PA - T NG H P Testbank

CHAPTER 1+2
1. Regarding liabilities, which of the following statements is incorrect?

A. Many, but not all, liabilities have the word payable in their titles.
B. Liabilities represent one of the two claims to assets.
C. A creditor who has loaned money to a business has a claim to some of the business's assets
until the business pays the debt.
D. Liabilities are economic resources that are expected to benefit the business in the future.
2. Which of the following statements regarding the primary objective of financial

reporting is correct?
A. Relevant information ensures that users of the information will make the correct decisions.
B. The primary objective of financial reporting is to provide information useful for the
acquisition of long-term assets.
C. To be useful, information must follow the Generally Accepted Accounting Principles which
are created and governed by the Securities and Exchange Commission.
D. Information that is faithfully represented is complete, neutral, and free from error.
3. The field of accounting that focuses on providing information for external decision
makers is ________.
A. financial accounting
B. managerial accounting
C. cost accounting
D. non monetary accounting
4. Ten years ago, a company purchased a building for $190,000. At that time, the
company felt that the building was worth $215,000. The current market value of the
building is $450,000. The building has been assessed at $425,000 for property tax
purposes. At which amount should the company record the building in its
accounting records?
A. $190,000
B. $450,000
C. $215,000
D. $425,000
5. According to the ________, acquired assets should be recorded at the amount

actually paid rather than at the estimated market value.
A. Monetary unit assumption
B. Economic entity concept
C. Cost principle
D. Going concern assumption
6. Which of the following is TRUE of assets?

A. Not combined with the proprietor's personal income
B. Handled similarly to that of a corporation
C. Subject to double taxation
D. Combined with the personal income of the proprietor
7. The earnings of a sole proprietorship are ________.

A. Not combined with the proprietor's personal income
B. Handled similarly to that of a corporation
C. Subject to double taxation
D. Combined with the personal income of the proprietor
8. Which of the following events is NOT recorded by accountants?

A. sale of merchandise on account
B. purchase of a building for $200,000 cash
C. effects of an economic boom
D. signing a $400,000 note to purchase land
9. Fred Jones, the sole owner of a business, withdraws cash for his personal use. How
does this transaction affect the accounting equation?
A. The assets, liabilities, and equity remain the same.
B. The assets decrease and equity decreases.
C. The assets increase and liabilities decrease.
D. The assets decrease and equity increases.
10. Montgomery Equipment Rental Company received $1,000 cash from a customer;
the amount was owed to the business from the previous month. What is the effect of
this transaction on the accounting equation?
A. Cash increases and Service Revenue increases
B. Cash increases and Accounts Receivable decreases
C. Cash increases and Accounts Payable decreases
D. Accounts Receivable increases and Service Revenue increases
11. Regarding the accounting equation, which of the following is a correct statement?
A. The accounting equation is made up of three parts.

B. The accounting equation is the basic tool of accounting.
C. All of the statements are correct.
D. Assets - Liabilities = Equity.
12. Precision Camera Services started the year with total assets of $120,000 and total
liabilities of $40,000. The company is a sole proprietorship. The revenues and the
expenses for the year amounted to $140,000 and $50,000, respectively. During the
year, there were no new capital contributions and the owner withdrew $45,000.
What is the amount of owner's equity at the end of the year?
A. $50,000
B. $45,000
C. $125,000
D. $140,000
13. Which of the following statements is TRUE of a sole proprietorship?
A. A sole proprietorship joins two or more individuals as co-owners.
B. A sole proprietorship has to pay business income taxes.
C. The sole proprietor is personally liable for the liabilities of the business.
D. A sole proprietorship is taxed separately from the owner.
14. Performed services for $3,000 on account; received cash on account, $8,000; paid
$900 for repair expense; paid $1,600 to a supplier that it owed from the previous
month. What is the combined effect on Cash of these June transactions?
A. $5,500 increase
B. $5,500 decrease
C. $2,500 decrease
D. $8,000 increase
15. Hollywood Talent Services is a sole proprietorship operated by Phil Morris. The net
income of Hollywood Talent Services is $23,000 for the year. The beginning and
ending Morris, Capital account was $33,000 and $50,000, respectively. During the
year, there were no new capital contributions. Calculate the amount of the owner's
withdrawals for the year.
A. $9,000
B. $6,000
C. $16,000
D. $10,000
16. During the year 2016, Dallas Company earned revenues of $90,000, had expenses of
$62,000, purchased assets with a cost of $10,000, and had owner drawings of $6,000.
Net income for the year is
A. $28,000.
B. $22,000.
C. $18,000.
D. $32,000.
17. The earnings of a sole proprietorship are
A. handled similarly to that of a corporation
B. subject to double taxation
C. not combined with the proprietor's personal income
D. combined with the personal income of the proprietor
18. Which of the following is TRUE of assets?

A. Assets are something of value the business owns or controls.
B. Assets can be recorded at the market value if acquired at a bargain
C. Assets do not need to provide future benefits to the business.
D. Assets include Cash, Merchandise Inventory, and Accounts Payable
19. On January 1st, 2009, an entity's balance sheet showed total assets of Rs. 750 and
liabilities of Rs. 250. Owners' equity on January 1st was?
A. Rs. 750
B. Rs. 1,000
C. Rs. 500
D. Rs. 250
20. The accounting equation should remain in balance because every transaction
affects how many accounts?
(a) Only one

(b) Only two
(c) Two or more
(d) All of the given options
21. Which of the following is not a correct form of the Accounting Equation?
(a) Assets = Claims

(b) Assets = Liabilities + Owner Equity
(c) Assets – Liabilities = Owner’s Equity
(d) Assets + Owner’s Equity = Liabilities
22. Find out the value of the accounts receivable from the following Cash Rs. 48,000
account payable Rs. 33,000 office equipment Rs. 21,000 owner equity Rs. 77,000?
(a) Rs. 21,000

(b) Rs. 41,000
(c) Rs. 15,000
(d) Rs. 110,000
23. During a reporting period, a company’s assets increase by Rs. 80,000,000.

Liabilities decrease by Rs. 20,000,000. Equity must, therefore?
(a) Decrease by Rs. 100,000,000

(b) Increase by Rs. 100,000,000
(c) Decrease by Rs. 60,00,000
(d) Increase by Rs. 60,000,000
24. Which one of the following equations correctly expresses the relationship between
assets (A), liabilities (L), revenues (R), expenses (E), and capital (C)?
a. A = L + R + E + C
b. A = C + L + (R-E)
c. A = C - (R - E) + L
d. A = (L - C) + (R - E)
25. Which of the following accounts is affected by the drawings of cash in sole-
proprietorship business?
a. Shareholder account
b. Capital account
c. Liability account
d. Expense account
26. Mr. A provided the following information from his books of accounts at the end of
the month. What is the amount of his capital?
a. Rs. 200
b. Rs. 900
c. Rs. 1,200
d. Rs. 1,300
27. Which of the following accounts will be used in the equation, if the goods are sold
on credit to Mr. Mahmood?
a. Cash account and Owner’s equity

b. Account Receivable and Owner’s equity
c. Cash and Account Receivable
d. Account Payable and Owner’s Equity
28. The favorable balance of profit and loss account should be?
a. Added in liabilities
b. Subtracted from current assets
c. Subtracted from liabilities
d, Added in capital
29. Revenue of the business includes?
a. Cash sales only

b. Credit sales only
c. Credit purchases only
d. Both cash sales and credit sales
30. Which of the following transactions would have no impact on stockholders' equity?
a. Purchase of land on credit
b. Dividends to stockholders
c. Net loss
d. Investment in cash by stockholders
31. General Ledger is also known as?
a. Book of original entry
b. T Account
c. Source document
d. Voucher
32. Management could determine the amounts due from customers by examining which
ledger account?
a. Accounts Payable
b. Service Revenue
c. Accounts Receivable
d. Supplies
33. In January, the balance in Bigelow InCs supplies account was $780. During
February, Bigelow purchased supplies of $1,600 and used supplies of $1,150. At the
end of February, the balance in the supplies account should be
a. $1,230 debit
b. $1,030 debit
c. $1,230 credit
d. $2,380 debit
34. The double-entry system requires that each transaction must be recorded
a. first as revenue and then as an expense.
b. in at least two different accounts,
c. in two sets of books
d. in a journal and in a ledger.
35. A trial balance will not balance if

a. a journal entry is posted twice.
b. incorrect account titles are used in journalizing.
c. a journal entry is only partially posteD.
d. a wrong amount is used in journalizing.
36. If a company has overdrawn its bank balance, then

a. the cash account debits will exceed the cash account credits.
b. it cannot be detected by observing the balance of the cash account.
c. its cash account will show a debit balance.
d. its cash account will show a credit balance.
37. Which of the following is false about a journal?

a. It keeps in one place all the information about changes in specific account balances.
b. It discloses in one place the complete effects of a transaction.
c. It helps to prevent or locate errors because debit and credit amounts for each entry can be
readily compared.
d. It provides a chronological record of transactions.
38. Bertoli Company showed the following balances at the end of its first year:
Cash $4,000
Prepaid insurance 7,000
Accounts receivable 8,000

Accounts payable 4,000
Notes payable 7,000
Owner's Capital 3,000
Owner's Drawings 2,000
Revenues 32,000
Expenses 25,000
What did Bertoli Company show as total credits on its trial balance?
a. $48,000
b. $44,000
c. $14,000
d. $46,000
39. An account consists of

A. a title, a debit side, and a credit side.
B. a title, a debit balance, and a credit balance.
C. a title, a right side, and a debit balance.
D. a title, a left side, and a debit balance.
40. The left side of an account is

a. blank.
b. the debit side.
c. a description of the account.
d. the balance of the account
41. Phast Mail Service purchased equipment for $2,000. Phast paid $500 in cash and
signed a note for the balance. Phast debited the Equipment account, credited Cash
and
a. credited a liability account for $1,500.
b. debited the Capital account for $1,500.
c. credited another asset account for $500.
d. nothing further must be done.
42. Which of the following is the correct sequence of steps in the recording process?
a. Analyzing, journalizing, posting
b. Posting, journalizing, analyzing
c. Analyzing, posting, journalizing
d. Journalizing, analyzing, posting
43. An accounting record of the balances of all assets, liabilities, and owner's equity
accounts is called a
a. compound entry.
b. general ledger.
c. general journal,
d. chart of accounts.
44. A debit to an asset account indicates

a. a credit was made to a liability account.
b. a decrease in the asset.
c. an error.
d. an increase in the asset.
45. The revenue recognition principle dictates that revenue should be recognized in the
accounting records
a. when the performance obligation is satisfied.
b. when cash is received.
c. at the end of the month.
d. in the period that income taxes are paid.
46. The best interpretation of the word credit is the

a. right side of an account.
b. offset side of an account.
c. increase side of an account.
d. decrease side of an account.
47. Which one of the following is called a book of original entry?

