1) Two main accounting principles used in accrual accounting are matching and full
closure.
2) Equivalent units of production are always the same as the total number of physical
units finished during the period.
3) Companies can report credit card expense as a discount deducted from sales or as a
selling expense.
4) The periodic inventory system requires updating the inventory account only at the
end of the period to reflect the quantity and cost of both the goods available and the
goods sold.
5) Joint costs can be allocated either using a physical basis or a value basis.
6) The FASB recommends that the operating section of the statement of cash flows be
reported using the direct method.
7) Brown Company sold supplies in the amount of 15,000 euros to a French company
when the exchange rate was $1.15 per euro. At the time of payment, the exchange rate
decreased to $1.12. Brown must record a loss of $450.
8) In closing the accounts at the end of a period, the partners’ capital accounts are
credited for their share of the partnership loss or debited for their share of the
partnership net income.
9) An overstatement of ending inventory will cause an overstatement of assets and an
understatement of equity on the balance sheet.
10) The closing process is a step in the accounting cycle that prepares accounts for the
next accounting period.
11) A company made an error in recording the 2009 purchase of computer equipment as
an expense. This was discovered in 2011. The item should be reported as a prior period
adjustment on the 2009 income statement.
12) Equity securities giving an investor significant influence over an investee are
always considered short-term investments.
13) The inventory turnover ratio is computed by dividing average merchandise
inventory by cost of goods sold.
14) If a U. S. company’s credit sale to an international customer allows payment to be
made in a foreign currency, the transaction is recorded using the exchange rate on the
date of sale.
15) If all columns balance upon completion of a work sheet, you can be sure that no
errors were made in preparing the work sheet.
16) The accounting equation can be restated as: Assets – Equity = Liabilities.
17) Long-term investments in available-for-sale securities are reported at fair value on
the balance sheet.
18) Which of the following items are management concepts that were created to
improve companies’ performances?
A.Just-in-time manufacturing
B.Customer orientation
C.Total quality management
D.Continuous improvement
E.All of these
19) Based on the information provided below, complete the following worksheet to be
used to prepare the statement of cash flows using the indirect method.
(a) Net income for the year was $30,000.
(b) Dividends of $10,000 were declared and paid.
(c) Stylish’s only noncash expense was depreciation which totaled $50,000.
(d) The company purchased plant assets for $70,000.
(e) Notes payable in the amount of $40,000 were issued during the year for cash.
20) A company paid $150,000, plus a 6% commission and $4,000 in closing costs for a
property. The property included land appraised at $87,500, land improvements
appraised at $35,000, and a building appraised at $52,500. What should be the
allocation of this property’s costs in the company’s accounting records?
A.Land $75,000; Land Improvements, $30,000; Building, $45,000
B.Land $75,000; Land Improvements, $30,800; Building, $46,200
C.Land $81,500; Land Improvements, $32,600; Building, $48,900
D.Land $79,500; Land Improvements, $32,600; Building, $47,700
E.Land $87,500; Land Improvements; $35,000; Building; $52,500
21) The primary objective of financial accounting is:
A.To serve the decision-making needs of internal users
B.To provide financial statements to help external users analyze an organization’s
activities
C.To monitor and control company activities
D.To provide information on both the costs and benefits of looking after products and
services
E.To know what, when, and how much to produce
22) Amortization:
A.Is the systematic allocation of the cost of an intangible asset to expense over its
estimated useful life
B.Is the process of allocating to expense the cost of a plant asset to the accounting
periods benefiting from its use
C.Is the process of allocating the cost of natural resources to periods when they are
consumed
D.Is an accelerated form of expensing an asset’s cost
E.Is also called depletion
23) The cash flow on total assets ratio is calculated by:
A.Dividing cash flows from operations by average total assets
B.Dividing total cash flows by average total assets
C.Dividing average total assets by cash flows from investing activities
D.Dividing average total assets by total cash flows
E.Total cash flows divided by average total assets times 365
24) The entry necessary to establish a petty cash fund should include:
A.A debit to Cash and a credit to Petty Cash
B.A debit to Cash and a credit to Cash Over and Short
C.A debit to Petty Cash and a credit to Cash
D.A debit to Petty Cash and a credit to Accounts Receivable
E.A debit to Cash and a credit to Petty Cash Over and Short
25) In applying the lower of cost or market method to inventory valuation, market is
defined as:
A.Historical cost
B.Current replacement cost
C.Current sales price
D.FIFO
E.LIFO
26) Which of the following is the best explanation for why it is necessary to calculate
equivalent units of production in a process costing environment?
