1) The adjusting entry for a prepaid expense has the effect of reducing total assets and
reducing net income.
2) Operating activities are both inflows and outflows of cash resulting from the external
financing of a business.
3) After closing entries are posted to the accounts in the general ledger, all asset and
liability accounts have a balance of zero.
4) Under the indirect method, an increase in prepaid rent is added to net income to
arrive at net cash flows from operating activities.
5) The LIFO conformity rule requires a company that uses LIFO for tax reporting to use
FIFO for financial reporting.
6) Because cash-basis accounting violates both the revenue recognition principle and
the matching principle, it is generally not accepted in preparing financial statements.
7) As a companys default risk increases, investors demand a higher market interest rate
on their bond investments.
8) Authorized stock is the number of shares that have been sold to investors.
9) The internal control component of information and communication relates to the
effectiveness of accurately measuring and communicating business transactions.
10) Changes in accounting estimates usually have no effect on a companys underlying
cash flows.
11) Companies are not allowed to report inventory costs by assuming which units of
inventory are sold and which units still remain on hand.
12) The receivables turnover ratio equals average accounts receivable divided by net
credit sales.
13) The Retained Earnings balance reported on the balance sheet typically is not
affected by:
a.Net income
b.Net loss
c.Dividends paid
d.Stock splits
14) A bond issued at a discount indicates that at the date of issue:
a. Its stated rate was lower than the prevailing market rate of interest on similar bonds
b. Its stated rate was higher than the prevailing market rate of interest on similar bonds
c. The bonds were issued at a price greater than their face value
d. The bonds must be non-interest bearing
15) The two categories of stockholders equity usually found in the balance sheet of a
corporation are:
a. Common stock and liabilities
b. Assets and liabilities
c. Common stock and retained earnings
d. Revenues and expenses
16) Financial leverage is best measured by which of the following ratios?
a. The debt to equity ratio
b. The return on equity ratio
c. The times interest earned ratio
d. The return on assets ratio
17) A minor amount of cash kept on hand to pay for small purchases is referred to as a:
a. Petty cash fund
b. Cash receipts fund
c. Cash payments fund
d. Cookie jar fund
18) Match each of the following preferred stock features with its description.
Preferred Stock Features Description
_____ 1> Convertible a. Shares receive dividend priority, if dividend not paid.
_____ 2> Redeemable b. Shares can be exchanged for common stock.
_____ 3> Cumulative c. Shares can be sold at a predetermined price.
19) Suppose that Hastings Corporation overstates its ending inventory for 2015. What
effect will this have on the reported amount of cost of goods sold for 2015?
a. Overstate cost of goods sold
b. Understate cost of goods sold
c. Have no effect on cost of goods sold
d. Cannot be determined given the information provided
20) The entry to record a monthly payment on an installment note such as a car loan:
a.Increases expense, decreases liabilities, and decreases assets
b.Increases expense, increases liabilities, and increases assets
c.Increases expense, decreases liabilities, and increases assets
d.Increases expense, increases liabilities, and decreases assets
21) Leonards Jewelry owns a patent with a carrying value of $50 million. Due to
adverse economic conditions, Leonard’s management determined that it should assess
whether an impairment should be recognized for the patent. The estimated future cash
flows to be provided by the patent total $43 million, and its fair value at that point totals
$35 million. Under these circumstances, Leonard:
a.Would record no impairment loss on the patent
b.Would record a $7 million impairment loss on the patent
c.Would record a $15 million impairment loss on the patent
d.Would record a $31 million impairment loss on the patent
22) Return on assets is equal to:
a. Profit margin plus asset turnover
b. Profit margin minus asset turnover
c. Profit margin times asset turnover
d. Profit margin divided by asset turnover
23) In a perpetual inventory system, the purchase of inventory is debited to:
a. Purchases
b. Cost of Goods Sold
c. Inventory
d. Accounts Payable
24) 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 increased Gotebos liabilities?
a. Four
b. Three
c. Two
d. One
25) Assume that Sallisaw Sideboards, Inc. had a retained earnings balance of $10,000
on April 1, and that the company had the following transactions during April.
Issued common stock for cash, $5,000.
Provided services to customers on account, $2,000.
Provided services to customers in exchange for cash, $900.
Purchased equipment and paid cash, $4,300.
Paid April rent, $800.
Paid employee salaries for April, $700.
What was Sallisaws retained earnings balance at the end of April?
a. $11,400
b. $12,100
c. $16,400
d. Some other amount
26) The practice of using the lower-of-cost-or-market to evaluate inventory reflects
which of the following accounting principles?
a. Matching principle
b. Revenue recognition
c. Conservatism
d. Materiality
27) The statement of cash flows reports cash flows from the activities of:
a. Operating, purchasing, and investing
b. Borrowing, paying, and investing
c. Financing, investing, and operating
d. Using, investing, and financing
28) When cash payments are made to stockholders, what is the effect on the companys
accounts?
a. Cash decreases and dividends increase
b. Cash increases and dividends decrease
c. Cash decreases and common stock decreases
d. Cash increases and common stock increases
29) At times, businesses require advance payments from customers that will be applied
to the purchase price when goods are delivered or services provided. These customer
advances represent:
a.Liabilities until the product or service is provided
b.A component of stockholders equity
c.Long-term assets until the product or service is provided
dRevenue upon receipt of the advance payment
30) How many of the following events would require an expense to be recorded?
