CHAPTER 4
1. An accounting time period that is one year in length is called:
a. a fiscal year.
b. an interim period.
c. the time period assumption.
d. a reporting period.
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2. Expenses are recognized wh
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CHAPTER 4
1. An accounting time period that is one year in length is called:
a. a fiscal year.
b. an interim period.
c. the time period assumption.
d. a reporting period.
,
2. Expenses are recognized when:
a. they contribute to the production of revenue.
b. they are paid.
c. they are billed by the supplier.
d. the invoice is received.
3. Which of the following is not generally an accounting time period?
a. A week.
b. A month.
c. A quarter.
d. A year.
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4. The revenue recognition principle dictates that revenue should be recognized in the accounting records:
a. when cash is received.
b. when the performance obligation is satisfied.
c. at the end of the month.
d. in the period that income taxes are paid.
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5. The expense recognition principle matches:
a. customers with businesses.
b. expenses with revenues.
c. assets with liabilities.
d. creditors with businesses.
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6. The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that:
a. assets should be matched with liabilities.
b. efforts should be matched with accomplishments.
c. dividends should be matched with stockholder investments.
d. cash payments should be matched with cash receipts.
7. Why do generally accepted accounting principles require the application of the revenue recognition principle?
a. Failure to apply the revenue recognition principle could lead to a misstatement of revenue.
b. It is easy to apply the revenue recognition principle because revenue issues are always easy to identify and resolve.
c. Recording revenue when cash is received is an objective application of the revenue recognition principle.
d. Accounting software has made the revenue recognition easy to apply.
8. Under the accrual basis of accounting:
a. cash must be received before revenue is recognized.
b. net income is calculated by matching cash outflows against cash inflows.
c. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
d. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.
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9. A small company may be able to justify using a cash basis of accounting if they have:
a. sales under $1,000,000.
b. no accountants on staff.
c. few receivables and payables.
d. all sales and purchases on account.
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10. Under the cash basis of accounting, an amount received from a customer in advance of providing the services would be reported as a(n):
a. revenue.
b. liability.
c. expense.
d. prepaid expense.
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11. Why was Apple required to spread their iPhone revenues over a two year period?
a. Because of its newness, their returns might exceed the normal level of returns.
b. Because they were required to provide software updates over that two year period.
c. Because that was the estimated life of the iPhone.
d. Because they needed to defer revenue recognition since they had a swap program available for future models.
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12. The primary difference between prepaid and accrued expenses is that prepaid expenses have:
a. been incurred and accrued expenses have not.
b. not been paid and accrued expenses have.
c. been recorded and accrued expenses have not.
d. not been recorded and accrued expenses have.
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13. The primary difference between accrued revenues and unearned revenues is that accrued revenues have:
a. not been recognized and accrued revenues have been.
b. been paid and unearned revenues have not.
c. been recorded and unearned revenues have not.
d. not been recorded and unearned revenues have.
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14. The general term employed to indicate an expense that has not been paid or revenue that has not been received and has not yet been recognized in the accounts is:
a. contra asset.
b. prepayment.
c. asset.
d. accrued.
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15. Accounts often need to be adjusted because:
a. there are never enough accounts to record all the transactions.
b. many transactions affect more than one time period.
c. there are always errors made in recording transactions.
d. management can't decide what they want to report.
16. Adjusting entries are made to ensure that:
a. expense are recognized in the period in which they are incurred.
b. revenues are recorded in the period in which the performance obligation is satisfied.
c. balance sheet and income statement accounts have correct balances at the end of an accounting period.
d. All of these answer choices are correct.
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17. Adjusting entries are:
a. not necessary if the accounting system is operating properly.
b. usually required before financial statements are prepared.
c. made whenever management desires to change an account balance.
d. made to balance sheet accounts only.
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18. Each of the following is a major type (or category) of adjusting entry except:
a. earned expenses.
b. prepaid expenses.
c. accrued expenses.
d. accrued revenues.
