Test Bank Financial Accounting 6th Libby, Libby & Short
Multiple Choice Questions
1. The primary purpose of the balance sheet is to
A. measure the net income of a business up to a particular point in time.
B. report the difference between cash inflows and cash outflows for the period.
C. report the financial position of the reporting entity at a particular point in time.
D. report the current value of the business.
2. The Beta Corporation had 2009 revenues of $200,000, expenses of $140,000, and an income tax rate of 30 percent. Net income after taxes would be
3. Atlantic Corporation reported the following amounts at the end of the first year of operations: contributed capital $100,000; sales revenue $400,000; total assets $300,000; $20,000 dividends; and total liabilities $160,000. Retained earnings and total expenses would be
A. retained earnings $40,000 and expenses $340,000.
B. retained earnings $60,000 and expenses $320,000.
C. retained earnings $140,000 and expenses $240,000.
D. retained earnings $160,000 and expenses $220,000.
4. The financial statement that reports the financial position of a business is the
A. income statement.
B. balance sheet.
C. statement of cash flows.
D. footnotes to the financial statements.
5. Which of the following reports the cash inflows, cash outflows, and change in cash for period?
A. Income statement.
B. Balance sheet.
C. Statement of cash flows.
D. Auditor’s report.
6. For a business, a supplier
A. is a company or individual that owns shares of the business.
B. is a company or individual to whom the business sells goods or services.
C. provides goods and services used by the business.
D. makes loans to the company to help finance its activities.
7. For a business, an example of an internal decision maker is
A. a loan officer at a bank.
B. a supplier who sells goods to the company on account.
C. one of the business’s long-term customers.
D. one of the business’s managers.
8. Financial accounting
A. provides information primarily for external decision makers.
B. is required for corporations but probably would not be done by other business entities.
C. provides information primarily for the use of managers of the company.
D. has been practiced in this country for approximately the last 15 years.
9. Accounting information developed primarily for internal decision makers is called
A. management accounting.
B. risk accounting.
D. financial accounting.
10. What financial statement would you look at to determine the dividends declared by a business?
A. income statement.
B. statement of retained earnings.
C. statement of cash flows.
D. balance sheet.
11. Which of Chao’s financial statements would you look at to determine whether Chao will be able to pay for the goods when payment is due in 30 days?
A. income statement.
B. balance sheet.
C. statement of retained earnings.
D. statement of cash flows.
12. Which of the following is not considered to be a liability?
A. accounts payable
B. notes payable
C. wages payable
D. cost of goods sold
13. A business’s assets are
A. equal to liabilities minus stockholders’ equity.
B. the economic resources of the business.
C. Reported at current cost.
D. Reported on the income statement.
14. Assets for a particular business might include
A. cash, accounts payable, and notes payable.
B. cash, retained earnings, and accounts receivable.
C. cash, accounts receivable, and inventory.
D. inventories, property and equipment, and contributed capital.
15. A business’s balance sheet cannot be used to accurately predict what the business might be sold for because
A. it identifies all the revenues and expenses of the business.
B. assets are generally listed on the balance sheet at their historical cost, not their current value.
C. it gives the results of operations for the current period.
D. some of the assets and liabilities on the balance sheet may actually be those of another entity.
16. Liabilities and stockholders’ equity are
A. sources of financing for economic resources.
B. economic resources used by a business entity.
C. increases in assets resulting from profitable operations.
D. shown on the income statement in calculating net income.
17. The accounting equation (balance sheet equation) is
A. Assets + Liabilities = Stockholders’ equity.
B. Assets + Stockholder’s equity = Liabilities.
C. Assets = Liabilities + Stockholders’ equity.
D. Revenues Expenses = Net income.
18. Downard Bank, in deciding whether to make a loan to Rodney Company, would be interested in the amount of liabilities Rodney has on its balance sheet because
A. the liabilities represent resources that could be used to repay the loan.
B. if Rodney already has many other obligations, it might not be able to repay the loan.
C. existing liabilities give an indication of how profitable Rodney has been in the past.
D. Downard would be interested in the amount of Rodney’s assets but not the amount of liabilities.
19. The two categories of stockholders’ equity usually found on the balance sheet of a corporation are
A. contributed capital and long-term liabilities.
B. contributed capital and property, plant, and equipment.
C. retained earnings and notes payable.
D. contributed capital and retained earnings.
20. Which financial statement for a business would you look at to determine the company’s earnings performance during an accounting period?
A. balance sheet.
B. statement of retained earnings.
C. income statement.
D. statement of cash flows.
1. Which of the following statements about stockholders’ equity is not correct?
A. Stockholders’ equity is the shareholders’ residual interest in the company resulting from the difference in assets and liabilities.
B. Stockholders’ equity accounts are increased with credits.
C. Stockholders’ equity results only from contributions of the owners.
D. The purchase of land for cash has no effect on stockholders’ equity.
2. All liabilities appear on the
A. Balance sheet.
B. Income statement.
C. Statement of stockholders’ equity.
D. Statement of cash flows.
3. Morgan Company owes Regan Company $1,000, Morgan would reflect this on its
A. statement of cash flows.
B. income statement.
C. balance sheet.
D. statement of stockholders’ equity.
4. The assumption that a business can continue to remain in operation into the future is the
A. historical cost principle.
B. unit-of-measure assumption.
C. continuity assumption.
D. separate-entity assumption.
5. Assets are defined as
A. resources with possible future economic benefits owed by an entity as a result of past transactions.
B. resources with probable future economic benefits owned by an entity as a result of past transactions.
C. resources with probable future economic benefits owned by an entity as a result of future transactions.
D. resources with possible future economic benefits owed by an entity as a result of future transactions.
6. The assumption that the assets and liabilities of the business are accounted for on the books of the company but not included in the records of the owner is the
A. unit-of-measure assumption.
B. continuity assumption.
C. historical cost principle.
D. separate entity assumption.
7. Liabilities are defined as
A. possible debts or obligations of an entity as a result of future transactions which will be paid with assets or services.
B. possible debts or obligations of an entity as a result of past transactions which will be paid with assets or services.
