1) Companies are free to choose FIFO, LIFO, or weighted-average cost to report
inventory and cost of goods sold.
2) Purchasing equipment using cash causes assets to increase.
3) A larger estimation of the allowance for uncollectible accounts, the write-down of
overvalued inventory and the use of a shorter useful life for depreciation are all
examples of conservative accounting.
4) Losses have the effect of reducing net income, while gains increase net income.
5) A journal provides a chronological record of all transactions affecting a firm.
6) A gain on the sale of long-term assets is added to net income to arrive at net cash
flows from operating activities under the indirect method.
7) We record a contingent liability when the likelihood of the loss occurring is
reasonably possible and the amount can be reasonably estimated.
8) The market interest rate does not change over time.
9) The 1933 Securities Act and the 1934 Securities Exchange Act were designed to
restore investor confidence in financial accounting following the stock market crash in
1929 .
10) The journal entry to record a contingent liability requires a debit to a loss (or
expense) account and a credit to a liability.
11) Trade discounts represent a discount offered to the purchasers for quick payment.
12) If an item meets one but not both criteria for extraordinary item treatment, it is
correctly excluded from extraordinary items and included with other revenue and
expenses.
13) Interest expense is calculated as the carrying value times the market rate.
14) Ratios that compare an income statement account with a balance sheet account
should express the balance sheet account as an average of the beginning and ending
balances.
15) Long-term asset categories include investments; property, plant, and equipment; and
intangible assets.
16) Using the indirect method, we begin with net income and then list adjustments to
net income in order to arrive at operating cash flows.
17) An amortization schedule provides a summary of the cash interest payments,
interest expense, and changes in carrying value for each period.
18) What is the primary purpose of financial accounting?
a. Determine the amount of tax liability owed to the government
b. Communicate business transactions to internal management
c. Measure business transactions and communicate those measures to external users to
make decisions
d. Measure the profitability of the company in order to assist employees with making
decisions
19) Fundamental qualitative characteristics of accounting information are:
a. Relevance and comparability
b. Comparability and consistency
c. Faithful representation and relevance
d. Faithful representation and consistency
20) Listed below are five terms followed by a list of phrases that describe or
characterize the terms. Match each phrase with the best term by placing the letter
designating the term in the space provided.
a. Cash equivalent
b. Bank reconciliation
c. Petty cash
d. Debit card
e. Credit card
____ Withdraws funds directly from the users account at the time of use.
21) Listed below are several terms and phrases associated with current liabilities. Pair
each item from List A (by letter) with the item from List B that is most appropriately
associated with it.
List A List B
_____ 1> A written promise to repay the amount borrowed plus interest. a. Current
portion of long-term debt b. Unearned revenues
_____ 2> Loss is reasonably possible and can be reasonably estimated. c. Recording a
contingent liability d. Disclosure of a contingent liability
_____ 3> Debt that will be paid within the next year. e. Notes payable
_____ 4> Loss is probable and can be reasonably estimated.
_____ 5> A liability that requires the sacrifice of something other than cash.
22) Which of the following accounts will NOT be involved in closing entries?
a. Prepaid Insurance
b. Service Revenue
c. Utilities Expense
d. Retained Earnings
23) The distinction between operating and nonoperating income relates to:
a. Continuity of income
b. Principal activities of the reporting entity
c. Consistency of income stream
d. Reliability of measurements
24) A company has the following transactions:
1> Pay workers salaries for the current period.
2> Pay rent in advance.
3> Pay dividends to stockholders in the current period.
4> Receive (but do not pay) a utility bill.
5> Use supplies previously purchased.
How many of these transactions result in an expense being reported in the current
period using cash-basis accounting?
a. 1
b. 2
c. 3
d. 4
e. 5
25) Which of the following is not an asset account?
a. Supplies
b. Accounts Payable
c. Equipment
d. Accounts Receivable
26) When bonds are issued at a discount, what happens to the carrying value and
interest expense over the life of the bonds?
a. Carrying value and interest expense increase
b. Carrying value and interest expense decrease
c. Carrying value decreases and interest expense increases
d. Carrying value increases and interest expense decreases
27) Which of the following is a conservative accounting practice?
a. The use of a longer service life for depreciation
b. Waiting to record a litigation loss
c. Adjust the allowance for uncollectible accounts to a smaller amount
d. The write-down of overvalued inventory
28) Which of the following statements is NOT correct about the financial statements?
a. An income statement reports revenues, expenses, and net income information
b. The statement of stockholders equity presents common stock, dividends, and retained
earnings information
c. A balance sheet reports assets, liabilities, revenues, and expenses
d. The statement of cash flows shows cash inflows and outflows from operating,
financing, and investing activities
29) Lail Inc. accounts for bad debts using the allowance method. On June 1, Lail Inc.
wrote off Andrew Greens $2,500 account. Based on Lails estimation, Andrew Green
will never pay any portion of the balance in his account. What effect will this write-off
have on Lail Inc.s balance sheet at the time of the write-off?
a. An increase to stockholders equity and a decrease to liabilities
b. No effect
c. An increase to assets and an increase to stockholders equity
d. A decrease to assets and a decrease to stockholders equity
30) For each transaction below, calculate the amount of revenue to be recognized in the
current period using accrual-basis accounting:
(a) Performed $24,000 of services during the month and received full cash payment
from customers at the time of service.
