Special items and earnings per share are reported on the income statement after income
from continuing operations.
Using the effective-interest amortization method, the calculation for the amount of
premium amortization is the difference between the cash paid for interest and the
calculated interest expense based on the effective interest rate.
The matching principle ensures all expenses are recorded when they are incurred during
the period and are matched to the cash payments for expenses.
The investing activities section of the statement of cash flows reports cash receipts and
payments that increase or decrease long-term liabilities.
Future value is always less than present value.
The heading of a balance sheet will show the date as a specific date, not a period of
time.
If the amount of the petty cash fund is decreased, the Petty Cash Fund account should
be credited.
Manley Corporation issued 2,500 shares of its $50 par, 4% preferred stock on March
31, 2019, at $80 per share. The amount credited to Paid-In Capital in Excess of
Par-Preferred is $200,000.
Companies process credit and debit card transactions internally.
The price/earnings ratio measures the value that the stock market places on $1 of a
company’s earnings.
The days’ sales in inventory ratio is calculated by dividing cost of goods sold by the
average merchandise inventory.
Issuing preferred stock to stockholders in exchange for cash is shown under the
financing activities section of the statement of cash flows.
Businesses must maintain a single Accounts Receivable control account regardless of
the number of customers.
In the closing process, the Dividends account is closed to the Retained Earnings
account.
A T-account is a summary device with credits posted on the left side of the vertical line.
The intellectual property of a business is easy to measure.
The beginning balance in the Retained Earnings account of a company was $11,000.
The revenues and expenses were $240,000 and $160,000, respectively. During the year,
the company paid dividends of $6,000. The ending balance in Retained Earnings was
$91,000.
Treasury stock is a contra equity account.
The beginning balance in the Common Stock account of a company was $10,000. The
revenues and expenses were $200,000 and $140,000, respectively. During the year, the
company declared and paid dividends of $5,000. The ending balance in the Retained
Earnings was $55,000. (Assume that the beginning balance of Retained Earnings was
zero.)
Cash dividends and stock splits decrease the Retained Earnings account.
If a company does not protect its assets, it is throwing away resources.
The price/earnings ratio is the ratio of the earnings per share of common stock to the
market price of a share of the common stock.
Cost of Goods Sold appears on a multi-step income statement but not on a single-step
income statement.
A memorandum entry is an entry in the journal that notes a significant event but has no
debit or credit amount.
The Sarbanes-Oxley Act was passed by the Public Company Accounting Oversight
Board.
The indirect and direct methods use different computations but produce the same
amount of net cash provided by operating activities.
The normal balance of an account is the increase side of the account.
In an audit report in the annual report, a qualified opinion states that the financial
statements are presented fairly in all material respects.
Liabilities are economic resources that are expected to benefit the business in the future.
Contingencies that are reasonably possible have a greater chance of occurring but are
not likely.
Burglar alarms, fire alarms, and security cameras improve internal control.
The Merchandise Inventory account is an asset account that is used only for goods
purchased that the business owns and intends to resell to customers.
Merchandisers must adjust for estimated sales returns and inventory shrinkage.
The balance sheet allows decision makers to determine their opinion about the financial
position of the company.
Historical Art is a new business. During its first year of operations, credit sales were
$50,000 and collections on credit sales were $34,000. One account of $500 was written
off. Management uses the percent-of-sales method to account for bad debts expense and
estimates 3% of credit sales to be uncollectible. The ending balance of Allowance for
Bad Debts account is ________.
A) $1,000
B) $1,500
C) $465
D) $2,505
Which of the following will be categorized as a financing activity on the statement of
cash flows?
A) Cash received by selling old equipment
B) Cash paid for purchase of new machinery
C) Cash paid for rent
D) Cash received from issuance of shares of common stock
Which of the following sections of the statement of cash flows include activities that
create revenue and expenses of the business?
A) the investing activities section
B) the financing activities section
C) the operating activities section
D) the non-cash investing and financing section
Inventory turnover measures ________.