(a) General Journal
(b) General Ledger
(c) Trial Balance
(d) Receipt and Payment Account
48. A debit to an asset account indicates

a. a credit was made to a liability account.
b. a decrease in the asset.
c. an error.
d. an increase in the asset.
49. Which of the following is incorrect regarding a trial balance?

a. It proves that the debits equal the credits after posting.
b. A trial balance uncovers errors in journalizing and posting.
c. A trial balance is useful in the preparation of financial statements.
d. It proves that the company has recorded all transactions.
50. Credits…..
a. increase both assets and liabilities.
b. increase assets and decrease liabilities.
c. decrease assets and increase liabilities.
d. decrease both assets and liabilities.
51. An awareness of the normal balances of accounts would help you spot which of the
following is an error in recording?
a. A debit balance in the owner's drawings account
b. A credit balance in a revenue account
c. A credit balance in a liability account
d. A credit balance in an expense account
52. Which of the following transactions occurs on a daily basis in a large business
organization?
a. Purchaser of equipment
b. Payroll
c. Credit sales
d. Payment of suppliers
53. Transactions are initially recorded in the?
a. Book of Final Entry

b. Accounting Equation
c. T Accounts
d. Book of Original Entry - THE JOURNAL
54. Of the following account types, which would be increased by a debit?
a. Liabilities and expenses

b. Assets and equity
c. Assets and expenses
d. Equity and revenues
55. Sales made to Ahmed on credit should be debited to?
a. Account Receivable
b. Cash
c. Account Receivable-Ahmed
d. Sales
56. In which order does the Journal list transactions?
a. Chronological
b. Decreasing
c. Increasing
d. Alphabetical
57. All of the following are true regarding journal entries except?
a. Journal entries show the effects of transactions

b. Journal entries provide account balances
c. The debited account titles are listed first
d. Each journal entry should begin with a date
58. Which one of the following is used to record financial transactions in date-wise
order?
a. Account
b. Voucher
c. General Journal
d. General Ledger
59. The T-account is used to summarize which of the following?
a. Increase and decrease to a single account in the accounting system

b. Debit and credit to a single account in the accounting system
c. Changes in specific account balances over a time period
d. All of the above describe how T-accounts are used by accountants
60. The process of transferring the debit and credit items from a journal to their
respective account in the ledger is termed as?
a. Balancing
b. Posting
c. Arithmetic
d. Entry
CHAPTER 3: ADJUSTING THE ACCOUNT
1. Unearned Revenue record revenue earned that was previously received as

cash in advance (T/F) true
2. The revenue recognition principle is that expenses should be recognized in

the same period that the related revenues are recognized. (T/F) false
3. Monthly and quarterly time periods are commonly referred to as fiscal

periods. (T/F) false
4. Expense Recognition (Matching) Principle is that if revenue is deferred to a

future period, the related costs of generating that income should be deferred to the
same future period. (T/F) false
5. Cost-less accumulated depreciation is a measurement of the current value of

an asset such as equipment or a building. (T/F) false
6. Depreciation is the process of allocating the cost of an asset to expense over

its useful life in a rational and systematic manner. (T/F) true
7. Accumulated depreciation is an asset account. (T/F) false
8. A contra-asset account is an account whose balance is deducted from a

related asset in the financial statements. (T/F) false
9. When accrual-basis accounting is applied, adjusting entries are not
necessary. (T/F) true
10. Adjustments for accrued expenses are necessary to record the obligations
that exist at the balance sheet date and to recognize the expenses that are applicable
to the current accounting period. (T/F) true

11. The adjusting entry for unearned revenues results in Debit: liability and Credit:
Revenue true
12. Normal balance of accumulated depreciation-equipment is debit (T/F) false
13. Accrual accounting records revenue only when it is earned. (T/F) false
14. Recording the usage of office supplies during the period is an example of a deferral
adjusting entry. (T/F) true
15. The adjusted trial balance shows account balances after adjustments(T/F) true
16. A&D Window Cleaning performed $450 of services but has not yet billed customers for
the month.If A&D fails to record the adjusting entry, what is the impact on the balance
sheet?
a. Assets understated
b. Assets overstated
c. Revenue understated
d. Revenue overstated
17. X Company performed $1,000 of services but has not yet billed customers for the
month. If X fails to record the adjusting entry, what is the impact on the income statement?
a. Assets understated
b. Assets overstated
c. Revenue understated
d. Revenue overstated
18. Thompson Company had $1,000 in office supplies at the beginning of the fiscal year. At
the end of the fiscal year, Thompson Company did an inventory of the office supplies and
determined that $300 of supplies remained in the supply room unuseD. What is the amount
of Supplies Expense at the end of the fiscal year?
a. $1,000
b. $300
c. $700
d. $1,300
19. Smith Company had $1,200 in office supplies at the beginning of the fiscal year. At the
end of the fiscal year, Smith Company did an inventory of the office supplies and
determined that $400 of supplies remained in the supply room unuseD. What is the journal
entry to adjust for the use of supplies at the end of the fiscal year?
a. Office Supplies 800 Debit; Supplies Expense 800 Credit.

b. Supplies Expense 800 Debit; Office Supplies 800 Credit.
c. Office Supplies 1,600 Debit; Supplies Expense 1,600 Credit.
d. Supplies Expense 1,600 Debit; Office Supplies 1,600 Credit.
20. On February 1, Clovis Wilson Law Firm contracted to provide $3000 of legal services
for the next three month and received $3000 cash from the client. Assuming Wilson records
deferred revenue using the alternative treatment, what would be the adjusting entry
recorded on February 28?
a. Accounts Receivable 2000 Debit; Service Revenue 2000 Credit

b. Unearned Revenue 2000 Debit; Service Revenue 2000 Credit
c. Cash 2000 Debit; Service Revenue 2000 Credit
d. Service Revenue 2000 Debit; Unearned Revenue 2000 Credit
21. Jones Company purchased $800 in office supplies with cash this year but it will be used
up before the end of the year when the finances are prepared. Since it is short lived and will
be used up during this accounting period, Jones Company decided to record it as an
expense instead of an asset at the time of purchase. The journal entry to record this
transaction when Jones Company buys the office supplies would be:
a. Office Supplies 800 Debit; Cash 800 Credit

b. Cash 800 Debit; Office Supplies 800 Credit
c. Cash 800 Debit; Cash Supplies Expense Credit
d. Supplies Expense 800 Debit; Cash 800 Credit
22. Software Solutions was hired by Jones Company on December 1 to install and updated
software. The total entire amount of $1,800 in revenues is to be paid to us by Jones
Company when the job is completed the following January 31. As of December 31, we have
completed one half of the software installation and updates. On December 31, Software
Solutions makes the following entry to adjust for the revenues earned during December:
a. Accounts Receivable 900 Debit; Service Revenue 900

b. Unearned Revenue 900 Debit; Service Revenue 900 Credit
c. Cash 900 Debit; Service Revenue 900 Credit
d. Service Revenue 900 Debit; Unearned Revenue 900 Credit
23. When accounts have normal balances, which of the following accounts does not have a
debit balance on the Adjusted Trial balance?
a. Cash
b. Accounts Payable
c. Supplies Expense
d. Accounts Receivable
24. Which of the following is an example of an accrued expense adjusting entry?
a. Salaries Expense
b. Unearned Revenue
c. Depreciation Expense
d. Accumulated Depreciation
25. A piece of equipment purchased cost $10,000 and has depreciation expense of $2,000 for
this year. What is the journal entry to record the depreciation expense for the year ?
a. Depreciation Expense 10,000 Debit; Accumulated Depreciation - Equipment 10,000

Credit
b. Accumulated Depreciation - Equipment 10,000 Debit; Depreciation Expense 10,000
Credit
c. Depreciation Expense 2,000 Debit; Accumulated Depreciation - Equipment 2,000 Credit
d. Accumulated Depreciation - Equipment 2,000 Debit; Depreciation Expense 2,000 Credit
26. Assume the weekly payroll of the Abbott Company is $5,000. December 31, the end of
the year, falls on a Wednesday and Abbott will pay its employee on Friday for the full
week. What adjusting entry will Abbott make on Wednesday, December 31 (Use five days
as a full work week)?
a. Salaries Expense 5000 Debit; Salaries Payable 5000 Credit

b. Salaries Expense 3000 Debit; Salaries Payable 3000 Credit
c. Salaries Expense 2000 Debit; Salaries Payable 2000 Credit
d. Salaries Expense 1000 Debit; Salaries Payable 1000 Credit
27. Jones Company purchased a piece of equipment for $12,000. It has accumulated
depreciation at the end of three years of $4,000. What is the book value of the equipment at
the end of year 3?
a. $12,000
b. $4,000
c. $8,000
d. $6,000
28. On the worksheet, the Service Revenue account has a credit balance of $20,000 on the
Unadjusted Trial Balance. In the Adjustments, there is a credit of $2,000. What is the
amount for Service Revenue in the Adjusted Trial Balance?
a. $20,000
b. $22,000
c. $2,000
d. $18,000
29. On the worksheet, the Service Revenue account has a credit balance of $15,000 on the
Unadjusted Trial Balance. In the Adjustments, there is a debit of $5,000. What is the
amount for Service Revenue in the Adjusted Trial Balance?
a. $20,000
b. $10,000
c. $15,000
d. $5,000
30. On the worksheet, Accounts Receivable has a debit balance of $15,000 on the
Unadjusted Trial Balance. In the Adjustments, there is a debit of $3,000.What is the
amount for Accounts Receivable in the Adjusted Trial Balance?
a. $12,000
b. $15,000
c. $3,000
d. $18,000
31. On the worksheet, Accounts Receivable has a debit balance of $10,000 on the
Unadjusted Trial Balance. In the Adjustments, there is a credit of $3,000.What is the
amount for Accounts Receivable in the Adjusted Trial Balance?
a. $13,000
b. $10,000
c. $7,000
d. $3,000
32. Becker Company purchased a piece of equipment for $15,000. It has accumulated
depreciation at the end of three years of $4,000. What is the book value of the equipment at
the end of year 3?
a. $13,000
b. $11,000
c. $9,000
d. $7,000
33. If a journal entry and posting for the use of one month of rent from the prepaid rent
account during the year is accidentally omitted, what would be the impact on the Balance
sheets?
a. Expenses would be understated

b. Expenses would be overstated
c. Assets would be understated
d. Assets would be overstated
34. If a journal entry and posting for the use of one month of rent from the prepaid rent
account during the year is accidentally omitted, what would be the impact on the Income
Statement?
a. Expenses would be understated

b. Net Income would be overstated
c. Expenses would be overstated
d. a. & b. Correct
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35. Assume the weekly payroll of the Abbott Company is $10,000. December 31, the end of
the year, falls on a Wednesday and Abbott will pay its employee on Friday for the full
week. What adjusting entry will Abbott make on Wednesday, December 31 (Use five days
as a full work week)?
a. Salaries Expense 10,000 Debit; Salaries Payable 10,000 Credit

