ACG Exam 2

40. Temporary accounts (closed accounts)

revenues, expenses, dividends (RED)

30. deferral

=dollar -occurs when cash is received/paid before revenue/expense is recognized

29. accurals

=action -occurs when action is recorded before cash is received

26. cash-basis accounting

-CASH is exchanged for revenues and expenses

27. accrual accounting

-GOODS/SERVICES are exchanged for revenues and expenses (not when cash is exchanged)

31. depreciation

-allocate cost of long-term assets across future time periods -depreciable assets= machinery, delivery trucks, computers, buildings

25. periodicity

-corporations break their business year into segments (months, quarters, years) -segmented into artificial time periods

16. A certain company debited prepaid insurance when it paid for a one-year insurance policy. If the company does not record any year-end adjusting entries then (E/S)

-expenses would be understated. -stockholders' equity would be overstated.

22. If the year-end adjusting entry to record salaries owed to employees were omitted then (EL/AR)

-expenses/liabilities would be understated -assets and retained earnings would be overstated

41. permanent accounts (post-closing accounts)

-found on balance sheet -assets, liabilities, some equity

37. retained earnings

-increased by revenues -decreased by expenses and dividends

28. adjusting entries

-occur at end of period to account for expenses/revenues (does not include cash) Four cases 1. unrecorded (accrued) revenue 2. unrecorded (accrued) expenses 3. prepaid (deferred) expenses 4. unearned (deferred) revenue

33. closing process

-occurs when revenues, expenses, and dividends are transferred to retained earnings at end of accounting period

32. adjusted trial balance

-provide all debits and credits after adjusting entries are posted in ledger *provides primary basis for all financial statements made

6. A company has unearned revenues on its books. If the company fails to record a year-end adjusting entry for unearned revenues, then its financial statements (RR/L)

-understate retained earnings and revenues. -overstate liabilities.

77. Which of the following statements is correct about the periodic inventory system? A. A company which uses a periodic inventory system needs only one journal entry when it sells merchandise. B. A company which uses a periodic inventory system debits Cost of Goods Sold and credits Inventory each time it sells merchandise. C. A company that uses the periodic inventory system does not have an inventory account. D. A company which uses a periodic inventory system needs exactly two journal entries when it sells merchandise. E. None of these

A. A company which uses a periodic inventory system needs only one journal entry when it sells merchandise.

72. Which of the following statements about inventory systems is correct? A. A perpetual inventory system provides better control over inventories than does a periodic inventory system. B. A perpetual inventory system computes cost of goods sold only at the end of the accounting period. C. A periodic inventory system provides better control over inventories than does a perpetual inventory system. D. None of these E. A periodic inventory system computes cost of goods sold each time a sale occurs.

A. A perpetual inventory system provides better control over inventories than does a periodic inventory system.

59. What type of account is Sales Returns and Allowances? A. Contra revenue account B. Contra asset account C. Book value account D. Contra expense account E. Expense account

A. Contra revenue account

75. Indicate which one of the following would likely appear on both a multi-step income statement and a single-step income statement. A. Cost of goods sold B. Gross profit C. None of these would appear on both types of income statement D. Income from operations E. All of these would appear on both types of income statement

A. Cost of goods sold

8. Which of the following correctly describes the closing process? A. Each revenue account and expense account is closed to a zero balance. B. Net income is transferred to the Cash account. C. Net income is transferred to the Common Stock account. D. Permanent accounts are closed to zero balances. E. All of these are correct.

A. Each revenue account and expense account is closed to a zero balance.

51. Which of the following describes how to compute the gross profit rate? A. Net sales minus cost of goods sold, divided by net sales B. Cost of goods sold divided by net sales C. Net income divided by net sales D. Sales minus cost of goods sold, divided by cost of goods sold E. Gross margin divided by net income

A. Net sales minus cost of goods sold, divided by net sales

52. A company's gross profit rate is lower this year compared to the prior year. Which of the following would not be a possible cause for this decline in the gross profit rate? A. The company began selling products with a higher markup. B. The company offered more sales discounts to customers in order to sell as many units of inventory as the prior year. C. The company's average margin between selling price and inventory cost decreased. D. All of the above would explain the decline in Bolton's gross profit rate. E. The company began paying higher prices to suppliers without passing these costs on to customers.

