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chapter 3
Copyright Cengage Learning. Powered by Cognero.
Page 1
Indicate whether the statement is true or false.
1. The matching concept requires expenses to be recorded in the same period that the related revenue is recorded.
a. True
b. False
2. The process that begins with the analysis of transactions and ends with preparing the accounting records for the next
accounting period is called the accounting cycle.
a. True
b. False
3. Liabilities that will not be due for more than one year are called long-term liabilities.
a. True
b. False
4. "Brand name" recognition is an example of goodwill.
a. True
b. False
5. To arrive at cash flows from operations, it is necessary to convert the income statement from an accrual basis to the
cash basis of accounting.
a. True
b. False
6. The accrual basis recognizes liabilities at the time the business incurs the obligation to pay for the services or goods
purchased.
a. True
b. False
7. An adjusting entry would adjust an expense account so that the expense is reported when incurred.
a. True
b. False
8. Accrual accounting does not require that the accounting records be updated prior to preparing financial statements.
a. True
b. False
9. An adjusting entry would adjust revenue so that it is reported when earned and not when cash is received.
a. True
b. False
10. Receiving cash in advance of performing a service creates a liability for the company.
a. True
b. False
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chapter 3
11. The fixed asset section of a balance sheet may also be labeled as property, plant, and equipment.
a. True
b. False
12. It is easy to objectively determine the physical decline in the ability of fixed assets to provide service.
a. True
b. False
13. Expenses on the income statement are assets used up or services consumed in the process of generating revenues.
a. True
b. False
14. Under the accrual basis of accounting, net cash flows from operating activities on the statement of cash flows will
normally be the same as net income.
a. True
b. False
15. Every company must use the cash basis of accounting.
a. True
b. False
16. Accrued expenses are expenses that have been incurred and paid.
a. True
b. False
17. Under the cash basis of accounting, a business records only transactions involving increases or decreases of its cash.
a. True
b. False
18. If land costing $75,000 was sold for $135,000, the amount reported in the investing activities section of the statement
of cash flows would be $135,000.
a. True
b. False
19. Under the cash basis of accounting, no adjustments are necessary prior to the preparation of the financial statements.
a. True
b. False
20. Land is an example of a current asset.
a. True
b. False
21. Physical assets of a long-term nature are referred to as fixed assets.
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a. True
b. False
22. The accrual basis of accounting requires revenue to be recorded when the service is performed.
a. True
b. False
23. Rights that are short term in nature are called intangible assets.
a. True
b. False
24. Under accrual accounting, expenses are recorded when incurred regardless of when paid.
a. True
b. False
25. Under the accrual basis of accounting, the accounting records are normally updated after the preparation of the
financial statements.
a. True
b. False
26. To determine cash payments for operating expenses for the cash flow statement using the direct method, depreciation
expense is added to net income.
a. True
b. False
27. The revenue recognition concept states that revenue should be recorded in the same period as the cash is received.
a. True
b. False
28. Current assets are assets that are expected to be converted to cash, sold, or used up within six months.
a. True
b. False
29. Under the cash basis of accounting, expenses are recorded when paid.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
30. Which of the following statements is prepared with various sections, subsections, and captions?
a. A statement of current assets
b. A statement of stockholders' equity
c. A pro forma contra asset statement
d. A classified balance sheet
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31. Deferred revenue is initially recorded as _____.
a. revenue but becomes a liability over time
b. an asset but becomes revenue over time
c. a liability but becomes revenue over time
d. revenue but becomes an asset over time
32. Unearned rent, representing rent for the next six months' occupancy, would be reported on the landlord's balance sheet
as a(n) _____.
a. asset
b. liability
c. common stock
d. revenue
33. In August, Falcon Inc. received cash in advance for rendering services to its clients. If only a few of those services
were provided by December 31, the year-end adjustment would _____.
a. increase unearned revenue and decrease revenue
b. increase accounts payable and decrease revenue
c. increase cash and decrease accounts receivable
d. decrease unearned revenue and increase revenue
34. Which of the following is an accrued expense?
a. Rent owed but not yet paid
b. Accumulated depreciation
c. Inventory in process
d. A prepaid advertising expense
35. Perill Co. has a five-day workweek (Monday through Friday). Employees earn $650 per day. If the month ends on
Wednesday, and wages will not be paid until Friday, how much wage expense should be accrued on Wednesday?
a. $650
b. $1,950
c. $3,250
d. $1,300
36. Depreciation on factory equipment would be reported in the statement of cash flows prepared by the indirect method
in _____.
a. the cash flows from financing activities section
b. the cash flows from investing activities section
c. a separate schedule
d. the cash flows from operating activities section
37. Which of the following is an example of an intangible asset?
a. Goodwill
b. Patents
c. Copyrights
d. All of these
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38. The following assets are included in the December 31, 20Y8, balance sheet of Fortible Auto Parts, Inc.