b. Salaries Expense 6,000 Debit; Salaries Payable 6,000 Credit
c. Salaries Expense 5,000 Debit; Salaries Payable 5,000 Credit
d. Salaries Expense 3,000 Debit; Salaries Payable 3,000 Credit
36. What is the difference between cash-basis and accrual basis of accounting ? (Short-
answer)
37. Accumulated-depreciation is NOT a contra asset account (T/F) false
38. Unearned revenue belongs to:
a. Liabilities
b. Asset
c. Owner’s equity
d. Revenue
39. Prepaid expense belongs to
a. Liabilities
b. Asset
c. Owner’s equity
d. Revenue
40. Accruals include prepaid expense and unearned revenue(T/F) false -> Deferals
CHAPTER 4: COMPLETING THE ACCOUNTING CYCLE
1. Closing entries are necessary for

a. permanent accounts only
b. permanent or real accounts only
c. temporary accounts only
d. both permanent and temporary accounts
2. 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. plant
b. long-term
c. Intangible
d. current
3. Which of the following steps must be completed before preparing the adjusted trial
balance?
a. journalize and post the closing entries
b. prepare the post-closing trial balance
c. prepare the financial statements
d. post journal entries to the accounts
4. The income statement and balance sheet columns of Beer and Nuts Company's
worksheet reflect the following totals
The net income (or loss) for the period is

a. $51.000 income
b. not determinable
C. $24.000 income
D. $24,000 loss
5. The balances of select accounts of Sandra Company as of December 31, 2018, are
given below
The insurance has been prepaid until June 30, 2019. Determine the amount of total current
assets reported on the balance sheet on December 31, 2018.
a. $10,200
b. $10,750
c. $12,950 ( cash, office supplies, prepaid insurance, acc receivable)
d. $17,200
6. Revenues and expenses may be transferred to the ____ account before their final
transfer into the Owner, Capital account
a. Assets
b. Owner, Withdrawals
c. Net Income
d. Income Summary
7. The information for preparing a trial balance on a worksheet is obtained from

a. financial statements,
b. business documents
c. general ledger accounts.
d. general journal entries
8.
The entry to close the revenue account includes a

a. debit to Income Summary for $2.000.
b. credit to Income Summary for $2,000.
c. credit to Income Summary for $7,300
d. debit to Income Summary for $7,300
9. The net income of Hendley Company for the year is $25,000. Withdrawals during
the year were $30,000. No new capital contributions were made during the year.
Which of the following statements is TRUE?
a. Hendley, Capital will remain the same.
b. Hendley, Capital account decreases by $5,000.
c. Hendley, Capital account increases by $30,000.
d. Hendley, Capital account decreases by $25,000.
10. Woods Company earned revenues of $12,000 and incurred expenses of $9,500. The
owner, Woods, withdrew $3,000. What is the balance in the Income Summary
account after closing net income or loss to the Woods, Capital account?
a. balance of $0
b. debit balance of $12,000
c. credit balance of $9,500
d. credit balance of $2,500
11. On May 25, Mt. Hood Company received a $370 check from Douglas Fir for
services to be performed in the future. The bookkeeper for Mt. Wood Company
incorrectly debited Cash for $370 and credited Accounts Receivable for $370. The
amounts have been posted to the ledger. To correct this entry, the bookkeeper
should
a. debit Accounts Receivable $370 and credit Unearned Service Revenue $370
b. debit Cash $370 and credit Unearned Service Revenue $370.
c. debit Accounts Receivable $370 and credit Service Revenue $370.
d. debit Accounts Receivable $370 and credit Cash $370.
12. Osteen Company earned revenues of $61,000 and incurred expenses of $71,000. No
withdrawals were taken The owner did not make any new capital contributions
during the year. The company is a sole proprietorship. Which of the following
statements is correct?
a. Olsteen, Capital will be debited for $10,000 and Income Summary will be credited for
$10,000.
b. The entries to close revenues and expenses will differ if there is a net loss.
c. The entry to close Income Summary is the same regardless of a net income or a net loss.
d. The entry to close Income Summary requires a debit to the Income Summary account.
13. The process by which companies produce their financial statements for a specific
period is called the
a. opening process
b. operating cycle
c. accounting cycle
d. closing process
14. The financial statements are prepared from the

a. unadjusted trial balance
b. statement of owner's equity
c. adjusted trial balance
d. chart of accounts
15. Which of the following are NOT included in a post-closing trial balance?
a. Owner, Capital, and assets
b. Owner, Capital, and liabilities
c. Assets and liabilities
d. Revenues and expenses
16. Regarding a classified balance sheet, which of the following statements regarding
liabilities is incorrect?
a. Liabilities are listed in the order in which they must be paid
b. Current liabilities Include Accounts Payable and Unearned Revenue.
c. Long-term liabilities must be paid either with cash or with goods and services within one
entity's operating cycle if the cycle is longer than one year.
d. Many Notes Payable are long-term
17. In preparing a worksheet, a net loss would be computed and entered in the?
a. Debit column of the income statement columns of the worksheet
b. Credit column of the income statement in worksheet
c. In the debit column of the adjusted trial balance
d. In the credit column of the balance sheet columns of the worksheet
18. Each of the following accounts is closed to Income Summary except

a. Expenses.
b. Revenues.
c. All of these are closed to Income Summary
d. Owner's Drawings.
19. Regarding a classified balance sheet, which of the following statements is correct?
a. Assets are listed in alphabetical order.

b. Accounts are classified by their purchase dates.
c. Account balances are listed from the highest amount to the lowest amount
d. Assets are listed in the order of their liquidity
20. Which of the following is a measure of how quickly an item can be converted into
cash?
a. Debt ratio
b. Accounting cycle
c. Liquidity
d. Return on assets ratio
21. Which of the following is NOT the column of the worksheet?

a.Trial balance
b.Adjustments
c.Adjusted trial balance
d.Owner’s equity
22. Which of the following belong to the column of the worksheet?

a. owner’s equity
b. Cash
c. Net income
d. Balance sheet
23. In the worksheet, how do we know the net income
a. In the income statement column, total the Dr>Cr
b. In the income statement column, total the Cr>Dr
c. In the balance sheet column, total Dr<Cr
d. In the adjustment column, total Dr>Cr
24. In the worksheet, how do we know net income

a. In the adjustment column, total the Dr>Cr
b. In income statement column, total the Dr>Cr
c. In the balance sheet column, total Dr>Cr
d. In the balance sheet column, total Cr>Dr
25. In the worksheet, how do we know net loss

a. In income statement column, total the Dr>Cr
b. In income statement column, total the Cr>Dr
c. In the balance sheet column, total Dr>Cr
d. In the adjustment column, total Dr>Cr
26. The accountant's worksheet?

(a) Lays the groundwork for formal financial statement preparation
(b) Is a fundamental financial statement
(c) Is prepared at the end of each operating cycle
(d) Provides details necessary for full disclosure and the preparation of footnotes
27. Revenues and expenses may be transferred to the ______ account before their
transfer to the Owner Capital account
a. Assets
b. Owner, Withdrawals
c. Net income
d. Income summary
28. A worksheet provides total information for preparing?

(a) Income statement
(b) Balance sheet
(c) Financial statement
(d) Adjusting entries
29. WSU earned revenue of $124,000 and incurred expenses of $30,000. The school
owner withdrew $1,000 for personal uses. What is the balance in the income summary
before closing net income/net loss.
a. Balance of $0
b. Credit balance of $94,000
c. Debit balance of $94,000
d. Debit balance of $93000
30. The information for preparing a trial balance on worksheet is obtained from:
a. General ledger account
b. Financial statements
c. General journal entries
d. Business document
31. In general, the asset side of the balance sheet is designed to summarize balance sheet
accounts with?
(a) Credit balances
(b) Debit balances
(c) Neither a. nor b
(d) Both a. and b
32. Assets that are hard to be converted into cash, sold, or used up over the next 12
months are called ____ assets
a. Long-term
b. Intangible
c. Current
d. Plant
33. Which of the following accounts would not be closed at the end of an accounting
period?
(a) Income summary
(b) Profit
(c) Revenue
(d) Inventory
34. Which of the following accounts would not be included in a Post-closing Trial
balance?
(a) Accumulated depreciation
(b) Cash
(c) Fees earned
(d) Owner's equity
35. Summarizes the company permanent accounts at a specific point in time are called?
(a) Cash flow statement
(b) Income statement
(c) Balance Sheet
(d) none of them
36. Which account would be listed on a Post-closing Trial balance?

(a) A revenue
(b) The depreciation
(c) The retained earnings
(d) The income tax expense
37. Which of the following is not a current asset?

(a) Accounts receivable
(b) Inventory of finished products
(c) Inventory of raw materials
(d) Land
38. Which of the following accounts would not be closed to the income summary
account at the end of an accounting period?
(a) Accumulated depreciation
(b) Rent expense
(c) Fees earned
(d) Wages expense
39. Which of the following entries closes the owner's drawing account at the end of the
period?
(a) Debit the drawing account, credit the owner's capital account
(b) Debit the income summary account, credit the drawing account
(c) Debit the owner's capital account, credit the drawing account
(d) Debit the drawing account, credit income summary account
40. Which of the following statements is false?

(a) If you increase an asset account, you could increase a liability account
(b) If you decrease an asset account, you could increase a shareholders’ equity account
(c) If you increase an asset account, you could decrease an asset account
(d) If you decrease an asset account, you could decrease a shareholders’ equity account
CHAP 5: ACCOUNTING FOR MERCHANDISING OPERATIONS
I. True/False questions:
1. The steps in the accounting cycle for a merchandising company are different from
the accounting cycle for a service company.