A. The company began selling products with a higher markup.

34. Which statement is correct? A. The use of the cash-basis of accounting violates both the revenue recognition and expense recognition principles. B. The cash-basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received. C. All of these are true D. As long as a company consistently uses the cash-basis of accounting, generally accepted accounting principles allow its use. E. As long as management is ethical, a company is allowed to use the cash-basis of accounting.

A. The use of the cash-basis of accounting violates both the revenue recognition and expense recognition principles.

67. Which of the following will be shown on the income statement for a merchandising company? A. All of these B. None of these C. Revenue D. Gross profit E. Cost of goods sold

A. all of these

58. Marsh, Inc. paid for freight costs on merchandise it shipped to a customer. In what account will Marsh record this cost in a perpetual inventory system? A. Freight-out B. Cost of goods sold C. Inventory D. Freight-in E. Revenue

A. freight-out

79. Which of the following would NOT be classified as an operating expense on a multi-step income statement? A. Salaries and wages expense B. Interest expense C. Freight-out D. Advertising expense E. Depreciation expense

B. Interest expense

69. Given the following quality of earnings ratios, which suggests the company may be using the most conservative accounting techniques? A. 1.6 B. 1.8 C. 0.6 D. 0.2 E. 1.0

B. 1.8

13. Which one of the following is not a proper justification for adjusting entries? A. Adjusting entries are necessary to enable financial statements to be in conformity with generally accepted accounting principles. B. Adjusting entries are necessary to bring the general ledger accounts in line with the budget. C. All of these are proper justifications for adjusting entries. D. Adjusting entries are necessary to ensure that the expense recognition principle is followed. E. Adjusting entries are necessary to ensure that the revenue recognition principle is followed.

B. Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

45. Which of the following statements about a periodic inventory system is true? A. Companies continuously maintain detailed records of the cost of each inventory purchase and sale. B. Companies determine cost of goods sold only at the end of the accounting period. C. The periodic system provides better control over inventories than a perpetual system. D. The increased use of computerized systems has increased the use of the periodic system. E. None of these are true.

B. Companies determine cost of goods sold only at the end of the accounting period.

48. Which of the following would appear on both a single-step and a multiple-step income statement? A. Gross profit B. Cost of goods sold C. Income from operations D. All of these E. Other expenses and losses.

B. Cost of Goods Sold

55. Which is true about a wholesaler? A. It is a company that sells directly to consumers. B. It sells to another business that will sell to the customer rather than sell directly to the consumer. C. It is the same as a retailer. D. It sells only to manufacturing companies. E. It conducts small sales for consumers on a nonrecurring basis.

B. It sells to another business that will sell to the customer rather than sell directly to the consumer.

24. Which of the following is not based on accrual accounting? A. Net income B. Net cash provided by operating activities C. Retained earnings D. Total assets

B. Net cash provided by operating activities

80. A company's gross profit rate increased in the current year relative to the prior year. Which of the following would be a possible explanation for this change? A. The company's average margin between the selling price and the inventory cost decreased over this two-year period. B. The company's global sourcing efforts at the beginning of the current year resulted in a lower cost of merchandise sold. C. The company increased its product markdowns and discounts offered to customers in the current year. D. The company's new profit lines with lower margins became a larger component of their sales. E. None of the above would explain Haverty's increase in gross profit rate.

B. The company's global sourcing efforts at the beginning of the current year resulted in a lower cost of merchandise sold.

18. Companies prepare various types of trial balances. Which trial balance lists all of a company's permanent accounts but not its temporary accounts? A. The pre-disclosure trial balance B. The post-closing trial balance C. The adjusted trial balance D. The trial balance prepared before recording adjusting entries E. All of these list the same number of accounts.

B. The post-closing trial balance

46. Which statement is true when recording the sale of goods for cash in a perpetual inventory system? A. Only one journal entry is necessary. It will record the receipt of cash and sales revenue. B. Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and to reduce inventory. C. Two journal entries are necessary: one to record the receipt of cash and reduction of inventory, and one to record the cost of goods sold and sales revenue. D. Only one journal entry is necessary. It will record cost of goods sold and reduce of inventory. E. Two journal entries are necessary: one to record the payment of cash and reduction of inventory, and one to record the accounts receivable and sales revenue.

B. Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and to reduce inventory.

