All journal entries made related to bank reconciliations include an expense or revenue
account.
Two of the steps in the accounting cycle are adjusting the accounts and closing the
accounts.
Net sales is calculated by subtracting cost of goods sold from sales revenue.
If a company uses the LIFO cost flow method, it is not required by generally accepted
accounting principles to apply the lower-of-cost-or-market rule.
The most frequently reported measure of a company’s value is earnings per share.
Journals are sometimes called books of original entry because transactions are recorded
in journals before amounts are entered into the ledger.
Payment of interest on a note payable is considered a financing activity on the
statement of cash flows.
A company using a perpetual inventory system treats transportation-out as a selling and
administrative expense.
All of a business’s temporary accounts appear on the income statement.
Depletion of a natural resource is usually calculated using the straight-line basis.
The issuer of a note payable is also known as the maker.
In a perpetual inventory system, a purchase allowance is treated as a decrease in
expenses by the company that purchased the goods.
All adjustments to the unadjusted cash balance on a bank reconciliation require journal
entries, but no adjustments to the bank statement balance require journal entries.
The net realizable value of accounts receivable is the amount of receivables a company
expects to collect.
Other things being equal, the longer a company’s operating cycle, the higher the
company’s operating costs are likely to be.
Independent contractors must be individuals who are employed by another company.
Davis Corporation borrowed $50,000 on January 1, 2016. The loan is for a ten-year
period and has an annual interest rate of 9%. At the end of each year, Davis will make a
payment of $7,791, which includes both principal and interest. The amount of the
payment for 2016 that is interest expense is $4,500.
Sales discounts affect net sales, but purchase discounts do not.
Cash flow from operating activities is often less stable from year to year than is the
amount of net income reported on the income statement.
Costs charged to the Merchandise Inventory account are product costs.
Requiring separation of duties in a business eliminates the need for the work of one
employee to serve as a check on the work of other employees.
Chisolm Corporation issued 10,000 shares of $5 par common stock for $22 per share.
As a result of this transaction, Chisolm’s legal capital increased by $50,000.
The term “FOB shipping point” indicates that the seller is responsible for transportation
costs.
Collection of a credit card receivable is an asset source transaction.
Singleton Company’s perpetual inventory records included the following information:
If Singleton uses the weighted-average cost flow method, its weighted-average cost per
unit would be $8.00.
Separation of duties in an organization should be required to reduce the likelihood of
theft.
For a business, Cash generally includes currency, customers’ checks, and some savings
accounts.
Sometimes the recognition of revenue is accompanied by an increase in liabilities.
On June 1, 2016, Carolina Company collected a $24,000 note receivable that had been
issued on June 1, 2015. The note carried a 6% interest rate. The interest revenue
recognized on the maturity date is $1,440.
Treasury Stock is an equity account with a normal credit balance.
The term used to recognize expense for property, plant, and equipment assets is
depletion.
The value created by a business may be called assets.
Companies that issue bonds are required to pay the face value of the bonds at maturity
and to make fluctuating periodic interest payments based on the market interest rate.
The gross margin method of estimating inventory is not useful in detecting inventory
fraud.
Use the following account numbers and corresponding account titles to answer the next
three questions.
Which accounts would appear on the income statement?
A.Account numbers 3, 4, 7, 8, and 9.
B.Account numbers 3, 4, 5, 7, and 9.
C.Account numbers 2, 3, 7, 8, and 9.
D.Account numbers 3, 5, 7, and 8.
When using the indirect method to complete the cash flows from operating activities
section of the statement of cash flows, what is the proper disposition of a loss on
disposal of equipment?
A.Disregard the loss because it relates to an investing activity.
B.Disregard the loss because it relates to a financing activity.
C. Add the loss to net income.
D.Subtract the loss from net income.
The Griffin Corporation accepted a credit card for a sale of $3,000 on December 16,
2016. The credit card company charges a fee of 4%. On January 5, 2017, Griffin
received payment from the credit card company. Indicate whether each of the following
statements is true or false.