2. The measurement of net income for a merchandising company conceptually is
different from a service company.
3. The cost of goods sold is determined only at the end of the accounting period under
a perpetual inventory system.
4. Sales discounts is a contra revenue account and has a debit balance
5. In the balance sheet, inventory is reported as a current asset immediately below

accounts receivable.
6. In preparing a worksheet for a merchandising firm, all income statement column

debits represent expenses
7. Under the perpetual inventory system, the purchase of merchandise is recorded

with a debit to the purchases account
8. In a multiple income statement, gross profit and operating income are shown on the
income statement
9. Income from operations is determined by subtracting other expenses and losses

from gross profit
10. Sales revenue is the primary source of revenue for a merchandising company.
11. FOB shipping point is freight terms indicating that the seller places goods free on
board the carrier, and the buyer pays the freight costs.
12. Cost of goods solds is a contra revenue account and has a debit balance.
13. When an invoice is paid within the discount period, the amount of the discount
credited to Inventory.
14. Both sales returns and allowances and sales discounts are subtracted from sales
revenue in the income statement
15. FOB destination is freight terms indicating that the seller places the goods free on
board to the buyer's place of business, and the seller pays the freight.
II. Multiple Choice Questions:
16. Cost of goods solds

A. is an expense.
B. has a normal debit balance.
C. appears on the balance sheet.
D. is a contra revenue account.
17. Sales Discounts

A. is a contra revenue account.
B. has a normal debit balance.
C. appears on the income statement.
D. all of the above
18. Goods costing $2,000 are purchased on account on July 15 with credit terms of 2/10,
n/30. On July 18, a $200 credit memo was received from the supplier for damaged
goods. Give the journal entry on July 24 to record payment of the balance due
within the discount period using a perpetual inventory system.
A. Dr. A/P 2,000; Cr. Cash 2,000

B. Cr. A/P 1,800; Dr. Cash 1,800
C. Dr. Inventory 36; Dr. Cash 1,762; Cr. A/P 1,800
D. Dr. A/P 1,800; Cr. Inventory 36; Cr. Cash 1,764
19. What merchandising account(s) will appear in the post-closing trial balance?
A. COGS (exp)
B. Supplies (not a merchandising account)
C. Freight-out (exp)
D. Inventory
20. Net sales equals:
A. Sales revenue less Cost of goods sold
B. The excess of net sales over the cost of goods solD.
C. Sales minus expenses
D. sales minus sales discounts minus sales returns and allowances
21. Credit term 3/10, n/30

A. 1% discount if paid within 2 days, otherwise net amount due within 10 days.
B. 2% discount if paid within 3 days, otherwise net amount due within 30 days.
C. 3% discount if paid within 10 days, otherwise full amount due within 30 days.
D. 2% discount if paid within 10 days, otherwise full amount due within 10 days.
22. The cost of goods sold is determined and recorded each time a sale occurs in:
A. A periodic inventory system only.
B. A perpetual inventory system only.
C. both a periodic and perpetual inventory system.
D. Neither a periodic nor perpetual inventory system.
23. In a perpetual inventory system, a return of defective merchandise by a purchaser

is recorded by crediting:
A. Purchases.
B. Purchase Returns and Allowances.
C. Purchase Discounts.
D. Inventory.
24. FOB shipping point means that the

A. goods are placed free on board to the buyer's place of business.
B. The buyer pays the freight.
C. The seller pays the freight.
D. common carrier pays the freight
A. the sellers spend one more cost which is named freight in
B. Paid for by the buyer.
C. the buyers record the cost of transportation into the freight out account
D. Freight cost which is at the sellers expense.
A. A periodic inventory system only.
B. A perpetual inventory system only.
C. both a periodic and perpetual inventory system.
D. Neither a periodic nor perpetual inventory system
27. In a periodic inventory system, when is the cost of the merchandise sold
determined?
A. Periodically during the period
B. At the time of the sale
C. Either at time of sale, end of period, or periodically during the perioD.
D. At the end of the period
28. Which inventory system will likely be used by a company with merchandise that has
a high per unit value?
A. Single entry inventory system
B. Perpetual inventory system
C. Cash basis system
D. Periodic inventory system
29. In a periodic inventory system the entry to record the credit sale of merchandise
affects which of the following accounts?
A. Purchases
B. Sales revenue
C. Inventory
D. COGS
30. Credit term 2/10, n/30

A. 10% discount if paid within 2 days, otherwise net amount due within 30 days.
B. 30% discount if paid within 2 days, otherwise net amount due within 30 days.
C. 2% discount if paid within 10 days, otherwise full amount due within 30 days.
D. 30% discount if paid within 10 days, otherwise full amount due within 2 days
next.
31. Identify the distinguishing features of an income statement for a merchandising

company (compared with a service company)
A. (1) a sales revenues section, (2) a cost of goods sold section, and (3) net income.
B. (1) a revenues section, (2) operation expenses, and (3) gross profit.
C. (1) a sales revenues section, (2) a cost of goods sold section, and (3) gross profit.
D. (1) revenues section, (2) expense section, and (3) net income.
32. In a perpetual inventory system, which accounts will the seller credit when a
customer returns merchandise after purchasing it on account?
A. (i) Sales Returns and Allowances and (ii) Inventory
B. (i) Sales Returns and Allowances and (ii) Accounts Receivable
C. (i) Accounts Receivable and (ii) Cost of Goods Sold
D. (i) Inventory and (ii) Cost of Goods Sold
33. On May 7, Jason, InC. purchased $27,000 of Merchandise Inventory on account,

credit terms are 2/10, n/30. On May 15, Jason, InC. paid the amount due on the
purchase of May 7 Which records for the transaction on May 15 are correct?
A. Debit Accounts Payable, Credit Cash, Credit Inventory
B. Credit Accounts Payable, Debit Inventory
C. Debit Accounts Payable, Credit Cash, Debit Inventory
D. Credit Accounts Payable, Credit Cash, Debit Inventory
34. Jackson Company uses a perpetual inventory system. On November 30, it
purchased $10,000 of merchandise and it must pay the $200 shipping charges. The
credit terms for the merchandise were 2/10, n/30. The company paid for both the
merchandise and the shipping charges nine days after their invoice dates. Which of
the following is part of the required journal entry when Jackson pays the shipping
charges of $200?
A. A debit to cash for $200
B. A debit to Freight-in for $200
C. A debit to Freight-out for $200
D. A debit to Inventory for $200
35. If beginning inventory is $60,000, cost of goods purchased is $380,000, and ending
inventory is $50,000, cost of goods sold is
A. $330,000.
B. $390,000.
C. $400,000.
D. $270,000.
36. On what amount is a sales discount based?

A. Invoice price plus freight-out
B. Invoice price plus returns and allowances.
C. Invoice price less returns and allowances
D. Invoice price plus freight-in
37. Steve Company purchases $7,400 of merchandise on April 11, with credit terms of
2/15, n/30. If Steve pays on April 27, what is the cost of this purchase?
A. $6,526.80
B. $7,528.
C. $7,400
D. $6,660
38. Company X purchases $1,300 of merchandise from Company B on June 1 with
credit terms 3/10, n/30. Company A returns $100 of the merchandise on July 5. On
June 10, Company B received full payment from Company A. The amount of the
payment on June 10 is
A. $1,200.
B. $24.
C. $1,164.
D. $1,176
39. Company A purchases $1,200 of merchandise from Company B on July 1 with

credit terms 2/10, n/30. Company A returns $200 of the merchandise on July 5. On
July 11, Company B received full payment from Company A. The amount of the
payment on July 11 is
A. $20.
B. $980.
C. $1,176.
D. $1,00
40. Sales revenue total $15,000. Sales returns and allowances are $750 and sales
discounts are $1,000. How much is net sales?
A. $980.
B. $20.
C. $1,176.
D. $1,00
41. Arbor Corporation reports the following: Sales revenue $186,000; sales discount
$3,720; returns and allowances $15,000. Calculate the company's COGS.
A. $165,100
B. $150,100
C. $175,500
D. $167,280
42. Which of the following describes how to compute the gross profit rate?
A. Gross margin divided by net income
B. Sales minus cost of goods sold, divided by cost of goods sold
C. Net income divided by net sales
D. Net sales minus cost of goods sold, divided by net sales
43. A company has the following accounts balances: Sales revenue $90,000; Sales
Returns and Allowances $25,000; Sales Discounts $10,000; and Cost of Goods Sold
$20,000. How much is the gross profit rate
A. 54,7%
B. 63.6%
C. 60.5%
D. 70.2%
44. A company has the following accounts balances: Sales revenue $2,000,000; Sales
Returns and Allowances $250,000; Sales Discounts $50,000; and Cost of Goods Sold
$1,275,000. How much is the gross profit rate?
A. 36%
B. 64%
C. 25%
D. 46.7%
45. Wilma's Foods recorded the following events involving a recent purchase of
inventory, uses the perpetual inventory system:
Received goods for $25,000, terms 2/10, n/30.
Returned $800 of the shipment for credit.
Paid $200 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company's inventory?
A. increased by $23,916.
B. increased by $25,000.
C. increased by $25,206.
D. increased by $24,116.
46. Which of the following is classified in an income statement as a non-operating

activity?
A. Freight-out
B. Salaries and wages expense
C. Interest expense
D. Cost of goods sold
47. Which of the following is classified in an income statement as an operating expense?

A. Income tax expense
B. Dividend revenue from investments
C. Advertising expense
D. Interest expense
48. Net income is $15,000, operating expenses are $20,000, and net sales total $75,000.
How much is the cost of goods sold?
A. $35,000
B. $40,000
C. $60,000
D. $55,000
49. Beginning inventory is $12,000; purchases are $34,000; sales revenue are $60,000;
and cost of goods sold is $31,000. How much is the ending inventory?
A. $14,000
B. $15,000
C. $35,000
D. $31,000
50. A retailer makes a $100 sale with terms of 2/10, n/30 on the first of the month. The
customer returns $20 of merchandise for credit on account. What journal entry will
the retailer record when payment is received within the discount period under a
perpetual inventory system?
A. $78.40 debit to Cash, $1.60 debit to Sales Discounts, and $80.00 credit to Accounts
Receivable
B. $78.40 deb it to Cash, $1.60 debit to Purchase Discounts, and $80.00 credit to Accounts
Payable
C. $98.00 debit to Cash, $2.00 debit to Sales Discounts, and $100.00 credit to Accounts
Receivable
D. $78.40 debit to Cash, $1.60 debit to Sales Discounts, and $80.00 credit to Accounts
Payable
III. Short answers:

1. What are the advantages of the perpetual inventory system?
2. What are the advantages of the periodic inventory system?

CHAPTER 6: INVENTORIES
I. True/ False questions
1. When prices are rising, FIFO results in a higher ending inventory than LIFO.
2. We can use the LIFO inventory method only if we know that the newest units are
always sold first.
3. Goods in transit would be included in the ending inventory of the buyer and the
seller.
4. When beginning inventory is understated, net income will be understated.

5. Net income plus operating expenses is equal to gross profit.
6. Inventory is classified as current assets.
7. The LIFO method assumes that the earliest goods purchased are the first to be sold.
8. Some argue that the use of FIFO in a period of inflation enables a company to avoid
reporting paper (phantom) profit as economic gain.
9. In a period of inflation, the cost flow method that results in the lowest income taxes
is the LIFO method.
10. Under the LCM approach market value is defined as current replacement cost.
11. An error in the ending inventory of the current period will have no effect on net
income of the next accounting period.
12. Days in inventory measures the average number of days inventory is held.
13. The results under FIFO in a perpetual system are the same as in a periodic system.
14. Under LIFO, the ending inventory is based on the latest units purchased.
15. Overstating beginning inventory will overstate net income.
II. MCQs
16. In periods of rising prices, the inventory method which results in the inventory
value on the balance sheet that is closest to current cost is the:
A. FIFO method.
B. LIFO method.
C. average cost method.
D. tax method.
17. The first costs assigned to ending inventory are the costs of the beginning inventory
under the
A. FIFO method.
B. LIFO method.
C. average cost method.
D. LCM method.
18. In periods of rising prices, LIFO will produce
A. higher net income than FIFO.

