1) The Public Company Accounting Oversight Board (PCAOB) has the authority to
establish standards dealing with auditing, quality control, ethics, independence, and
other activities relating to the preparation of audited financial reports.
2) The gross profit ratio is calculated as gross profit divided by net sales.
3) When we reissue treasury stock, we report the difference between its cost and the
cash received as an increase/decrease in additional paid-in capital.
4) The Accumulated Depreciation account allows us to reduce the carrying value of
assets through depreciation, while maintaining the original cost of each asset in the
accounting records.
5) Expenses have the effect of decreasing retained earnings.
6) The primary objective of the IASB is to develop accounting standards in the U.S.
7) The FIFO inventory method is not allowed under IFRS.
8) If a transaction causes total assets of the company to increase by $5,000 and total
liabilities to increase by $3,000, then stockholders equity increases by $8,000.
9) The petty cash fund represents cash on hand and is used to pay for minor purchases.
10) The employer records amounts deducted from employee payroll as liabilities until it
pays them to the appropriate organizations.
11) On March 3, Cobra Inc. purchased a desk for $450 on account. On March 22, Cobra
purchased another desk for $500 also on account, and then on March 24, Cobra paid
$400 on account. At the end of March, what amount should Cobra report for desks
(assuming these two desks were the only desks they had)?
a. $50
b. $450
c. $500
d. $950
12) A company received a bill for newspaper advertising services, $400. The bill will be
paid in 10 days. How would the transaction be recorded today?
a. Debit Advertising Expense $400, credit Accounts Payable $400
b. Debit Accounts Payable $400, credit Advertising Expense $400
c. Debit Accounts Payable $400, credit Cash $400
d. Debit Advertising Expense $400, credit Cash $400
13) Compute the future value of the following invested amounts at the specified periods
and interest rates.
Invested Interest Number of
Item Amount Rate Periods
a. $20,000 8% 10
b. $30,000 4% 8
c. $10,000 12% 15
14) Frosty Inc. has the following balances on December 31 prior to closing entries:
Based upon the balances above, what net adjustment would be made to Retained
Earnings due to closing entries?
a. Increase of $11,000
b. Increase of $13,000
c. Increase of $12,000
d. Increase of $14,000
15) The following table contains financial information for Trumpeter Inc. before closing
entries:
What is the amount of Trumpeters total assets?
a. $81,500
b. $82,500
c. $68,500
d. $83,500
16) When using the equity method to account for an investment, cash dividends
received by the investor from the investee should be recorded:
a.As a reduction in the Investments account
b.As an increase in the Investments account
c.As dividend income
d.As a contra item to stockholders’ equity
17) Which of the following is an aggressive accounting practice?
a. Change from straight-line to double-declining balance depreciation
b. Record sales revenue before it is actually earned
c. Adjust the allowance for uncollectible accounts to a larger amount
d. Record inventory at lower of cost or market rather than at cost
18) Under the direct write-off method, what adjustment is made at the end of the year to
account for possible future bad debts?
a. Debit Bad Debt Expense
b. Debit Allowance for Uncollectible Accounts
c. Credit Accounts Receivable
d. No adjustment is made
19) Clement Company paid an account payable related to a previous utility bill of
$1,000. This transaction should be recorded as follows on the payment date:
a. Debit Accounts Payable $1,000, credit Cash $1,000
b. Debit Cash $1,000, credit Accounts Payable $1,000
c. Debit Utilities Expense $1,000, credit Cash $1,000
d. Debit Cash $1,000, credit Utilities Expense $1,000
20) Listed below are five 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. Return on assets
b. Profit margin
c. Asset turnover
d. Impairment
e. Big bath
Phrases:
_____ Net sales divided by average total assets; which measures the sales per dollar of
assets invested.
_____ Net income divided by net sales; indicates the earnings per dollar of sales.
_____ Net income divided by average total assets; measures the amount of net income
generated for each dollar invested in assets.
_____ Recording all losses in one year to make a bad year even worse.
_____ Occurs when the future cash flows (future benefits) generated for a long-term
asset fall below its book value (cost minus accumulated depreciation).
21) Prepare adjusting journal entries, as needed, for the following items.
(a) The Supplies account shows a balance of $500, but a count of supplies reveals only
$200 on hand at year-end.
(b) The company initially records the payments of all insurance premiums as prepaid
insurance. The unadjusted trial balance at year-end shows a balance of $500 in Prepaid
Insurance. A review of insurance policies reveals that $100 of insurance is unexpired.
(c) Employees work Monday through Friday, and salaries of $2,500 per week are paid
each Friday. The companys year-end falls on Tuesday.
