Exam 1

1) Which of the following is an external user of a business's financial information?

A) customers
B) cost accountant
C) company manager
D) the board of directors

2) GAAP refers to guidelines for accounting information in the United States. The acronym
GAAP in this statement refers to ________.
A) Globally Accepted Accounting Policies
B) Government Approved Accounting Principles
C) Generally Accredited Accounting Policies
D) Generally Accepted Accounting Principles

3) Gatto Production Services started the year with total assets of $100,000 and total liabilities
of $55,000. The revenues and the expenses for the year amounted to $140,000 and $80,000,
respectively. During the year, the company did not issue any common stock, but it
distributed dividends of $60,000. Calculate Gatto's net income for the year.
A) $60,000
B) $140,000
C) $80,000
D) $100,000

4) Lorna Smith decided to start her own CPA practice as a professional corporation, Smith
CPA PC. Her corporation purchased an office building for $35,000 that her real estate agent
said was worth $50,000 in the current market. The corporation recorded the building as a
$50,000 asset because Lorna believes that is the real value of the building. Which of the
following concepts or principles of accounting is being violated?
A) cost principle
B) economic entity assumption
C) monetary unit assumption
D) going concern assumption

5) Peterson Company reported stockholders' equity of $75,000 at the beginning of 2017.

During the year, the company recognized net income of $15,000. During the year, the
stockholders made an additional investment of $10,000 in exchange for common stock. The
company paid a $5,000 dividend at year-end. What is the total amount of stockholders' equity
at the end of 2017?
A) $75,000
B) $55,000
C) $85,000
D) $95,000
6) A company has a calendar year end. The company pays its workforce on Fridays for a five-
day workweek ending on that day. The payroll for a week is $100,000. If December 31 falls on
a Wednesday, the adjusting journal entry the company needs to record will include a:

A) credit to Salaries and Wages Payable $50,000

B) credit to Salaries and Wages Payable $60,000.
C) debit to Salaries and Wages Expense $40,000.
D) debit to Salaries and Wages Expense $100,000.
E) credit to Salaries and Wages Payable $100,000.

7) Which of the following are current assets?

a) Common Stock, Cash, Office Supplies
b) Cash, Equipment, Accounts Receivable
c) Land, Accounts Payable, Equipment
d) Cash, Accounts Receivable, Office Supplies

8) Which of the following is FALSE about what closing entries accomplish?

a) Zero out the revenue, expenses, and dividends

b) Posts assets and liabilities to the Retained Earnings account
c) Bring the Retained Earnings account to its correct balance
Transfer revenue, expenses, and dividends to the Retained earnings

9) In a statement of retained earnings, decreases in retained earnings result from ________.

A) issuance of stock
B) net losses
C) net income
D) revenues earned

10) Westwood Supply Services received $1,000 cash from a customer; the amount was owed
to the business from the previous month. Which of the following accounts will decrease as a
result of this transaction?
A) Cash
B) Revenue
C) Accounts Payable
D) Accounts Receivable

11) Which of the following is recorded as a debit?

a) Decrease to Accounts Payable

b) Decrease to Prepaid Rent
c) Increase to Salaries Payable
d) Increase to Common Stock

12) Which of the following is an asset account?

A) Wages Payable
B) Notes Payable
C) Unearned Revenue
D) Accounts Receivable

13) 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

14) The closing entry process consists of closing

a) All asset and liability accounts

b) All temporary accounts
c) All permanent accounts
d) Out the owner's capital account

15) The ability of a company to pay its debts can be evaluated by using the ________.
A) earnings per share
B) return on assets ratio
C) debt ratio
D) fully diluted earnings per share

16) Which of the following journal entries would be recorded if a business purchased $800 of
office supplies on account?

A)
Accounts Payable 1800
Office Supplies 1800

B)
Office Supplies 1800
Accounts Payable 1800

C)
Office Supplies 1800
Cash 1800
D)
Cash 1800
Office Supplies 1800

17) Wilson Furniture Company received cash of $40,000 and issued common stock. Which of
the following accounts will be debited?
A) Accounts Receivable
B) Cash
C) Common Stock
D) Accounts Payable

18) Electrelane Company showed the following account balances at the end of its first year
(assume all accounts have normal balances):
Cash $ 2,000
Equipment 5,000
Depreciation expense 2,000
Service Revenue 16,000
Prepaid insurance 3,500
Accumulated Depreciation
--Equipment 2,000
Salaries and Wages expense 4,000
Accounts receivable 2,500
Accounts payable 2,000
Rent expense 2,500
Notes payable 3,000
Common stock 1,000
Unearned Service Revenue 2,000
Dividends 500
Insurance expense 3,000
Interest expense 1,000

Net income for the first year is:

A) $6,000
B) $3,500
C) $3,000
D) $5,500
E) $4,000

19) The percentage of assets owned by a company representing owners' claims to company
resources is ______.

a) Total Assets
b) Stockholders' equity
c) Liabilities
d) Net Income

20) Which of the following is true for accrual basis accounting?

a) Often used by small businesses.

b) The revenue recognition principle requires companies to record revenue when it has
satisfied each performance obligation.
c) Revenue is recorded only when cash is received, and expenses are recorded only when
cash is paid.
d) Not GAAP approved.

21) Crue Company had the following transactions during 2017:

 Service Revenue of $4,800 on account. Services were performed in 2017.

 Collected $2,000 cash for services to be performed in 2018
 Paid $1,625 cash in salaries for services performed by employees in 2017
 Paid $250 cash for an insurance policy. The term of the insurance policy is for
January 2018 thru December 2018.

What is Crue’s 2017 net income using accrual basis accounting?

a. $2,925
b. $3,175
c. $4,925
d. $5,175
e. $125

22) The accountant of Newton Legal Services failed to make an adjusting entry for supplies
that had been used for the year. Assume the supplies were initially recorded as an asset.
Which of the following statements is true?
A) The total liabilities will be overstated.
B) The equity will be understated.
C) The total assets will be overstated.
D) The total assets will be understated.

23) Quatro Enterprises has the following balances:

Assets = Liabilities + Stockholders Equity

$120,000 = $58,000 + $62,000
 If Quattro purchases office equipment on account for $15,000, the balances will be:

a) $120,000 = $43,000 + $77,000

b) $135,000 = $58,000 + $77,000
c) $120,000 = $58,000 + $62,000
d) $135,000 = $73,000 + $62,000

24) Which of the following is a correct accounting equation?

a) Stockholders’ equity = Assets – Liabilities

b) Assets + Liabilities = Stockholders’ equity
c) Assets = Liabilities – Stockholders’ equity
d) Liabilities = Assets + Stockholders’ equity

25) The accounting standard that assumes an entity will remain in operation for the
foreseeable future (usually one year) is called:

a) Timeliness
b) Going Concern Assumption
c) Viable Business
d) Accrual basis of accounting

26) An adjusting entry that credits Salaries Payable is an example of a(n) ________.
A) accrued expense
B) deferred revenue
C) accrued revenue
D) deferred expense

27) The matching principle states that ________.

A) financial statements can be prepared for specific periods
B) a business's activities can be sliced into small time segments
C) all expenses should be recorded when they are incurred during the period
D) companies should record revenue when it has been earned

28) A Company reported the following information at December 31, 2017:

Accounts Payable $ 19,000

Accounts Receivable 18,700
Cash 46,980
Service Revenue 120,010
Insurance Expense 13,026
Advertising Expense 45,638
Salaries and Wages Expense 71,346
Common Stock 180,000
Equipment 99,000
Prepaid Insurance -expires July 31, 2018 62,400
Notes Payable due December 31,2018 5,000
Retained Earnings, January 1, 2017 28,180
Salaries and Wages Payable 4,900

What is the amount of current assets on the classified balance sheet?

A) $65,680

B) $128,080

C) $156,260

D) $227,080

E) $64,040

29) Assets that are expected to be converted to cash, sold, or used up during the next 12
months, or within the business's normal operating cycle if the cycle is longer than a year, are
called ________ assets.
A) intangible
B) plant
C) long-term
D) current

30) Which of the following accounts will be closed by crediting the Income Summary
account?
A) Service Revenue
B) Depreciation Expense
C) Accounts Payable
D) Accumulated Depreciation

31) In general, net Income or net loss equals:

A) Total Revenue – Retained Earnings at the beginning
B) Retained Earnings at the beginning + (Total Revenue – Expenses) - Dividend
C) Total Revenues – Total Expenses
D) Sales Revenue – Operating Expenses

32) Which of the following statements is correct?

A) Unearned Revenue is increased with a debit.
B) Prepaid Expenses are decreased with a debit
C) Rent Expense is increased with a credit.
D) Accounts Receivable is increased with a debit.

33) The time period concept states that ________.

A) financial statements can be prepared for specific periods
B) all expenses should be recorded when they are incurred during the period
C) companies should record revenue when it has been earned
D) expenses incurred during a period should be matched against the revenues of the period

34) Which of the following accounts will have an ending balance after the closing process is
completed?
A) Dividends
B) Rent Expense
C) Accumulated Depreciation
D) Service Revenue

35) A business purchased equipment for $140,000 on January 1, 2018. The equipment will be
depreciated over the five years of its estimated useful life using the straight-line depreciation
method. The business records depreciation once a year on December 31. Which of the
following is the adjusting entry required to record depreciation on equipment for the year
2018? (Assume the residual value of the acquired equipment to be zero.)

A) Debit $140,000 to Equipment, and credit $140,000 to Cash.

B) Debit $28,000 to Depreciation Expense—Equipment, and credit $140,000 to Accumulated
Depreciation—Equipment.
C) Debit $28,000 to Depreciation Expense—Equipment, and credit $28,000 to Accumulated
Depreciation—Equipment.
D) Debit $28,000 to Depreciation Expense, and credit $28,000 to Equipment.
Exam 2
1) A Company uses the percentage of sales basis of estimating uncollectible accounts
receivable. The percentage of sales basis is an illustration of:

a) matching of expenses with revenues.

b) the revenue recognition principle.
c) the monetary unit assumption.
d) the econominc entity assumption.

2) The book value of an asset (i.e. book value of plant assets) is equal to the

a) asset's fair value less its historical cost.

b) retained earnings of an asset..
c) replacement cost of the asset.
d) asset's cost less accumulated depreciation.

3) A company purchased factory equipment for $700,000 on January 1. It is estimated

that the equipment will have a $70,000 salvage value at the end of its estimated 5-
year useful life. If the company uses the straight-line method of depreciation, the
amount of annual depreciation recorded for the second year after purchase would
be:

a) $140,000.
b) $168,000.
c) $126,000.
d) $120,960.

The following is details to answer Questions 4, 5, 6 & 7.

4) Moroni Industries has the following inventory information for July:

July1 Beginning Inventory 40 units at $120

5 Purchases 240 units at $112
21 Purchases 120 units at $115
28 Sold 300 units at $160

Assuming that a periodic inventory system is used, what is the amount allocated to
ending inventory at July 31 on a FIFO basis?

a) $11,500
b) $11,520
c) $33,960
d) $33,980
5. What is the amount to COGS at July 28 on a FIFO basis?
a. $11,500
b. $11,520
c. $33,960
d. $33,980

6. What is the amount to GAFS (goods available for sale) at July 28 on a FIFO basis?
a. $45,480
b. $48,000
c. $33,960
d. $33,980

7. Assume that the customer has a term 2/10, n/30. Which one is the correct sales
transaction at July 28?
A)
Account Receivable 48,000
Sales Revenue 48,000

B)
Sales Revenue 48,000
Accounts
Receivable 48,000

C)
Account Receivable 47,040
Sales Revenue 47,040

D)
Sales Revenue 47,040
Accounts
Receivable 47,040

8) One of the purposes of the statement of cash flows is to ________.

A) determine the operating income of a business
B) calculate inventory turnover
C) evaluate the level of debt and leverage of a company
D) predict the ability of a company to pay debts and dividends

9) Cash payment of dividends is an example of

A) operating activities
B) investing activities
C) financing activities
D) non-cash
10) The main expense of a merchandiser is usually ________.
A) cost of goods sold
B) current assets
C) selling and administrative expenses
D) production overhead

11) _________________ refer to reductions in the selling price of merchandise sold to

customers, often involving damaged or defective merchandise that a customer is
willing to purchase with a decrease in the selling price.
A. FOB shipping point
B. Sales returns
C. Sales allowances
D. FOB destination

12) A company had sales of $678,000 and its cost of goods sold of $278,000. Also, its
operating expenses is 190,000 Its gross profit equals:
A. $210,000
B. $678,000
C. $400,000
D. $278,000

13) Landon Jewelers uses the perpetual inventory system. On April 2, Landon sold
merchandise with a cost of $3,500 for $8,000 to a customer on account with terms of
1/15, n/30. The journal entry to record the cost of goods sold would be:
A)
Cost of Goods Sold 3,500
Accounts
Receivable 3,500

B)
Sales Revenue 3,500
Cost of Goods Sold 3,500

C)
Cost of Goods Sold 3,500
Merchandise
Inventory 3,500

D)
Merchandise Inventory 3,500
Cost of Goods Sold 3,500
14) Cost of goods sold:
A. Is another term for merchandise sales
B. Is the cost of buying and the carrying value of goods sold during a particular
period
C. Is another term for revenue
D. Is also called gross margin

15) Which of the following is an application of conservatism?

A) reporting inventory at the lower of cost or market
B) reporting only material amounts in the financial statements
C) reporting all relevant information in the financial statements
D) using the same depreciation method from period to period

16) A company used the FIFO method to value inventory in 2017 and the LIFO
method to value inventory in 2018. Which of the accounting principles was violated?
A) conservatism
B) consistency
C) disclosure
D) materiality

17) Which of the following inventory costing methods yields the lowest cost of goods
sold during a period of rising inventory costs?
A) lower of cost or market
B) weighted-average
C) last-in, first-out
D) first-in, first-out

18) The ending inventory of a company was $920,000 as per the perpetual inventory
records. The current replacement cost for the ending inventory is $810,000. Which of
the following is the correct journal entry to adjust inventory?
A)
Cost of Goods Sold 110,000
Merchandise
Inventory 110,000

B)
Merchandise Inventory 110,000
Cost of Goods
Sold 110,000

C)
Account Receivable 110,000
Merchandise
Inventory 110,000
D)
Merchandise Inventory 110,000
Accounts
Receivable 110,000

19) Which of the following statements regarding LIFO is correct?

A) The first units in are assumed to be the first units sold.
B) Ending inventory comes from the most recent purchases.
C) This method leaves the oldest costs in ending inventory.
D) Uses the newest purchases to calculate the value of the ending inventory

20) Which of the following illustrates the internal control procedure—separation of

duties?
A) Cashiers must not have access to accounting records.
B) External auditors will monitor internal controls.
C) Electronic devices must be installed to reduce theft.
D) The invoices and other documents must be pre-numbered.

21) A business maintains subsidiary accounts for each of its customers. On May 15,
the business sells services on account: $2,100 to customer J. Simmons; $4,000 to
customer A. Jones; and $1,500 to customer J. Williams. Which journal entry is
needed to record this sales transaction?
A)
May 15 Accounts Receivable 7,600
Service Revenue 7,600

B)
Accounts Receivable - J.
May 15 Simmons 2,100
Accounts Receivable - A. Jones 4,000
Accounts Receivable - J. Williams 1,500
Service Revenue 7,600

C)
May 15 Service Revenue 7,600
Accounts
Receivable 7,600

D)
May 15 Accounts Receivable Control 7,600
Sales Revenue 7,600

May 15 Accounts Receivable - J. Simmons 2,100

 Accounts Receivable - A. Jones 4,000
Accounts Receivable - J. Williams 1,500
Accounts Receivable -
Control 7,600

22) Which of the following is a requirement of the Sarbanes-Oxley Act?

