Chapter 1
True or False
A.An example of a business stakeholder is the federal government.
B.A corporation is a business that is legally separate and distinct from its owners.
C.Accounting is a service that provides many different users with financial information to make
economic decisions.
D.Small ethical lapses are harmless in and of themselves.
E.Managerial accounting is primarily concerned with the recording and reporting of economic
data and activities of an entity for use by owners, creditors, governmental agencies, and the public.
F.The unit of measurement concept requires that economic data be recorded in a common unit of
measurement.
G.If a building is appraised for $90,000, offered for sale at $95,000, and the buyer pays $85,000
cash for it, the buyer would record the building at $90,000.
H.The owner’s rights to the assets rank ahead of the creditors' rights to the assets.
I.Business transactions are economic events that directly or indirectly change an entity's
financial condition or results from operations.
J.If net income for a proprietorship was $25,000, the owner withdrew $10,000 in cash and the owner invested $5,000 in cash, the capital of the owner increased by $20,000.
K.The owner is only allowed to withdraw cash from the business.
L.Receiving a bill or otherwise being notified that an amount is owed is not recorded until the amount is paid.
M.The principal financial statements of a proprietorship are the income statement, statement of owner's equity, and the balance sheet.
N.An income statement is a summary of the revenues and expenses of a business as of a specific date.
O.A low ratio of liabilities to owner's equity indicates that a business is near bankruptcy.
Multiple choice
1.Profit is the difference between
a. assets and liabilities
b. the incoming cash and outgoing cash
c. the assets purchased with cash contributed by the owner and the cash spent to operate the business
d. the assets received for goods and services and the amounts used to provide the goods and services
2.Which of the items below is not a business organization form?
a. entrepreneurship
b. proprietorship
c. partnership
d. corporation
3.Which of the following is not a step in providing accounting information to stakeholders?
a. design the accounting information system
b. prepare accounting surveys
c. identify stakeholders
d. record economic data
4.For accounting purposes, the business entity should be considered separate from its owners if
the entity is
a. a corporation
b. a proprietorship
c. a partnership
d. all of the above
5.Which of the following is not a business transaction?
a. make a sales offer
b. sell goods for cash
c. receive cash for services to be rendered later
d. pay for supplies
6.The Reynolds Company estimated that the value of its land had increased from $10,000 to
$16,000 and therefore wrote up the land account to $16,000. Which accounting concept(s) was (were) violated?
a. cost concept
b. objectivity concept
c. all of the above
d. none of the above
7.Goods purchased on account for future use in the business, such as supplies, are called
a. prepaid liabilities
b. revenues
c. prepaid expenses
d. liabilities
8.All of the following are financial statement(s) of a proprietorship except the
a. statement of retained earnings
b. statement of owner's equity
c. income statement
d. statement of cash flows
Chapter 2
True or False
A.A chart of accounts is a listing of accounts that make up the journal.
B.Drawings are an example of an expense.
C.To determine the balance in an account, always subtract credits from debits.
D.The double-entry accounting system records each transaction twice.
E.The increase side of all accounts is the normal balance.
F.The journal is the book of original entry.
G.Journalizing transactions using the double-entry bookkeeping system will eliminate fraud.
H.The process of transferring the data from the journal to the ledger accounts is posting.
I.The post reference notation used in the journal is the page number.
J.When a business receives a bill from the utility company, no entry should be made until the invoice is paid.
K.A proof of the equality of debits and credits in the ledger at the end of an accounting period is called a balance sheet.
L.Even when a trial balance is in balance, there may be errors in the individual accounts.
M.Posting a part of a transaction to the wrong account will cause the trial balance totals to be unequal.
N.Horizontal analysis is used to compare the financial statements of the same company for different periods.