(d) At year-end, the company received a utility bill for Decembers electricity usage of
$200 that will be paid in early January.
22) Baker Fine Foods has beginning inventory for the year of $12,000. During the year,
Baker purchases inventory for $150,000 and ends the year with $20,000 of inventory.
Baker will report cost of goods sold equal to:
a. $150,000
b. $158,000
c. $142,000
d. $170,000
23) Listed below are six profitability ratios listed in alphabetical order followed by a list
of phrases that describe or characterize the ratios. Match each phrase with the correct
ratio placing the letter designating the ratio in the space provided.
Ratios:
a. Asset turnover
b. Gross profit ratio
c. Price-earnings (PE) ratio
d. Profit margin
e. Return on assets
f. Return on equity
Phrases:
_____ Net income divided by average total assets; measures the amount of net income
generated for each dollar invested in assets.
_____ Compares a companys share price with its earnings per share.
_____ Net income divided by average stockholders equity; measures the income
generated per dollar of equity.
_____ Gross profit divided by net sales; measures the amount by which the sale price of
inventory exceeds its cost per dollar of sales.
_____ Net sales divided by average total assets; which measures the sales per dollar of
assets invested.
_____ Net income divided by net sales; indicates the earnings per dollar of sales.
24) The acid-test ratio is most similar to the:
a.Current ratio
b.Debt to equity ratio
c.Times interest earned ratio
d.Inventory turnover ratio
25) A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The
current market rate of interest is 6%. These bonds will sell at a price that is:
a.Equal to $500,000
b.More than $500,000
c.Less than $500,000
d.The answer cannot be determined from the information provided
26) Which of the following is NOT a reason why a bank reconciliation is necessary?
a. The company has transactions that the bank has not recorded
b. Petty cash has a low balance
c. The bank has transactions that the company has not recorded
d. Reconciliations provide a control over cash
27) Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown
below.
HHF’s debt to equity ratio is:
a.0.75
b.1.13
c.0.38
d.1.80
28) The balance sheet of Computer World reports total assets of $350,000 and $450,000
at the beginning and end of the year, respectively. Sales revenues are $800,000, net
income is $100,000, and net cash flows from operating activities are $150,000. What is
Computer World’s cash flow to sales?
a. 15.6%
b. 25.0%
c. 18.8%
d. 37.5%
29) Which of the following is True regarding LIFO and FIFO?
a. In a period of decreasing costs, LIFO results in lower total assets than FIFO
b. In a period of decreasing costs, LIFO results in lower net income than FIFO
c. In a period of rising costs, LIFO results in lower net income than FIFO
d. The amount reported for COGS is based on market value of inventory if LIFO is
used
30) Given the information below, which bond(s) will be issued at a premium?
a. Bond 1
b. Bond 2
c. Bond 3
d. Bonds 2 and 4
31) Tony Hawks Adventure (THA) issued callable bonds on January 1, 2015 . THA’s
accountant has projected the following amortization schedule from issuance until
maturity:
THA issued the bonds for:
a.$200,000
b.$194,758
c.$242,000
d.Cannot be determined from the given information
32) An extraordinary item must meet which of the following criteria?
a. Unusual in nature
b. Infrequent in occurrence
c. Unusual in nature and infrequent in occurrence
d. Unusual in nature or infrequent in occurrence
33) X2 issued callable bonds on January 1, 2015 . The bonds pay interest annually on
December 31 each year. X2’s accountant has projected the following amortization
schedule from issuance until maturity:
What is the annual stated interest rate on the bonds?
a.3%
b.3.5%
c.6%
d.7%
34) Which of the following is True concerning temporary and permanent accounts?
a. Cash is a temporary account
b. Permanent accounts represent activity over the entire life of the company
c. Permanent accounts must be closed at the end of every reporting period
d. Temporary accounts represent activity over the previous three years
35) Recognition of impairment for long-term assets is required if book value exceeds:
a.Original cost
b.Fair value
c.Future cash flows
d.Accumulated depreciation
36) The body primarily responsible for establishing a single set of global accounting
standards is the:
a. IASB
b. SEC
c. FASB
d. IOSCO
37) If a company provides services on account, which of the following is True?
a. Expenses increase
b. Liabilities increase
c. Stockholders equity increases
d. Assets decrease
38) If a company has stockholders equity of $60,000 at the end of the year, which of the
following statements must be True?
a. The companys assets exceed liabilities by $60,000
b. The company has issued $60,000 of common stock
c. Net income for the year equals $60,000
d. Total revenues earned during the year equal $60,000
39) The adjusting entry required to record accrued expenses includes:
a. A credit to Cash
b. A debit to an asset
c. A credit to an asset
d. A credit to liability
40) Kela Corporation reports net income of $450,000 that includes depreciation
expense of $70,000. Also, cash of $50,000 was borrowed on a 5-year note payable.
