1) Accounting information is used by investors and lenders, but not by regulatory
bodies.
2) When an investor owns 35% of the stock of another business, cash dividends
received from the investee company are recorded by decreasing the Equity-Method
Investment account.
3) When a company factors its receivables, accounts receivable will be debited.
4) Long-term debt is a liability that is payable beyond one year from the date of the
financial statements.
5) Differences between the bank statement and the company’s Cash account are
primarily the result of a time lag in recording transactions.
6) The person performing the bank reconciliation should not have any other cash duties.
7) A potential obligation that depends on the future outcome of past events is a
contingent liability.
8) The accounting process begins and ends with people making decisions.
9) In an unadjusted trial balance, the accounts are not yet ready for the preparation of
the company’s financial statements.
10) Under the allowance method, companies are prohibited from using different
methods to estimate Uncollectible-Account Expense.
11) If the sale of plant assets is a company’s major source of cash, it may be a sign of
financial difficulty.
12) When a company discontinues a segment of its business, the income statement
should report income (loss) from continuing operations and income (loss) from
discontinued operations.
13) Only the financing activities section of a statement of cash flows differs between
the direct and indirect methods.
14) Each journal entry should contain a brief description of the transaction
15) A corporation’s net income receives more attention than any other financial
statement item. Why?
A) An upward trend in net income usually leads to dividends in the future
B) An upward trend in net income usually leads to higher stock prices in the future
C) An upward trend in net income usually leads to an unqualified audit opinion
D) A and B
16) The demise of Arthur Andersen, one of the largest public accounting firms, can be
attributed to:
A) reversal of an indictment by the U.S. Justice Department
B) fines levied by the U.S. Securities and Exchange Commission
C) the death of Kenneth Lay
D) the lack of quality of audit work for several clients that include Enron, WorldCom
and Waste Management
17) For a plant asset that generates revenue evenly over time, which depreciation
method best meets the expense recognition principle?
A) straight-line
B) double-declining-balance method
C) modified accelerated method
D) units-of-production
18) If treasury stock is sold at a price greater than its reacquisition cost, the difference
is:
A) debited to Paid-in Capital from Treasury Stock Transactions
B) credited to Paid-in Capital from Treasury Stock Transactions
C) debited to Retained Earnings
D) credited to Retained Earnings
19) A doctor performed surgery in March and did not receive cash from the patient until
July. Under accrual-basis accounting, the doctor recognizes revenue:
A) in March
B) in July
C) in either March or July
D) at a time that cannot be determined from the facts
20) When reporting cash on the balance sheet, companies:
A) show each bank account separately
B) combine cash with accounts receivable
C) include any restricted amounts
D) combine cash and cash equivalents
21) Operating income reflects:
A) income from a company’s main and secondary business activities
B) income from a company’s main or core business activities
C) income from operating a company plus investment income
D) income from continuing operations only
22) A transaction that includes a debit to an expense and a credit to a liability indicates
that:
A) revenues increased
B) expenses decreased
C) liabilities increased
D) cash decreased
23) After the closing entries are prepared and posted:
A) all asset accounts will have a zero balance
B) the Retained Earnings account will have the correct ending balance
C) the temporary accounts will have debit balances
D) all liability accounts will have a zero balance
24) Wayne Technical Corporation signed a lease for equipment, which requires lease
payments of $50,000 per year for four years. The equipment has an estimated useful life
of 7 years. This lease would be a capital lease if:
A) the equipment is leased for 4 years
B) the present value of the lease payments equals $150,000 and the fair value of the
equipment is $200,000
C) title to the equipment does not transfer to the lessee at the end of the lease term
D) the lease agreement allows Wayne to purchase the equipment for $5 at the end of the
lease
25) The stable monetary unit assumption:
A) ensures that accounting records and statements are based on the most reliable data
available
B) holds that the entity will remain in operation for the foreseeable future
C) maintains that each organization or section of an organization stands apart from
other organizations and individuals
D) enables accountants to ignore the effect of inflation on the accounting records
26) Emma Jones Company has the following information available:
Did the current ratio improve from 2014 to 2015?
A) No
B) Yes
C) It stayed the same
D) There is not enough information
27) Unrealized gains and losses from long-term available-for-sale investments arise
from:
A) the purchase of an investment
B) the sale of the investment
C) changes in the fair value of the investment
D) investor’s share of investee’s net income or net loss
28) In order to compare the financial statements of Toyota Corporation to the financial
statements of General Motors, it would be preferable to use _________.
A) U.S. Generally Accepted Accounting Principles for General Motors and
International Financial Reporting Standards for Toyota
B) U.S. Generally Accepted Accounting Principles for both companies
C) International Financial Reporting Standards for both companies
D) U.S. Generally Accepted Accounting Principles for Toyota Corporation and
International Financial Reporting Standards for General Motors
29) The three types of activities reported on the statement of cash flows are presented in
the following order:
A) operating, investing, and financing
B) financing, operating, and investing
C) investing, operating, and financing
D) financing, investing, and operating
30) The estimated value of a company is $18 million. The company has 2 million shares
outstanding at a market price of $10 per share. You already own 1,000 shares of the
stock. Should you buy, sell or hold the stock?