70. Financial statements can be prepared directly from the A. All of these are correct. B. adjusted trial balance. C. post-closing trial balance. D. trial balance. E. reversing trial balance.

B. adjusted trial balance.

23. The closing entry process consists of closing A. only the dividends account. B. all temporary accounts. C. only the Retained Earnings account. D. all permanent accounts. E. all asset and liability accounts.

B. all temporary accounts

42. Year-end adjusting entries for prepaid expenses A. decrease assets and increase revenues. B. decrease assets and increase expenses. C. decrease revenues and increase assets. D. increase revenues and increase assets. E. decrease expenses and increase assets.

B. decrease assets and increase expenses.

66. The operating cycle of a merchandising company has an extra asset account compared to a service company. What is that extra asset account? A. Income Summary B. Inventory C. Accounts Receivable D. Operating Expense E. Revenue

B. inventory

11. The generally accepted accounting principle which dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied is the A. going concern assumption. B. revenue recognition principle. C. expense recognition principle. D. periodicity assumption. E. accrued revenues principle.

B. revenue recognition principle.

35. Which account will have a zero balance after a company has journalized and posted closing entries? A. All of these B. Service Revenue C. Accumulated Depreciation D. Supplies E. None of these

B. service revenue

9. The accounting cycle is a series of certain steps that businesses, such as corporations, perform in sequence and repeat in each accounting period. Although steps may be missing among the options listed below, which of the following lists steps of the accounting cycle in their correct order? A. Post the transactions, post the closing entries, and post the adjusting entries. B. Post the transactions, journalize the transactions, and prepare a trial balance. C. Journalize the transactions, post the adjusting entries, journalize the closing entries. D. Journalize the closing entries, prepare the adjusted trial balance, and prepare the financial statements, E. Prepare the financial statements, journalize the adjusting entries, and post the closing entries.

C. (1) Journalize the transactions, post the adjusting entries, journalize the closing entries. (2)Post the transactions, journalize the adjusting entries, and prepare the financial statements.

74. Which one of the following statements is correct? A. A company which uses a perpetual inventory system does not record any journal entries when it sells merchandise. B. A company which uses a perpetual inventory system debits inventory and credits cost of goods sold when it sells merchandise. C. A company which uses a perpetual inventory system needs two journal entries when it sells merchandise. D. None of the answer choices are correct. E. A company which uses a perpetual inventory system needs only one journal entry when it sells merchandise.

C. A company which uses a perpetual inventory system needs two journal entries when it sells merchandise.

63. Which of the following would affect the gross profit rate if sales remain constant? A. An increase in advertising expense B. A decrease in insurance expense C. All of these D. An increase in cost of goods sold E. A decrease in depreciation expense

D. An increase in cost of goods sold

7. Which of the following is correct concerning the adjusted trial balance? A. The adjusted trial balance provides the primary basis for the preparation of financial statements. B. The company prepares the adjusted trial balance after it has journalized and posted the adjusting entries. C. All of these statements are correct. D. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made. E. None of these statements are correct.

C. All of these statements are correct.

56. Which of the following is not a component or step of the operating cycle for a service company? A. Receive cash payments from customers B. Perform services for customers C. Buy inventory to be resold to customers D. Record an increase to accounts receivable when services are performed for customers on account E. All of these are steps of the operating cycle of a service company

C. Buy inventory to be resold to customers

71. Which of the following is true about a merchandiser? A. It has no inventory. B. Its revenue primarily comes from the performance of services. C. Its revenue primarily comes from the sale of merchandise. D. It does not have a cost of goods sold account. E. It sells its goods and services only to manufacturing companies.

C. Its revenue primarily comes from the sale of merchandise.

65. Which of the following determines the quality of earnings ratio? A. Net cash flow from all activities divided by the net income B. Operating income divided by the net income C. Net cash provided by operating activities divided by net income D. Net cash provided by operating activities divided by operating income E. Revenues divided by operating income

C. Net cash provided by operating activities divided by net income

54. Which statement is true when goods are purchased for resale by a company using a periodic inventory system? A. Purchases on account are debited to the Inventory account. B. Freight costs resulting from purchasing inventory are debited to the Purchases account. C. Purchases on account are debited to the Purchases account. D. None of these E. Purchase returns are debited to the Purchase Returns and Allowances account.

