Many companies use MACRS (Modified Accelerated Cost Recovery System)
depreciation for
a. financial reporting purposes and a different method for tax purposes.
b. financial reporting purposes because depreciation is not allowed for tax purposes.
c. tax purposes because it results in a larger net income in the early years of a plant
asset’s life.
d. tax purposes because of a desire to report higher expenses in early years in order to
pay lower taxes.
A company reported the following amounts in its financial statements:
2015 2014
Average inventory $ 100,000 $ 60,000
Cost of goods sold 2,000,000 1,500,000
From 2014 to 2015, the company’s efficiency in managing inventory was
a. declining, because the inventory turnover ratio is decreasing.
b. improving, because the inventory turnover ratio is increasing.
c. declining, because the inventory turnover ratio is increasing.
d. improving, because the inventory turnover ratio is decreasing.
Refer to the information provided for Stallworth Corp. If the company uses the
weighted average cost method, the cost assigned to each unit in ending inventory would
be
a. $15.00.
b. $15.10.
c. $15.11.
d. $15.20.
Grady Company’s hourly employees earned $55,600 in the pay period ending March
31. Assume further that federal and state income taxes withheld are $9,452 and $2,224,
respectively. In addition, social security and medicare taxes are applicable at rates of
6.2% and 1.45%, respectively, and federal and state unemployment taxes are applicable
at rates of 4.5% and 3%, respectively. All wages are subject to these taxes.
A) Prepare the journal entry related to the $55,600 gross pay earned by the company’s
employees. Round all amounts to the nearest dollar, if necessary.
B) Prepare the journal entry for the company’s payroll taxes over and above gross pay.
Round all amounts to the nearest dollar, if necessary.
A certain company began the year with total assets of $10,000,000 and total liabilities
of $6,200,000. No additional stock was issued during the year. Use the accounting
equation to answer the following questions.
Match these terms with their correct definition.
a. Cash flow adequacy ratio
b. Cash flows from financing activities
c. Cash flows from investing activities
d. Cash flow from operating activities
e. Direct method
f. Free cash flow
g. Income statement
h. Indirect method
i. Noncash investing & financing activities
j. Statement of cash flows
23/ Determines operating cash flow which begins with net income and then adjusts it
for noncash items.
24/ Include cash received from the sale of property, plant, and equipment and cash paid
to purchase equity securities.
25/ Provides information that can be used to judge a company’s ability to meet its
obligations and pay dividends.
26/ Determines operating cash flow by adjusting each item on the income statement by
the changes in the related current asset or liability accounts.
27/ Represents the cash flow that a company is able to generate after considering the
maintenance or expansion of its assets and the payment of dividends.
28/ Measures the company’s ability to meet its maturing debt obligations
29/ A transaction that represents both an investing and financing activity but that does
not involve the receipt or payment of cash.
30/ Include cash sales to customers and cash dividends received.
31/ Provides several pieces of information needed to prepare the cash flow statement.
32/ Include cash received from the issuance of stock and cash used to pay dividends.
Which of the following statements is true?
a. Inventory data can be identified and controlled better under the perpetual system.
b. Inventory can only be sold at the end of an accounting period under the periodic
system.
c. There is no difference in cost to implement a perpetual as compared to a periodic
system.
d. The perpetual system eliminated the need for an annual inventory count.
A petty cash custodian maintains a $250 petty cash fund. At the end of each month, the
custodian tallies the records of the petty cash transactions and presents them for
reimbursement.
April 4 U.S. Post Office (postage) $ 48
April 21 Callabaugh Supply (office supplies) 146
April 25 Speedy Delivery (package delivery) 35
Which of the following entries is necessary for recording the replenishment of the fund?
a. Cash 229
Petty Cash Fund 229
b. Postage Expense 48
Office Supplies Expense 146
Delivery Expense 35
Petty Cash 229
c. Postage Expense 48
Office Supplies Expense 146
Delivery Expense 35
Cash 229
d. Postage Expense 48
Office Supplies Expense 146
Delivery Expense 35
Cash Over and Short 21
Petty Cash Fund 250
Which one of the following is a correct fundamental accounting equation?
a. Assets + Liabilities = Stockholders’ Equity
b. Assets + Retained Earnings = Stockholders’ Equity
c. Assets + Stockholders’ Equity = Liabilities
d. Assets = Liabilities + Stockholders’ Equity
Klump Co.
Klump Co. uses a perpetual inventory system and had the following inventory
transactions for the month of June.
June 1 On hand, 50 units at $18.00 each $ 900.00
4 Purchased 115 units at $18.20 each 2,093.00
5 Sold 100 units
10 Purchased 75 units at $18.25 each 1,368.75
24 Sold 50 units
Total cost of goods available for sale $4,361.75
30 On hand, 1000 units
Refer to the information provided for Klump Co. If the company uses the FIFO
inventory costing method, the amount of ending inventory reported on the balance sheet
is:
a. $1,800.00
b. $1,810.00
c. $1,823.75
d. $1,825.00
A company’s control environment is primarily influenced by the tone at the top. This
refers to each of the following except
a. the philosophy and operating style of management.
b. the policies and practices that are promoted within the company.
c. the experiential background of management.
d. the priority placed upon the company’s internal control system.
