Accounting Ch. 1-5 Test

What is the order of the accounting cycle?

1. journalize transactions 2. post each journal entry to the appropriate ledger account 3. prepare financial statements

Paddle, Incorporated purchased equipment for $14,760 on February 1, Year 1. The equipment has a useful life of 3 years. How much depreciation expense should Paddle recognize on its income statement for Year 1?

4510

Suppose a number of your friends have organized a company to develop and sell a new software product. They have asked you to loan them $8,000 to help get the company started, and they have promised to repay your $8,000 plus 10% interest in one year. What amount may be described as the return on your investment?

800

The information systems of most business organizations: A. Are tailored to meet the organization's needs for accounting information and the resources available for operating the system. B. Are similar in design to the journals, ledgers, and worksheets illustrated in this text. C. Utilize data bases, rather than ledger accounts. D. Are designed by the CPA firm that performs the annual financial audit.

A. Are tailored to meet the organization's needs for accounting information and the resources available for operating the system.

If a company has a profit: A. Assets will be equal to liabilities plus owners' equity. B. Assets will be less than liabilities plus owners' equity. C. Assets will be greater than liabilities plus owners' equity. D. Owners' equity will be greater than its assets.

A. Assets will be equal to liabilities plus owners' equity.

Shop supplies are expensed when: A. Consumed B. Purchased C. Paid for D. Ordered

A. Consumed

The collection of accounts receivable is recorded by a: A. Debit to Cash and a credit to Accounts Receivable. B. Credit to Cash and a credit to Accounts Receivable. C. Credit to Cash and a debit to Accounts Receivable. D. Debit to Cash and a debit to Accounts Receivable.

A. Debit to Cash and a credit to Accounts Receivable.

The objectives of an accounting system include all of the following, except: A. Dictate the specific types of business transactions the enterprise may pursue. B. Summarize and communicate information to decision makers. C. Interpret and record the effects of business transactions. D. Classify the effects of transactions to facilitate the preparation of reports.

A. Dictate the specific types of business transactions the enterprise may pursue.

Which of the following accounts will not appear on an After-Closing Trial Balance? A. Dividends B. Prepaid Expenses C. Unearned Revenue D. Retained Earnings, at the end of the period

A. Dividends

Which of the following is considered a return "on" investment? A. Dividends B. Repayment of a loan C. Purchase of an asset D. Securing a loan

A. Dividends

An annual report: A. Includes comparative financial statements for several years. B. Must be filed with the SEC by all companies in the United States. C. Must be audited by the IRS. D. Is delivered to stockholders and the public on the last day of the fiscal year.

A. Includes comparative financial statements for several years.

Which of the following financial statements is usually prepared first? A. Income statement. B. Statement of retained earnings. C. Balance sheet

A. Income statement.

The adjusting entry to record interest that has accrued on a note payable to the bank will cause an immediate: A. Increase in liabilities and reduction in net income. B. Decrease in liabilities and reduction in net income. C. Decrease in assets and reduction in net income. D. Increase in assets and increase in net income.

A. Increase in liabilities and reduction in net income.

Objectives of financial reporting to external investors and creditors include preparing information about all of the following except: A. Information used to determine which products to produce. B. Information about economic resources, claims to those resources, and changes in both resources and claims. C. Information that is useful in assessing the amount, timing, and uncertainty of future cash flows. D. Information that is useful in making investment and credit decisions.

A. Information used to determine which products to produce.

Which of the following does not describe accounting? A. It is an end rather than a means to an end. B. It is used by businesses, governments, non-profit organizations, and individuals. C. It is useful for decision-making. D. It is commonly referred to as the language of business.

A. It is an end rather than a means to an end.

The journal entry to record a particular business transaction includes a credit to the Cash account. This transaction is most likely also to include: A. Payment of an outstanding note payable. B. Issuance of new capital stock. C. A credit to Accounts Receivable. D. The purchase of an asset on account.

