Gross profit is not a ledger account name.
A company that pays no dividends is always a poor investment.
When a periodic inventory system is in use, the Inventory account is updated only at the
end of the period.
Bonds allow a company to borrow large sums of money from many different investors.
An overstatement of ending inventory will cause an overstatement of assets and an
understatement of stockholders’ equity on the balance sheet.
A good voucher system includes procedures and approvals designed to control cash
payments.
If a company forgot to prepare an adjusting entry to record salaries and wages incurred
but unpaid at the end of the period, Total Liabilities would be understated and Retained
Earnings would be overstated on the Balance Sheet.
The straight-line method of amortization allocates the amount of bond premium or
discount over each period of a bond’s life in amounts corresponding to the bond’s
carrying value.
When accrual basis accounting is used, net income equals the amount of cash generated
by the business.
The price-earnings ratio reveals information about the stock market’s expectations for a
company’s future growth in earnings.
Interest on a two-month, 7%, $1,000 note would be calculated as $1,000 x 0.07 x 2.
Accounts Payable, Notes Payable, and Salaries and Wages Payable are examples of
liabilities.
Generally, a physical count of inventory is performed annually in both a perpetual
inventory system and a periodic inventory system.
Which of the following statements about inventory classifications is not correct?
A) Inventory may include materials used in producing goods for sale.
B) Manufacturers hold three types of inventory that are referred to as raw materials
inventory, work in process inventory, and finished goods inventory.
C) Inventory is classified as a long-term asset on the balance sheet.
D) Merchandisers buy inventory in finished form ready for resale.
Choose the appropriate letter to match the terms to the blanks below to complete the
relevant equation for each financial statement.
FINANCIAL STATEMENT EQUATION
TERM
A. Cash at beginning of year
B. Net cash flow from operating activities
C. Balance of retained earnings from previous year
D. Net cash flow from investing activities
E. Liabilities
F. Net cash flow from financing activities
G. Balance of retained earnings at end of year
H. Net income
I. Revenue
J. Assets
K. Stockholders’ equity
L. Expenses
M. Cash at end of year
N. Dividends paid
Special items reported as part of comprehensive income, but not included in net
income, might include:
A) gains or losses on foreign currency exchange.
B) interest expense.
C) extraordinary gains and losses.
D) income tax expense.
Use the information above to answer the following question. The gross profit
percentage for the current year is closest to:
A) 42%.
B) 13.5%.
C) 57.7%.
D) 21.15%.
If a company’s gross salaries and wages are $12,000, and it withholds $1,800 for
income taxes and $800 for FICA taxes, the journal entry to record the employees’ pay
should include a:
A) debit to Salaries and Wages Expense for $9,400.
B) debit to Salaries and Wages Payable for $9,400.
C) credit to Salaries and Wages Payable for $12,000.
D) credit to Salaries and Wages Payable for $9,400.
West Corporation issued a $100 gift card. What journal entry will West Corporation
record?
A) Debit Cash and credit Sales Revenue for $100.
B) Debit Cash and credit Unearned Revenue for $100.
C) Debit Unearned Revenue and credit Cash for $100.
D) Debit Accounts Receivable and credit Cash for $100.
Which of the following statements about preparation of the statement of cash flows is
correct?
A) GAAP allows the indirect method only.
B) GAAP allows the direct method only.
C) GAAP allows either the indirect or direct method.
D) Although GAAP allows either method for the preparation of the operating activities
section of the statement of cash flows, the indirect method must be used to prepare the
investing activities section of the statement of cash flows.
A corporate charter specifies that the company may sell up to 20 million shares of
stock. The company sells 12 million shares to investors and later buys back 3 million
shares. The current number of outstanding shares after these transactions have been
accounted for is:
A) 8 million shares.
B) 20 million shares.
C) 10 million shares.
D) 9 million shares.
A company lends its supplier $150,000 for 3 years at a 6% annual interest rate. Interest
payments are to be made twice a year. The entry to record this lending transaction
includes a debit to:
A) Notes Receivable and a credit to Cash for $150,000.
B) Cash and a credit to Notes Payable for $150,000.
C) Cash and a credit to Interest Revenue for $9,000.
D) Interest Receivable and a credit to Interest Revenue for $4,500.
All of the following are requirements of the Sarbanes-Oxley Act (SOX) except:
A) tip lines that allow employees to secretly submit concerns about questionable
accounting or auditing practices
B) fines of up to $5 million plus repayment of any fraud proceeds
C) evaluation and reporting on the effectiveness of internal control over financial
reporting for large public companies by external auditors
D) evaluation and reporting on the effectiveness of internal control over financial
reporting for all public companies by management with disclosure that management is
not responsible for the internal control system
Melrose Inc. buys back 300,000 shares of its stock from investors at $6.50 a share. Two
years later, it reissues this stock for $6.00 a share. The stock reissue would be recorded
with a debit to Cash for:
A) $1.8 million, a debit to Additional Paid-in Capital for $150,000, and a credit to
Treasury Stock for $1.95 million.
B) $1.95 million, a credit to Treasury Stock for $1.8 million, and a credit to Additional
Paid-in Capital for $150,000.
C) $1.95 million and a credit to Treasury Stock for $1.95 million.
D) $1.8 million and a credit to Treasury Stock for $1.8 million.