A) An outside auditor must evaluate the client's internal controls and report on the
internal controls as part of the audit report.
B) The Public Company Accounting Oversight Board must conduct audits of public
companies.
C) The accounting firm that audits a public client must also provide consulting
services for the same client.
D) The Public Company Accounting Oversight Board must create new accounting
standards.

23) Which of the following statements is true of the Sarbanes-Oxley Act?

A) Accounting firms are allowed to provide both auditing services and a full range of
consulting services to their public company clients.
B) Those who commit securities fraud must be sentenced to 10 years in prison.
C) All private and foreign companies must issue an internal control report evaluated
by an outside auditor.
D) The Public Company Accounting Oversight Board oversees the work of
auditors of public companies.

24) Which of the following statements is true?

A) Accounts receivable are more liquid than cash.
B) Notes receivable are always classified as current assets.
C) Notes receivable usually have longer collection terms than accounts receivable.
D) Accounts receivable are liabilities.

25) Which of the following is true of the balance sheet presentation of the Allowance
for Bad Debts?
A) It is reported as a current liability.
B) It is reported as an operating expense.
C) It is reported as a separate, independent line item under current assets.
D) It is shown as a contra account related to accounts receivable.

26) The Allowance for Bad Debts has a credit balance of $9,000 before the adjusting
entry for bad debts expense. After analyzing the accounts in the accounts receivable
subsidiary ledger using the aging-of- receivables method, the company's
management estimates that uncollectible accounts will be $17,000. What will be the
amount of Bad Debts Expense reported on the income statement?
A) $25,000
B) $9,000
C) $17,000
D) $8,000

27) At Carlson Services, the cashier collects checks and cash from customers, and the
junior accountant records the transactions in the journal. The supervisor approves the
journal entries and bank reconciliations. The treasurer signs checks and approves
contracts. Which internal control procedure is exemplified in the above situation?
A) assignment of responsibilities
B) competent, reliable, and ethical personnel
C) separation of duties
D) documents

28) After the December 31, 2019 adjusting journal entries have been posted, Sinclair
Enterprises has the following account balances (all accounts have normal balances)
are:
Account Title Account Balance
Accounts Receivable $159,000
Allowance for Bad Debts $6,000
Bad Debts Expense $8,000

What is the net receivables value as of December 31, 2019?

A) $163,600
B) $150,000
C) $154,400
D) $153,000

29) The number of times a company collects the average accounts receivable balance
in a year is known as:
A) acid-test ratio
B) days’ sales in receivables
C) accounts receivable turnover ratio
D) current ratio

30) Which of the following is included in the cost of land?

A) cost of fencing
B) cost of paving
C) brokerage commission
D) cost of outdoor lighting

31) Danube Corp. purchased a used machine for $21,000. The machine required
installation costs of $6000 and insurance while in transit of $1800. At which of the
following amounts would the machine be recorded?
A) $21,000
B) $29,000
C) $20,800
D) $28,800

32) Which of the following should be classified as a short-term asset?

A) Notes Payable, due in 5 years
B) Accounts Receivable, due in 90 days
C) Notes Receivable, due in 5 years
D) Unearned Revenue

33) Businesses record goodwill ________.

A) when they enjoy an outstanding reputation and loyalty with customers
B) if they acquire another company at an amount higher than the market value of
its net assets
C) when they continue the business of an acquired corporation
D) if their market value has increased significantly in the recent years

34) Motor Sales sold its old office furniture for $9000. The original cost was $17,000,
and at the time of sale, accumulated depreciation was $14,000. What is the effect of
this transaction?
A) gain of $9000
B) gain of $6000
C) loss of $6000
D) loss of $9000

35) Which of the following is true of goodwill?

A) Goodwill must be capitalized when acquired and amortized over seven years or
less.
B) Both created and acquired goodwill must be recorded in the books.
C) Goodwill must be expensed when acquired.
D) Goodwill is not amortized.