A. Payment of an outstanding note payable.

The purpose of making closing entries is to: A. Prepare revenue and expense accounts for the recording of the next period's revenue and expenses. B. Enable the accountant to transfer the balances from all permanent accounts to the Income Summary account. C. Establish new balances in the balance sheet accounts. D. Reduce the number of expense accounts.

A. Prepare revenue and expense accounts for the recording of the next period's revenue and expenses.

Dividends declared: A. Reduce retained earnings B. Increase retained earnings. C. Reduce net income. D. Increase net income.

A. Reduce retained earnings

Which of the following entries causes an immediate decrease in assets and in net income? A. The entry to record depreciation expense. B. The entry to record revenue earned but not yet received. C. The entry to record the earned portion of rent received in advance. D. The entry to record accrued wages payable.

A. The entry to record depreciation expense.

n example of a contra-asset account is:

Accumulated depreciation

Prepaid expenses are: (Assets, liabilities, Expenses, income)

Assets

What is the accounting equation?

Assets - Liabilities = Owner's equity

The essential point of a double-entry system of accounting is that every transaction: A. Increases one ledger account and decreases another. B. Affects two or more ledger accounts and is recorded by an equal dollar amount of debits and credits. C. Affects accounts on both sides of the balance sheet. D. Is recorded in both the journal and the ledger.

B. Affects two or more ledger accounts and is recorded by an equal dollar amount of debits and credits.

Adjusting entries are prepared: A. After a trial balance has been prepared and after financial statements are prepared. B. Before financial statements and after a trial balance has been prepared. C. Anytime an accountant sees fit to prepare the entries. D. After posting but before a trial balance is prepared.

B. Before financial statements and after a trial balance has been prepared.

Under accrual accounting, salaries earned by employees but not yet paid should be expensed in the period: A. With lower earnings. B. In which they are earned. C. With higher earnings. D. In which they are paid.

B. In which they are earned.

The normal order in which the financial statements are prepared is: A. Balance sheet, income statement, statement of retained earnings. B. Income statement, statement of retained earnings, balance sheet. C. Income tax return, income statement, balance sheet. D. Income statement, annual report, balance sheet.

B. Income statement, statement of retained earnings, balance sheet.

The principal difference between management accounting and financial accounting is that financial accounting information is: A. Prepared by managers. B. Intended primarily for use by decision makers outside the business organization. C. Prepared in accordance with a set of accounting principles developed by the Institute of Certified Management Accountants. D. Oriented toward measuring solvency rather than profitability.

B. Intended primarily for use by decision makers outside the business organization.

Tuna Company purchased a building in Year 1 for $650,000 and debited an asset called "Buildings" for the entire amount. The company never depreciated the building although it had a useful life of 15 years. At the end of Year 1, this action will cause: A. Net income to be understated. B. Net income to be overstated. C. Net income will not be affected. D. Total assets will be understated.

B. Net income to be overstated.

Which of the following is not a step in the accounting cycle? A. Prepare a trial balance. B. Prepare a purchase order. C. Prepare financial statements. D. Prepare an adjusted trial balance.

B. Prepare a purchase order

The purpose of making closing entries is to: A. Reduce the number of expense accounts. B. Prepare revenue and expense accounts for the recording of the next period's revenue and expenses. C. Enable the accountant to transfer the balances from all permanent accounts to the Income Summary account. D. Establish new balances in the balance sheet accounts.

B. Prepare revenue and expense accounts for the recording of the next period's revenue and expenses.

Return on equity measures: A. Solvency. B. Profitability. C. Leverage. D. Both solvency and leverage.

B. Profitability.

Financial statements are designed primarily to: A. Indicate to investors in a particular company the current market values of their investments. B. Provide people outside the business organization with information about the company's financial position and operating results. C. Report to the Internal Revenue Service the company's taxable income. D. Provide managers with detailed information tailored to the managers' specific information needs.

B. Provide people outside the business organization with information about the company's financial position and operating results.