Multiple choice
1. A group of related accounts that comprise a complete unit is called a
a. Journal
b. liability
c. ledger
d. transaction
2.Which statement(s) concerning cash is (are) true?
a. cash will always have more debits than credits
b. cash will never have a credit balance
c. cash is increased by debiting
d. all of the above
3.Which of the following types of accounts have a normal credit balance?
a. assets and liabilities
b. liabilities and expenses
c. revenues and liabilities
d. capital and drawing
4.Which of the following entries records the receipt of cash from patients on account?
a. Accounts Payable, debit; Fees Earned, credit
b. Accounts Receivable, debit; Fees Earned, credit
c. Accounts Receivable, debit; Cash, credit
d. Cash, debit; Accounts Receivable, credit
5.If the two totals of a trial balance are not equal, it could be due to
a. failure to record a transaction
b. recording the same erroneous amount for both the debit and the credit parts of a transaction
c. an error in determining the account balances, such as a balance being incorrectly computed
d. recording the same transaction more than once
6.Which of the following errors, each considered individually, would cause the trial balance
totals to be unequal?
a. a transaction was not posted
b. a payment of $96 for insurance was posted as a debit of $46 to Prepaid Insurance and a
credit of $46 to Cash
c. a payment of $311 to a creditor was posted as a debit of $3,111 to Accounts Payable and a
debit of $311 to Accounts Receivable
d. cash received from customers on account was posted as a debit of $140 to Cash and a
credit of $140 to Accounts Payable
Chapter 3
True or False
1.The accrual basis of accounting requires revenue be recorded when cash is received from
customers.
2.The matching concept requires expenses be recorded in the same period that the related
revenue is recorded.
3.Adjusting entries are made at the end of an accounting period to adjust accounts on the balance
sheet.
4.The difference between deferred revenue and accrued revenue is that accrued revenue has been
recorded and needs adjusting and deferred revenue has never been recorded.
5.The systematic allocation of land's cost to expense is called depreciation.
6.The difference between the balance of a fixed asset account and the balance of its related
accumulated depreciation account is termed the book value of the asset.
7.If the adjustment for accrued salaries at the end of the period is inadvertently omitted, both
liabilities and owner's equity will be overstated for the period.
8.The financial statements are prepared from the unadjusted trial balance.
9.Vertical analysis compares each item in a statement with another item in the same statement. The correct: 2,6,9
Multiple choice
1.Which account would normally not require an adjusting entry?
a. Wages Expense
b. Accounts Receivable
c. Accumulated Depreciation
d. Smith, Capital
2.What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid
insurance account balance before adjustment, $15,500, and unexpired amounts per analysis of policies, $4,500?
a. debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500
b. debit Insurance Expense, $15,500; credit Prepaid Insurance, $15,500
c. debit Prepaid Insurance, $11,500; credit Insurance Expense, $11,500
d. debit Insurance Expense, $11,000; credit Prepaid Insurance, $11,000
3.Depreciation Expense and Accumulated Depreciation are classified, respectively, as
a. expense, contra asset
b. asset, contra liability
c. revenue, asset
d. contra asset, expense
4.If there is a balance in the unearned subscriptions account after adjusting entries are made, it
represents a(n)
a. deferral
b. accrual
c. drawing
d. revenue
5.What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid
insurance account balance before adjustment, $15,500, and unexpired amounts per analysis of policies, $4,500?
a. debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500
b. debit Insurance Expense, $15,500; credit Prepaid Insurance, $15,500
c. debit Prepaid Insurance, $11,500; credit Insurance Expense, $11,500
d. debit Insurance Expense, $11,000; credit Prepaid Insurance, $11,000
6.Depreciation Expense and Accumulated Depreciation are classified, respectively, as
a. expense, contra asset
b. asset, contra liability
c. revenue, asset
d. contra asset, expense
7.If there is a balance in the unearned subscriptions account after adjusting entries are made, it
represents a(n)
a. deferral
b. accrual
c. drawing
d. revenue
Multiple choice: d d a a
Chapter 4
True or false
1.The most important output of the accounting cycle is the financial statements.
2. A net loss is shown on the work sheet in the credit columns of both the Income Statement
columns and the Balance Sheet columns.
3.The difference between a classified balance sheet and one that is not classified is that the
classified one has subheadings.
4.Since the adjustments are entered on the work sheet, it is not necessary to record them in the
journal or post them to the ledger.
