Notes receivable represent a written promise that a party will pay a fixed amount of
principal plus interest on a stated maturity date.
The balance sheet shows whether or not a business is profitable.
In a perpetual inventory system, the Cost of Goods Sold account is debited at the time
of each sale.
Unexpected or inconsistent movements among sales, merchandise inventory, and
receivables reflect normal market conditions and do not pose red flags in financial
statements.
The payee is the issuer of a check.
When a business makes a cash payment, the Cash account is debited.
The Salaries Payable account is a permanent account.
Under the new revenue recognition standards, companies are required to identify the
performance obligations associated with each contract.
If a long-term debt is paid in installments, the business will report the current portion of
the note payable as a current liability.
The balance sheet shows the balance in Bonds Payable plus any discount or minus any
premium.
Exchanges of plant assets that have commercial substance require any gain or loss on
the transaction to be recognized.
When using a payroll register, Salaries and Wages Expense equals the current period
earnings of employees.
Depreciation is the allocation of a plant asset’s cost to expense over its useful life.
For strong controls over cash receipts, the checks to be deposited should be sent to the
treasurer, and the remittance advices should be sent to the accounting department.
Buying property, plant, and equipment for cash is considered a cash outflow for the
financing activities section of the statement of cash flows.
Outside investors ordinarily use financial accounting information to decide whether or
not to invest in a business.
The process of transferring data from the ledger to the journal is called posting.
The Current Portion of Long-Term Notes Payable would normally be shown on the
balance sheet under current liabilities.
All petty cash fund payments should be supported with sequentially numbered petty
cash tickets.
Freight out is the freight on purchased goods.
Common stock represents the basic ownership of every corporation.
Martin Company’s cost of goods sold is 40% of net sales revenue. This means that for
every $1 of net sales revenue, Martin has $0.60 of gross profit.
Small stock dividends increase the Paid-In Capital in Excess of Par account.
There is a discount on freight in, thus purchase discounts are computed on
transportation costs.
The acid-test ratio is a more stringent measure of liquidity than the cash ratio.
Each inventory costing method matches the flow of inventory costs in a business and is
used to determine ending inventory and cost of goods sold.
Under IFRS, Cost of Goods Sold represents a functional expense which explains the
purpose of the cost incurred.
Using the gross method for recording sales, if a customer pays within the discount
period, the seller records the discount as a decrease in Sales Revenue.
In computing the lower-of-cost-or-market, market value generally means the selling
price.
First Street Merchandisers has total cost of goods sold of $54,500, total beginning
inventory of $18,500, and total ending inventory of $22,100. Cost of goods available
for sale is $73,000.
An audit is an examination of a company’s financial statements and records.
If inventory turnover is too slow, a company may be unable to sell goods or it may be
understating merchandise inventory.
The journal entry to open a new petty cash fund includes a debit to the Petty Cash
account and a credit to the Cash account.
Which of the following is subtracted from net sales revenue to arrive at gross profit on a
multi-step income statement?
A) selling expense
B) cost of goods sold
C) sales discounts
D) all of the above
The face value of a bond is $71,000, its stated rate is 7%, and the term of the bond is
five years. The bond pays interest semiannually. At the time of issue, the market rate is
8%. Determine the present value of the bonds at issuance.
Present value of $1:
Present value of ordinary annuity of $1:
A) $50,844
B) $20,156
C) $68,152
D) $71,000
A company sold merchandise with a cost of $207 for $370 on account. The seller uses
the perpetual inventory system. The entry to record the cost of merchandise sold would
include ________.
A) a debit to Sales Revenue and a credit to Cash for $370
B) a debit to Cash and a credit to Sales Revenue for $370
C) a debit to Cost of Goods Sold and a credit to Merchandise Inventory for $207
D) a debit to Merchandise Inventory for $207 and a credit to Cost of Goods Sold for
$207
Which of the following items are NOT reported as part of income from continuing
operations?
A) discontinued operations
B) gross profit
C) other income and (expenses)
D) gain on sale of equipment
On a statement of cash flows prepared using the direct method, cash received from
selling merchandise is considered a ________.
A) cash inflow from investing activities
B) cash inflow from operating activities
C) cash outflow from financing activities
D) cash outflow from investing activities
Which of the following statements regarding corporations is incorrect?