A strong internal control structure: A. Ensures a business will remain solvent. B. Provides reasonable assurance that the organization produces reliable financial reports. C. Will prevent a business from operating at a loss. D. Will prevent fraud, theft, and embezzlement.

B. Provides reasonable assurance that the organization produces reliable financial reports.

Which of the following is the primary objective of an income statement? A. Providing managers with detailed information about where the enterprise stands at a specific date. B. Providing users outside the business organization with information about the company's operating results for a period of time. C. Reporting to the Internal Revenue Service the company's taxable income. D. Indicating to investors in a particular company the current market values of their investments.

B. Providing users outside the business organization with information about the company's operating results for a period of time.

The purpose of adjusting entries is to: A. Prepare the revenue and expense accounts for recording the revenue and expenses of the next accounting period. B. Record certain revenue and expenses that are not properly measured in the course of recording daily routine transactions. C. Correct errors made during the accounting period. D. Update the owners' equity account for the changes in owners' equity that had been recorded in revenue and expense accounts throughout the period.

B. Record certain revenue and expenses that are not properly measured in the course of recording daily routine transactions.

The field of accounting may best be described as: A. Recording the financial transactions of an economic entity. B. The art of interpreting, measuring, and describing economic activity. C. Developing information in conformity with generally accepted accounting principles. D. Developing the information required for the preparation of income tax returns.

B. The art of interpreting, measuring, and describing economic activity.

Which of the following is not characteristic of financial accounting? A. Information used in financial statements is prepared in conformity with generally accepted accounting principles. B. The information is confidential and is intended for use only by company management. C. The information is developed primarily by "private accountants" that is, accountants employed by business organizations. D. The information is used in a wide variety of business decisions.

B. The information is confidential and is intended for use only by company management.

The measures used by an organization to provide reasonable assurance that the organization produces reliable financial reports, complies with applicable laws and regulations, and conducts its operations in an efficient and effective manner are collectively referred to as: A. Financial accounting standards. B. The internal control structure. C. Securities and exchange regulations. D. Generally accepted accounting principles.

B. The internal control structure.

Under accrual accounting, fees received in advance from customers should be shown as being earned: A. When cash is collected. B. When services are performed or goods delivered. C. When tax rates are low. D. When tax rates are high.

B. When services are performed or goods delivered.

Blue Wholesale Shirt Company sold shirts to Pink Retail Shoppe. The owner of Pink Retail said she would pay Blue at a later date, which Blue Wholesale agreed to. Blue Wholesale Shirt Company is considered to be a: A. borrower. B. creditor C. liability D. debtor

B. creditor

The balance of an unearned revenue account: A. Appears in a separate section of the income statement for revenue not yet earned. B. Appears in the liability section of the balance sheet. C. Appears in the balance sheet as a component of owners' equity. D. Appears in the income statement along with other revenue accounts.

B.Appears in the liability section of the balance sheet.

The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the restaurant's balance sheet. The reporting of this item in this manner violated the:

Business entity concept

The adequacy of a company's disclosure is based on: A. Laws established by Congress. B. IRS rules and FASB requirements. C. A combination of official rules, tradition, and professional judgment. D. The needs of stockholders and creditors.

C. A combination of official rules, tradition, and professional judgment.

Generally accepted accounting principles are intended to assist accountants in preparing financial statements that: A. Are ideally suited to the specific needs of each user of the financial statements. B. Comply with all income tax rules and regulations. C. Are relevant, verifiable, comparable, and understandable. D. Show the business to be both solvent and profitable.

C. Are relevant, verifiable, comparable, and understandable.

Collection of an accounts receivable: A. Increases the total assets of a company. B. Decreases the total assets of a company. C. Does not change the total assets of a company. D. Reduces a company's total liabilities.

C. Does not change the total assets of a company.

Owners' equity in a business increases as a result of which of the following? A. Payments of cash to the owners. B. Losses from unprofitable operation of the business. C. Earnings from profitable operation of the business. D. Borrowing from a commercial bank.