(b) Performed $9,000 of services during the month and billed customers. Customers are
expected to pay next month.
(c) Received $12,000 cash from customers for services to be provided next month.
31) Fashion, Inc. had a Retained Earnings balance of $12,000 at December 31, 2015 .
The company had an average income of $7,500 over the next 3 years, and an ending
Retained Earnings balance of $15,000 at December 31, 2016 . What was the total
amount of dividends paid over the last three years?
a. $4,500
b. $6,500
c. $19,500
d. $27,000
32) When $2,500 of accounts receivable are determined to be uncollectible, which of
the following should the company record to write off the accounts using the allowance
method?
a. A debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts
b. A debit to Allowance for Uncollectible Accounts and a credit to Bad Debt Expense
c. A debit to Bad Debt Expense and a credit to Accounts Receivable
d. A debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable
33) Data Solutions reports income tax expense of $1,700,000. Income taxes payable at
the beginning and end of the year are $250,000 and $370,000, respectively. What is the
amount of cash paid for income taxes?
a.$1,700,000
b.$1,820,000
c.$2,070,000
d.$1,580,000
34) Clothing Emporium was organized on January 1, 2015 . The firm was authorized to
issue 100,000 shares of $5 par value common stock. During 2015, Clothing Emporium
had the following transactions relating to shareholders’ equity:
Issued 30,000 shares of common stock at $7 per share.
Issued 20,000 shares of common stock at $8 per share.
Reported a net income of $100,000.
Paid dividends of $50,000.
What is the total stockholders equity at the end of 2015?
a.$420,000
b.$370,000
c.$470,000
d.$250,000
35) Which element of the fraud triangle do companies have the greatest ability to
eliminate?
a. Motive
b. Rationalization
c. Opportunity
d. Intelligence
36) Which of the following is an example of vertical analysis?
a. Comparing gross profit across companies
b. Comparing income statement items as a percentage of sales
c. Comparing debt with industry averages
d. Comparing the change in sales over time
37) Which one of the following regarding the book value of an asset is correct?
a. It is the fair value of the asset if the asset is sold
b. It reflects the original cost of the asset less accumulated depreciation
c. It is the original cost of the asset minus the depreciation expense for that asset during
the year
d. It is the original cost at which the asset was purchased
38) What is the concept behind separation of duties in establishing internal controls?
a. The companys financial accountant should not share information with the companys
tax accountant
b. Duties of middle-level managers should be clearly separated from those of top
executives
c. Employee fraud is less likely to occur when access to assets and access to accounting
records are separated
d. The external auditors of the company should have no contact with managers while
the audit is taking place
39) Which of the following accounts has a credit balance?
a. Salaries Expense
b. Income Tax Payable
c. Land
d. Prepaid Rent
40) A company purchased $400 of office supplies on account during May. All the
supplies were used in May, and the account was paid during June. What would the
impact of these transactions be during May on each of the following three items?
CashCash-basisAccrual-basis
BalanceNet IncomeNet Income
a. No effectNo effectDecrease
b. DecreaseDecreaseNo Effect
c. DecreaseDecreaseDecrease
d. DecreaseNo effectNo effect
41) Listed below are ten terms followed by a list of phrases that describe or characterize
five of the terms. Match each phrase with the best term placing the letter designating
the term in the space provided.
a. Accounts receivable
b. Allowance method
c. No effect
d. Direct write-off method
e. Net realizable value
f. Aging method
g. Bad debt expense
h. Receivables written off
i. Decrease assets and increase expenses
j. Allowance for uncollectible accounts
_____ The amount of the adjustment to the allowance for uncollectible accounts
during the period.
42) Which of the following is true with regard to how to account for company As
investment in company Bs common stock?
a. The fair value method is used when A owns more than 50% of B
b. The equity method is used when A owns from 20% to 50% of B
c. The consolidation method is used when A owns less than 20% of B
d. All of the above are true
43) California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at
the beginning of 2014 . All remaining shares are common stock. The company was not
able to pay dividends in 2014, but plans to pay dividends of $100,000 in 2015 .
