Entries in the sales journal are posted to both the accounts receivable subsidiary ledger
and the general ledger.
As long as an increase and decrease of the same amount is recorded on one side of the
accounting equation, the accounting equation remains in balance.
The operating cycle is the time span required for a business to repay its long-term
liabilities.
When a company receives interest revenue on a bond investment, total stockholders’
equity remains unchanged.
The gross profit percentage is an indicator of how well a company is positioned to pay
off its short-term liabilities.
The consistency principle states that businesses should report the same amount of
ending merchandise inventory from period to period.
Having a cash ratio above 1.0 implies that a company has enough cash and cash
equivalents to pay current liabilities.
If the debt to equity ratio is greater than 1, the company is financing more assets with
equity than with debt.
The Social Security system is funded by contributions from both the employer and
employee.
The Dividends account is a permanent account.
The Common Stock account is a permanent account.
Entry-level software packages for accounting information systems are difficult to use
and require a complete knowledge of GAAP.
The par value of a stock has no relation to the market value.
Tennessee Moving Company uses the indirect method to prepare its statement of cash
flows. Refer to the following portion of the comparative balance sheet:
Tennessee Company
Comparative Balance Sheet
December 31, 2018 and 2017
If the net income for the year was $66,000, the company must have declared $44,000 as
dividends during the year.
The cash ratio helps to determine a company’s ability to meet its short-term obligations
using cash and cash equivalents.
Preparing the worksheet is a required step of the accounting cycle.
The declaration date is the date the corporation prepares a journal entry to record that
stockholders will receive dividend checks.
If the debt ratio is too high, the company may be unable to pay its debts.
Inventory turnover is computed by dividing average merchandise inventory by cost of
goods sold.
Plant assets are long-lived, tangible assets used in the operation of a business.
Interest is generally stated as a monthly rate on notes receivable.
The balance sheet of a business summarizes an entity’s revenues and expenses.
The accounting principles followed for a $5,000 cost in a small company must be the
same as the accounting principles followed for a $5,000 cost in a large company.
In a periodic inventory system, the “cash register” at the store is a computer terminal
that records sales and updates inventory records.
As proof of the deposit transaction, a customer receives a canceled check from the
bank.
Gains and losses on the sale of plant assets are always reported as discontinued
operations.
The key differences between the cash basis and accrual basis of accounting can be
explained by understanding the time period concept and the revenue recognition and
matching principles.
When using the weighted-average inventory costing method in a perpetual inventory
system, a new weighted average cost per unit is computed at the end of each quarter.
A merchandiser sold goods on account to Customer A for $8,000 with terms of 2/10,
n/30. If the payment is received after the discount period, Accounts Receivable is
decreased by $8,000.
A law firm provides legal services for clients who do not pay immediately. There is no
effect on the accounting equation until the clients pay for the services.
When using the periodic inventory system, there is no need to record an adjusting entry
for inventory shrinkage.
Based on the following information for Montana Investments, Inc., compute the rate of
return on total assets. (Round the percentage to two decimal places.)
A) 9.42%
B) 19.41%
C) 9.71%
D) 1.76%
For Office Supplies, the category of account and its normal balance is ________.
A) liabilities and a debit balance
B) assets and a debit balance
C) liabilities and a credit balance
D) assets and a credit balance
International Financial Reporting Standards ________ U.S. Generally Accepted
Accounting Principles.
A) are the same as
B) are generally less specific than
C) are based less on principle than
D) leave less room for professional judgment than
The balance in the Bonds Payable account is a credit of $67,000. The balance in the
Discount on Bonds Payable account is a debit of $3350. What is the bond’s carrying
amount?
A) $3350
B) $70,350
C) $67,000
D) $63,650
Nichols, Inc. had the following balances and transactions during 2018:
What would be reported for Ending Merchandise Inventory on the balance sheet at
December 31, 2018 if the perpetual inventory system and the first-in, first-out inventory
costing method are used?
A) $6,400
B) $51,000
C) $37,400
D) $24,000
On November 1, 2018, Arch Services issued $313,000 of eight-year bonds with a stated
rate of 12% at par. Interest payments occur each April 30 and October 31. On December
31, 2018, Arch made an adjusting entry to accrue interest at year-end. What is the
amount of Interest Expense that will be recorded on December 31, 2018? (Do not round
any intermediate calculations, and round your final answer to the nearest dollar.)
A) $37,560
B) $6260
C) $18,780
D) $783
Which type of debt security is always categorized as a current asset?
A) available-for-sale debt investments
B) trading debt investments
C) held-to-maturity debt investments
D) Each of these choices can be categorized as long-term if the investor intends to hold
the investment for longer than one year.
Amex Corporation invests excess cash to purchase $25,000 in corporate bonds on
March 30, 2018. In addition to the $25,000, Amex also paid a brokerage fee of $1,000.
