Exam 2 Practice Questions

In recording an accounting transaction in a double-entry system

the amount of the debits must equal the amount of the credits.

Which of the following should not be included in the physical inventory of a company?

Goods held on consignment from another company - because they are owned by another company

Which of the following would most likely employ the specific identification method of inventory costing?

jewelry store

The purchase of an asset for cash

leaves total assets unchanged.

Which of the following statements is correct?

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

Which situation requires a departure from the cost basis of accounting to the lower-of-cost-or-market basis in valuing inventory?

A decline in the value of the inventory

Which accounts normally have debit balances?

Assets, dividends, and expenses

Which of the following correctly identifies normal balances of accounts?

Assets. Debit Liabilities Credit Common Stock. Credit Revenues Credit Expenses. Debit

When is a physical inventory usually taken?

At the end of the company's fiscal year

Cecil gives goods on consignment to Jerry who agrees to try to sell them for a 25% commission. At the end of the accounting period, which of the following parties includes in its inventory the consigned goods?

Cecil

A credit is not the normal balance for which account listed below?

Dividends account

Swifty Corporation paid dividends of $3800. As a result of this event, the

Dividends account was increased by $3800.

In a period of inflation, LIFO produces a higher net income than FIFO. (T/F)

F

In the accounting cycle, closing entries are prepared before adjusting entries. (T/F)

F

The days in inventory is calculated by dividing the inventory turnover by 365. (T/F)

F - The days in inventory is calculated by dividing the inventory turnover by 365.

In a period of rising prices which inventory method will result in the greatest amount of income tax expense?

FIFO

Ownership passes to the buyer when purchased goods are received from a public carrier if the goods are shipped

FOB destination

Ownership passes to the buyer when the public carrier accepts the goods if the goods are shipped

FOB shipping point

Which of the following is true of the FIFO inventory method?

It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold.

In a period of falling prices, which of the following methods will give the largest net income?

LIFO

With the assumption of costs and prices generally rising, which of the following is correct?

LIFO provides the closest valuation of cost of goods sold to replacement cost of inventory sold.

In periods of rising prices, what will LIFO produce?

Lower net income than FIFO

Are advanced receipts from customers treated as revenue at the time of receipt? Why or why not?

No, revenue cannot be recognized until the work is performed.

The classification and normal balance of the Dividends account is

stockholders' equity with a debit balance

Which accounts normally have credit balances?

Revenues, liabilities, and retained earnings

Which of the following statements is true?

Specific identification method inventory valuation requires physical flow of goods to be representative of the cost flow

Which of the following describes the classification and normal balance of the Retained Earnings account?

Stockholders' equity, credit

Accounts receivable is a permanent account. (T/F)

T

An expense account is closed with a credit to the expense account and a debit to the Income Summary account. (T/F)

T

Closing entries result in the transfer of net income or net loss into the Retained Earnings account. (T/F)

T

Financial statements can be prepared from the information provided by an adjusted trial balance. (T/F)

T

Financial statements must be prepared before the closing entries are made. (T/F)

T

Prepaid expenses are assets. (T/F)

T

The only accounts that are closed are temporary accounts. (T/F)

T

The post closing trial balance will have fewer accounts than the adjusted trial balance. (T/F)

T

The post-closing trial balance will contain only permanent—balance sheet—accounts. (T/F)

T

Under FIFO, cost of goods sold consists of the units with the oldest costs. (T/F)

T

When the terms of a sale are FOB destination, legal title to the goods passes to the buyer when the goods reach the buyer's place of business. (T/F)

T

Without an adjusting entry for accrued interest expense, liabilities and interest expense are understated, and net income and stockholders' equity are overstated. (T/F)

T

Two companies report the same cost of goods available for sale, but each employs a different inventory costing method. If the price of goods has increased during the period, which statement is true?

The company using FIFO will have the highest ending inventory.

Which of the following is not a legitimate business reason for taking a physical inventory?

To verify the profitability of individual inventory items - he profitability of individual inventory items cannot be assessed from counting the items in the ending inventory of a company. A more in depth analysis must be performed for this

An investment by the stockholders in a business increases

assets and stockholders' equity

Blossom Company received a cash advance of $590 from a customer. As a result of this event,

assets increased by $590.

If total liabilities decreased by $3520, then

assets must have decreased by $3520, or stockholders' equity must have increased by $3520.

If expenses are paid in cash, then

assets will decrease.

If services are rendered for cash, then

assets will increase.

If a company buys a $840 machine on credit, this transaction will affect the

balance sheet only.

Waterway Industries provided consulting services and billed the client $2750. As a result of this event

both assets and equity increased by $2750.

If a company pays dividends of $7800,

both retained earnings and stockholders' equity will be reduced by $7800

What accounting concept is employed when using the lower-of-cost-or-market valuation?

conservatism

Inventory costing methods place primary reliance on assumptions about the flow of

costs

The payment of a liability

decreases assets and liabilities.

A paid dividend

decreases assets and stockholders' equity

An expense

decreases stockholders' equity.

on chapter 4, review questions 92, 89, 95, 98, 99, 106, 108, 110, 111, 114, 116, 118, 120, 122, 123, 124, 128, 131, 148, 150, 154, 155, 158

got wrong

The double-entry system requires that each transaction must be recorded

in at least two different accounts.

Debits

increase assets and decrease liabilities.

Collection of a $720 Accounts Receivable

increases an asset $720; decreases an asset $720.

The purchase of an asset on credit

increases assets and liabilities

The receipt of cash in advance from a customer

increases assets and liabilities.

A revenue generally

increases assets and stockholders' equity.

The right side of an account

is the credit side

A payment of a portion of an accounts payable will

not affect stockholders' equity.

Under what system is cost of goods sold determined at the end of an accounting period?

periodic inventory system

Look at questions 135,

s

The normal balance of any account is the

side which increases that account

If services are rendered on account, then

stockholders' equity will increase

When collection is made on Accounts Receivable,

total assets will remain the same