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19. Adjusting entries are required:
a. because some costs expire with the passage of time and have not yet been journalized.
b. when the company's profits are below the budget.
c. when expenses are recorded in the period in which they are earned.
d. None of these answer choices are correct.
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20. An adjusting entry:
a. affects two balance sheet accounts.
b. affects two income statement accounts.
c. affects a balance sheet account and an income statement account.
d. is always a compound entry.
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21. Adjusting entries are:
a. the same as correcting entries.
b. needed to ensure that the expense recognition principle is followed.
c. optional.
d. rarely needed.
22. Adjusting entries can be classified as:
a. postponements and advances.
b. accruals and deferrals.
c. deferrals and postponements.
d. accruals and advances.
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23. Which of the following describes an accrued expense?
a. Incurred but not yet paid or recorded.
b. Paid and recorded in an asset account after they are used or consumed.
c. Paid and recorded in an asset account before they are used or consumed.
d. Incurred and already paid or recorded.
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24. Accrued revenues are:
a. received and recorded as liabilities before they are recognized.
b. recognized and recorded as liabilities before they are received.
c. recognized but not yet received or recorded.
d. recognized and already received and recorded.
25. Goods purchased for future use in the business, such as supplies, are called:
a. prepaid expenses.
b. revenues.
c. stockholders’ equity.
d. liabilities.
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26. Accrued expenses are:
a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.
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27. Unearned revenues are:
a. received and recorded as liabilities before they are recognized.
b. recognized and recorded as liabilities before they are received.
c. recognized but not yet received or recorded.
d. recognized and already received and recorded.
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28. Depreciation is the process of:
a. valuing an asset at its fair value.
b. increasing the value of an asset over the periods in which it is used.
c. allocating the cost of an asset to the periods in which it is used.
d. writing down an asset to its real value each accounting period.
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CHAPTER 5
29. Merchandising companies that sell to retailers are known as
a. brokers.
b. corporations.
c. wholesalers.
d. service firms.
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30. Which of the following would not be considered a merchandising operation?
a. Retailer
b. Wholesaler
c. Service firm
d. Merchandising company
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31. Which of the following activities is not a component of the operating cycle?
a. Sale of merchandise
b. Payment of employees’ salaries
c. Collection of cash from merchandise sales
d. Purchase of merchandise
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32. Gross profit equals the difference between
a. net income and operating expenses.
b. sales revenue and cost of goods sold.
c. sales revenue and operating expenses.
d. sales revenue and cost of goods sold plus operating expenses.
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33. Each of the following companies is a merchandising company except a
a. wholesale parts company.
b. candy store.
c. moving company.
d. furniture store.
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34. Net income will result if gross profit exceeds
a. cost of goods sold.
b. operating expenses.
c. purchases.
d. cost of goods sold plus operating expenses.
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35. A merchandiser will earn an operating income of exactly $0 when
a. net sales equals cost of goods sold.
b. cost of goods sold equals gross margin.
c. operating expenses equal net sales.
d. gross profit equals operating expenses.
36. A merchandiser that sells directly to consumers is a
a. retailer.
b. wholesaler.
c. broker.
d. service enterprise.
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37. Two categories of expenses in merchandising companies are
a. cost of goods sold and financing expenses.
b. operating expenses and financing expenses.
c. cost of goods sold and operating expenses.
d. other expenses and cost of goods sold.
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38. The primary source of revenue for a wholesaler is
a. investment income.
b. service revenue.
c. the sale of merchandise.
d. the sale of plant assets the company owns.
39. Generally, the revenue account for a merchandising enterprise is called
a. Sales Revenue or Sales.
b. Investment Income.
c. Gross Profit.
d. Net Sales.
40. Under a perpetual inventory system
a. accounting records continuously disclose the amount of inventory.
b. increases in inventory resulting from purchases are debited to purchases.
c. there is no need for a year-end physical count.
d. the account purchase returns and allowances is credited when goods are returned to vendors.
41. The operating cycle of a merchandising company is
a. always one year in length.
b. ordinarily longer than that of a service company.
c. about the same as that of a service company.
d. ordinarily shorter than that of a service company.
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42. Sales revenue less cost of goods sold is called
a. gross profit.
b. net profit.
c. net income.
d. marginal income.
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43. After gross profit is calculated, operating expenses are deducted to determine
a. gross margin.
b. net income.
c. gross profit on sales.
d. net margin.
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44. A perpetual inventory system would most likely be used by a(n)
a. automobile dealership.
b. hardware store.
c. drugstore.
d. convenience store.
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45. In a perpetual inventory system, cost of goods sold is recorded
a. on a daily basis.
b. on a monthly basis.
c. on an annual basis.
d. each time a sale occurs.
46. Inventory becomes part of cost of goods sold when a company
a. pays for the inventory.
b. purchases the inventory.
c. sells the inventory.
d. receives payment from the customer.
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47. If a company determines cost of goods sold each time a sale occurs, it
a. must have a computer accounting system.
b. uses a combination of the perpetual and periodic inventory systems.
c. uses a periodic inventory system.
d. uses a perpetual inventory system.
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48. What is a difference between merchandising companies and service enterprises?
a. Merchandising companies must prepare multiple-step income statements and service enterprises must prepare single-step income statements.
b. Merchandising companies generally have a longer operating cycle than service enterprises.
c. Cost of goods sold is an expense for service enterprises but not for merchandising companies.
d. All are these choices are differences.
49. Under the perpetual inventory system, which of the following accounts would not be used?
a. Sales Revenue
b. Purchases
c. Cost of Goods Sold
d. Inventory
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50. Under a perpetual inventory system, acquisition of merchandise for resale is debited to
a. the Inventory account.
b. the Purchases account.
c. the Supplies account.
d. the Cost of Goods Sold account.
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51. The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit
a. Accounts Payable.
b. Purchase Returns and Allowances.
c. Sales Revenue.
d. Inventory.
52. If a purchaser using a perpetual inventory system pays the transportation costs, then the
a. Inventory account is increased.
b. Inventory account is not affected.
c. Freight-Out account is increased.
d. Delivery Expense account is increased.
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53. In the credit terms of 1/10, n/30, the “1” represents the
a. number of days in the discount period.
b. full amount of the invoice.
c. number of days when the entire amount is due.
d. percent of the cash discount.
54. When using a perpetual inventory system, why are discounts credited to Inventory?
a. The discounts are debited to discount expense and thus the credit has to be made to merchandise inventory.
b. The discounts reduce the cost of the inventory.
c. The discounts are a reduction of business expenses.
d. None of these answers choices are correct.
Ans:
(Purch.amount −ret.) (1 − 0.2) + freight
55. Assets purchased for resale are recorded in which of the following accounts?
a. Supplies
b. Inventory
c. Equipment
d. Patents
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56. Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in which account?
a. Freight Expense
b. Freight-In
c. Inventory
d. Freight-Out
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57. of the following accounts is classified as a contra revenue account?
a. Sales Revenue
b. Cost of Goods Sold
c. Sales Returns and Allowances
d. Purchase Discounts
58. Sales revenues are usually considered earned when
a. cash is received from credit sales.
b. an order is received.
c. goods have been transferred from the seller to the buyer.
d. adjusting entries are made.
59. A sales invoice is prepared when goods
a. are sold for cash.
b. are sold on credit.
c. sold on credit are returned.
d. are sold on credit or for cash.
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60. If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales
a. discount.
b. return.
c. contra asset.
d. allowance.
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61. A Sales Returns and Allowances account is not debited if a customer
a. returns defective merchandise.
b. receives a credit for merchandise of inferior quality.
c. utilizes a prompt payment incentive.
d. returns goods that are not in accordance with specifications.
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62. As an incentive for customers to pay their accounts promptly, a business may offer its customers
a. a sales discount.
b. free delivery.
c. a sales allowance.
d. a sales return.
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63. The credit terms offered to a customer by a business firm were 2/10, n/30, which means
a. the customer must pay the bill within 10 days.
b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date.
c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.
d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.
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64. Which of the following would not be classified as a contra account?
a. Sales Revenue
b. Sales Returns and Allowances
c. Accumulated Depreciation
d. Sales Discounts
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65. The respective normal account balances of Sales, Sales Returns and Allowances, and Sales Discounts are
a. credit, credit, credit.
b. debit, credit, debit.
c. credit, debit, debit.
d. credit, debit, credit.
66. Indicate which one of the following would not appear on both a single-step income statement and a multiple-step income statement.
a. Gross profit
b. Operating expenses
c. Sales revenue
d. Cost of goods sold
67. An advantage of the single-step income statement over the multiple-step form is
a. the amount of information it provides.
b. its comprehensiveness.
c. its simplicity.
d. its use in computing ratios.
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68. Income from operations appears on
a. both a multiple-step and a single-step income statement.
b. neither a multiple-step nor a single-step income statement.
c. a single-step income statement.
d. a multiple-step income statement.
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CHAPTER 6:
69. The factor which determines whether or not goods should be included in a physical count of inventory is
a. physical possession.
b. legal title.
c. management's judgment.
d. whether or not the purchase price has been paid.
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70. If goods in transit are shipped FOB destination
a. the seller has legal title to the goods until they are delivered.
b. the buyer has legal title to the goods until they are delivered.
c. the transportation company has legal title to the goods while the goods are in transit.
d. no one has legal title to the goods until they are delivered.
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71. Independent internal verification of the physical inventory process occurs when
a. the employee is required to count all items twice for sake of verification.
b. the items counted are compared to the inventory account balance.
c. a second employee counts the inventory and compares the result to the count made by the first employee.
d. all prenumbered inventory tags are accounted for.
72. Which of the following should not be included in the physical inventory of a company?
a. Goods held on consignment from another company.
b. Goods in transit from another company shipped FOB shipping point.
c. Goods shipped on consignment to another company.
d. All of these answer choices should be included.
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73. The term "FOB" denotes
a. free on board.
b. freight on board.
c. free only (to) buyer.
d. freight charge on buyer.
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74. Goods held on consignment are
a. never owned by the consignee.
b. included in the consignee’s ending inventory.
c. kept for sale on the premises of the consignor.
d. included as part of no one’s ending inventory.
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75. The LIFO inventory method assumes that the cost of the latest units purchased are
a. the last to be allocated to cost of goods sold.
b. the first to be allocated to ending inventory.
c. the first to be allocated to cost of goods sold.
d. not allocated to cost of goods sold or ending inventory.
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76. The selection of an appropriate inventory cost flow assumption for an individual company is made by
a. the external auditors.
b. the SEC.
c. the internal auditors.
d. management.
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77. In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the
a. FIFO method.
b. LIFO method.
c. average-cost method.
d. tax method.
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78. The lower of cost or market basis of valuing inventories is an example of
a. comparability.
b. the historical cost principle.
c. conservatism.
d. consistency.
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79. The difference between ending inventory using LIFO and ending inventory using FIFO is referred to as the
a. FIFO reserve.
b. inventory reserve.
c. LIFO reserve.
d. periodic reserve.
CHAPTER 7:
80. Which of the following is not one of the main factors that contribute to fraudulent activity?
a. Opportunity.
b. Incompatible duties.
c. Financial pressure.
d. Rationalization.
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81. All of the following are examples of internal control procedures except
a. using prenumbered documents.
b. reconciling the bank statement.
c. customer satisfaction surveys.
d. insistence that employees take vacations.
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82. Each of the following is a feature of internal control except
a. an extensive marketing plan.
b. bonding of employees.
c. separation of duties.
d. recording of all transactions.
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83. Each of the following is a feature of internal control except
a. limited access to assets.
b. independent internal verifications.
c. authorization of transactions.
d. generic design of documents.
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84. Internal control is defined, in part, as a plan that safeguards
a. all balance sheet accounts.
b. assets.
c. liabilities.
d. capital stock.
85. Under the concept of establishment of responsibility, how many people should have the ultimate responsibility?
a. Everyone in the organization.
b. An individual and his/her supervisor.
c. Only one individual.
d. The CEO.
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86. Internal controls are not designed to safeguard assets from
a. natural disasters.
b. employee theft.
c. robbery.
d. unauthorized use.
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87. Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them
a. increases the potential for errors and fraud.
b. decreases the potential for errors and fraud.
c. is an example of good internal control.
d. is a good example of safeguarding the company's assets.
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88. The custodian of a company asset should
a. have access to the accounting records for that asset.
b. be someone outside the company.
c. not have access to the accounting records for that asset.
d. be an accountant.
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89. Internal auditors
a. are hired by CPA firms to audit business firms.
b. are employees of the IRS who evaluate the internal controls of companies filing tax returns.
c. evaluate the system of internal controls for the companies that employ them.
d. cannot evaluate the system of internal controls of the company that employs them because they are not independent.
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90. When two or more people get together for the purpose of circumventing prescribed controls, it is called
a. a fraud committee.
b. collusion.
c. a division of duties.
d. bonding of employees.
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91. From an internal control standpoint, the asset most susceptible to improper diversion and use is
a. prepaid insurance.
b. cash.
c. buildings.
d. land.
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92. A very small company would have the most difficulty in implementing which of the following internal control activities?
a. Separation of duties.
b. Limited access to assets.
c. Periodic independent verification.
d. Sound personnel procedures.
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93. The control principle related to not having the same person authorize and pay for goods is known as
a. establishment of responsibility.
b. independent internal verification.
c. separation of duties.
d. rotation of duties.
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94. Physical controls to safeguard assets do not include
a. cashier department supervisors.
b. vaults.
c. safety deposit boxes.
d. locked warehouses.
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95. In a small business, the lack of certain separations of duties can best be overcome by
a. bonding the employees.
b. getting the owner actively involved.
c. hiring only honest employees.
d. holding one person responsible for a given set of transactions.
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96. Which of the following would not be included in the definition of cash?
a. Money on deposit in a bank.
b. Coins.
c. NSF checks.
d. Petty cash.
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97. The use of prenumbered checks is an example of
a. documentation procedures.
b. independent internal verification.
c. establishment of responsibility.
d. segregation of duties.
98. Electronic funds transfer (EFT) is a disbursement system that transfers cash from one location to another using
a. a telephone.
b. a telegraph.
c. a computer.
d. a telephone, telegraph, or computer.
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99. A bank statement
a. lets a depositor know the financial position of the bank as of a certain date.
b. is a credit reference letter written by the depositor's bank.
c. is a bill from the bank for services rendered.
d. shows the activities that increased or decreased the depositor's account balance.
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100. All of the following are items that would most likely be paid from a petty cash fund except
a. postage due.
b. taxi fares.
c. administrative wages.
d. freight-out.
101. Which of the following would not be reported on the balance sheet as a cash equivalent?
a. Money market fund.
b. Commercial paper.
c. Treasury bill.
d. Restricted cash.
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102. Cash equivalents do not include
a. money market accounts.
b. commercial paper.
c. U.S. Treasury bills.
d. long-term investment.
PROBLEMS
CHAPTER 5
1: Financial information is presented below:
Operating expenses $ 45,000
Sales returns and allowances 3,000
Sales discounts 7,000
Sales revenue 160,000
Cost of goods sold 96,000
The amount of net sales on the income statement would be ___________
2. Financial information is presented below:
Operating expenses $ 45,000
Sales returns and allowances 3,000
Sales discounts 7,000
Sales revenue 160,000
Cost of goods sold 96,000
Gross profit would be ___________
3. Financial information is presented below:
Operating expenses $ 45,000
Sales returns and allowances 3,000
Sales discounts 7,000
Sales revenue 160,000
Cost of goods sold 96,000
The gross profit rate would be _________
4. Financial information is presented below:
Operating expenses $ 45,000
Sales returns and allowances 3,000
Sales discounts 7,000
Sales revenue 160,000
Cost of goods sold 96,000
The profit margin would be ____________
5. At the beginning of the year, Uptown Athletic had an inventory of $600,000. During the year, the company purchased goods costing $2,250,000. If Uptown Athletic reported ending inventory of $750,000 and sales of $3,000,000,
their cost of goods sold would be ________
and gross profit rate would be ____________
6. During the year, Megan’s Pet Shop’s merchandise inventory decreased by $80,000. If the company’s cost of goods sold for the year was $1,200,000, purchases would have been _____________
CHAPTER 6:
7 . Alpha First Company just began business and made the following four inventory purchases in June:
June 1 150 units $ 1,040
June 10 200 units 1,560
June 15 200 units 1,680
June 28 150 units 1,320
$5,600
A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is ____________
8. Baker Bakery Company just began business and made the following four inventory purchases in June:
June 1 150 units $ 1,040
June 10 200 units 1,560
June 15 200 units 1,680
June 28 150 units 1,320
$5.600
A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is ________
9. Charlene Cosmetics Company just began business and made the following four inventory purchases in June:
June 1 150 units $ 1,040
June 10 200 units 1,560
June 15 200 units 1,680
June 28 150 units 1,320
$5,600
A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the average cost method, the amount allocated to the ending inventory on June 30 is ______
10. Jenks Company developed the following information about its inventories in applying the lower of cost or market (LCM) basis in valuing inventories:
Product Cost Market
A $114,000 $120,000
B 80,000 76,000
C 160,000 162,000
If Jenks applies the LCM basis, the value of the inventory reported on the balance sheet would be _________
11. Use the following information regarding Black Company and Red Company to answer the question “Which amount is equal to Black Company's "days in inventory" for 2017 (to the closest decimal place)?”
Year Inventory Turnover Ending Inventory
Black Company 2015 $26,340
2016 8.7 $29,890
2017 8.4 $30,100
Red Company 2015 $25,860
2016 7.0 $24,750
2017 7.5 $22,530
a. 43.5 days
b. 52.1 days
c. 48.7 days
d. 42.0 days
12. Redeker Company had the following records:
2017 2016
Ending inventory $32,650 $30,490
Cost of goods sold 213,600 209,040
What is Redeker’s inventory turnover for 2017? (rounded) __________
Solution: $213,600 [($32,650 + $30,490) 2] 6.8
(2017 COGS ÷ [(2017 E.I. + 2016 E.I.) ÷ 2])
CHAPETR 7:
13. Nilson Company gathered the following reconciling information in preparing its August bank reconciliation:
Cash balance per books, 8/31 $28,000
Deposits in transit 1,200
Notes receivable and interest collected by bank 6,800
Bank charge for check printing 160
Outstanding checks 16,000
NSF check 1,360
The adjusted cash balance per books on August 31 is ___________
14. In the month of November Gavin Company Inc. wrote checks in the amount of $55,500. In December, checks in the amount of $75,948 were written. In November, $50,808 of these checks were presented to the bank for payment, and $65,298 in December. What is the amount of outstanding checks at the end of December? ____________
15. The following information was taken from Mitchell Company cash budget for the month of July:
Beginning cash balance $125,000
Cash receipts 120,000
Cash disbursements 170,000
If the company has a policy of maintaining an end of the month cash balance of $125,000, the amount the company would have to borrow is __________
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