A) Corporations dominate business activity in the United States.
B) Corporations are businesses organized under state law and do not have an existence
that is separate from their owners.
C) Most well-known corporations tend to be large multinational businesses.
D) Corporations are separate legal entities.
Match the benefit of an effective accounting information system with the
definition.
A) Provides information that will improve decision making and reduce uncertainty.
B) Benefits received outweigh the cost of the system.
C) Works smoothly with the business’s employees and organization structure.
D) Can accommodate changes in the business over time.
E) Provides safeguards for a business’s assets and reduces the likelihood of fraud and
errors.
Relevance
Artist Paints Company uses the direct method for preparing its statement of cash flow.
Artist reports the following information regarding 2019:
From the income statement:
Sales Revenues, $265,000
Cost of Goods Sold, $214,000
Operating Expenses, $33,000
From the balance sheet:
What amount will be shown for collections from customers?
A) $261,900
B) $268,100
C) $265,000
D) $32,700
Rambler, Inc. reported sales revenue for 2019 of $903,000. The products were sold with
a nine-month warranty. Members of Rambler’s management estimate that the cost of the
warranty will be equal to 7% of sales revenue. Which of the following will be included
in the entry to record the actual amounts paid out as a result of warranty claims?
A) a debit to Estimated Warranty Payable for the actual amount of payments
B) a credit to Estimated Warranty Payable for $63,210
C) a debit to Estimated Warranty Payable for $63,210
D) a debit to Warranty Expense for the actual amount of payments
Which of the following is true of internal control?
A) A company’s outside auditor is responsible for the company’s internal control
system.
B) One of the major purposes of internal control is to ensure that the assets are
safeguarded.
C) Internal control procedures tend to diminish the importance of operational efficiency.
D) Internal controls are only necessary for public companies.
Journalize the following transaction for a merchandiser that uses the perpetual
inventory system.
Sold goods to A. Pitt, on account, $2,500 (cost, $1,750). Omit explanations.
The Allowance for Bad Debts account has a debit balance of $9,000 before the
adjusting entry for bad debts expense. After analyzing the accounts in the accounts
receivable subsidiary ledger using the aging-of-receivables method, the company’s
management estimates that uncollectible accounts will be $11,000. What amount of bad
debts expense will be reported on the income statement?
A) $8,000
B) $20,000
C) $2,000
D) $11,000
Which of the following statements describes a purchase order?
A) It is an order to purchase goods from a supplier.
B) It is a statement from the supplier showing the goods purchased and the amount due.
C) It is a report showing that the goods have been received in good condition, as
ordered.
D) It is a document authorizing a payment to a supplier.
Which of the following is true of posting from a sales journal to the general ledger?
A) Entries in the sales journal are posted to either the accounts receivable subsidiary
ledger or the general ledger.
B) Individual accounts receivable are posted daily from the sales journal to the accounts
receivable subsidiary ledger.
C) Even though the sales journal is posted monthly to the subsidiary ledger, it is a
reliable record of the amount received from each customer.
D) Under a perpetual inventory system, the sales journal will not have the Cost of
Goods Sold DR and Merchandise Inventory CR column.
A company uses the weighted-average method of inventory valuation under a periodic
inventory system. The company began the year with a zero inventory balance. They had
the following transactions during the year.
1. Purchased 65 units at $7 per unit
2. Purchased 130 units at $7 per unit
3. Sold 110 units at $11 per unit
4. Purchased 55 units at $8 per unit
5. Sold 110 units at $13.25 per unit
At the end of the year, the company counted the inventory and found 30 units
remaining. Calculate the cost of goods sold for the year. (Round the unit costs to two
decimal places and total costs to the nearest dollar.)
A) $7
B) $217
C) $1,805
D) $1,588
Dodgers Corp.’s beginning and ending total assets in the year 2019 were $19,900,000
and $22,100,000, respectively. Its asset turnover ratio for the year was calculated to be
1.8 times. Calculate the amount of net sales for the year 2019.
A) $24,960,000
B) $43,100,000
C) $37,800,000
D) $53,500,000
The Estimated Returns Inventory account ________.