Assuming the preferred stock is noncumulative, how much of the $100,000 dividend
will be paid to preferred stockholders and how much will be paid to common
stockholders in 2015?
a. $40,000 to preferred stockholders and $60,000 to common stockholders
b. $80,000 to preferred stockholders and $20,000 to common stockholders
c. $20,000 to preferred stockholders and $80,000 to common stockholders
d. $100,000 to preferred stockholders and $0 to common stockholders
44) Which of the following is not a reason why accounting differs across countries?
a. Culture
b. Population
c. Tax laws
d. Sources of financing
45) At the end of 2015, Murray State Lenders had a balance in its Allowance for
Uncollectible Accounts of $4,500 (debit) before any adjustment. The company
estimated its future uncollectible accounts to be $12,000 using the
percentage-of-receivables method. Murray States adjustment on December 31, 2015, to
record its estimated uncollectible accounts included a:
a. Credit to Allowance for Uncollectible Accounts of $12,000
b. Debit to Bad Debt Expense of $16,500
c. Credit to Allowance for Uncollectible Accounts of $16,500
d. Both b and c
46) Lake Incorporated purchased all of the outstanding stock of Huron Company
paying $850,000 cash. Lake assumed all of the liabilities. Book values and fair values
of acquired assets and liabilities were:
Lake would record goodwill of:
a.$ 0
b.$150,000
c.$345,000
d.$850,000
47) Which of the following would NOT represent good controls over cash
disbursements?
a. Make all disbursements, other than very small ones, by check, debit card, or credit
card
b. Require only one signature for checks, especially larger ones
c. Authorize all expenditures before purchase and verify the accuracy of the purchase
itself
d. The employee who authorizes payment should not also be the employee who
prepares the check
48) The statement of cash flows reports cash flows from the activities of:
a.Operating, purchasing, and investing
b.Borrowing, paying, and investing
c.Operating, investing, and financing
d.Using, investing, and financing
49) The purchase of land is classified in the statement of cash flows as a(n):
a. Operating activity
b. Investing activity
c. Financing activity
d. Noncash activity
50) The disadvantages of the corporate form of business include:
a. Ability to transfer ownership
b. Additional taxes
c. Limited liability
d. Ability to raise capital
51) On November 10 of the current year, Flores Mills provides services to a customer
for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on
November 17 . How would Flores record the collection of cash on November 17?
a. Cash7,840
Accounts Receivable7,840
b. Cash7,840
Sales Discounts 160
Accounts Receivable8,000
c. Cash7,840
Sales Revenue 160
Accounts Receivable8,000
d. Cash8,000
Accounts Receivable8,000
52) Listed below are five terms followed by a list of phrases that describe or
characterize the terms. Match each phrase with the best term placing the letter
designating the term in the space provided.
a. Patent
b. Copyright
c. Trademark
d. Franchise
e. Goodwill
Phrases:
_____ An exclusive right of protection given to the creator of a published work such as
a song, film, painting, photograph, book, or computer software.
_____ Payment for the exclusive right to use the companys name and to sell its
products within a specified geographical area.
_____ The purchase price of a company less the fair value of the net assets acquired.
_____ An exclusive right to manufacture a product or to use a process.
_____ A word, slogan, or symbol that distinctively identifies a company, product, or
service.
53) Western World has the following selected data ($ in millions):
Based on these amounts, calculate the following ratios for Western World in 2015:
1> Debt to equity ratio.
2> Return on assets ratio.
3> Return on equity ratio.
4> Times interest earned ratio.
54) Describe the procedures used to reconcile a companys cash balance.
55) Donnie Hilfiger has the following balances in its stockholders equity accounts on
December 31, 2015: Treasury Stock, $375,000; Common Stock, $350,000; Preferred
Stock, $1,200,000; Retained Earnings, $1,675,000; and Additional Paid-in Capital,
$3,150,000. Prepare the stockholders equity section of the balance sheet for Donnie
Hilfiger as of December 31, 2015 .
56) A company purchases supplies on account for $1,700. Indicate the amount of
increases and decreases in the accounting equation.
57) Briefly explain why the value of $100 received today is greater than the value of
$100 received one year from now.
58) Sun City issues $50 million of bonds on January 1, 2015 that pay interest
semiannually on June 30 and December 31 . Portions of the bond amortization schedule
appear below:
Required:
1> Were the bonds issued at face amount, a discount, or a premium?
2> What is the original issue price of the bonds?
3> What is the face amount of the bonds?
4> What is the stated annual interest rate? (Hint: Be sure to provide the annual rate
rather than the
six month rate.)
5> What is the market annual interest rate? (Hint: Be sure to provide the annual rate
rather than
the six month rate.)
6> What is the total cash paid for interest assuming the bonds mature in 20 years?