C. Purchases on account are debited to the Purchases account.

What is the periodicity assumption? A. None of these B. Companies should recognize revenue in the accounting period in which the performance obligation is satisfied. C. The economic life of a business can be divided into artificial time periods. D. A principle that a company's fiscal year-end should correspond with the calendar year. E. Companies should match expenses with revenues.

C. The economic life of a business can be divided into artificial time periods.

14. Year-end adjusting entries for unearned revenues A. decrease revenues and decrease assets. B. increase liabilities and increase revenues. C. decrease liabilities and increase revenues. D. increase assets and increase revenues. E. increase revenues and decrease stockholders' equity.

C. decrease liabilities and increase revenues.

36. Adjusting entries are made to ensure that A. income statement accounts have zero balances at the end of an accounting period. B. All of these choices are correct. C. expenses are recognized in the period in which they are incurred. D. None of the choices are correct. E. revenues are partitioned between revenue from sales to customers and revenue from other sources (e.g., interest revenue).

C. expenses are recognized in the period in which they are incurred.

47. Which of the following would be classified as an operating expense on a multi-step income statement? A. Sales returns and allowances B. Gain on disposal of plant assets C. Freight-Out D. Income tax expense E. Interest expense

C. freight-out

4. Payments from customers received before performing services for the customers are recorded as A. expenses. B. equity. C. liabilities. D. revenues. E. dividends.

C. liabilities

19. Adjusting entries are made to ensure that A. revenues are recorded in the period in which the performance obligation is satisfied. B. None of the choices are correct. C. balance sheet and income statement accounts have correct balances at the end of an accounting period. D. All of these choices are correct. E. expenses are recognized in the period in which they are incurred.

D. All of these choices are correct.

68. Which factor would not affect the gross profit rate? A. An increase in the sale of luxury items B. An increase in the price of inventory items C. An increase in the use of "discount pricing" to sell merchandise D. An increase in the cost of heating the store E. None of these would affect the gross profit rate

D. An increase in the cost of heating the store

2. Which one of these statements about the accrual-basis of accounting is false? A. This basis is in accord with generally accepted accounting principles. B. All of these are true C. Companies record events that change a company's financial statements in the periods in which the events occur. D. Companies record revenue only when they receive cash, and record expense only when they pay out cash. E. Companies recognize revenue in the period in which the performance obligation is satisfied.

D. Companies record revenue only when they receive cash, and record expense only when they pay out cash.

50. Which of the following will result in negative gross profits? A. Net sales revenue exceeding cost of goods sold B. Cost of goods sold exceeding operating expenses C. Net sales revenue exceeding both cost of goods sold and operating expenses D. Cost of goods sold exceeding sales revenue E. Cost of goods sold exceeding operating expense

D. Cost of goods sold exceeding sales revenue

73. On what amount is a sales discount based? A. Invoice price plus returns and allowances. B. Invoice less discount C. Invoice price plus freight-out D. Invoice price less returns and allowances E. Invoice price plus freight-in

D. Invoice price less returns and allowances

17. Which of the following correctly describes the closing process? A. Each stockholders' equity account is closed to a zero balance. B. Net income is transferred to the Cash account. C. Permanent accounts are closed to zero balances. D. Net income is transferred to the Retained Earnings account. E. All of these are correct.

D. Net income is transferred to the Retained Earnings account.

76. Under what inventory system is cost of goods sold determined after each sale? A. Periodic inventory system B. No inventory systems C. Single entry inventory system D. Perpetual inventory system E. Double entry inventory system

D. Perpetual inventory system

60. Which of the following will not be shown on the income statement for a merchandising company? A. Cost of goods sold B. Sales discounts C. Gross profit D. Retained earnings E. Revenue

D. Retained earnings

62. Which one of the following equals cost of goods sold? A. Gross profit minus operating expense B. Sales revenue minus net income C. Operating expenses minus cost of goods sold D. Sales revenue minus gross profit E. Operating expenses minus net income

D. Sales revenue minus gross profit

12. If revenues are recognized only when a customer pays, what method of accounting is being used? A. Recognition basis B. Accrual-basis C. Periodicity D. Cash-basis E. Matching basis

D. cash-basis

39. If a year-end adjusting entry is not recorded for unearned revenues the result will be to A. understate net income and overstate retained earnings. B. Not recording such a journal entry would not affect the financial statements; the financial statements will be correct. C. understate retained earnings and overstate revenues. D. overstate liabilities and understate revenues. E. overstate assets and understate liabilities.