C. Earnings from profitable operation of the business.

The accounting cycle begins with: A. Posting of journal entries to ledger accounts. B. Formation of a business. C. Initial recording of business transactions. D. Preparation of a trial balance.

C. Initial recording of business transactions.

Internal users of financial accounting information include all of the following except: A. CEO B. CFO C. Investors D. Managers

C. Investors

Generally accepted accounting principles: A. Are based on tradition only. B. Are based on an accountant's experience only. C. May change over time. D. Are based on official decrees only.

C. May change over time.

Declaring a dividend will: A. Increase net income. B. Decrease net income. C. Not change net income. D. Increase the net worth of a company.

C. Not change net income.

The financial statements of a business entity: A. Are prepared for a fee by the Financial Accounting Standards Board. B. Include the balance sheet, income statement, and income tax return. C. Provide information about the cash flow prospects of the company. D. Are the first step in the accounting process.

C. Provide information about the cash flow prospects of the company.

The basic purpose of bookkeeping is to: A. Provide financial information about an economic entity. B. Determine the taxable income of individuals and business entities. C. Record the financial transactions of an economic entity. D. Develop the types of information best-suited to specific managerial decisions.

C. Record the financial transactions of an economic entity.

Closing entries would be prepared before: A. The opening balance sheet is prepared. B. Adjusting entries. C. The after-closing trial balance. D. An adjusted trial balance.

C. The after-closing trial balance.

Which of the following is not a basic function of an information system? A. To interpret and record the effects of business transactions. B. To classify the effects of similar transactions in a manner that permits determination of various totals and subtotals useful to management. C. To ensure that a business organization will be managed profitably. D. To summarize and communicate information to decision makers.

C. To ensure that a business organization will be managed profitably.

Which of the following is not a purpose of adjusting entries? A. To accomplish the objective of offsetting the revenue of the period with all the expenses incurred in generating that revenue. B. To establish the proper amounts of assets and liabilities in the balance sheet. C. To prepare the revenue and expense accounts for recording transactions of the following period. D. To apportion the proper amounts of revenue and expense to the current accounting period.

C. To prepare the revenue and expense accounts for recording transactions of the following period.

Assets are considered current assets if they are cash or will usually be converted into cash: A. Within a month or less. B. Within 3 months. C. Within a year or less. D. Within 6 months or less.

C. Within a year or less.

Transactions are recorded in the general journal in what order?

Chronological

The normal balance of the Accumulated Depreciation account is: (no normal, credit or debit?)

Credit balance

Which of the following accounts should not be closed? A. Expenses and revenues. B. Dividends. C. Income summary. D. Accumulated depreciation.

D. Accumulated depreciation.

Which of the following best defines an asset? A. Something owned by a business that has a ready market value. B. An economic resource representing cash or the right to receive cash in the near future. C. Something with physical form that is valued at cost in the accounting records. D. An economic resource owned by a business and expected to benefit future operations.

D. An economic resource owned by a business and expected to benefit future operations.

A revenue transaction may result in all of the following except: A. An increase in assets. B. A positive cash flow in either the past, present, or future. C. An increase in owners' equity. D. An increase in liabilities.

D. An increase in liabilities.

In comparison with a financial statement prepared in conformity with generally accepted accounting principles, a management accounting report is more likely to: A. Be used by decision makers outside of the business organization. B. Focus upon the operation results of the most recently completed accounting period. C. View the entire organization as the reporting entity. D. Be tailored to the specific needs of an individual decision maker.

D. Be tailored to the specific needs of an individual decision maker.

In which of the following situations would Daystar Company record unearned revenue in May? A. In April, Daystar Company received payment from a customer for services that are performed in May. B. aystar Company completes a job for a customer in May; payment will be received in June. C. Daystar Company is paid on May 25 for work done in the first two weeks of May. D. Daystar Company receives payment in May for work to be performed in June and July.

D. Daystar Company receives payment in May for work to be performed in June and July.

Decreases in owners' equity are caused by: A. Payment of liabilities and unprofitable operations. B. Purchases of assets and payment of liabilities. C. Purchases of assets and incurrence of liabilities. D. Distributions of assets to the owners and unprofitable operations.

