s debts.
51) The _____________ of recording purchases records purchases under the
assumption that the cash discount for prompt payment will be taken.
52) A stock ____________________ assists with purchases and sales of shares of stock
by receiving and issuing certificates as necessary.
53) The difference between the flexible budget sales and the fixed budget sales is called
the __________________________ variance.