1) Depreciation allocates the cost of land to expense over the useful life of the land.
2) A purchase discount decreases the cost of the inventory.
3) GAAP requires the use of accrual-basis accounting.
4) When preparing a statement of cash flows, cash equivalents are subtracted from cash
in order to calculate the net change in cash during a period.
5) Usually new companies have a lower cost of capital.
6) There is no journal entry for cash dividends on the date of record.
7) Liquidity measures how quickly an item can be converted into cash.
8) The business records of a sole proprietorship should include the proprietor’s personal
assets such as a house.
9) If deferred revenue has been earned by the end of the current period and no
adjustment is recorded, net income for the current period will be understated.
10) The accounting equation must always be in balance.
11) The effective-interest method of amortization results in changing amounts of
interest expense for every interest payment over the bond’s life.
12) The normal balance of the Accumulated Depreciation account is a debit.
13) Trading securities may generate dividend revenue.
14) Under cash-basis accounting, no journal entry is recorded when a sale is made on
account.
15) Some intangible assets are not amortized.
16) The Net Cash Provided by Financing Activities is the most important category on
the statement of cash flows because it generates the most cash for most companies.
17) Inventory turnover is calculated by dividing the cost of goods sold by the average
inventory.
18) Fair value is the amount for which investment securities can be sold.
19) In vertical analysis:
A) a base amount is optional
B) a base amount is required
C) line items from balance sheets are examined only
D) line items from income statements are examined only
20) Under the effective-interest method of amortization, interest expense for each
interest period can be calculated by multiplying the:
A) face value of the bonds times the effective-interest rate for the appropriate time
period
B) carrying value of the bonds times the effective-interest rate for the appropriate time
period
C) face value of the bonds times the stated interest rate for the appropriate time period
D) carrying value of the bonds times the stated interest rate for the appropriate time
period
21) When analyzing a company’s income statement, a fact to remember is that:
A) cost of sales is another term for gross profit
B) operating expenses are the costs of everyday operations such as selling expenses
C) companies are not allowed to offset items such as interest income and interest
expense against each other
D) net sales is equal to sales revenue less cost of goods sold
22) Which of the following is a CORRECT statement about the lower-of-cost-or market
rule?
A) Under GAAP, once inventory has been written down to market value, the
write-downs can be reversed in future periods
B) Under GAAP, the lower-of-cost-or-market rule is optional
C) Under IFRS, lower-of-cost-or-market write-downs cannot be reversed
D) Under IFRS, lower-of-cost-or-market write-downs can be reversed
23) Arnold, Inc. declares and distributes a 10% common stock dividend when it has
20,000 shares of $10 par value common stock outstanding. If the market value of the
common stock is $25, the journal entry to record the stock dividend would include a:
A) debit to Retained Earnings $50,000
B) debit to Retained Earnings $20,000
C) credit to Paid-in Capital in Excess of ParCommon $50,000
D) credit to Paid-in Capital in Excess of ParCommon $20,000
24) When a business receives cash from a customer before earning the revenue, they
credit:
A) Accounts Receivable
B) Sales Tax Payable
C) Accounts Payable
D) Unearned Revenue
25) The journal entry to close out beginning inventory under the periodic inventory
system is:
A) debit Purchases and credit Cost of Goods Sold
B) debit Purchases and credit Inventory
C) debit Inventory and credit Cost of Goods Sold
D) debit Cost of Goods Sold and credit Inventory
26) Investments in Trading Securities are reported on the:
A) income statement at fair value
B) balance sheet at cost
C) balance sheet at fair value
D) income statement at cost
27) The debt ratio is computed by dividing:
A) total liabilities by total assets
B) current liabilities by total assets
C) total assets by total liabilities
D) total assets by current liabilities
28) A company had credit sales of $30,000 and cash sales of $20,000 during the month
of May. Also during May, the company paid wages of $21,000 and utilities of $8,000. It
also received payments from customers on account totaling $4,000. What was the
company’s net income for the month?
A) $20,000
B) $21,000
C) $50,000
D) $79,000
29) Preferred stock that requires the issuer to redeem the stock at a set price is called:
A) liquidating preferred stock
B) convertible preferred stock
C) redeemable preferred stock
D) callable preferred stock
30) The “tone at the top” refers to:
A) a component of the control environment
B) attitudes and behaviors directed towards people of different heritage
C) owners and top managers behaving honorably to set a good example for employees
D) A and C
31) At January 1, 2015, the Estimated Warranty Payable is $1,000. During 2015, the
company recorded Warranty Expense of $17,500. During 2015, the company replaced
defective products in accordance with product warranties at a cost of $10,000. What is
the Estimated Warranty Payable at December 31, 2015?
A) $7,500
B) $8,500
C) $9,000
D) $17,500
32) The chronological order of dates for cash dividends are:
A) date of record, date of declaration, date of payment
B) date of annual Board of Directors meeting, date of payment, date of record, date of
declaration
C) date of annual Board of Directors meeting, date of record, date of declaration, date
of payment
D) date of declaration, date of record, date of payment
33) When inventory costs are falling, which inventory costing method minimizes the
taxes paid?