Refer to Bass Tours. If the average current ratio for similar companies is 2.0 to 1, what
does this tell you about this company’s liquidity?
a. The company is more liquid than its competitors.
b. The company has more long-term assets than its competitors.
c. The company is bankrupt.
d. The company is more profitable than its competitors.
Refer to the information provided for Klump Co. If the company uses the FIFO
inventory costing method, cost of goods sold for the month of June is:
a. $2,520.00
b. $2,538.00
c. $2,540.00
d. $2,550.00
What is the primary reason for a stock split?
a. To distribute cash to the investor.
b. To decrease the market value of the stock.
c. To decrease the number of shares outstanding.
d. To increase the capital stock of the corporation.
Which one of the following financial statements show the end of the year cash balance
for a business entity?
a. Income Statement and Statement of Retained Earnings
b. Balance Sheet and Statement of Cash Flows
c. Statement of Retained Earnings and Statement of Cash Flows
d. Balance Sheet and Statement of Retained Earnings
If the sum of the debits is not equal to the sum of the creditsin a trial balance, then
a. there is no concern because the two amounts are not meant to be equal.
b. the chart of accounts does not balance.
c. it is safe to proceed with the preparation of financial statements.
d. it is likely that an error was made in journalizing or posting transactions or in
computing the account balance.
Roe Company purchased merchandise on account from Rodriguez Company on
December 12, 2013. On December 13, 2013, Roe Company returned damaged
merchandise to Rodriguez Company and was granted an adjustment on its account. Roe
Company uses the periodic inventory system. What effect does the merchandise return
have on Roe Company’s accounting equation?
a. assets and stockholders’ equity decrease
b. assets and liabilities decrease
c. liabilities decrease and stockholders’ equity increases
d. liabilities and stockholders’ equity decrease
Which of the following underlying assumptions for the conceptual framework is the
reason the dollar is used in the preparation of financial statements?
a. Economic Entity
b. Continuity
c. Time-Period
d. Monetary Unit
Refer to Kaleidoscope Paint. The cash payment on June 30, 2013, is
a. $25,000.
b. $22,500.
c. $45,000.
d. $50,000.
Refer to Landmark Company. If the company repurchased 500 shares of its common
stock for $20 per share, what is the amount of total stockholders’ equity after this
transaction?
a. $1,510,000
b. $1,500,000
c. $1,494,000
d. $1,490,000
Refer to Designs on You. What is the net amount of the adjustments to the company’s
cash balance as a result of the bank reconciliation process?
a. $210 increase
b. $135 increase
c. $135 decrease
d. $65 decrease
The bond issue price is determined by calculating the
a. present value of the stream of interest payments and the future value of the maturity
amount.
b. future value of the stream of interest payments and the future value of the maturity
amount.
c. future value of the stream of interest payments and the present value of the maturity
amount.
d. present value of the stream of interest payments and the present value of the maturity
amount.
Which of the following is the correct entry to establish a petty cash fund in the amount
of $300?
a. Cash 300
Petty Cash Fund 300
b. Petty Cash Fund 300
Cash 300
c. Miscellaneous Expense 300
Petty Cash Fund 300
d. None of these, as no entry is necessary to record an exchange of cash.
Refer to the information provided for Tedder Co. If the company uses the LIFO
inventory method, how much is inventory on the balance sheet at the end of January?
a. $40
b. $50
c. $58
d. $60
Carnegie Jewelers accepted a 9-month, 9% note for $100,000 from a customer on July
1, 2013. The note is due on March 31, 2014. Assuming the company’s accounting
period ends on December 31, 2013, how much interest revenue should be recognized
during 2013 and 2014?
2013 2014
a. $2,250 $4,500
b. $4,500 $2,250
c. $9,000 $ -0-
d. $4,500 $4,500
Refer to Rainsoft Company. Assume that competitors in the industry have an average
inventory turnover ratio of 20.8 times in 2015. Rainsoft’s inventory turnover ratio for
2015 indicates that the company
a. has too little inventory on hand at the end of 2015.
b. is pricing its products too low.
c. is selling its inventory much more quickly than the industry average.
d. may have obsolete inventory or problems with sales.
Which of the following is notincluded in Cash and Cash Equivalents on a company’s
balance sheet?
a. a savings account at the bank
b. a checking account at the bank
c. a bank certificate of deposit for one year
d. petty cash
Which of the following statements is falseregarding the use of source documents?
a. Checks and deposit slips are the main source documents backing up the bank
statement.
b. Retailers may use cash register tapes to recognize sales transactions.
c. Stock certificates provide evidence of being a creditor of the company.
d. Time cards may be used as a source of information to record wages.
