Chapter 5

When a manufacturer invests in short-term marketable securities: A. the return on investment is more important than the risk involved. B. the securities are likely to have a maturity date more than a year in the future. C. the market value of the securities is likely to fluctuate significantly. D. risk avoidance is of great importance.

risk avoidance is of great importance.

16. Trading and Available-for-Sale securities are reported on the balance sheet at: A. net realizable value. B. historical cost. C. weighted average cost. D. market value.

market value.

15. If an organization purchases $700 of supplies on account, with terms of 2/15, n50: A. $650 must be paid within 15 days of the invoice date. B. $698 must be paid within 50 days of the invoice date. C. $686 can be paid within 15 days of the invoice date, or $700 must be paid within 50 days of the invoice date. D. $686 can be paid within 15 days of the invoice date, or $714 must be paid within 50 days of the invoice date.

$686 can be paid within 15 days of the invoice date, or $700 must be paid within 50 days of the invoice date.

30. Which of the following is true regarding notes receivables? A. A notes receivable is always a long-term asset. B. A notes receivable is always a current asset. C. A note is a more formal document than an account receivable. D. A note is a less formal document than an account receivable.

A note is a more formal document than an account receivable.

2. Which of the following is the correct balance sheet presentation for current assets? A. Cash, inventories, account receivables, prepaid expenses. B. Cash equivalents, cash, other current assets, accounts receivable. C. Accounts receivable, inventories, prepaid expenses, other current assets. D. Marketable securities, cash, notes receivable, prepaid expenses.

Accounts receivable, inventories, prepaid expenses, other current assets.

42. Assume that on September 1, 2013, a 6-month rent payment for $3,000 per month (for a total of $18,000) was made with respect to a commercial lease that the company entered into on that date as a tenant. The company took occupancy of the rented space immediately. The lease term will expire on February 28, 2014. The $18,000 payment was recorded as a debit to Prepaid Rent on September 1, 2013. The adjusting entry on December 31, 2013, is as follows: A. Option A B. Option B C. Option C D. Option D

Debit Rent Expense 12 Cr. Prepaid Rent 12

24. When costs are rising over time: A. LIFO results in higher profits that FIFO. B. Cost of goods sold using the weighted average method will be greater than LIFO cost of goods sold. C. ending inventory balances will be greater under LIFO. D. FIFO results in higher profits than LIFO.

FIFO results in higher profits than LIFO.

39. Which of the following is (are) true regarding cost flow assumptions? A. Manufacturing firms are required to use FIFO. B. Service firms are required to use LIFO. C. If a firm uses FIFO for tax purposes, then FIFO must be used for financial reporting purposes. D. If a firm uses LIFO for tax purposes, then LIFO must be used for financial reporting purposes. E. All of these.

If a firm uses LIFO for tax purposes, then LIFO must be used for financial reporting purposes.

40. Which of the following is NOT an example of an inventory account a manufacturing firm might use? A. Work in process inventory. B. Finished goods inventory. C. Merchandise inventory. D. Raw materials inventory.

Merchandise inventory.

28. Which of the following inventory accounting systems has been made much more feasible as a result of computer systems developments? A. Periodic. B. Physical. C. Perpetual. D. Just-in-time.

Perpetual

8. The accrual of interest on short-term marketable securities results in: A. an increase in current assets and a decrease in net income. B. an increase in current assets and an increase in net income. C. an increase in noncurrent assets and an increase in liabilities. D. an increase in current liabilities and an increase in net income.

an increase in current assets and an increase in net income.

1. The current assets of most companies are usually made up of: A. assets that are currently used in the operations of the company. B. cash and assets expected to be converted to cash within a year. C. a very small proportion (less than 10%) of the total assets of the entity. D. cash, marketable securities, and accounts and notes receivable.

cash and assets expected to be converted to cash within a year.

10. The allowance for uncollectible accounts is a(n): A. asset. B. contra current asset. C. expense. D. contra revenue.

contra current asset.

3. The principal reason for reconciling the cash balance per books with the balance shown on the bank statement is to: A. determine the amount of cash in the account actually available to the entity. B. satisfy generally accepted accounting principles. C. verify the amount of petty cash on hand. D. determine whether or not the entity has issued an NSF check.

determine the amount of cash in the account actually available to the entity.

20. An accounts receivable results from the sale of: A. property, plant, and equipment for cash. B. goods and services to customers on account. C. goods and services to customers for cash. D. the firm's common stock.

goods and services to customers on account.

26. One of the principal reasons for selecting the LIFO cost flow assumption instead of the FIFO cost flow assumption in an inflationary economic environment is that: A. net income will be higher. B. income taxes will be lower. C. balance sheet inventory values will be higher. D. a higher selling price can be established.

income taxes will be lower.

6. A cash equivalent is a current asset that: A. will be converted to cash within one year. B. will be converted to cash within one month. C. is readily convertible into cash with a minimal risk. D. is readily convertible into cash with a substantial risk. E. none of these.

is readily convertible into cash with a minimal risk.

27. The balance sheet valuation of inventories is: A. lower of cost or market. B. lower of selling price or cost. C. lower of realizable value or selling price. D. cost, regardless of the cost of replacing the inventory.

lower of cost or market.

14. An organization's system of internal control is designed primarily to: A. ensure that no employees steal the organization's property. B. increase efficiency by letting one employee handle all aspects of a transaction from beginning to end. C. ensure that the organization's balance sheet will always balance. D. provide an operating framework for all employees as they work to achieve the organization's goals.

provide an operating framework for all employees as they work to achieve the organization's goals.

41. The reason for recording a prepaid expense as a current asset is: A. that the prepaid item will be returned for a cash refund. B. that the prepaid item has not yet become an expense. C. that the expense has been incurred but not yet paid. D. to avoid recognizing an expense so net income will be higher for the current accounting period.

that the prepaid item has not yet become an expense.

23. One inventory cost flow assumption will result in different cost of goods sold from another inventory cost flow assumption only if: A. inventory quantities change from the beginning to end of the year. B. a new product is added to inventory during the year. C. the cost of inventory items changes during the year. D. price levels do not change during the year.

the cost of inventory items changes during the year.

38. The valuation of short-term marketable securities on the balance sheet is likely to be for an amount that is approximately equal to the cost of these investments because: A. the market value of short-term marketable securities does not fluctuate from cost. B. the high quality and close maturity date of the securities cause their market values to be relatively stable. C. generally accepted accounting principles require that short-term marketable securities be reported at cost. D. the question statement is false; the valuation of short-term marketable securities on the balance sheet is not likely to be for an amount that is approximately equal to the cost of these investments.

the high quality and close maturity date of the securities cause their market values to be relatively stable.

4. For which of the following reconciling items would an adjusting entry be necessary on the company's book? A. A deposit in transit. B. An error by the bank. C. Outstanding checks. D. A bank service charge.

A bank service charge.

When a firm uses the LIFO inventory cost flow assumption:

better matching of revenue and expense is achieved than under FIFO.

17. Which of the following is(are) a category for securities? A. Trading. B. Held-to-maturity. C. Available-for-sale. D. All of these.

All of these.

11. Bad debt expense is recognized in the same accounting period as the revenue that is related to the receivable because: A. the accounts receivable asset should be stated at original cost. B. the exact amount of the losses from bad debts is known. C. revenues should be stated at realizable value. D. all costs incurred in the current period should be subtracted from current period revenues.

all costs incurred in the current period should be subtracted from current period revenues.

32. Prepaid expenses classified as current assets represent: A. current year expenses that have been accrued. B. current year cash payments that will be matched against revenues of the next year or for several future years. C. cash that has been segregated to pay for future expenses. D. expenses of the current year that have been paid in advance.

current year cash payments that will be matched against revenues of the next year or for several future years.

33. The balance sheet presentation of accounts receivable net of the allowance for doubtful accounts has the effect of stating accounts receivable at: A. original cost. B. net realizable value. C. market value. D. lower of cost or market.

net realizable value.

35. One of the most important reasons for having a system of internal control is to: A. improve the effectiveness and efficiency of the operations of the organization. B. ensure no employees have ever been convicted of stealing. C. eliminate any temptations that may be presented to employees that could lead to theft from the company. D. prevent a salesperson from using a company car for personal transportation.

improve the effectiveness and efficiency of the operations of the organization.

22. The inventory cost flow assumption describes the flow of product cost: A. from the warehouse to the customer. B. into the asset (inventory) account and out to the expense (cost of goods sold) account. C. into the revenue (sales) account and out to the expense (cost of goods sold) account. D. into the asset (inventory) account and out to the revenue (sales) account.

into the asset (inventory) account and out to the expense (cost of goods sold) account.

7. The accounting concept or principle applied when the cost of short-term marketable securities is adjusted to market value is: A. objectivity. B. matching revenue and expense. C. original cost. D. consistency.

matching revenue and expense.

9. The accounting concept or principle applied when an allowance is provided for estimated uncollectible accounts receivable is: A. consistency. B. matching revenue and expense. C. original cost. D. objectivity.

matching revenue and expense.

36. A firm has used LIFO for several years during which costs have trended higher. If this firm achieves a substantial reduction in inventory quantities in 2014 by selling more merchandise than it purchases, the effect on 2014 net income of the inventory reduction, compared to having no change in inventory quantity from the beginning to the end of 2014, is: A. net income for 2014 will be greater if the inventory quantity declines. B. net income for 2014 will be less if the inventory quantity declines. C. net income for 2014 will not be affected because of the inventory quantity decline. D. can't tell from the information given.

net income for 2014 will be greater if the inventory quantity declines.

34. A firm has used LIFO for several years during which costs have trended higher. The effect on 2014 net income using LIFO, relative to FIFO, will be: A. net income for 2014 will be greater under LIFO than FIFO. B. net income for 2014 will be less under LIFO than FIFO. C. net income for 2014 will be the same under LIFO as under FIFO. D. can't tell from the information given.

net income for 2014 will be less under LIFO than FIFO.

19. Accounts receivable are reported at: A. net realizable value. B. historical cost. C. weighted average cost. D. market value.

net realizable value.

25. In an inflationary economic environment, the selling price set for a firm's products will: A. not be affected by the cost flow assumption used. B. be higher if LIFO is used than if FIFO is used. C. be higher if FIFO is used than if LIFO is used. D. be derived from the weighted average cost of inventory.

not be affected by the cost flow assumption used.

29. The effect of an error resulting in an understatement of ending inventory is to: A. overstate the next period's beginning inventory. B. understate cost of goods sold of the current period. C. overstate cost of goods sold of the current period. D. overstate operating expenses of the current period.

overstate cost of goods sold of the current period.

37. The amount of cash related to a particular bank checking account that is shown on the balance sheet at December 31 is: A. the cash balance shown on the bank's records at the close of business on December 31, without further adjustments. B. the cash balance shown in the company's general ledger account for this checking account at the close of business on December 31, without further adjustments. C. the cash balance shown in the general ledger account for this checking account as of the close of business on December 31, after recognizing any outstanding checks and/or deposits in transit from the December 31 bank account reconciliation. D. the cash balance shown in the general ledger account for this checking account as of the close of business on December 31, after recognizing any bank service charges and/or interest income from the December 31 bank account reconciliation.

the cash balance shown in the general ledger account for this checking account as of the close of business on December 31, after recognizing any bank service charges and/or interest income from the December 31 bank account reconciliation.

31. Regardless of the inventory cost flow assumption used, inventories on the balance sheet are stated at: A. original cost. B. realizable value. C. replacement cost. D. the lower of cost or market.

the lower of cost or market.

21. The principal reason for converting a customer's account receivable to a note receivable is: A. the note receivable earns interest and the account receivable does not. B. the receivable is less likely to have to be written off as uncollectible. C. working capital is immediately increased. D. the customer is more likely to continue purchasing the company's products.

the note receivable earns interest and the account receivable does not.

13. With respect to the write-off of an uncollectible account receivable against the allowance for bad debts, a sound system of internal control would require: A. the write-off be approved by two employees. B. an investigation of why credit was extended to this customer in the first place. C. a lawsuit to be initiated to recover the uncollectible amount. D. the write-off to be made within six months after the date of sale.

the write-off be approved by two employees.

12. When an uncollectible account receivable is written off against the allowance for bad debts: A. total current assets decrease and expenses increase. B. total current assets are not affected. C. total current assets decrease and expenses decrease. D. current assets decrease and expenses are not affected.

total current assets are not affected.