Accounting Final Exam

Which of the following activities is an example of a financing activity? A) Receiving a loan from a bank B) Selling merchandise online C) Purchasing a delivery truck D) Paying employee salaries

Answer: A

2. A firm's cash flow from investing activities includes: A) Cash received from the sale of a plant asset B) Cash paid as dividends C) Cash received from the rendering of services to customers D) Cash paid to retire bonds payable

Answer: A

3. A firm's cash flow from financing activities includes: A) Cash paid to reacquire treasury stock B) Cash paid for merchandise purchased C) Cash received from sale of investment in bonds D) Cash received as interest income

Answer: A

4. In a statement of cash flows, interest paid to creditors is classified as a cash flow from: A) Operating activities B) Trading activities C) Financing activities D) Investing activities

Answer: A

8. Financial accounting oversight in the United States is provided by all of the following organizations except the: A) International Accounting Standards Board (IASB) B) Financial Accounting Standards Board (FASB) C) Public Company Accounting Oversight Board (PCAOB) D) U.S. Securities Exchange Commission (SEC)

Answer: A

On December 1, 2016, EMG Company purchased $60,000 of equipment by issuing a 120-day, 10% note payable to Bank of Maryland. Assuming the company's accounting period ends on December 31, the journal entry recorded by EMG Company on the note maturity date will include: A) Debit to Interest Expense for $1,500 B) Debit to Interest Payable for $1,500 C) Debit to Interest Payable for $1,000 D) Debit to Interest Expense for $500 loan amount x note rate x # of days /360

Answer: A 2016 Dec. 31 Interest expense 500 Interest payable 500 To accrue interest expense on the note to Bank of Maryland ($60,000 × 0.10 × 30/360 = $500).

Anthony's Art Supplies has an accrual basis net income of $104,000 in 2016 and the following related items: Depreciation expense $26,000 Accounts receivable decrease 14,000 Inventory decrease 10,000 Interest payable increase 12,000 Dividends paid 2,000 What is Anthony's Art Supplies' net cash flow from operating activities in 2016? A) $166,000 B) $ 94,000 C) $ 74,000 D) $162,000 Equation: net income+ depreciation expense+ accounts recievable decrease+inventorty decrease+interest paybale increase

Answer: A Rationale: $104,000 + $26,000 + $14,000 + $10,000 + $12,000 = $166,000

10. Consider the following: Net Income $34,600 Depreciation Expense 24,000 Gain on Sale of Land 15,000 Increase in Inventory 4,100 Increase in Wages Payable 12,300 Payment of Dividends 4,000 Calculate the net cash provided (or used) by operating activities using the indirect method: A) $51,800 B) $47,800 C) $71,800 D) $25,400 Equation: net income+ depreciation expense-gain on sale of land- increase on inventory+increase in wages payable

Answer: A Rationale: $34,600 + $24,000 - $15,000 - $4,100 + $12,300 = $51,800

10. Which of the following corporate bond ratings are listed in an increasing level of risk? A) AAA, A, BB, C B) A, AAA, BB, C C) BB, C, A, AAA D) C, BB, A, AAA

Answer: A Rationale: As debt quality moves from AAA to CCC, the market interest rate required increases.

15. Which of the following is a capital expenditure? A) Cost to add air conditioning to a company car B) Cost to purchase garbage cans for the company conference room C) Cost to replace spark plug on company lawnmower D) Cost to have store windows washed

Answer: A Rationale: Capital expenditures increase the book value of long‑lived assets. Two typical capital expenditures related to property, plant, and equipment are initial acquisitions and additions and betterments

12. Delta Company uses the allowance method of recording credit losses. In November 2016, Delta wrote off the $1,800 account of Epsilon Company. In January 2017, Epsilon paid the $1,800. The entry or entries to record the payment is/are: A) Cash 1,800 Recoveries of Accounts Written Off 1,800 B) Accounts Receivable—Epsilon Co. 1,800 Allowance for Doubtful Accounts 1,800 Cash 1,800 Accounts Receivable—Epsilon Co. 1,800 C) Allowance for Doubtful Accounts 1,800 Accounts Receivable—Epsilon Co. 1,800 D) Accounts Receivable—Epsilon Co. 1,800 Bad Debts Expense 1,800 Cash 1,800 Accounts Receivable—Epsilon Co. 1,800

Answer: B

13. Southwest Company uses the allowance method of recording credit losses. In November 2016, Southwest wrote off the $3,600 account of Gamma Company. In January 2017, Gamma paid the $3,600. The entry or entries to record the payment is/are: A) Cash 3,600 Recoveries of Accounts Written Off 3,600 B) Accounts Receivable—Gamma Co. 3,600 Allowance for Doubtful Accounts 3,600 Cash 3,600 Accounts Receivable—Gamma Co. 3,600 C) Allowance for Doubtful Accounts 3,600 Accounts Receivable—Gamma Co. 3,600 D) Accounts Receivable—Gamma Co. 3,600 Bad Debts Expense 3,600

Answer: B

9. A company had net income of $930,000 in 2016. Depreciation expense is $104,000. During the year, Accounts Receivable and Inventory increased $60,000 and $160,000, respectively. Prepaid Expenses and Accounts Payable decreased $8,000 and $16,000, respectively. There was also a loss on the sale of equipment of $12,000. How much cash was provided by operating activities in 2016? A) $ 784,000 B) $ 818,000 C) $1,104,000 D) $1,152,000

Answer: B

12. How many payment periods are in a 6-year, 8% bond with an effective interest rate of 6%, and paid semiannually? A) 3 B) 12 C) 48 D) 6 Equation: number of years x 2

Answer: B Rationale: 6 years × 2 = 12 payment periods

12. Which depreciation method does not consider salvage value in its first year calculation? A) Straight line B) Double-declining balance C) Units of production D) None of the above

Answer: B Rationale: An asset's salvage value is not considered in the calculation of declining-balance depreciation, except that the depreciation of an asset stops when the asset's book value equals its estimated salvage value

11. For what is the coupon rate used to compute? A) Rate that investors expect to earn on this investment B) Interest payments paid to bondholders during the life of the bond issue C) Bond issue price D) Fee paid to an underwriter for determining the bond price

Answer: B Rationale: Coupon rates are used to compute the dollar amount of interest payments paid to the bondholder semi-annually.

3. What effects would the accrual of $160 of interest on a note payable have on financial statements? I. Balance sheet: Liabilities are decreased by $160 II. Income statement: Expenses are increased by $160 III. Balance sheet: Retained earnings are decreased by $160 IV. Balance sheet: Cash assets are decreased by $160 V. Balance sheet: Liabilities are increased by $160 A) I, II, and III B) II, III, and V C) II, IV, and V D) II, III, and IV

Answer: B Rationale: Interest is recorded on the balance sheet as interest payable, increasing liabilities by $160, decreasing retained earnings by $160, and adding $160 to expenses on the income statement. Since no cash is spent to pay the note or the interest, cash assets are not affected.

13. The book value of a depreciable asset is: A) The original cost of the asset B) The original cost of the asset less its accumulated depreciation C) The original cost of the asset less its salvage value D) The accumulated depreciation on the asset

Answer: B Rationale: The book value of an asset is the acquisition cost less accumulated depreciation. It is also referred to as the net book value.

Under which method of inventory cost flows is the cost flow assumed to be in the reverse order in which the expenditures were made? A) First-in, first-out B) Last-in, first-out C) Average cost D) Lower of cost or market

Answer: B Rationale: Under LIFO, the cost flow is assumed to be in the reverse order in which the expenditures were made.

2. Goods in transit which are shipped F.O.B. shipping point should be: A) Included in the inventory of the shipping company B) Included in the inventory of the buyer C) Included in the inventory of the seller D) None of the above

Answer: B Rationale: When the freight terms are F.O.B. shipping point, the buyer assumes ownership of the merchandise at the time the common carrier accepts the items from the seller.

On November 1, Mcgonagall borrowed from Dumbledore, giving him a $12,000, 3 month, 9% note, interest payable at maturity. Mcgonagall made no entry after November 1. What entry would Mcgonagall make on December 31, the end of the accounting period? A) Interest Payable 180 Interest Expense 180 B) Interest Expense 180 Interest Payable 180 C) Interest Expense 180 Cash 180 D) Interest Expense 180 Discount on Notes Payable 180 Equation: note amount x note % x number of months /12``

Answer: B Rationale: $12,000 x 9% x 2/12 = $180

7. On December 1, Buckbeak Company borrowed $20,000 from Pettigrew Company, giving a 60-day, 12% note. If the correct adjusting entry is made on December 31, Buckbeak's entry at maturity is: A) Notes Payable 20,000 Cash 20,000 B) Notes Payable 20,000 Interest Payable 200 Interest Expense 200 Cash 20,400 C) Notes Payable 20,000 Interest Expense 400 Cash 20,400 D) Notes Payable 20,000 Interest Payable 400 Cash 20,400 Equation: loan amount x note rate x number of days /360

Answer: B Rationale: $20,000 x 12% x 30/360 = $200 accrued interest

1. A firm's net cash flow from operating activities includes: A) Cash received from sale of equipment B) Cash received from issuance of common stock C) Cash received from sale of merchandise D) Cash received as payment of loan from a borrower

Answer: C

The entry to record the write-off of Dominick, Inc.'s account using the allowance method is: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Accounts Receivable C) Allowance for Doubtful Accounts Accounts Receivable D) Accounts Receivable Allowance for Doubtful Accounts

Answer: C

6. Lumos, Inc. has an accrual basis net loss of $80,000 in 2016 and the following related items: Depreciation expense $44,000 Accounts receivable decrease 32,000 Inventory increase 24,000 Accounts payable increase 12,000 Accrued liabilities increase 20,000 How much is Lumos' net cash flow from operating activities in 2016? A) $140,000 B) $(16,000) C) $ 4,000 D) $ (52,000) Equation: accrual basis net loss +depreciation expense+accounts recievable decrease-inventory increase+accounts payable increase+accrued liablilites increase

Answer: C Rationale: $(80,000) + $44,000 + $32,000 - $24,000 + $12,000 + $20,000 = $4,000

Which of the following plant assets is not depreciated? A) Leasehold improvements B) Equipment C) Land for site use D) Furniture

Answer: C Rationale: Land is not depreciated.

1. Which of the following is not an inventory account for manufacturing companies? A) Work-in-process B) Finished goods C) Cost of goods sold D) Raw materials

Answer: C Rationale: Raw materials, work-in-process, and finished goods are all inventory accounts. Cost of goods sold is the account used for goods that are sold and is reported on the income statement.

14. Jane Cooper Industries plans to issue 8-year, 8%, $200,000 bonds paying interest on an annual basis, at a $4,000 premium. Which one of the following statements is true? A) The cash paid to bondholders will be $4,000 each interest period. B) Jane Cooper will receive $196,000 as the issue price. C) Jane Cooper's annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year. D) Jane Cooper's annual interest expense on the bonds will be greater than the amount of interest payments to bondholders each year.

Answer: C Rationale: Since the premium is a benefit the issuer receives at issuance, the interest expense will be less than the amount of interest payments to bondholders each year.

Several years ago, Beglen, Inc. purchased a computer costing $90,000, for which total depreciation of $70,000 has been recorded. Assuming that the computer is sold for $30,000 cash, the proper entry to record the sale is: A) Debit Cash, $30,000; debit Accumulated Depreciation, $70,000; credit Computer, $90,000 B) Debit Cash, $30,000; debit Accumulated Depreciation, $70,000; credit Computer, $96,000 C) Debit Cash, $30,000; debit Accumulated Depreciation, $70,000; credit Computer, $90,000; credit Gain on Sale of Computer, $10,000 D) Debit Cash, $30,000; credit Computer $20,000; credit Gain on Sale of Computer, $10,000 Equation: computer original cost- computer selling price

Answer: C Rationale: The gain of $10,000 is calculated as the sale proceeds of $30,000 minus the asset's book value of $20,000 ($90,000 - $70,000).

13. The price of a bond is equivalent to: I. Face value II. Projected interest payments discounted to the present III. The amortization amount of a bond IV. The present value of the principal payment A) I + III B) I - III C) II + IV D) I + II

Answer: C Rationale: The price of a bond is the present value of both the interest payments and the principal payment.

Sisters Inc. issued a 120-day note in the amount of $180,000 on November 1, 2016 with an annual rate of 6%. What amount of interest has accrued as of December 31, 2016? A) $3,000 B) $2,250 C) $1,800 D) Zero. The interest is accrued at the end of the 120 day period. Equation: note amount x annual rate x # of days /360

Answer: C Rationale: $180,000 × 6% × 60/360 = $1,800

1. Which one of the following is a current liability? A) A credit guarantee provided for a supplier B) Bond payable C) Accounts receivable D) FICA taxes payable

Answer: D

11. After writing off a customer's account, a company using the allowance method subsequently collected the account in full. It should: A) Debit Cash and credit Accounts Receivable B) Debit Cash and credit Miscellaneous Income C) Debit Accounts Receivable and credit Allowance for Doubtful Accounts D) Both A) and C)

Answer: D

Under the allowance method of accounting for credit losses, the entry to write off a specific account: A) Will increase total assets B) Debits Bad Debts Expense and credits Allowance for Doubtful Accounts C) Debits Bad Debts Expense and credits Accounts Receivable D) Does not affect net income or total assets

Answer: D

5. Bentley Company has an accrual basis net income of $180,000 in 2016 and the following related items: Depreciation expense $38,000 Accounts receivable increase 12,000 Inventory decrease 14,000 Accounts payable decrease 8,000 How much is Bentley's net cash flow from operating activities in 2016? A) $174,000 B) $202,000 C) $124,000 D) $212,000 Equation: Accrual basis income -depreciation expense+ inventory decrease-accounts payable decrease

Answer: D Rationale: $180,000 + $38,000 - $12,000 + $14,000 - $8,000 = $212,000

7. Consider the following: • Net income, $190,000 • Depreciation Expense $22,000 • Increase in accounts receivable, $8,000 • Decrease in merchandise inventory, $40,000 • Decrease in accounts payable, $16,000 • Increase in income taxes payable, $6,000 Using the Indirect Method, the Net Cash provided by Operating Activities was: A) $180,000 B) $212,000 C) $202,000 D) $234,000 Equation:net income + depreciation expense-increase in accounts recievable+decrease in merchandise inventory-decrease in accounts payable+increase in income taxes

Answer: D Rationale: $190,000 + $22,000 - $8,000 + $40,000 - $16,000 + $6,000 = $234,000

1. Which of the following is a term identifying the periodic expensing of a plant asset? A) Amortization B) Depletion C) Betterment D) Depreciation

Answer: D Rationale: Depreciation refers to the process of allocating a portion of an asset's acquisition cost to expense on the income statement to reflect the consumption of the asset as it produces revenue for a business.

14. Which of the following is a revenue expenditure? A) Adding air conditioning to a company car B) Adding a loading and unloading dock to the company's warehouse C) Purchasing a microcomputer for the marketing department D) Replacing the battery in a company truck

Answer: D Rationale: Revenue expenditures are expenditures relating to plant assets that are expensed when incurred. Two common types of revenue expenditures are: 1. Expenditures for ordinary maintenance and repairs of existing plant assets, and 2. Expenditures to acquire low‑cost items that benefit the firm for several periods

Emma Swan Company borrowed $24,000 from Bank of Storybrook on December 1, 2016, and signed a 90 day, 8% Notes Payable. If Emma Swan's accounting period ends on December 31, 2016, which of the following will not be true for Emma Swan Company? A) On December 31, 2016, Emma Swan will debit Interest Expense for $160 B) On December 31, 2016 Emma Swan, will credit Interest Payable for $160 C) On March 1, 2017, Emma Swan will debit Interest Expense for $320 D) On March 1, 2017, Emma Swan will debit Interest Payable for $320 loan amount x note rate x number of days/360

Answer: D Rationale: At year-end, Emma Swan Company records the following entry: 2016 Dec. 31 Interest expense 160 Interest payable 160 To accrue interest expense on the note to Bank of Storybrook ($24,000 × 0.08 × 30/360 = $160).

Which of the following does not affect the current liabilities section of the balance sheet? A) Purchase of inventory on credit B) Wages owed to employees but not yet paid C) Insurance bill to be paid next month D) Sale of goods on credit

Answer: D Rationale: The sale of goods on credit impacts current assets, accounts receivable. All the other items are liabilities that the company must pay within the next year, current liabilities.

1. Beautiful Lawns Company estimates its doubtful accounts by aging its accounts receivable and applying percentages to various aged categories of accounts. The Beautiful Lawns Company computes a total of $3,600 in estimated doubtful accounts as of December 31, 2016. Its Accounts Receivable account has a balance of $112,800 and its Allowance for Doubtful Accounts has a credit balance of $600 before adjustment at December 31, 2016. How much bad debts expense will Beautiful Lawns report in 2016? A) $ 480 B) $3,840 C) $3,000 D) $3,360 Equation: estimated doubtful accounts-credit

Process: 3,600-600=3000 Answer: C Rationale: To bring the allowance to the desired balance of $3,600, the Beautiful Lawns Company will need to increase the allowance account by $3,000, resulting in bad debts expense of that same amount

11. The Cash T-account of Rainbow, Inc. has a beginning balance of $52,000. During the year, $244,000 was debited and $241,000 was credited to the account. What is the ending balance of cash? A) $55,000 B) $37,000 C) ($ 5,000) D) Cannot be determined from the information given Equation: Beginning cash + Cash receipts - Cash payments = Ending Cash

$55,000 • Answer: A

Why is one dollar now worth more than one dollar in the future? A) Funds can be invested in earning assets to yield a positive return B) The amount to be received in the future is smaller than the amount to be paid off today C) The value of interest declines over time D) The time value of money depreciates over long periods of time

Answer: A Rationale: Investing money received today generates interest so that the investor will have more accumulated funds compared to waiting to receive funds in the future

14. The distinguishing feature of a permanent account is that any balance in the account at the end of an accounting period is: (A) Carried forward to the next accounting period (B) Transferred to a temporary account (C) Transferred to the Cash account (D) Transferred to a permanent stockholders' equity account

Answer: A Rationale: Permanent accounts are accounts presented on the balance sheet. The distinguishing feature of a permanent account is that any balance in the account at the end of an accounting period is carried forward to the next accounting period.

6. The term "debit" refers to: A) The left side of an account B) The right side of an account C) The side of an account on which increases are recorded D) Both A and C

Answer: A Rationale: The terms debit and credit are used to refer to the left side and the right side, respectively, of an account.

Purdue Company signed a one-year lease on April 1, 2016, and paid the $45,600 total year's rent in advance. Purdue recorded the transaction as a debit to Prepaid Rent and a credit to Cash. What adjusting entry should Purdue make on December 31, 2016 (no previous adjustment has been made)? (A) Rent Expense 34,200 Prepaid Rent 34,200 (B) Rent Expense 11,400 Prepaid Rent 11,400 (C)Prepaid Rent 11.400 Rent Expense 11,400 (D) Prepaid Rent 34,200 Rent Expense 34,200 Equation: # of months /12 x total years rent

Answer: A Rationale: Transfer 9/12 x $45,600 = $34,200 from Prepaid Rent to Rent Expense

7. Which of the following is not shown in the statement of stockholder's equity? (A) Unearned revenue (B) Dividends (C) Retained earnings (D) Common stock

Answer: A Rationale: Unearned revenue is a liability that represents amounts collected in advance from customers. It is an obligation that must be satisfied with a future cash payment or delivery of goods or services.

10. Which of the following is a correct statement of the accounting equation in economic terms? A) Economic resources = operating assets + financial assets B) Economic resources = creditor financing + owner financing C) Economic resources = creditor financing - owner financing D) Creditor financing = investing + operating

Answer: B

9. Which of the following involves an analysis of the income statement? (A) Current ratio (B) Return on sales ratio (C) Debt-to-total assets ratio (D) Free cash flow

Answer: B

4. As supplies and PPE assets on the balance sheet are consumed, they are reflected: A) As a revenue on the income statement B) As an expense on the income statement C) As common stock on the balance sheet D) Assets are never consumed

Answer: B Rationale: As assets are consumed (used up), their cost is transferred into the income statement as an expense.

3. Current assets are cash and other assets that will be converted into cash or used up within (A) One year (B) The normal operating cycle of the business or one year, whichever is longer (C) The normal operating cycle of the business (D) The normal operating cycle of the business or one year, whichever is shorter

Answer: B Rationale: Current assets are cash and other assets that will be converted into cash or used up within the normal operating cycle of the business or one year, whichever is longer. The normal operating cycle of a business is the average period of time between the use of cash to deliver a service or to buy goods for resale and the subsequent collection of cash from customers who purchase those services or products.

2. Current assets are usually listed in the order of their: (A) Size: smallest to largest (B) Liquidity: most liquid to least liquid (C) Size: largest to smallest (D) Lack of liquidity: least liquid to most liquid

Answer: B Rationale: Current assets are listed on a classified balance sheet in the order of their expected liquidity. Liquidity is determined by the ability of an asset to be readily converted into cash

. Internal auditing is a company function that: A) Audits the firm's financial statements and expresses an opinion on them B) Provides independent appraisals of the company's financial statements, its internal control, and its operations C) Prepares the firm's income tax returns D) All of the above

Answer: B Rationale: Internal auditing is a company function that provides independent appraisals of the company's internal statements, its internal control, and its operations.

5. Which of the following is not a feature of good internal accounting control over cash? A) All cash receipts are deposited in the bank each day. B) Most bills are paid with paper currency and coins to minimize the bank service charges. C) A bank reconciliation is prepared when each bank statement is received. D) Cash is handled separately from the recording of cash transactions

Answer: B Rationale: Payments should be made using checks, which have control numbers, referred to as a check number, preprinted on them. Each control number should be unique for that type of document. These numbers are a detection control enabling a firm to track each check written, and to ensure that no one has written an improper check against their account.

3. Which of the following is a poor internal accounting control feature? A) Segregation of duties. B) Combining authorization with custodianship. C) Rotation of personnel. D) Internal auditing.

Answer: B Rationale: Segregation of duties requires that when allocating various duties within the accounting system, management should make sure that no employee is assigned too many different responsibilities. As a general rule, no individual employee should be able to perpetrate and conceal irregularities in the transaction processing system. To accomplish this, management must separate three functions: the authorization function, the recording function, and the custody function.

13. Which of the following is a temporary account category? (A) Assets (B) Expenses (C) Liabilities (D) Common stock

Answer: B Rationale: Temporary accounts are accounts used to gather information for a particular accounting period. Expenses are a temporary subdivision of stockholders' equity.

8. When adjusting for depreciation, which of the following is one effect of the adjustment? A) Accumulated depreciation is debited B) The asset's book value declines C) The cost of the equipment declines D) The market value of the equipment declines

Answer: B Rationale: The adjusting entry creates a credit to accumulated depreciation and a debit to depreciation expense. The credit causes the book value to decline because it increases the contra account that is shown as a deduction from the cost of the equipment on the balance sheet

8. The current ratio is computed as: (A) Current liabilities divided by current assets (B) Current assets divided by current liabilities (C) Current assets minus current liabilities (D) Current assets divided by total assets

Answer: B Rationale: The current ratio of a company is its current assets divided by its current liabilities. The current ratio is a widely used measure of a company's liquidity. A current ratio greater than one implies that a company has more cash and current assets than needed to pay off its current obligations and a ratio of less than one implies the opposite

Which of the following is desirable in a good system of internal accounting control? A) Responsibility and authority for a given function should be shared among several employees B) Appropriate forms, such as checks and sales invoices, should have preprinted control numbers C) All accounting personnel in a firm should be bonded D) To obtain the benefit of specialization, employees should not be rotated among similar jobs

Answer: B Rationale: The use of control numbers on all business documents as a detection control enabling a business to track each check written. Responsibilities should not be shared. The organizational structure of a company defines the lines of authority and responsibility within the company. It informs employees about who is in charge of which functions and to whom each person reports. Requiring job rotation and vacations allows another employee to perform these job responsibilities, often leading to the discovery of fraud. There is no requirement that personnel in a firm should be bonded.

15. Tang Company's average inventory for 2016 was $15,000 and its inventory turnover for 2016 was 5.5; Tang's 2016 days' sales in inventory (computed to one decimal place) is: A) 12.7 days B) 66.4 days C) 68.5 days D) 53.8 days

Answer: B Rationale: 365 / 5.5 = 66.4 days

. The accounting equation states: A) Assets + Liabilities = Stockholders' Equity B) Assets = Liabilities - Stockholders' Equity C) Assets = Liabilities + Stockholders' Equity D) Assets + Stockholders' Equity = Liabilities

Answer: C

13. Which of the following is presented in a statement of stockholders' equity? A) Revenues B) Expenses C) Net income D) Assets

Answer: C

2. Which of the following is not an advantage of the corporate form of business organization? A) The ease with which capital can be raised B) The protection afforded stockholders against personal liability C) Both the business and the owners are taxed D) The relative ease of selling ownership shares

Answer: C

Currently, the organization with the primary responsibility for formulating U.S. generally accepted accounting principles is the: A) American Institute of Certified Public Accountants B) Securities and Exchange Commission C) Financial Accounting Standards Board D) Internal Revenue Service

Answer: C

Which of the following activities is an example of an investing activity? A) Receiving a loan from a bank B) Selling merchandise online C) Purchasing a delivery truck D) Issuing shares of stock in exchange for cash

Answer: C

15. Recording a stock issuance in exchange for cash involves: A) Debiting Cash and crediting Notes Payable B) Debiting Cash and crediting Dividends C) Debiting Cash and crediting Common Stock D) Debiting Common Stock and crediting Cash

Answer: C Rationale: Cash is debited because a cash payment has been received. Common stock is credited to reflect an increase in the amount of common stock outstanding, due to the issuance of common stock.

17. A trial balance that balances is useful because it indicates with certainty that: A) All entries into accounts during the period were made correctly. B) All accounts have normal balances. C) Total debits in the general ledger equal total credits. D) All of the above

Answer: C Rationale: The trial balance serves as an interim check on whether the sum of the debit balances and the sum of the credit balances from the general ledger accounts are equal. If the totals are not equal, it would indicate the presence of some type of recording error. The trial balance also shows all general ledger account balances in one location, which facilitates the preparation of financial statements. The trial balance, however, is not a financial statement.

A company paid employee wages of $48,000 for the month. What would the effect of this transaction on the current month's accounting equation? A) No effect on Assets; $48,000 decrease in Liabilities; $48,000 increase in Stockholders' Equity B) $48,000 increase in Assets; $48,000 increase in Liabilities; No effect on Stockholders' Equity C) $48,000 decrease in Assets; No effect on Liabilities; $48,000 decrease in Stockholders' Equity D) $48,000 decrease in Assets; $48,000 decrease in Liabilities; No effect on Stockholders' Equity

Answer: C Rationale: Wage expense 48,000 Cash 48,000

10. The following amounts and costs of platters were available for sale by Utah Pottery during 2016: Beginning inventory.................. 10 units at $ 82 First purchase.......................... 15 units at $110 Second purchase....................... 30 units at $140 Third purchase......................... 25 units at $130 Utah Pottery has 35 platters on hand at the end of the year. How much is cost of goods sold in dollars at the end of the year according to the weighted-average cost method? A) $9,920 B) $3,720 C) $5,580 D) $3,465 o Equation: o 1st multiply all the units times there designated unit price o 2nd divide the total unit price by the total of all units to get the average unit price o Multiply the average unit price times the units on hand Process: Rationale: (10 units x $82) + (15 units x $110) + (30 units x $140) + (25 units x $130) = $9,920 $9,920 / 80 units = $124.00 45 units sold x $124 = $5,580

Answer: C Rationale: (10 units x $82) + (15 units x $110) + (30 units x $140) + (25 units x $130) = $9,920 $9,920 / 80 units = $124.00 45 units sold x $124 = $5,580

3. Which of the following is a distinguishing characteristic of a deferral? A) It affects at least one liability account B) It always impacts the cash account C) It includes the adjustment of an amount previously recorded in a balance sheet account D) It increases a balance sheet account and decreases an income statement account

Answer: C Rationale: A deferral adjusts an amount previously recorded in a balance sheet account.

. Which of the following accounts normally has a credit balance? A) Accounts Receivable B) Dividends C) Notes Payable D) Rent Expense

Answer: C Rationale: Assets, dividend, and expense accounts normally have debit balances, whereas liabilities, common stock, and revenue accounts normally have credit balances. Notes payable is a liability account, so the normal balance would be a credit balance

. Which of the following accounts normally has a debit balance? A) Accounts Payable B) Common Stock C) Dividends D) Service Revenue

Answer: C Rationale: Assets, dividend, and expense accounts normally have debit balances, whereas liabilities, common stock, and revenue accounts normally have credit balances. So, dividends would have a normal debit balance.

1. Assets are recorded in the balance sheet in order of: (A) Market value (B) Historic value (C) Liquidity (D) Maturity

Answer: C Rationale: Liquidity refers to the ease of conversation to cash. Current assets are to be used during the current operating cycle (starting with cash, short-term investments, accounts receivables, inventories and other assets). Market value and historic value refer to the measurement of assets. Maturity refers to the order in which liabilities are recorded in the balance sheet.

3. Which of the following will properly record the payment of a two-year insurance policy? (Hint: prepaid) A) Increase assets and increase retained earnings B) Increase liabilities and decrease retained earnings C) Increase and decrease assets D) Decrease assets and decrease liabilities

Answer: C Rationale: Prepaid insurance in increased and cash is decreased, both of which are assets.

1. Which of the following is not an internal control component identified in the COSO framework: (A) Risk assessment (B) Monitoring activities (C) Technology (D) Control environment

Answer: C Rationale: The COSO framework identifies five internal control components: (1) the control environment, (2) risk assessment, (3) control activities, (4) information and communication, and (5) monitoring activities.

As of the beginning of 2016, the Let's Move Company had equipment totaling $1,800,000 which was depreciated at $150,000 per year. If Let's Move makes the appropriate adjusting entry at year end, which of the following is one part of the journal entry that will be made? A) Debit Equipment for $150,000 B) Credit Depreciation Expense for $150,000 C) Debit Depreciation Expense for $150,000 D) Debit Accumulated Depreciation for $150,000

Answer: C Rationale: The entry will debit Depreciation Expense for $150,000 and credit Accumulated Depreciation for the same amount.

7. The normal balance of an account is: A) The debit side B) The credit side C) The side on which increases are recorded D) The side on which decreases are recorded

Answer: C Rationale: The normal balance of an account is the side on which increases are recorded. This is because increases in an account are usually greater than, or equal to, the decreases to an account.

Which of the following is one effect of a purchase of $600 of supplies on credit? A) It would decrease liabilities by $600 B) It would decrease cash assets by $600 C) It would increase liabilities by $600 D) It would decrease retained earnings $600

Answer: C Rationale: The purchase on credit creates an account payable. It would increase liabilities by $600. In addition, the supplies account in the asset section of the balance sheet would also increase.

1. Under the accrual basis of accounting: (A) Cash must be received before revenue is recognized. (B) Net income is calculated by matching cash outflows against cash inflows. (C) Events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. (D) The ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

Answer: C Rationale: Under the accrual basis of accounting, events that change a company's financial statements (e.g., sales revenue or expenditures) are recognized in the period when they occur, regardless of when the related cash is received or paid.

11. On January 1, 2016, Clementine Company purchased a new truck for $29,400. Its estimated useful life is seven years or 200,000 miles. The truck's expected salvage value is $1,400. During 2016, the truck was driven 20,000 miles. Assuming units-of-production depreciation, 2016 depreciation expense is: A) $2,940 B) $4,200 C) $2,800 D) $4,000 o Equation: Purchase price of the asset-salvage value/ estimated useful life in miles x miles actually driven

Answer: C Rationale: [($29,400 - $1,400) / 200,000] x (20,000) = $2,800

1. Which of the following is the correct order of the steps in the accounting cycle? A) Adjust, report, analyze, record, and close B) Record, report, analyze, adjust, and close C) Report, analyze, close, record, and adjust D) Analyze, record, adjust, report, and close

Answer: D

14. Which of the following financial statements is a period statement? A) Income statement B) Statement of retained earnings C) Statement of cash flows D) All of the above

Answer: D

16. Recording the borrowing of money for which a note is signed involves: A) Debiting Cash and crediting Notes Receivable B) Debiting Cash and crediting Accounts Payable C) Debiting Cash and crediting Service Fees Earned D) Debiting Cash and crediting Notes Payable

Answer: D Rationale: Cash is debited because cash payment has been received as a result of borrowing money. Notes Payable is credited to reflect an increase in liabilities, due to the borrowing of money.

5. Which of the following assets would not be classified as a current asset? (A) Accounts receivable (B) Prepaid rent (C) Supplies (D) Equipment

Answer: D Rationale: Current assets are cash and other assets that will be converted into cash or used up within the normal operating cycle of the business or one year, whichever is longer. Equipment is not readily converted into cash and is classified as a long-term asset.

10. Debits to which accounts result in an increased balance? A) Assets and common stock B) Revenues and assets C) Common stock and expenses D) Assets and expenses

Answer: D Rationale: The normal balance of an account is the side on which increases are recorded. Assets, dividend, and expense accounts normally have debit balances.

5. Which of the following does not affect stockholders' equity? (Hint: the expanded accounting equation) A) Paying wages to employees B) Receiving cash from an owner C) Selling goods to customers with payment due in 30 days D) Purchasing equipment with payment due in 30 days

Answer: D Rationale: The purchase of equipment (asset) with a payment due in 30 days (liability) does not affect stockholders' equity. All of the other transactions do.

Which of the following has no effect on stockholders' equity? A) Issuing shares of stock B) Expenses and revenues C) Paying dividends D) None of the above

Answer: D Rationale: All of the transactions impact stockholders' equity.

. The distinguishing feature of a temporary account is that any balance in the account at the end of an accounting period is: (A) Carried forward to the next accounting period (B) Reported in the balance sheet (C) Transferred to the Cash account (D) Transferred to a permanent stockholders' equity account

Answer: D Rationale: At the end of the accounting period, temporary account balances are transferred to Retained Earnings, which is a permanent stockholders' equity account.

18. Which of the following errors may escape detection when a trial balance is taken? A) Failing to record or enter a particular transaction B) Entering a transaction more than once or entering one or more amounts in the wrong accounts C) Making an error that exactly offsets the effect of another error D) All of the above

Answer: D Rationale: If any of these errors occurred, the debits and credits of the trial balance would still be equal; therefore the errors may go undetected.

10. Gallery Company calculates that interest of $1,800 has accrued at December 31 on outstanding notes payable. How should Gallery record this on December 31? (A) Interest Expense 1,800 Cash 1,800 (B) Interest Payable 1,800 Interest Expense 1,800 (C) Prepaid Interest 1.800 Interest Expense 1,800 (D) Interest Expense 1,800 Interest Payable 1,800

Answer: D Rationale: Interest expense for the month of December must be recognized as expense. A liability (payable) must be recorded since the amount has not yet been paid.

4. From the viewpoint of good internal accounting control, which of the following individuals would be the proper person to prepare bank reconciliations for a company that receives cash payments both through the mail and from customers in person? A) The individual who opens the company's mail and lists the payments received B) The individual who works in the customer service department and receives payments from customers who pay in person C) The individual who deposits the daily cash receipts in the bank D)None of the above

Answer: D Rationale: Internal audit is an independent department; it has no recurring custody, recording, or authorization duties related to accounting transactions and therefore should prepare the monthly bank reconciliation and create any needed journal entries

5. The following hammers were available for sale during the year for Waiculus Tools: Beginning inventory ................... 10 units at $ 80 First purchase ......................... 15 units at $100 Second purchase ..................... 30 units at $120 Third purchase ........................ 25 units at $130 Waiculus has 30 hammers on hand at the end of the year. What is the dollar amount of COST OF GOOD's SOLD for the year according to the FIFO (first-in, first-out) method? A) $3,950 B) $5,300 C) $3,150 D) $3,900 o Equation: o 1st: 1st step: since we're trying to find the cost of goods sold start from the bottom seeing how much you must take from each unit to get to the amount on hand the whole of 10 from and 15 l and 5 to get to 30 o 2nd: Multiply the acquired differences by there designated units (10 x $80) + (15 x $100) + (25 x $120) o 3rd: find the product

Answer:B

13. Kirsten Company presented the following data at the end of 2016: Cash $900,000 Accounts receivable 1,600,000 Merchandise inventory 1,400,000 Prepaid insurance 150,000 Property & equipment 4,000,000 Accounts payable 350,000 Unearned revenue 400,000 Wages payable 800,000 Bonds payable 2,000,000 Determine the current ratio for Kirsten Company (rounded). (A) 4.41 (B) 4.23 (C) 2.61 (D) 2.38 o Equation: Rationale: Current ratio = Current assets / Current liabilities

Process • Add up all the current assets and the current liabilities then use the equation. • X = ($900,000 + $1,600,000 + $1,400,000 + $150,000) / ($350,000 + $400,000 + $800,000) • X = $4,050,000 / $ 1,550,000 • X = 2.61

8. Lumber Company imports and sells a product produced in Canada. In the summer of 2016, a natural disaster disrupted production, affecting its supply of product. Lumber Company uses the LIFO inventory method. On January 1, 2016, Lumber Company's inventory records were as follows: Year purchased Quantity (units) Cost per unit Total cost 2014 2,000 $ 80 $160,000 2015 5,000 $110 550,000 Total 7,000 $710,000 Through mid-December of 2016, purchases were limited to 8,000 units, because the cost had increased to $160 per unit. Lumber sold 14,200 units during 2016 at a price of $204 per unit, which significantly depleted its inventory. Assume that Lumber Company makes no further purchases during 2016. Compute Lumber Company's gross profit for 2016. A) $ 881,200 B) $2,073,200 C) $2,494,000 D) $ 970,800 o Equation: o 1st: using LIFO method subtract the designated units until you get to 14,200 so 8,000 units sold 5,000 units sold and subtract them both from 14,200 you are now left with 1,200 o 2nd: now multiply 1,200 times 80 since that's where you left off in the equation o 3rd: now multiply Cost of goods sold (8,000 x $160) + (5,000 x $110) + (1,200 x $80)= 1,926,000 o 4th: calculate sales revenue :Sales revenue 14,200 x $204 = $2,896,800 from 1.926,000 o 5th: you now get $ 970,800

Process: Answer: D Rationale: Sales revenue 14,200 x $204 = $2,896,800 Cost of goods sold (8,000 x $160) + (5,000 x $110) + (1,200 x $80) 1,926,000 Gross profit $ 970,800 Answer is D.

4. John Den Bear Company had a $150,000 beginning balance in Accounts Receivable and a $6,000 credit balance in the Allowance for Doubtful Accounts. During the year, credit sales were $600,000 and customers' accounts collected were $590,000. Also, $4,000 in worthless accounts were written off. What was the net amount of receivables included in the current assets at the end of the year, before any provision was made for doubtful accounts? A) $130,000 B) $126,000 C) $154,000 D) $120,000 o Equation: o 1st: Year end allowance for doubtful accounts= credit balance for the allowance of doubtful accounts-worthless accounts o 2nd: Year end accounts recievable=Begginning balance+ credit sales-customers accounts collected-worthless accounts o 3rd: net accounts recievable= year end accounts recievable-year end allowance for doubtful accounts

Process: Year-end Allowance for Doubtful Accounts = $6,000 - $4,000 = $2,000 Year-end Accounts receivable = $150,000 + $600,000 - $590,000 - $4,000 = $156,000 Net Accounts Receivable = $156,000 - $2,000 = $154,000 • Answer:C

14. Keith Company paid Major Company for merchandise with an $8,000, 2-month, 9% note dated April 1. If Keith Company pays the note at maturity, what entry should Major make at that time? A) Cash 8,720 Interest income 720 Notes receivable 8,000 B) Notes payable 8,000 Interest expense 720 Cash 8,720 C) Cash 8,120 Interest income 120 Notes receivable 8,000 D) Notes payable 7,880 Interest expense 120 Cash 8,000 o Equation: amount of money x interest rate x # of months/ 12

Process: Collected Keith Company note ($8,000 x 9% x 2/12 = $120) Answer:C

7. On January 1, 2016, Ceramic, Inc. purchased a new machine for $160,000. Its estimated useful life is eight years with an expected salvage value of $12,000. Assuming double-declining balance depreciation, 2016 depreciation expense is: A) $20,000 B) $13,500 C) $37,000 D) $40,000 o Equation: purchase price of new machine x 2 / number of years for estimated useful life

Process: $160,000 x (2/8) = $40,000 • Answer:D

10. Data from the financial statements of Dils Brothers Co. and J. Cox, Inc. are presented below (in millions): Dils Brothers Co. J. Cox, Inc. Total liabilities, 2016 $70,914 $47,422 Total liabilities, 2015 72,208 60,092 Total assets, 2016 100,372 73,744 Total assets, 2015 94,114 70,416 Revenue, 2016 306,932 163,040 Net income, 2016 280 1,572 To the nearest hundredth, what is the 2016 debt-to-total-assets ratio for Dils Brothers Co.? (A) 0.71 (B) 0.26 (C) 3.78 (D) 44.16 o Equation: Debt-to-total-assets = Total liabilities / Total assets

Process: $70,914 / $100,372= 0.71 • Answer: A

17. Rain Company paid Drop Company for merchandise with an $18,000, 90-day, 10% note dated December 11, 2016. What entry should Drop Company make in its books at the end of the accounting period on December 31, 2016? What entry should Drop Company make in its books at the end of the accounting period on December 31, 2016? A) Interest receivable 100 Interest income 100 B) Cash 100 Interest receivable 100 C) Interest income 100 Interest receivable 100 D) Cash 100 Interest income 100 o Equation: amount of money x interest rate x number of days/360

Process: ($18,000 x 10% x 20/360 = $100) • Answer: A

6. On January 1, 2016, Roberto, Inc. acquired a new machine for $186,750. Its estimated useful life is nine years with an expected salvage value of $6,750. Assuming straight-line depreciation, 2016 depreciation expense is: A) $20,750 B) $16,500 C) $19,000 D) $20,000 o Equation: Price of acquired new machine-salvage value/ number of estimated life.

Process: ($186,750 - $6,750) / 9 = $20,000 • Answer:D

16. On November 16, 2016, Soccer Company borrowed $20,000 from Ball Company and gave a 90-day, 12% note. On December 31, 2016 the end of the accounting period, Ball makes the: following entry: A) Notes receivable 300 Interest income 300 B) Interest receivable 600 Interest income 600 C) Cash 300 Interest income 300 D) Interest receivable 300 Interest income 300 o Equation: amount of money x interest rate x number of days/360

Process: ($20,000 x 12% x 45/360 = $300) • Answer:D

15. On December 11, 2016, Hoover gave a $20,000, 60-day, 9% note to Jay in payment of an account. On December 31, 2016, Jay should record: A) $100 interest income B) $100 interest expense C) $300 interest income D) $300 interest expense o Equation: amount of money x interest rate x difference of dates/360= interest income:

Process: ($20,000 x 9% x 20/360 = $100) B

13. Beginning and ending Cash account balances of Moonbeam, Inc. were $38,000 and $16,000, respectively. If total cash received during the period was $74,000, what amount of cash was paid out during the period? A) $106,000 B) $ 96,000 C) $ 60,000 D) $ 92,000 Equation: Beginning cash + Cash receipts - Cash payments = Ending Cash

Process: ($38,000 + $74,000 - X = $16,000) (X = $38,000 + $74,000 - $16,000) = $96,000 • Answer:B

13. Quasim Corporation sells three different products. The following information is available on December 31: Inventory Item Units Cost per unit Market value per unit X 100 $8.00 ...........$6.00 Y 200 $4.00 ..........$2.00 Z 500 $6.00.......... $8.00 When applying the lower of cost or market rule to each item, what will Quasim report as its cost of ending inventory on December 31? A) $4,600 B) $4,400 C) $5,300 D) $4,000 o Equation: all the units x there lower unit price= cost ending inventory

Process: (100 x $6) + (200 x $2) + (500 x $6) = $4,000 • Answer:D

4. The following inventory was available for sale during the year for Thomasina Tools: Beginning inventory ................. 10 units at $ 80 First purchase ........................ 15 units at $110 Second purchase .................... 30 units at $140 Third purchase ....................... 20 units at $130 Thomasina has 25 units on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the FIFO (first-in, first-out) method? A) $3,300 B) $5,950 C) $3,150 D) $3,900 o Equation: o 1st step: since we're trying to find the dollar amount of the ending inventory begin from the bottom and seeing how much you must take from each unit to get to the amount on hand the whole of 20 from 30 leaves you with 5 o 2nd: Multiply the acquired differences by there designated units (20 x $130) + (5 x 140) o 3rd: find the product

Process: (20 x $130) + (5 x $140) = $3,300 • Answer: A

11. Assume December 31 is a Monday. Weld-Rite Company's wages are paid every Friday, and the weekly payroll (for five days) amounts to $12,000. To record the correct amount of expense for December Weld-Rite makes the following entry on December 31: (A) Wages Expense 12,000 Wages Payable 12,000 (B) Wages Expense 9,600 Wages Payable 9,600 (C)Wages Expense 2,400 Wages Payable 2,400 (D) Wages Payable 2,400 Wages Expense 2,400 o Equation: 1/number of days x amount of money

Process: 1/5 x $12,000 = $2,400 of Wages Expense • Answer: C

11. Data from the financial statements of Crafty Crafts and Hobbies, Inc. are presented below (in millions): Crafty Crafts Hobbies, Inc. Total liabilities, 2016 $31,957 $25,461 Total liabilities, 2015 36,104 30,046 Total assets, 2016 46,186 32,872 Total assets, 2015 46,514 35,208 Net sales, 2016 161,466 81,702 Net income, 2016 1,040 1,766 To the nearest hundredth of a percent, what is the 2016 return on sales ratio for Crafty Crafts? (A) 0.30% (B) 0.38% (C) 0.64% (D) Not enough information provided o Equation: Net income / Net sales

Process: = $1,040 / $161,466 = 0.0064= 0.64% • Answer:C

9. Oakpark, Inc.'s $180,000 Accounts Receivable balance at December 31 consisted of $160,000 current balances and $20,000 past-due balances. At December 31, the Allowance for Doubtful Accounts had a credit balance of $1,600. Oakpark estimated that 2% of current balances and 15% of past-due balances will prove uncollectible. The adjusting entry to record credit losses is: A) Bad Debts Expense 5,800 Allowance for Doubtful Accounts 5,800 B) Bad Debts Expense 4,600 Allowance for Doubtful Accounts 4,600 C) Bad Debts Expense 4,200 Accounts Receivable 4,200 D) Bad Debts Expense 7,400 Allowance for Doubtful Accounts 7,400 o Equation: o 1st: Allowance required=( % of current balance x current balance)+(% of past due balance x past due balance)=desired balance o Required adjusting entry= desired balance-allowance for doubtful accounts credit balance

Process: Answer: B Rationale: Allowance required = (2% x $160,000) + (15% x $20,000) = $6,200 desired balance Required adjusting entry = $6,200 - $1,600 = $4,600

12. At year-end, The Chiller Shop has a freezer on hand that has been used as a demonstration model. The freezer cost $780 and sells for $1,500 when new. In its present condition, the freezer will be sold for $760. Related selling costs are an estimated $40. At what amount should the freezer be carried in inventory? Related selling costs are an estimated $40. At what amount should the freezer be carried in inventory? A) $750 B) $760 C) $720 D) $800 o Equation: Price that the good was sold at-selling cost= price be carried at inventory

Process: Carry at net realizable value: $760 - $40 = $720 • Answer: C

11. Hooper Company uses the periodic inventory system. For the current month, the beginning inventory consisted of 200 units that cost $130 each. During the month, the company made two purchases: 300 units at $138 each and 150 units at $140 each. The company also sold 500 units during the month. Using the periodic weighted-average cost method, what is the cost of ending inventory? A) $67,540 B) $20,400 C) $21,000 D) $66,800 o Equation: o 1st all unit price x cost= total unit price times cost o 2nd Total unit price times cost/ total units=average unit cost at month end o 3rd last units x average unit cost method at month end

Process: Rationale: (200 x $130) + (300 x $138) + (150 x $140) = $88,400 Average unit cost at month end = $88,400 / 650 = $136; 150 Units x $136 = $20,400 • Answer:B

10. Mario Company's Accounts Receivable balance at December 31 was $300,000 and there was a credit balance of $1,400 in the Allowance for Doubtful Accounts, The year's sales were $1,800,000. Mario estimates credit losses for the year at 1.5% of sales. After the appropriate adjusting entry is made for credit losses, what is the net amount of accounts receivable included in the current assets at year-end? A) $300,000 B) $271,600 C) $325,400 D) $277,400 o Equation: o 1st:Bad debt expense= years sales x % of estimated credit losses o 2nd: allowance for doubtful accounts= credit balance+ bad debt expense o 3rd" net accounts recievable= accounts recievable balance-allowance for doubtful accounts

Process: Rationale: Bad Debt Expense = $1,800,000 x 1.5% = $27,000 Allowance for Doubtful Accounts = $1,400 + $27,000 = $28,400 Net Accounts Receivable = $300,000 - $28,400 = $271,600 • Answer:B

7. Assume the following unadjusted account balances at the end of the accounting period for Johanna Company: Accounts Receivable, $100,000; Allowance for Doubtful Accounts, $1,400 (debit balance); and Net sales, $1,200,000. If Johanna's past experience indicates credit losses of 1% of net sales, the adjusting entry to estimate doubtful accounts is: A) Bad Debts Expense 12,000 Accounts Receivable 12,000 B) Bad Debts Expense 10,600 Allowance for Doubtful Accounts 10,600 C) Bad Debts Expense 13,400 Allowance for Doubtful Accounts 13,400 D) Bad Debts Expense 12,000 Allowance for Doubtful Accounts 12,000 o Equation: Bad debt expense= net sales x % of past credit losses

Process: X = $1,200,000 x 1% = $12,000 • Answer:D

18. Annabeth, Inc. had net sales of $1,530,000 during 2016. On January 1, 2016, Annabeth's accounts receivable were $320,000. On December 31, 2016, Annabeth's accounts receivable were $400,000. What was Annabeth's accounts receivable turnover for 2016? A) 4.25 B) 3.03 C) 3.83 D) 4.78 o Equation: Accounts receivable turnover = Net sales / 1st account recievable + 2nd accounts recievable/2

Process: X = $1,530,000 / [($320,000 + $400,000) / 2] = 4.25 • Answer:A

14. Presented below is the Statement of Cash Flows for Eva Originals Clothing Company: EVA ORIGINALS CLOTHING COMPANY Statement of Cash Flows For Year Ended December 31, 2016 Cash flows from operating activities: Received from sales to customers $ 1,000,000 Interest income received 20,000 Payment for inventory (160,000) Payment to employees (120,000) Net increase from operating activities $ 740,000 Cash flows from investing activities: Payment for stock of another company (100,000) Payment for purchase of equipment (400,000) Net decrease from investing activities $(500,000) Cash flows from financing activities: Received from loans from bank $ 100,000 From issuance of common stock 300,000 From issuance of bonds 200,000 Payment of dividends (40,000) Net increase from financing activities $ 560,000 Net increase in cash $ 800,000 Determine the company's free cash flow: (A) ($300,000) (B) $240,000 (C) $360,000 (D) $340,000 o Equation: Free cash flow = Cash flow from operations - Capital expenditures

Process: X = (Net increase (in cash) from operating activities) - (Payment for purchase of equipment) X = $740,000 - $400,000 X = $340,000

8. M. Fields, Inc. wishes to accumulate $1,200,000 to be used to pay off a balloon note at the end of 2 years. How much will M. Fields invest today to accumulate the desired amount if the investment earns an annual rate of 12%? (Select the closest amount.) A) 956,632 B) 845,563 C) 1,000,000 D) 1,685,914 o Equation: PV=FV/(1+r)^n or number of years

Process:1,200,000/(1+12%)*(1+12%)=1200000/1.2544=956,632

9. The following amounts and costs of platters were available for sale by Corpus Christy Ceramics during 2016: Beginning inventory................. 10 units at $ 82 First purchase.......................... 15 units at $110 Second purchase...................... 30 units at $140 Third purchase........................ 25 units at $130 Corpus Christy Ceramics has 35 platters on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the weighted-average cost method? A) $9,920 B) $6,200 C) $3,4653.0 D) $4,340 o Equation: o 1st multiply all the units times there designated unit price o 2nd divide the total unit price by the total of all units to get the average unit price o Multiply the average unit price times the units on hand Process: (10 units x $82) + (15 units x $110) + (30 units x $140) + (25 units x $130) = $9,920 $9,920 / 80 units = $124 35 units x $124 = $4,340

Rationale: (10 units x $82) + (15 units x $110) + (30 units x $140) + (25 units x $130) = $9,920 $9,920 / 80 units = $124 35 units x $124 = $4,340 • Answer:D

5. Boulder Beaver Company had a $300,000 beginning balance in Accounts Receivable and a $12,000 credit balance in the Allowance for Doubtful Accounts. During the year, credit sales were $1,200,000 and customers' accounts collected were $1,180,000. Also, $8,000 in worthless accounts were written off. What was the net amount of receivables included in the current assets at the end of the year, before any provision was made for doubtful accounts? A) $260,000 B) $252,000 C) $308,000 D) $240,000 o Equation: o 1st: credit balance- minus worthless accounts= Year end balance for doubtful accounts o 2nd: Year-end accounts recievable=beginning balance+ credit sales-customers accounts collected-worthless accounts o Net accounts recievable=year end accounts recievable-year-end allowance for doubtful accounts

Rationale: Year-end Allowance for Doubtful Accounts = $12,000 - $8,000 = $4,000 Year-end Accounts receivable = $300,000 + $1,200,000 - $1,180,000 - $8,000= $312,000 Net Accounts Receivable = $312,000 - $4,000 = $308,000

20. Annabeth, Inc. had net sales of $1,530,000 during 2016. On January 1, 2016, Annabeth's accounts receivable were $320,000. On December 31, 2016, Annabeth's accounts receivable were $400,000. What was Annabeth's average collection period for 2016? A) 85.9 days B) 15.5 days C) 95.4 days D) 43.0 days o Equation: Average collection period = 365 /(net sales (1st account recieavable + 2nd account recievable/2)

...Answer: A Rationale: Average collection period = 365 / Accounts receivable turnover X = 365 / ($1,530,000 / [($320,000 + $400,000) / 2]) = 85.9 days

12. Which of the following is a permanent account category? (A) Revenues (B) Dividends (C) Expenses (D) Liabilities

Answer: D Rationale: Permanent accounts are accounts presented on the balance sheet. Revenues, dividend, and expenses are presented on the income statement.

Answer: B Rationale: $120,000 x 2/5 = $48,000 ($120,000 - $48,000) x 2/5 = $28,800 ($72,000 - $28,800) x 2/5 = $17,280 $120,000 - ($48,000 + $28,800 + $17,280) = $25,920

10. Blue Moon Company purchased a machine on January 1, 2016 for $120,000, with a 5-year life, and a $12,000 residual life. Compute the book value of the machine on December 31, 2018 if the company uses the double-declining balance method of depreciation. A) $20,000 B) $25,920 C) $21,600 D) $48,000 o Equation: o 1st:Purchase Price of an asset x 2/ estimated number of years for purchase price of an asset= depreciation expense o 2nd: Purchase price of an asset- depreciation expense x 2/ estimated number of years for asset= 2nd depreciation expense o 3rd:(Purchase price of asset - 1st depreciation expense)= difference o 4th: difference - 2nd depreciation expense x 2/ number of years for estimated useful life=3rd depreciation expense o Beginning-(1st depreciation expense +second depreciation expense+3rd depreciation expense)=book value of the machine

Which of the following statements about operating activities is not correct? A) Operating activities refers to the day-to-day activities of producing and selling a product or providing a service. B) Creditors and stockholders beliefs about a company's ability to generate a profit are unimportant. C) Operating activities are critical for a business. D) If a company is unable to generate income from its operations it is very likely that it will fail.

Answer: B

11. How are the balance sheet and the statement of cash flows linked? A) By the cash balance B) By the amount of total retained earnings C) By the total shareholder equity D) By the amount of net income

Answer: A

12. An income statement: A) Reports the results of operations for a period B) Reports on the events causing a change in stockholders' equity during a period C) Presents a firm's assets, liabilities, and stockholders' equity on a given date D) Reports cash inflows and outflows during a period

Answer: A

Equity financing involves: A) Selling shares of stock to investors B) Borrowing money from a bank C) Issuing bonds payable D) Repayment of principal and interest to a creditor

Answer: A

2. Which one of the following is not a reason for which adjusting entries are made? A) To close the income statement accounts and prepare them for the following year's activity B) To allocate used or expired assets to reflect expenses incurred in the period C) To allocate the earned portion of unearned revenue to reflect revenues earned during the period D) To accrue expenses to reflect expenses incurred in the period that are not yet paid or recorded

Answer: A Rationale: Adjusting entries are made for all the reasons above except to close out the accounts. Answer A describes closing entries.

1. Which of the following forms of business organizations exists as a legal entity for tax purposes? A) A sole proprietorship B) A partnership C) A corporation D) A labor union

Answer: C

The primary components of the stockholders' equity section of a balance sheet for a corporation are: (A) A capital amount for each stockholder in the corporation (B) Net income and retained earnings (C) Common stock and dividends (D) Common stock and retained earnings

Answer: D Rationale: Stockholders' equity is the residual ownership interest in the assets of a business after its liabilities have been paid off, The stockholders; equity of a corporation is divided into two main categories: amounts invested by stockholders (common stock) and the cumulative net income of a business that has not yet been distributed to its stockholders as a dividend (retained earnings).

The balance sheet format that reports assets first and then, beneath the assets, reports the liabilities and stockholders' equity is called the: (A) Account form (B) Stack form (C) Classified form (D) Report form

Answer: D Rationale: The balance sheet format that reports assets first and then, beneath the assets, reports the liabilities and stockholders' equity is called the report form. This is one of the two generally accepted formats for presenting a classified balance sheet.

15. Which one of the following is not a key linkage among the four primary financial statements? A) The expenses in the income statement link to the total liability balance. B) The statement of cash flows links to ending cash balance reported on the balance sheet. C) The income statement links to the ending retained earnings in the statement of stockholders' equity D) The statement of stockholders' equity links to ending retained earnings on the balance sheet.

Answer:B

20. The accounting equation for Hephalump Enterprises is as follows: Assets = Liabilities + Stockholders' Equity $360,000 = $180,000 + $180,000 If the company now purchases a truck on account for $30,000, the accounting equation will change to: Assets Liabilities Stockholders' Equity A) $390,000 = $180,000 + $210,000 B) $390,000 = $198,000 + $192,000 C) $390,000 = $210,000 + $180,000 D) $360,000 = $180,000 + $180,000 Equation: Assets = Liabilities + Stockholders' Equity

Equation: Assets = Liabilities + Stockholders' Equity Process: Original Balance $360,000 = $180,000 + $180,000 Purchase Truck $30,000 = $30,000 + _________ Total $390,000 = $210,000 + $180,000 • Answer:C

8. Assume the following unadjusted account balances at the end of the accounting period for Morgen Company: Accounts Receivable, $200,000; Allowance for Doubtful Accounts, $2,800 (debit balance); and Net sales, $2,400,000. If Morgen's past experience indicates credit losses of 1% of net sales, the adjusting entry to estimate doubtful accounts is: A) Bad Debts Expense 24,000 Accounts Receivable 24,000 B) Bad Debts Expense 21,200 Allowance for Doubtful Accounts 21,200 C) Bad Debts Expense 26,800 Allowance for Doubtful Accounts 26,800 D) Bad Debts Expense 24,000 Allowance for Doubtful Accounts 24,000 o Equation: Rationale: Bad debt expense = Credit Sales x % of past credit losses

Process: X = $2,400,000 x 1% = $24,000 • Answer:D

14. For 2016, Brutus Company reported sales of $1,800,000, cost of goods sold of $1,200,000, and a gross profit of $600,000. Brutus's inventory at January 1, 2016 was $340,000; the inventory at December 31, 2016 was $500,000. Brutus's 2016 inventory turnover is: A) 7.20 B) 4.27 C) 2.86 D) 2.08 o Equation: cost of goods sold/ (1st inventory+ second inventory)/2= inventory turnover

Process:$1,200,000 / [($500,000 + $340,000) / 2] = 2.86 • Answer: C

12. The following amounts have been taken from the recent financial statements for Emma Enterprises: Current liabilities: $890,000: Cash from operations: $4,200,000: Expenditures on PPE :$1,500,000 Dividends (cash): $130,000 Which of the following amounts is the free cash flow for Emma Enterprises? (A) $ 530,000 (B) $ 660,000 (C) $2,050,000 (D) $2,700,000 o Equation: Free cash flow = Cash flow from operations - Capital expenditures

X = (Cash from operating activities) - (Payment for expenditures on PPE) • Process:X = $4,200,000 - $1,500,000 = $2,700,000

7. On September 1, the beginning inventory for Burkemper Company was 110 units at $100 each. Purchases and sales during September were: Purchases During Sept 2016 Sales During Sept 2016 Sept 7 120 units @ $112 Sept 12 70 units Sept 17 70 units @ $ 88 Sept 22 110 units Sept 25 100 units @ $ 84 Sept 29 90 units What is the cost of ending inventory for Burkemper Company on September 30 if the periodic LIFO (last-in, first-out) costing method is used? A) $14,320 B) $11,040 C) $13,240 D) $13,000

o Equation: o 1st Beginning inventory+ unit purchased= total units purchased o 2nd add all the units sold o 3rd units purchased-units sold= ending inventory o Ending inventory-beginning inventory=remaining inventory o Remaining inventory x original beginning inventory price before ending inventory was subtracted + beginning inventory x its designated price o Process in action o 110+ (120+70+100)=400 o 400-(70+110+90)=130 o 110-130 o 110x100 since it's beginning inventory o 20x112 Answer: C Rationale: (110 x $100) + (20 x $112) = $13,240

5. The Green Mango Company's Office Supplies account had a beginning balance of $4,000. During the month, purchases of office supplies totaling $1,000 were debited to the Office Supplies account. If $1,500 worth of office supplies is still on hand at month-end, w(A) Office Supplies Expense 1,500 Office Supplies 1,500 (B) Office Supplies 1,500 Office Supplies Expense 1,500 (C) Office Supplies Expense 3,500 Office Supplies 3,500 (D) Office Supplies 3,500 Office Supplies Expense 3,500 hat is the proper adjusting entry? Equation: Beginning balance+amount of money still on hand-debited amounts

• Process: $4,000 + $1,000 - $1,500 = $3,500 o Answer:C Note: Its from office supplies to supplies expense

11. Hooper Company uses the periodic inventory system. For the current month, the beginning inventory consisted of 200 units that cost $130 each. During the month, the company made two purchases: 300 units at $138 each and 150 units at $140 each. The company also sold 500 units during the month. Using the periodic weighted-average cost method, what is the cost of ending inventory? A) $67,540 B) $20,400 C) $21,000 D) $66,800 Equation: 1st:Multiply all the units times there designated unit prices 2nd: divide the total unit price by the total amount of units 3rd: subtract the total amount of units from the units sold at the end of the month 4th: multiply the subtracted amount times the divided amount of total units

• Process: Rationale: (200 x $130) + (300 x $138) + (150 x $140) = $88,400 • Average unit cost at month end = $88,400 / 650 = $136; 150 Units x $136 = $20,400 Answer:B

9. Susan Lane received $5,000 from a tenant on December 1 for five months' rent of an office. This rent was for December, January, February, March, and April. If Susan debited Cash and credited Unearned Rental Income for $5,000 on December 1, what necessary adjustment would be made on December 31? (A) Unearned Rental Income 1,000 Rental Income 1,000 (B) Rental Income 4,000 Unearned Rental Income 4,000 (C) Unearned Rental Income 4,000 Rental Income 4,000 (D) Rental Income 1,000 Unearned Rental Income 1,000 Equation: 1/# of months x amount of money received

• Process: Rationale: Transfer 1/5 x $5,000 = $1,000 from o Answer:A

15. Chocolate Mountain Company has beginning retained earnings of $300,000, earns a net income of $50,000, and pays dividends of $6,000 during the period. The balance in Chocolate Mountain's ending retained earnings is: (A) $344,000 (B) $244,000 (C) $356,000 (D) $350,000 o Equation: Ending retained earnings = Beginning retained earnings + Net income (loss) - Dividends

• Process: X = $300,000 + $50,000 - $6,000 • X = $344,000