The auditor’s opinions regarding effectiveness of a public company’s internal controls
and appropriateness of its financial statements are found within the Form 10-K on
a. Item 1.
b. Item 7.
c. Item 8.
d. Item 9.
An addition to employee compensation whereby the corporation provides a right to
purchase stock at a set price is called
a. treasury stock.
b. a stock option.
c. the conversion privilege.
d. a call option.
When using the indirect method to determine operating cash flows, how is the issuance
of stock to retire a long-term debt shown on a statement of cash flows?
a. operating activity
b. investing activity
c. financing activity
d. noncash investing or financing activity
e. not reported on the statement of cash flows
Oliver & Co. has been in business for fifteen years. During that time, the company has
consistently used the LIFO inventory costing method. Because of inflation, purchase
prices for merchandise have increased consistently over the fifteen years. The company
has maintained the same inventory quantities over the 15 years. Which of the following
statements is true for the company?
a. The company’s total net income for the past 15 years is greater than it would have
reported using another inventory method.
b. The company will have paid more income taxes over the past 15 years than it would
have if it had used the FIFO method.
c. The company will have to continue to use the LIFO method indefinitely because of
federal income tax rules.
d. The ending inventory amount reported on the balance sheet may be significantly
lower than its current value.
General Lighting
During the first quarter of 2013, the company sold 4,000 batteries on credit for $150
each plus state sales tax of 6%.
Refer to General Lighting. Sales taxes are required to be paid to the state taxing
authority at the end of the quarter. Which of the following records the sale of the
batteries?
a. Accounts Receivable 636,000
Sales Revenue 600,000
Sales Tax Payable 36,000
b. Accounts Receivable 600,000
Sales Revenue 600,000
c. Accounts Receivable 600,000
Sales Revenue 564,000
Sales Tax Payable 36,000
d. Accounts Receivable 636,000
Sales Revenue 636,000
If a company understates its inventory, what are the effects on cost of goods sold and
net income for the current year?
a. Cost of goods sold will be understated and net income will be overstated.
b. Cost of goods sold will be overstated and net income will be understated.
c. Both cost of goods sold and net income will be understated.
d. Both cost of goods sold and net income will be overstated.
Under the double-entry system of accounting, a debit is always a negative entry.
____________________ is the liability created when customers pay for goods or
services in advance.
The names of the four major types of adjusting entries are ____________________,
____________________, ____________________, and ____________________.
Match the terms with the descriptions provided.
a. Average days to sell inventory d. Inventory turnover ratio
b. Gross margin e. Freight-in
c. Gross profit ratio f. Freight-out
31. The difference between a company’s net sales and its cost of goods sold.
32. Generally speaking, the lower this measure the better.
33. Transportation costs paid by the buyer.
34. For a given level of sales, the higher the cost of goods sold, the lower this measure.
35. Term referring to transportation costs paid by the seller.
36. Measures how quickly merchandise is purchased and sold.
Items that are included on a bank statement and decrease the bank account balance are
called ____________________.
Income from operations includes interest revenue and interest expense because these
items are considered to be operating in nature.
The weighted average cost per unit must be continually updated under the perpetual
inventory system.
An accounting system must be computerized in order to ensure the company has proper
internal control.
The demand for accounting information comes from stakeholders both inside and
outside the business. The five stakeholder groups discussed in the text include
____________________, ____________________, ____________________,
____________________, and ____________________.
Stockholders equity is composed of contributed capital and retained earnings.
Refer to Mary Kay Cosmetics. What amount was paid to acquire equipment during
2014?
Refer to Cabana Club. The company reported $210,000,000 and $120,000,000 of
accrued interest payable in the liability section of its balance sheet at December 31,
2014 and 2013, respectively. How much cash did it pay during 2014 for interest?
a. Franchise e. Organizational costs
b. Intangible operating assets f. Property, plant, and equipment
c. Natural resources g. Trademark
d. Operating assets h. Voluntary disposal
41. Represent future economic benefit to the company but they lack physical
substance
42. Include costs such as legal fees, stock issue costs, accounting and promotional
fees
43. Assets such as coal deposits, oil reserves, and mineral deposits
44. Right to exclusive use of a distinctive name, phrase, or symbol
45. Exclusive right to conduct a certain type of business in some particular
geographic area
46. Tangible operating assets used in the normal operations of a business
47. Consist of the long-lived assets that are owned by a business
48. Occurs when a company determines that an asset is no longer useful
If a company records a $450 receipt as $540, this type of mistake is called a(n)
____________________.
The _________________ preference is a preferred stock feature that provides for the
current stated dividends to be paid to preferred stockholders before they are paid to
common stockholders.
Using good form, prepare a Balance Sheet for Ben & Terry’s Ice Cream.
Debenture bonds are backed by specific collateral of the issuing company.