Ordering office supplies
Hiring a receptionist
Paying employee salaries for the current month
Receiving but not paying a current utility bill
Paying for insurance in advance
a. One
b. Two
c. Three
d. Four
31) The balance shown in the August bank statement of Colt Company was $23,200.
After examining the August bank statement and items included with it, the company’s
accountant found:
Checks outstanding$4,300
NSF check 140
Note collected by bank for the Colt Company 1,200
Deposits outstanding 1,800
Bank service fees 60
What is the amount of cash that should be reported in the balance sheet as of August
31? a. $20,700
b. $17,200
c. $18,700
d. $22,200
32) 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. Cash equivalent
b. Bank reconciliation
c. Petty cash
d. Debit card
e. Credit card
____ Allows users to purchase items without having to pay cash immediately.
33) Compute the present value of the following single amounts to be received at the end
of the specified period at the given interest rate.
Invested Interest Number of
Item Amount Rate Periods
a. $1,500 10% 1
b. $1,500 10% 2
c. $1,500 10% 3
d. $1,500 10% 4
34) At December 31, Amy Jo’s Appliances had account balances in Accounts
Receivable of $311,000 and $970 (debit) 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
35) The major underlying assumptions of accounting include all of the following
except:
a. Economic entity
b. Monetary unit
c. Legal liability
d. Going concern
36) Lewis Inc. had the following information taken from various accounts for 2015:
What was Lewis Inc.s net revenues in 2015?
a. $368,000
b. $434,000
c. $383,000
d. $437,000
37) Suppose Company A places an order with Company B on May 12 . On May 14,
Company B ships the ordered goods to Company A with terms FOB destination. The
goods arrive at Company A on May 17 . Company A begins selling the goods to
customers on May 19 and pays Company B on May 20 . When would Company B
record the sale of goods to Company A?
a. May 12
b. May 14
c. May 19
d. May 17
38) A company has the following three events in December:
1> December 1 – Pay last months rent (November), $500
2> December 15 – Pay rent for the current month (December), $500
3> December 31 – Pay rent for the following year, $6,000
How much would be recorded as Rent Expense for the month of December using
accrual-basis accounting?
a. $6,500
b. $7,000
c. $1,000
d. $500
39) Which of the following is not a reason why a company might prefer to report a
liability as long-term rather than current?
a.It may cause the firm to appear less risky to investors and creditors
b.It may increase interest rates on borrowing
c.It may cause the company to appear more stable commanding a higher stock price for
new stock listings
d.It may reduce interest rates on borrowing
40) Which of the following would NOT represent good controls over cash
disbursements?
a. Periodically check amounts shown in the debit card and credit card statements
against purchase receipts
b. The employee verifying the accuracy of the debit card and credit card statements
should not also be the employee responsible for actual purchases
c. Set maximum purchase limits on debit cards and credit cards
d. Employees responsible for making cash disbursements should also be in charge of
cash receipts
41) Indicate whether each of the following transactions increases (+), decreases (), or
has no effect (NE) on total assets, total liabilities, and total stockholders equity.
42) The year-end adjusted trial balance included the following account balances: Cash,
$5,000; Equipment, $25,000; Accounts payable, $7,000; Common stock, $15,000;
Retained earnings, $6,000; Dividends, $1,000; Service revenue, $18,000; Salaries
expense, $9,000; and Utilities expense, $6,000. Prepare the post-closing trial balance.
43) Riley Incorporated reports the following amounts at the end of the year:
In addition, the company had common stock of $65,000 at the beginning of the year and
issued an additional $5,000 during the year. The company also had retained earnings of
$20,700 at the beginning of the year and paid dividends of $2,000 during the year.
Prepare the income statement, statement of stockholders equity, and balance sheet.
44) Perform a vertical analysis on the following information:
45) Presented below is a partial amortization schedule for Discount Foods:
1> Record the bond issue.
2> Record the first interest payment.
46) __________ is commonly referred to as the balance sheet approach.
47) During January, Deluxe Printing pays employee salaries of $1 million.
Withholdings in January are $76,500 for the employee portion of FICA, $210,000 for
federal and state income tax, and $40,000 for the employee portion of health insurance
(payable to Blue Cross/Blue Shield). The company incurs an additional $38,000 for
federal and state unemployment tax and $30,000 for the employer portion of health
insurance.
1> Record the employee salary expense, withholdings, and salaries payable.
2> Record the employer-provided fringe benefits.
3> Record the employer payroll taxes.