On September 1, a corporation with 50,000 shares of $5 par value common stock and
$1,000,000 of Retained Earnings issues a 2-for-1 stock split. The market price of the
stock on that date is $12 per share. Which of the following statements is correct
concerning this stock split?
A) Contributed capital will increase by $250,000.
B) Retained Earnings will decrease by $600,000.
C) Dividends payable will increase by 250,000.
D) No entry will be made for this transaction.
A loss on disposal of an asset would be reported:
A) in the Operating Revenues section of the income statement.
B) in the Operating Expenses section of the income statement.
C) as a direct increase to the asset account on the balance sheet.
D) as a direct decrease to the asset account on the balance sheet.
The balance of the Allowance for Doubtful Accounts was $12,656 at the beginning of
the year and $14,348 at the end of the year. Bad Debt Expense was $3,879 for the year.
Recoveries in the amount of $100 were recorded during the year. Which of the
following statements is correct?
A) The Allowance for Doubtful Accounts account was retroactively debited for $2,187
to record additional bad debts that became apparent in a future time period.
B) The Allowance for Doubtful Accounts account was debited for $2,287 to record
write-offs during the year.
C) The Allowance for Doubtful Accounts account was credited $2,287 for payments
from customer whose account balances were previously written off.
D) The Allowance for Doubtful Accounts account was credited $2,187 for the
difference between the percent of credit sales method and the aging of accounts
receivable method.
The WC Company borrowed $26,500 from a bank during the year. This borrowing
would be reported on the statement of cash flows as a(n):
A) investing activity is the amount of ($26,500).
B) financing activity in the amount of ($26,500).
C) investing activity is the amount of $26,500.
D) financing investing activity is the amount of $26,500.
No mention is required in the financial statements for contingent liabilities that are:
A) probable.
B) remote.
C) possible.
D) likely.
Which of the following items appear on more than one financial statement?
A) Ending Cash and ending Retained Earnings
B) Ending Cash and beginning Retained Earnings
C) Sales Revenue and ending Retained Earnings
D) Beginning Cash and Sales Revenue
During its first year of operations, Energy Inc. is experiencing increasing inventory
costs.
Required:
Part a. Explain how each of the inventory costing methods will affect the amount
reported for inventory at the end of the year. (Ignore the specific identification method.)
Part b. Explain how each of those three inventory costing methods will affect the
amount reported for cost of goods sold.
Part c. Identify the inventory costing methods that will produce the highest and lowest
inventory turnover ratios.
If net income is rising, but net sales revenue and the gross profit percentage remain the
same, then:
A) operating expenses are falling.
B) operating expenses are rising.
C) cost of goods sold is falling.
D) cost of goods sold is rising.
Which of the following statements about cash basis accounting and accrual basis
accounting is correct?
A) Using the accrual basis of accounting, if payment is received before delivery of
goods or a service, revenue is recorded at the time the payment is received.
B) Using the accrual basis of accounting, if payment is received after delivery of goods
or a service, an asset is recorded at the time the good or service was delivered.
C) Using the cash basis of accounting, if payment is received before delivery of goods
or a service, net income is affected when goods or services are delivered.
D) Using the cash basis, if payment is received after delivery of goods or a service,
unearned revenue is recorded.
CheapBooks Incorporated (CBI) had the following business activities:
1)Stockholders invest $25,000 cash in the corporation.
2)CBI purchased $400 of office supplies on credit.
3)CBI purchased office equipment for $7,000, paying $2,500 in cash and signing a
30-day note payable for the remainder.
4)CBI paid $200 cash on account for office supplies purchased in transaction 2.
5)CBI purchased two acres of land for $10,000, signing a 2-year note payable.
6)CBI sold one acre of land at one-half of the total cost of the two acres, receiving the
full amount or $5,000 in cash.
7)CBI made a payment of $5,000 on its 2-year note.
Required:
Prepare the journal entries that would be used to record the transactions. (Reference
each journal entry to the transaction number, shown above).
A petty cash fund was originally established with a check for $150 On September 10,
the petty cash fund was replenished when there was $4.25 remaining and there were
petty cash receipts for postage, $43.50; supplies, $51.85; and equipment repair, $49.00.
Required:
Prepare the journal entry, if any, required, to record the replenishment of the petty cash
fund on December 31.
The following information is available for the Tierney Company for the month of
November.
On November 30, after all transactions have been recorded, the balance in the
company’s Cash account has a balance of $27,202.
The company’s bank statement shows a balance on November 30 of $29,279.
Outstanding checks at November 30 include check #3030 in the amount of $1,525 and
check #3556 in the amount of $1,459.
Included with the bank statement was a credit memo in the amount of $770 for an EFT
in payment of a customer’s account.
The bank deducted $67 for an NSF check from a customer deposited on November 22.
A deposit placed in the bank’s night depository on November 30 totaled $1,675 and did
not appear on the bank statement.
Examination of the checks on the bank statement with the entries in the accounting
records reveals that check #3445 for the payment of an account payable was correctly
written for $2,450, but was recorded in the accounting records as $2,540.
Included with the bank statement was a debit memorandum in the amount of $25 for
bank service charges.
Required:
Prepare a bank reconciliation for Tierney Company as of November 30.
Which inventory system (periodic or perpetual) inventory system provides the best
inventory control?
Evaluate each inventory error separately and determine whether it overstates or
understates cost of goods sold and net income.