Accounts Receivable
(net of Allowance for Uncollectible Accounts) $ 65,000
Accumulated Depreciation, Building 32,000
Building 150,000
Cash 80,000
Land 160,000
Merchandise Inventory 90,000
Trademark 125,500
The total dollar amount of assets classified as property, plant, and equipment on Fortible Auto Part's December 31, 20Y8,
classified balance sheet is _____.
a. $250,000
b. $310,000
c. $278,000
d. $375,000
39. On June 1, Unidevo, Inc. purchased $1,700 worth of supplies on account. Prior to the purchase, the balance in the
supplies account was $0. On December 31, the fiscal year-end for Unidevo, it is determined that $800 of supplies still
remain. What is the balance in the supplies account after adjustment?
a. $800
b. $900
c. $0
d. $1,700
40. Flyer Co. billed a client for flying lessons given in January. The payment was received in February. Under the accrual
basis of accounting, when should Flyer Co. record the revenue?
a. January
b. February
c. Some in January and some in February
d. Flyer Co. should not record any revenue
41. Eagle Eye, Inc., a corporation, received an additional investment of $6,000 cash in exchange for shares of common
stock. How does this transaction affect Eagle Eye's accounts?
a. Increase in stock expense and decrease cash by $6,000 each
b. Increase common stock and increase cash by $6,000 each
c. Increase common stock and increase revenue by $6,000 each
d. Increase common stock and decrease retained earnings by $6,000 each
42. Accrued expenses are ordinarily reported on the balance sheet as _____.
a. assets
b. liabilities
c. fixed assets
d. prepaid expenses
43. Using accrual accounting, expenses are recorded and reported only _____.
a. when they are incurred, whether or not cash is paid
b. when they are incurred and paid at the same time
c. if they are paid before they are incurred
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d. if they are paid after they are incurred
44. The quick ratio is computed as _____.
a. quick assets divided by current liabilities
b. quick assets divided by current assets
c. current assets divided by stockholders' equity
d. current liabilities divided by current assets
45. Accumulated depreciation is a(n) _____.
a. contra asset
b. contingent asset
c. revenue expenditure
d. accrued expense
46. Which of the following is not reported as revenue on the income statement?
a. Unearned revenue
b. Fees revenue
c. Commissions revenue
d. Rent revenue
47. When an entry is made to adjust the supplies account and recognize supplies expense for the period, which section of
the statement of cash flows is affected?
a. Cash Flow from Operating Activities
b. Cash Flow from Investing Activities
c. Cash Flow from Financing Activities
d. There is no effect on the statement of cash flows.
48. Perill Co. has a five-day workweek (Monday through Friday). Employees earn $650 per day. How much cash will be
paid on Friday?
a. $650
b. $1,950
c. $1,300
d. $3,250
49. Cash and other assets that are expected to be converted to cash or sold or used up within one year or less through the
normal operations of the business are called _____.
a. current assets
b. intangible assets
c. fixed assets
d. notes receivable
50. Accrued revenue is shown on a balance sheet as _____.
a. an asset
b. common stock
c. a liability
d. retained earnings
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51. Identify the item that should be treated as a deferred expense by a company.
a. Prepaid advertising
b. Unpaid wages
c. Unearned rent
d. Notes receivable
52. Electrodo Co. purchased land for $55,000 with $20,000 paid in cash and $35,000 in notes payable. What effect does
this transaction have on the accounts under the accrual basis of accounting?
a. Net increase in assets and liabilities of $55,000
b. Net increase in assets of $35,000 and a net increase in liabilities of $35,000
c. Net increase in assets of $55,000 and a net decrease in liabilities of $35,000
d. Net increase in assets of $75,000 and a net decrease in liabilities of $30,000
53. XYZ Co. paid $1,000 in dividends to stockholders. How does this transaction affect the accounts of XYZ?
a. Cash will decrease by $1,000, and retained earnings will decrease by $1,000.
b. Cash will decrease by $1,000, and expenses will increase $1,000.
c. Cash will decrease by $1,000, and revenues will decrease $1,000.
d. Net income will decrease by $1,000.
54. Which of the following accounts would require an adjustment when making an adjusting entry for a deferral?
a. Accrued interest
b. Unearned rent
c. Salary expense
d. Notes receivable
55. Accounts receivable arising from trade transactions amounted to $62,000 and $78,000 at the beginning and end of the
year, respectively. Net income reported on the income statement for the year was $125,000. Exclusive of the effect of
other adjustments, the cash flows from operating activities to be reported on the statement of cash flows prepared by the
indirect method are _____.
a. $109,000
b. $141,000
c. $125,000
d. $140,000
56. Which of the following transactions will affect the profitability metric of a company?
a. Rent received in advance
b. Prepaid insurance
c. Purchase of supplies on account
d. Fees received in cash for services provided
57. When cash is received in payment of an account receivable, which section of the Statement of Cash Flows is affected?
a. Cash Flow from Operating Activities
b. Cash Flow from Investing Activities
c. Cash Flow from Financing Activities
d. There is no effect on the Statement of Cash Flows.
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chapter 3
58. Which of the following assets never loses its ability to provide service and, as a result, does not need to be
depreciated?
a. A copyright
b. Office equipment
c. A patent
d. Land
59. Which of the following should be shown on a statement of cash flows under the financing activity section?
a. The purchase of a long-term investment in the common stock of another company
b. The payment of cash to retire a long-term note
c. The proceeds from the sale of a building
d. The issuance of a long-term note to acquire land
60. Which of the following should be deducted from net income in calculating net cash flow from operating activities
using the indirect method?
a. A decrease in inventory
b. A decrease in accounts payable
c. Preferred dividends declared and paid
d. A decrease in accounts receivable
61. Which of the following is the effect of the issuance of additional common stock by a company on its liquidity and
profitability metrics?
a. Its profitability increases.
b. Its profitability and liquidity increase.
c. Its profitability and liquidity remain unaffected.
d. Its liquidity increases.
62. The balance in the office supplies account on May 1 was $6,380, supplies purchased during May were $4,740, and the
supplies on hand at May 31 were $2,360. The amount to be used for the appropriate adjusting entry is _____.
a. $8,740
b. $4,740
c. $8,760
d. $13,480
63. A&M Co. provided services of $1,000,000 to clients on account. How does this transaction affect A&M's accounts?
a. Increase accounts receivable and cash by $1,000,000 each
b. Increase accounts receivable and revenues by $1,000,000 each
c. Increase accounts receivable and unearned revenues by $1,000,000 each
d. Increase cash and decrease accounts receivable by $1,000,000 each
64. On the statement of cash flows prepared by the indirect method, a $50,000 gain on the sale of investments would be
_____.
a. deducted from net income in converting the net income reported on the income statement to cash flows from
operating activities
b. added to net income in converting the net income reported on the income statement to cash flows from operating
activities
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c. added to cash received from the sale to determine cash flows from investing activities
d. deducted from cash received from the sale to determine cash flows from investing activities
65. Interest receivable is an example of _____.
a. accrued revenue
b. retained earnings
c. deferred revenue
d. a prepaid expense
66. From the following data for David ProElecticals, calculate the quick ratio.
Cash $ 68,500
Accounts receivable 130,000
Inventories 213,000
Prepaid expenses 25,000
Total current assets $436,500
Less current liabilities 275,000
Working capital $161,500
a. 1.6
b. 0.7
c. 0.3
d. 1.5
67. On June 1, Unidevo, Inc., purchased $2,300 worth of supplies on account. Prior to the purchase, the balance in the
supplies account was $350. On December 31, the fiscal year-end for Unidevo, it is determined that $500 of supplies still
remain. What is the balance in the supplies account after adjustment?
a. $0
b. $1,800
c. $500
d. $2,300
68. While calculating the carrying value of a building, its accumulated depreciation is _____.
a. not taken into consideration
b. subtracted from the building's cost
c. added to the building's cost
d. subtracted from the fair market value of the building
69. When an adjusting entry is made to record insurance expense and reduce the prepaid insurance account, which section
of the statement of cash flows is affected?
a. Cash Flow from Operating Activities
b. Cash Flow from Investing Activities
c. Cash Flow from Financing Activities
d. There is no effect on the statement of cash flows.
70. The liabilities that are due to be paid usually within a year or less are called _____.
a. long-term liabilities
b. deferred liabilities
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c. current liabilities
d. contingent liabilities
71. On April 1, Smart, Inc., paid $7,200 for an insurance premium on a three-year insurance policy. How does this
transaction affect Smart's accounts?
a. Increase insurance expense and decrease cash by $7,200 each
b. Increase prepaid insurance and decrease cash by $7,200 each
c. Increase unearned insurance and decrease cash by $7,200 each
d. Increase prepaid insurance and decrease retained earnings by $7,200 each
72. Speedy Company's weekly payroll of $250 is paid on Fridays (five-day work week). Assume that the last day of the
month falls on Thursday. Which of the following is the required month-end adjusting entry?