A) is an expense account
B) is a liability account
C) is credited when a customer returns merchandise to the seller
D) represents the selling price of goods the company believes it will receive in returns
Norwood, Inc. signs a $11,000, 8.5%, six-month note dated November 1, 2018. The
interest expense recorded for this note in 2018 will be ________. (Do not round any
intermediate calculations, and round your final answer to the nearest dollar.)
A) $935
B) $156
C) $468
D) $312
Shelcal, Inc. provides the following data for the year 2019:
The cost of goods sold as a percentage of net sales revenue is ________. (Round your
answer to two decimal places.)
A) 58.84%
B) 58.96%
C) 58.41%
D) 58.68%
Reversing entries are used in conjunction with ________.
A) accrual-type adjustments
B) deferred revenues
C) deferred expenses
D) Unearned Revenue and Prepaid Rent
A business borrows cash by signing a note payable. Which of the following accounts is
debited?
A) Notes Payable
B) Accounts Payable
C) Notes Receivable
D) Cash
The bank statement reveals an EFT payment made to one of the company’s suppliers
that has not yet been recorded in the journal. How would this information be included
on the bank reconciliation?
A) an addition on the bank side
B) a deduction on the bank side
C) a deduction on the book side
D) an addition on the book side
Which of the following is NOT an acceptable task for a retail store manager?
A) making the cash deposit at the bank
B) proving the cash by comparing the cash in the drawer against the point-of-sale
terminal’s record of cash sales
C) using the point-of-sale terminal’s tape to record the journal entry for sales revenue
D) overseeing the work of the sales clerks
Nice International originally issued 105,000 shares of common stock at a price of $22
per share. A year later, it distributed a 12% stock dividend to shareholders. At the time
of the stock dividend, the share price had increased to $27 per share. Which of the
following statements is true?
A) Nice will record sales revenues of $277,200.
B) Nice will record a loss of $63,000.
C) Nice will record a gain of $63,000.
D) Nice will record neither a gain nor a loss.
Virginia Company uses the indirect method to prepare the statement of cash flows.
Refer to the following section of the comparative balance sheet:
Virginia Company
Comparative Balance Sheet
December 31, 2018 and 2017
How will the change in Accounts Payable be shown on the statement of cash flows?
A) as an addition to Net Income
B) as a deduction from Net Income
C) as a deduction from investing cash flows
D) as an addition to operating cash flows
Prior period adjustments ________.
A) always increase the beginning balance of retained earnings
B) are shown on the statement of retained earnings as corrections to the beginning
balance
C) can be ignored because the financial statements have already been issued
D) must be recorded in the period in which the error occurred
Cash sales are recorded in the ________ journal.
A) general
B) sales
C) cash receipts
D) cash sales
In the event of a corporate liquidation, preferred stockholders ________.
A) are guaranteed to receive a full refund of the stock purchase price
B) have first claim on remaining corporate assets after debts are paid
C) are guaranteed to receive the par value of the preferred stock
D) may retain their proportionate share of voting rights
Lawrence, an employee of Triple Time, Inc., has gross salary for March of $4,000. The
entire amount is under the OASDI limit of $118,500 and thus subject to FICA. He is
also subject to federal income tax at a rate of 18%. Provide the journal entry to record
salaries expense and payroll withholdings. (Assume a FICA—OASDI Tax of 6.2% and
FICA—Medicare Tax of 1.45%.) Salaries will be paid at a later date. Omit explanation.
On August 14, Second Street Bank lent $210,000 to City Restaurant on a 75 day, 4%
note. What is the maturity date of the note?
A) Oct. 27
B) Oct. 28
C) Oct. 29
D) Oct. 30
Which of the following amounts could differ if a company, using the LIFO inventory
costing method, shifts from a periodic inventory system to a perpetual inventory
system?
A) ending merchandise inventory
B) sales revenue
C) purchases
D) purchase returns
Solutions Services sells service plans for commercial computer maintenance. The price
for each plan is $1,350 per year, paid in advance. On October 1, 2018, a service plan
was sold to a new customer for cash, and the plan covers the period October 1, 2018 to
September 30, 2019. Adjusting entries are made on December 31 of each year. Prepare
the journal entry for September 30, 2019. Round to two decimal places. Omit
explanation.