5.The post-closing trial balance will generally have fewer accounts than the trial balance.
6.Solvency is essentially the ability of an organization to pay its bills.
7.Working capital is current assets plus current liabilities.
ANS:T F T F T T F
Multiple choice
1. The worksheet
a. is an integral part of the accounting cycle
b. eliminates the need to rewrite the financial statements
c. is a working paper that is required
d. is used to summarize account balances and adjustments for the financial statements
2. Which one of the fixed asset accounts listed below will not have a related contra asset account?
a. Office Equipment
b. Land
c. Delivery Equipment
d. Building
3. Which of the accounts below would be closed by making a debit to the account?
a. Unearned Revenue
b. Fees Earned
c. Jeff Ritter, Drawing
d. Rent Expense
4. Which of the following accounts ordinarily appears in the post-closing trial balance?
a. Bill Smith, Drawing
b. Supplies Expense
c. Fees Earned
d. Unearned Rent
5. A fiscal year
a. ordinarily begins on the first day of a month and ends on the last day of the following twelfth month
b. for a business is determined by the federal government
c. always begins on January 1 and ends on December 31 of the same year
d. should end at the height of the business's annual operating cycle
6. A current ratio of 4.3 means that
a. there are $4.30 in current assets available to pay each dollar of current liabilities
b. the company cannot pay its debts as they come due
c. there are $4.30 in current assets for every $4.30 in current liabilities
d. there are $4 in current assets for every $3 in current liabilities
ANS: dbbdaa
Chapter 6
True or False
1.In a merchandise business, sales minus operating expenses equals net income.
2.In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the
beginning inventory.
3.The single-step income statement is easier to prepare, but a criticism of this format is that gross
profit and income from operations are not readily available.
4.Under the perpetual inventory system, when a sale is made, both the retail and cost values are
recorded.
5.Sales Discounts is a revenue account with a credit balance.
6.Discounts taken by the buyer for early payment of an invoice are credited to Cash Discounts
by the buyer.
7.If the ownership of merchandise passes to the buyer when the seller delivers the merchandise
for shipment, the terms are stated as FOB destination.
8.If merchandise costing $2,500, terms FOB destination, 2/10, n/30, with prepaid transportation
costs of $100, is paid within 10 days, the amount of the purchases discount is $50.
9.The adjusting entry to record inventory shrinkage would generally include a debit to Cost of
Merchandise Sold.
Multiple choice
1.The primary difference between a periodic and perpetual inventory system is that a
a. periodic system determines the inventory on hand only at the end of the accounting period
b. periodic system keeps a record showing the inventory on hand at all times
c. periodic system provides an easy means to determine inventory shrinkage
d. periodic system records the cost of the sale on the date the sale is made
2. A sales invoice included the following information: merchandise price, $4,000; transportation, $300; terms 1/10, n/eom, FOB shipping point. Assuming that a credit for merchandise returned of $600 is granted prior to payment, that the transportation is prepaid by the seller, and that the invoice is paid within the discount period, what is the amount of cash received by the seller?
a.$3,366
b.$3,400
c.$3,666
d.$3,950
3.The net sales to assets ratio measures a company's
a. working capital
b. net worth
c. effective use of sales to support the purchase of new assets
d. effective use of assets to generate sales
The correct: 3,4,8,9 Multiple choice: a c d
Chapter 7
True or false
4. A customer's check received in settlement of an account receivable is considered
cash.
5.If the balance in Cash Short and Over at the end of a period is a credit, it
indicates that cash shortages have exceeded cash overages for the period.
6. A voucher system is an example of an internal control procedure over cash
payments.
7. A remittance advice is the notification accompanying the check issued to a
creditor that states the specific invoice being paid.
8.The amount of the "adjusted balance" appearing on the bank reconciliation as of
a given date is the amount that is shown on the balance sheet for that date.
9.When the petty cash fund is replenished, the petty cash account is credited for the
total of all expenditures made since the fund was last replenished.
10.Cash equivalents are short -term investments that will be converted to cash
within 120 days.
