Contingencies that are reasonably possible are not described in the notes to the financial
statements.
Any person or business to whom a business owes money is called the business’s
creditor.
After a machine is installed and is up and running, repairs and maintenance are
recorded as part of the cost of the machine.
Electronic data interchange (EDI) allows a retailer’s computers to communicate with the
computers of suppliers.
The Merchandise Inventory account is an expense account that is used only for goods
purchased that the business owns and intends to resell to customers.
Long-term liabilities can be structured either with an equal principal payment or with an
equal total payment.
The purchase discount amount is calculated on the amount of the invoice minus the
returns and allowances.
In a manual accounting information system, reports and financial statements must be
created using Word documents, Excel spreadsheets, or PowerPoint.
Accountants assume that the dollar’s purchasing power is stable.
Short Company owns a 2% investment in the common stock of Long Company. The
receipt of a cash dividend from Long will have no effect on Short’s total equity.
Under IFRS, “probable” is defined as more than a 50% chance.
If a customer makes payment on a receivable that has already been written off, the
receivable account is reestablished.
The useful life of a plant asset is the length of the service period expected from the
asset.
Investments accounted for by the equity method are recorded at cost at the time of
purchase.
The Financial Accounting Standards Board is a U.S. governmental agency that oversees
the creation and governance of accounting standards.
Because amounts owed for products or services on account are typically due in 60 days,
they are current liabilities.
The collection of time records for company employees is an accounting information
system activity that is classified as a business transaction involving the sale of
merchandise inventory.
Decision makers are looking for an international accounting language because the most
significant change in the business world in the last decade has been the huge increase in
international commerce.
The price/earnings ratio shows the market price of $1 of earnings.
Deferred expenses are also called prepaid expenses.
The use of computer firewalls is an essential element of good internal controls for
e-commerce.
Paid-in capital is externally generated capital and results from transactions with
outsiders.
The last two columns generally found on the right side of the worksheet are the income
statement columns.
Shell, Inc. uses the indirect method to prepare the statement of cash flows. Refer to the
following section of the comparative balance sheet:
Shell, Inc.
Comparative Balance Sheet
December 31, 2018 and 2017
The change in Accounts Receivable is shown as a negative cash flow in the adjustments to
net income.
Companies can report a negative amount in retained earnings.
Gains and losses on the sale of plant assets are reported as discontinued operations.
A company that is controlled by another corporation is called a subsidiary company.
Plant assets remain on the business’s books until they are disposed of.
The current ratio is calculated using the values from the income statement.
Asset and liability accounts may be closed to the Income Summary account.
As long as the same person deposits customer checks and makes the journal entry to
customer accounts, there will be good internal control over cash receipts.
Dividends are a distribution of a corporation’s earnings to stockholders.
FOB destination represents a situation in which the buyer takes title to the goods after
the goods leave the seller’s place of business.
Each receivable transaction involves two parties – the one who takes on the obligation
and the one who will collect the cash.
Which is a true statement regarding the accounting equation?
A) The equation can be stated as assets minus liabilities equals equity.
B) The equation consists of three parts: assets, liabilities, and net income.
C) The equation is an optional tool for accountants to use.
D) The equation does not need to balance during a specific period.
If an adjusting entry includes a debit to Rent Expense, it indicates that the payment of
rent had been previously recorded as a(n) ________.
A) deferred expense
B) depreciation expense
C) accrued expense
D) accrued revenue
Cougar, Inc. had the following balances and transactions during 2019:
What would be reported as Cost of Goods Sold on the income statement for the year
ending December 31, 2019 if the perpetual inventory system and the weighted-average
inventory costing method are used? (Round the unit costs to two decimal places and total
costs to the nearest dollar.)
A) $21,190
B) $32,600
C) $15,410
D) $11,410
Which of the following will be categorized as an operating 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 to employees
D) Cash received from issuance of shares of common stock
Which of the following statements regarding earnings per share (EPS) is incorrect?
A) EPS for income from continuing operations must be reported on the face of the
income statement.
B) EPS is the most widely used of all business statistics.
C) When computing EPS, preferred dividends are subtracted from net income because
the preferred stockholders have the first claim to dividends.
D) EPS reports the amount of income (loss) for each share of the company’s issued
common stock.
A business buys $300 of office supplies on account. Which of the following accounts is
debited?
A) Cash
B) Accounts Payable
C) Office Supplies
D) Accounts Receivable
Holland Corporation’s annual report is as follows.
Based on the information provided, find the rate of return on common stockholders’ equity
on March 31, 2018. (Round your final answer two decimal places.)
A) 8.36%
B) 9.32%
C) 8.67%
D) 7.99%
The only part that differs in a statement of cash flows prepared by the direct method
from one prepared by the indirect method is the ________.
A) financing activities section
B) investing activities section
C) operating activities section
D) non-cash investing and financing activities section
Under the direct write-off method, the entry to write off an uncollectible account will
include ________.