A.In most manufacturing environments, it is not possible to conduct a physical count of
units
B.Companies often use a combination of a process costing and job order costing
systems
C.In most process costing systems, direct materials are added at the beginning of the
process while conversion costs are added evenly throughout the manufacturing process
D.All of the work to make a unit 100% complete and ready to move to the next stage of
production or to finished goods inventory may not have been completed in a single time
period
E.In most cases, there is no difference between physical units and equivalent units of
production
27) Monte Ray leases office space for $7,000 per month. On January 3, Monte Ray
incurs $75,000 to improve his leased office space. These improvements are expected to
yield benefits for 8 years. Ray has 6 years remaining on his lease. Compute the amount
of expense that should be recorded the first year related to the improvements.
A.$19,500
B.$7,000
C.$12,500
D.$9,375
E.$16,375
28) On December 1, Miller Company borrowed $300,000, at 8% annual interest, from
the Nomo Bank. Miller has 60 days before the first payment is required. What is the
adjusting entry that Miller would need to make on December 31, the calendar year-end?
A.Debit Interest Payable, $2,000; credit Interest Expense, $2,000
B.Debit Interest Expense, $2,000; credit Interest Payable, $2,000
C.Debit Interest Expense, $2,000; credit Cash, $2,000
D.Debit Interest Expense, $4,000; credit Interest Payable, $4,000
E.Debit Interest Expense, $24,000; credit Interest Payable, $24,000
29) All of the following statements related to U.S. GAAP and IFRS are true except:
A.Accounting for basic inventory transactions is the same under the two systems.
B.The closing process for merchandisers is the same under both systems.
C.U.S. GAAP offers little guidance about the presentation order of expenses.
D.Neither system requires separate disclosure of items when their size, nature, or
frequency are important for proper interpretation.
E.Neither system defines operating income.
30) The quality of receivables refers to:
A.The creditworthiness of sellers
B.The speed of collection
C.The likelihood of collection without loss
D.Sales turnover
E.The interest rate
31) An employee earned $47,000 during the year working for an employer. The FICA
tax rate for Social Security is 6.2% and the FICA tax rate for Medicare is 1.45%. The
employee’s annual FICA taxes amount is:
A.$681.50
B.$2,914.00
C.$3,595.50
D.$7,191.00
E.Zero, since the employee’s pay exceeds the FICA limit
32) An annual reporting period consisting of any twelve consecutive months is known
as:
A.Fiscal year
B.Calendar year
C.Interim financial period
D.Natural business year
E.Seasonal year
33) If throughout an accounting period the fees for legal services paid in advance by
clients are recorded in an account called Unearned Legal Fees, the end-of-period
adjusting entry to record the portion of those fees that has been earned is:
A.Debit Cash and credit Legal Fees Earned
B.Debit Cash and credit Unearned Legal Fees
C.Debit Unearned Legal Fees and credit Legal Fees Earned
D.Debit Legal Fees Earned and credit Unearned Legal Fees
E.Debit Unearned Legal Fees and credit Accounts Receivable
34) The Discount on Bonds Payable account is:
A.A liability
B.A contra liability
C.An expense
D.A contra expense
E.A contra equity
35) Cabot Company collected the following data regarding production of one of its
products. Compute the direct materials cost variance.