B. the same net income as FIFO.
C. lower net income than FIFO.
D. higher net income than average costing.
19. Inventory turnover is calculated by dividing cost of goods sold by
A. beginning inventory.
B. ending inventory.
C. average inventory.
D. 365 days.
20. A new average cost is computed each time a purchase is made in the
A. average cost method.
B. moving-average cost method.
C. weighted-average cost method.
D. all of these methods.
21. Which of these would cause the inventory turnover ratio to increase the most?
A. increasing the amount of inventory on hand.
B. keeping the amount of inventory on hand constant but increasing sales.
C. keeping the amount of inventory on hand constant but decreasing sales.
D. decreasing the amount of inventory on hand and increasing sales.
22. The inventory turnover ratio is computed by dividing cost of goods sold by
A. 365 days
B. beginning inventory.
C. ending inventory.
D. average inventory.
23. Which of the following should not be included in the physical inventory of a
company?
A. Goods held on consignment from another company.
B. Goods shipped on consignment to another company.
C. Goods in transit from another company shipped to the FOB shipping point.
D. All of these.
24. James gives goods on consignment to John who agrees to try to sell them for a 15%
commission. At the end of the accounting period, which of the following parties
includes the consigned goods in its inventory?
A. James.
B. John.
C. Both James and John.
D. Neither James nor John.
25. Which of the following statements is correct ?

A. The FIFO method assumes that the costs of the earliest goods acquired are the last
to be sold.
B. Under the FIFO method, the cost of goods sold is based on the latest units
purchased.
C. Under FIFO, the ending inventory is based on the latest units purchased.
D. FIFO seldom coincides with the actual physical flow of inventory.
26. When inventory is understated

A. COGs is understated, Net income understated
B. COGs is overstated, net income understated
C. COGs is understated, net income overstated
D. COGs is understated, net income is overstated
27. The lower of cost or market basis of valuing inventories is an example of

A. the cost principle.
B. conservatism.
C. consistency.
D. comparability.
28. Factors that affect the selection of an inventory costing method do not include
A. tax effects.
B. perpetual vs. periodic inventory system.
C. balance sheet effects.
D. income statement effects.
29. Cost of goods available for sale consists of two elements: beginning inventory and
A. cost of goods purchased.
B. Ending inventory
C. COGS
D. All above
30. Cost of goods sold =

A. Beginning inventory + Purchases - ending inventory
B. Beginning inventory - Ending inventory
C. Beginning inventory+Cost of goods available for sale
D. Cost of goods purchased +Cost of goods available for sale
31. Inventory costing methods place primary reliance on assumptions about the flow of
A. costs
B. goods
C. values
D. Resale prices.
32. Goods in transit should be included in the inventory of the buyer when the
A. public carrier accepts the goods from the seller.
B. goods reach the buyer.
C. terms of sale are FOB destination.
D. terms of sale are FOB shipping point.
33. Which method might be used to estimate inventory costs when physical inventories
are not taken?
A. LIFO
B. FIFO
C. Average cost method
D. Gross profit method
34. The gross profit method can be used for all of the following reasons except
A. preparation of annual financial statements.
B. estimating inventory losses due to some casualty.
C. testing the reasonableness of the physical inventory count.
D. preparation of interim financial statements.
35. When the current replacement cost of inventory is less than its cost, it is written
down to
A. FIFO value.
B. LIFO value.
C. market value.
D. average-cost value.
36. On September 12, beginning inventory of company A were 100 units, each unit cost
$2. On September 14, the company purchased 200 units, each unit cost $3. On
September 19, the company sold 240 units of product with a price of $5. Calculate
COGs under FIFO method
A. $620
B. $680
C. $1200
D. $580
37. On September 12, beginning inventory of company A were 100 units, each unit cost
$2. On September 14, the company purchased 200 units, each unit cost $3. The
company sold 240 units of product with a price of $5. Calculate COGs under LIFO
method
A. $620
B. $680
C. $1200
D. $580
38. Hudson Company started its year with 600 units of beginning inventory at a cost of
$4.00. During the year, the company made the following purchases: May, 900 units
at $5.00 and July, 500 units at $6.00. A physical count of inventory at year-end
indicates that there are 700 units in ending inventory. What is the cost of the ending
inventory if Hudson Company uses the FIFO method for valuing inventory?
A. $4,000
B. $3,000.
C. $1,000
D. $7,000
39. Hudson Company started its year with 600 units of beginning inventory at a cost of
$4.00. During the year, the company made the following purchases: May, 900 units
at $5.00 and July, 500 units at $6.00. A physical count of inventory at year-end
inventory if Hudson Company uses the LIFO method for valuing inventory?
A. $3,000
B. $2,600.
C. $2,900
D. $2,400
40. Tinker Bell Company started its year with 600 units of beginning inventory at a cost
of $4.00. During the year, the company made the following purchases: May, 900
units at $5.00 and July, 500 units at $6.00. A physical count of inventory at year-end
inventory if Hudson Company uses the Average-cost method for valuing inventory?
A. $2,300.
B. $3,465.
C. $4,176.
D. $5,060
41. Tinker Bell Company started its year with 8,000 units of beginning inventory at a
cost of $11. During the year, the company made the following purchases: June,
13,000 units at $12 and Nov, 5,000 units at $13. Tinker Bell has 9,000 units on hand
as of December 3. What is the cost of goods available for sale?
A. $221,000.
B. $88,000.
C. $309,000.
D. $65,000
as of December 3. The cost of the ending inventory under FIFO is
A. $108,000
B. $113,000
C. $100,000
D. $167,000
as of December 3. COGS under FIFO is
A. $196,000
B. $113,000
C. $100,000
D. $167,000
44. Sheldon's Jewelers uses the specific identification method of inventory costing.
During May, Sheldon purchased 3 gemstones for $4,000, $5,000, and $6,000
respectively. During May, Sheldon sold two of the gemstones for $6,500 each. At the
end of May, Sheldon determined that the $6,000 gemstone was still in his inventory.
What is Sheldon's gross profit for the month of May?
A. $4,000
B. $3,000
C. $5,000
D. $7,000
45. The following information is available for Tye Company at December 31: Beginning
inventory $80,000; Ending inventory $120,000; Cost of goods sold $1,200,000; and
Sales Revenue $1,600,000. Tye's average inventory is
A. $6,000
B. $8,000
C. $200,000
D. $100,000
Sales Revenue $1,600,000. Tye's inventory turnover is
A. 6 times
B. 16 times
C. 8 times
D. 12 times
Sales Revenue $1,600,000. Tye's days in inventory is
A. 22.8 days
B. 30.4 days
C. 60.8 days
D. 44.1 days
48. Trendy Toy Company purchased 1,000 toys at a cost of $50 each. Trendy Toys has
200 toys in inventory at year-end with a replacement cost of $45 each. The ending
inventory at lower of cost or market is..
A. $45,000
B. $50,000
C. $9,000
D. $10,000
49. Rickety Company purchased 1,000 widgets and has 200 widgets in its ending
inventory at a cost of $91 each and a current replacement cost of $80 each. The
ending inventory under lower of cost or market is...
A. $80,000
B. $91,000
C. $16,000
D. $18,200
50. Harold Company overstated its inventory by $15,000 on December 31, 2012. It did
not correct the error in 2012 or 2013. As a result, Harold's stockholders' equity was
A. Overstated on December 31, 2012, and understated on December 31, 2013.

B. Overstated on December 31, 2012, and properly stated on December 31, 2013.
C. Understated on December 31, 2012, and understated on December 31, 2013.
D. Overstated on December 31, 2012, and overstated on December 31, 2013.
III. Short answers:

1. What are the advantages of the FIFO method?
2. What are the advantages of the LIFO method?
CHAPTER 9: ACCOUNTING FOR RECEIVABLE
I. True/ False questions:
1. Trade receivables occur when two companies trade or exchange notes receivables.
2. Other receivables include nontrade receivables such as loans to company officers.
3. Both accounts receivable and notes receivable represent claims that are expected to
be collected in cash.
4. Receivables are valued and reported in the balance sheet at their gross amount less
any sales returns and allowances and less any cash discounts.
5. The three primary accounting problems with accounts receivable are: (1)
recognizing, (2) depreciating, and (3) disposing.
6. Accounts receivable are the result of cash and credit sales.
7. If a retailer assesses a finance charge on the amount owed by a customer, Accounts
Receivable is debited for the amount of the interest.
8. If a company uses the allowance method to account for uncollectible accounts, the
entry to write off an uncollectible account only involves balance sheet accounts.
9. The percentage of receivables basis of estimating expected uncollectible accounts
emphasizes income statement relationships.
10. Under the direct write-off method, no attempt is made to match bad debts expense
to sales revenues in the same accounting period.
11. Allowance for Doubtful Accounts is debited under the direct write-off method when
an account is determined to be uncollectible.
12. Allowance for Doubtful Accounts is a contra asset account.
13. Cash realizable value is determined by subtracting Allowance for Doubtful
Accounts from Net Sales.
14. Generally accepted accounting principles require that the direct write-off method be
used for financial reporting purposes if it is also used for tax purposes.
15. Under the allowance method, Bad Debts Expense is debited when an account is
deemed uncollectible and must be written off.
16. Sales resulting from the use of VISA and MasterCard are considered credit sales by
the retailer.
17. A factor purchases receivables from businesses for a fee and collects the remittances
directly from customers.
18. A major advantage of national credit cards to retailers is that there is no charge to
the retailer by the credit card companies for their services.
19. Receivables may be sold because they may be the only reasonable source of cash.
20. If a retailer accepts a national credit card such as VISA, the retailer must maintain
detailed records of customer accounts.
21. A note receivable is a written promise by the maker to the payee to pay a specified
amount of money at a definite time.
22. The maturity date of a 1-month note receivable dated June 30 is July 30.
23. The two key parties to a note are the maker and the payee.
24. When the due date of a note is stated in months, the time factor in computing
interest is the number of months divided by 360 days.
25. The accounts receivable turnover ratio is computed by dividing total sales by the
average net receivables during the year.
I.
II. MCQs:
26. Janway sells softball equipment. On November 14, they shipped $1,000 worth of
softball
uniforms to Chris Middle School, terms 2/10, n/30. On November 21, they received an
order from Douglas High School for $600 worth of custom printed bats to be produced in
December. On November 30, Chris Middle School returned $100 of defective merchandise.
Janway has received no payments from either school as of month end. What amount will
be recognized as net accounts receivable on the Balance Sheet as of November 30?
a. $1,600
b. $1,500
c. $1,000
d. $900
27. Larson Company on July 15 sells merchandise on account to Stuart Co. for $1,000,
terms 2/10, n/30. On July 20 Stuart Co. returns merchandise worth $400 to Larson
Company. On July 24 payment is received from Stuart Co. for the balance due. What is the
amount of cash received?
a. $600
b. $588
c. $580
d. $1,000
28. An aging of a company's accounts receivable indicates that $9,000 are estimated to be
uncollectible. If Allowance for Doubtful Accounts has a $1,100 credit balance, the
adjustment to record bad debts for the period will require a
a. debit to Bad Debts Expense for $9,000.
b. debit to Allowance for Doubtful Accounts for $7,900.
c. debit to Bad Debts Expense for $7,900.
d. credit to Allowance for Doubtful Accounts for $9,000.
29. The allowance method of accounting for uncollectible accounts is required if
a. the company makes any credit sales.
b. bad debts are significant in amount.
c. the company is a retailer.
d. the company charges interest on accounts receivable.
30. Bad Debts Expense is reported on the income statement as