Amex intends to hold the bonds until maturity and has the ability to do so. When the
bonds mature on March 30, 2020, Amex plans to use the cash for its business
expansion. Which of the following is included in the journal entry on March 30, 2018?
A) a debit to Held-to-Maturity Debt Investments for $25,000
B) a debit to Trading-Debt Investments for $25,000
C) a debit to Held-to-Maturity Debt Investments for $26,000
D) a debit to Trading-Debt Investments for $26,000
Which of the following accounting information system activities is completed when
merchandise inventory is sold?
A) preparation and payment of payroll
B) receipt of customer payment
C) receipt of goods or services
D) payment for goods or services
Brandy Enterprises discarded a computer that was fully depreciated and had no residual
value. As a result of this transaction, Brandy will _________.
A) report a loss equal to the historical cost of the computer.
B) debit the Computer account and credit the Accumulated Depreciation – Computer
account.
C) debit the Accumulated Depreciation – Computer account; debit Loss on Disposal of
Computer account, and credit the Computer account.
D) zero out the Computer and Accumulated Depreciation – Computer accounts.
On April 1, 2019, Barnes Services received a 9-month note for $12,000 at 12%.
Calculate the amount of interest due at maturity. (Round any intermediate calculations
to two decimal places, and your final answer to the nearest dollar.)
A) $972
B) $1,188
C) $1,440
D) $1,080
Cycle Sales, Inc. offers warranties on all their bikes. They estimate warranty expense at
3.5% of sales. At the beginning of 2019, the Estimated Warranty Payable account had a
credit balance of $1400. During the year, Cycle Sales had $299,000 in sales and had to
pay out $5900 in warranty payments. How much Warranty Expense will be reported on
the 2019 income statement?
A) $5965
B) $7300
C) $9065
D) $10,465
Which of the following sections of the statement of cash flows includes activities that
increase and decrease long-term liabilities and stockholders’ equity?
A) the financing activities section
B) the operating activities section
C) the investing activities section
D) change in cash section
Significant influence equity investments must be accounted for using the ________
method.
A) equity
B) consolidation
C) discounted cash flow
D) acquisition
Cash and cash equivalents are divided by ________ to determine the cash ratio.
A) total current liabilities
B) fixed assets
C) equity
D) total long-term liabilities
The net income of a company for the year was $600,000. The company has no preferred
stock. Common stockholders’ equity was $1,200,000 at the beginning of the year and
$2,500,000 at the end of the year. Calculate the rate of return on common stockholders’
equity. (Round your answer to two decimal places.)
A) 24.00%
B) 19.35%
C) 50.00%
D) 32.43%
State unemployment compensation tax (SUTA) is paid by the employer and is not
deducted from an employee’s gross earnings.
When a plant asset is disposed of, the business must ________.
A) immediately replace it
B) ensure that the plant asset is obsolete or worn out
C) comply with the conservatism principle and record losses but not gains
D) bring the depreciation up to date
Athens Delivery Service is hired on October 31, 2018 to perform services, beginning on
November 1, 2018. The delivery services will be performed for six months at a rate of
$3,500 per month. Athens’ fiscal year ends on December 31. What amount of service
revenue should be recorded as an adjusting entry on December 31, 2018?
A) $3,500
B) 0
C) $7,000
D) $10,500
Which of the following may pay dividends?
A) preferred stock
B) investors
C) Treasury bills
D) notes payable
When a company that uses the perpetual inventory system sells goods for cash, the
journal entry to record cost of goods sold is:
A)
B) No journal entry is required.
C)
D)
What is the net result if the amount of net income for the year is less than the amount of
the Dividends?
A) Retained Earnings increases
B) Cash balance decreases
C) Cash balance increases
D) Retained Earnings decreases
Gulf Waterworks Corporation provides plumbing services. Transactions during the first
year of operations are given below.
a) Received $4,000 cash and issued common stock to Jason Robinson.
b) Paid $2,000 cash for equipment to be used for plumbing repairs.
c) Borrowed $26,000 from a local bank and deposited the money in the checking
account.
d) Paid $800 rent for the year.
e) Purchased $800 of office supplies on account.
f) Completed a plumbing repair project for a local lawyer and received $3,500 cash.
Calculate the amount of total stockholders’ equity at the end of the first year after
recording the transactions. Assume office supplies of $800 are left at the end of the
year.
A) $6,700
B) $3,500
C) $4,000
D) $26,000
The accountant of Omega, Inc. failed to make an adjusting entry to record $6,000 of
unearned service revenue that has now been earned. Assume the deferred revenue was
initially recorded as a liability. 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.
Common Stock is a separate account in the ________ category of the accounting
equation.
A) equity
B) asset
C) liability
D) revenue
Under which of the following terms will the buyer be required to pay transportation
costs?
A) FOB destination
B) FOB shipping point
C) freight out
D) delivery expense
A journal entry for a $65 payment for rent expense was posted as a debit to Salaries
Expense and a credit to Cash. Which of the following statements correctly states the
effect of the error on the trial balance?