11.The doomsday ratio is almost always less than one.
ANS:T F T T T F F T
Multiple choice
1.Credit memorandums from the bank
a. decrease a bank customer's account
b. are used to show a bank service charge
c. show that a company has deposited a customer's NSF check
d. show the bank has collected a note receivable for the customer
2. Journal entries based on the bank reconciliation are required in the depositor's accounts for
a. outstanding checks
b. deposits in transit
c. bank errors
d. book errors
ANS: d d
Chapter 8
True or false
1. Receivables from company owners and officers should be disclosed separately on the balance
sheet.
2. Since those responsible for receivables record keeping and credit approval do not handle cash,
these duties do not need to be separated to maintain good internal control.
3. Of the two methods of accounting for uncollectible receivables, the allowance method provides in
advance for uncollectible receivables.
4. Although Allowance for Doubtful Accounts normally has a credit balance, it may have either a
debit or a credit balance before adjusting entries are recorded at the end of the accounting period.
5. At the end of a period, before the accounts are adjusted, Allowance for Doubtful Accounts has a
debit balance of $2,000. If the estimate of uncollectible accounts determined by aging the receivables is $30,000, the current provision to be made for uncollectible accounts expense is $30,000.
6. The due date of a 60-day note dated July 10 is September 10.
7. If the maker of a note fails to pay the debt on the due date, the note is said to be dishonored.
8. The discounting of a note receivable creates a contingent liability that continues in effect until the
due date of the note.
ANS: T F T T F F T T
Multiple choice
1. Allowance for Doubtful Accounts has a debit balance of $500 at the end of the year (before
adjustment), and uncollectible accounts expense is estimated at 3% of net sales. If net sales are $600,000, the amount of the adjusting entry to record the provision for doubtful accounts is
a. $18,500
b. $17,500
c. $18,000
d. none of the above
2. On the balance sheet, the amount shown for the Allowance for Doubtful Accounts is equal to the
a. Uncollectible accounts expense for the year
b. total of the accounts receivables written-off during the year
c. total estimated uncollectible accounts as of the end of the year
d. sum of all accounts that are past du
e.
3. What is the type of account and normal balance of Allowance for Doubtful Accounts?
a. Contra asset, credit
b. Asset, debit
c. Asset, credit
d. Contra asset, debit
4. If the direct write-off method of accounting for uncollectible receivables is used, what general
ledger account is credited to write off a customer's account as uncollectible?
a. Uncollectible Accounts Expense
b. Accounts Receivable
c. Allowance for Doubtful Accounts
d. Interest Expense
5. A 90-day, 12% note for $10,000, dated May 1, is received from a customer on account. The
maturity value of the note is
a. $10,000
b. $10,300
c. $450
d. $9,550
ANS: c c a b b
Chapter 9
True or false
1. A business using the perpetual inventory system, with its detailed subsidiary records, does not
need to take a physical inventory.
2. Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory.
3. Unsold consigned merchandise should be included in the consignee's inventory.
4. Of the three widely used inventory costing methods (FIFO, LIFO, and average), the LIFO method
of costing inventory is based on the assumption that costs are charged against revenues in the reverse order in which they were incurred.
5. During inflationary periods, the use of the FIFO method of costing inventory will yield an
inventory amount for the balance sheet approximating the current replacement cost.
6. When using the FIFO inventory costing method, the most recent costs are assigned to the cost of
goods sold.
7. The use of the lower-of-cost-or-market method of inventory valuation increases net income for the
period in which the inventory replacement price declined.