A) a debit to Bad Debts Expense account
B) a debit to the customer’s Account Receivable
C) a credit to the Allowance for Bad Debts
D) No entry is made to write off uncollectible accounts.
Keith, an employee of Sunbeam, Inc., has gross salary for May of $15,000. The entire
amount is under the OASDI limit of $118,500 and thus subject to FICA. He is also
subject to federal income tax at a rate of 20%. Which of the following is a part of the
journal entry to record the disbursement of his net pay? (Assume a FICA—OASDI Tax
of 6.2% and FICA—Medicare Tax of 1.45%.) (Round the final answer to the nearest
dollar.)
A) debit to Cash for $10,852.50
B) credit to Cash for $10,852.50
C) debit to Employee Income Tax Payable of $10,852.50
D) debit to FICA Tax Payable of $10,852.50
Which of the following is a disadvantage when a business accepts credit cards or debit
cards from customers?
A) The business bears the responsibility of collecting cash from the customer.
B) The business bears the risk of nonpayment by the customer.
C) The business pays a processing fee.
D) The business checks customers’ credit ratings.
Which of the following is true of a corporation?
A) A corporation cannot be privately held.
B) The earnings of a corporation may be subject to double taxation.
C) A corporation has a limited life.
D) The stockholders of a corporation have unlimited liability for the corporation’s debt.
Modern Moving Company reported the following amounts on its balance sheet as of
December 31, 2019 and December 31, 2018:
For the vertical analysis, what is the percentage of stockholders’ equity as of December 31,
2019? (Round your answer to two decimal places.)
A) 100.00%
B) 59.36%
C) 59.24%
D) There is not enough information provided to make this computation.
Equity of a corporation is broken out into two components. Which of the following are
the two components of the equity of a corporation?
A) current assets and fixed assets
B) common stock and liabilities
C) revenues and expenses
D) contributed capital and retained earnings
Rockville Corporation makes a $1,200 purchase of merchandise inventory on account.
This transaction will be recorded in the ________.
A) cash payments journal
B) sales journal
C) cash receipts journal
D) purchases journal
On March 31, 2018, Water Front, Inc. shows the following data on its balance sheet:
Assume that Water Front sells 1500 shares of treasury stock at $33 per share. What is total
stockholders’ equity after this transaction?
A) $6,940,500
B) $7,039,500
C) $6,979,500
D) $7,000,500
The financial statements of Denison Furniture Company include the following items:
What is the 2019 cash ratio? (Round your answer to two decimal places)
A) 0.18
B) 0.10
C) 0.35
D) 0.23
Which of the following statements is true of the Common Stock account?
A) It is an equity account that has a normal credit balance.
B) It is a liability account that has a normal credit balance.
C) It is a liability account that has a normal debit balance.
D) It is an equity account that has a normal debit balance.
Which of the following is true when the estimate of an asset’s useful life is changed?
A) The new estimate is ignored until the last year of the asset’s life.
B) The depreciation expense in the prior years are restated.
C) Prior years’ financial statements must be restated.
D) The asset’s remaining depreciable book value will be spread over the asset’s
remaining life.
All available-for-sale (AFS) debt investments are reported on the balance sheet at
________.
A) historical cost
B) replacement cost
C) current market value
D) net realizable value
Weston Jewelers uses the perpetual inventory system. On April 2, Weston sold
merchandise with a cost of $1,257 for $2,200 to a customer on account with the terms
3/15, n/30. Weston paid $125 for delivery of the merchandise. Calculate the amount of
net sales revenue. (Round any intermediary calculations and your final answer to the
nearest dollar.)
A) $2,325
B) $2,200
C) $2,134
D) $1,257
The current ratio measures ________.
A) a company’s ability to sell its long-term assets
B) a company’s ability to pay current liabilities from its total assets
C) a company’s ability to pay current liabilities from current assets
D) a company’s profitability during a particular period
Regarding the statement of stockholders’ equity, which of the following statements is
incorrect?
A) The statement of stockholders’ equity has more information than the statement of
retained earnings because it reports the changes in all stockholders’ equity accounts.
B) The statement of stockholders’ equity does not show the changes to the Retained
Earnings account because that information is provided in the statement of retained
earnings.
C) The statement of stockholders’ equity is an option for reporting the changes in
stockholders’ equity of a corporation.
D) The statement of stockholders’ equity reports the number of shares and any changes
during the year in preferred, common, and treasury stock.
The accountant of Peyton Financial Services failed to make an adjusting entry to record
$7,000 of depreciation expense. Which of the following statements is true?
A) The total revenue will be overstated.
B) The total revenue will be understated.
C) The total expenses will be overstated.
D) The total expenses will be understated.
Which of the following items are included as an operating activity on the statement of
cash flows, using the direct method?
A) purchase of treasury stock
B) payment of dividends
C) issuance of stock
D) payment of interest expense
Match the benefit of an effective accounting information system with the definition.
A) Provides information that will improve decision making and reduce uncertainty.