A.$6,000 favorable
B.$3,570 unfavorable
C.$2,430 favorable
D.$6,000 unfavorable
E.$3,570 favorable
36) A company has an overhead application rate of 125% of direct labor costs. How
much overhead would be allocated to a job if it required total labor costing $20,000?
A.$5,000
B.$16,000
C.$25,000
D.$125,000
E.$250,000
37) On July 24 of the current year, The Georgia Peach Company experienced a natural
disaster that destroyed the company’s entire inventory. At the beginning of July, the
company reported beginning inventory of $226,750. Inventory purchased during July
(until the date of the disaster) was $197,800. Sales for the month of July through July
24 were $642,500. Assuming the company’s typical gross profit ratio is 50%, estimate
the amount of inventory destroyed in the natural disaster.
A.$212,275
B.$103,300
C.$217,950
D.$321,250
E.$157,788
38) On January 1 of Year 1, Drum Line Airways issued $3,500,000 of par value bonds
for $3,200,000. The bonds pay interest semiannually on January 1 and July 1. The
contract rate of interest is 7% while the market rate of interest for similar bonds is 8%.
The bond premium or discount is being amortized at a rate of $10,000 every six
months.
The company’s December 31, Year 1 balance sheet should reflect total liabilities
associated with the bond issue in the amount of:
A.$3,220,000
B.$3,342,500
C.$3,097,500
D.$3,780,000
E.$3,902,500
39) A target income refers to:
A.Income at the break-even point
B.Income from the most recent period
C.Income planned for a future period
D.Income only in a multiproduct environment
E.Income at the minimum contribution margin
40) Amounts received in advance from customers for future products or services:
A.Are revenues
B.Increase income
C.Are liabilities
D.Are not allowed under GAAP
E.Require an outlay of cash in the future
41) On October 1, Robinson Company sold merchandise in the amount of $5,800 to
Rosser, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robinson
uses the perpetual inventory system. The journal entry or entries that Robinson will
make on October 1 is:
A.Choice A
B.Choice B
C.Choice C
D.Choice D
42) The difference between actual and standard cost caused by the difference between
the actual price and the standard price is called the:
A.Standard variance
B.Quantity variance
C.Volume variance
D.Controllable variance
E.Price variance
43) Salvage value is:
A.Also called residual value
B.Also called scrap value
C.An estimate of the asset’s value at the end of its benefit period
D.A factor relevant to determining depreciation
E.All of these
44) Badger and Fox are forming a partnership. Badger invests a building that has a
market value of $350,000; the partnership assumes responsibility for a $125,000 note
secured by a mortgage on the property. Fox invests $100,000 in cash and equipment
that has a market value of $75,000. For the partnership, the amounts recorded for total
assets and for total capital account are:
A.Total assets $525,000; total capital $400,000
B.Total assets $400,000; total capital $400,000
C.Total assets $650,000; total capital $650,000
D.Total assets $400,000; total capital $525,000
E.Total assets $525,000; total capital $525,000
45) Net income divided by net sales is the:
A.Return on total assets
B.Profit margin
C.Current ratio
D.Total asset turnover
E.Days’ sales in inventory
46) A company estimates that warranty expense will be 4% of sales. The company’s
sales for the current period are $185,000. The current period’s entry to record the
warranty expense is:
A.Debit Warranty Expense $7,400; credit Sales $7,400
B.Debit Warranty Expense $7,400; credit Estimated Warranty Liability $7,400
C.Debit Estimated Warranty Liability $7,400; credit Warranty Expense $7,400
D.Debit Estimated Warranty Liability $7,400; credit Cash $7,400
E.No entry is recorded until the items are returned for warranty repairs
47) Bard Manufacturing uses a job order cost accounting system. During one month
Bard purchased $198,000 of raw materials on credit; issued materials to production of
$195,000 of which $30,000 were indirect. Bard incurred a factory payroll of $150,000,
paid in cash, of which $40,000 is classified as indirect labor. Bard uses a predetermined
overhead application rate of 150% of direct labor cost. The total manufacturing costs
added during the period are:
A.$440,000
B.$470,000
C.$500,000
D.$570,000
E.$540,000
48) A company purchased $11,200 of merchandise on credit. Identify the journal the
transaction would be recorded in.