D. overstate liabilities and understate revenues.

64. A decline in a company's gross profit could be caused by all of the following except A. selling products with a lower markup. B. increasing competition resulting in a lower selling price. C. all of these could cause a decline in gross profit. D. paying lower prices to its suppliers. E. clearance of discontinued inventory.

D. paying lower prices to its suppliers.

3. Adjusting entries are made to ensure that A. All of these choices are correct. B. expenses are recognized in the period in which they are incurred. C. None of the choices are correct. D. revenues are partitioned between revenue from sales to customers and revenue from other sources (e.g., interest revenue). E. income statement accounts have zero balances at the end of an accounting period.

D. revenues are partitioned between revenue from sales to customers and revenue from other sources (e.g., interest revenue).

10. Which of the following is not included in the computation of net cash provided by operating activities? A. Payment of rent B. Purchase of insurance C. Cash received from customers D. Supplies used

D. supplies used

81. In a periodic inventory system, when is the cost of the merchandise sold determined? A. Periodically during the period B. Either at time of sale, end of period, or periodically during the period. C. At the time of the sale D. Daily E. At the end of the period

E. At the end of the period

44. The operating cycle of a merchandising company has an extra expense account compared to a service company. What is that extra expense account? A. Accounts Receivable B. Operating Expense C. Income Summary D. Revenue E. Cost of Goods Sold

E. Cost of Goods Sold

1. Which principle dictates that efforts (i.e., expenses) be matched with results (i.e., revenues)? A. Monetary unit assumption B. Periodicity principle C. Historical cost principle D. Revenue recognition principle E. Expense recognition principle

E. Expense recognition principle

78. Which of the following items does not result in an entry to the Inventory account under a perpetual system? A. Payment of freight costs for goods received from a supplier B. A return of Inventory to the supplier C. All of these result in an entry to the inventory account under a perpetual system. D. A purchase of merchandise E. Payment of freight costs for goods shipped to a customer

E. Payment of freight costs for goods shipped to a customer

49. Under what inventory system is cost of goods sold determined at the end of an accounting period? A. Perpetual inventory system B. All inventory systems C. Double entry inventory system D. Single entry inventory system E. Periodic inventory system

E. Periodic inventory system

57. 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. Cash basis system C. Periodic inventory system D. Double entry inventory system E. Perpetual inventory system

E. Perpetual inventory system

15. The difference between an asset's cost and its accumulated depreciation is called A. real value. B. fair value. C. market value. D. nominal value. E. book value.

E. book value

61. Indicate which one of the following would not likely appear on both a multi-step income statement and a single-step income statement. A. Net income B. Cost of goods sold C. None of these D. All of these E. Gross profit

E. gross profit

38. Which types of accounts will appear in the post-closing trial balance? A. All accounts will appear in the post-closing trial balance. B. None of these answer choices are correct. C. Temporary accounts D. Accounts shown in the income statement E. Permanent accounts

E. permanent accounts

43. Which of the following is a merchandising company that sells directly to consumers? A. Wholesaler B. Customer C. All of these D. Service enterprise E. Retailer

E. retailer

53. If a company is using aggressive accounting techniques in order to accelerate income recognition then its quality of earnings ratio is A. significantly more than 1. B. below zero. C. significantly more than 100. D. equal to zero. E. significantly less than 1.

E. significantly less than 1.

21. The book value of equipment owned by a business and used in its operations is equal to A. the asset's cost. B. the asset's salvage value. C. the asset's fair market value. D. the asset's cost minus its outstanding mortgage. E. the asset's cost minus its accumulated depreciation.

E. the asset's cost minus its accumulated depreciation.

5. The book value of equipment owned by a business and used in its operations is equal to A. the asset's fair market value. B. the asset's salvage value. C. the asset's cost. D. the asset's cost minus its outstanding mortgage. E. the asset's cost minus its accumulated depreciation.

E. the asset's cost minus its accumulated depreciation.

20. Which of the following is not a typical example of a prepaid expense? A. All of these are examples of prepaids B. Rent C. Supplies D. Insurance E. Wages

E. wages