_____ a) Griffin should record $2,880 revenue in 2016 when the sale is made.
_____ b) Griffin should record a credit card receivable account receivable of $3,000 on
12/16/16.
_____ c) The sale has no impact on the statement of cash flows in 2016.
_____ d) The collection of cash increases total assets in 2017.
_____ e) The entry on 12/16/16 increases total revenues and total expenses on the 2016
income statement.
Financial accounting standards are known collectively as GAAP. What does that
acronym stand for?
A.Generally Accepted Accounting Principles
B.Generally Applied Accounting Procedures
C.Governmentally Approved Accounting Practices
D.Generally Authorized Auditing Principles
Which of the following would cause net income on the accrual basis to be different
from (either higher or lower than) “cash provided by operating activities” on the
statement of cash flows?
A.Purchased land for cash.
B.Purchased supplies for cash.
C.Paid advertising expense.
D.Paid dividends to stockholders.
Weymouth Company uses the indirect method to prepare its statement of cash flows.
Indicate whether each of the following statements is true or false.
_____ a) Depreciation expense would be subtracted from net income when determining
the amount of cash flow from operating activities.
_____ b) Losses would be added to net income when determining the amount of cash
flow from operating activities.
_____ c) Cash flow from investing activities would be reported the same as if the direct
method were used.
_____ d) The amount of net cash flow from operations will be higher than it would be if
the direct method were used.
_____ e) With the indirect method, a decrease in accounts receivable is added to net
income in calculating the amount of cash flows from operating activities.
Revenue on account amounted to $9,000. Cash collections of accounts receivable
amounted to $8,100. Cash paid for expenses was $7,500. The amount of employee
salaries accrued at the end of the year was $900. Cash flow from operating activities
was
A.$900.
B.$600.
C.$1,500.
D.$8,700.
Indicate whether each of the following statements about financial statement analysis is
true or false.
_____ a) Having too little inventory can hurt a company’s profitability because of lost
sales.
_____ b) Having too much inventory can hurt a company’s profitability because of
excess costs.
_____ c) Generally, a lower inventory turnover indicates that merchandise is being
handled more efficiently.
_____ d) Average days to sell inventory is the number of times, on average, that
inventory is replaced during the year.
_____ e) Values for the inventory turnover ratio vary widely among different industries.
Max Company’s first year in operation was 2016. The following inventory purchase
information comes from Max’s accounting records for the year.
In December 2016, Max sold 350 units for $480 each. Operating expenses for the year
were $30,000, and the tax rate was 30%.
Required: a) Calculate the cost of goods sold by LIFO and by FIFO.
b) What amount of income tax would Max have to pay if it uses LIFO? If it uses FIFO?
c) Assuming that the results for 2016 are representative of what Max can generally
expect, would you recommend that the company use LIFO or FIFO? Explain.
Select the true statement (note: an answer may be true even if it does not identify all
accounts that appear on that particular financial statement).
A.Account numbers 2, 4, and 5 will appear on the income statement.
B.Account numbers 1, 3, and 8 will appear on the balance sheet.
C.Account numbers 2, 5, and 8 will appear on the statement of cash flows.
D.Account numbers 4, 5, and 6 will appear on the statement of changes in equity.
Indicate whether each of the following statements is true or false.
_____ a) Other things being equal, an operating cycle of 49 days is more desirable than
an operating cycle of 120 days.
_____ b) The operating cycle is longer for a winery than a fast-food restaurant.
_____ c) The length of an operating cycle is not relevant to the profitability of a
business.
_____ d) The length of an operating cycle equals the average days to collect accounts
receivable.
_____ e) The length of an operating cycle is computed by adding the sum of the
average days in inventory and the average number of days to collect accounts
receivable.
On January 1, 2015, Chavez Company had beginning balances as follows:
Assets = $12,500
Liabilities = $4,500
Common Stock = $3,000
During 2016, Chavez paid dividends to its stockholders of $2,000. Given that ending
retained earnings was $6,000, what was Chavez’s net income for the 2016 accounting
period?
