1) The indirect method of reporting operating activities on the statement of cash flow
begins with net income and adjusts for cash items.
2) The trial balance needs to be prepared prior to preparation of the income statement.
3) Direct material costs are a component of the cost of the work-in process inventory.
4) Purchasing supplies for cash results in an increase in total assets for the purchasing
company.
5) Gross profit is calculated as gross sales less cost of sales.
6) The lower of cost or market (LCM) rule is used due to the conservatism constraint,
and therefore an inventory calculation may result in a departure from the historical cost
principle.
7) Due to the relationship of financial statements, the statement of retained earnings
links the income statement to the balance sheet.
8) Gross profit decreases when sales discounts increase.
9) On January 1, 2014, equipment was purchased for $80,000; the equipment’s
estimated residual value is $15,000, and its estimated useful life is 10 years. For 2014,
the depreciation expense under the double-declining balance method is $13,000.
10) Deferred expenses are initially recorded as assets and when they are later used,
expenses will increase and assets will decrease.
11) Which of the following is not a reason for the Jones Hardware Store to accept credit
cards from customers?
A.Jones can receive its money faster than if it directly extended credit to the customer
by an account receivable.
B.The credit card company offers a discount to Jones so that Jones will have more
money available for operations.
C.Jones will not have to be concerned with nonsufficient funds checks from customers.
D.Jones will not have to have extra office workers to make phone calls to customers
requesting collections on accounts.
12) Which of the following are the components of stockholders’ equity on the balance
sheet?
A.Common stock and liabilities.
B.Common stock and assets.
C.Retained earnings and dividends.
D.Common stock and retained earnings.
13) Merchandise was sold on credit for $30,000, terms 3/15, n/30. Which of the
following journal entry descriptions correctly describes the cash collection?
A.Cash is debited for $25,500 and accounts receivable is credited for $25,500 if the
collection is within the discount period.
B.Cash is debited for $29,100, sales discounts is debited for $900, and accounts
receivable is credited for $30,000 if the collection is within the discount period.
C.Cash is debited for $30,000, accounts receivable is credited for $29,100, and sales
discounts is credited for $900 if the collection is within the discount period.
D. Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the
collection is after the discount period.
14) Which of the following does not correctly describe an adjusting journal entry that
debits rent expense and credits prepaid rent?
A.It increases expenses and decreases stockholders’ equity.
B.It decreases net income and decreases assets.
C.It increases expenses and decreases current assets.
D.It decreases net income and decreases liabilities.
15) Which of the following statements incorrectly describes earnings per share?
A.Earnings per share is a ratio calculated per common share.
B.An increase in the market price per common share does not result in a decrease in
earnings per share.
C.An increase in dividends per share results in an increase in earnings per share.
D.The reissue of treasury stock decreases earnings per share.
16) Which of the following statements is correct?
A.When cost of goods sold as a percentage of sales increases, the gross profit
percentage will increase.
B.It is possible that when cost of goods sold in dollars increases, cost of goods sold as a
percentage of sales decreases.
C.If gross profit percentage is the same for the current and past year, then sales and cost
of goods sold in dollars did not change.
D.If gross profit percentage increases from one year to the next, then the net income
percentage will also increase from one year to the next.
If the percentage increase in sales is greater relative to the percentage increase in cost of
goods sold, then cost of goods sold relative to sales will decrease.
17) A company provided the following data: sales, $500,000; beginning inventory,
$40,000; ending inventory, $45,000; and gross profit, $150,000. What was the amount
of inventory purchased during the year?
A.$385,000.
B.$355,000.
C.$345,000.
D.$145,000.
18) A company reported the following asset and liability balances at the end of 2013
and 2014:
If the company paid dividends totaling $5,000, what is the amount of net income for
2014?
A.$20,000.
B.$105,000.
C.$80,000.
D.$25,000.
19) Below are two related transactions for Golden Corporation. The annual accounting
period ends December 31. The books are adjusted only at year-end.
A. October 1, 2014: Golden Corporation borrowed $100,000 and signed a note
providing for 8% interest. The principal and interest are due in one year on September
30, 2015.
B. December 31, 2014: End of the annual accounting period.
Prepare the required journal entry at October 31 and December 31, 2014 for each of the
above items.
20) Which of the following statements is correct?
A.Accumulated depreciation is the amount of depreciation on the income statement.
B.Current liabilities are debts expected to be paid within one year.
C.Current assets are resources of a company that might include cash and copyrights.
D.Patents, goodwill, and deferred revenues are classified as intangible assets on the
balance sheet.
21) A company’s January 1, 2014 balance sheet reported total assets of $120,000 and
total liabilities of $40,000. During January 2014, the following transactions occurred:
(A) the company issued stock and collected cash totaling $30,000; (B) the company
paid an account payable of $6,000; (C) the company purchased supplies for $1,000 with
cash; (D) the company purchased land for $60,000 paying $10,000 with cash and
signing a note payable for the balance. What is total stockholders’ equity after the
transactions above?
A.$30,000.
B.$110,000.
C.$80,000.
D.$194,000.
22) A company has paid cash to repurchase its common stock that was previously
issued. Where will this cash flow be reported on the statement of cash flows?
A.Operating activities.
B.Financing activities.
C.Investing activities.
D.Stockholder activities.
23) Which of the following journal entries correctly records a transaction where
services were provided to a customer on account?
A.Option A
B.Option B
C.Option C
D.Option D
When services are provided to a customer on account, a debit to accounts receivable is
required. The services have been provided so it is appropriate to credit revenue.
24) William Company uses the periodic inventory system and has provided the
following data:
26) The Alex Company, a consulting firm, recorded the following selected business
transactions during May, 2014. Indicate whether each transaction would increase,
decrease, or have no effect on the total assets of the company.
1. Issued capital stock in exchange for cash contributed by owners.
2. Purchased office supplies for cash.
3. Purchased office supplies on credit.
4. Paid cash on accounts payable to a supplier.
5. Collected cash on accounts receivable.
6. Borrowed money from the bank on a promissory note payable.
7. Loaned money to an employee in exchange for a note.
8. Purchased a building by using cash and signing a mortgage loan payable for the
balance.
27) Stone Company issued a $1,000,000 bond on January 1, 2014. The bond was dated
January 1, 2014, had an 8% stated rate, pays interest annually on December 31, and
sold for $1,084,249 at a time when the market rate of interest was 6%. Stone uses the
effective-interest method to account for its bonds.
Prepare the necessary journal entry for each of the following dates:January 1,
2014December 31, 2014December 31, 2015
28) On January 1, 2014, the stockholders’ equity section of Gibbons Corporation’s
balance sheet reported the following:
During 2014, the following selected transactions occurred (assume they occurred in the
order given):
Prepare the stockholders’ equity section of the balance sheet as of December 31, 2014.