A) the days’ sales in inventory ratio
B) how rapidly merchandise inventory is purchased
C) how rapidly merchandise inventory is sold
D) the time period for inventory to become obsolete
Which of the following is not typically shown as a separate column in a cash receipts
journal that uses the perpetual inventory system?
A) Interest Revenue CR column
B) Cost of Goods Sold DR, Merchandise Inventory CR column
C) Sales Revenue CR column
D) Sales Discounts Forfeited CR column
Which of the following is the correct accounting treatment for a patent?
A) A patent must be shown as a current asset on the balance sheet.
B) A patent must be depreciated or impaired, but not amortized.
C) A patent must be capitalized and amortized over 20 years or less.
D) A patent must be expensed, not capitalized, in the period in which it is purchased.
Danby, Inc. provides the following data from its income statement for 2018:
Calculate the gross profit percentage. (Round your answer to two decimal places.)
A) 17.37%
B) 63.46%
C) 100.00%
D) 36.54%
Atlantis Corporation has 12,000 shares of 14%, $78 par noncumulative preferred stock
outstanding and 29,000 shares of no-par common stock outstanding. At the end of the
current year, the corporation declares a dividend of $188,000. How is the dividend
allocated between preferred and common stockholders?
A) The dividend is allocated $6023 to preferred stockholders and $132,976 to common
stockholders.
B) The dividend is allocated $131,040 to preferred stockholders and $56,960 to
common stockholders.
C) The dividend is allocated $55,024 to preferred stockholders and $132,976 to
common stockholders.
D) The dividend is allocated $316,680 to preferred stockholders and $128,680 to
common stockholders.
The asset turnover ratio measures ________.
A) how efficiently a business uses its sales to finance the assets
B) how efficiently a business uses its average total assets to generate sales
C) how efficiently a business uses its net profit to finance the assets
D) how the ending inventory helps increase the value of assets
When 1000 shares of $3 stated value common stock is issued at $18 per share,
________.
A) Common Stock — $3 Stated is credited for $18,000
B) the account titled Paid-In Capital in Excess of Stated-Common is used to record the
issue price of the stock
C) the difference between the issue price and the stated value is credited to Paid-In
Capital in Excess of Stated-Common
D) the accounting is exactly the same as the accounting for par value stock
Which of the following describes the risk assessment component of internal control?
A) Internal auditors monitor company controls to safeguard assets, and external
auditors monitor the controls to ensure that the accounting records are accurate.
B) Risk assessment is the “tone at the top” of the business.
C) A company must identify its risks and take necessary steps to minimize them.
D) Risk assessment is designed to ensure that the business’s goals are achieved.
Ending inventory for the current accounting period is overstated by $2,700. What effect
will this error have on Cost of Goods Sold and Net Income for the current accounting
period?
A)
B)
C)
D)
An accounting information system is said to be relevant, if it ________.
A) works smoothly with the business’s employees and organizational structure
B) safeguards a business’s assets and reduces the likelihood of fraud and errors
C) provides information that will improve decision making and reduce uncertainty
D) accommodates changes in the business over time
The equity of Alliance Company is $170,000 and the total liabilities are $30,000. The
total assets are ________.
A) $340,000
B) $60,000
C) $140,000
D) $200,000
Celebrate Holidays Company signed a 7%, 10-year note for $161,000. The company
paid an installment of $2500 for the first month. What portion of the first monthly
payment is principal? (Do not round any intermediate calculations, and round your final
answer to the nearest dollar.)
A) $1561
B) $4061
C) $4830
D) $15,917
Which of the following is true of the Premium on Bonds Payable account? (The bonds
are due in ten years.)
A) It is added to the Bonds Payable balance and shown with long-term liabilities on the
balance sheet.
B) It is added to the Bonds Payable balance and shown with stockholders’ equity on the
balance sheet.
C) It is subtracted from the Bonds Payable balance and shown with long-term liabilities
on the balance sheet.
D) It is subtracted from the Bonds Payable balance and shown with the current
liabilities on the balance sheet.
Regarding the new revenue recognition standards, which of the following statement is
correct?
A) The gross method should be used only if the seller does not expect to collect from
the customer within the discount period
B) Under the gross method, Sales Discounts Forfeited is credited when customers do
not pay within the discount period.