Based on this data, total cash inflows from operating activities are:
a. $380,000
b. $470,000
c. $520,000
d. $570,000
41) Kansas Enterprises purchased equipment for $60,000 on January 1, 2015 . The
equipment is expected to have a five-year life, with a residual value of $5,000 at the end
of five years.
Using the double-declining balance method, the book value at December 31, 2016
would be:
a.$21,600
b.$24,800
c.$36,000
d.$45,600
42) The exclusive right to benefit from a creative work, such as a film, is a:
a.Patent
b.Copyright
c.Trademark
d.Franchise
43) Given a choice, most companies would prefer to report a liability as long-term
rather than current because:
a.It may cause the firm to appear less risky to investors and creditors
b.It may reduce interest rates on borrowing
c.It may cause the company to appear more stable commanding a higher stock price for
new stock listings
d.All of the other answers are true
44) Consolidated financial statements are prepared when one company has:
a.Accounted for the investment using the equity method
b.Accounted for the investment as available-for-sale securities
c.Control over another company
d.None of these is correct
45) On May 1, Ace Bonding Company purchased inventory costing $2,000 on account
with terms 2/10, n/30. On May 8, Ace pays for this inventory and records which of the
following using a perpetual inventory system?
a. Accounts Payable 2,000
Cash 2,000
b. Accounts Payable 1,960
Inventory 40
Cash 2,000
c. Accounts Payable 2,000
Inventory 40
Cash 1,960
d. Cash 2,000
Accounts Payable 2,000
46) When treasury stock is purchased, what is the effect on assets and stockholders
equity?
a.Assets and stockholders equity increase
b.Assets and stockholders equity decrease
c.Assets increase and stockholders equity decrease
d.Assets decrease and stockholders equity increase
47) Advantages of the corporate form of business include which of the following?
I. Double taxationIV. More paperwork
II. Ability to raise capitalV. Limited liability
III. Ability to transfer ownership
a. II
b. II., III., V
c. I., II., III
d. II., IV., V
48) Following are transactions of Gotebo Tanners, Inc., a new company, during the
month of January:
1> Issued 10,000 shares of common stock for $15,000 cash.
2> Purchased land for $12,000, signing a note payable for the full amount.
3> Purchased office equipment for $1,200 cash.
4> Received cash of $14,000 for services provided to customers during the month.
5> Purchased $300 of office supplies on account.
6> Paid employees $10,000 for their first months salaries.
How many of these transactions decreased Gotebos total assets?
a. One
b. Two
c. Three
d. Four
49) A framework for designing an internal control system is provided by the:
a. Committee of Sponsoring Organizations
b. Financial Accounting Standards Board
c. Securities and Exchange Commission
d. International Accounting Standards Board
50) Match (by letter) the correct reporting method for each of the items listed below.
Reporting Method
C. Current liability
L. Long-term liability
D. Disclosure note only
N. Not reported
51) Describe the difference between external events and internal events and give two
examples of each.
52) On November 1, 2015, Dual Systems borrows $200,000 to expand operations. Dual
Systems signs a six-month, 9% promissory note. Interest is payable at maturity. Dual
Systems year-end is December 31 .
1> Record the issuance of the note by Dual Systems.
2> Record the appropriate adjusting entry for the note by Dual Systems on December
31, 2015 .
3> Record the payment of the note by Dual Systems at maturity on April 30, 2016 .
53) Use the following information to prepare a trial balance.
54) When inventory costs are declining, __________ generally results in a lower
amount of reported cost of goods sold.
55) Which inventory cost flow assumption is allowed under U.S. GAAP but not under
IFRS? Explain why some U.S. companies will lobby strongly to keep this method as an
allowable alternative.
56) Holiday Laboratories purchased a high speed industrial centrifuge at a cost of
$420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost
$8,000. An additional water line had to be run to the equipment at a cost of $3,000.
Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. What is
the total cost of the equipment? How much of this amount should be expensed
immediately?
57) Touche Manufacturing is considering a rearrangement of its manufacturing
operations. A consultant estimates that the rearrangement should result in after-tax cash
savings of $6,000 the first year, $10,000 for the next two years, and $12,000 for the
next two years. Assuming a 12% discount rate, calculate the total present value of the
cash flows.
