Principles of Accounting - VYC1

A firm reported sales of $300,000 during the year and has a balance of $20,000 in its Accounts Receivable account at year-end. Prior to adjustment, Allowance for Doubtful Accounts has a credit balance of $300. The firm estimated its losses from uncollectible accounts to be one-half of one percent (or 0.5%) of sales. The entry to record the estimated losses from uncollectible accounts will include a credit to Allowance for Doubtful Accounts for: Multiple Choice $1,200. $1,500. $1,800. $3,000.

$1,500. Explanation Recall that the expense charge is the focal point when sales is used as the basis for the estimate. The balance in the allowance account before the adjustment is ignored in determining how much will be charged to expense and credited to the allowance account. This is why the method is referred to as an "income statement approach." As such, the adjusting entry to record the estimated loss from uncollectible accounts includes a debit to the Uncollectible Expense account and a credit to the Allowance for Doubtful Accounts account for $1,500 (or $300,000 x .005).

A firm's bank reconciliation shows, in part, a book balance of $15,820, a deposit in transit of $300, an NSF check of $400, outstanding checks totaling $10,000, and a service charge of $20. Its adjusted book balance is Multiple Choice $16,240. $15,400. $15,440. $16,200.

$15,400. Explanation The adjusted book balance would be computed as follows: book balance of $15,820 less NSF check of $400 less service charge of $20 = $15,400. Deposits in transit and outstanding checks are used to compute the adjusted bank (rather than book) balance.

On May 1, 2016, a firm purchased a 1-year insurance policy for $3,600 and paid the full premium in advance. The insurance expense associated with this policy for 2016 is: Multiple Choice $3,600. $2,400. $2,100. $1,200.

$2,400. Explanation On December 31, 2016, eight months (May through December) of insurance coverage has expired. An adjustment for $2,400 (or $3,600 x 8/12) must be made to charge the cost of the expired insurance to operations and to decrease the Prepaid Insurance account to reflect the prepaid insurance premium that remains.

An employee whose regular hourly rate is $10 and whose overtime rate is 1.5 times the regular rate worked 44 hours in one week. In the payroll register, the employer should record an overtime premium of Multiple Choice $440. $220. $20. $5.

$20. Explanation The Wage and Hour Law method identifies the overtime premium as the amount the firm could have saved if all the hours were paid at the regular rate. The overtime premium rate is the number of overtime hours of 4 (or 44 - 40) times the overtime premium rate of $5 (or $10 x one-half) or $20.

Suppose the list price of goods is $1,000 and the trade discount is 20 percent. What is the amount of the discount and what is the net price to be recorded in the sales journal? Multiple Choice $20; $1,000 $200; $800 $200; $1,000 $800; $200

$200; $800 Explanation The amount of the discount is $200 (or $1,000 x 20%) and the net price to be shown on the invoice and recorded in the sales journal is $800 (or $1,000 - $200).

On July 1, 2016, a firm purchased equipment for $7,200. Depreciation expense for the year ended December 31, 2016, given the straight-line method, a 5-year useful life, and a salvage value of $600, is: Multiple Choice $1,440. $1,320. $720. $660

$660 Explanation The equipment should be depreciated for six months in 2016. Depreciation per month is calculated as follows: ($7,200 - $600) ÷ 60 months = $110 per month. $110 * 6 months of use = $660.

The beginning capital balance shown on a statement of owner's equity is $100,000. Net income for the period is $50,000. The owner withdrew $25,000 cash from the business and made no additional investments during the period. The owner's capital balance at the end of the period is: Multiple Choice $100,000. $125,000. $150,000. $175,000.

125,000. Explanation Beginning capital balance of $100,000 plus net income of $50,000 less withdrawals of $25,000 equals an ending capital balance of $125,000.

On October 1, 2016, Fairbanks Company accepted from a customer a four-month, 15 percent note for $1,000. As of December 31, 2016, the adjusting entry to record the accrued interest on the note receivable would include a debit to Interest Receivable for: Multiple Choice $37.50. $333.33. $1,000. $1,250.

37.50. Explanation On December 31, 2016, three months (October through December) of interest income has been earned. To record the interest income earned, but not yet received, the adjusting entry would include a debit to the Interest Receivable account and a credit to the Interest Income account for $37.50 (or $1,000 x .15 x 3/12).

Which of the following statements is not correct? Multiple Choice Reversing entries are made to reverse the effect of certain adjustments. Reversing entries provide a way to guard against oversights, eliminate the review of accounting records, and simplify the entry made in the new period. A reversing entry is the exact opposite (the reverse) of the adjustment. After the reversing entry is posted for the adjustment made to recognize the salaries expense at the end of the accounting period, the Salaries Expense account will have a zero balance and the Salaries Payable account will have a credit balance.

After the reversing entry is posted for the adjustment made to recognize the salaries expense at the end of the accounting period, the Salaries Expense account will have a zero balance and the Salaries Payable account will have a credit balance. Explanation The adjustment for accrued salaries expense at the end of the period includes a debit to the Salaries Expense account and a credit to the Salaries Payable account. The reversing entry at the beginning of the next accounting period will be just the opposite; a debit to Salaries Payable and a credit to Salaries Expense. As a result, after the reversing entry is posted for the adjustment made to recognize the salaries expense at the end of the accounting period, the Salaries Payable account will have a zero balance (rather than a credit balance) and the Salaries Expense account will have a credit balance (rather than a zero balance). This is unusual because the normal balance of an expense account is a debit. Then, on the first payroll date of the next accounting period, the payment of salaries is recorded in the normal manner. That is, this entry reduces the Cash account and increases the Salaries Expense account for the entire amount. Since a reversing entry has been made, this entry does not need to allocate the amount paid between the expense and liability accounts.

Which of the following statements is not correct? Multiple Choice All adjustments are shown on the worksheet. After the financial statements have been prepared, the adjustments are made a permanent part of the accounting records. Adjustments are recorded in the general journal as adjusting journal entries and are posted to the general ledger. All of the above statements are correct.

All of the above statements are correct. Explanation All adjustments are shown on the worksheet. After the financial statements have been prepared, the adjustments are made a permanent part of the accounting records. Adjustments are recorded in the general journal as adjusting journal entries and are posted to the general ledger.

Which of the following statements is correct? Multiple Choice The FUTA tax provides benefits for employees who become unemployed. The federal unemployment tax rate can be reduced by the rate charged by the state for the state unemployment tax. The earnings base for the federal and most state unemployment taxes are the same, the first $7,000 of an employee's earnings for the year. All of these are correct.

All of these are correct. Explanation All of the following statements are correct: The FUTA tax provides benefits for employees who become unemployed. The federal unemployment tax rate can be reduced by the rate charged by state for the state unemployment tax. The earnings base for the federal and state unemployment taxes are the same, the first $7,000 of an employee's earnings for the year.

Which of the following statements is correct? Multiple Choice The Securities and Exchange Commission issues the Statements of Financial Accounting Standards. Statements issued by the American Institute of Certified Public Accountants are binding on the members of the Financial Accounting Standards Board. An act of law gave the Securities and Exchange Commission the authority to determine the form and content of accounting reports filed by companies under its jurisdiction. Generally Accepted Accounting Standards were established by an act of Congress.

An act of law gave the Securities and Exchange Commission the authority to determine the form and content of accounting reports filed by companies under its jurisdiction. Explanation The Financial Accounting Standards Board (FASB) (rather than the Securities and Exchange Commission (SEC)) issues the Statements of Financial Accounting Standards. Statements issued by the Financial Accounting Standards Board are binding on the American Institute of Certified Public Accountants. Accounting principles in the United States are developed through a cooperative effort between the private sector and government.

The cost of goods sold is calculated as follows: Multiple Choice Beginning Merchandise Inventory plus Net Delivered Cost of Purchases less Ending Merchandise Inventory equals cost of Goods Sold. Total Merchandise Available for Sale less Ending Merchandise Inventory. Both A and B. Neither A or B.

Both A and B. Explanation Beginning Merchandise Inventory plus Net Delivered Cost of Purchases less Ending Merchandise Inventory equals Cost of Goods Sold. Or, in other words, since Beginning Merchandise Inventory plus Net Delivered Cost of Purchases equals Total Merchandise Available for Sale, then Total Merchandise Available for Sale less Ending Merchandise Inventory also equals Cost of Goods Sold.

Investors and creditors expect to receive a cash flow from the business entity: Multiple Choice directly from the distribution of the company's earnings. indirectly through the disposition of their interests for cash. Both of the above. Neither of the above.

Both of the above. Explanation In its conceptual framework project, the Financial Accounting Standards Board (FASB) concluded that the information needed by investors and creditors should help them assess the likelihood of receiving a future cash flow, the amount of such a cash flow, and the time when the cash flow may be received. This conclusion is based on the idea that investors and creditors expect to receive a cash flow directly from the distribution of the company's earnings or indirectly through the disposition of their interests for cash.

When a sales tax return is prepared, the amount of a firm's taxable gross sales for the month are computed as Multiple Choice Cash sales plus Credit sales less Sales returns and allowances. Credit sales less Sales returns and allowances from credit customers. Cash sales plus Credit sales. Cash sales plus Credit sales plus Sales returns and allowances.

Cash sales plus Credit sales less Sales returns and allowances. Explanation When a sales tax return is prepared, the amount of a firm's taxable gross sales for the month are computed as Cash sales plus Credit sales less Sales returns and allowances.

All of the following are steps in the closing process except: Multiple Choice Close expense accounts and cost of goods sold accounts with debit balances to the Income Summary account. Close owner's capital to the Income Summary account. Close the drawing account to the owner's capital account. Close revenue accounts and cost of goods sold accounts with credit balances to the Income Summary account.

Close owner's capital to the Income Summary account. Explanation There are four steps in the closing process. (1) Close revenue accounts and cost of goods sold accounts with credit balances to the Income Summary account. (2) Close expense accounts and cost of goods sold accounts with debit balances to the Income Summary account. (3) Close Income Summary, which now reflects the net income or loss for the period, to the owner's capital account (rather than close owner's capital to the Income Summary account). (4) Close the drawing account to the owner's capital account.

Which of the following statements is correct? Multiple Choice A company is required to withhold various employee taxes from amounts paid independent contractors. The accountant who performs the independent audit for a company is an employee of the company. All employees must be paid at the minimum wage rate set by the Fair Labor Standards Act. Disability benefits for the worker and the worker's dependents are provided by the Federal Insurance Contributions Act

Disability benefits for the worker and the worker's dependents are provided by the Federal Insurance Contributions Act Explanation Disability benefits for the worker and the worker's dependents are provided by the Federal Insurance Contributions Act

The employer records the amount of federal income tax withheld from employees as Multiple Choice Income Tax Expense. Employee Income Tax Payable. Social Security Tax Expense. Social Security Tax Payable.

Employee Income Tax Payable. Explanation The general journal entry to record the payroll expense includes a debit to each Wages Expense account (such as Shipping and Office Salaries Expense), a credit to the separate liability account for each type of deduction (for example, Social Security Tax Payable, Medicare Tax Payable, Employee Income Tax Payable, Health Insurance Premiums Payable), and a credit to Salaries and Wages Payable for the amount of the net pay

All of the following are current assets except: Multiple Choice Accounts Receivable. Prepaid Insurance. Merchandise Inventory. Equipment.

Equipment. Explanation Accounts Receivable, Prepaid Insurance, and Merchandise Inventory are current assets. Equipment is a noncurrent or long-term asset.

A firm that sells goods that it purchases for re-sale is a Multiple Choice service business. merchandising business. manufacturing business. non-profit business.

Explanation A merchandising business is a business that sells goods purchased for resale.

The Sales Returns and Allowances account is classified as Multiple Choice an asset account. an expense account. a revenue account. a contra revenue account.

Explanation The Sales Returns and Allowances account has the effect of reducing revenue and is, therefore, a contra revenue account because it has a debit balance, which is contrary, or opposite to the normal balance for a revenue account.

Merchandise is sold on credit for $500 plus 6 percent sales tax. The entry in the general journal will include a debit to Accounts Receivable for Multiple Choice $530.00. $506.00. $503.00. $500.00.

Explanation The correct entry includes a debit to accounts receivable for $530.00. (6% x $500 = $30 sales tax; $500 + $30 = $530.)

Which of the following forms is submitted by the employer with a copy of the Form W-2 for each employee to the Social Security Administration? Multiple Choice Form W-3. Form W-4. Form 940. Form 941.

Form W-3. Explanation The Transmittal of Wage and Tax Statements, Form W-3, is submitted with Forms W-2 to the Social Security Administration.

The rules to combine amounts and complete the Adjusted Trial Balance section of the worksheet include all of the following except: Multiple Choice If the account has a credit balance in the Trial Balance section and a credit entry in the Adjustments section, add the two amounts. If the account has a credit balance in the Trial Balance section and a debit entry in the Adjustments section, subtract the debit amount. If the account has a debit balance in the Trial Balance section and a debit entry in the Adjustments section, subtract the two amounts. If the account has a debit balance in the Trial Balance section and a credit entry in the Adjustments section, subtract the credit amount.

If the account has a debit balance in the Trial Balance section and a debit entry in the Adjustments section, subtract the two amounts Explanation Follow these rules to combine amounts and complete the Adjusted Trial Balance section of the worksheet: If the account has a debit balance in the Trial Balance section and a debit entry in the Adjustments section, add (rather than subtract) the two amounts. If the account has a debit balance in the Trial Balance section and a credit entry in the Adjustments section, subtract the credit amount. If the account has a credit balance in the Trial Balance section and a credit entry in the Adjustments section, add the two amounts. If the account has a credit balance in the Trial Balance section and a debit entry in the Adjustments section, subtract the debit amount.

Which of the following statements about the interpretation of the financial statements is not correct? Multiple Choice Interpreting the financial statements can only be performed by auditors. Interpreting the financial statements is the final step in the accounting cycle. To interpret the financial statements means to understand and explain the meaning and importance of information in accounting reports. All of these statements are correct.

Interpreting the financial statements can only be performed by auditors. Explanation Interpreting the financial statements is the final step in the accounting cycle. To interpret the financial statements means to understand and explain the meaning and importance of information in accounting reports. The interpretation can be performed by any user of the financial statements, not just by the company's auditors.

The practical considerations recognized as constraining or modifying the application of the accounting principles include which of the following? Multiple Choice Materiality, cost-benefit test, and conservatism, but not industry practice. Materiality, cost-benefit test, and industry practice, but not conservatism. Cost-benefit test, conservatism, and industry practice, but not materiality. Materiality, cost-benefit test, conservatism, and industry practice.

Materiality, cost-benefit test, conservatism, and industry practice. Explanation The practical considerations recognized as constraining or modifying the application of the accounting principles includes materiality, cost-benefit test, conservatism, and industry practice.

The net delivered cost for purchases is calculated as follows: Multiple Choice Purchases plus Freight In plus Purchases Returns and Allowances. Purchases less Freight In less Purchases Returns and Allowances. Purchases plus Freight In less Purchases Returns and Allowances. Purchases less Freight In plus Purchases Returns and Allowances.

Purchases plus Freight In less Purchases Returns and Allowances. Explanation The net delivered cost for purchases is calculated as follows: Purchases plus Freight In less Purchases Returns and Allowances.

All of the steps listed below are required under the new core principle of recognizing revenue, except: Multiple Choice Identify the contracts and the performance obligations in the contracts. Determine the contract price. Allocate the transaction price to the contract's performance obligations. Recognize revenue when it is earned or realized.

Recognize revenue when it is earned or realized. Explanation Effective for annual reporting periods beginning after December 15, 2017, for public entities and for annual reporting periods beginning after December 15, 2018, for nonpublic entities, entities will be required to perform a five-step process including all of the steps in A thru C, but not D. Item D reflects the current revenue recognition principle which is in effect until the new ones become effective in 2017 and 2018. Item A reflects the first two steps that must be performed. Item B reflects the third step and item C reflects the fourth step. The fifth step is to recognize revenue when (or as) the entity satisfies a performance obligation.

Which of the following accounts would be closed? Multiple Choice Supplies Expense Accounts Receivable Supplies Accumulated Depreciation

Supplies Expense Explanation Recall from chapter 3 that accounts are classified as permanent accounts or temporary accounts. Asset, liability, and owner's equity accounts appear on the balance sheet at the end of an accounting period. The balances of these accounts are then carried forward to start the new period. Because they continue from one accounting period to the next, these accounts are called permanent accounts or real accounts. Revenue and expense accounts appear on the income statement. The drawing account appears on the statement of owner's equity. These accounts classify and summarize changes in owner's equity during the period. They are called temporary accounts or nominal accounts because the balances in these accounts are transferred to the capital account at the end of the accounting period. The Supplies Expense account is a temporary account and is closed at the end of the accounting period.

Which of the following statements is not correct? Multiple Choice The allowance method involves anticipating losses from uncollectible accounts by recognizing an expense for these losses before the actual accounts are written off. The adjusting entry to record the estimated loss from uncollectible accounts includes a credit to the Accounts Receivable account. Losses from uncollectible accounts can be estimated by analyzing sales or accounts receivable. The balance of Uncollectible Accounts Expense account appears among the operating expenses on the income statement.

The adjusting entry to record the estimated loss from uncollectible accounts includes a credit to the Accounts Receivable account. Explanation The adjusting entry to record the estimated loss from uncollectible accounts includes a debit to the Uncollectible Accounts Expense account and a credit to the Allowance for Doubtful Accounts account (rather than the Accounts Receivable account).

Which of the following statements is not correct? Multiple Choice The amount of social security tax withheld depends on an employee's gross earnings, marital status, and number of withholding allowances. Federal law requires that social security, Medicare, and federal income taxes be deducted from the gross pay of most employees. Medicare taxes are levied in an equal amount on both employers and employees. Once an employee's year-to-date wages reach a certain amount prescribed by law, social security tax is no longer withheld

The amount of social security tax withheld depends on an employee's gross earnings, marital status, and number of withholding allowances. Explanation The amount of social security tax withheld depends on an employee's gross earnings, but not marital status or withholding allowances.

Which of the following statements is not correct? Multiple Choice The audit trial should be used to trace data through the accounting records to find and correct errors. If the postclosing trial balance does not balance, there are errors in the accounting records. The balance of the owner's capital account on the adjusted trial balance will ordinarily be different than that reported on the postclosing trial balance. The balance of the owner's capital account, as reflected on the postclosing trial balance, will match the amount reported on the income statement.

The balance of the owner's capital account, as reflected on the postclosing trial balance, will match the amount reported on the income statement. Explanation The balance of the owner's equity account is reported on the statement of owner's equity and the balance sheet, but not the income statement.

Which of the following statements describes the proper matching of revenue and expenses? Multiple Choice Manufacturing costs are identified with specific products and are charged to cost of goods sold when the manufacturing process is complete. The cost of a building is recorded as an asset. Depreciation expense is recognized over the periods in which the asset is expected to help earn revenues for the business. Insurance premiums cover specific periods and are charged to expense when they are paid. General office salaries are recorded as assets when they are incurred because they benefit future periods.

The cost of a building is recorded as an asset. Depreciation expense is recognized over the periods in which the asset is expected to help earn revenues for the business. Explanation The matching principle states that revenue must be matched against expired costs incurred in earning the revenue to properly measure income. Depreciation matches the cost of a long-term asset to the time periods when that asset is expected to help earn revenues for the business

Which of the following statements is correct? Multiple Choice The purchase requisition is the form sent to a supplier to order goods. The Purchases account is reported as an asset on the balance sheet. To the customer, a supplier's invoice is a sales invoice. The credit terms, 2/10, n/30, allow the customer to take a 2 percent discount if payment is made within 10 days.

The credit terms, 2/10, n/30, allow the customer to take a 2 percent discount if payment is made within 10 days. Explanation The credit terms, 2/10, n/30, allow the customer to take a 2 percent discount if payment is made within 10 days. If payment is not made within 10 days, the full amount of the invoice is due within 30 days. On the other hand, after a supplier of merchandise is selected, the purchasing department issues a purchase order (rather than a purchase requisition). A purchase order is an order to the supplier of goods specifying items needed, quantity, price, and credit terms. The Purchases account is classified as a cost of goods sold account on the income statement. To the customer, that supplier's invoice is referred to as a purchase (rather than sales) invoice; to the supplier, the supplier's invoice is referred to as the sales invoice.

Which of the following statements about the payroll register is not correct? Multiple Choice The payroll register supplies all the information to make the journal entry to record the payroll. The hours worked and the pay rate are used to calculate regular pay, the overtime earnings, and gross pay. The cumulative earnings after this pay period is computed by adding the beginning cumulative earnings and the current period's gross pay. The deductions are added to the gross earnings to compute Net Amount, which is the amount paid to each employee.

The deductions are added to the gross earnings to compute Net Amount, which is the amount paid to each employee. Explanation The deductions are deducted from (rather than added to) the gross earnings to compute Net Amount, which is the amount paid to each employee.

Which of the following statements is correct? Multiple Choice The use of the direct charge-off method of recording losses from uncollectible accounts usually results in the balance in the Accounts Receivable account being overstated. The direct charge-off method of recording losses from uncollectible accounts is the method required by Federal income tax laws. The direct charge-off method of recording losses from uncollectible accounts reflects generally accepted accounting principles. The direct charge-off method is an application of the matching principle.

The direct charge-off method of recording losses from uncollectible accounts is the method required by Federal income tax laws. Explanation Federal income tax laws now require the direct charge-off method in preparing the federal tax return, despite the fact that the allowance method is an application of the matching principle, consistent with generally accepted accounting principles.

Which of the following statements is correct? Multiple Choice The entry to record the payment of an invoice within the cash discount period would include a debit to the Purchases Discounts account. The entry to record a cash purchase of merchandise would include a debit to Purchases and a credit to Cash. A transaction that is properly recorded in the cash payments journal will always include the recording of an amount in the Cash Debit column. Purchase discounts is a contra revenue account.

The entry to record a cash purchase of merchandise would include a debit to Purchases and a credit to Cash. Explanation The entry to a cash purchase of merchandise would include a debit to Purchases and a credit to Cash. On the other hand, the entry to record the payment of an invoice within the cash discount period would include a credit (rather than a debit) to the Purchases Discounts account. A transaction that is properly recorded in the cash payments journal will always include the recording of an amount in the Cash Credit (rather than Debit) column. Purchases Discounts is a contra Cost of Goods Sold account that appears in the Cost of Goods Sold section of the income statement.

Which of the following statements is not correct? Multiple Choice The federal government allows a credit, or reduction, in the federal unemployment tax for amounts charged by the state for unemployment taxes. The normal federal unemployment tax rate of 0.6% (or 6.0% less the state unemployment tax credit of 5.4%) changes if favorable experience ratings change the state unemployment tax rate. The earnings limits for the federal and the state unemployment tax are usually the same, $7,000. Under the experience rating system, the state tax rate may be reduced to less than 1 percent for businesses that provide steady employment. In contrast, some states levy penalty rates as high as 10 percent for employers with poor records of providing steady employment. The reduction of state unemployment taxes because of favorable experience ratings does not affect the credit allowable against the federal tax.

The normal federal unemployment tax rate of 0.6% (or 6.0% less the state unemployment tax credit of 5.4%) changes if favorable experience ratings change the state unemployment tax rate Explanation The federal unemployment tax rate is 6.0 percent less a state unemployment tax credit of 5.4 percent; thus the federal tax rate is reduced to 0.6 percent (6.0% - 5.4%). The reduction of state unemployment taxes because of favorable experience ratings does not affect the credit allowable against the federal tax.

Which of the following accounts will appear on the post-closing trial balance? Multiple Choice The owner's drawing account Fees Income The owner's capital account Rent Expense

The owner's capital account Explanation Asset, liability, and owner's equity accounts appear on the balance sheet at the end of an accounting period. The balances of these accounts are then carried forward to start the new period. Because they continue from one accounting period to the next, these accounts are called permanent accounts or real accounts. The owner's capital account, an owner's equity and permanent account, is not closed. Note that many students struggle with this concept since the owner's capital account appears in the last two closing entries. The owner's capital account appears in the third closing entry because this entry transfers net income (or net loss) to owner's equity by crediting (or increasing) the owner's capital account for the amount of the net income (or debiting the owner's capital account for the amount of the net loss). Likewise, the fourth closing entry includes the owner's capital account because this entry transfers the owner's withdrawals to owner's equity by debiting (or decreasing) the owner's capital account for the amount of the withdrawals. (Remember that you don't want to wipe out the owner's equity by closing the capital account!) Revenue and expense accounts appear on the income statement. The drawing account appears on the statement of owner's equity. These accounts classify and summarize changes in owner's equity during the period. They are called temporary accounts or nominal accounts because the balances in these accounts are transferred to the capital account at the end of the accounting period. In the next period, these accounts start with zero balances. The owner's drawing account, Fees Income, and Rent Expense are temporary accounts that must be closed at the end of the period. As such, since they then have zero balances, these accounts would not be listed on the post-closing trial balance.

Which of the following statements is not correct? The Medicare tax is levied on both the employee and the employer. To compute the Medicare tax to withhold from the employee's paycheck, multiply the net take-home wages by the Medicare tax rate of 1.45%. If an employee works for more than one employer during the year, the FICA tax is deducted and matched by each employer. All of these statements are correct.

To compute the Medicare tax to withhold from the employee's paycheck, multiply the net take-home wages by the Medicare tax rate of 1.45%. Explanation The amount of Medicare tax to withhold from the employee's paycheck is determined by multiplying the gross wages by the Medicare tax rate of 1.45%. There is no base taxable earnings amount as is the case with FICA.

Which of the following is an objective of internal control of purchases? Multiple Choice To create written proof that purchases and payments are authorized. To create a disciplined work environment. To make the sales process more complex. To create more organized invoices.

To create written proof that purchases and payments are authorized. Explanation A business should ensure its control process includes sufficient safeguards to create written proof that purchases and payments are authorized, as well as to ensure that different people are involved in the process of buying goods, receiving goods, and making payments.

The entry to close the Income Summary account may include Multiple Choice a debit to Income Summary and a credit to the owner's capital account. a debit to Income Summary and a credit to Cash. a debit to Cash and a credit to Income Summary. a debit to Income Summary and a credit to the owner's drawing account.

a debit to Income Summary and a credit to the owner's capital account. Explanation After the revenue and expense accounts are closed, if revenues are greater than expenses, the Income Summary account will have a credit balance, which represents the net income. The entry to transfer net income to owner's equity includes a debit to Income Summary and a credit to the owner's capital account. The Cash account, an asset and permanent account, would not appear in any of the closing entries. The entry to close the owner's drawing account, which has a debit balance, includes a debit to the owner's capital account and a credit to the owner's drawing account. That closing entry does not include the Income Summary account because withdrawals do not appear on the income statement and, as such, are not part of the calculation of the net income or loss.

The entry to record a purchase of merchandise on credit includes Multiple Choice a debit to Accounts Payable and a credit to Purchases. a debit to Sales and a credit to Accounts Payable. a debit to Purchases and a credit to Accounts Payable. a debit to Purchases and a credit to Accounts Receivable.

a debit to Purchases and a credit to Accounts Payable. Explanation The purchase of merchandise is debited to the purchases account, and if purchased on credit, a credit entry is made to accounts payable.

The schedule of accounts payable is prepared from the Multiple Choice general journal. purchases journal. general ledger. accounts payable subsidiary ledger.

accounts payable subsidiary ledger. Explanation The schedule of accounts payable is prepared from the accounts payable subsidiary ledger.

The schedule of accounts receivable is prepared from the Multiple Choice general journal. sales journal. general ledger. accounts receivable subsidiary ledger.

accounts receivable subsidiary ledger. Explanation The schedule of accounts receivable is prepared from the accounts receivable subsidiary ledger.

A check issued for $890 to pay a vendor on account was recorded in the firm's records as $980; the canceled check was properly listed on the bank statement at $890. To arrive at an accurate balance on a bank reconciliation statement, the error should be Multiple Choice added to the book balance. added to the bank statement balance. deducted from the book balance. deducted from the bank statement balance.

added to the book balance. Explanation The book balance is understated because the check was recorded in the books at an amount greater than the actual amount. To correct the error, the difference should increase the book balance.

Common internal controls for accounts receivable include all the following except: Multiple Choice authorizing all credit sales. aging the accounts receivable if the aging the accounts receivable method is used to record the estimated expense from uncollectible accounts receivable. approving the write-off of accounts by authorized individuals only, and making the approvals in writing. investigating and taking appropriate action on past due accounts.

aging the accounts receivable if the aging the accounts receivable method is used to record the estimated expense from uncollectible accounts receivable. Explanation Common internal controls for accounts receivable include aging the accounts receivable to allow management to identify and monitor slow-paying accounts. As such, this control should be in place regardless of whether percentage of net credit sales method, the percentage of total accounts receivable method, or the aging the accounts receivable method is used to record the estimated expense from uncollectible accounts receivable.

The Periodicity of Income Assumption: Multiple Choice allows businesses to record property and equipment at their cost. allows companies to place a value on intangible assets, such as goodwill. allows companies to assume that business activities can be separated into discrete units of time. allows companies to assume that the business will continue to operate indefinitely.

allows companies to assume that business activities can be separated into discrete units of time. Explanation While the final results of a business can be known only when the business ceases to operate, the Periodicity of Income Assumption enables the business to assume that activities can be separated into time periods and to assign revenues and expenses to those time periods.

The frequency of deposits of federal income taxes withheld and social security and Medicare taxes is most dependent on the: Multiple Choice amount of the tax liability. number of payroll periods a firm has. profit reported by the firm. number of employees on the payroll

amount of the tax liability. Explanation The frequency of deposits depends on the amount of tax liability.

Detailed information about the individual accounts for all creditors is provided by Multiple Choice the general journal. the purchases journal. the general ledger. an accounts payable ledger.

an accounts payable ledger. Explanation Detailed information about the individual accounts for all creditors is provided by an accounts payable ledger.

Detailed information about the transactions with credit customers and the balances owed by such customers is provided by Multiple Choice the general journal. the sales journal. the general ledger. an accounts receivable ledger.

an accounts receivable ledger. Explanation Detailed information about the transactions with credit customers and the balances owed by such customers is provided by an accounts receivable ledger.

The Securities and Exchange Commission's 2003 report to the Congress on "principles-based" accounting observed that the first characteristic of objectives-based standards, dictated by the Sarbanes-Oxley Act, is that any standard must be based on: Multiple Choice the cost-benefit test. an improved and consistently applied framework. qualitative characteristics. transparency.

an improved and consistently applied framework. Explanation Section 108 of the 2002 Sarbanes-Oxley Act requires the Securities and Exchange Commission (SEC) to "conduct a study on the adoption by the United States financial reporting system of a principles-based accounting system." The FASB itself conducted a study and issued a report in October 2002. In July 2003, the SEC completed its study and made its report to Congress. The result is an intention for the FASB to issue "objectives-oriented standards" and to "address deficiencies in the conceptual framework." The goal is to arrive at an "internally consistent" and "complete" framework.

All of the following are internal control procedures that are recommended to protect payroll operations except: Multiple Choice make voluntary deductions from employee earnings based only on a signed authorization from the employee. keep payroll records in locked files. retain all Forms W-4. assign new employees to work in payroll operations.

assign new employees to work in payroll operations. Explanation To maintain proper internal control, employers should assign only highly responsible, well-trained employees to work in payroll operations.

A cash sale of merchandise would be recorded in the Multiple Choice sales journal. general journal. cash receipts journal. cash payments journal.

cash receipts journal. Explanation A cash sale of merchandise would be recorded in the cash receipts journal. Recall that only sales on credit are recorded in the sales journal.

If a check written by a firm is not canceled by the bank and returned with the month's bank statement, the firm should Multiple Choice adjust the balance in the firm's checkbook to reflect the data that appears in the bank's records. immediately notify the bank requesting that it correct its records. consider this check as outstanding when preparing the bank reconciliation. consider this check to be lost and issue a replacement check.

consider this check as outstanding when preparing the bank reconciliation. Explanation Outstanding checks are checks that are recorded in the cash payments journal but have not been paid by the bank. There are numerous reasons that a check would be outstanding at the time of the bank reconciliation, including a delay in depositing the check by the payee.

Gross profit on sales is calculated by subtracting: Multiple Choice sales returns and allowances from sales. cost of goods sold from net sales. ending inventory from the total merchandise available for sale. total expenses from sales.

cost of goods sold from net sales. explanation Gross profit on sales is calculated by subtracting cost of goods sold from net sales.

Upon collection of the amount due on an interest-bearing promissory note from a customer, the accountant would debit Cash, credit Notes Receivable, and Multiple Choice debit Interest Expense. credit Interest Income. credit Interest Expense. debit Interest Income.

credit Interest Income. Explanation Upon collection of the amount due on an interest-bearing promissory note from a customer, the accountant would debit Cash, credit Notes Receivable, and credit Interest Income.

A company uses the allowance method. The balance in the allowance account is a credit of $3,600. A $400 account is deemed to be uncollectible and is written off. After the transaction, the balance in the allowance account is a: Multiple Choice debit balance of $3,200. credit balance of $3,200. debit balance of $4,000. credit balance of $4,000.

credit balance of $3,200. Explanation The entry to record the write off of a customer's account would include a debit to the Allowance for Doubtful Accounts account and a credit to the Accounts Receivable account. The $400 debit to the Allowance for Doubtful Accounts account reduces that credit balance to $3,200 ($3,600 cr - $400 dr = $3,200 cr).

A publishing company publishes a monthly magazine. At the end of the year, the Unearned Subscription Income account had a balance of $150,000. During the year, $100,000 of magazines were delivered and income was earned. After the adjusting entry to recognize income is recorded, the Unearned Subscription Income account will have a: Multiple Choice debit balance of $50,000. credit balance of $50,000. debit balance of $100,000. credit balance of $250,000.

credit balance of $50,000. Explanation The Unearned Subscription Income account, a liability account, began the year with a credit balance of $150,000. The adjustment to recognize the income earned is a debit to Unearned Subscription Income for $100,000 and a credit to Subscription Income for $100,000. After the adjustment is made, the Unearned Subscription Income account will have a credit balance of $50,000 (or the beginning credit balance of $150,000 less the debit of $100,000), which represents subscriptions for future periods.

At the end of the month, after the equality of the debits and credits recorded in the cash payments journal is proved by comparing the column totals, the summary posting from the cash payments journal would include a Multiple Choice debit to Accounts Payable, a credit to Purchase Discount and a credit to Cash. In addition, amounts in the "Other Accounts Debit Amount column" would also be posted as debits to those accounts. debit to Accounts Payable, a credit to Purchase Discount and a credit to Cash. In addition, amounts in the "Other Accounts Credit Amount column" would also be posted as credits to those accounts. debit to Accounts Payable, a debit to Purchase Discount and a credit to Cash. In addition, amounts in the "Other Accounts Debit Amount column" would also be posted as credits to those accounts. debit to Accounts Payable, a debit to Purchase Discount and a credit to Cash. In addition, amounts in the "Other Accounts Credit Amount column" would also be posted as credits to those accounts.

debit to Accounts Payable, a credit to Purchase Discount and a credit to Cash. In addition, amounts in the "Other Accounts Debit Amount column" would also be posted as debits to those accounts. Explanation At the end of the month, after the equality of the debits and credits recorded in the cash payments journal is proved by comparing the column totals, the summary posting from the cash payments journal would include a debit to Accounts Payable, a credit to Purchase Discount and a credit to Cash. In addition, amounts in the "Other Accounts Debit Amount column" would also be posted as debits to those accounts.

The payment of a purchase invoice when a cash discount is taken includes a Multiple Choice debit to Accounts Payable, a credit to Purchases Discounts, and a credit to Cash. debit to Accounts Payable, debit to Purchases Discounts, and credit to Cash. debit to Accounts Payable and credit to Cash. debit to Purchases, credit to Purchases Discounts, and credit to Cash.

debit to Accounts Payable, a credit to Purchases Discounts, and a credit to Cash. Explanation The payment of a purchase invoice when a cash discount is taken includes a debit to Accounts Payable, a credit to Purchases Discounts, and a credit to Cash.

At the end of the month, after the equality of the debits and credits recorded in the sales journal is proved by comparing the column totals, the summary posting from the sales journal would include a Multiple Choice debit to Accounts Receivable, a credit to Sales Tax Payable, and a credit to Sales. debit to Cash and a credit to Sales. debit to Cash, a credit to Sales Tax Payable, and a credit to Sales. debit to Sales Tax Payable, a debit to Sales, and a credit to Accounts Receivable.

debit to Accounts Receivable, a credit to Sales Tax Payable, and a credit to Sales. Explanation At the end of the month, after the equality of the debits and credits recorded in the sales journal is proved by comparing the column totals, the summary posting from the sales journal would include a debit to Accounts Receivable, a credit to Sales Tax Payable, and a credit to Sales.

The entry to record a deposit of federal income taxes withheld and social security and Medicare taxes owed would include a: Multiple Choice debit to an expense account and credit to one or more liability accounts. debit to an asset account and credit to an expense account. debit to one or more liability accounts and credit to an asset account. debit to one or more expense accounts and credit to one or more liability accounts.

debit to one or more liability accounts and credit to an asset account. Explanation The entry to record a deposit of federal income taxes withheld and social security and Medicare taxes owed would include a debit to Social Security Tax Payable, a debit to Medicare Tax Payable, a debit to Employee Income Tax Payable, and a credit to Cash. As such, this entry includes debits to various liability accounts (Social Security Tax Payable, Medicare Tax Payable, and Employee Income Tax Payable) and a credit to an asset account (Cash).

When the allowance method is used, the entry to record the collection of an account that has been previously written off would include a: Multiple Choice debit to the Accounts Receivable account and a credit to the Allowance for Doubtful Accounts account. debit to the Uncollectible Accounts Expense account and a credit to the Accounts Receivable account. debit to the Allowance for Doubtful Accounts account and a credit to the Accounts Receivable account. debit to the Uncollectible Accounts Expense account and a credit to the Allowance for Doubtful Accounts account.

debit to the Accounts Receivable account and a credit to the Allowance for Doubtful Accounts account. Explanation The entry to record the collection of an account that has been previously written off would include a debit to the Accounts Receivable account and a credit to the Allowance for Doubtful Accounts account. An entry in the cash receipts journal would then be made in the usual way to record the collection; that entry would include a debit to the Cash account and a credit to the Accounts Receivable account.

When the direct charge-off method is used and payment is received in a period subsequent to that in which an account was charged off, the entry would include a: Multiple Choice debit to the Accounts Receivable account and a credit to the Uncollectible Accounts Expense account. debit to the Accounts Receivable account and a credit to the Uncollectible Accounts Recovered account. debit to the Allowance for Doubtful Accounts account and a credit to the Accounts Receivable account. debit to the Uncollectible Accounts Expense account and a credit to the Allowance for Doubtful Accounts account.

debit to the Accounts Receivable account and a credit to the Uncollectible Accounts Recovered account. Explanation When the direct charge-off method is used and payment is received in a period subsequent to that in which an account was charged off, the entry would include a debit to the Accounts Receivable account and a credit to the Uncollectible Accounts Recovered account. If the amount recovered in a period subsequent to the write-off is credited to the Uncollectible Accounts Expense account, the expense for the period of recovery will be understated.

The adjusting entry to record accrued interest on a note payable would include a: Multiple Choice debit to the Interest Income account and a credit to the Notes Payable account. debit to the Interest Payable account and a credit to the Interest Expense account. debit to the Interest Expense account and a credit to the Cash account. debit to the Interest Expense account and a credit to the Interest Payable account.

debit to the Interest Expense account and a credit to the Interest Payable account Explanation The adjusting entry to record accrued interest on a note payable would include a debit to the Interest Expense account and a credit to the Interest Payable account.

The entry to place the ending inventory on the books would include a: Multiple Choice debit to the Merchandise Inventory account and a credit to the Income Summary account. debit to the Income Summary account and a credit to the Merchandise Inventory account. debit to the Merchandise Inventory account and a credit to the Cost of Goods Sold account. None of the above.

debit to the Merchandise Inventory account and a credit to the Income Summary account. Explanation The entry to place the ending inventory on the books would include a debit to the Merchandise Inventory account and a credit to the Income Summary account.

When the direct charge-off method is used, the entry to record the write off of a customer's account would include a: Multiple Choice debit to the Accounts Receivable account and a credit to the Uncollectible Accounts Expense account. debit to the Uncollectible Accounts Expense account and a credit to the Accounts Receivable account. debit to the Allowance for Doubtful Accounts account and a credit to the Accounts Receivable account. debit to the Uncollectible Accounts Expense account and a credit to the Allowance for Doubtful Accounts account.

debit to the Uncollectible Accounts Expense account and a credit to the Accounts Receivable account. Explanation When the direct charge-off method is used, the entry to record the write off of a customer's account would include a debit to the Uncollectible Accounts Expense account and a credit to the Accounts Receivable account.

The adjusting entry to record estimated losses from uncollectible accounts consists of a: Multiple Choice debit to the Uncollectible Accounts Expense account and a credit to the Accounts Receivable. debit to the Uncollectible Accounts Expense account and a credit to the Allowance for Doubtful Accounts account. debit to the Allowance for Doubtful Accounts account and a credit to the Accounts Receivable account. debit to the Accounts Receivable account and a credit to the Allowance for Doubtful Accounts account.

debit to the Uncollectible Accounts Expense account and a credit to the Allowance for Doubtful Accounts account. Explanation The adjusting entry to record the estimated loss from uncollectible accounts includes a debit to the Uncollectible Accounts Expense account and a credit to the Allowance for Doubtful Accounts account.

A company uses the allowance method to account for uncollectible accounts receivable. At year end, the balance in accounts receivable is $120,000 and the balance in the allowance for doubtful accounts is a debit balance of $300. An aging analysis of accounts receivable estimates uncollectible accounts to be $2,500. The adjustment to record uncollectible accounts expense will include a: Multiple Choice debit to uncollectible accounts expense for $2,200. debit to uncollectible accounts expense for $2,500. debit to uncollectible accounts expense for $2,800. debit to uncollectible accounts expense for $3,100.

debit to uncollectible accounts expense for $2,800. Explanation When an aging of accounts receivable is used to estimate uncollectible accounts, the adjustment is used to bring the credit balance in the allowance for doubtful accounts to the estimated uncollectible accounts ($2,800 cr adjustment - $300 dr beginning balance = $2,500 cr adjusted balance).

The Fees Income account is closed by Multiple Choice debiting Cash and crediting Fees Income. debiting Fees Income and crediting Income Summary. debiting the owner's capital account and crediting Fees Income. debiting Income Summary and crediting Fees Income.

debiting Fees Income and crediting Income Summary. Explanation The entry to close the Fees Income account, a temporary account with a credit balance, includes a debit to Fees Income and a credit to Income Summary for the total account balance in the Fees Income account.

The owner's drawing account is closed by Multiple Choice debiting the owner's drawing account and crediting the owner's capital account. debiting the owner's capital account and crediting the owner's drawing account. debiting Income Summary and crediting the owner's drawing account. debiting the owner's drawing account and crediting Income Summary.

debiting the owner's capital account and crediting the owner's drawing account. Explanation The entry to close the owner's drawing account, a temporary account with a debit balance, includes a debit to the owner's capital account and a credit to the owner's drawing account for the total account balance in the owner's drawing account.

The entry to replenish a petty cash fund includes a Multiple Choice debit to Cash and a credit to Petty Cash. debit to Petty Cash Fund and a credit to Cash. debits to various expense accounts and a credit to Petty Cash Fund. debits to various expense accounts and a credit to Cash.

debits to various expense accounts and a credit to Cash. Explanation The check used to replenish a petty cash fund would be recorded in the cash payments journal. The petty cash analysis sheet will list the accounts and amounts to debit. The credit appears in the Cash Credit column of the cash payments journal.

Employees' payments for federal income taxes withheld and social security and Medicare taxes are periodically: Multiple Choice sent directly to the Internal Revenue Service. deposited in a special-purpose bank account, controlled by the company, until year-end when the funds are sent to the U.S. Treasury Department. sent to the local office of the Internal Revenue Service. deposited in a government-authorized financial institution.

deposited in a government-authorized financial institution. Explanation Employees' payments for federal income taxes withheld and social security and Medicare taxes are periodically deposited in a government-authorized financial institution.

Inventory turnover is calculated by: Multiple Choice dividing average inventory by net sales. dividing net sales by average inventory. dividing average inventory by cost of goods sold. dividing cost of goods sold by average inventory.

dividing cost of goods sold by average inventory. Explanation Inventory turnover shows the number of times that inventory is replaced during the accounting period, and is calculated by dividing cost of goods sold by average inventory.

The amount of federal income tax to withhold from an employee's earnings depends on the earnings during the pay period and length of the pay period. earnings during the pay period and length of the pay period, and marital status. earnings during the pay period and length of the pay period, and number of withholding allowances. earnings during the pay period and length of the pay period, marital status, and number of withholding allowances.

earnings during the pay period and length of the pay period, marital status, and number of withholding allowances. Explanation The amount of federal income tax to withhold from an employee's earnings depends on the earnings during the pay period and length of the pay period, marital status, and number of withholding allowances.

Each employee of a firm will receive several copies of the Wage and Tax Statement, Form W-2, from the: Multiple Choice employer with each paycheck. employer once a year. Federal government once a year. employer once a quarter.

employer once a year. Explanation Employers provide a Wage and Tax Statement, Form W-2, to each employee by January 31st for the previous calendar year's earnings. The information for Form W-2 comes from the employee's earnings record. The Form W-2 must be issued within 30 days after the request or after the final wage payment, whichever is later. At least four copies of each of Form W-2 are prepared.

The Employer's Quarterly Federal Tax Return includes a calculation of the firm's liability for the quarter for: Multiple Choice federal income taxes withheld, social security and Medicare taxes, and FUTA taxes. federal income taxes withheld and social security and Medicare taxes. social security and Medicare taxes and FUTA taxes. federal and state income taxes withheld.

federal income taxes withheld and social security and Medicare taxes. Explanation The Employer's Quarterly Federal Tax Return includes a calculation of the firm's liability for the quarter for federal income taxes withheld and social security and Medicare taxes.

If special journals are in use, sales returns and allowances from credit customers may be entered in the Multiple Choice general journal. cash receipts journal. sales journal. general ledger.

general journal. Explanation Sales returns and allowances may be recorded in the general journal or in a special sales returns and allowances journal.

If special journals are in use, purchase returns to and allowances granted by suppliers may be entered in the Multiple Choice general journal. cash payments journal. purchase journal. general ledger.

general journal. Explanation Purchase returns and allowances may be recorded in the general journal or in a special purchase returns and allowances journal.

The assumption that permits preparers of the financial statements to record property and equipment as assets at their cost is the: Multiple Choice periodicity of income assumption. going concern assumption. monetary unit assumption. separate entity assumption.

going concern assumption. Explanation The going concern assumption permits businesses to record property and equipment as assets at their cost without having to be concerned about what they are worth in case of liquidation in the near future. The periodicity of income assumption assumes that the activities of the business can be separated into time periods with revenues and expenses being assigned on a logical basis to those periods. There are two aspects to the monetary unit assumption. The first is the idea that expressing financial facts and events are meaningful only when they can be expressed in monetary terms. The second aspect of the monetary unit assumption is that the value of money is stable. The separate entity assumption assumes that the business is separate from its owners.

Which of the following is a factor in the determination of the amount of social security tax to withhold from an employee's pay? hours worked during the pay period gross wages withholding allowances claimed on Form W-4 marital status

gross wages Explanation Social security tax is calculated as a percentage of gross wages up to a maximum as prescribed by law.

Credit terms of 1/10, n/30 means that Multiple Choice payment in full is due 30 days after date of the invoice. if the invoice is paid within 10 days of its date, a 1% discount may be taken; otherwise the total amount is due in 30 days. payment in full is due 10 days after date of the invoice. if the invoice is paid within 10 days of its date, a 1% discount may be taken; otherwise the total amount is due in 20 days.

if the invoice is paid within 10 days of its date, a 1% discount may be taken; otherwise the total amount is due in 30 days. Explanation The 1/10 refers to the offer of a 1% cash discount if the purchaser pays within 10 days. If the purchaser doesn't accept that offer, the entire amount of the invoice is due in 30 days.

After the closing entries are posted to the ledger, each expense account will have Multiple Choice a credit balance. a debit balance. either a debit or a credit balance. none of these are correct.

none of these are correct. Explanation After the closing entries are posted to the ledger, each expense account will have a zero balance, as all temporary accounts are reduced to a zero balance in the closing process.

With the accrual basis of accounting, it is appropriate to recognize revenue from a credit sale: Multiple Choice on the date the account is collected in full. each time a payment on an account balance is received. Incorrect on the date of the sale. either on the date of the sale or when the amount of the sale is collected.

on the date of the sale. Explanation Using the accrual basis of accounting, revenue is recognized when it is earned.

The balance of the owner's drawing account is listed: Multiple Choice in the Other Expenses section of the income statement. in the Current Assets section of the balance sheet. on the statement of owner's equity. in the Operating Expenses section of the income statement.

on the statement of owner's equity. Explanation The balance of the owner's drawing account is listed in the calculation of ending capital on a statement of owner's equity.

Form 941 is filed: Multiple Choice weekly. monthly. quarterly. annually.

quarterly. Explanation Form 941 is the Employer's Quarterly Federal Tax Return, and is filed quarterly.

Accounting information is capable of making a difference in a decision by the report user if it is: Multiple Choice comparable. reliable. relevant. neutral.

relevant. Explanation Relevance means that accounting information is capable of making a difference in a decision by the report user. Conversely, if information is not capable of being useful to the user in making a decision, it is not relevant. Comparability means that the financial data is presented in such a manner that it can be meaningfully compared with the same data for other companies. Another aspect of comparability is that a company's financial reports for one period may be meaningfully compared with its own statements for another period. Reliability means simply that the information should be dependable. Reliable information is verifiable, is a faithful representation of the company's financial affairs, and is reasonably free of error and bias. Neutrality often referred to as "objectivity," is the idea that the financial statements are not prepared in a way to favor one group of users (management, owners, creditors, employees, etc.) over other groups. The information should be prepared in such a way that it is helpful to all groups.

An income statement that lists all revenues in one section and all expenses in another section is known as a: Multiple Choice classified income statement. multiple-step income statement. single-step income statement. categorized income statement.

single-step income statement. Explanation A single step income statement lists all revenues in one section and all expenses in another section. The term multiple-step (rather than single-step) income statement is sometimes used to describe a classified income statement.

Most businesses use the petty cash fund to pay for Multiple Choice accounts payable. small expenditures. office lunches. internal expenses.

small expenditures. Explanation In a well-managed business, most bills are paid by check. However, there are times when small expenditures are made with currency and coin, and in those instances, those small transactions are paid from a petty cash fund.

Both the employer and the employee are responsible for paying: Multiple Choice social security, Medicare, and FUTA taxes. FUTA taxes. SUTA taxes. social security and Medicare taxes.

social security and Medicare taxes. Explanation Only the employer is responsible for paying FUTA and SUTA taxes. Both the employee and the employer are responsible for paying social security and Medicare taxes.

Allowance for Doubtful Accounts is: Multiple Choice deducted from Sales in the Revenue section of the income statement. listed in the Liabilities section of the balance sheet. subtracted from Accounts Receivable in the Assets section of the balance sheet. listed in the Operating Expenses section of the income statement.

subtracted from Accounts Receivable in the Assets section of the balance sheet. Explanation The Allowance for Doubtful Accounts account is a contra asset that is reported on the balance sheet. The credit balance in the Allowance for Doubtful Accounts account is deducted from the debit balance in Accounts Receivable to derive Net Accounts Receivable.

The Purchases account is a Multiple Choice permanent account. temporary account. subsidiary account. liability account.

temporary account. Explanation The Purchases account is a temporary account classified as a cost of goods sold account on the income statement.

After all postings have been made, the total of the schedule of accounts receivable should equal Multiple Choice the balance of the Accounts Receivable account in the general ledger. the total of Cash in the general ledger. the total of all sales on account for the accounting period. the total amount collected during the accounting period

the balance of the Accounts Receivable account in the general ledger. Explanation The accounts receivable account serves as the link between the subsidiary ledger and the general ledger. The balance is a summary of the balances in the related individual customers' accounts.

All details related to an employee's earnings, deductions, and net pay throughout the year would be found in Multiple Choice the Wages Expense account in the general ledger. the individual earnings record. the general journal. the payroll register.

the individual earnings record. Explanation The employer sets up an individual earnings record for each employee to maintain all details related to an employee's earnings, deductions, and net pay throughout the year.

The entry to transfer a net loss to the owner's capital account would include a debit to Multiple Choice the owner's capital account and a credit to Cash. the owner's drawing account and a credit to the owner's capital account. Income Summary and a credit to the owner's capital account. the owner's capital account and a credit to Income Summary.

the owner's capital account and a credit to Income Summary. Explanation After the revenue and expense accounts are closed, if expenses are greater than revenues, the Income Summary account will have a debit balance, which represents the net loss. The entry to transfer net loss to owner's equity would then include a debit to the owner's capital account and a credit to Income Summary.

Purchases of merchandise on credit should be recorded in Multiple Choice the purchases journal. the general journal. the cash payments journal. the sales journal.

the purchases journal. Explanation Purchases of merchandise on credit should be recorded in the purchases journal.

One purpose of closing entries is to Multiple Choice transfer the results of operations to owner's equity. Correct reduce the owner's capital account balance to zero so that the account is ready for the next period. close all accounts so that the ledger is ready for the next accounting period. adjust the ledger account balances to provide complete and accurate figures for use on financial statements.

transfer the results of operations to owner's equity. Explanation Closing entries (1) transfer the results of operations (net income or net loss) to owner's equity, and (2) reduce revenue, expense, and drawing account balances to zero. Asset, liability, and owner's equity accounts appear on the balance sheet at the end of an accounting period. The balances of these accounts are then carried forward to start the new period. Because they continue from one accounting period to the next, these accounts are called permanent accounts or real accounts. As such, the asset, liability and owner's equity (owner's capital) accounts are not closed (that is, their balances are not reduced to zero). Also, note that adjusting (rather than closing) entries are made to update accounts for items that were not recorded during the accounting period and, as such, help to ensure that complete and accurate figures appear in the financial statements.

Accrued expenses are: Multiple Choice used in one period but not paid for or recorded until a later period. paid for, recorded, and used in one period. paid for and recorded in one period but not fully used until a later period. budgeted but not paid for or used during the period

used in one period but not paid for or recorded until a later period. Explanation Accrued expenses are expenses that relate to (are used in) the current period but have not yet been paid and do not yet appear in the accounting records.

In order to ensure that they are meaningful and useful, financial statements should be prepared: Multiple Choice in accordance with section 108 of the Sarbanes-Oxley Act. on a daily basis. on a timely basis. using generally accepted accounting principles.

using generally accepted accounting principles. Explanation In order to ensure that they are meaningful and useful, financial statements should be prepared using generally accepted accounting principles (GAAP).