C. probable debts or obligations of an entity as a result of future transactions which will be paid with assets or services.
D. probable debts or obligations of an entity as a result of past transactions which will be paid with assets or services.
8. Stockholders’ equity is
A. probable debts or obligations of an entity as a result of past transactions which will be paid with assets or services.
B. assets minus liabilities.
C. probable future economic benefits owned by an entity as a result of past transactions.
D. the financing provided by the creditors of a business.
9. Chad Jones is the sole owner and manager of Jones Glass Repair Shop. In 2009, Jones purchases a truck for $30,000 to be used in the business. Which of the following fundamentals requires Jones to record the truck at the price paid to buy it?
A. Separate-entity assumption.
B. Revenue principle.
C. Full disclosure.
D. Historical cost principle.
10. On a balance sheet, assets are listed in the order of
A. dollar amount (largest first).
B. date of acquisition (earliest first).
C. ease of conversion to cash.
D. importance to the operation of the business.
11. In what order would the assets of Mertz Company be listed on their balance sheet?
A. Cash, Accounts Receivable, Inventory, Plant and Equipment
B. Cash, Inventory, Accounts Receivable, Plant and Equipment
C. Cash, Accounts Receivable, Marketable Securities, Inventory
D. None of these are in correct order
12. We would report changes in stockholders’ equity caused by operating activities
A. in an asset account.
B. in a contributed capital account.
C. in a liability account.
D. in the retained earnings account.
13. Which of the following events will cause retained earnings to increase?
A. Dividends declared by the Board of Directors.
B. Net income reported for the period.
C. Net loss reported for the period.
D. Issuance of stock in the business
14. Which of the following transactions would cause retained earnings to increase?
A. Collection of a customer’s account.
B. Loan from a bank.
C. Sale of service to a customer.
D. Wage costs owed to employees.
15. The primary objective of financial accounting is to
A. provide information about a business to internal parties.
B. provide information about a business’ future business strategies.
C. provide useful economic information about a business to help external parties make sound financial decisions.
D. provide predictions of future stock price.
16. Which of the following would not be considered a current liability?
A. Accounts Payable
B. Prepaid Expenses
C. Taxes Payable
D. Utilities Payable
17. Which of the following would not be considered a current asset?
B. Prepaid Expenses
D. Accounts Receivable
18. “Accounts Payable” refers to
A. an amount owed to a business.
B. an amount a business owes to a third party.
C. the bottom line on the income statement.
D. the total cash paid by a business during the year.
19. Which of the following is not a liability?
A. Accounts payable.
B. Retained earnings.
C. Notes payable.
D. Unearned Revenue.
20. Which of the following liability accounts is usually not satisfied by payment of cash?
A. Accounts payable
B. Unearned revenues
C. Taxes payable
D. All of these are satisfied by paying cash
1. The principle that requires us to record a transaction when we provide service to a client and bill them is
A. historical cost principle
B. cost principle.
C. full disclosure.
D. revenue recognition.
2. The primary difference between revenues and gains is
A. gains are increases in net assets from peripheral activities while revenues are increases from ongoing activities.
B. generally accepted accounting principles makes no distinction between them since they both increase income.
C. revenues cause increases in net assets as a result of peripheral activities and gains cause increases through ongoing activities.
D. both revenues and gains cause a decrease in net assets from ongoing and peripheral transactions respectively.
3. Which of the following would shorten the operating cycle causing an improvement in cash flows?
A. Faster collection of accounts receivables.
B. Selling inventory in a shorter period of time.
C. Increasing the number of customers who paid cash to buy our goods.
D. All of these would shorten the operating cycle.
4. Which of the following is true about the time period assumption?
A. It assumes we value the business properly as of the end of every month.
B. It is the cutoff point for asset and liability recognition.
C. It keeps the company’s transactions separate and apart from those of the owners.
D. It assumes we divide the long life of a business into a series of shorter time periods for accounting and reporting purposes.
5. Financial analysts look to the income statement to determine
A. whether the company has generated sufficient cash to pay its bills.
B. if the company has invested too much cash in its inventory.
C. whether the company has generated income from operations.
D. if the company has too much debt.
6. The operating cycle of a business is best defined as
A. the period of time for which we prepare our financial statements.
B. the time it takes for a company to purchase and pay for goods or services from suppliers, sell those goods or services to customers and collect cash from the customers.
C. the length of time over which property, plant and equipment assets are expected to be used by the company in generating revenues.
D. the period of time between borrowing money and repaying it.
7. The effect of shortening the length of the operating cycle is
A. increase in operating costs. B. decreased cash inflow.
C. increased profits. D. increased debt.
8. Which of the following costs is most likely to be the largest expense item on the income statement of a merchandising chain such as Wal-Mart?
A. Wage, salary and benefits expense
B. Cost of Sales
D. Income tax expense
9. Which of the following businesses would not report cost of sales on their income statements?
A. A large law firm
B. An automobile dealership
C. A pizza restaurant chain
D. A computer chip manufacturer
10. Calculate the effective income tax rate for a company that reports income tax expense of
$142.5 million, net income of $357.5 million, and income before income taxes of $500 million.
A. 33 1/3% B. 25% C. 8.5% D. 71.5%.
11. Revenues are defined as
A. increases in net assets as a result of peripheral transactions.
B. decreases in net assets as a result of ongoing operations.
C. increases in net assets as a result of ongoing operations.
D. decreases in net assets as a result of peripheral transactions.
12. Which of the following statements is true?
A. The balance sheet must disclose earnings per share (EPS).
B. The income statement reports revenues, expenses, gains and losses.
C. A loss causes an increase in net assets resulting from a peripheral transaction.
D. Dividends are disclosed on the balance sheet.
13. Which of the following activities will most likely result in a reported gain on the income statement?
A. The sale of inventory to customers
B. The sale of old equipment
C. The wages and benefits paid to employees
D. The payment of dividends to stockholders
14. Which of the following expenses is usually listed last on the income statement?
A. Cost of sales
B. Salaries and benefits expense
C. Advertising expense
D. Income tax expense
15. A landlord received $5,000 cash for December 2011’s rent but the tenant’s rent for
December is $8,000. Which of the following is true for year ended 2011?
A. $8,000 would be reported on the statement of cash flows.
B. $8,000 would appear on the balance sheet as rent receivable.
C. $8,000 would appear on the income statement as rent revenue earned.
D. $5,000 would appear on the balance sheet as prepaid rent.
16. Two basic accounting principles determine when revenues and expenses are to be recorded under accrual basis accounting. They are
A. revenue recognition and matching principles.
B. revenue recognition and measurement principles.
C. cost and matching principles.
D. none of these.
17. During 2010, Sigma Company earned service revenues amounting to $700,000, of which
$630,000 was collected in cash; the balance will be collected in January 2011. The 2010 income statement of the company should report the following amount for service revenues
A. $ 630,000.
B. $ 700,000.
C. $ 70,000.
18. The owner of an office building should report rent collected in advance as a debit to cash and a credit to
A. a liability.
B. an asset other than cash.
C. a revenue.
D. an expense.
19. The revenue principle requires four conditions to be met. Which of the following is one of the four conditions?
A. The customer has paid for the goods or services.
B. Delivery of goods or performance of service has occurred or is scheduled to occur.
C. The price is fixed or determinable.
D. The customer has signed a contract.
20. Accrued expenses which must be recorded in adjusting entries represent expenses
A. incurred and paid.
B. incurred but not paid.
C. paid in advance.
D. paid in advance and not recorded.
1. Which of the following is a correct statement about the unadjusted trial balance?
A. It provides a listing of the balance sheet accounts only.
B. It provides data in a convenient form for preparing the adjusting entries and financial statements.
C. It provides a check of the equality of the debits and credits of the ledger accounts after transactions have been journalized and posted.
D. Both B and C are correct.
2. Morgan Company purchased supplies inventory for $2,000. Due to an error in posting, the inventory account was debited for only $200 when accounts payable was credited for $2,000. During which phase of the accounting cycle would this error be discovered?
A. Recording the transaction in the journal.
B. Preparation of the financial statements.
C. Preparation of the trial balance.
D. Analysis of each transaction.
3. Which is the correct order of the steps in the accounting cycle during the accounting period?
A. Transaction analysis, journal entries, trial balance
B. Transaction analysis, posting to the ledger, journal entries
C. Transaction analysis, posting to the ledger, adjusting the accounts
D. Transaction analysis, journal entries, posting to the ledger
4. Which is the correct order of the steps in the accounting cycle at the end of the accounting period?
A. Prepare financial statements, journalize and post adjusting entries, journalize and post the closing entries, and prepare a post-closing trial balance
B. Prepare an unadjusted trial balance, journalize and post adjusting entries, journalize and post the closing entries, and prepare financial statements
C. Journalize and post adjusting entries, journalize and post the closing entries, prepare financial statements, and prepare an adjusted trial balance
D. Prepare an unadjusted trial balance, journalize and post adjusting entries prepare financial statements, and journalize and post the closing entries
5. The following is an example of an error that will not be discovered on the trial balance:
A. An entry was journalized and posted as a debit to cash for $500 and credit to accounts receivable for $5,000.
B. An entry was journalized and posted as a debit to cash for $500 and a credit to sales revenue $500 when payment was received on a customer’s account.
C. An entry was journalized and posted as a debit to wages expense for $20,000 and a debit to wages payable for $20,000.
D. An entry was journalized and posted as a debit to cash for $1,110 and a credit to sales for
6. On October 1, 2009, Adams Company paid $4,000 for a two-year insurance policy on the building with the insurance starting on that date. The accounting period ends December 11. At the end of December 31, 2009, the financial statements should report
A. Prepaid insurance, $4,000 and Insurance expense, $0.
B. Prepaid insurance, $0 and Insurance expense, $4,000.
C. Prepaid insurance, $2,000 and Insurance expense, $2,000.
D. Prepaid insurance, $3,500 and Insurance expense, $500.
7. On April 1, 2007, the premium on a one-year insurance policy on equipment was paid amounting to $3,000 with the insurance starting on that date. At the end of December 31,
2007 (end of the accounting period), the financial statements for 2007, would report
A. Insurance expense, $3,000; Prepaid insurance $0.
B. Insurance expense, $0; Prepaid insurance $3,000.
C. Insurance expense, $750; Prepaid insurance $2,250.
D. Insurance expense, $2,250; Prepaid insurance $750.
8. On July 1, 2009, Allen Company signed a $100,000, one-year, 6 percent note payable. At due date, June 30, 2010, the principal and interest will be paid. Interest expense should be reported on the income statement (for the year ended December 31, 2009) as
A. $6,000. B. $3,000. C. $1,500. D. $1,200.
9. On December 31, 2009, the effect of recording an adjusting entry for accrued wages of $2,000 would be
A. a decrease in stockholders’ equity and decrease in an asset.
B. a decrease in liabilities and increase in stockholders’ equity.
C. a decrease in stockholders’ equity and an increase in liabilities.
D. an increase in stockholders’ equity and increase in an asset.
10. On January 1, 2007, the ledger of Global Corporation correctly showed supplies inventory of $1,000. During 2007, supplies purchases amounted to $5,000. A physical count of inventory on hand at December 31, 2007, showed $1,200. The 2007 income statement should report supplies expense amounting to
A. $ 6,000. B. $ 5,200. C. $ 4,800. D. $ 1,000.
11. How is carrying value calculated?
A. Acquisition cost minus accumulated depreciation
B. Acquisition cost minus depreciation expense
C. Acquisition cost divided by the useful life of the asset
D. None of the other answers is correct.
12. On December 31, 2007 (end of the accounting period), Dallas Company recorded depreciation on its company truck of $5,000. Transaction analysis of the depreciation should reflect the following
A. decrease stockholders’ equity and increase liabilities.
B. decrease assets and increase liabilities.
C. decrease stockholders’ equity and decrease assets.
D. decrease assets and increase stockholders’ equity.
13. On July 1, 2009, Canine Company signed a two-year $50,000 note payable with 8 percent interest. At due date, July 1, 2011, the principal and interest will be paid in full. Interest expense should be reported on the income statement for the year ended December 31, 2009, in the amount of
A. $ 2,000. B. $ 2,250. C. $ 4,000. D. $ 0.
14. On July 1, 2009, Gerdin Company borrowed $100,000. The company signed a note payable with interest at 6 percent per year. The note and interest are due on December 31, 2009. On December 31, 2009, Goode paid $103,000 to settle the debt in full. Assuming no accruals for interest have been made during the year, transaction analysis of the $103,000 cash payment on December 31, 2009, should reflect the following:
A. decrease assets, $103,000; decrease liabilities, $103,000.
B. decrease assets, $100,000; decrease stockholders’ equity, $3,000; and decrease liabilities, $103,000.
C. decrease stockholders’ equity, $100,000; decrease liabilities, $3,000; and decrease assets, $103,000.
D. decrease liabilities, $100,000; decrease stockholders’ equity, $3,000; and decrease assets, $103,000.
15. On January 1, 2009, Ryan Company paid the premium in advance on a three-year insurance policy on equipment in the amount of $6,000. At that time, the full amount paid was recorded as prepaid insurance. On December 31, 2009, the end of the accounting year, Hammond Company would be required to record an adjusting entry that would include a
A. $6,000 credit to prepaid insurance.
B. $2,000 debit to insurance expense.
C. $2,000 debit to prepaid insurance.
D. $6,000 debit to insurance expense.
16. On January 1, 2009, Ryan Company paid the premium in advance on a three-year insurance policy on equipment in the amount of $6,000. At that time, the full amount paid was recorded as prepaid insurance. After recording the adjusting entry for the insurance policy on December 31, 2009, Ryan Company’s records would reflect a balance in the prepaid insurance account of
A. $1,000. B. $2,000. C. $3,000. D. $4,000.
17. At the end of its accounting period, December 31, 2009, August Corporation owed $1,000 for property taxes for the current year, which had not been recorded or paid. Therefore, the 2009, adjusting entry should be
A. $1,000 credited to an expense account and debited to a liability account.
B. $1,000 debited to an expense account and credited to an asset account.
C. $1,000 credited to a liability account and debited to an expense account.
D. $1,000 debited to a liability account and credited to an asset account.
18. On October 1, 2009, Ethan Company borrowed $20,000 on a 6-month note with an annual interest rate of 10 percent. How much interest expense should be reported for the year ended December 31, 2009?
A. $ 313. B. $ 500. C. $2,000. D. $ -0-.
19. Adjusting entries
A. always include the cash account
B. usually are recorded as of the first day of the accounting period
C. always change at least one income statement account balance and one balance sheet account balance
D. are prepared after closing entries
20. Assume Idaho Company recorded the following adjusting entry at year-end:
If the beginning balance in prepaid insurance was $500 and $2,500 was paid for an insurance premium during the year, the ending balance in the prepaid insurance account (after the above adjusting entry) would be
A. $1,200 debit. B. $ 700 debit. C. $2,200 debit. D. $1,000 debit.
1. Which of the following statements is true?
A. revenue is usually recorded when goods are shipped
B. revenue is recorded when cash collection is made.
C. revenue is usually recorded upon delivery to the customer.
D. revenue is recorded either when the sale is made, collection occurs and/or delivery is made. It is the company’s decision.
2. A company that sells magazines and collects subscription fees prior to the publication and distribution of the magazine. As the cash is received in advance from the customers, the company should record a debit to Cash and a credit to
A. Sales revenue.
B. Prepaid expenses.
C. Unearned revenue.
D. Accounts payable.
3. Most companies usually recognize revenue as earned and record the revenue when
A. the customer’s order is received
B. the order is shipped
C. the order is delivered
D. the return period is over.
4. When a company ships product to a customer with the terms FOB (free on board)
destination, which of the following is true?
A. The seller will pay the shipping charges and title will not be exchanged until goods are received by the customer.
B. The buyer will pay the shipping charges and title is exchanged at point of shipment.
C. The seller will pay the shipping and title is exchanged at point of shipment.
D. The buyer will pay the shipping and title is exchanged when the goods are received by the customer.
5. On the income statement, the amount of sales returns and allowances is normally
A. added into selling expenses.
B. subtracted from gross margin to determine net sales.
C. added in the calculation of cost of goods sold.
D. subtracted from gross sales to determine net sales.
6. Which of the following statements is false?
A. Sales returns and allowances is always treated as a contra-revenue.
B. Sales returns and allowances, sales discounts and credit card discounts are always treated as selling expenses.
C. Credit card discounts and sales discounts can be treated as contra-revenue accounts or as selling expenses.
D. Sales discounts are used to encourage early payment by customers.
7. Credit terms of 2/10, n/30 indicate that a
A. two percent discount for early payment is available if the invoice is paid before the tenth day of the month following the month to of sale.
B. two percent discount for early payment is available within ten days of the date of sale.
C. ten percent discount for early payment is available if the invoice is paid within two days of the date of the invoice.
D. two percent discount for early payment is available if the invoice is paid after the tenth day, but before the thirtieth day of the invoice date.
8. Miranda Corp. received an order from a customer on October 1. The toys were shipped on October 15. The customer sent a check for full payment on November 5. Miranda received the check on November 10 and deposited it in the bank account. Miranda should record sales revenue related to this series of transactions on
A. October 1. B. October 15. C. November 5. D. November 10.
9. A customer purchased $5,000 of goods on credit from Discount Paper Supply on September 1. The customer received the bill on September 13 and mailed a $5,000 check on September 10. Discount Paper Supply received the check on October 4. In recording this transaction, Discount Paper Supply should credit Sales Revenue for $5,000 on
A. September 1. B. September 13. C. September 10. D. October 4.
10. When a credit sale is made with terms of 2/10, net 30 on May 10 and the customer’s check is received on May 19, which of the following is true about the May 19 journal entry?
A. The debit to cash will equal the credit to accounts receivable because the discount was recorded on May 10.
B. There will be a debit to sales discounts on May 10.
C. The debit to cash will be less than the credit to accounts receivable on May 19.
D. There will be a credit to sales discounts on May 19.
11. When goods are sold to a customer with credit terms of 2/10, n/30, the customer will receive a
A. 10% discount if they pay within 2 days.
B. 2% discount if they pay 10% of the amount due within 30 days.
C. 10% discount if they pay within 30 days.
D. 2% discount if they pay within 10 days.
12. A company had the following partial list of account balances at year-end:
The amount of Net Sales shown on the income statement would be
A. $91,900. B. $90,700. C. $89,900. D. $88,600.
13. A company purchased goods on credit with credit terms of 3/15, n/45. Although the company does not have cash available to pay within the discount period, the manager of the company is considering borrowing money to take advantage of the discount. In order to make the appropriate decision, the manager computed the annual interest rate associated with the sales discount. This annual rate is approximately
A. 56%. B. 38%. C. 25%. D. 18%.
14. When credit terms for a sale are 2/15, n/40, the customer saves by paying the bill early. Approximately what percent would this savings amount to on an annual basis?
A. 18%. B. 20%. C. 30%. D. 37%.
15. What is the annual interest rate of a sales discount of 3/10, n/60?
A. 1.9% B. 2.6% C. 18.8% D. 14.6%
16. Which of the following accounts is not treated as a contra-revenue?
A. Sales discounts
B. Credit card discounts
C. Sales returns and allowances
D. Purchase discounts
17. By treating sales returns and allowances, sales discounts, and credit card discounts as contra-revenues, we have the following impact
A. Gross margin is reduced by sales returns and allowances, sales discounts and credit card discounts
B. Gross margin is increased by sales returns and allowances, sales discounts and credit card discounts
C. Gross margin is unchanged by sales returns and allowances, sales discounts and credit card discounts
D. Net income is increased by sales returns and allowances, sales discounts and credit card discounts
18. In 2006, Deckers gross profit percentage was 46.4% while their competitor, Timberland’s percentage was 47.3%. Which was the most likely reason for Timberland’s higher percentage?
A. Higher selling prices
B. Lower product cost as a percentage of sales
C. Ability to differentiate their product in consumers’ eyes
D. Lower cost of goods sold
19. Which of the following is the most likely cause of a decrease in a company’s gross profit percentage?
A. They discounted their prices.
B. They reduced product cost as a percentage of sales.
C. They reduced their operating costs.
D. They sold fewer products.
20. Which of the following is the most likely cause of an increase in gross profit percentage?
A. selling products for higher prices
B. selling products with lower margins
C. higher product costs
D. selling fewer products
1. Which of the following best describes inventory?
A. They are held for resale.
B. They are tangible property.
C. They are used in the operations of the company.
D. They are held for resale and are tangible property.
2. Which of the following statements about inventory is true?
A. It is acquired for use in operating the company.
B. It is intangible property.
C. It is a current asset on the balance sheet.
D. Manufacturers have four inventory accounts.
3. Rockwell Company reported the following amounts on its 2009 income statement: Purchases,
$100,000; Beginning inventory, $20,000; and Cost of goods sold, $110,000. Therefore, the 2009 ending inventory was
A. $10,000. B. $25,000.
C. $15,000. D. $27,000.
4. The 2009 records of Coleman Company showed beginning inventory, $100,000; cost of goods sold, $450,000; and ending inventory, $80,000. The purchases for 2009 equal
A. $450,000. B. $410,000. C. $430,000. D. $420,000.
5. When goods are sold on credit, revenue usually should be recognized at the date of
A. receipt of the sales order.
B. passage of title from the seller to the buyer.
C. receipt of the goods by the buyer.
D. manufacture of the goods.
6. Which of the following types of inventory usually is not held by a manufacturing business?
A. Finished goods inventory
B. Raw material inventory
C. Merchandise inventory
D. Work in process inventory
7. Which of the following is true about a manufacturing company’s inventory?
A. Components purchased from vendors will be added to a raw material inventory account.
B. Direct labor and factory overhead are added to the materials in the raw material inventory account.
C. Cost of storing finished units in a separate warehouse will be added to the finished goods inventory account.
D. Direct labor and factory overhead are subtracted from the materials in the raw material inventory account.
8. Thorton Co. reported the following data at year-end. Sales, $500,000; beginning inventory,
$40,000; ending inventory, $45,000; cost of goods sold, $350,000; and gross margin, $150,000. What was the amount of merchandise purchased during the year?
9. The following information was taken from the 2010 income statement of Cobra Company: Pretax income, $12,000; Total operating expenses (not including income taxes), $20,000; Sales revenue,
$120,000. Compute cost of goods sold.
A. $ 88,000
10. The following information was taken from the 2010 income statement of Milburn Company: Pretax income, $12,000; Total operating expenses (not including income taxes), $20,000; Sales revenue, $120,000; Beginning inventory, $8,000; and Purchases, $90,000. Compute the amount of the ending inventory.
C. $ 8,000
11. Which of the following is true?
A. Factory overhead consists of manufacturing costs other than direct materials and direct labor. B. Net realizable value is the expected sales price plus selling costs.
C. LIFO Reserve is a contra sales account for the excess of LIFO over FIFO inventory.
D. Purchases discounts increase sales revenue to arrive at net sales.
12. Sheffield Company had the following information taken from its 2009 adjusted trial balance: Sales, $400,000; Sales Discounts, $12,000; Beginning Inventory, $20,000; and Purchases, $200,000. Ending inventory was determined to be $25,000. Compute the gross margin (gross profit) that would appear in the income statement.
A. $162,000. B. $180,000. C. $193,000. D. $205,000.
On March 10, Anthony Company received merchandise for resale from its normal supplier. The price was $3,600 with terms of 2/10, n/30 for 100 units of Part #345. The invoice was paid on March
13. Freight costs were $120 and the company paid $108 of interest on a loan to buy the inventory. What is the unit cost that should be recorded for each of the 100 units of Part # 345?
14. Which of the following is correct?
A. Beginning Inventory + Purchases Cost of Goods Sold = Ending Inventory.
B. Sales + Cost of Goods Sold = Gross Margin.
C. Beginning Inventory + Ending Inventory Purchases = Cost of Goods Sold.
D. Income Before Taxes Operating Expenses = Cost of Goods Sold.
15. Which of the following costs while includable in inventory, is usually expensed as incurred instead of being assigned to the inventory units?
A. Freight costs
B. Inspection and preparation costs
C. Purchases discounts
D. Purchase returns
16. Which of the following costs would not be part of product inventory costs for a manufacturer such as Harley Davidson?
A. Costs to advertise the newest model.
B. Kickstands purchased for use in manufacturing the motorcycles
C. The factory manager’s salary and benefits
D. The wages and benefits of an employee in the welding department
17. Which of the following businesses would not have cost of goods sold?
A. A jewelry store
B. A grocery store
C. A law firm
D. A manufacturer of batteries
18. Which of the following inventory costing methods is subject to manipulation with regard to the resulting inventory cost?
C. Weighted-average cost.
D. All of the inventory methods are subject to manipulation.
19. Lauer Corporation uses the periodic inventory system and the following information about their laptop computer is available:
During the year, 750 laptop computers were sold.
What was ending inventory and cost of goods sold on 12/31 under the FIFO cost flow assumption?
A. $60,000 and $710,000.
B. $52,500 and $717,500.
C. $52,000 and $718,000.
D. None of the answers is correct.
20. Lauer Corporation uses the periodic inventory system and the following information about their laptop computer is available:
During the year, 750 laptop computers were sold.
What was ending inventory and cost of goods sold on 12/31 under the LIFO cost flow assumption?
A. $56,000 and $714,000.
B. $45,000 and $725,000.
C. $40,000 and $730,000.
D. None of the answers is correct.
1. Long-lived, productive assets do not include the following kind of assets
A. land held for resale.
B. plant and equipment in use.
C. patents in use.
D. mineral deposits being mined.
2. Rockwell, Inc., a manufacturing company, is preparing their annual financial statements. Which of the following accounts would not be grouped under long-lived, productive assets?
B. Land on which the building is located.
D. Finished goods inventory.
3. Long-lived, productive assets that have physical substance are
A. Long-term investments.
B. Intangible assets.
C. Tangible assets.
D. Current assets.
4. Tangible assets include
A. Land, buildings and natural resources. B. Land, buildings and leaseholds.
C. Natural resources, buildings, and franchises. D. Licenses, trademarks, and land.
5. Intangible assets include
A. Natural resources, patents, and trademarks.
B. Accounts receivable, franchises, and trademarks.
C. Copyrights, licenses, and land.
D. Leaseholds, patents and copyrights.
6. Which statement is false?
A. Shortening the estimated useful lives of operational assets will lead to a higher fixed asset turnover.
B. Using an accelerated depreciation method instead of straight-line will lead to reporting a higher fixed asset turnover.
C. Acquiring more long-lived, productive assets when a company is growing will lead to a lower fixed asset turnover.
D. Selling off long-lived, productive assets while maintaining sales will lead to a lower fixed asset turnover.
7. On March 1, Wright Company purchased new equipment for $50,000. Wright paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installation cost, $2,500. The cost recorded for the equipment was
A. $56,500. B. $54,000. C. $51,000. D. $50,000.
8. The amount of sales tax paid on the purchase of new machinery should be debited to
A. the machinery account.
B. a separate deferred charge account.
C. a sales tax expense account.
D. accumulated depreciation for machinery.
9. On August 1, Red Company purchased computer equipment for $10,000 cash and also gave 100 shares of White common stock held by Red Company as an investment. The White common stock cost Red Company $5,000 and on August 1 had a market value of $4,200. The installation cost was $700 and the shipping cost was $500. What amount should be the total amount debited to the computer equipment account?
A. $14,200. B. $15,000. C. $15,400. D. $16,200.
10. Salvia Company recently purchased a truck. The price negotiated with the dealer was $40,000. Salvia Company also paid sales tax of $2,000 on the purchase, shipping and preparation costs of $3,000, and insurance for the first year of operation of $4,000. For the truck, what amount should be debited to the asset account Vehicles?
A. $40,000. B. $42,000. C. $43,000. D. $45,000.
11. The book value of a tangible long-lived, productive asset is the
A. acquisition cost.
B. current estimated market value.
C. acquisition cost minus the balance in accumulated depreciation.
D. total depreciation that has been recorded on the asset to date.
12. Which of the following costs would be subtracted from the acquisition cost of equipment purchased from a supplier?
A. Cost to install the equipment.
B. A purchase discount offered by the supplier.
C. The cost to widen an entrance in the building to bring the equipment into the facilities.
D. The cost of freight paid to get the equipment into the facilities.
13. If an expenditure is treated as a capital expenditure, instead of as a revenue expenditure, which of the following statements is true?
A. The current year’s net income will be lower and future depreciation expense will be higher.
B. The current year’s net income will be higher and future depreciation expense will be lower.
C. The current year’s net income will be higher and future depreciation expense will be higher.
D. The current year’s net income will be lower and future depreciation expense will be lower.
14. Which of the following would not be included in the acquisition cost of a building?
A. The purchase price of a building including title transfer fees.
B. The cost of putting new windows and doors in the building before it opens for operations.
C. The cost of paving the parking lot and outdoor lighting in the lot.
D. The cost of paying an architect to design the remodeling modifications of the building before the store opens.
15. A company acquires land by issuing 10,000 shares of its $10 par value common stock currently trading at $20 per share and the appraised value of the land is $250,000. We would record the land by
A. Using its appraised value of $250,000 and recognize a gain of $50,000 since we are issuing stock only currently worth $200,000.
B. Record the land at the value of the consideration given up, $200,000.
C. Record the land at the average of its appraised value of $250,000 and the $200,000 value of the stock issued, thereby recognizing a $25,000 gain.
D. Record the land at the par value of the stock given up, $100,000.
16. A company may include interest cost as part of the cost of the asset
A. when they buy a piece of equipment and finance its acquisition by a bank loan.
B. when they must borrow money to finance the manufacture of their inventory items.
C. when they are self-constructing a piece of equipment they will use to manufacture their products but only during the period of construction.
D. under no circumstances as interest is never capitalized.
17. Which of the following is false?
A. Replacement of a truck’s tires would be treated as a capital expenditure.
B. The cost of replacing carpet in a building would be a revenue expenditure.
C. Cost of replacing a roof on a newly purchased building before using it as a store would be a capital expenditure.
D. The cost of repainting a hallway would be a revenue expenditure.
18. In 2010, Gilbert Company made an ordinary repair to a delivery truck at a cost of $500. Gilbert Company’s accountant debited the asset account, Delivery Vehicles. Was this treatment an error, and if so, what will be the effect on the financial statements of Gilbert Company?
A. The repair was accounted for correctly.
B. The error increased assets and net income in 2010.
C. In the years following 2010, net income will be too high.
D. The error decreased net income in 2010.
19. Which of the following would most likely not be a revenue expenditure?
A. Replacing carpet in the sales department’s offices.
B. Repairing a leaky roof.
C. Putting a hydraulic lift on a delivery truck making it easier and quicker to deliver appliances.
D. Painting the exterior of a store.
20. The main purpose of recording depreciation is to
A. allocate the cost of a tangible asset to the periods in which its use contributes to generating revenue.
B. estimate the remaining useful life of the asset.
C. report the asset on the balance sheet at the estimated amount for which the asset could be sold on the balance sheet date.
D. estimate the current replacement cost of the asset.
1. A liability is measured in terms of its
A. amount owed plus interest.
B. current cash equivalent.
C. historical cost.
D. none of the other answers is correct.
2. Which of the following statements is true?
A. Use of more debt in the company’s capital structure usually reduces the rate of return generated for stockholders.
B. Use of more debt in the capital structure can lead to positive financial leverage if we can generate a return on investment in assets greater than the cost of borrowing.
C. Use of more debt decreases the level of risk assumed by a company.
D. All statements are false.
3. Which of the following statements is true?
A. Liabilities are initially recorded at the amount of their principle plus interest.
B. Liabilities can decrease the return on stockholders’ equity if the interest rate paid is less than the return on assets.
C. Capital structure is the relative proportion of debt and equity financing.
D. Liabilities are current if due within 60 days.
4. Which of the following is false?
A. Current liabilities are those that will be satisfied within one year or the operating cycle, whichever is longer.
B. Liquidity is the ability of the company to meet its total obligations.
C. Current liabilities impact a company’s liquidity.
D. Working capital is equal to current assets minus current liabilities.
5. The current ratio is computed as follows
A. current assets divided by total assets.
B. current assets divided by current liabilities.
C. current liabilities divided by total assets.
D. current liabilities divided by current assets.
6. A company has a current ratio of 1.9 before paying off a large current liability with cash. Following this payment, the current ratio will be
A. greater than 1.9.
B. less than 1.9.
C. equal to 1.9.
D. greater than 1.9 or less than 1.9 depending upon the dollar amount involved.
7. The following is a partial list of account balances from the books of Probst Enterprise at the end of 2009:
Based solely upon these balances, the amount of current liabilities appearing on Probst
Enterprise’s 2009 year-end balance sheet should be
A. $24,900. B. $24,100. C. $23,700. D. $20,500.
8. In 2009, General Tech reported a current ratio of 2.75 and in 2008 it was 3.10. Which of the following is a potential cause of a fall in this ratio?
A. An increase in accounts payable.
B. A decrease in inventories.
C. A decrease in short-term borrowings.
D. Both an increase in accounts payable and a decrease in inventories could cause the ratio to fall.
9. If a current ratio has been increasing over the past several years, which of the following would cause the ratio to rise?
A. An increase in accounts payable.
B. An increase in inventories.
C. An increase in short-term borrowings.
D. A decrease in prepaid rent.
10. In 2009, The Western Air Freight Company reported current assets of $12,094 million, total assets of $31,327 million, current liabilities of $10,971 million, and total liabilities of $15,392 million. What was their current ratio for 2009?
11. Chavez Chocolates had a current ratio of 1.74 in 2008. Which of the following would cause the ratio to decrease in 2009?
A. A decrease in cash and equivalents and short-term investments.
B. An increase in cash and equivalents and short-term investments.
C. An increase in current assets that exceeded the increase in current liabilities.
D. Current assets as a percentage of total assets increased while current liabilities as a percentage of total liabilities and stockholders’ equity decreased.
12. Which of the following would most likely cause an increase in the current ratio?
A. A short-term borrowing of $100.
B. A purchase of $100 of inventory for cash.
C. A $100 payment to suppliers thereby reducing accounts payable
D. A $100 receipt of cash from a customer’s accounts receivable.
13. Which of the following is always a current liability?
A. Pension obligations
B. Estimated warranty liability
C. Accounts payable
D. Bonds payable
14. Which of the following usually is not a current liability?
A. Wages payable.
B. Rent revenue collected in advance.
C. Dividends payable.
D. Pension obligations.
15. Which of the following is true?
A. Social Security tax is employer paid only.
B. The pay period always ends in conjunction with the company’s fiscal year end.
C. Many fringe benefits such as sick and vacation leave benefits should be recognized when the employee earns the benefit not when they take the leave.
D. Medical insurance benefits are always paid by the employee and not by the employer.
16. An accrued liability results from an expense that is
A. incurred and paid.
B. incurred but not yet paid.
C. paid but not yet incurred.
D. neither incurred nor paid.
17. Which of the following statements is false relating to payroll taxes?
A. When recording the payroll entry, the credit to cash is usually more than the debit to compensation expense.
B. FICA (social security) tax is a “matching” tax with the employer.
C. Income taxes withheld from employees’ paychecks are liabilities of the employer.
D. None of the other answers is false.
18. Gross wages of $20,000 accrued but not paid to employees at the end of 2010 should be recorded by the employer in a journal entry that includes a
A. debit of $20,000 to Compensation payable. B. credit of $20,000 to Cash.
C. debit of $20,000 to Compensation expense. D. debit of $20,000 to Cash.
19. Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year
6%, interest-bearing note payable. Assuming no adjusting entries have been made during the year, the required adjusting entry at the end of the accounting period, December 31, 2010, would be A. B. C. D.
20. The federal government requires
A. only the employer to pay FICA taxes.
B. only the employee to pay FICA taxes.
C. both the employer and the employee to pay FICA taxes.
D. neither the employer nor the employee to pay FICA taxes.
1. When a company prepares a bond indenture, certain provisions of the bonds are included. Which of the following is/are not specified in the indenture?
A. Dates of each interest payments.
B. Rate of interest to be paid.
C. Maturity date.
D. Cash to be received at the issue date.
2. A bond contract that specifies the legal provisions of a bond issue is called
A. a junk bond. B. an indenture. C. a premium. D. a risk covenant.
3. An unsecured bond for which no assets are specifically pledged to guarantee repayment is called
A. a debenture
B. a callable bond
C. a convertible bond
D. an indenture
4. Which of the following is not a reason that a corporation would want to issue bonds instead of stock?
A. Interest payments can be deducted for income tax purposes.
B. Stockholders maintain control.
C. The impact on earnings may be positive.
D. There is less cash outflow resulting from bonds.
5. Bonds payable usually are classified on the balance sheet as
A. long-term liabilities. B. current liabilities.
C. investments and funds. D. current assets.
6. The annual interest rate specified on a bond (which is based on the maturity amount of the bond) appropriately can be called the
A. stated rate. B. market rate. C. effective rate. D. .risk rate.
7. Bonds usually are issued to obtain cash for the purpose of
A. meeting working capital needs.
B. investing in short-term marketable securities.
C. purchasing insurance.
D. acquisitions of long-term assets.
8. Callable bonds may be
A. turned in for early retirement at the option of the bondholder.
B. converted to common stock at the option of the bondholder.
C. called for early retirement at the option of the issuer.
D. converted to registered bonds at the option of the company president.
9. Which of the following is a disadvantage to the corporation issuing bonds?
A. The required interest payment due at maturity.
B. The liquid nature of the bonds makes them attractive to investors who may not want to hold them to maturity.
C. The large principal payment due at maturity.
D. The required dividend payments to bondholders each period.
10. Which of the following is an advantage of issuing bonds versus issuing stock to finance expansion?
A. Stockholders remain in control as bondholders cannot vote or share in the company’s earnings.
B. Interest expense is tax deductible but dividends are not.
C. Money can usually be borrowed at a lower rate and then invested to earn a higher return on assets.
D. All answers are advantages.
11. A bond where no specific assets are pledged to guarantee repayment is called a
A. debenture bond.
B. callable bond.
C. discount bond.
D. convertible bond.
12. Which of the following statements is true?
A. Unsecured debt has a preferential claim against the liquidation of assets in relationship to other creditor claims.
B. Convertible bonds may be retired before maturity at the option of the issuer.
C. Junk bonds are those with a low rating and because their rating is below investment grade level, they are considered high risk.
D. Secured debt does not have a preferential claim against the liquidation of assets in relationship to other creditor claims.
13. Which of the following statements is false?
A. Because junk bonds are higher risk than higher rated investment grade bonds, many banks, mutual funds and trusts are not allowed to invest in them.
B. Callable bonds can be retired before maturity at the option of the bondholder for a predetermined cash call price.
C. A debenture bond is one that is not secured by specific assets of the company.
D. A debenture bond is also known as an unsecured bond.
14. Halverson’s times interest earned ratio was 2.98 in 2009, 2.79 in 2008, and 2.31 in 2007. Which of the following statements about their ratio is correct?
A. Their increasing ratio indicates decreasing levels of debt on which interest is incurred.
B. Their increasing ratio indicates their strategy of pursuing growth by investment in other companies which has increased debt but their profits have not yet increased from those investments.
C. The higher ratio was adversely affected by the net loss they reported in 2007.
D. Their increasing ratio would be considered by creditors to be an indicator of higher risk.
15. Which of the following is true?
A. A higher times interest earned ratio could indicate a growing company.
B. A lower times interest earned ratio is desired by creditors.
C. A more important indicator that a company is able to meet its debt obligations would be the sufficiency of its cash flow from operating activities.
D. A more important indicator that a company is able to meet its debt obligations would be the sufficiency of the current ratio.
16. In 2009, Patty’s Pizza reported net income of $4,212 million, interest expense of $167 million and income tax expense of $1,372 million. In 2008, they reported net income of
$3,568 million, interest expense of $163 million and income tax expense of $1,424 million. Calculate the times interest earned ratio for 2009and 2008 respectively.
A. 12.2 and 9.4 times B. 8.4 and 3.8 times C. 14.4 and 11.6 times D. 14.1 and 6.6 times
17. In 2009, NTV reported a times interest earned ratio of 12.7 times while Home Movie Channel reported a ratio of 14.4 times. Which of the following statements is true?
A. NTV and Home Movie Channel have more than adequate ratios demonstrating their ability to cover interest charges with their earnings levels.
B. Home Movie Channel’s ratio is significantly higher than NTV’s ratio.
C. Lenders would be pleased with the ratios of both companies and be willing to lend them money for future expansion.
D. All statements are true.
18. If the market interest rate for a bond is higher than the stated interest rate, the bond will sell at
A. a discount. B. a premium. C. par. D. the price cannot be determined from the information given.
19. On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds at 97. The bonds were dated November 1, 2009, and interest is payable each November 1 and May 1. The amount of discount amortization at each semi-annual interest date would be (assume straight-line amortization):
A. $ 50. B. $100. C. $600. D. $450.
20. Gammell Company issued $50,000 bonds payable, 9% annual interest, maturity in ten years. The bonds were issued at $48,000. Gammel Company uses straight-line amortization. The amount of interest expense each full year would be
A. $4,700. B. $4,300. C. $4,500. D. $4,680.
AND MUCH MORE