D. Distributions of assets to the owners and unprofitable operations.

Which of the following is generally not considered an external user of accounting information? A. Financial analysts. B. Bank lenders C. Stockholders D. Factory managers

D. Factory managers

Audits of financial statements are performed by: A. The management of the reporting company. B. The controller of the reporting company. C. The Financial Accounting Standards Board (FASB). D. Independent certified public accountants (CPAs).

D. Independent certified public accountants (CPAs).

The NYSE requires all listed companies to: A. Register with the PCAOB (Public Company Accounting Oversight Board). B. Use IFRS (International Financial Reporting Standards) for financial statement reporting purposes. C. Send financial statements directly to investors, creditors, and other users of financial information. D. Maintain an internal audit function.

D. Maintain an internal audit function.

If a business closes its accounts only at year-end: A. Adjusting entries are made only at year-end. B. Monthly and quarterly financial statements cannot be prepared. C. Financial statements are prepared only at year-end. D. Revenue and expense accounts reflect year-to-date amounts throughout the year.

D. Revenue and expense accounts reflect year-to-date amounts throughout the year.

T or F Increases in owners' equity are recorded by credits; increases in assets and in liabilities are recorded by debits.

False

T or F: Earning revenue increases owners' equity and expenses reduce owners' equity, therefore, revenues are recorded with debit entries and expenses are recorded with credit entries.

False

T or F: The annual financial statements of large corporations such as Microsoft or PepsiCo need not be audited by independent certified public accountants, since these companies maintain large accounting departments as part of their organizations.

False

T or F: The income statement, statement of retained earnings, and the balance sheet can all be prepared directly from the Management's Discussion and Analysis.

False

True or false: The statement of cash flows provides a link between two balance sheets by showing how net income (or loss) has changed owners' equity from one balance sheet date to the next.

False

T or F: Real accounts can only be closed at the end of the year with a single compound entry.

Fasle

What is the matching principle?

Fill

The set of standards, assumptions, and concepts that form the "ground rules" for financial reporting in the United States is termed:

Generally accepted accounting principles.

The accounting principle that assumes that a company will operate in the foreseeable future is:

Going concern

The matching principle:

Is used in accrual accounting to determine the proper period for recognition of expenses.

The concept of materiality:

Justifies ignoring the matching principle or the realization principle in certain circumstances.

In accounting, the terms debit and credit indicate, respectively:

Left and right

If Income Summary has a net credit balance, it signifies: (net income or net loss?)

Net income

Depreciation expense is:

Only an estimate

The balance sheet item that represents the portion of owners' equity resulting from profitable operations of the business is:

Retained earnings

Operating activities are:

Revenues and expenses

A balance sheet is designed to show:

The assets, liabilities, and owners' equity of a business as of a particular date.

On a balance sheet, what happens when a corporation uses cash to pay for an expense?

Total assets decrease

Which of the following is correct for total assets if a company purchases equipment for $70,000 cash? (increase, decrease, or stay the same)

Total assets will remain the same.

T or F: A credit to a ledger account refers to the entry of an amount on the right side of an account.

True

T or F: A transaction that causes an increase in an asset may also cause a decrease in another asset, an increase in a liability, or an increase in owners' equity.

True

T or F: Adjusting entries are needed whenever transactions affect the revenue or expenses of more than one accounting period.

True

T or F: All liability accounts normally have a credit balance.

True

T or F: Management accounting information is oriented toward the future while financial accounting information is historical in nature.

True

T or F: One purpose of generally accepted accounting principles is to make accounting information prepared by different companies more comparable.

True

T or F: Prepaid expenses are assets that should appear on the balance sheet.

True

T or F: The accounting equation may be stated as "assets minus liabilities equals owners' equity."

True

T or F: When a company uses the double-entry method, the total dollar amount of debits recorded must equal the total dollar amount of credits recorded, but the number of debit and credit entries may differ.

True