Accounting Exam Question and Answers

1. Financing that individuals or institutions have provided to a company is A. always classified as liabilities. B. classified as liabilities when provided by creditors and shareholders' equity when provided by owners ...

1. Financing that individuals or institutions have provided to a company is A. always classified as liabilities. B. classified as liabilities when provided by creditors and shareholders' equity when provided by owners. C. always classified as shareholders' equity. D. classified as shareholders' equity when provided by creditors and liabilities when provided by owners. 2. Which of the following would affect shareholders' equity? A. A company borrows $100 million and buys $100 million in equipment. B. A company pays $100 million to shareholders as a dividend. C. A company sells $100 million in assets for $100 million cash. D. A company receives payment for $100 million in accounts receivable. 3. During 2007, a company's assets rise $56,000 and its liabilities rise $38,000. If no dividend is paid and no further capital is contributed, shareholders' equity would: A. rise $56,000. B. rise $18,000. C. fall $38,000. D. fall $94,000. 4. Which of the following is incorrect about the notes to the financial statements: A. explain what accounting policies were used to prepare the financial statements. B. provide additional information about what is included in the financial statements. C. provide additional information about financial matters that are not included in the financial statements. D. certify to the fact that the statements have been audited. 5. Investors are often interested in the amount distributed as dividends. In which section of the financial statements would investors look to find this amount? A. Statement of retained earnings. B. Balance sheet. C. Notes to the financial statements. D. Income statement 6. When is the financial information relevant? A. If it makes a difference in decision making. B. Meets the requirement of Toronto Stock Exchange. C. If it fully depicts the economic substance of business activities. D. If it allows management the discretion when to release it to investors and general public. 7. When is the financial information a faithful representation? A. If it fully depicts the economic substance of business activities B. If it allows management to be faithful to its shareholders C. Meets the requirements of the stock exchanges D. If it makes a difference in decision making 8. The Sweet Smell of Success Fragrance Company borrowed $60,000 from the bank and used all of the money to re-design its new store. Sweet Smell's balance sheet would show this as: A. $60,000 under Furnishings & Equipment and $60,000 under Notes Payable. B. $60,000 under Supplies and $60,000 under Accounts Payable. C. $60,000 under Prepaid Expenses and $60,000 under Accrued Liabilities. D. $60,000 under Other Assets and $60,000 under Other Liabilities. 9. Your company pays back $2 million on a loan it had received earlier from a bank. How does this transaction affect the accounting equation? A. Assets are unchanged, liabilities and shareholders' equity both increase by $2 million. B. Assets decrease by $2 million, liabilities decrease by $2 million, shareholders' equity is unchanged. C. Assets are unchanged, liabilities increase by $2 million, contributed capital decreases by $2 million. D. Assets decrease by $2 million, liabilities are unchanged, contributed capital decreases by $2 million. 10. Which of the following would not be recorded as an identifiable accounting transaction? A. Putting a deposit down on a new vehicle. B. Hiring a new employee. C. Obtaining a bank loan. D. Receiving a deposit from a customer. 11. During June, The Grass Is Greener Company mows 100 lawns a week and is paid in July by those customers. The company uses the accrual basis of accounting. How will these events affect the company's financial statements? A. The income statement shows the effects of the transactions in June. B. The income statement shows the effects of the transactions in July. C. The balance sheet shows no effect from the transactions in June. D. The transactions have no effect on the balance sheet. 12. During April, the Grass is Greener Company buys and pays for a six-month supply of fertilizer in order to receive a bulk discount. The cost of fertilizer is recorded: A. immediately as an expense. B. as a liability, which will later be reduced as the fertilizer used. C. partially as an expense and partially as a liability. D. as an asset, which will later be reduced as the fertilizer is used. 13. A customer purchased $1,500 of services on credit two months ago and has just paid the bill. The receipt of the payment from the customer is recorded as a A. debit to Cash and a credit to Accounts Receivable. B. debit to Cash and a credit to Inventory. C. debit to Expenses and a credit to Revenue. D. debit to Accounts Receivable and a credit to Retained Earnings. 14. At the end of the month, the adjusting journal entry to record the use of supplies would include: A. A debit to supplies and a credit to expenses. B. A credit to supplies and a debit to expenses. C. A debit to supplies and a credit to revenue. D. A credit to supplies and a debit to cash. 15. A company has a loan that accrues interest at a rate of $20 a day. The company pays the interest once a quarter. Which of these would be an accurate adjustment for a month in which no payments are made? A. Debit Interest Payable and credit Interest Expense. B. Debit Loans Payable and credit Cash. C. Debit Interest Expense and credit Interest Payable. D. Debit Cash and credit Loans Payable. 16. Contra-accounts: A. are used to increase the original value of the account they offset. B. always appear in the same column of the trial balance as the account they offset. C. always reduce the account they offset. D. Always increase the account they offset. 17. Closing entries: A. are prepared before financial statements are prepared. B. reduce the number of permanent accounts. C. cause the revenue and expense accounts to have zero balances. D. summarize the activity in every account. 18. All of the following bank reconciliation items would result in an adjusting journal entry on the company's books except: A. interest earned. B. deposits in transit. C. service charge. D. a customer's cheque returned NSF. 19. DigDug Corporation had outstanding cheques totalling $5,400 on its June bank reconciliation. In July, DigDug issued cheques totalling $38,900. The July bank statement shows that $26,300 in cheques cleared the bank in July. The amount of outstanding cheques on DigDug's July bank reconciliation should be: A. $12,600. B. $18,000. C. $5,400. D. $7,200. Remaining outstanding cheques = Outstanding cheques + additional cheques issued - cheques cleared $5,400 + $38,900 - $26,300 = $18,000 20. The perpetual inventory method of tracking inventory is considered superior to the periodic method because the perpetual method: A. makes calculations easier and less technology can be deployed. B. tells what inventory a company should have at any point in time. C. saves a company from ever having to count the goods in inventory. D. is more consistent with how companies calculated inventory in the past. 21. BetterBuy sells a computer from inventory for $599 on credit. BetterBuy originally bought the computer from IBM for $395. What are the journal entries Betterbuy would record if Betterbuy uses a perpetual inventory system? A. Debit Cash for $599, credit Sales for $599; debit Inventory for $395 and credit Cost of Goods Sold for $395. B. Debit Accounts Receivable for $599, credit Inventory for $395, and credit Retained Earnings for $204. C. Debit Accounts Receivable for $599, credit Sales for $599; debit Cost of Goods Sold for $395 and credit Inventory for $395. D. Debit Inventory for $395, debit Cost of Goods Sold for $204, and credit Accounts Receivable for $599. 22. When goods are sold to a customer with credit terms of 2/15, n/30, the customer will: A. receive a 15% discount if they pay within 2 days. B. receive a 2% discount if they pay 15% of the amount due within 30 days. C. receive a 15% discount if they pay within 30 days. D. receive a 2% discount if they pay within 15 days. 23. At the beginning of the quarter Purrfect Pets has $30,000 in inventory. During the quarter the company purchases $7,900 of new inventory, has purchase returns of $700, and purchase discounts of $200. At the end of the quarter the balance in the Inventory account is $26,500. What is the cost of goods sold? A. $10,500. B. $11,400. C. $3,500. D. $11,900. Net purchases = $7,900 - 700 - 200 = 7,000 COGS = Beg. Inventory + Net Purchases - Ending Inventory 30,000 + 7000 - 26,500 COGS = $10,500 24. The Acme Corporation buys 300 units of merchandise in January at $5 each. In February, Acme buys 500 units at $4 each and in March it buys 200 units at $6 each. Acme sells 150 units during this quarter. What is the cost of goods sold under the FIFO method? A. $600 B. $934 C. $750 D. $900 FIFO method determines cost of goods sold using the cost of the oldest units first. 150 units @ $5/unit = $750 25. When the replacement cost of inventory drops below the cost recorded in the financial records, applying the lower of cost or net realizable value (LC&NRV) rule means: A. a decrease in cost of goods sold. B. no change in net income, other things being equal. C. inventory be written down to its net realizable value. D. none of the above. 26. A $15,000 overstatement of the 2011 ending inventory was discovered after the financial statements for 2011 were prepared. How would that inventory error impact the 2011 financial status? A. Current assets were overstated and net income was understated. B. Current assets were understated and net income was understated. C. Current assets were overstated and net income was overstated. D. Current assets were understated and net income was overstated. 27. During the year, a company concludes that $6,844 of specific customer accounts will not be collected. These are written off by: A. debiting Accounts Receivable and crediting Allowance for Doubtful Accounts for $6,844. B. debiting Accounts Receivable and crediting Bad Debt Expense for $6,844. C. debiting Bad Debt Expense and crediting Accounts Receivable for $6,844. D. debiting Allowance for Doubtful Accounts and crediting Accounts Receivable for $6,844. 28. The amount of uncollectible accounts at the end of the year is estimated, using the aging of receivables method, to be $25,000. The balance in the Allowance for Doubtful Accounts account is an $8,000 credit before adjustment. Assuming no accounts are written off during the period, what will be the amount of bad debts expense for the period? A. $8,000. B. $17,000. C. $25,000. D. $33,000. 29. At the beginning of the quarter, your company borrows $20,000 using a four-year promissory note that states an annual interest rate of 8% plus principal repayments of $5,000 each year. Interest is paid at the end of the second and fourth quarter, whereas principal payments are due at the end of each year. How does this new promissory note affect the amounts of current and non-current liabilities reported on the balance sheet at the end of the first quarter? A. Option A B. Option B C. Option C D. Option D At the end of the first quarter, the accrued interest payable is $400 ($20,000 * .08 * 3/12), $5,000 of the principal is a current liability since it is owed within one year, and the remaining $15,000 is a long-term liability. 30. A company pays $18,000 in interest on notes, consisting of $12,000 interest that accrued during the last accounting period and $6,000 of interest accumulated during this accounting period but not previously accrued on the books. The journal entry for the interest payment should: A. debit Interest Expense for $18,000 and credit Cash for $18,000. B. debit Cash for $18,000 and credit Interest Payable for $18,000. C. debit Interest Expense for $6,000, debit Interest Payable $12,000 and credit Cash for $18,000. D. debit Interest Payable for $12,000, debit Accrued Interest $6,000 and credit Cash for $18,000. 31. IBM is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15, 2012. Interest rates rise in the economy so that similar financial investments pay 9%. IBM will: A. not be able to issue the bonds because no one will buy them. B. receive a higher issue price to compensate buyers for the lower stated interest rate. C. have to accept a lower issue price to attract buyers. D. have to reprint the bond certificates to change the stated interest rate to 9%. 32. The going-concern assumption states that the: A. company will always maximize the profit for shareholders. B. company is not expected to go out of business in the near future. C. company is a separate concern from the shareholders. D. company's results will be reported in a consistent manner from period to period. Ratio formulas can be found on the last page of this exam. 33. Which of the following would cause the greatest increase in a company's inventory turnover ratio? A. Keeping the same amount of inventory on hand while unit sales are increasing. B. Increasing the amount of inventory on hand while unit sales are increasing. C. Keeping the same amount of inventory on hand while unit sales are decreasing. D. Decreasing the amount of inventory on hand while unit sales are increasing. 34. A high accounts receivable turnover ratio indicates: A. the company's sales are increasing. B. a large proportion of the company's sales are on credit. C. customers are making payments very quickly. D. the company is taking longer to sell inventory 35. A company has $72,500 of inventory at the beginning of the year and $65,500 at the end of the year. Sales revenue is $986,400, cost of goods sold is $572,700, and net income is $124,200 for the year. The inventory turnover ratio is: A. 1.8. B. 8.3. C. 6.0. D. 14.3 Avg. inventory = (prior EB inventory + current EB inventory)/2 ($72,500 + $65,500)/2 = $69,000 Inventory turnover ratio = COGS/Avg. Inventory $572, 700/$69,000/8.3 36. The Grass is Greener Corporation's receivables turnover ratio decreases from 14.1 to 11.8. Which of the following statements is true? A. This indicates that the company is taking longer to collect credit payments. B. This is an indication that the company is experiencing falling credit costs. C. This could be an indication that the company is using more efficient collection methods. D. This is an indication that the company is buying and selling financial assets less rapidly. 37. A company has current assets of $5 million and net income of $10 million. Current liabilities total $2.5 million, interest expense is $2 million, and income tax expense is $3 million. The times interest earned ratio for this company is approximately: A. 0.5. B. 7.5. C. 0.3. D. 2.0. ($10,000,000 + $2,000,000 + $3,000,000)/$2,000,000 = 7.5 38. A company sells $200,000 in long-term bonds and pays off $200,000 in accounts payable. Which of the following statements is true? A. Both the quick ratio and times interest earned ratio will rise. B. The quick ratio will fall but the times interest earned ratio will rise. C. The quick ratio will rise but the times interest earned ratio will fall. D. Both the quick ratio and times interest earned ratio will fall. 39. Company X has net sales revenue of $1,250,000, cost of goods sold of $760,000, and all other expenses of $290,000. The beginning balance of shareholders' equity is $400,000 and the beginning balance of fixed assets is $361,000. The ending balance of shareholders' equity is $600,000 and the ending balance of fixed assets is $389,000. What is the fixed asset turnover ratio? A. 0.53 B. 2.50 C. 3.33 D. 0.80 Average net assets = (Beginning fixed assets + Ending fixed assets)/2 ($361,000 + $389,000)/2 = $375,000 Fixed asset turnover = Net Sales/Average Net Fixed Assets $1,250,000/375,000 = 3.33 40. A company that has a current ratio less than one cannot cover: A. current liabilities with its current cash flow. B. current expenses with its current sales revenue. C. expenses with its current revenues. D. current liabilities with its current assets. 1. When the amount of a contingent liability can be estimated and its likelihood is possible but not probable, the company should: A. include a description in the footnotes to the financial statements. B. record the amount of the liability times the probability of its occurrence. C. record the liability and estimated amount of the loss on the statement of financial position. D. omit the information about the contingent liability from its financial statements and footnotes. 2. When a company encounters a contingent liability that is remote in likelihood, the company should: A. include a description in the foot notes to the financial statements. B. record the amount of the liability times the probability of its occurrence. C. record the liability and estimated amount of the loss on the statement of financial position. D. omit the information about the contingent liability from its financial statements and footnotes. 3. If a company's gross salaries are $12,000, and it withholds $1,800 for income taxes and $800 for Employment Insurance and other deductions, the journal entry to record the employees' pay should include a: A. debit to Salaries Expense for $9,400. B. debit to Salaries Payable for $9,400. C. credit to Salaries Payable for $12,000. D. credit to Cash for $9,400. 4. A company receives $95 for merchandise sold to a consumer, of which $5 is for sales tax. The $5 of sales tax: A. increases sales revenue. B. increases current liabilities. C. increases selling expenses. D. none of the answers are acceptable. 5. If the market rate of interest is 6%, a $10,000, 10-year bond with a stated annual interest rate of 8% would issue at an amount: A. less than face value (discount). B. equal to the face value (par). C. greater than face value (premium). D. that cannot be determined. 6. Under the cost principle: A. only reasonable and necessary costs of acquiring an asset should be recorded as a cost of the asset. B. costs of preparing an asset for use should never be recorded as part of the cost of the asset. C. all reasonable and necessary costs of acquiring an asset and preparing it for use should be recorded as a cost of the asset. D. only the actual purchase price of the asset is recorded as the cost of the asset. 7. The Gulp convenience store chain buys new soda machines for $450,000 and pays $50,000 for installation. One-half of the total cost is paid in cash; the other half is financed. How should the company record this transaction? A. Debit cash for $250,000, debit notes payable for $250,000, and credit equipment for $500,000. B. Debit equipment for $500,000, credit cash for $250,000, and credit notes payable for $250,000. C. Debit cash for $250,000, debit notes payable for $250,000 credit equipment for $450,000, and credit expenses for $50,000. D. Debit equipment for $450,000, debit expenses for $50,000, credit cash for $250,000, and credit notes payable for $250,000. 8. Ordinary repairs and maintenance always: A. are part of the asset cost of equipment and facilities. B. are recorded as expenses. C. are recorded as liabilities. D. improve the asset beyond the current accounting period. 9. Which of the following statements most appropriately describes the purpose of depreciation of a long-lived tangible asset? A. To indicate how the asset has physically deteriorated. B. To show that the asset will eventually and gradually become obsolete. C. To record that the asset's market value declines over time. D. To match the cost of the asset to the period in which it generates revenue. 10. Under what circumstance should a company record an asset impairment loss? A. When residual value is greater than the repairs and maintenance expenses needed to keep the asset. B. When net book value is less than the residual value of the asset. C. When accumulated depreciation equals the purchase cost of the asset. D. When net book value is greater than expected future cash flows for the asset. 11. How does an asset impairment loss impact a company's financial statements? A. Raise expenses and lower both revenue and net income. B. Lower assets, shareholders' equity, and net income. C. Raise expenses and lower net income with no effect on any other items. D. Raise liabilities and lower shareholders' equity. 12. In recording the acquisition cost of an entire business: A. goodwill is recorded as the excess of cost over the fair market value of identifiable net assets. B. assets are recorded at the seller's book values. C. goodwill, if it exists, is never recorded. D. goodwill is recorded as the excess of cost over the book value of identifiable net assets. Questions 13-14 Use the Information Below In March, BetterBuy purchases six plasma TVs from Toshiba for $1,500 each (serial numbers 11534892 through 11534897). In April, the company purchases four more identical TVs from Toshiba for $1,450 each (serial numbers 11542631 through 11542634). In May, the company purchases five more identical TVs for $1,600 each (serial numbers 11550964 through 11550968). In June, BetterBuy sells two of these TVs (serial numbers 11534894 and 11542631). 13. BetterBuy records $3,000 as the cost of goods sold. BetterBuy is using the: A. Specific identification method. B. LIFO method. C. FIFO method. D. Weighted average cost method. 14. If BetterBuy uses the weighted average method, its cost of goods sold will be: A. $2,900. B. $2,950. C. $3,040. D. $3,033. 6 @ $1,500 = $9,000 4 @ $1,450 = $5,800 5 @ $1,600 = $8,000 $22, 800 Average cost per unit = 22,800/15 = $1,520 * 2 = $3,040 15. The following information was available to the accountant of Horton Company when preparing the monthly bank reconciliation: The amount of cash that should appear on the statement of financial position following completion of the reconciliation and adjustment of the accounting records is: A. $660. B. $640. C. $620. D. $305. Cash on balance sheet = Cash per bank + Deposits in transit - Outstanding cheques $975 + $190 - ($502 + $43) = $620 or, Cash on balance sheet = Cash per books + Interest received from bank - NSF checks - Bank service charges. $660 + $5 - $20 - $25 = $620 16. Deposits in transit: A. have been recorded by the company but not yet by the bank. B. have been recorded by the bank but not yet by the company. C. have not been recorded by the bank or the company. D. are customers' cheques that have not yet been received by the company. 17. Which of the following situations would cause the balance per bank to be more than the balance per books? A. Deposits in transit. B. Service charges. C. Outstanding cheques. D. Cheques from customers returned as NSF. 18. When are ratios most useful for analysis? A. When used alone. B. When compared with historical ratios of the same company. C. When compared with ratios for other companies in the industry. D. When compared with both historical ratios of the same company and ratios for other companies in the industry. 19. The cash flow statement will not report the A. amount of cheques outstanding at the end of the period. B. sources of cash in the current period. C. uses of cash in the current period. D. change in the cash balance for the current period. 20. Which of the following transactions does not affect cash during a period? A. Write-off of an uncollectible account B. Collection of an accounts receivable C. Sale of common shares D. Redemption of bonds 21. At the end of 2013, Libby Company reported an ending balance for retained earnings of $50,000. During 2014, the company reported the following amounts: Dividends declared and paid, $30,000 and profit, $40,000. The 2014 statement of Retained Earnings should report an ending balance for retained earnings of which of the following? A. $60,000. B. $80,000. C. $90,000. D. $100,000. Calculation: $50,000 - $30,000 + $40,000 = $60,000 22. If a business declared and paid a $500 dividend, it would appear on which of the following? A. Income statement only. B. Statement of financial position only. C. Statement of changes in equity and the statement of cash flows. D. Statement of changes in equity only.