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92. The updating of accrual accounting records before preparing financial statements is referred to as the _____.
a. consolidation process
b. full disclosure process
c. adjustment process
d. money measurement process
93. St. Nick Corporation’s Toy-Making Supplies account showed a beginning balance of $200 and supplies purchased of
$800. There were $400 of supplies on hand at year-end. The year-end adjustment would include an increase in Toy-
Making Supplies Expense for _____.
a. $1,000
b. $800
c. $600
d. $400
94. On the statement of cash flows, the cash flows from operating activities section would include _____.
a. receipts from the issuance of common stock
b. receipts from the sale of investments
c. payments for the acquisition of investments
d. cash receipts from sales activities
95. Which one of the following should be added to net income in calculating net cash flow from operating activities using
the indirect method?
a. A gain on the sale of land
b. A decrease in accounts payable
c. An increase in accrued liabilities
d. Dividends paid on common stock
96. A company’s stockholders’ equity is bifurcated into _____.
a. current assets and long-term assets
b. common stock and long-term assets
c. retained earnings and long-term assets
d. common stock and retained earnings
97. The net income reported on the income statement for the current year was $310,000. Depreciation recorded on fixed
assets and amortization of patents for the year were $40,000 and $9,000, respectively. Balances of current asset and
current liability accounts at the end and at the beginning of the year are as follows:
End Beginning
Cash $ 50,000 $ 60,000
Accounts receivable 112,000 108,000
Inventories 105,000 93,000
Prepaid expenses 4,500 6,500
Accounts payable (merchandise creditors) 75,000 89,000
What is the amount of cash flows from operating activities reported on the statement of cash flows prepared by the
indirect method?
a. $233,000
b. $289,000
c. $387,000
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d. $331,000
98. The accrual basis of accounting recognizes _____.
a. revenues when cash is received and expenses when cash is paid
b. revenues when earned and expenses when cash is paid
c. revenues when cash is received and expenses when incurred
d. revenues when earned and expenses when incurred
99. Which transaction would be recorded in a cash basis system of accounting?
a. Purchase of equipment by signing a note
b. Purchase of supplies on credit
c. Sale of goods against a note
d. Sale of goods for cash
100. Which of the following metrics is affected when a business makes prepayment of rent?
a. Profitability
b. Leverage
c. Liquidity
d. Contingency
101. Which of the following is true about quick ratio?
a. It is computed as quick assets multiplied by current liabilities.
b. It includes cash, inventory, and short-term investments.
c. If it is less than 1.0, it raises liquidity concerns for creditors.
d. It is a suitable measure to derive the profitability of the company.
102. X&Y Co. received $4,000 in payments from clients for services billed in a previous month. What effect does this
transaction have on the accounts under the accrual basis of accounting?
a. Total assets increase by $4,000.
b. Assets increase by $4,000 and revenues increase $4,000.
c. Total assets decrease by $4,000.
d. The net effect on assets is zero.
103. A deferred expense is initially recorded as _____.
a. an asset but becomes an expense over time
b. an expense but becomes an asset over time
c. a liability but becomes an expense over time
d. an expense but becomes a liability over time
104. Which of the following is the effect of a company recording depreciation?
a. Its cash flow decreases.
b. Its net income decreases.
c. Its quick assets decrease.
d. Its common stock increases.
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105. Why is a physical count of supplies necessary at the end of the accounting period?
106. Describe the end-of-the-period adjustment process. Why is it necessary?
107. When are sales recognized under the cash basis of accounting? When are expenses recognized?
108. Describe the differences between the cash and accrual bases of accounting.
109. Refer to Coke’s Statement of Cash Flows. What amount of depreciation and amortization did Coke record in 2018?
110. Under the balance sheet classification of property, plant, and equipment, some accounts need adjustment and others
do not. Which do and why? Which do not and why?
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111. Electroyo Corporation’s accumulated depreciation increased by $8,500, while patents decreased by $2,800 between
consecutive balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In
addition, the income statement showed a gain of $5,350 from sale of land. Reconcile a net income of $68,000 to net cash
flow from operating activities.
112. Describe deferrals and accruals.
113. At the end of the fiscal year, the following adjusting entries were omitted:
(a) No adjusting entry was made to transfer the $3,000 of prepaid insurance from the asset account to the expense
account.
(b) No adjusting entry was made to record accrued fees of $500 for services provided to customers.
Assuming that financial statements are prepared before the errors are discovered, indicate the effect of each error,
considered individually, by inserting the dollar amount in the appropriate spaces. Insert “0” if the error does not affect the
item.
Error (a) Error (b)
Overstated Understated Overstated Understated
(1) Assets at December 31 would be
$
$
$
$
(2) Liabilities at Dec. 31 would be
$
$
$
$
(3) Net income for the year would be
$
$
$
$
(4) Retained earnings at Dec. 31 would be
$
$
$
$
114. Identify the classification of the following items as
a. accrued asset
b. unearned revenue
c. accrued liability
d. prepaid expense
(1) Three months’ interest on notes payable paid in advance
(2) Subscription fees for six months received in advance
(3) Services rendered but not yet billed at month-end
(4) Interest payable accrued on an accounts payable but not yet paid
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(5) Salaries payable owed but not yet paid
(6) Two year’s premium on building paid in advance
115. BlueInk Corporation’s accumulated depreciation increased by $14,000, while patents decreased by $3,875 between
consecutive balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In
addition, the income statement showed a loss on sale of land of $1,950. Accounts receivable increased $6,320, inventory
decreased $3,125, prepaid expenses decreased $720, and account payable increased $2,760. Reconcile a net income of
$55,000 to net cash flow from operating activities.
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116. Refer to Coke’s balance sheet. Does it appear that Coke uses the cash or accrual basis of accounting?
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Answer Key
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