C) Under the net method, Sales Discounts are debited when customers pay within the
discount period.
D) The gross method should be used if the seller expects to collect from the customer
within the discount period.
Common-size statements ________.
A) allow the users to compare numbers in relative terms rather than absolute amounts
B) report dollar amounts and percentages
C) create a dollar value bias
D) show the same percentages that appear in a horizontal analysis
Vargas, Inc. sold goods with a selling price of $50,000 in 2019 and estimated 5%
warranty expense for the year. Customers complained of defects, and goods with a cost
of $1500 had to be replaced. Which of the following is the correct journal entry for
honoring the warranties with goods?
A)
B)
C)
D)
A corporation has been sued for product failures allegedly resulting in injuries to the
individuals bringing the lawsuit. The company’s lawyers believe it is more than remote,
but less than probable, that the lawsuit will result in an actual liability. Which of the
following actions should be taken by the company’s management?
A) The liability should be estimated and recorded as an expense.
B) The situation should be described in a note to the financial statements.
C) The possible liability should be ignored.
D) Management should consider resigning.
Which one of the following account groups normally has a credit balance?
A) assets and liabilities
B) equity and assets
C) liabilities and revenues
D) assets and expenses
Ohio, Inc. uses the indirect method to prepare the statement of cash flows. Refer to the
following income statement:
Ohio, Inc.
Income Statement
Year Ended December 31, 2018
Additional information provided by the company includes the following:
Current assets, other than cash, decreased by $5200.
Current liabilities increased by $2300.
Compute the net cash provided by (used for) operating activities.
A) $(28,600)
B) $(55,800)
C) $10,200
D) $33,600
Classic Autos specializes in selling gently used specialty sports cars and uses the
specific identification method of determining ending inventory and cost of goods sold.
Item 507K was sold for $90,000. Classic purchased the sports car for $50,000 and paid
$1,800 for freight in and $1,000 for freight out. What is the cost of goods sold?
A) $38,200
B) $51,800
C) $51,000
D) $50,000
For each of the following scenarios, state the type of investment:
1. Available-for-sale debt investment
2. No significant influence equity investment
3. Trading debt investment
4. Significant influence equity investment
5. Held-to-maturity debt investment
6. Controlling interest equity investment
Indicate your answer by placing the correct number next to the scenario.
a. _____ Arnold Corp. owns a debt security in Brady Corp. Arnold plans on holding the
debt for thirty days.
b. _____ Maxwell Inc. owns 70% of the voting stock of Russell Corp.
c. _____ Millie Inc. owns a debt security of Auntie Inc. Millie intends to and has the
ability to hold the debt security until maturity.
In 2018, a corporation purchased a small business for $250,000. The market value of
the small business’s assets was $400,000, and the market value of the liabilities was
$200,000. The corporation recorded goodwill of $50,000 at the time of acquisition. At
the end of 2019, it measured goodwill and found it had a remaining fair value of only
$20,000. At year-end 2019, the corporation will ________.
A) record a loss on sale of assets
B) record an impairment loss
C) record accumulated depletion
D) record a gain in goodwill
Which of the following statements regarding debt securities is incorrect?
A) Debt securities include Held-to-Maturity Debt Investments, Trading Debt
Investments, and Available-for-Sale Debt Investments.
B) When recording the receipt of interest revenue on Trading Debt Investments, Interest
Revenue is credited.
C) If a Held-to-Maturity Debt Investment is purchased at a discount or premium, the
discount/premium must be amortized when the interest revenue is earned.
D) All investments in debt securities are categorized as long-term assets.
The sum of all the depreciation expense recorded to date for a depreciable asset is
called ________.
A) book value
B) residual value
C) depreciation expense
D) accumulated depreciation
The Allowance for Bad Debts account has a credit balance of $2,000 before the
adjusting entry for bad debts expense. The company’s management estimates that 4% of
net credit sales will be uncollectible for the year 2019. Net credit sales for the year
amounted to $250,000. What is the amount of Bad Debts Expense reported on the
income statement for 2019?