A) FIFO
B) LIFO
C) average cost
D) specific identification
34) On January 1, 2015, Barry Corporation paid $800,000 for 100,000 shares of Oak
Company’s common stock, which represents 40% of Oak’s outstanding common stock.
For the year ending December 31, 2015, Oak reported net income of $200,000 and paid
cash dividends of $60,000. Barry should report the investment in Oak Company on its
balance sheet at December 31, 2015 at:
A) $800,000
B) $744,000
C) $824,000
D) $856,000
35) A disadvantage of using bonds instead of stock as a method of long-term financing
is that with bonds:
A) interest must be paid regardless of the level of earnings
B) interest expense is tax deductible
C) bonds do not dilute stockholders’ proportionate ownership
D) issuing bonds results in higher earnings per share than issuing common stock
36) Which of the following statements is TRUE for a proprietorship?
A) Legally, a proprietorship is separate from the proprietor
B) For accounting purposes, a proprietorship is separate from the proprietor
C) For accounting purposes, a proprietorship is not separate from the proprietor
D) A and B
37) Which statement is FALSE?
A) Depreciation is caused by the physical wear and tear of a plant asset
B) Depreciation is caused by obsolescence of a plant asset
C) Depreciation is not based on changes in the fair value of a plant asset
D) Accumulated Depreciation is a cash fund to be used to replace a plant asset when it
wears out
38) If a bank statement includes an EFT receipt of $200 for interest, the journal entry to
record this reconciling item should include a:
A) debit to Cash for $200 and a credit to Interest Revenue for $200
B) debit to Accounts Receivable for $200 and a credit to Interest Revenue for $200
C) debit to Interest Revenue for $200 and credit to Cash for $200
D) debit to Interest Expense for $200 and credit to Prepaid Interest for $200
39) Bonds that are secured by real estate are called:
A) term bonds
B) secured bonds
C) mortgage bonds
D) B and C
40) A lump-sum purchase of multiple, long-term plant assets:
A) requires the company to record the assets bought as a single asset
B) requires the company to divide the total cost among the various assets according to
their historical costs
C) requires the company to divide the total cost among the various assets according to
their market values
D) requires the company to divide the total cost among the various assets according to
their book values
41) A company performed tax services for a client on account. The amount billed to the
client was $5,000. In transaction analysis, how does this transaction affect the
accounting equation?
A) Add $5,000 to Cash account and add $5,000 to Service Revenue account
B) Add $5,000 to Cash account and add $5,000 to Retained Earnings account
C) Add $5,000 to Accounts Receivable account and add $5,000 to Retained Earnings
account
D) Add $5,000 to Accounts Payable account and add $5,000 to Service Revenue
account
42) The Unrealized Gain on Investment in Available-for-Sale Securities is reported in:
A) Other Revenues and Gains on the income statement
B) Other Comprehensive Income on the Statement of Comprehensive Income
C) Accumulated Other Comprehensive Income on the balance sheet
D) B and C
43) Fenway Corporation issued a $20,000, 10-year, 10% bond dated January 1, at 102.
The journal entry to record the issuance of the bond will include a:
A) debit to Cash for $20,000
B) debit to Cash for $20,400
C) credit to Bonds Payable for $20,400
D) debit to Discount on Bonds Payable for $400
44) Which of the following transactions does NOT affect cash during a period?
A) Sale of treasury stock
B) Write-off of an uncollectible account
C) Purchase of property with cash
D) Payment of an accounts payable
45) What is lapping accounts receivable?
A) A way to speed up the collection of accounts receivable by calling the debtors every
week
B) A way to speed up the collection of accounts receivable by sending reminder notices
to the debtors every week
C) Transferring accounts receivable to another company to collect the receivables
D) An embezzlement scheme whereby an employee steals customers’ checks and uses
devious bookkeeping procedures to conceal the theft
46) On January 1, 2015, plant assets, net are $200,000. On December 31, 2015, plant
assets, net are $300,000. Depreciation expense for the year is $20,000. During the year,
plant assets were acquired for $150,000 with cash. There is a Gain on Sale of Plant
Asset of $10,000. What are the cash proceeds from the sale of the plant asset?
A) $0
B) $20,000
C) $30,000
D) $40,000
47) Which of the following statements regarding a trial balance is TRUE?
A) A trial balance may be prepared at any time during the accounting period
B) A trial balance is a list of all accounts used in a business with their balances
C) A trial balance shows that total debits equals total credits
D) All of the above are true
48) Beckowsik Company began business in June and completed the following
transactions:
A) Received $50,000 cash and issued common stock to the stockholders
B) Purchased supplies for $5,000 on account
C) Paid utilities bill of $2,000 for the month
D) Performed services for a customer and billed the customer $6,000
E) Received $3,000 from the customer on account
F) Paid for the supplies purchased on account
G) Purchased equipment for $10,000 on account
H) Declared and paid dividends of $2,200
Required:
1> Record the effects of the above transactions on the accounting equation
2> Prove the accounting equation using the final balances in the accounts
49) Which of the following statements regarding the time-period concept is NOT
correct?
A) Interim financial reports are rarely prepared
B) Accountants prepare financial statements for specific periods of time
C) The basic accounting period is one year
D) Most large companies use a calendar year for financial reporting