a. Increase Salaries Expense $200 and increase Salaries Payable $200
b. Increase Salaries Expense $50 and increase Salaries Payable $50
c. Increase Salaries Payable $200 and increase Cash $200
d. Increase Salaries Expense $250 and increase Cash $250
73. The expired amount of a prepaid expense is recorded as _____.
a. accrued revenue
b. a contra asset
c. a liability
d. an expense
74. Expenses not related to the primary operations of the business are sometimes reported as _____.
a. administrative expense
b. operating expense
c. other expense
d. all of these
75. Which of the following is the effect of the company’s payment of dividends to stockholders?
a. The company's liquidity decreases, while profitability remains unchanged.
b. The company's profitability and liquidity remains unchanged.
c. The company's profitability and liquidity decrease.
d. The company's profitability increases, while its liquidity decreases.
76. ASE Company sold goods, receiving $35,000 in cash and $15,000 on credit. How much revenue should it record
under the accrual basis of accounting?
a. $35,000
b. $15,000
c. $50,000
d. $50,000
77. Using accrual accounting, revenue is recorded and reported only _____.
a. when cash is received without regard to when the services are rendered
b. when the services are rendered without regard to when cash is received
c. when cash is received before services are rendered
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d. if cash is received after the services are rendered
78. Cash receipts from interest and dividends are classified as _____.
a. investing activities
b. operating activities
c. either financing or investing activities
d. financing activities
79. Unearned interest is categorized as _____.
a. a fixed asset
b. stockholders' equity
c. an intangible asset
d. a liability
80. The unearned rent account has a balance of $60,000. If $4,000 of the $60,000 is unearned at the end of the accounting
period, the amount of the adjusting entry is _____.
a. $64,000
b. $56,000
c. $60,000
d. $4,000
81. Which of the following is normally the result of cash being received or paid before the revenue is earned or the
expense is incurred?
a. A deferred expense
b. An accrued expense
c. A contra asset
d. An intangible asset
82. Which of the following should be added to net income in calculating net cash flow from operating activities using the
indirect method?
a. An increase in inventory
b. A decrease in accounts payable
c. Preferred dividends declared and paid
d. A decrease in accounts receivable
83. Which of the following transactions will affect the liquidity metric of a company?
a. Supplies used for manufacturing a product
b. Salary owed but not paid
c. Services provided but not billed to the customer
d. Depreciation charged on fixed asset
84. _____ represent rights of a long-term nature, such as patent rights, copyrights, and goodwill.
a. Accrued revenues
b. Intangible assets
c. Retained earnings
d. Long-term liabilities
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chapter 3
85. When cash is paid to suppliers on account, which section of the Statement of Cash Flows is affected?
a. Cash Flow from Operating Activities
b. Cash Flow from Investing Activities
c. Cash Flow from Financing Activities
d. There is no effect on the Statement of Cash Flows.
86. On April 1, Tenity, Inc., paid $3,300 for an insurance premium on a three-year insurance policy. At the end of
December, Tenity's fiscal year-end, what should be the balance in the prepaid insurance account?
a. $1,100
b. $2,475
c. $3,300
d. $2,200
87. QRT Co. received $1,560 advance from Zync Inc. as rent for the use of a building owned by QRT Co. How does this
transaction affect QRT's accounts if QRT recognizes a liability on receipt of the rent?
a. Cash is increased, and sales revenue is increased.
b. Cash is increased, and rent income is decreased.
c. Cash is increased, and unearned rent is increased.
d. Cash is increased, and prepaid rent is increased.
88. The reduction in the ability of a fixed asset to provide service over time is called _____.
a. deferral recognition
b. depreciation
c. consolidation
d. accumulation
89. Which of the following is true about an accrual?
a. It is normally the result of cash being received or paid before the revenue is earned or the expense is incurred.
b. It is initially recorded as an asset but becomes an expense over time.
c. It is initially recorded as a liability but become revenue over time.
d. It is normally the result of cash being received or paid after revenue has been earned or an expense has been
incurred.
90. XYZ Co. received $3,000 in payments from clients for services billed in a previous month. Which accounts will be
affected and by what amounts under the accrual basis of accounting?
a. Cash will increase by $3,000, and accounts receivable will decrease by $3,000.
b. Cash will increase by $3,000, and revenues will increase $3,000.
c. Accounts receivable will increase by $3,000, and revenue will increase by $3,000.
d. Accounts receivable will increase by $3,000, and cash will increase by $3,000.
91. _____ is the process that begins with analyzing transactions and ends with preparing financial statements.
a. Liquidity reporting
b. The accounting cycle
c. Amortization of accounts
d. Cost reporting