8. Generally, the lower the number of days' sales in inventory, the better.
ANS: F F F T T F F T
Multiple choice
1. Taking a physical count of inventory
a. is not necessary when a periodic inventory system is used
b. is a detective control
c. has no internal control relevance
d. is not necessary when a perpetual inventory system is used
2. Merchandise inventory at the end of the year was inadvertently overstated. Which of the
following statements correctly states the effect of the error on net income, assets, and owner's equity?
a. net income is overstated, assets are overstated, owner's equity is understated
b. net income is overstated, assets are overstated, owner's equity is overstated
c. net income is understated, assets are understated, owner's equity is understated
d. net income is understated, assets are understated, owner's equity is overstated
3. Inventory costing methods place primary emphasis on assumptions about
a. flow of goods
b. flow of costs
c. flow of goods or costs depending on the method
d. flow of values
4. If merchandise inventory is being valued at cost and the purchase price is steadily falling, which
method of costing will yield the largest net income?
a. average cost
b. LIFO
c. FIFO
d. weighted average
5. On the basis of the following data, what is the estimated cost of the merchandise inventory on
October 31 by the retail method?
Cost Retail Oct. 1 Merchandise Inventory $225,000 $324,500 Oct. 1-31 Purchases (net) 335,000 475,500 Oct. 1-31 Sales (net) 700,000
a. $372,000
b. $140,000
c. $100,000
d. $ 70,000
6. If the estimated rate of gross profit is 40%, what is the estimated cost of the merchandise
inventory on June 30, based on the following data?
June 1 Merchandise inventory $ 75,000 June 1-30 Purchases (net) 150,000 June 1-30 Sales (net) 135,000
a. $144,000
b. $140,000
c. $ 81,000
d. $ 54,500
7. Too much inventory on hand
a. reduces solvency
b. increases the cost to safeguard the assets
c. increases the losses due to price declines
d. all of the above
ANS: b b b b d a d
Chapter 10
True or False
1. The acquisition costs of property, plant, and equipment should include all normal, reasonable
and necessary costs to get the asset in place and ready for use.
2. Land acquired as a speculation is reported under Investments on the balance sheet.
3. Standby equipment held for use in the event of a breakdown of regular equipment is reported
as property, plant, and equipment on the balance sheet.
4. As a company depreciates a piece of equipment, it cash flow goes up.
5. All property, plant, and equipment assets are depreciated over time.
6. The declining-balance method is an accelerated depreciation method.
7. The cost of replacing an engine in a truck is an example of ordinary maintenance.
8. The cost of new equipment is called a revenue expenditure because it will help generate
revenues in the future.
9. A gain can be realized when a fixed asset is discarded.
10. When exchanging equipment, if the trade-in allowance is greater than the book value a loss results.
11. The cost of a patent with a remaining legal life of 10 years and an estimated useful life of 7 years is amortized over 10 years.
12. The method used to calculate the depletion of a natural resource is the straight line method.
13. The higher the ratio of fixed assets to long-term liabilities the greater the margin of safety. ANS: T T T F F T F F F F F F T
Multiple choice
1. Factors contributing to a decline in the usefulness of a fixed asset may be divided into the following two categories
a. salvage and functional
b. physical and functional
c. residual and salvage
d. functional and residual
2. Accumulated Depreciation
a. is used to show the amount of cost expiration of intangibles
b. is the same as Depreciation Expense
c. is a contra asset account
d. is used to show the amount of cost expiration of natural resources
3. Equipment with a cost of $80,000, an estimated residual value of $5,000, and an estimated life of 15 years was depreciated by the straight-line method for 5 years. Due to obsolescence, it was determined that the useful life should be shortened by 5 years and the residual value changed to zero. The depreciation expense for the current and future years is
a. $5,500
b. $11,000
c. $10,000
d. $5,000
4. A fixed asset with a cost of $42,000 and accumulated depreciation of $38,500 is traded for a similar asset priced at $60,000. Assuming a trade-in allowance of $5,000, the cost basis of the new asset is
a. $58,000
b. $58,500
c. $60,000
d. $61,500
5. A machine with a cost of $65,000 has an estimated residual value of $5,000 and an estimated life of 4 years or 18,000 hours. What is the amount of depreciation for the second full year, using the declining-balance method at double the straight-line rate?
a. $15,000
b. $30,000
c. $16,250
d. $32,500
ANS: b c b b c
Chapter 11
True or False
1. For a current liability to exist, the following two tests must be met. The liability must be due usually within a year and must be paid out of current assets.
