1) The effective interest rate method of amortization amortizes the discount or premium
in a manner that produces a constant amount of interest expense from period to period.
2) International accounting standards require companies to revalue their property, plant,
and equipment to reflect fair market values.
3) The accounts receivable turnover ratio is used to evaluate how well a company does
in collecting its accounts receivable.
4) No special internal control procedures are necessary with a petty cash account
because the amount is usually so small.
5) Stockholders’ equity is composed of three parts: contributed capital, earnings
retained in the business, and dividends paid.
6) The going concern assumption infers that a company will continue to operate
indefinitely.
7) The percentage of net credit sales approach for recognizing bad debts considers any
existing balance in Allowance for Doubtful Accounts.
8) [APPENDIX] Deferred tax is an amount that reconciles the differences between the
income for financial purposes with the income reported for tax purposes. In most cases,
it is a long-term liability.
9) Cash flows from purchases of merchandise are classified as investing activities.
10) An increase in a company’s revenue and expense accounts will automatically cause
an increase in net income for the period.
11) Preferred stock receives first preference on voting rights.
12) School Time Corp. completed a physical inventory at the end of 2014. A review of
the physical inventory procedures and records uncovered several errors that are
described below. In the columns provided, indicate the effect, if any, on the four
financial statement items listed. Use the following codes for your answers:
Balance Sheet Income Statement
Ending Inventory Retained Earnings Cost of Goods Sold Net Income
a. One batch of goods was counted twice.
b. One page of items was misplaced when the inventory was calculated
c. Goods sold FOB shipping point were included in School Times inventory.
d. Goods in transit from a supplier, FOB shipping point, were not included in inventory.
13) Having only one person authorized to both prepare and sign checks is a violation of
what internal control procedure?
A.Segregation of duties
B.Independent review and appraisal
C.Independent verifications
D.Proper authorizations
14) The stockholders’ equity section of Wild Weavers balance sheet on January 1, 2012,
appeared as follows:
On March 1, 2012, Wild Weaver reacquired 800 shares of common stock at $10 per
share. Wild Weaver sold 400 of the treasury shares on November 15 for $12 per share.
The entry to record the sale on November 15 would show:
A.an increase in Gain on Sale of Treasury Stock, $800
B.an increase in Common Stock, $4,800
C.a decrease in Cash, $4,800
D.a decrease in Treasury Stock, $4,000
15) Which of the following accounts would not appear on the balance sheet of a lessee
company recording a capital lease?
A.Accumulated depreciation on the leased asset
B.Lease obligation in the current liability section
C.Lease obligation in the long-term liability section
D.Rent expense on the income statement
16) Oldham Inc. purchased a truck on January 1, 2013 for $40,000. The truck had an
estimated life of six years and an estimated salvage value of $4,000. Oldham uses the
straight-line method to depreciate the asset. On July 1, 2015, the truck was sold for
$14,000 cash.
17) Two methods are available to prepare the operating activities section of a statement
of cash flows. Which of the following statements regarding these two methods is false?
A.If a company uses the indirect method, it must separately disclose the cash payments
made for interest and income taxes
B.If a company uses the direct method, it must present a separate schedule which
reconciles net income to net cash from operating activities
C.Advocates of the direct method believe that the indirect method reveals too much by
telling readers gross amounts of cash receipts and cash payments from operations
D.The FASB prefers the direct method, while most companies use the indirect method
in practice
18) Sunset, Inc. purchased merchandise from Rumble Music Company on June 5, 2014.
The goods were shipped the same day. The merchandise’s selling price was $15,000.
The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Sunset
received the merchandise on June 10, 2014. Sunset paid the amount due on June 13,
2014.
If Sunset uses the periodic inventory system, the effect of recording the payment on
June 13, 2014, will include
A.A decrease to Purchases for $15,000
B.An increase to Inventory for $14,850
C.A decrease to Cash for $15,000
D.A decrease to Accounts Payable for $15,000
19) How are assets which are expected to be realized in cash, sold, or consumed within
the normal operating cycle of a business or within one year (if the operating cycle is
shorter than one year) reported on a classified balance sheet?
A.Property, plant, and equipment
B.Current assets
C.Intangible assets
D.Current liabilities
20) Four journal entries are presented below. Write an explanation for each entry in the
space provided below the entry.
A) Cash 12,200
Service Revenue 12,200
B) Accounts Receivable 17,500
Service Revenue 17,500
C) Cash 16,900
Accounts Receivable 16,900
D) Cash 1,830
Deposits Received in Advance 1,830
21) A bill is received for electric service; the charge for the electricity is recorded, but
payment will be made later. For this transaction, identify the effect on the accounting
equation.
A.Assets increase and liabilities increase
B.Assets increase and stockholders equity increases
C.Liabilities increase and stockholders equity decreases
D.Liabilities decrease and assets decrease
22) Amortization of bond discount results in a(n)
A.decrease of the bonds payable account
B.decrease of stockholders equity
C.increase of stockholders equity
D.decrease in the cash account
23) [APPENDIX] When the owner of a sole proprietorship withdraws assets from the
business for personal use
A.it is treated like a noncash dividend
B.it is illegal because the assets belong to the separate entity, the proprietorship
C.it would be recorded as a loss by the proprietorship
D.it is recorded as a reduction of owner’s equity
24) The cost of goods sold for Johnnie, Inc. totaled $1,305,000. Sales returns and
purchase returns were $3,000 and $4,000, respectively. Purchases totaled $1,300,000.
Discounts taken by Johnnie totaled $7,000, while discounts taken by customers totaled
$5,000. Beginning inventory was $90,000. Determine the amount of ending inventory
to be reported on Johnnie, Inc.’s balance sheet.
25) Cash flows from purchases, sales, and maturities of investments are usually
classified as _________________ activities.
26) Why do many companies use MACRS (Modified Accelerated Cost Recovery
System) depreciation for tax purposes?
If a company uses MACRS for depreciation for tax purposes, can it use a different
method for financial reporting? Explain why or why not.
27) ___________________ means the presentation of information is free from bias
toward a particular result.
28) Note Disclosure of Legal Matters
Use the Note Disclosure Of Legal Matters below to answer the questions that follow.
Note 13 – Legal Matters
On December 14, 2011, the Company was served with a class action complaint filed in
federal court in Burlington, Vermont. The complaint, captioned John Doe vs. The
Company was filed by a Companys shareholder on behalf of himself and purportedly
on behalf of all other Companys shareholders who purchased the common stock of the
Company during the period from March 25, 2010 through December 19, 2010. Plaintiff
alleges that the Company violated the federal securities laws by making, in 2010, untrue
statements of material facts and omitting to state material facts primarily concerning the
Company’s construction and start-up of its new manufacturing facility. Also named as
defendants in the Complaint are certain present and former officers and directors of the
Company. Plaintiff is seeking an unspecified amount of monetary damages.
While this action is in its preliminary stages, management believes, based on an initial
review, the allegations made in the lawsuit are without merit and the Company intends
to defend the lawsuit vigorously.
Review the Note Disclosure of Legal Matters.
REQUIRED:
(1) What type of liability does this lawsuit typify?
(2) In your opinion, should the Company prepare a journal entry in 2011 to record a
liability for this lawsuit? Why or why not?
29) For what purpose is horizontal analysis used by management? Is this information
provided to stockholders? If so, in what form? If not, why?