a. part of cost of goods sold.
b. reducing gross profit.
c. an operating expense.
d. a contra-revenue account.
31. The percentage of receivables basis for estimating uncollectible accounts emphasizes
a. cash realizable value.
b. the relationship between accounts receivable and bad debts expense.
c. income statement relationships.
d. the relationship between sales and accounts receivable.
32. Long Company uses the percentage of sales method for recording bad debts expense.
For the year, cash sales are $500,000 and credit sales are $2,000,000. Management
estimates that 1% is the sales percentage to use. What adjusting entry will Long Company
make to record the bad debts expense?
a. Bad Debts Expense ....................................................... 25,000
Allowance for Doubtful Accounts .......................... 25,000
b. Bad Debts Expense ....................................................... 20,000
Allowance for Doubtful Accounts .......................... 20,000
c. Bad Debts Expense ....................................................... 20,000
Accounts Receivable ............................................ 20,000
d. Bad Debts Expense ....................................................... 25,000
Accounts Receivable ............................................ 25,000
uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the
b. debit to Allowance for Doubtful Accounts for $2,800.
uncollectible. If Allowance for Doubtful Accounts has a $1,200 debit balance, the
b. debit to Bad Debts Expense for $4,200.
35. Using the percentage of receivables method for recording bad debts expense, estimated
uncollectible accounts are $10,000. If the balance of the Allowance for Doubtful Accounts is
$2,000 debit before adjustment, what is the balance after adjustment?
a. $10,000
b. $12,000
c. $8,000
d. $2,000
36. Winsor Furniture factors $800,000 of receivables to Fast Factors, Inc. Fast Factors
assesses a 2% service charge on the amount of receivables sold. Winsor Furniture
factors its receivables regularly with Fast Factors. What journal entry does Winsor make
when factoring these receivables?
a. Cash............................................................................... 784,000
Loss on Sale of Receivables .......................................... 16,000
Accounts Receivable ............................................. 800,000
b. Cash............................................................................... 784,000
c. Cash............................................................................... 800,000
Gain on Sale of Receivables ................................. 16,000
d. Cash............................................................................... 784,000
Service Charge Expense................................................ 16,000
37. A note receivable is a negotiable instrument which

a. eliminates the need for a bad debts allowance.
b. can be transferred to another party by endorsement.
c. takes the place of checks in a business firm.
d. can only be collected by a bank.
38. A company that receives an interest bearing note receivable will

a. debit Notes Receivable for the maturity value of the note.
b. credit Notes Receivable for the maturity value of the note.
c. debit Notes Receivable for the face value of the note.
d. credit Notes Receivable for the face value of the note.
39. The face value of a note refers to the amount

a. that can be received if sold to a factor.
b. borrowed plus interest received at maturity from the maker.
c. that is identified on the formal instrument of credit.
d. remaining after a service charge has been deducted.
40. Risen Company receives a $5,000, 3-month, 8% promissory note from Dodd Company
in settlement of an open accounts receivable. What entry will Risen Company make upon
receiving the note?
a. Notes Receivable............................................................ 5,100
Accounts Receivable—Dodd Company................. 5,100
b. Notes Receivable............................................................ 5,100
Interest Revenue ................................................... 100
c. Notes Receivable............................................................ 5,000
Interest Receivable ................................................ 100
Interest Revenue ................................................... 100
d. Notes Receivable............................................................ 5,000
Use the following information for questions 41–42.

The financial statements of Bolton Manufacturing Company report net sales of $500,000 and
accounts receivable of $50,000 and $30,000 at the beginning and end of the year, respectively.
41 What is the receivables turnover ratio for Bolton?

a. 7 times
b. 10 times
c. 16.7 times
d. 12.5 times
42. What is the average collection period for accounts receivable in days?
a. 52.1
b. 29.2
c. 21.9
d. 36.5
Use the following information for questions 43–44.

The financial statements of Colter Manufacturing Company report net sales of $400,000 and
accounts receivable of $80,000 and $40,000 at the beginning and end of the year, respectively.
43. What is the receivables turnover ratio for Colter?

a. 6.7 times
b. 10 times
c. 5 times
d. 8 times
44. What is the average collection period for accounts receivable in days?
a. 40 times
b. 80 times
c. 54.7 times
d. 50 times
45. Gudenas Co., makes a credit card sale to a customer for $600. The credit card sale has a
grace period of 30 days and then an interest charge of 18% per year or 1.5% per month is
added to the balance. If the unpaid balance on the above sale is $360 at the end of the
grace period, the interest charge is
a. $9.00.
b. $6.00.
c. $3.60.
d. $5.40.
46. The interest rate specified on any note is for a

a. day.
b. month.
c. week.
d. year.
47. On February 1, Maris Company received a $9,000, 10%, four-month note receivable.
The cash to be received by Maris Company when the note becomes due is
a. $300.
b. $9,000.
c. $9,300.
d. $9,900.
48. The entry to record the dishonor of a note receivable assuming the payee expects
eventual collection includes a debit to
a. Notes Receivable.
b. Cash.
c. Allowance for Doubtful Accounts.
d. Accounts Receivable.
49. Which of the following statements concerning receivables is incorrect?

a. Notes receivable are often listed last under receivables.
b. The contingent liability from selling notes receivable should be disclosed.
c. Both the gross amount of receivables and the allowance for doubtful accounts should
be reported.
d. Interest revenue and gain on sale of notes receivable are shown under other revenues
and gains.
50. The accounts receivable turnover ratio is computed by dividing

a. total sales by average net accounts receivable.
b. net credit sales by average net accounts receivable.
c. total sales by ending net accounts receivable.
d. net credit sales by ending net accounts receivable.
III. Short answers:
On December 31, 2016, House Co. reported the following information on its balance
sheet.
Accounts receivable $960,000
Less: Allowance for doubtful accounts 80,000
During 2017, the company had the following transactions related to receivables.
1. Sales on account $3,700,000
2. Sales returns and allowances 50,000
3. Collections of accounts receivable 2,810,000
4. Write-offs of accounts receivable deemed uncollectible 90,000
5. Recovery of bad debts previously written off as uncollectible 29,000
Instructions
(a) Prepare the journal entries to record each of these five transactions. Assume that no
cash discounts were taken on the collections of accounts receivable.
(b) Enter the January 1, 2017, balances in Accounts Receivable and Allowance for
Doubtful Accounts, post the entries to the two accounts (use T-accounts), and determine
the balances.
(c) Prepare the journal entry to record bad debt expense for 2017, assuming that AN
aging of accounts receivable indicates that expected bad debts are $115,000.
(d) Compute the accounts receivable turnover for 2017 assuming the expected bad debt
information provided in (c).
CHAPTER 10: PLANT ASSETS, NATURAL RESOURCES
I. True/ False:
1. Depreciation is a process of asset valuation, not cost allocation.
2. Depreciation provides for the proper matching of expenses with revenues.
3. The book value of a plant asset should approximate its fair value.
4. Depreciation applies to three classes of plant assets: land, buildings, and equipment.
5. Depreciation does not apply to a building because its usefulness and revenue-producing
ability generally remain intact over time.
6. The revenue-producing ability of a depreciable asset will decline due to wear and tear
and to obsolescence.
7. Recognizing depreciation on an asset results in an accumulation of cash for replacement
of the asset.
8. The balance in accumulated depreciation represents the total cost that has been charged
to expense.
9. Depreciation expense and accumulated depreciation are reported on the income
statement.
10. Four factors affect the computation of depreciation: cost, useful life, salvage value, and
residual value.
11. Patents have a book value.
12. Patents have a contra account.
13. Corporations are recognized as separate, legal entities or "persons".
14. For common stock, dividends and residual assets are given on a pro rata basis, which
means 1 share = 1 dividend, 1 share = 1 asset
15. Preferred stock does not require a stock certificate.
16. Dividends in arrears are recorded as a liability.
17. Sale at par value will be recorded as:
Cash XXX
Common Stock XXX
18. The book value of an asset equals its cost less accumulated depreciation.
19. Cost to construct a plant includes the contract price, architect’s fees, building fees,
excavation costs but not interest costs incurred to finance the project.
II/ MCQs:
20. ____ is a depreciation method that expenses more of the asset's cost near the start of its
useful life and less at the end of its useful life.
A. Accelerated depreciation method
B. Declining balance method
C. Straight line depreciation
D. Double declining balance method steps
21. ____ is tangible assets used in a company's operations that have a useful life of more
than one accounting period
A. Building
B. Equipment
C. Plant assets
D. Inventory
22. Equipment was purchased for $85,000 on January 1, 2014. Freight charges amounted
to $3,500 and there was a cost of $10,000 for building a foundation and installing the
equipment. It is estimated that the equipment will have a $15,000 salvage value at the end
of its 5-year useful life. What is the amount of accumulated depreciation at December 31,
2015, if the straight-line method of depreciation is used?
A. $95,000
B. $33,400
C. $18,500
D. $66,400
23. Sargent Corporation bought equipment on January 1, 2014. The equipment cost
$360,000 and had an expected salvage value of $60,000. The life of the equipment was
estimated to be 6 years. The depreciation expense using the straight-line method of
depreciation is
A. $30,000
B. $60,000
C. $50,000
D. $120,000
24. What method applies Straight line rate =100% / useful life, straight line rate X 2 =
double declining rate, and Double declining rate x beginning period book value
A. Accelerated depreciation method
B. Declining balance method
C. Straight line depreciation
D. Double declining balance method steps
25. What is equal cost minus accumulated depreciation?