2. For an interest bearing note payable, the amount borrowed is equal to the face value of the note.
3. The proceeds of a discounted note are equal to the face value of the note.
4. Obligations that depend on past events and that are based on future transactions are contingent liabilities.
5. The journal entry to record the cost of warranty repairs that were incurred during the current period, but related to sales made in prior years, includes a debit to Warranty Expense.
6. Generally, all deductions made from an employee's gross pay are required by law.
7. FICA tax is a payroll tax that is paid only by employers.
8. The higher the quick ratio, the more liquid a company is.
ANS: T T F F F F F T
Multiple choice
1. On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable to Still Co. Assume that the fiscal year of Acme Co. ends June 30. What is the amount of interest expense recognized by Acme in the current fiscal year?
a. $293.33
b. $400.00
c. $391.11
d. $1,600.00
2. Proceeds of $48,750 were received from discounting a $50,000, 90-day note at a bank. The discount rate used by the bank in computing the proceeds was
a. 6.25%
b. 10.00%
c. 10.26%
d. 9.75%
3. Pilgrim Company sells merchandise with a one year warranty. In 2005, sales consisted of 1,500 units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in 2005 and 70% in 2006. In the 2005 income statement, Pilgrim should show warranty expense of
a. $4,500
b. $10,500
c. $15,000
d. $0
ANS: a b c
Chapter 12
True or False
1. A corporation is a separate entity for accounting purposes but not for legal purposes.
2. Double taxation is a disadvantage of a corporation because the same party has to pay taxes twice on the income.
3. The two main sources of stockholders' equity are investments contributed by stockholders and net income retained in the business.
4. The balance in retained earnings should be interpreted as representing surplus cash left over for dividends.
5. Preferred stock with a preferential right to dividends in arrears is referred to as participating preferred.
6. If 50,000 shares are authorized, 37,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 39,000.
7. When a corporation issues stock at a premium, it reports the premium as an other income item on the income statement.
8. If 100 shares of treasury stock were purchased for $50 per share and then sold at $60 per share, $1,000 of income is reported in the income statement.
9. Since a stock split changes information of a business, this transaction needs to be recorded.
10. If 20,000 shares are authorized, 14,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of $1 per share would amount to $14,000.
11. The declaration and issuance of a stock dividend does not affect the total amount of a corporation's assets, liabilities, or stockholders' equity.
12. The dividend yield indicates the rate of return to stockholders in terms of cash dividend distributions.
ANS: F F T F F F F F F F T T
Multiple choice
1. The outstanding stock is composed of 10,000 shares of $100 par, cumulative preferred $8 stock, and 50,000 shares of no-par common stock. Preferred dividends have been paid every year except for the preceding year and the current year. If $380,000 is to be distributed as a dividend for the current year, what total amount will be distributed to the common stockholders?
a. $380,000
b. $220,000
c. $80,000
d. $160,000
2. A corporation issues 2,000 shares of common stock for $ 32,000. The stock has a stated value of $10 per share. The journal entry to record the stock issuance would include a credit to Common Stock for
a. $20,000
b. $32,000
c. $12,000
d. $2,000
3. When common stock is issued in exchange for a noncash asset, the transaction should be recorded at
a. the par value of the stock issued
b. the fair market value of the stock
c. the fair market value of the asset acquired
d. the fair market value of the asset acquired or the fair market value of the stock, whichever can
be determined more objectively.
4. Treasury stock that had been purchased for $5,400 last month was reissued this month for $7,500. The journal entry to record the reissuance would include a credit to
a. Treasury Stock for $7,500
b. Paid-In Capital from Treasury Stock for $7,500
c. Paid-In Capital in Excess of Par/Common for $2,100
d. Paid-In Capital from Treasury Stock for $2,100
5. The liability for a dividend is recorded on which of the following dates?
a. the date of record
b. the date of payment
c. the date of announcement
d. the date of declaration
6. The entry to record the issuance of stock certificates for a common stock dividend that had been declared would include a debit to
a. Common Stock
b. Paid-In Capital in Excess of Par-Common Stock
c. Stock Dividends Distributable
d. Cash
ANS: b a d d d c