A.Cash disbursements journal
B.Sales journal
C.Cash receipts journal
D.Purchases journal
E.General journal
49) Coffer Co. is analyzing two projects for the future. Assume that only one project
can be selected.
If the company is using the payback period method and it requires a payback of three
years or less, which project should be selected?
A.Project Y
B.Project X
C.Both X and Y are acceptable projects
D.Neither X nor Y is an acceptable project
E.Project Y because it has a lower initial investment
50) The general journal provides a place for recording all of the following except:
A.The transaction date
B.The names of the accounts involved
C.The amount of each debit and credit
D.An explanation of the transaction
E.The balance in each account
51) A company is considering an investment that will return $20,000 semiannually at
the end of each semiannual period for 4 years. If the company requires an annual return
of 10%, what is the maximum amount it is willing to pay for this investment?
A.Not more than $63,398
B.Not more than $126,796
C.Not more than $80,000
D.Not more than $129,264
E.Not more than $160,000
52) An asset’s book value is $18,000 on June 30, Year 6. The asset is being depreciated
at an annual rate of $3,000 on the straight-line method. Assuming the asset is sold on
December 31, Year 7 for $15,000, the company should record:
A.A loss on sale of $1,500
B.A gain on sale of $1,500
C.Neither a gain nor a loss is recognized on this type of transaction
D.A gain on sale of $3,000
E.A loss on sale of $3,000
53) Breanna Boutique purchased on credit £50,000 worth of clothing from a British
company when the exchange rate was $1.97 per British pound. At the year-end balance
sheet date the exchange rate increased to $2.76. Breanna Boutique must record a:
A.gain of $39,500
B.loss of $39,500
C.gain of $138,000
D.loss of $138,000
E.neither a gain nor loss
54) Assets created by selling goods and services on credit are:
A.Accounts payable
B.Accounts receivable
C.Liabilities
D.Expenses
E.Equity
55) The hurdle rate is often set at:
A.The rate the company could earn if the investment were placed in the bank
B.The company’s cost of capital
C.10% above the IRR of current projects
D.10% above the ARR of current projects
E.The rate at which the company is taxed on income
56) During March, the production department of a process manufacturing system
completed a number of units of a product and transferred them to finished goods. Of the
units transferred, 25,000 were in process at the beginning of March and 110,000 were
started and completed in March. March’s beginning inventory units were 100%
complete with respect to materials and 55% complete with respect to labor. At the end
of March, 30,000 additional units were in process in the production department and
were 100% complete with respect to materials and 30% complete with respect to labor.
The production department incurred direct labor cost of $578,900 and its beginning
inventory included labor cost of $54,700. Compute the direct labor cost per equivalent
unit for the department using the weighted-average method.
A.$4.69
B.$3.84
C.$4.86
D.$4.28
E.$4.40
57) Explain what a predetermined overhead allocation rate is, how it is calculated, and
why it is used.
58) _______________ refers to the expected proceeds from converting an asset into
cash.
59) A company purchased a truck on October 1 of the current year at a cost of $40,000.
The truck is expected to last six years and has a salvage value of $2,200. The company’s
annual accounting period ends on December 31.
1> What is the depreciation expense for the current year, assuming the straight-line
method is used?
2> What is the depreciation expense for the current year, assuming the
double-declining-balance method is used?
60) A company’s stock is selling for $35 per share at year-end. This current year it paid
shareholders a $2.45 per share cash dividend, reported earnings per share of $12.00, and
had 750,000 common shares outstanding at year-end. Calculate the company’s dividend
yield.
61) Paco and Kate invested $99,000 and $126,000, respectively, in a partnership they
began one year ago. Assuming the partnership earned $120,000 during the current year;
compute the share of the net income each partner should receive under each of these
independent assumptions.