1) Companies should set maximum purchase limits on debit cards and credit cards as
part of internal controls.
2) Generally, a lower gross profit ratio reflects positively on a companys ability to
manage its inventory.
3) We report the purchase of stock in another corporation as a cash outflow from
investing activities.
4) Risk assessment procedures include periodic reviews of internal controls, assessing
managements oversight of the internal control, developing solutions to known cases of
internal control failures, and determining whether each division or operation within a
company is meeting its objectives.
5) In the event a corporation is dissolved, common stockholders receive preference over
preferred stockholders in the distribution of assets.
6) Expenses are regular cash payments by a corporation to its stockholders.
7) Because adjusting entries allow the proper application of the revenue recognition
principle or the matching principle, they are a necessary part of cash-basis accounting.
8) The percentage-of-receivables method for estimating uncollectible accounts is
commonly referred to as the balance sheet method, because the estimate of bad debts is
based on a balance sheet amountaccounts receivable.
9) If accounts receivable decreases, this indicates that revenues exceed cash receipts
from customers.
10) Using the direct method we adjust the items on the income statement to directly
show the cash inflows and outflows from operations.
11) Suppose Simeon Company begins the year with $1,000 in supplies, purchases an
additional $5,500 of supplies during the year, and ends the year with $700 in supplies.
The year-end adjusting entry includes Supplies Expense of $7,200.
12) The revenue recognition principle states that we record revenue in the period in
which we collect cash.
13) The following information relates to inventory for Shoeless Joe Inc.
At what amount would Shoeless report gross profit using LIFO cost flow assumptions?
a. $105
b. $80
c. $175
d. $120
14) Listed below are eight 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. Terms: Vertical analysis Horizontal
analysis Liquidity Solvency Discontinued operation Extraordinary item Aggressive
accounting practices Conservative accounting practices Phrases: _____ A company’s
ability to pay its current liabilities. _____ Accounting choices that result in reporting
lower income, lower assets, and higher liabilities. _____ A profit or loss unusual in
nature and infrequent in occurrence. _____ Accounting choices that result in reporting
higher income, higher assets, and lower liabilities. _____ A tool to analyze trends in
financial statement data for a single company over time. _____ The sale or disposal of
a significant component of a company’s operations. _____ A means to express each
item in a financial statement as a percentage of a base amount. _____ A company’s
ability to pay its long-term liabilities.
15) Boynton Jewelers reported the following amounts at the end of the year: total sales
= $550,000; sales discounts = $12,000; sales returns = $44,000; sales allowances =
$17,000. What was the companys net revenues for the year?
a. $489,000
b. $485,000
c. $477,000
d. $499,000
16) Excerpts from TPX Company’s December 31, 2015 and 2014, financial statements
are presented below:
TPX Companys 2015 receivables turnover ratio is:
a.5.3 times
b.5.6 times
c.5.0 times
d.0.2 times
17) Skypt is involved in a lawsuit and sued by Cortez for $500,000. Skypt feels it is
probable that it will lose the lawsuit. What should Skypt and Cortez record or disclose
concerning the lawsuit?
a. Skypt should record a $500,000 contingent liability; Cortez should record a $500,000
contingent gain
b. Skypt should record a $500,000 contingent liability; Cortez should not record a
contingent gain
c. Skypt should disclose a $500,000 contingent liability; Cortez should disclose a
$500,000 contingent gain
d. Skypt should not record or disclose a contingent liability; Cortez should record a
$500,000 contingent gain
18) McGill purchases additional office equipment to better serves its customers. This
purchase is classified as what type of activity?
a. Company activity
b. Financing activity
c. Investing activity
d. Operating activity
19) Abbott Company purchased a computer that cost $10,000. It had an estimated
useful life of 5 years and no residual value. The computer was depreciated by the
straight-line method and was sold at the end of the fourth year of use for $3,000 cash.