A. book value
B. residual value
C. depletion expense
D. Historical value
26. The cost of a factory machine includes all of the following costs except
A. invoice price less discount taken.
B. sales tax and insurance during shipping.
C. three-year insurance policy on the machine.
D. testing and installation cost.
27. On January 1, a machine with a useful life of 5 years and a salvage value of $8,000 was
purchased for $160,000. What is the depreciation expense in year 2 under the double
declining-balance method?
A. $38,400
B. $36,480
C. $25,600
D. $24,320
28. On January 1, a machine with a useful life of 5 years and a salvage value of $8,000 was
purchased for $160,000. What is the depreciation expense in year 2 under the straight-line
method?
A. $38,400
B. $36,480
C. $25,600
D. $30,400
29. On January 1, a machine expected to be used 200,000 hours over its estimated useful
life of 5 years and a salvage value of $8,000 was purchased for $160,000. Actual miles
driven were 25,000 in 1st year, 20,000 in 2nd year. What is the depreciation expense in year
2 under the Units-of-activity method?
A. $19,400
B. $16,480
C. $15,200
D. $20,700
30. Which of the following is NOT considered as the way companies make assets disposal:
A. Sale
B. Retirement
C. Exchange
D. Buy
31. A gain on disposal occurs when _____, And we _____ the gain on disposal account in
the journal
A. The sales exceed the book value, credit
B. The sales are less than the book value, credit
C. The sales exceed the book value, debit
D. The sales are less than the book value, debit
32. Depletion is one of the method of reduction, which is used for:

A. Building
B. Machine
C. Copyright
D. Oil fields
33. The Coal company invested 2 millions in a mine and estimated to have 1 millions tons of
coal and 0.5 millions salvage value. If Anna extracts 250,000 tons in the first years, then the
depletion for the years is:
A. 250,000
B. 500,000
C. 125,000
D. 375,000
34. What does asset turnover tell us ? (choose the best answer)
A. We would know each dollar invested in asset would produce how much money in sales
B. Average total assets
C. The relationship between liabilities and assets
D. The relationship between liabilities and owner’s equity.
35. Net sales of Apple is $2 billions in January, and had total asset in 1st january is $7
billion, and had total asset on 31st of $8 billions. Determine Apple’s asset turnover rate?
A. 2
B. 0.26(6)
C. 0.1(3)
D. 4
36. ____ is the expected value of the asset at the end of its useful life that used in
determining depreciation in each of the methods except the declining-balance method.
A. Market value
B. Depreciate value
C. Historical value
D. Salvage value
37. ____ is expressed in years under the straight-line method and in units of activity under
the units-of-activity method
A. Useful life
B. Life
C. Expected life
D. Salvage life
38. ____of periodic depreciation expense over useful life is constant under the straight-line
method and variable under the units-of-activity method.
A. Tangible assets
B. The pattern
C. Copyright
D. Cost
39. If the proceeds of the sale exceed the book value of the plant asset, a _______ occurs.
A. Disposal
B. Lost on disposal
C. Gain or lost on disposal
D. Gain on disposal
40. _____is the allocation of the cost of natural resources to expense in a rational and
systematic manner over the resource’s useful life.
A. Depletion
B. Depletion cost
C. Depreciation
D. Depreciation cost
41. When assets are exchanged, the gain or loss on disposal is computed as the difference
between __________ of the asset given up at the time of exchange.
A. COGS and revenue
B. Sales and cost
C. The book value and the fair value
D. Historical cost and depreciation cost
III. Short answers:

42. A company purchased factory equipment for $700,000. 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 double-declining-balance method of depreciation, the amount of
annual depreciation recorded for the second year after purchase would be:
43. Equipment with a cost of $400,000 has an estimated salvage value of $25,000 and an
estimated life of 4 years or 15,000 hours. It is to be depreciated using the units-of-activity
method. What is the amount of depreciation for the first full year, during which the
equipment was used 3,300 hours?
44. Salem Company hired Kirk Construction to construct an office building for £6,400,000
on land costing £1,600,000, which Salem Company owned. The building was complete and
ready to be used on January 1, 2014 and it has a useful life of 40 years. The price of the
building included land improvements costing £480,000 and personal property costing
£600,000. The useful lives of the land improvements and the personal property are 10 years
and 5 years, respectively. Salem Company uses component depreciation, and the company
uses straight-line depreciation for other similar assets. What total amount of depreciation
expense would Salem Company report on its income statement for the year ended
December 31, 2014?
45. Moreno Company purchased equipment for $900,000 on January 1, 2013, and will use
the double-declining-balance method of depreciation. It is estimated that the equipment
will have a 3-year life and a $40,000 salvage value at the end of its useful life. The amount
of depreciation expense recognized in the year 2015 will be?
46. On July 1, 2014, Jenks Company purchased the copyright to Jackson Computer
tutorials for $324,000. It is estimated that the copyright will have a useful life of 5 years
with an estimated salvage value of $24,000. The amount of Amortization Expense
recognized for the year 2014 would be?
47. A company has the following assets:

Buildings and Equipment, less accumulated depreciation of $2,000,000 = $9,600,000
Copyrights = $960,000
Patents = $4,000,000
Timberlands, less accumulated depletion of $2,800,000=$4,800,000
The total amount reported under Property, Plant, and Equipment would be?
48. On July 4, 2014, Wyoming Mining Company purchased the mineral rights to a granite
deposit for $1,600,000. It is estimated that the recoverable granite will be 400,000 tons.
During 2014, 100,000 tons of granite was extracted and 60,000 tons were sold. The amount
of the Depletion Expense recognized for 2014 would be?
49. On October 30, Cleo Co. purchased a machine for $26,000 and estimates it will use the
machine for four-years with a $2,000 salvage value. Using the straight-line depreciation
method, compute the machine's first year partial depreciation expense for October 30
through December 31. What is a partial year depreciation?
50. Gunkelson Company sells equipment on September 30, 2017, for $18,000 cash.
The equipment originally cost $72,000 and as of January 1, 2017, had accumulated
depreciation of $42,000. Depreciation for the first 9 months of 2017 is $5,250. Prepare the
journal entries to (a) update depreciation to September 30, 2017, and (b) record the sale of
the equipment.
51. Olathe Company exchanges old delivery equipment for new delivery equipment.
The book value of the old delivery equipment is $31,000 (cost $61,000 less accumulated
depreciation $30,000). Its fair value is $24,000, and cash of $5,000 is paid. Prepare the entry
to record the exchange, assuming the transaction has commercial substance.
52. The following expenditures were incurred by McCoy Company in purchasing land:
cash price $50,000, accrued taxes $3,000, attorneys’ fees $2,500, real estate broker’s
commission $2,000, and clearing and grading $3,500. What is the cost of the land?
53. Flaherty Company had the following two transactions related to its delivery truck.
1. Paid $45 for an oil change.
2. Paid $400 to install a special gear unit, which increases the operating efficiency of the
Truck.
Prepare Flaherty’s journal entries to record these two transactions.
54. Corales Company acquires a delivery truck at a cost of $38,000. The truck is expected
to have a salvage value of $6,000 at the end of its 4-year useful life. Compute annual
depreciation expense for the first and second years using the straight-line method.
55. Chisenhall Company purchased land and a building on January 1, 2017. Management’s
best estimate of the value of the land was $100,000 and of the building $200,000. However,
management told the accounting department to record the land at $220,000 and the
building at $80,000. The building is being depreciated on a straight-line basis over 15 years
with no salvage value. Why do you suppose management requested this accounting
treatment? Is it ethical?
56. Yello Bus Lines uses the units-of-activity method in depreciating its buses. One bus was
purchased on January 1, 2017, at a cost of $148,000. Over its 4-year useful life, the bus is
expected to be driven 100,000 miles. Salvage value is expected to be $8,000.
Instructions
(a) Compute the depreciable cost per unit.
(b) Prepare a depreciation schedule assuming actual mileage was: 2017, 26,000; 2018,
32,000; 2019, 25,000; and 2020, 17,000.
CHAPTER 17: CASH FLOW STATEMENT
1.Which of the following is not one of the main useful information of the statement of cash
flows?
a. The company’s ability to generate revenue in the future cash flows
b. The company’s ability to pay dividends and meet obligations
c. The cash investing and financing transactions during the period
d. The relationship of the company with others
2.The investing activities of the company include:

a. The cash effects of transactions that create revenues and expense
b. Obtaining cash from issuing debt and repaying the amount borrowed
c. Lending money and collecting loans
d. Obtaining cash from stockholders, repurchasing shares, and paying dividends.
3. Which of the following is the cash inflow of operating activities?

a. Pay government taxes
b. Pay wages to employees
c. Sale of property, plant, and equipment
d. Interest received and dividends received
4. The cash outflow of operating activities is:
a. Pay government taxes
b. Purchase plant and equipment
c. Buying a land
d. Sale of goods or services. -> INFLOW
5. The cash inflows of investing activities include:

a. Pay employees for wages ( OUTFLOW OF OPERATING ACTIVITIES)
b. Pay tax for the government ( OUTFLOW OF OPERATING ACTIVITIES)
c. Cash from the sale of equipment
d. Sale of goods or services.
6. Cash inflow of financing activities is:

a. Sale of common stock
b. Pay dividends to stockholders OUTFLOW FINANCING
c. Make loans for other entities
d. Pay wages for employees OUTFLOW OF OPERATING
7. Which of the following are NOT the activities of cash flows?

a. Financing
b. Operating
c. Investing
d. Buying and selling
8. Which activities are the most important? Operating? Financing? Or Investing? Why?
(short answer)
9. Apple purchased to building in HCM city, this is a(an) ___ activity
a. Financing
b. Operating
c. Investing
d. None of the above
10. Company collected $100,000 cash from service performed, this is a ____ activity, and
cash ____
a. Financing, inflow
b. Operating, inflow
c. Investing, inflow
d. Financing, outflow
11. Which of the following are the financing activities?

a. The company borrowed $123,456 from Bank, signing a 5-year note bearing 8% interest
b. Company pay salaries for employees
c. Sell a land a have $10,000 gain on disposal
d. Pay taxes for government
12 Investing activities involve

a. Income statement items
b. Changes in long-term liability and stockholders’ equity items.
c. Changes in investments and long-term asset activities.
d. None of the above
13.Financing activities involve cash flow resulting from:

a. Changes in long-term liabilities
b. Income statement items
c. Changes in investments
d. Changes in long-term asset activities
14. Operating activities involve cash flow resulting from:

a. Changes in long-term liabilities
b. Income statement items
c. Changes in investments
d. Changes in long-term asset activities
15. Which of the following is NOT a non-cash activity?

a. Conversion of bond into common stock
b. Exchange of plant asset
c. Direct insurance of common stock to buy assets
d. Borrow a bank an amount of money
16. The information to prepare the statement of cash flows usually comes from three
sources:
a. Comparative balance sheet, additional information, owner’s equity
b. Additional information, comparative balance sheet, trial balance
c. Income statement, additional information, comparative balance sheet
d. Owner’s equity, trial balance, comparative balance sheet
17. What are the two reasons why companies prefer the indirect method to the direct
method of preparing a statement of cash flows: (short answer)
18. We_______ noncash expense in operating activities, example is ____ and ______
a. Add back, account receivable, and account payable
b. Deduct, depreciation and amortization
c. Deduce, account receivable, and accounts payable
d. Add back, depreciation and amortization
19. Change in balance of depreciation expense account from 2019 to 2020 is 15,000
increase, then what we do in operating activities is:
A. Add back 15,000, because depreciation reduces net income, but do not reduce cash
B. Deduct 15,000, because depreciation increase net income, but do not increase cash
C. Add back 15,000, because depreciation increase net income, but do not reduce cash
D. Do nothing
20. Which of the following is TRUE

