Your friend, Dean, has opened a movie theater. Dean states that he does not have time
to develop and implement a system of internal controls.
a. Provide Dean with the objectives of a system of internal controls.
b. Explain to Dean why he should develop a system of internal controls.
Answer:
Which of the following changes in retained earnings during a period will be reported in
the financing activities section of the statement of cash flows?
1> Declaration and payment of a cash dividend during the period.
2> Net income for the period.
a. 1
b. 2
c. Neither 1 nor 2
d. Both 1 and 2
Answer:
The statement of cash flows should help investors and creditors assess each of the
following except the
a. entity’s ability to generate future income.
b. entity’s ability to pay dividends.
c. reasons for the difference between net income and net cash provided by operating
activities.
d. cash investing and financing transactions during the period.
Answer:
Freight terms of FOB shipping point mean that the
a. buyer must bear the freight costs.
b. seller must debit freight out.
c. goods are placed free on board at the buyer’s place of business.
d. seller must bear the freight costs.
Answer:
Which statement is correct?
a. As long as a company consistently uses the cash basis of accounting, generally
accepted accounting principles allow its use.
b. The use of the cash basis of accounting violates both the revenue recognition and
expense recognition principles.
c. The cash basis of accounting is objective because no one can be certain of the amount
of revenue until the cash is received.
d. As long as management is ethical, there are no problems with using the cash basis of
accounting.
Answer:
A debit balance in the Allowance for Doubtful Accounts
a. is the normal balance for that account.
b. indicates that actual bad debt write-offs have exceeded previous provisions for bad
debts.
c. indicates that actual bad debt write-offs have been less than what was estimated.
d. cannot occur if the percentage of sales method of estimating bad debts is used.
Answer:
Quagle Company had the following transactions pertaining to debt securities held as a
short-term investment.
Instructions
(a) Journalize the transactions.
(b) Prepare the adjusting entry for the accrual of interest on December 31.
Answer:
Expenditures that maintain the operating efficiency and expected productive life of a
plant asset are generally
a. expensed when incurred.
b. capitalized as a part of the cost of the asset.
c. debited to the Accumulated Depreciation account.
d. not recorded until they become material in amount.
Answer:
The average time that is required to go from “cash to cash” in producing revenues is
referred to as the
a. business cycle.
b. operating cycle.
c. fiscal year cycle.
d. accounting cycle.
Answer:
Bay Company acquires 60, 8%, 5 year, $1,000 Community bonds on January 1, 2014
for $60,000.
The journal entry to record this investment includes a debit to
a. Debt Investments for $64,800.
b. Debt Investments for $60,000.
c. Cash for $60,000.
d. Stock Investments for $60,000.
Answer:
Golf Pro Publications publishes a golf magazine for women. The magazine sells for $3
a copy on the newsstand. Yearly subscriptions to the magazine cost $24 per year (12
issues). During December 2014, Golf Pro Publications sells 12,000 copies of the golf
magazine at newsstands and receives payment for 25,000 subscriptions for 2015.
Financial statements are prepared monthly.
Instructions
(a) Prepare the December 2014 journal entries to record the newsstand sales and
subscriptions received.
(b) Prepare the necessary adjusting entry on January 31, 2015. The January 2015 issue
has been mailed to subscribers.
Answer:
Reliable Insurance Company collected a premium of $36,000 for a 1-year insurance
policy on May 1. What amount should Reliable report as a current liability for
Unearned Insurance Revene at December 31?
a. $0.
b. $12,000.
c. $24,000.
d. $36,000.
Answer:
On February 1, Ville Company received a $6,000, 5%, four-month note receivable. The
cash to be received by Ville Company when the note becomes due is
a. $100.
b. $6,000.
c. $6,100.
d. $6,300.
Answer:
Enos Company has decided to change the estimate of the useful life of an asset that has
been in service for 2 years. Which of the following statements describes the proper way
to revise a useful life estimate?
a. Revisions in useful life are permitted if approved by the IRS.
b. Retroactive changes must be made to correct previously recorded depreciation.
c. Only future years will be affected by the revision.
d. Both current and future years will be affected by the revision.