Abbott should record:
a. a gain of $1,000
b. a loss of $1,000
c. neither a gain nor a loss – the computer was sold at its book value
d. neither a gain nor a loss – the gain that occurred in this case would not be recognized
20) Resources owned by the company that will provide a benefit for more than one year
are called:
a. Current assets
b. Current liabilities
c. Long-term assets
d. Revenues
21) Anthony Corporation reported the following amounts for the year:
Net sales$296,000
Cost of goods sold 138,000
Average inventory 50,000
Anthonys inventory turnover ratio is:
a. 2.42
b. 2.76
c. 3.21
d. 2.14
22) Which of the following is an example of detective controls?
a. Separation of duties
b. Physical controls
c. Proper authorization
d. Reconciliations
23) On July 5, Harris Company purchased supplies from the hardware store for $600 on
account. On July 10, Harris receives a bill from the hardware store as a reminder about
the account balance. On July 17, Harris pays the account in full. How does Harris
record the transaction on July 17?
a. Supplies 600
Accounts Payable 600
b. Accounts Payable 600
Supplies 600
c. Cash 600
Accounts Payable 600
d. Accounts Payable 600
Cash 600
24) For each of the following accounts, indicate whether we use a debit or a credit to
increase the balance of the account.
(a) Accounts Receivable
(b) Accounts Payable
(c) Salaries Expense
(d) Service Revenue
(e) Supplies
(f) Common Stock
(g) Advertising Expense
(h) Dividends
25) The form of business organization that is legally separate from its owners is a:
a. Partnership
b. Sole proprietorship
c. Corporation
d. Separation entity
26) At December 31, Gill Co. reported accounts receivable of $238,000 and an
allowance for uncollectible accounts of $600 (credit). An analysis of accounts
receivable suggests that the allowance for uncollectible accounts should be 3% of
accounts receivable. The amount of the adjustment for uncollectible accounts would be:
a. $6,540
b. $7,800
c. $7,140
d. $7,740
27) At December 31, Amy Jo’s Appliances had account balances in Accounts
Receivable of $311,000 and $970 (credit) in Allowance for Uncollectible Accounts. An
analysis of Amy Jo’s December 31 accounts receivable suggests that the allowance for
uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the
year should be:
a. $6,220
b. $6,450
c. $5,250
d. $7,190
28) Return on equity is calculated as:
a. Net income divided by average stockholders equity
b. Net income divided by ending stockholders equity
c. Net income divided by average market value of equity
d. Net income divided by ending market value of equity
29) 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.
What was the balance of Gotebos Cash account following these six transactions?
a. $29,800
b. $19,300
c. $17,800
d. $22,400
30) Revenues have what effect on the accounting equation?
a. Increase liabilities
b. Decrease assets
c. Increase stockholders equity
d. No effect
31) IFRS stands for:
a. Independent Financial Reporting System
b. International Financing Reform System
c. International Financial Reporting Standards
d. International Financial Regulation of Securities
32) Oswego Clay Pipe Company provides services of $46,000 to Southeast Water
District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego
record on April 23, assuming the customer made the correct payment on that date?
a. Cash 45,540
Sales Revenue 460
Accounts Receivable 46,000
b. Cash 46,000
Sales Discounts 460
Accounts Receivable 46,000
Interest Revenue 460
c. Cash 45,540
Sales Discounts 460
Accounts Receivable 46,000
d. Cash 46,000
Accounts Receivable 45,540
Sales Revenue 460
33) Which of the following is not a solvency ratio?
a.Time interest earned ratio
b.The debt to equity ratio
c.The current ratio
d.All of the other options are solvency ratios
34) Which of the following would NOT need to be accounted for in a bank
reconciliation?
a. Deposits outstanding recorded by the company but not the bank
b. Interest earned recorded by the bank but not the company
c. NSF checks recorded by the bank but not by the company
d. Checks written by the company and recorded by the bank
35) Accounting information that does not provide measurement bias in favor of a
particular set of companies has the characteristic of:
a. Relevance
b. Consistency
c. Materiality
d. Neutrality
36) For the first three years of operations, the company reports net income of $1,000,
$2,000, and $3,000, and pays dividends of $500, $1,000, and $1,000. What is the
balance of retained earnings at the end of the third year?
a. $2,000
b. $2,500
c. $3,500
d. $6,000
37) Having an independent party assess each year the adequacy of the companys
internal control procedures is an example of which detective control?
