Extraordinary repairs, replacements, and additions are added to the appropriate asset
accounts rather than being recorded as expenses.
You are pleasantly surprised to discover that a popular actress appears on The Tonight
Show wearing your company’s jeans. Later, your company’s sales increase by $500,000
as a result. When the actress appeared on TV, you would have recorded an asset because
the TV appearance was expected to bring future economic benefits to your company.
Long-lived assets found on a company’s balance sheet may include some assets that
have no physical substance.
If the likelihood of a loss is reasonably possible, a contingent liability is recorded by
making an appropriate journal entry.
Company X issues $40 million in new stock for cash. This does not affect stockholders’
equity because as new shares are sold, the value of existing shares falls.
The allowance method for uncollectible accounts is used for accounts receivable, but
not for notes receivable.
How will a company ‘s current ratio be affected when the company receives $20,000
from owners and issues common stock to them?
A) The current ratio will increase because current assets increase.
B) The current ratio will increase because current liabilities decrease.
C) There will be no change in the company ‘s current ratio.
D) The current ratio will decrease because current liabilities increase.
Jim’s Gymnastics Training’s operations for the month of October are summarized as
follows:
A. Provided $5,000 of training to students on account.
B. Received $4,000 cash from students for training provided in October.
C. Received $1,000 cash for training to be provided in November.
D. Received $3,000 cash from students on account for training provided in September.
E. Paid September’s gym rental bill on account in the amount of $1,000.
F. Received October’s rental bill of $1,500; set it aside.
Required:
Part a. Determine the net income for October using the cash basis of accounting.
Part b. Determine the net income for October using the accrual basis of accounting.
Grossing Inc. receives $10,000 in advance this month for work to be performed next
month. This month, the company should record a journal entry that includes a debit to:
A) Cash and a credit to Service Revenue for $10,000.
B) Cash and a credit to Unearned Revenue for $10,000.
C) Cash and a credit to Accounts Receivable for $10,000.
D) Prepaid Services and a credit to Cash for $10,000.
A company entered into the following transactions during April.
Required:
Complete the following table by indicating the amount and effect of each transaction on
the accounting equation.
Transaction Assets Liabilities Stockholders’ Equity
A. Signed a lease and made a payment of $4,500 to the landlord comprised of the
current month’s rent of $1,500 and the required $3,000 security deposit.
B. Purchased equipment on account for $35,000.
C. Purchased supplies for $6,500 on account and used them immediately.
D. Performed services and received cash of $57,000.
E. Performed services on account for $28,000.
F. Received a payment of $24,000 for services to be performed in the future.
G. Collected $14,000 from customers on account.
H. Paid employees $11,000 for work done during the month.
I. Made a $35,000 payment on account for equipment that was purchased above.
J. Made a payment of $6,500 on account for the supplies purchased above.
K. Received bills for the current month from telephone and electricity companies
totaling $3,800; payments will be made next month.
Which of the following statements about the Price/Earnings ratio is notcorrect?
A) The Price/Earnings ratio indicates how much investors are willing to pay for a share
of a company’s stock as a multiple of current earnings.
B) A high Price/Earnings ratio may mean that investors have pushed the price of the
stock up in anticipation of higher future net income.
C) If EPS decreases and there is no change in the market price of the stock, the
Price/Earnings ratio will decrease.
D) If the market price of the stock increases and there is no change in EPS, the
Price/Earnings ratio will increase.
Which of the following statements concerning a petty cash fund is not correct?
A) A petty cash fund acts as a control by establishing a limited amount of cash to use
for specific types of expenses.
B) A petty cash fund is similar to an imprest payroll account.
C) The company ‘s petty cash custodian is responsible for operating the petty cash fund.
D) To avoid the administrative costs of the use of purchasing cards, or Pcards, many
organizations have started using petty cash funds.
Which of the following statements about the balance sheet is correct?
A) An item on a balance sheet that is labeled as €payable€ is a liability of that company.
B) Assets are listed on the balance sheet in alphabetical order.
C) The balance sheet balances when assets plus liabilities equal stockholders ‘ equity.
D) The balance sheet proves that asset debits = liability credits.
Choose the appropriate letter to match the term and the definition. There are more
definitions than terms.
Term
1> ____ Cost of Goods Sold Equation
2> ____ Goods Available for Sale
3> ____ Gross Profit (or Gross Margin)
4> ____ Gross Profit Percentage
5> ____ Multistep Income Statement
Definition
A. The sum of beginning inventory and purchases for the period.
B. Expresses the relationship between inventory on hand, purchased, and sold; shown
as either BI + P – EI = CGS or BI + P – CGS = EI.
C. The cost of inventory lost to theft, fraud, and error.
D. A reduction in the cost of inventory purchases associated with unsatisfactory goods.
E. A cash discount received for prompt payment of a purchase on account.
F. Refunds and price reductions given to customers after goods have been sold and
found unsatisfactory.
G. A sales price reduction given to customers for prompt payment of their account
balance.
H. Presents important subtotals, such as gross profit, to help distinguish core operating
results from other, less significant items that affect net income.
I. Net sales minus cost of goods sold. It is a subtotal, not an account.
J. A ratio indicating the percentage of profit earned on each dollar of sales, after
considering the cost of products sold.
A company started the year with the following: Assets $100,000; Liabilities $30,000;
Common Stock $60,000; Retained Earnings $10,000. During the year, the company
earned revenue of $5,000, all of which was received in cash, and incurred expenses of
$3,000, all of which were unpaid as of the end of the year. In addition, the company
paid dividends of $1,000 to owners. Assume no other activities occurred during the
year.
Use the information above to answer the following question. The amount of retained
earnings at the end of the year is
A) $15,000.
B) $11,000.
C) $12,000.
D) $1,000.
Charter Company, which uses the perpetual inventory method, purchases different
letters for resale. Character had a beginning inventory comprised of seven units at $4
per unit. The company purchased five units at $6 per unit in February, sold seven units
in October, and purchased two units at $7 per unit in December.
Use the information above to answer the following question. If Charter Company uses
the LIFO method, what is the cost of goods sold for the year?
A) $38
B) $34
C) $44
D) $72
Which of the following errors cause net income to be understated?
A) Employee wages that have not been paid are not recorded.
B) Depreciation Expense is not recorded.
C) Collection of an accounts receivable is not recorded.
D) Revenue that has been earned but not yet collected has not been recorded.
Which of the following statements about the unadjusted trial balance is not correct?
A) trial balance is an internal report used to determine whether total debits equal total
credits.
B) A trial balance lists every account name in one column, usually in the order of assets,
liabilities, stockholders’ equity, revenues and expenses.
C) A trial balance shows the ending balances obtained from the ledger listed in either
the debit or credit column.
D) You can assume that no errors were made in the recording of transactions if total
debits equal total credits on the unadjusted trial balance.
A company has a loan that accrues interest at a rate of $20 a day. The company pays the
interest once a quarter. Which of the following adjustments would be made at the end of
a month in which no payment for interest was made?
A) Debit Interest Payable and credit Interest Expense
B) Debit Notes Payable and credit Cash
C) Debit Interest Expense and credit Interest Payable
D) Debit Cash and credit Notes Payable