A) You should buy more shares of the stock
B) You should hold the stock for now
C) You should sell the stock
D) There is not enough information to make a decision
31) In performing vertical analysis, the base for income before taxes is:
A) net income
B) gross sales
C) gross profit
D) net sales
32) Under the indirect method of preparing a statement of cash flows, amortization
expense for the current period is:
A) added in the investing activities section
B) subtracted in the investing activities section
C) added in the financing activities section
D) added in the operating activities section
33) The statement of cash flows provides information about:
A) a company’s ability to pay interest and dividends
B) a company’s future cash flows
C) decisions made by a company’s management
D) all of the above
34) If bonds are issued at a discount, it means that the:
A) market interest rate is higher than the stated interest rate
B) market interest rate is lower than the stated interest rate
C) financial strength of the issuer is weak
D) bond is convertible
35) The balance in the Unrealized Gain on Investment in Available-for-Sale Securities
account is reported on the ________. The investments are classified as long-term.
A) balance sheet as a contra asset account
B) income statement under Other Expenses and Losses
C) balance sheet, as part of the stockholders’ equity section
D) balance sheet, as part of Long-Term Investments
36) On a statement of cash flows, repayment of long-term debt is considered:
A) an operating activity
B) an investing activity
C) a financing activity
D) a noncash investing and financing activity
37) The first step in recording a transaction in the journal is:
A) determining whether each account is increased or decreased by the transaction
B) copying the information from the journal to the ledger
C) entering the debit side of the journal entry on the left margin and the credit side is
indented to the right
D) specifying each account affected by the transaction and classifying the account by
type
38) Under the effective-interest method, if bonds are issued at a discount, the amount of
interest expense:
A) increases each period as the bonds move towards maturity
B) decreases each period as the bonds move towards maturity
C) remains the same over the term of the bonds
D) is less than the cash interest payment
39) What do the price-earnings ratio and dividend yield have in common?
A) Earnings per share is the denominator for both ratios
B) Earnings per share is the numerators for both ratios
C) Dividends per share is in both ratios
D) Market price per share is in both ratios
40) Company A has an accounts payable turnover of 9.5. Company B has an accounts
payable turnover of 7.3. Which company is more liquid?
A) Company A is more liquid
B) Company B is more liquid
C) Both are equally liquid
D) None of the above are correct
41) Under the allowance method for estimating uncollectible accounts:
A) a company sets up an Allowance for Uncollectible Accounts to estimate the amount
of the receivables the company does not expect to collect
B) the Allowance for Uncollectible Accounts is a contra account to gross Accounts
Receivable
C) the Allowance for Uncollectible Accounts will normally have a credit balance
D) all of the above
42) When preparing the bank reconciliation, if the the adjusted book balance and the
adjusted bank balance disagree, this may indicate:
A) an error made in preparing the bank reconciliation
B) stealing of cash by an employee in the business
C) fraudulent financial reporting
D) A and B
43) Nichols Company has shipped goods to one of its customers FOB shipping point.
Nichols Company will recognize sales revenue when:
A) their customer has received the goods
B) when the goods leave Nichols’ shipping dock
C) whenever the two parties agree that revenue should be recognized
D) when the customer pays the invoice
44) An owner makes an investment of cash into the business and receives shares of
stock This transaction would include a:
A) debit to Common Stock and a credit to Cash
B) debit to Cash and a credit to Common Stock
C) debit to Retained Earnings and a credit to Cash
D) debit to Common Stock and a credit to Retained Earnings
45) Kolander Company has the following accounts and balances at the end of the year:
What is the amount of Retained Earnings at the end of the year?
A) $52,000
B) $98,500
C) $150,500
D) $174,000
46) The adjusting entry to record the accrual of income tax expense includes a:
A) debit to Income Tax Payable
B) credit to Income Tax Expense
C) credit to Accounts Payable
D) credit to Income Tax Payable
47) The balancing figure that brings the dollar amount of the total liabilities and
stockholders’ equity of the foreign subsidiary into agreement with the dollar amount of
its total assets is the:
A) equity adjustment
B) foreign-currency exchange rate
C) foreign-currency translation adjustment
D) foreign consolidation adjustment
48) The process of copying the information from the journal to the trial balance is:
A) called posting
B) not undertaken
C) called journalizing
D) used to prepare the financial statements
49) Hill Company purchased stamps for $46 using the petty cash fund. What journal
entry is required?
A) Debit Postage Expense for $46 and credit Cash for $46
B) Debit Accounts Payable for $46 and credit Cash for $46
C) Debit Petty Cash for $46 and credit Cash for $46
D) No journal entry is required until the petty cash fund is replenished at the end of the
month