A.$3,000
B.$5,000
C.$7,000
D.$2,000
The following information is for Benitez Company for 2016:
Required: Assuming that Benitez uses the FIFO cost flow method,
a) How much product cost would be allocated to Cost of Goods Sold?
b) How much product cost would be allocated to Merchandise Inventory at the end of
the year?
c) Calculate the average number of days to sell inventory for the year.
The December 31, 2016 balance sheet of Rowan Company shows current assets of
$32,000 and current liabilities of $20,000. On January 1, 2017 the company recorded
the following entries:
After the two journal entries were recorded, the company current ratio is:
A.2 to 1
B.1.6 to 1
C.2.4 to 1
D.2.1 to 1
Poole Company purchased two identical inventory items. One of the items, purchased
in January, cost $4.50. The other, purchased in February, cost $4.75. One of the items
was sold in March at a selling price of $7.50. Select the correct answer assuming that
Poole uses a LIFO cost flow.
A.The balance in ending inventory would be $4.75.
B.The amount of gross margin would be $2.75.
C.The amount of ending inventory would be $4.625.
D.The amount of cost of goods sold would be $4.50.
On January 1, 2016 Brown Co. issued $200,000 of 10%, 20-year bonds. If Bluefield’s
tax rate is 40%, the after-tax cost of borrowing related to these bonds for 2016 is:
A.$12,000.
B.$8,000.
C.$20,000.
D.$28,000.
What action did the U. S. Congress take because of the audit failures at Enron,
WorldCom and other companies?
A.Required publicly-traded companies to be audited by a government agency
B.Passed the Sarbanes-Oxley Act
C.Required companies to begin preparing an additional financial statement
D.Passed an amendment to the Securities and Exchange Act
Flagler Company purchased $4,000 of merchandise on account. Flagler sold the
merchandise to a customer for $7,000 cash. What is the increase in gross margin and the
net change in cash flow from operating activities as a result of these transactions?
A.
B.
C.
D.
Indicate whether each of the following statements regarding internal controls is true or
false.
_____ a) Separation of duties is an internal control feature that requires different
individuals to perform the following functions: authorization, recording, and custody of
assets.
_____ b) Under proper internal controls, the person who collects customer payments
should also maintain the records of cash receipts.
_____ c) Under proper internal controls, those who are given authority should bear the
corresponding responsibility.
_____ d) One of the basic rules of internal control is to require some employees to take
regular vacations.
_____ e) A fidelity bond is a form of insurance that companies ask employees to buy to
protect the company from loss due to employee dishonesty.
The term “double taxation” refers to which of the following?
A.Corporations must pay income taxes on their net income, and their stockholders must
pay income taxes on their dividends.
B.In a partnership, both partners are required to claim their share of net income on their
tax returns.
C.A sole proprietorship must pay income taxes on its net income and the owner is also
required to pay income taxes on withdrawals.
D.A sole proprietorship must pay income taxes to both the state government and the
federal government.
The Yankee Corporation has recently begun to accept credit cards. On July 7, 2016,
Yankee made a credit card sale of $600. The credit card company charges a fee of 3%.
Which of the following correctly shows the effects of the sale on July 7? Assume that
the credit card fee is recorded on the date of sale.
A.
B.
C.
D.
Below are listed several transactions of Phelps Company during 2016.
1) Provided services to customers for cash, $70,000
2) Purchased land by paying cash, $32,000
3) Paid rent for 6 months, $24,000
4) Acquired cash of $50,000 by issuing common stock
5) Purchased office supplies on account, $5,400
6) Receive payment of $6,000 from a customer for services that will be provided over
the next six months.
Required:
a) Prepare journal entries for each of the preceding transactions, using the general
journal below.
b) Show how each transaction affects the financial statements model by inserting
amounts. Precede the amount with a minus sign if the transaction reduces that section of
the equation. Precede a cash outflow amount with a minus sign. Enter 0 for items not
affected.
In the Activity Type column, use the letters OA for operating activities, IA for investing
activities, and FA for financing activities. Insert NA if cash flow is not affected.
Which of the following terms is used to identify the expense recognition for intangible
assets?
A.Allocation.
B.Depletion.
C.Depreciation.
D.Amortization.
Which of the following items is not a product cost?
A.Transportation cost on goods delivered to customers.
B.Cost of merchandise purchased for resale.
C.Transportation cost on merchandise purchased from suppliers.
D.All of these answer choices are product costs.
Which of the following transactions would immediately increase a company’s return on
assets ratio?
A.Received cash from customers for goods sold to them on account last month.
B.Borrowed cash from a local bank.
C.Incurred expenses on account.
D.Paid cash on accounts payable.
Select the incorrect statement regarding ratio analysis.
A.Ratio analysis involves making comparisons between different accounts in the same
set of financial statements.
B.There are many different ratios available for evaluating a firm’s performance.
C.Some ratios involve an account from the balance sheet and one from the income
statement.
D.Ratio analysis is a specific form of horizontal analysis.
Which of the following is decreased with a debit?
A.Accounts Receivable
B.Accounts Payable
C.Prepaid Rent
D.Rent Expense
During 2016, Chico Company earned $1,950 of cash revenue, paid $1,600 of cash
expenses, and paid a $150 cash dividend to its owners. Based on this information
alone,which of the following is not correct?
A.Net income amounted to $350.
B.Total assets increased by $200.
C.Cash inflow from operating activities was $350.
D.Cash inflow from operating activities was $200.
The year-end financial statements of Calloway Company contained the following
elements and corresponding amounts: Assets = $50,000; Liabilities = ?; Common Stock
= $15,000; Revenue = $22,000; Dividends = $1,500; Beginning Retained Earnings =
$3,500; Ending Retained Earnings = $7,500.
The amount of liabilities reported on the end-of-period balance sheet was
A.$27,500.
B.$31,500.
C.$35,000.
D.$42,500.
As of December 31, 2016, Bristol Company had $100,000 of assets, $40,000 of
liabilities and $25,000 of retained earnings. What percentage of Bristol’s assets were
obtained through investors?
A.60%
B.25%
C.40%
D.35%
Indicate how each event affects the income statement and the statement of cash flows.
Record the amount of the effect in the box shown below each element. Use the letter “I”
to indicate increase, the letter “D” to indicate decrease, and the letter “N” to indicate no
effect. Use only one letter for each element.
Howard Co. declared and paid a $1.50 per share cash dividend on the 20,000 shares of
its common stock.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts.
North Co. issued a note to purchase a building.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts. Assume that Frank Company uses a perpetual inventory system.
After a physical count of its inventory, Whetzel Co. discovered that $400 of inventory is
missing. Show how the required write-down of inventory would affect Whetzel Co.’s
statements.
If goods are shipped FOB destination, who is responsible for the shipping costs?
If a company uses the perpetual inventory method, when would it normally discover
that merchandise inventory has been lost or stolen?
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts. Assume that Frank Company uses a perpetual inventory system.
Whetzel Co. returned some defective merchandise it had previously purchased on
account from a supplier, Jacobs Company. Jacobs Company agreed to credit Whetzel’s
account.
The post-closing trial balance of Chester Company at December 31, 2016 is as follows:
Required:
1) Use the trial balance of Chester Company to prepare the current assets and current
liabilities sections of Chester’s balance sheet at December 31, 2016.
2) Calculate the current ratio at December 31, 2016. Show all calculations and round
the ratio to two decimal places.
What does a company’s statement of cash flows tell you about the company?
Discuss the significance of the average number of days to sell inventory.
What is a disclaimer of audit opinion?
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts. Enter only one letter for each element.
Sierra Mining is the defendant in a $3 million lawsuit involving damage to the
environment. Sierra’s attorneys have advised the company that the outcome of the
lawsuit is probable, and the likely settlement will be $750 thousand.
Explain how a choice of depreciation methods will have an impact on financial
performance measures. Give one example.