Budget Office Supply Corporation completed the following stock issuance transactions:
Prepare the journal entries to record these transactions. Explanations are not required.
On April 1, 2018, Morton Company invests $50,000 in Johnson Company stock.
Johnson pays Morton a $2,000 dividend on November 30, 2018. Morton sells the
Johnson stock on December 31, 2018 for $54,500. Assume the investment is
categorized as a short-term equity investment and that Morton does not have significant
influence over Johnson.
Requirements:
1. Journalize the transactions for Morton’s investment in Johnson’s stock.
2. What was the net effect of the investment on Morton’s net income for the year ended
December 31, 2018.
List and briefly discuss the two basic components of a computerized accounting
information system.
England Corporation issued a $400,000, 5.5%, 10-year bonds payable at 101 on
January 1, 2009. The bonds are retired on January 1, 2019. Prepare the journal entries
on the date of issuance and at the date of retirement. Omit explanations.
For each of the following accounts, state type of account and the normal account
balance. Assume a periodic inventory system.
Lane Outfitters, Inc., a retailer, accepts payment through credit cards. During August,
credit card sales amounted to $12,000. The processor charges a 3% fee. Assuming that
the credit card processor uses the gross method, prepare the journal entries, on the
books of Lane Outfitters, for the credit card sales and the payment of fees. (Ignore cost
of goods sold.) Omit explanation.
Provide a description of the contents of each of the following components of the annual
report.
Dew Drops, Inc. purchased equipment for $200,000. The company recorded total
depreciation of $140,000. On January 1, 2018, the company exchanges the equipment
for new equipment, paying $150,000 cash. The fair market value of the new equipment
is $250,000. Prepare the journal entry to record this transaction. Assume the exchange
has commercial substance. Omit explanation.
A merchandiser, following the perpetual inventory system, has the following
transactions during August, 2019:
Credit terms of invoice are 2/15, n/45. Prepare journal entries for the above transactions.
Omit explanations.
Grand Office Supply reported the following gross profit percentages: 2017: 37.5%;
2018: 36.2%; 2019: 20.8%. The industry average is 35%. What are some possible
reasons for the decline in 2019?
Explain the difference between Prepaid Rent and Unearned Revenue.
On January 1, 2018, Shade Landscaping borrowed $100,000 on a 15%, 10-year note
with annual installment payments of $10,000 plus interest due on December 31 of each
year. Prepare the journal entry for the first installment payment made on December 31,
2018. Omit explanation.
Journey Corp. purchased equipment for $45,000. Total depreciation of $36,000 was
recorded. On January 1, 2017, Journey exchanged the equipment for new equipment,
paying $56,000 cash. The market value of the new equipment is $65,000. Prepare the
journal entry to record this transaction. Assume the exchange has commercial
substance. Omit explanation.
A company purchased inventory for $2,200 on account, and recorded the following
journal entry:
The vendor’s invoice showed terms of 3/10, n/30. Prepare the journal entry for the
purchaser for the payment of the invoice 17 days after the invoice date. Omit explanation.
On October 1, 2018, Natural, Inc. purchased a patent for $100,000 cash. Although the
patent gives legal protection for 20 years, it is expected to be used for only eight years.
Journalize the purchase of the patent. Omit explanation.
On January 1, 2019, a corporation acquired a truck for $100,000. Residual value was
estimated to be $20,000. The truck can be driven for 50,000 miles over the next three
years. Actual usage of the truck was recorded as 8,640 miles for the first year. Give the
journal entry to record depreciation for the first year calculated as per the
units-of-production method. (Do not round your intermediate calculations.)
The periodic inventory records of Canine Veterinary Supply indicate the following for
the month of April:
As of April 30, Canine counts 8 units of merchandise inventory on hand.
Compute ending merchandise inventory and cost of goods sold for Canine using the
weighted-average inventory method. (Round the per unit cost to two decimal places.)
A business hired a repair service to overhaul its plumbing system. The repair service
began work on September 15 and intends to complete it on October 15. The business
will pay the repair service $4,000 when the work is completed. As of September 30, the
work was 50% complete. Provide the adjusting entry to accrue repair expense by the
end of September. (Ignore explanation).