CLEP Study Guide

Before the football season begins, a college football team receives $12,000,000 from season-ticket holders for one year's home games. The team will play three home games in September, one in October, and two in November. How much revenue is recognized in September?

$ 6,000,000

On August 1, Carlos Company pays $3,600 for a two-year insurance policy covering the period beginning September 1. How much insurance expense should be recognized by Carlos this year if the company reports on a calendar-year basis?

$ 600

A company had net sales of $27,900 in April. Beginning inventory was $5,000. Net inventory purchases were $15,000. Ending inventory was $7,000. Total operating expenses were $6,500. How much net income did the company earn in April?

$ 8,400

Green Corporation with assets of $5,000,000 and liabilities of $2,000,000 has 6,000 shares of capital stock outstanding (par value $300). What is the book value per share?

$ 833

On November 1, Greenberg Partners pays $7,200 for a one-year insurance policy, effective the same date. How much insurance expense should Greenberg Partners report for the year ending December 31 ?

$1,200

If net sales are $2,000,000, operating expenses are $300,000, and gross profit is $360,000, how much is the cost of goods sold?

$1,640,000

If a company issues $10,000,000 of 6 percent bonds at 1051∕2, the amount of cash received from the sale is

$10,550,000

Net purchases for the year amounted to $80,000. The merchandise inventory at the beginning of the year was $19,000. On sales of $120,000, a 30 percent gross profit on the selling price was realized. The inventory at the end of the year was

$15,000

A machine with a useful life of eight years was purchased for $600,000 on January 1. The estimated salvage value is $50,000. What is the first year's depreciation by using the double declining-balance method?

$150,000

If an individual borrows $95,000 in July of the current year from Community Bank by signing a $95,000, 9 percent, one-year note, what is the accrued interest as of December 31 of the current year?

$4,275

Stephanie Company reported net income of $52,000 for the year. The net income includes depreciation expense of $3,800 and a gain on sale of equipment of $6,900. On the statement of cash flows, how much cash will Stephanie Company report from operating activities?

$48,900

Sonny Corporation has a simple capital structure of 100,000 shares of $1 par common stock and 20,000 shares of 5 percent preferred stock, $50 par. Both classes of stock were outstanding for the entire year. During the year, the company reported net income of $550,000 and declared dividends of $75,000 and $50,000 on the common stock and the preferred stock, respectively. Sonny's earnings per share for the year were

$5.00

Equipment with a cost of $50,000 has an estimated residual value of $2,000 and an estimated life of ten years or 8,000 machine hours. It is to be depreciated by the units-of-production method. What is the amount of depreciation for the third year, during which the machine was used 1,000 machine hours?

$6,000

A machine that cost $25,000 three years ago is sold in the current year for $6,000. The accumulated depreciation taken on the machine was $20,000. This sale would be reported in the current year's statement of cash flows as

$6,000 inflow in the cash from investing activities section

Accrued expense / (AE)

an incurred expense that hasn't been paid yet.

(1) Adjusted trial balance is prepared. (2) Transactions are posted to ledgers. (3) Transactions are recorded in a journal. (4) Closing entries are made. (5) Adjusting journal entries are made. (6) Trial balance is prepared. (7) Financial statements are prepared. Each of the principal steps in the accounting cycle is identified above by a number. Which response lists the correct sequence of events in the accounting cycle?

3, 2, 6, 5, 1, 7, 4

An inventory valuation method such as FIFO or LIFO affects

both the income statement and the balance sheet

Operation expenses / (OE)

business expenditures not directly associated with the production of goods or services—for example, advertising costs, property taxes or insurance expenditures.

General ledger (GL)

A complete record of the financial transactions over the life of a company.

Certified public accountant / (CPA)

A designation given to an accountant who has passed a standardized CPA exam and met government-mandated work experience and educational requirements to become a CPA.

Capital / (CAP)

A financial asset or the value of a financial asset, such as cash or goods. Working capital is calculated by taking your current assets subtracted from current liabilities—basically the money or assets an organization can put to work.

Balance sheet / (BS)

A financial report that summarizes a company's assets (what it owns), liabilities (what it owes) and owner or shareholder equity ;at a given time.

Which of the following will be credited when recording an accrued expense?

A liability account

Generally accepted accounting principles / (GAAP)

A set of rules and guidelines developed by the accounting industry for companies to follow when reporting financial data. Following these rules is especially critical for all publicly traded companies.

Insolvency

A state where an individual or organization can no longer meet financial obligations with lender(s) when their debts come due.

Accounting / (ACCG)

A systematic way of recording and reporting financial transactions for a business or organization.

Enrolled agent / (EA)

A tax professional who represents taxpayers in matters where they are dealing with the Internal Revenue Service (IRS).

Credit / (CR)

An accounting entry that may either decrease assets or increase liabilities and equity on the company's balance sheet, depending on the transaction. When using the double-entry accounting method there will be two recorded entries for every transaction: A credit and a debit.

Debit / (DR)

An accounting entry where there is either an increase in assets or a decrease in liabilities on a company's balance sheet.

Which of the following businesses is most likely to use specific identification in recording inventory purchases and cost of goods sold?

An art dealer

How is treasury stock reported on the balance sheet?

As a decrease in stockholders' equity

Fixed assets / (FA)

Assets that are long-term and will likely provide benefits to a company for more than one year, such as a real estate, land or major machinery.

Current assets / (CA)

Assets that will be converted to cash within one year. Typically, this could be cash, inventory or accounts receivable.

Newman Corporation uses the allowance method of accounting for its accounts receivable. The company currently has a $100,000 balance in accounts receivable and a $5,000 balance in its allowance for uncollectible accounts. The company decides to write off $4,000 of its accounts receivable. What would be the balance in its net accounts receivable before and after the write-off?

Before: $ 95,000 After: $ 95,000

Cost of goods sold is determined by which of the following?

Beginning inventory plus net purchases minus ending inventory

The balance sheet of Harold Company shows current assets of $200,000 and current liabilities of $100,000. The company uses cash to acquire merchandise inventory. As a result of this transaction, which of the following is true of working capital and the current ratio?

Both are unchanged.

At the end of Dugan Retail Corporation's first year of operation, it was determined that the company had overstated its ending inventory. Indicate the effect that the overstatement will have on the first year's cost of goods sold and net income.

Cost of goods sold-Understated Net income-Overstated

How is depreciation on equipment recorded?

Depreciation Expense (equipment) XXXX

Which of the following will always increase when net income increases?

Equity

In a statement of cash flows prepared using the indirect method, which of the following is deducted from net income to determine cash provided by operating activities?

Gain on sale of land

The owner's equity in a business increases from which of the following?

I and II only

Equity and owner's equity / (OE)

In the most general sense, equity is assets minus liabilities. An owner's equity is typically explained in terms of the percentage of stock a person has ownership interest in the company. The owners of the stock are known as shareholders.

Which of the following correctly indicates how retained earnings can be affected?

Increased by net income, decreased by dividends, and decreased by realized losses

Ling is an accountant at a publicly traded corporation. She recently discovered in the accounting records a material error that affected last year's financial statements and will affect this year's statements. If the error is not corrected, it will reverse itself this year and probably no one else will discover it. Even though last year's net income was materially overstated and this year's net income will be materially understated, the overall effect on the two years combined net incomes is that the overstatement and the understatement will completely offset each other. Which of the following is the best action that Ling should take?

Inform her immediate supervisor and help correct last year's statements

Match each of the following terms with the corresponding asset category. Depreciation Depletion Amortization and Intangible assets Tangible assets Natural resources

Intangible assets-Amortization Tangible assets-Depreciation Natural resources-Depletion

Which of the following is true of annual depreciation expense?

It allocates the cost of use of a long-term asset to the revenue that it generates.

Which of the following identifies the income statement items in their proper order as found in a correctly prepared income statement?

Sales, cost of goods sold, gross profit, operating expenses, net income

Which of the following investing activities appears on the statement of cash flows?

Selling a building

The financial statement that includes classifications for operating, financing, and investing activities of a business entity for a period of time is called the

Statement of Cash Flows

Dividends paid is shown on which of the following financial statements?

Statement of cash flows

Which of the following equals the net assets of a company?

Stockholders' equity

ABC Company issued $5,000,000 of bonds on January 1 receiving cash of $5,300,000. Which of the following is true about the bonds?

The amount of annual interest expense will be less than the amount of interest paid annually in cash.

Accounts payable / (AP)

The amount of money a company owes creditors (suppliers, etc.) in return for goods and/or services they have delivered.

Accounts receivable / (AR)

The amount of money owed by customers or clients to a business after goods or services have been delivered and/or used.

On December 31, before making year-end adjusting entries, Accounts Receivable had a debit balance of $80,000, and the Allowance for Uncollectible Accounts had a credit balance of $3,500. Credit sales for the year were $600,000. If credit losses are estimated at 1/2 percent of credit sales, which of the following is true?

The balance of the Allowance for Uncollectible Accounts will be $6,500 after adjustment

A liability for dividends is recorded on which of the following?

The declaration date

Cost of goods sold / (COGS)

The direct expenses related to producing the goods sold by a business. The formula for calculating this will depend on what is being produced, but as an example this may include the cost of the raw materials (parts) and the amount of employee labor used in production.

Diversification

The process of allocating or spreading capital investments into varied assets to avoid over-exposure to risk.

Cash flow / (CF)

The revenue or expense expected to be generated through business activities (sales, manufacturing, etc.) over a period of time.

Assets are classified as intangible under which of the following conditions?

They have no physical substance

The lower of cost or market (LCM) is an application of

conservatism

What is the purpose of closing entries?

To reduce revenues, expenses, and dividends to zero for the next accounting period

What impact does collecting a receivable have?

Total assets and net income are not affected.

The owner of a small business paid the property taxes on her personal residence from the business checking account. The payment should be charged to which of the following?

Withdrawals

The Accumulated Depreciation account should be shown in the financial statements as

a contra (deduction) to an asset account

Asset class

a group of securities that behaves similarly in the marketplace. The three main asset classes are equities or stocks, fixed income or bonds, and cash equivalents or money market instruments.

A company prepares a bank reconciliation in order to

determine the correct amount of the cash balance

The matching concept matches

expenses with revenues

Variable expenses / (VE)

expenses, like labor costs, that may change in a given time period.

Trading securities must be reported on the balance sheet at

fair market value

. The income statement is designed to measure

the results of business operations

All of the following expenditures should be charged to an asset account rather than to an expense account of the current period EXCEPT the cost of

replacing worn-out tires on a delivery truck

Gross profit margin is useful for evaluating

profitability

In a limited partnership, limited partners are at risk for

the amount of their investment in the partnership

New World, Inc., purchased $30,000 in goods on account that in turn were sold on account for $35,000. If New World uses accrual accounting, how much should they record in expenses and revenue?

$35,000 in revenue and $30,000 in expenses

Longshore Group bought a piece of equipment for use in its operations under the following terms: 5 annual payments of $64,000 for the equipment, including interest. Although the list price of the equipment was $315,000, Longshore Group could have bought it for $300,000 cash. Salvage value is $20,000. Which amount should Longshore Group use to record the purchase of the machine on its books?

$300,000

Return on assets helps users of financial statements evaluate which of the following?

Profitability

Cash: $ 40,000 Accounts receivable: $120,000 Inventory: $300,000 Prepaid rent: $ 2,000 Accounts payable: $150,000 Salaries payable: $ 7,000 Long-term bonds payable: $200,000 The selected accounts above are from TJ Supply's balance sheet. What is TJ Supply's working capital?

$305,000

Brock Company purchased a patent for $72,000 from Carter Company. The patent has a remaining legal life of 6 years, with an expected useful life of 4 years. The first year's amortization is

$18,000

During the current year, accounts receivable increased from $27,000 to $41,000, and sales were $225,000. Based on this information, how much cash did the company collect from its customers during the year?

$211,000

Information in Covington Corporation's accounting records concerning its common stock shows that there are 100,000 shares authorized, 80,000 shares issued, and 5,000 shares held as treasury stock. If a $3.00-per-share dividend is declared by the board of directors, the total amount of the cash dividend would be

$225,000

Schreiber Industries estimates bad debts at 2% of sales. Schreiber began the year with $270,000 of accounts receivable and $38,600 of allowance for bad debts. During the year, Schreiber had sales of $920,000, wrote off bad debts of $26,000, and received cash on account of $905,000. What amount of accounts receivable, net of allowance for bad debts, should appear on the year-end balance sheet?

$228,000

Perfumes by Gladys purchased a patent at the beginning of year 1 at a cost of $72,000. The patent had a remaining legal life of 9 years but was expected to be useful for only 6 years. Early in year 3, Perfumes by Gladys realized that the benefits of owning the patent would disappear at the end of year 4. How much patent amortization expense should be recognized in year 3 ?

$24,000

Magoo Wholesaler finds that 30 percent of its customers pay cash for their purchases. The rest buy on credit, 60 percent of which is collected in the month of purchase, and the rest in the month after purchase. If sales in January are $120,000, what is the balance of accounts receivable on January 31?

$33,600

The L Company purchased new machinery and incurred the following costs: Invoice price $30,000 Freight (F.O.B. shipping point) $ 2,000 Foundation for machinery $ 1,000 Installation costs $ 900 Annual maintenance of machinery $ 600 The recorded cost of the machinery is

$33,900

On January 1 of the current year, beginning inventory for a furniture company was $35,000. During the year, the company purchased $242,000 inventory. On December 31 of the current year, the company had inventory of $26,000. What was cost of goods sold for the year?

$251,000

During the past year, a company reported net income of $230,000. Depreciation expense was $22,000. In December the company received $7,000 representing rent for the next year on a vacant warehouse. What is the amount of cash provided by operating activities that should appear on a statement of cash flows?

$259,000

A corporation bought a piece of used equipment by exchanging 20,000 shares of treasury stock. The treasury stock had a par value of $10 per share and had been originally issued for $14 per share. The current fair market value of the treasury stock is $13 per share. The equipment had been purchased by the seller three years earlier for $300,000 but had accumulated depreciation of $25,000. For what amount should the corporation record the purchase on its books?

$260,000

If a corporation has total assets of $1,568,000, current liabilities of $60,000, and long-term liabilities of $388,000, what is its approximate debt-to-equity ratio?

0.40

Assume there are 365 days in a year. What is the number of days' inventory on hand for a firm with cost of goods sold of $750,000 and average inventory of $150,000 ?

73

In a period of rising prices, which of the following inventory methods results in the highest cost of goods sold?

LIFO

A customer ordered merchandise from Van Lieshaut, Inc., on March 3. Van Lieshaut processed the order on March 5 and emailed the customer verifying that the order was ready. On March 8 the customer picked up the merchandise and signed the billing invoice. On March 12 the customer sent a check in payment for the merchandise, which was received by Van Lieshaut on March 15. On which day should Van Lieshaut recognize revenue from the sale?

March 8

Falcon, Inc., a manufacturer and supplier of kitchen appliances, provides a two-year warranty on component parts at no cost. Which accounting principle requires Falcon to recognize as an expense the estimated cost of fulfilling a warranty in the year the equipment is sold?

Matching principle

Cindy Company is preparing a bank reconciliation. Which of the following should be subtracted from the balance per bank statement to arrive at the adjusted cash balance?

Outstanding checks

A company bought a patent at a cost of $180,000. The patent had an original legal life of 17 years. The remaining legal life is 10 years, but the company expects its useful life will only be 6 years. When should the cost of the patent be charged to expenses?

Over the next 6 years

Intangible assets include which of the following?

Patents

Belford Brothers, Inc., has 10 percent noncumulative, nonparticipating preferred stock outstanding with a par value of $200,000. The company also has common stock outstanding with a par value of $800,000. In Belford's first year of operation, no dividends were paid, but during the second year, Belford declared dividends of $60,000. How should the dividends be distributed that year between the two classes of stock?

Preferred Stock: $20,000 Common Stock: $40,000

Accounts receivable turnover helps determine

how quickly a firm collects cash on its credit sales

Cash is reported

in net sales on the income statement

Fixed expenses / (FE)

payments like rent that will happen in a regularly scheduled cadence.