A) The sum of the credits will equal the sum of the debits.
B) The sum of the debits will exceed the sum of the credits by $65.
C) The sum of the debits will exceed the sum of the credits by $130.
D) The sum of the credits will exceed the sum of the debits by $130.
Modern Artists’ Services signed a contract with a maintenance service company to
maintain a building that Modern Artists’ will use as an office. The contract states that
the work will begin on February 1 and end on May 31. Modern Artists’ will pay the
maintenance service company $8,000 at the end of May. It accrues Maintenance
Expense at the end of every month. What is the balance in the Accounts Payable
account for amounts owed to the maintenance service company at the end of March?
A) Debit balance of $8,000
B) Credit balance of $4,000
C) Debit balance of $4,000
D) Credit balance of $8,000
A business renders services to a client and issues a sales invoice. The amount will be
collected from the customer at a later time. Which of the following is true at the time
the invoice is issued?
A) Equity will decrease.
B) Total liabilities will increase.
C) Total assets will decrease.
D) Net income will increase.
For each of the following ratios, provide the formula and state what the ratio tells the
financial statement user.
(a) acid-test ratio
(b) accounts receivable turnover ratio
(c) days’ sales in receivables
For trading debt investments, provide the following:
• Reporting method used
• How unrealized holding gain or loss is reported
• Balance sheet effects
• Income statement effects
Classify each of the following expenditures as capital expenditure (CE) or revenue
expenditure (RE).
1. _______ Ordinary recurring repairs to keep the machinery in good working order
2. _______ Major overhaul to extend the useful life of a vehicle by three years
3. _______ Installation costs for a new machine
4. _______ Painting
George, Inc. purchased a van on May 1, 2018, for $800,000. Estimated life of the van
was five years, and its estimated residual value was $80,000. George uses the
straight-line method of depreciation. Prepare the journal entry to record the depreciation
expense for 2018 on the van. Omit explanation.
A petty cash fund was established with a $300 balance. It currently has cash of $73 and
petty cash tickets totaling $222 for travel expense. Prepare the journal entry to record
the replenishment of the fund. Omit explanation.
Under U.S. GAAP, the monetary unit assumption states that transactions are recorded in
dollars. What is the basis for this assumption?
Data for Martin Corp. and Tante, Inc. follow:
Prepare a comparative common-size income statement for each company for the year
ending December 31, 2019. Round to two decimal places. Use a multi-step format for the
income statement.
What does the debt to equity ratio show, and how is it calculated?
State the purpose of a subsidiary ledger. What is included in the accounts receivable
subsidiary ledger?
A-Plus Carpets Company buys a building for $115,000, paying $30,000 cash and
signing a 30-year mortgage note for $85,000 at 11%. Prepare the journal entry for the
purchase. Omit explanation.
List three disadvantages of borrowing.
Journalize the following transactions for Park Gift Shop. Explanations are not required.
Park uses the gross method for sales transactions and a perpetual inventory system.
Mar. 5: Purchased $4,400 of merchandise inventory on account, 3/10, n/EOM and FOB
shipping point.
Mar. 9: Returned $700 of defective merchandise purchased on March 5.
Mar. 11: Paid the freight bill of $250 on the March 5 purchase.
Mar. 12: Sold merchandise inventory on account for $5,200., 2/15, n/30. These goods
cost the company $3,700.
Mar. 14: Paid amount owed on credit purchase of March 5, less the return and the
discount.
Mar. 30: Received cash from the March 12 customer in full settlement of the debt.
Journalize the following transactions for a merchandiser that uses the perpetual
inventory system.
On January 8, inventory was sold for $7,000 on account. Credit terms were 2/15, n/30
(cost $5,500). On January 17, cash was received in full settlement of the January 8 sale.
Omit explanations.
The following is the adjusted trial balance as of December 31, 2019 of Hawkins Dental
Lab, Inc.:
Prepare the closing entries. Omit explanation.
On March 1, 2016, Nortons, Inc. paid $60,000 as office rent covering the three-month
period ending May 31, 2016. Journalize the entry on March 1 by using the alternative
treatment of deferred expenses. Omit explanation.
The following is the adjusted trial balance as of December 31, 2019 of Bright Exteriors,
Inc., after the first year of operations:
Prepare the closing entry for the Income Summary account. Omit explanation.
Prepare the journal entry to record the acquisition of fences and signs for $5,000 cash.
Omit explanation.
On January 1, 2018, Gadsby Cabinetry Company purchases $300,000 of equipment by
paying $50,000 in cash and signing a 10-year mortgage note at 13% for the balance.
Gadsby will make yearly payments of $46,072. The amortization schedule for the first
five payments is provided.
Prepare the journal entries for the purchase of the equipment and for the January 1, 2019
mortgage payment. Omit explanations.
List the four financial statements and describe the information provided by each.