B) Benefits received outweigh the cost of the system.
C) Works smoothly with the business’s employees and organization structure.
D) Can accommodate changes in the business over time.
E) Provides safeguards for a business’s assets and reduces the likelihood of fraud and
errors.
Which of the following is classified as an asset account?
A) Prepaid Insurance
B) Notes Payable
C) Dividends
D) Unearned Revenue
David, an employee of Cecil, Inc., has gross salary for March of $5,900. The entire
amount is under the OASDI limit of $118,500, and thus subject to FICA. He is also
subject to federal income tax at a rate of 30%. His year-to-date pay has already
exceeded the $7,000 cap for FUTA and SUTA. The journal entry to record the
employer’s payroll tax expense includes a credit to FICA–OASDI Taxes Payable for
$365.80. (Assume a FICA–OASDI Tax of 6.2% and FICA–Medicare Tax of 1.45%.)
The bank’s routing number ________.
A) contains 10 digits
B) identifies the bank upon which the payment is drawn
C) includes the account number of the business
D) is not shown on the check
On July 1, 2018, Mason & Beech Services issued $33,000 of 10% bonds that mature in
five years. They were issued at par. The bonds pay semiannual interest payments on
June 30 and December 31 of each year. On December 31, 2018, what is the total
amount paid to bondholders?
A) $1650
B) $3300
C) $825
D) $1100
Which of the following is considered an operating activity on the statement of cash
flows prepared using the direct method?
A) dividends paid to stockholders
B) sale of merchandise inventory for cash
C) payment to purchase equipment
D) the receipt of cash from sale of equipment
Following is a list of advantages and disadvantages of the corporate form of business.
Identify each characteristic as either an advantage (A) or a disadvantage (D).
Which of the following is true of available-for-sale (AFS) debt investments?
A) They are always reported as current assets in the balance sheet.
B) They are always reported as long-term assets in the balance sheet.
C) They are reported as current assets on the balance sheet only if the business expects
to sell them within the first two years.
D) They are reported as long-term assets on the balance sheet only if they are planned
to be held for longer than a year.
Which of the following is true of comprehensive income?
A) All items included in comprehensive income enter into the determination of net
income.
B) Dividend payments are not included in the determination of comprehensive income,
even though it results in a decrease in total stockholders’ equity.
C) Comprehensive income includes company changes in total stockholders’ equity from
all sources, including owners’ investments.
D) Comprehensive income cannot be combined with a traditional income statement into
a combined statement of comprehensive income.
Equipment was purchased for $24,000 on January 1, 2018. The equipment’s estimated
useful life was five years, and its residual value was $4,000. The straight-line method of
depreciation was used. Prepare the journal entry to record the sale of the equipment for
$25,000 on January 3, 2019. The company has a calendar year accounting period. Omit
explanation.
For each account listed, identify the category in which it would appear on a classified
balance sheet.
Bronze Corporation had the following transactions:
Use the following cash receipts journal to record the preceding transactions. The company
uses the perpetual inventory system.
Cash Receipts Journal Page 3
List the order in which the balance sheet, statement of retained earnings, and income
statement are prepared. Briefly discuss why this order is necessary.
Campbell, Inc. has net income of $500,000 and 200,000 shares of common stock. The
company is considering a project that requires $800,000 and is considering two options:
• Option 1 is to borrow $800,000 at 12%.
• Option 2 is to issue 100,000 shares of common stock for $800,000.
Considering all relevant facts and figures, Campbell’s management is of the opinion that
the funds raised can be used to increase income before interest and taxes by $300,000
each year. The company estimates income tax expense to be 40%. Analyze the
Campbell situation to determine which plan will result in higher earnings per share.
(Round your answers to two decimal points.)
Provide definitions for the following terms.
1. Capitalize
2. Revenue Expenditure
3. Depreciation
Balancing errors can be detected by computing the difference between total debits and
total credits on the trial balance. List three actions that can then be used to find the
errors.
For the following situation, state whether it represents a strength or weakness in internal
control and give the reason for your answer.
Baker Auto Supply purchases merchandise inventory from A & B Company. The
accountant places the order, verifies receipt of the merchandise, and records the
transaction in the general journal.
List the five components of internal control.
Provide a brief definition of each of the following terms.
Provide a description of the contents of each of the following components of the annual
report.
“The amounts obtained for cost of goods sold and ending merchandise inventory are
always the same for FIFO perpetual and FIFO periodic.” Is this statement true? Why or
why not?
McBride Industries completed the following transactions during 2018:
Journalize the transactions (explanations are not required). Round to the nearest dollar.
Sapphire Corp. reported the following revenues and net income amounts.
Calculate Sapphire’s trend analysis for revenues and cost of goods sold. Use 2015 as the
base year, and round to the nearest percent.
Journalize the following purchase transactions for Main Street Office Supplies using the
periodic inventory system. Explanations are not required.
Concerning how companies control cash received by mail, state which employee should
perform the following duties:
