Accounting Exam 2. CH. 3&4

Which of these statements about a journal is false? (a) It contains only revenue and expense accounts. (b) It provides a chronological record of transactions. (c) It helps to locate errors because the debit and credit amounts for each entry can be readily compared. (d) It discloses in one place the complete effect of a transaction.

(a) A journal contains entries affecting all accounts, not just revenue and expense accounts. The other choices are true statements.

A trial balance: (a) is a list of accounts with their balances at a given time. (b) proves that proper account titles were used. (c) will not balance if a correct journal entry is posted twice. (d) proves that all transactions have been recorded.

(a) A trial balance is a list of accounts with their balances at a given time. The other choices are incorrect because (b) it does not confirm that proper account titles were used; (c) if a journal entry is posted twice, the trial balance will still balance; and (d) a trial balance does not prove that all transactions have been recorded.

Adjustments for unearned revenues: (a) decrease liabilities and increase revenues. (b) increase liabilities and increase revenues. (c) increase assets and increase revenues. (d) decrease revenues and decrease assets.

(a) Adjustments for unearned revenues decrease liabilities and increase revenues. The other choices are therefore incorrect.

If beginning inventory is $60,000, cost of goods purchased is $380,000, and ending inventory is $50,000, what is cost of goods sold under a periodic system? (a) $390,000. (b) $370,000. (c) $330,000. (d) $420,000.

(a) Beginning inventory ($60,000)+Cost of goods purchased ($380,000)−Ending inventory ($50,000)=Cost of goods sold ($390,000)

Which types of accounts will appear in the post-closing trial balance? (a) Permanent accounts. (b) Temporary accounts. (c) Expense accounts. (d) None of the above.

(a) Permanent accounts are the only type of accounts that appear in the post-closing trial balance because they are not closed at the end of the accounting period. Choices (b) and (c) are temporary accounts. Choice (d) is wrong because there is a correct answer.

Which account will have a zero balance after a company has journalized and posted closing entries? (a) Service Revenue. (b) Supplies. (c) Prepaid Insurance. (d) Accumulated Depreciation.

(a) Service Revenue will have a zero balance after a company has journalized and posted closing entries. The other choices are incorrect because (b) Supplies is an asset, or permanent account, and will not be closed at the end of the year; (c) Prepaid Insurance is an asset, or permanent account, and will not be closed at the end of the year; and (d) Accumulated Depreciation is a contra asset account. Contra asset accounts are permanent accounts and are not closed at the end of the year.

During 2017, Gibson Company assets decreased $50,000 and its liabilities decreased $90,000. Its stockholders' equity therefore: (a) increased $40,000. (b) decreased $140,000. (c) decreased $40,000. (d) increased $140,000. (LO 2)

(a) Since assets decreased by $50,000 and liabilities decreased by $90,000, stockholders' equity has to increase by $40,000 to keep the accounting equation balanced. The other choices are therefore incorrect.

Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)? (a) Expense recognition principle. (b) Historical cost principle. (c) Periodicity principle. (d) Revenue recognition principle.

(a) The expense recognition principle dictates that efforts (expenses) be recorded with accomplishments (revenues). The other choices are incorrect because (b) the historical cost principle states that when assets are purchased, they should be recorded at cost; (c) the periodicity assumption states that the life of a business can be divided into artificial time periods; and (d) the revenue recognition principle states that revenue should be recorded in the period in which the performance obligation is satisfied.

Under a perpetual inventory system, when goods are purchased for resale by a company: (a) purchases on account are debited to Inventory. (b) purchases on account are debited to Purchases. (c) purchase returns are debited to Purchase Returns and Allowances. (d) freight costs are debited to Freight‐Out.

(a) Under a perpetual inventory system, when a company purchases goods for resale, purchases on account are debited to the Inventory account, not (b) Purchases or (c) Purchase Returns and Allowances. Choice (d) is incorrect because freight costs are also debited to the Inventory account, not the Freight‐Out account.

Which of the following statements about a periodic inventory system is true? (a) Companies determine cost of goods sold only at the end of the accounting period. (b) Companies continuously maintain detailed records of the cost of each inventory purchase and sale. (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.

(a) Under the periodic inventory system, cost of goods sold is determined only at the end of the accounting period. The other choices are incorrect because (b) detailed records of the cost of each inventory purchase and sale are maintained continuously when a perpetual, not periodic, system is used; (c) the perpetual system provides better control over inventories than a periodic system; and (d) the increased use of computerized systems has increased the use of the perpetual, not periodic, system.

A quality of earnings ratio: (a) is computed as net income divided by net cash provided by operating activities. (b) that is less than 1 indicates that a company might be using aggressive accounting tactics. (c) that is greater than 1 indicates that a company might be using aggressive accounting tactics. (d) is computed as net cash provided by operating activities divided by total assets.

(b) A quality of earnings ratio that is less than 1 indicates that a company might be using aggressive accounting tactics. The other choices are incorrect because (a) Quality of earnings=Net cash provided by operating activities÷Net income,not vice versa

Which statement about an account is true? (a) In its simplest form, an account consists of two parts. (b) An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders' equity items. (c) There are separate accounts for specific assets and liabilities but only one account for stockholders' equity items. (d) The left side of an account is the credit, or decrease, side

(b) An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders' equity items. The other choices are incorrect because (a) in its simplest form, an account consists of three parts: a title and debit and credit side; (c) there are specific accounts for different types of stockholders' equity, such as Common Stock, Retained Earnings, and Dividends; and (d) the left side of an account is the debit side.

Bufford Corporation had reported the following amounts at December 31, 2017: sales revenue $184,000, ending inventory $11,600, beginning inventory $17,200, purchases $60,400, purchase discounts $3,000, purchase returns and allowances $1,100, freight‐in $600, and freight‐out $900. Calculate the cost of goods available for sale. (a) $69,400. (b) $74,100. (c) $56,900. (d) $197,700. (LO 6)

(b) Beginning inventory ($17,200)+Purchases ($60,400)−Purchases discounts ($3,000)−Purchase returns and allowances ($1,100)+Freight‐in ($600)=Cost of goods available for sale ($74,100)

If net sales are $400,000, cost of goods sold is $310,000, and operating expenses are $60,000, what is the gross profit? (a) $30,000. (b) $90,000. (c) $340,000. (d) $400,000.

(b) Gross profit=Net sales ($400,000)−Cost of goods sold ($310,000)=$90,000

Which is not part of the recording process? (a) Analyzing transactions. (b) Preparing an income statement. (c) Entering transactions in a journal. (d) Posting journal entries.

(b) Preparing an income statement is not part of the recording process. Choices (a) analyzing transactions, (c) entering transactions in a journal, and (d) posting transactions are all steps in the recording process.

Debits: (a) increase both assets and liabilities. (b) decrease both assets and liabilities. (c) increase assets and decrease liabilities. (d) decrease assets and increase liabilities.

(c) Debits increase assets and decrease liabilities. The other choices are therefore incorrect.

When goods are purchased for resale by a company using a periodic inventory system: (a) purchases on account are debited to Inventory. (b) purchases on account are debited to Purchases. (c) purchase returns are debited to Purchase Returns and Allowances. (d) freight costs are debited to Purchases.

(b) Purchases for resale are debited to the Purchases account. The other choices are incorrect because (a) purchases on account are debited to Purchases, not Inventory; (c) Purchase Returns and Allowances are always credited; and (d) freight costs are debited to Freight‐In, not Purchases.

Which of the following events is not recorded in the accounting records? (a) Equipment is purchased on account. (b) An employee is terminated. (c) A cash investment is made into the business. (d) Company pays dividend to stockholders.

(b) Termination of an employee is not a recordable event in the accounting records. The other choices all represent events that are recorded.

Colleen Mooney earned a salary of $400 for the last week of September. She will be paid on October 1. The adjusting entry for Colleen's employer at September 30 is: (a) No entry is required. (b) Salaries and Wages Expense 400 Salaries and Wages Payable 400 (c) Salaries and Wages Expense 400 Cash 400 (d) Salaries and Wages Payable 400 Cash 400

(b) The adjusting entry should be to debit Salaries and Wages Expense $400 and credit Salaries and Wages Payable for $400. Choice (a) is incorrect because if an adjusting entry is not made, the amount of money owed (liability) that is shown on the balance sheet will be understated and the amount of salaries and wages expense will also be understated. Choices (c) and (d) are incorrect because adjusting entries never affect cash.

A company makes a credit sale of $750 on June 13, terms 2/10, n/30, on which it grants a return of $50 on June 16. What amount is received as payment in full on June 23? (a) $700. (b) $686. (c) $685. (d) $650.

(b) The full amount of $686 is paid within 10 days of the purchase ($750−$50)−[($750−$50)×2%]

Genesis Company buys a $900 machine on credit. This transaction will affect the: (a) income statement only. (b) balance sheet only. (c) income statement and retained earnings statement only. (d) income statement, retained earnings statement, and balance sheet.

(b) When equipment is purchased on credit, assets are increased and liabilities are increased. These are both balance sheet accounts. The other choices are incorrect because neither the income statement nor the retained earnings statement is affected.

The effects on the basic accounting equation of performing services for cash are to: (a) increase assets and decrease stockholders' equity. (b) increase assets and increase stockholders' equity. (c) increase assets and increase liabilities. (d) increase liabilities and increase stockholders' equity.

(b) When services are performed for cash, assets are increased and stockholders' equity is increased. The other choices are therefore incorrect.

Adjustments for accrued revenues: (a) increase assets and increase liabilities. (b) increase assets and increase revenues. (c) decrease assets and decrease revenues. (d) decrease liabilities and increase revenues.

(b) When the adjustment is made for accrued revenues, an asset account (usually Accounts Receivable) is increased and a revenue account is increased. The other choices are therefore incorrect.

A ledger: (a) contains only asset and liability accounts. (b) should show accounts in alphabetical order. (c) is a collection of the entire group of accounts maintained by a company. (d) provides a chronological record of transactions.

(c) A ledger is a collection of the entire group of accounts maintained by a company. The other choices are therefore incorrect.

Adjustments for prepaid expenses: (a) decrease assets and increase revenues. (b) decrease expenses and increase assets. (c) decrease assets and increase expenses. (d) decrease revenues and increase assets.

(c) Adjustments for prepaid expenses decrease assets and increase expenses. The other choices are therefore incorrect.

Which sales accounts normally have a debit balance? (a) Sales Discounts. (b) Sales Returns and Allowances. (c) Both (a) and (b). (d) Neither (a) nor (b).

(c) Both Sales Discounts and Sales Returns and Allowances normally have a debit balance. Choices (a) and (b) are both correct, but (c) is the better answer. Choice (d) is incorrect as both (a) and (b) are correct.

The gross profit rate is equal to: (a) net income divided by sales. (b) cost of goods sold divided by sales. (c) net sales minus cost of goods sold, divided by net sales. (d) sales minus cost of goods sold, divided by cost of goods sold.

(c) Gross profit rate=Gross profit (Net sales−Cost of goods sold)÷Net sales

Which of the following would affect the gross profit rate? (Assume sales remains constant.) (a) An increase in advertising expense. (b) A decrease in depreciation expense. (c) An increase in cost of goods sold. (d) A decrease in insurance expense.

(c) Gross profit rate=Gross profit÷Net sales

Gross profit will result if: (a) operating expenses are less than net income. (b) net sales are greater than operating expenses. (c) net sales are greater than cost of goods sold. (d) operating expenses are greater than cost of goods sold.

(c) Gross profit will result if net sales are greater than cost of goods sold. The other choices are incorrect because (a) operating expenses and net income are not used in the computation of gross profit; (b) gross profit results when net sales are greater than cost of goods sold, not operating expenses; and (d) gross profit results when net sales, not operating expenses, are greater than cost of goods sold.

Which statement is incorrect concerning the adjusted trial balance? (a) 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. (b) The adjusted trial balance provides the primary basis for the preparation of financial statements. (c) The adjusted trial balance does not list temporary accounts. (d) The company prepares the adjusted trial balance after it has journalized and posted the adjusting entries. (LO 4)

(c) The adjusted trial balance does list temporary accounts. The other choices are true statements about the adjusted trial balance.

Queenan Company computes depreciation on delivery equipment at $1,000 for the month of June. The adjusting entry to record this depreciation is as follows: (a) Depreciation Expense 1,000 Accumulated Depreciation—Queenan Company 1,000 (b) Depreciation Expense 1,000 Equipment 1,000 (c) Depreciation Expense 1,000 Accumulated Depreciation—Equipment 1,000 (d) Equipment Expense 1,000 Accumulated Depreciation—Equipment 1,000

(c) The adjusting entry is to debit Depreciation Expense and credit Accumulation Depreciation—Equipment. The other choices are incorrect because (a) the contra asset account title includes the asset being depreciated, not the company name; (b) the credit should be to the contra asset account, not the asset; and (d) the debit should be to Depreciation Expense, not Equipment Expense.

The trial balance shows Supplies $1,350 and Supplies Expense $0. If $600 of supplies are on hand at the end of the period, the adjusting entry is: (a) Supplies 600 Supplies Expense 600 (b) Supplies 750 Supplies Expense 750 (c) Supplies Expense 750 Supplies 750 (d) Supplies Expense 600 Supplies 600

(c) The adjusting entry is to debit Supplies Expense for $750 ($1,350−$600) and credit Supplies for $750. The other choices are therefore incorrect.

A trial balance will not balance if: (a) a correct journal entry is posted twice. (b) the purchase of supplies on account is debited to Supplies and credited to Cash. (c) a $100 cash dividend is debited to Dividends for $1,000 and credited to Cash for $100. (d) a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.

(c) The entry will cause the trial balance to be out of balance. The other choices are incorrect because although these entries are incorrect, they will still allow the trial balance to balance

What is the periodicity assumption? (a) Companies should recognize revenue in the accounting period in which services are performed. (b) Companies should match expenses with revenues. (c) The economic life of a business can be divided into artificial time periods. (d) The fiscal year should correspond with the calendar year.

(c) The periodicity assumption states that the economic life of a business can be divided into artificial time periods. The other choices are incorrect because (a) this statement describes the revenue recognition principle, (b) this statement describes the expense recognition principle, and (d) the periodicity assumption states that the life of a business can be divided into artificial time periods, not that the fiscal year and calendar year must coincide.

To record the sale of goods for cash in a perpetual inventory system: (a) only one journal entry is necessary to record cost of goods sold and reduction of inventory. (b) only one journal entry is necessary to record the receipt of cash and the sales revenue. (c) 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 reduction of inventory. (d) 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.

(c) 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 reduction of inventory. The other choices are incorrect because (a) only considers the recognition of the expense and ignores the revenue, (b) only considers the recognition of revenue and leaves out the expense or cost of merchandise sold, and (d) the receipt of cash and sales revenue, not reduction of inventory, are paired together, and the cost of goods sold and reduction of inventory, not sales revenue, are paired together.

A revenue account: (a) is increased by debits. (b) is decreased by credits. (c) has a normal balance of a debit. (d) is increased by credits.

(d) Revenues are increased by credits. Revenues have a normal credit balance. The other choices are therefore incorrect.

Adjusting entries are made to ensure that: (a) expenses are recognized in the period in which they are incurred. (b) revenues are recorded in the period in which the performance obligation is satisfied. (c) balance sheet and income statement accounts have correct balances at the end of an accounting period. (d) All of the above.

(d) Adjusting entries are made to ensure that expenses are recognized in the period in which they are incurred, that revenues are recorded in the period in which the performance obligation is satisfied, and that balance sheet and income statement accounts have correct balances at the end of an accounting period. Although choices (a), (b), and (c) are correct, choice (d) is the better answer.

The multiple‐step income statement for a merchandising company shows each of these features except: (a) gross profit. (b) cost of goods sold. (c) a sales section. (d) an investing activities section.

(d) An investing activities section appears on the statement of cash flows, not on a multiple‐step income statement. Choices (a) gross profit, (b) cost of goods sold, and (c) a sales section are all features of a multiple‐step income statement.

Which accounts normally have debit balances? (a) Assets, expenses, and revenues. (b) Assets, expenses, and retained earnings. (c) Assets, liabilities, and dividends. (d) Assets, dividends, and expenses.

(d) Assets, dividends, and expenses have normal debit balances. The other choices are incorrect because (a) revenues have a normal credit balance, (b) retained earnings has a normal credit balance, and (c) liabilities have a normal credit balance.

All of the following are required steps in the accounting cycle except: (a) journalizing and posting closing entries. (b) preparing an adjusted trial balance. (c) preparing a post-closing trial balance. (d) prepare financial statements from the unadjusted trial balance.

(d) Financial statements are prepared from the adjusted trial balance, not the unadjusted trial balance. The other choices are incorrect because (a) journalizing and posting closing entries, (b) preparing an adjusted trial balance, and (c) preparing a post-closing trial balance are all required steps in the accounting cycle.

Which one of these statements about the accrual basis of accounting is false? (a) Companies record events that change their financial statements in the period in which events occur, even if cash was not exchanged. (b) Companies recognize revenue in the period in which the performance obligation is satisfied. (c) This basis is in accordance with generally accepted accounting principles. (d) Companies record revenue only when they receive cash and record expense only when they pay out cash.

(d) If companies record revenue only when they receive cash and record expense only when they pay out cash, they are using the cash basis of accounting. The other choices are true statements about accrual-basis accounting.

During the year ended December 31, 2017, Bjornstad Corporation had the following results: net sales $267,000, cost of goods sold $107,000, net income $92,400, operating expenses $55,400, and net cash provided by operating activities $108,950. What was the company's profit margin? (a) 40%. (b) 60%. (c) 20.5%. (d) 34.6%.

(d) Net income ($92,400)÷Net sales ($267,000)=Profit margin of 34.6%

Posting: (a) normally occurs before journalizing. (b) transfers ledger transaction data to the journal. (c) is an optional step in the recording process. (d) transfers journal entries to ledger accounts.

(d) Posting transfers journal entries to ledger accounts. The other choices are incorrect because posting (a) occurs after journalizing, (b) transfers the information contained in journal entries to the ledger, and (c) is a required step in the recording process. If posting is not done, the ledger accounts will not reflect changes in the accounts resulting from transactions.

Each of the following is a major type (or category) of adjusting entry except: (a) prepaid expenses. (b) accrued revenues. (c) accrued expenses. (d) unearned expenses.

(d) Unearned expenses are not a major type of adjusting entry. Choices (a) prepaid expenses, (b) accrued revenues, and (c) accrued expenses are all a major type of adjusting entry

Paying an account payable with cash affects the components of the accounting equation in the following way: (a) Decreases stockholders' equity and decreases liabilities. (b) Increases assets and decreases liabilities. (c) Decreases assets and increases stockholders' equity. (d) Decreases assets and decreases liabilities.

(d) When paying an account payable with cash, the asset cash decreases. Accounts payable, a liability, decreases as well. The other choices are therefore incorrect