a. Separation of duties
b. Reconciliations
c. Performance reviews
d. Audits
38) Morgan Pharmaceutical spends $50,000 this year in research and development for a
new drug to cure liver damage. By the end of the year, management feels confident that
the new drug will gain FDA approval and lead to higher future sales. What impact will
the $50,000 spending have on this years financial statements?
a. Increase Assets
b. Decrease Revenues
c. Increase Expenses
d. Increase Revenues
39) 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. Cash inflow from operating activities
b. Cash outflow from financing activities
c. Cash outflow from operating activities
d. Cash inflow from investing activities
e. Cash inflow from financing activities
f. Cash outflow from investing activities
____ Pay dividends to stockholders.
40) Consider the following list of accounts:
CashRetained Earnings
Service RevenueUtilities Expense
Salaries ExpenseAccounts Receivable
Accounts PayableCommon Stock
EquipmentDividends
How many of these accounts have a normal debit balance?
a. Four
b. Five
c. Six
d. Seven
41) If accounting information is considered to have faithful representation, then which
of the following is True?
a. The information represents to users what it claims to represent
b. The information follows conservatism principles and is also material
c. The information is considered pertinent to or affects decisions
d. The information will have predictive value, feedback value, and is timely
42) Listed below are ten terms followed by a list of phrases that describe or characterize
five of the terms. Match each phrase with the correct term by placing the letter
designating the term in the space provided.
a. Accrued expenses
b. Adjusted trial balance
c. Adjusting entries
d. Depreciation expense
e. Balance sheet
f. Prepaid expenses
g. Expenses
h. Post-closing trial balance
i. Income statement
j. Trial balance
____ A list of accounts and their balances used as the source data to prepare the
financial statements.
43) The current ratio is
a. Current assets divided by current liabilities
b. Cash and short-term investments divided by current liabilities
c. Cash, short-term investments, and accounts receivable divided by current liabilities
d. Cash, short-term investments, accounts receivable, and inventory divided by current
liabilities
44) 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 provided.
a. Monitoring
b. Oversight board
c. Control activities
d. Corporate executive accountability
e. Nonaudit services
f. Control environment
g. Internal control
h. Information and communication
i. Auditor rotation
j. Risk assessment
____ Management must document the effectiveness of procedures that could affect
financial reporting.
45) One of the primary reasons for investing in debt securities includes:
a. Receiving dividend payments
b. Acquiring significant influence
c. Earning interest revenue
d. Deducting interest payments for tax purposes
46) Panama Shirt Designs is a defendant in litigation involving an employee accident in
its manufacturing plant.
For each of the following scenarios, determine the appropriate way to report the
situation. Explain your reasoning and record any necessary entry.
1> The likelihood of a loss occurring is probable and the estimated loss is $650,000.
2> The likelihood of a loss occurring is probable and the loss is estimated to be in the
range of $500,000 to $800,000.
3> The likelihood of a loss occurring is reasonably possible and the estimated loss is
$650,000.
4> The likelihood of a loss occurring is remote, while the estimated potential loss is
$650,000.
47) What is internal control? Briefly describe the five components of internal control
outlined by the Committee of Sponsoring Organizations (COSO).
48) On April 1, 2015, a company loans one of its suppliers $50,000 and accepts a
24-month, 12% note receivable. Calculate the amount of interest revenue the company
will recognize in 2015, 2016, and 2017 .
49) Freedom Wireless reports operating expenses of $255,000. Operating expenses
include both rent expense and salaries expense. Prepaid rent decreases during the year
by $10,000 and salaries payable increases by $25,000. What is the cash paid for
operating expenses during the year?
50) Below are typical transactions for a company. Indicate whether each transaction is
classified as a financing, investing, or operating activity.
51) A companys Cash account shows a balance of $5,680 at the end of the month.
Comparing the companys Cash account with the monthly bank statement reveals
several additional cash transactions such as deposits outstanding ($1,250), checks
outstanding ($2,380), bank service fees ($40), an NSF check from a customer ($150), a
customers note receivable collected by the bank ($500), and interest earned ($60).
Prepare the necessary entries to adjust the balance of cash.