Answer:
Crain Company issued 2,000 shares of its $5 par value common stock in payment of its
attorney’s bill of $30,000. The bill was for services performed in helping the company
incorporate. Crain should record this transaction by debiting
a. Legal Expense for $10,000.
b. Legal Expense for $30,000.
c. Organization Expense for $10,000.
d. Organization Expense for $30,000.
Answer:
Finley Company had a beginning inventory of 200 units at a cost of $12 per unit on
August During the month, the following purchases and sales were made.
Finley uses a periodic inventory system.
Instructions
Determine ending inventory and cost of goods sold under (a) average cost, (b) FIFO,
and (c) LIFO.
(a) Average cost:
Ending inventory = $____________; cost of goods sold = $_____________.
(b) FIFO:
Ending inventory = $_____________; cost of goods sold = $____________.
(c) LIFO:
Ending inventory = $_____________; cost of goods sold = $____________.
Answer:
Crue Company had the following transactions during 2015:
ï€ Sales of $4,800 on account
ï€ Collected $2,000 for services to be performed in 2016
ï€ Paid $1,625 cash in salaries
ï€ Purchased airline tickets for $250 in December for a trip to take place in 2016
What is Crue’s 2015 net income using accrual accounting?
a. $2,925.
b. $3,175.
c. $4,925.
d. $5,175.
Answer:
Goodwill can be recorded
a. when customers keep returning because they are satisfied with the company’s
products.
b. when the company acquires a good location for its business.
c. when the company has exceptional management.
d. only when there is an exchange transaction involving the purchase of an entire
business.
Answer:
A horizontal analysis performed on a statement of retained earnings would not show a
percentage change in
a. dividends paid.
b. net income.
c. expenses.
d. beginning retained earnings.
Answer:
If unearned revenues are initially recorded in revenue accounts and not all the related
services been performed at the end of the accounting period, the failure to make an
adjusting entry will cause
a. liabilities to be overstated.
b. revenues to be understated.
c. revenues to be overstated.
d. accounts receivable to be overstated.
Answer:
Mofro’s Computer Repair Shop started the year with total assets of $300,000 and total
liabilities of $200,000. During the year, the business recorded $500,000 in computer
repair revenues, $300,000 in expenses, and Mofro paid dividends of $50,000.
Stockholders’ equity at the end of the year was
a. $200,000.
b. $100,000.
c. $250,000.
d. $300,000.
Answer:
A subsidiary ledger frees the general ledger from details of
a. individual balances.
b. external transactions.
c. internal transactions.
d. the control account.
Answer:
Which one of the following is a privately held corporation?
a. Intel
b. General Electric
c. Caterpillar Inc.
d. Cargill Inc.
Answer:
Transactions are entered in the ledger accounts and then transferred to journals.
Answer:
Uncle Tupelo’s Gifts signs a three-month note payable to help finance increases in
inventory for the Christmas shopping season. The note is signed on November 1 in the
amount of $75,000 with annual interest of 12%. What is the adjusting entry to be made
on December 31 for the interest expense accrued to that date, if no entries have been
made previously for the interest?
Answer:
A 10% stock dividend will increase the number of shares outstanding but the book
value per share will decrease.
Answer:
Comment on the validity of the following statements: ‘As an asset loses its ability to
provide services, cash needs to be set aside to replace it. Depreciation accomplishes this
goal.’
Answer:
A note is dishonored when it is not fully paid at maturity.
Answer:
On January 1, 2014, Brenner Company purchased at face value, a $1,000, 6% bond that
pays interest on January 1 and July 1. Brenner Company has a calendar year end.
The entry for the receipt of interest on July 1, 2014, is
Answer:
Booker Corporation had the following comparative current assets and current liabilities:
During 2016, credit sales and cost of goods sold were $750,000 and $400,000,
respectively.
Instructions
Compute the following liquidity measures for 2016:
1> Current ratio.
2> Working capital.
3> Acid-test ratio.
4> Accounts receivable turnover.
5> Inventory turnover.
Answer:
The inventory of Columbo Company was destroyed by fire on April 1. From an
examination of the accounting records, the following data for the first three months of
the year are obtained:
Instructions
Determine the merchandise lost by fire, assuming a beginning inventory of $50,000 and
a gross profit rate of 40% on net sales.
Answer:
Ordinary repairs which maintain operating efficiency and expected productive life are
called _______________.
Answer: