1) The shipping terms in the sales contract determine when ownership of goods changes
hands between the buyer and the seller.
2) A 2-for-1 stock split will increase total stockholders’ equity.
3) Lease payments are paid by the lessor.
4) Under the direct write-off method, the journal entry to record Uncollectible-Account
Expense includes a credit to Accounts Receivable.
5) The accounting equation shows the relationship among assets, liabilities and net
income.
6) In a foreign-currency transaction, foreign currencies must be converted to U.S.
dollars for financial reporting purposes.
7) A company that owns less than 20% of another company’s stock may not use the
consolidation method of accounting.
8) The fundamental qualitative characteristics of accounting information are relevance
and reliability.
9) Some trademarks have an indefinite life and should not be amortized.
10) To account for the disposal of a plant asset, the cost of the asset and its related
accumulated depreciation are removed from the books.
11) Income tax payable is the amount of tax to be paid to the government based on the
income tax return.
12) In the statement of cash flows, sales of marketable securities are considered an
operating activity.
13) Perpetrators of fraud usually commit fraud for their own short-term economic gain.
14) A company will include goods out on consignment in their ending inventory.
15) The installation costs for a new machine should be part of the cost of the machine
and depreciated.
16) Investments accounted for by the equity method are initially recorded at cost.
17) When a trial balance is out of balance due to a transposition error, the difference
between total debits and total credits will be evenly divisible by 2
18) Recognizing revenue before it is earned is a major source of financial statement
fraud.
19) The cost of land includes the cost of fencing the property and paving the parking lot
on the land.
20) To document approval of returns of inventory, a purchasing company will issue a
credit memorandum.
21) The direct write-off method records Uncollectible-Account Expense:
A) in the accounting period each sale occurs
B) at the end of the accounting period
C) when the specific account receivable is determined to be uncollectible
D) in the accounting period one year after the sale date
22) Cubs Corporation issues $500,000, 10%, 5-year bonds on January 1, 2014 for
$479,000. Interest is paid annually on January 1. If Cubs Corporation uses the
straight-line method of amortization of bond discount, the amount of interest expense
recorded at December 31, 2014 would be:
A) $21,000
B) $45,800
C) $50,000
D) $54,200
23) In 2014, First Company purchased Second Company for $16,000,000 cash. At the
time of purchase, Second Company’s assets had a fair market value of $28,000,000 and
the liabilities had a fair market value of $13,000,000. At the time of purchase, Second
Company’s assets had a book value of $10,000,000 and the liabilities had a book value
of $7,000,000. What amount of goodwill is recorded?
A) $1,000,000
B) $3,000,000
C) $12,000,000
D) $13,000,000
24) Steadily decreasing cost of goods sold as a percentage of net sales is a sign of:
A) increasing earnings quality
B) decreasing earnings quality
C) financial statement fraud involving expense recognition
D) financial statement fraud involving revenue recognition
25) Internal control is a plan of organization and system of procedures implemented by
company ________ and the ________ designed to accomplish five objectives.
A) internal auditors, employees
B) external auditors, management
C) management, board of directors
D) employees, board of directors
26) On June 1, Nicholson Company purchased inventory on account with a cost of
$1,000. Credit terms were 2/10, net 30. On June 2, Nicholson Company returned 50
percent of the inventory. Nicholson Company uses the perpetual inventory system.
What journal entry did Nicholson Company prepare on June 2?
A) debit Purchase Returns for $1,000 and credit Accounts Payable for $1,000
B) debit Cash for $1,000 and credit Accounts Payable for $1,000
C) debit Purchase Returns for $500 and credit Accounts Payable for $500
D) debit Accounts Payable for $500 and credit Inventory for $500
27) With regard to customer checks received by mail, which statement is TRUE?
A) The Debit to Cash by the Accounting Department should equal the amount deposited
in the bank by the mailroom employee
B) The customers’ Accounts Receivable accounts should be adjusted by the Treasury
Department for the payments received
C) The controller compares the customers’ checks to the remittance advices sent from
the mailroom
D) The Accounting Department handles the bookkeeping part and the cashier in the
Treasurer’s Department deposits the checks in the bank
28) When calculating the quick ratio, ________ is included in the numerator.
A) inventory
B) prepaid insurance
C) supplies
D) short-term marketable securities
29) Johnny Company deposited $25,000 in its bank on the same day as, but after the
bank prepared Johnny Company’s bank statement. The deposit should appear on the
bank reconciliation as a(n) ________ and is called a(n):
A) addition to the bank balance; outstanding deposit
B) addition to the bank balance; deposit in transit
C) deduction to the bank balance; deposit in transit
D) deduction to the bank balance; outstanding deposit
30) How is the percentage change (for horizontal analysis) for sales from 2014 to 2015
computed?
A) Year 2015 sales Year 2014 sales
B) (Year 2015 sales – Year 2014 sales) Year 2014 sales
C) (Year 2015 sales – Year 2014 sales) Year 2015 sales
D) (Year 2015 sales Year 2014 sales) 100
31) When an expense account is increased:
A) an amount is entered on the credit side of the expense account
B) an amount is entered on the debit side of the expense account
C) cash must always be credited
D) stockholders’ equity is not affected
32) The journal entry to record depreciation expense is:
A) debit Depreciation Expense, credit the asset account
B) debit Accumulated Depreciation, credit the asset account
C) debit the asset account, credit Accumulated Depreciation
D) debit Depreciation Expense, credit Accumulated Depreciation
33) Winter Company earned revenues of $160,000 in cash and $210,000 on account
during 2014. Of the $210,000 on account, $80,000 was collected in cash in 2014 and
the rest in 2015. The company incurred expenses of $125,000 in 2014 and made
payments of $90,000 towards the expenses in 2014. What is net income in 2014 under
accrual-basis accounting?
A) $85,000
B) $245,000
C) $280,000
D) $370,000
34) A company purchased a parcel of land using a long-term note payable. Using the
direct method, where is this transaction reported on the statement of cash flows?
A) operating activities
B) investing activities
C) financing activities
D) noncash investing and financing activities
35) An imprest petty cash fund of $400 was established for minor disbursements. At the
end of the month the fund included petty cash tickets for the purchase of $185 in
supplies, $41 for postage, $86 for fuel and a delivery charge of $65. How much cash
should left in the fund?
A) $23
B) $88
C) $174
D) $377
36) Westside Corporation had an investment in available-for-sale securities of $60,000.
This investment experienced an unrealized loss of $7,000 during the year. Ignoring
income taxes, the effect of this loss on comprehensive income will be:
A) $60,000 increase
B) $60,000 decrease
C) $7,000 increase
D) $7,000 decrease
37) Jensen Corporation uses the percentage-of-sales method to estimate uncollectibles.
Net credit sales for the current year amount to $2,000,000 and management estimates
2% will be uncollectible. The Allowance for Doubtful Accounts prior to adjustment has
a debit balance of $16,000. After all necessary adjusting entries are made, the balance in
Allowance for Uncollectible Accounts will be:
A) $16,000
B) $16,320
C) $24,000
D) $40,000
38) Cash received from the issuance of bonds would be reported on a statement of cash
flows under:
A) investing activities
B) financing activities
C) operating activities
D) noncash activities
39) In 2015, ending inventory is overstated. What is the effect of the error on net
income in 2015 and 2016?
A) net income is overstated in 2015 and understated in 2016
B) net income is understated in 2015 and overstated in 2016
C) net income is understated in 2015 and 2016
D) net income is overstated in 2015 and 2016
40) A multiple-step income statement reports different types of income that include:
A) sales revenue and service revenue
B) income tax expense, utilities expense, rent expense
C) gross profit, operating income and net income
D) cost of goods sold and operating expenses
41) When services are performed on account:
A) cash is increased
B) revenue will not be recorded until the cash is received from the customer
C) accounts receivable is increased
D) accounts payable is increased
42) Consolidated financial statements are prepared when a company owns ________ of
the common stock of another company.
A) between 20% and 50%
B) 50% or more
C) more than 50%
D) more than 90%
43) Which of the following costs associated with a delivery van should NOT be
capitalized?
A) The van’s engine is overhauled and this will extend the useful life by five years
B) The van’s transmission is overhauled and this will extend the useful life by two years
C) The van is repainted
D) The van is modified so the van can be used for multiple purposes in the business
44) A company has a pending lawsuit that has a remote possibility of being settled in
favor of the plaintiff who is a former employee. What should the company do?
A) Nothing
B) Prepare a note to the financial statements
C) Prepare a journal entry
D) Prepare a note to the financial statements and a journal entry
45) The leverage ratio is equal to:
A) total debt divided by total assets
B) total debt divided by total stockholders’ equity
C) total long-term debt divided by total stockholders’ equity
D) total assets divided by total stockholders’ equity
46) Given the following data:
In vertical analysis, net income would be expressed as:
A) 18%
B) 45%
C) 30%
D) 82%
47) The bookkeeper recorded a payment on account as $120 instead of the correct
amount of $210. What journal entry is required?
A) Debit Accounts Payable for $210 and credit Cash for $210
B) Debit Accounts Receivable for $210 and credit Cash for $210
C) Debit Accounts Payable for $90 and credit Cash for $90
D) Debit Cash for $90 and credit Accounts Payable for $90
48) On January 1, 2015, Carmody Corporation purchased 5% bonds with a face value
of $40,000 for $42,000. Carmody Corporation intends to hold the bonds until the
maturity date. Interest is paid semiannually on January 1 and July 1. The journal entry
on January 1, 2015 is:
A) debit Held-to-Maturity Investment in Bonds for $40,000, debit Premium on Bonds
for $2,000 and credit Cash for $42,000
B) debit Held-to-Maturity Investment in Bonds for $42,000 and credit Cash for $42,000
C) debit Investment in Bonds for $42,000 and credit Interest Revenue for $42,000
D) debit Investment in Bonds for $40,000, debit Premium on Bonds for $2,000 and
credit Interest Revenue $42,000
49) When preparing a bank reconciliation, which of the following items should be
added to the book balance?
A) EFT receipts
B) Deposits in transit
C) Collection of note receivable by bank
D) Both EFT receipts and collection of note receivable