A) $10,000
B) $12,000
C) $5,000
D) $8,000
The price/earnings ratio _________.
A) represents the market price of one share of common stock
B) of 8.5 implies that the company’s earnings per share is 8.5 times the market price of
one share of its common stock
C) is used by investors to measure the liquidity of their portfolio
D) is most useful when comparing one company to another
The income statement section of the worksheet includes ________.
A) Land and Salaries Payable
B) Common Stock, Retained Earnings, and Dividends
C) Furniture and Cash
D) Service Revenue and Utilities Expense
Which of the following is affected as a result of an error in performing the physical
count of inventory at the end of the accounting period?
A) sales revenue
B) operating expenses
C) net income
D) net cost of purchases
Which of the following is a cash outflow for a financing activity on the statement of
cash flows?
A) payment of interest on a loan
B) payment for purchasing Merchandise Inventory
C) payment of dividends
D) payments to the government for taxes
Which of the following is true of retained earnings?
A) Retained earnings decrease with payment of dividends.
B) Retained earnings increase with purchase of assets.
C) Retained earnings decrease with collection of revenue.
D) Retained earnings increase with payment on account.
A company has purchased inventory and received an invoice that requires the buyer to
pay the transportation costs for delivering the merchandise. The terms are ________.
A) FOB destination
B) FOB shipping point
C) FOB, 2/10, n/30
D) FOB in transit
On December 31, 2018, Action Services, Inc. prepared the following accrual
adjustment:
Action uses reversing entries. Prepare the reversing entry on January 1, 2019. Omit
explanation.
For each of the following amounts paid by a purchaser, determine whether the amount
is debited to Land, Land Improvements, or Building.
On December 31, 2018, Barry’s, Inc. borrowed $500,000 by signing a five-year, 8%
note payable. The note is payable in five yearly installments of $100,000 plus interest,
due at the end of every year beginning on December 31, 2019. What amount represents
the current portion of Long-term Notes Payable at December 31, 2018?
A company purchased inventory for $2,000 from a vendor on account, FOB shipping
point, with terms of 2/10, n/30. The company paid $100 cash for freight in. Prepare the
journal entry to record payment of the invoice, within 10 days of the invoice date, by
the purchaser. (Assume a perpetual inventory system.) Omit explanation.
Extracts from the balance sheet of Detroit, Inc. are as follows:
Compute the acid-test ratio.
For each of the following characteristics of a business organization, state whether it
applies to a sole proprietorship (SP), partnership (P) or a corporation (C). There may be
more than one correct answer for a characteristic.
Provide a definition for each of the following accounting principles.
Define assets. Provide three examples of assets.
For each of the following assets, provide a description and state the related expense.
On January 1, 2019, Sapphire Manufacturing Corporation purchased a machine for
$40,000,000. The corporation expects to use the machine for 24,000 hours over the next
six years. The estimated residual value of the machine at the end of the sixth year is
$40,000. The schedule of usage of the machine is below.
Prepare the depreciation schedule using the units-of-production method of depreciation.
Scotland, Inc. issued a $5,000 face value, 10%, five-year bond at 98. What will be the
journal entries at the maturity of the bond? The bonds have semiannual interest, and the
company uses the straight-line method of amortization. Omit explanations.
On April 1, 2018, Nunez Manufacturers purchases equipment for $100,000, paying
$30,000 in cash and signing a 10-year mortgage for $70,000 at 8% annual interest.
Prepare the journal entry to record the acquisition of the equipment. Omit explanation.
On October 1, 2019, Norway, Inc. borrowed $225,000 by signing a nine-month, 8%
note payable. Interest was accrued on December 31, 2019. Prepare the journal entry on
July, 1, 2020, the date the note was paid. Omit explanation.
Prepare the journal entries for the following petty cash transactions of Williamson
Dental Supplies. Omit explanations.
Deborah Consultants had the following accounts and account balances after adjusting
entries. Assume all accounts have normal balances. Calculate the amount of service
revenue and prepare the adjusted trial balance for Deborah Consultants as of December
31, 2019.