A. If there is an increase with A.R and inventory, we add the amount back
B. If there is an increase with A.R and inventory, we deduct the amount
C. If there is an increase in depreciation, we add the amount back
D. If there is a decrease in depreciation, we deduct the amount
21. Current liabilities NOT include which of the following:

A. Account payable
B. Tax payable
C. Salaries and wages payable
D. Common stock
22. The formula of free cash flow(FCF) is:

A. FCF= capital expenditure - cash dividends
B. FCF= Net cash provided by operating activities + cash dividends
C. FCF= Net cash provided by operating activities - capital expenditure-cash dividends
D. FCF= Net cash provided by operating activities + capital expenditure+cash dividends
23. Cash provided by operating activities is $21,000, dividends paid are $3,242, and
expenditure on property, plant and equipment is 1,000. Compute the free cash flow:
A. $23,242
B. $16,758
C. $18,758
D. $25,242
24. Which of the following is true about the direct and indirect methods?
A. The indirect method shows three types of cash flows, but the direct method does not.
B. The investing activities section is the only section that differs between direct and indirect
methods.
C. There will be a different result for each method
D. Both methods provide the same amount for operating activities
25. Which of the following sections of the statement of cash flows is presented differently
between direct and indirect methods?
A. Financing activities
B. Investing activities
C. Non-cash investing and financing activities
D. Operating activities
26. Investors who want to know the amount of cash a company has available for new
opportunities, such as expanding into a new sales region, should analyze the company’s
______
A. Asset turnover
B. Free cash flow
C. Gain on disposal
D. Earnings per share
27. Retained earnings belongs to:

A. Operating activities
B. Financing activities
C. Investing activities
D. None of the above
28. Company must at least maintain ______ at the current level to satisfy investor
A. Dividend
B. Cash
C. Common stock
D. Bond
29. Issuance of bond payable to purchase land is not noncash activities(T/F) FALSE
30. Assume that ISB reported a net loss of $6,000 for the year ended December 31, 2021.
During the year, AR increased $15,000, merchandise inventory decreased $12,000, account
payable decreased by $20,000, and depreciation expense of $12,000 was recordeD. During
2016, operating activities:
A. Provided net cash of $21,000
B. Used net cash of $17,000
C. Provided net cash of $24,000
D. Used net cash of $29,000
31. In preparing a statement of cash flows using the indirect method, the Depreciation
Expense ____
A. Is shown as a negative cash flow under operating activities
B. Is added back to the Purchase of plant assets under investing activities
C. Is added back as an adjustment to Net Income in the operating activities
D. Is an outflow of investing activities
32. Western Sydney University sold equipment for cash. The income statement shows a loss
on the sale of $7,000. The netbook value of the asset was $28,900. Which of the following
statements describe the cash effect of the transaction?
A. Positive cash flow of $35,900 from financing activities
B. Negative cash flow of $21,900 from financing activities
C. Positive cash flow of $21,900 from investing activities
D. Negative cash flow of $21,900 for operating activities
33. The activities that are included in the operating activities are:
A. Activities that create expenses and revenue
B. Activities that increase or decrease long-term asset
C. Activities that pertain to construct new facilities
D. activities that involve stockholder’s equity
34. Rent received by financing activities is classified under ___ activity

A. Financing
B. Investing
C. Operating
D. None
35. Which of the following is an example of a cash out-flow for a business?

A. Payment to creditors
B. Payment from debtors
C. Sale of goods
D. Receiving a loan from the bank
36. Under the indirect method of determining net cash provided by operating activities,
which of the following would be recorded as a deduction from net income?
A. A decrease in accounts receivable.
B. An increase in salaries payable.
C. A decrease in accounts payable.
D. An increase in deferred tax liability
37. Which of the following would be considered a "use" of cash for purposes of
constructing a statement of cash flows?
A. an increase in accounts payable.
B. an increase in prepaid expenses.
C. an increase in accrued liabilities.
D. an increase in accumulated depreciation.
38. An increase in the bonds payable account of $200,000 over the course of a year would
be shown on the company's statement of cash flows prepared under the indirect method as:
A. an addition of $200,000 under investing activities.
B. a deduction of $200,000 under investing activities.
C. an addition of $200,000 under financing activities.
D. a deduction of $200,000 under financing activities
39. The data given below are from the accounting records of the Kuhn Company:
Net Income (accrual basis) ...................... $45,000

Depreciation Expense ..................................9,000
Decrease in Accounts Payable .....................2,500
Decrease in Merchandise Inventory .............3,000
Increase in Long-term Liabilities ..............10,000
Sale of Capital Stock for cash ...................30,000
Increase in Accounts Receivable ................4,500
Based on this information, the cash provided by operating activities using the indirect
method would be:
A. $55,000.
B. $58,000.
C. $50,000.
D. $60,000.
40. Morey Company's net income last year was $27,000 and cash dividends declared and
paid to the company's stockholders totaled $13,000. Changes in selected balance sheet
accounts for
the year appear below:
Increases
(Decreases)
Debit balances:
Accounts receivable ......... ...$8,000
Inventory ...............................(3,000)
Prepaid expenses ............,,,,,,,4,000
Credit balances:
Accumulated depreciation ...18,000
Accounts payable ...................6,000
Taxes payable .......................(4,000)
Bonds payable .....................10,000
Based solely on this information, the net cash provided by operations under the indirect
method on the statement of cash flows would be:
A. $16,000.
B. $45,000.
C. $38,000.
D. $25,000
41. Moravec Company's net income last year was $46,000 and cash dividends declared and
paid to the company's stockholders totaled $18,000. Changes in selected balance sheet
accounts for the year appear below:
Increases
(Decreases)
Debit balances:
Accounts receivable ...............$8,000
Inventory .................................(5,000)
Credit balances:
Accumulated depreciation .....26,000
Accounts payable ...................10,000
Accrued liabilities ...................(9,000)
Taxes payable ...........................4,000
Bonds payable ........................60,000
Based solely on this information, the net cash provided by operations under the indirect
method on the statement of cash flows would be:
A. $126,000.
B. $74,000.
C. $72,000.
D. $18,000
42. Which of the following would be considered a "use" of cash for purposes of
constructing a statement of cash flows?
A. an increase in accounts payable.
B. an increase in prepaid expenses.
C. an increase in accrued liabilities.
D. an increase in accumulated depreciation
43 Which of the following would be considered a "use" of cash for purposes of constructing
a statement of cash flows?
A. An increase in accounts receivable.
B. A decrease in prepaid expenses.
C. An increase in bonds payable.
D. An increase in accumulated depreciation
44. All of the following should be classified under the operating section of the statement of
cash flows EXCEPT:
A. A decrease in inventory.
B. An increase in accumulated depreciation.
C. A decrease in prepaid insurance.
D. A purchase of land in exchange for a long-term note.
E. An increase in income tax payable
45.An increase in the plant and equipment account of $100,000 over the course of a year
would be shown on the company's statement of cash flows prepared under the indirect
method as:
A. An addition to net income of $100,000 in order to arrive at net cash provided by
operating activities.
B. A deduction from net income of $100,000 in order to arrive at net cash provided by
operating activities.
C. An addition of $100,000 under investing activities.
D. A deduction of $100,000 under investing activities.
46. Which one of the following transactions should be classified as a financing activity on
the statement of cash flows?
A. Purchase of equipment.
B. Purchase of the company's own stock.
C. Sale of a patent.
D. Payment of interest on a note.
E. Receipt of an income tax refund.
47. Under the indirect method of determining the net cash flow from operating activities on
the statement of cash flows, a gain on the sale of equipment would be subtracted from net
income(T/F)
48. If the income statement shows a loss for the period, then the net cash provided by
operating activities on the statement of cash flows cannot be positive(T/F) F
49. Cash dividends paid to the owners of a company would be classified as part of financing
activities on the statement of cash flows(T/F) T
50. The net cash provided by operating activities on the statement of cash flows will
generally be different than net income(T/F) T

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CHAPTER 1+2

1. Regarding liabilities, which of the following statements is incorrect?

2. Which of the following statements regarding the primary objective of financial

5. According to the ________, acquired assets should be recorded at the amount

6. Which of the following is TRUE of assets?

7. The earnings of a sole proprietorship are ________.

8. Which of the following events is NOT recorded by accountants?

A. The accounting equation is made up of three parts.

18. Which of the following is TRUE of assets?

(a) Only one

(a) Assets = Claims

(a) Rs. 21,000

23. During a reporting period, a company’s assets increase by Rs. 80,000,000.

(a) Decrease by Rs. 100,000,000

a. Cash account and Owner’s equity

29. Revenue of the business includes?

a. Cash sales only

a. Purchase of land on credit

31. General Ledger is also known as?

a. Book of original entry

35. A trial balance will not balance if

36. If a company has overdrawn its bank balance, then

37. Which of the following is false about a journal?

Prepaid insurance 7,000

Accounts receivable 8,000

Notes payable 7,000

Owner's Capital 3,000

Owner's Drawings 2,000

39. An account consists of

40. The left side of an account is

44. A debit to an asset account indicates

46. The best interpretation of the word credit is the

47. Which one of the following is called a book of original entry?

48. A debit to an asset account indicates

49. Which of the following is incorrect regarding a trial balance?

53. Transactions are initially recorded in the?

a. Book of Final Entry

54. Of the following account types, which would be increased by a debit?

a. Liabilities and expenses

56. In which order does the Journal list transactions?

a. Journal entries show the effects of transactions

59. The T-account is used to summarize which of the following?

a. Increase and decrease to a single account in the accounting system

1. Unearned Revenue record revenue earned that was previously received as

2. The revenue recognition principle is that expenses should be recognized in

3. Monthly and quarterly time periods are commonly referred to as fiscal

4. Expense Recognition (Matching) Principle is that if revenue is deferred to a

5. Cost-less accumulated depreciation is a measurement of the current value of

6. Depreciation is the process of allocating the cost of an asset to expense over

7. Accumulated depreciation is an asset account. (T/F) false

8. A contra-asset account is an account whose balance is deducted from a

9. When accrual-basis accounting is applied, adjusting entries are not

necessary. (T/F) true

to the current accounting period. (T/F) true

12. Normal balance of accumulated depreciation-equipment is debit (T/F) false

a. Office Supplies 800 Debit; Supplies Expense 800 Credit.

a. Accounts Receivable 2000 Debit; Service Revenue 2000 Credit

a. Office Supplies 800 Debit; Cash 800 Credit

a. Accounts Receivable 900 Debit; Service Revenue 900

24. Which of the following is an example of an accrued expense adjusting entry?

a. Depreciation Expense 10,000 Debit; Accumulated Depreciation - Equipment 10,000

a. Salaries Expense 5000 Debit; Salaries Payable 5000 Credit

a. Expenses would be understated