Chapter 4 – Accrual Accounting and Financial Statements

1. Which of the following is an example of an implicit transaction?

a. payment of one year's rent in advance

b. payment of dividends to stockholders
c. recording monthly depreciation on equipment
d. expiration of prepaid rent.
e. both a and c
f. both c and d

2. Which of the following is not an application of an accrual accounting?

a. adjusting the accounts at the end of a period

b. recognizing revenues when earned
c. recognizing expenses when incurred
d. recording expenses when paid

3. A company recorded cash purchases of equipment in the Depreciation Expense account

when purchased. The result would be an

a. understatement of assets.
b. overstatement of liabilities.
c. overstatement of assets.
d. understatement of net income.
e. understatement of liabilities.

4. In November, cash was received in advance of rendering a service. If the service was not
performed by December 31, the adjusting entry would be

a. a debit to Unearned Services and a credit to Cash.

b. a debit to Unearned Services and a credit to Revenue from Services.
c. a debit to Revenue from Services and a credit to Prepaid Services.
d. a debit to Prepaid Services and a credit to Revenue from Services.
e. both b and d.
f. none of the above.

5. The Wages Payable account is an example of

a. an expense.
b. an asset.
c. a liability.
d. an owners' equity item.

6. ABC Engineering completed a survey for York, Corp., on July 30 and billed the company
on August 1. For ABC, this is an example of

a. an accrued expense.
b. an accrued revenue.
c. a deferred expense.
d. a deferred revenue.
7. The journal entry to record the receipt of rent received in advance requires a

a. debit to Unearned Rent.

b. credit to Rent Revenue.
c. credit to Cash.
d. debit to Cash.
e. debit to Rent Revenue.

8. The journal entry to record the payment of interest expense on a one-year note requires a
credit to

a. Cash.
b. Interest Expense.
c. Unearned Interest.
d. Prepaid Interest.

9. Which of the following accounts is a current liability?

a. Accounts Receivable
b. Equipment
c. Goodwill
d. Accounts Payable

10. Which of the following accounts is a long-term liability?

a. Wages payable
b. Bonds Payable due 2019
c. Prepaid Rent
d. Sales Taxes Payable

Solution
 

1. f 6. b

2. d 7. d

3. a 8. a

4. f 9. d

5. c 10. b
Chapter 5 – Statement of Cash Flows

1. The primary purpose of the statement of cash flows is to provide information

a. about a company’s cash receipts and cash payments during an accounting

period.
b. about a company’s investing and financing activities during an accounting
period.
c. regarding a company’s financial position at the end of an accounting period.
d. regarding the operating activities for a period of time.

2. For the year ended December 31, 20X2, a company had cash collections from customers of
$50,000; cash paid to employees of $8,000; cash used to retire long-term bonds of $7,000;
and cash payments for dividends of $1,000. Cash provided by operating activities for 20X2
is

a. $34,000.
b. $35,000.
c. $42,000
d. $43,000.

3. For the year ended December 31, 20X2, a company had cash payments for dividends on
stock of $40,000; cash paid for interest of $7,000; cash paid to suppliers of $8,000; and
cash payments for equipment of $9,000. Cash used by investing activities for 20X2 is

a. $9,000.
b. $17,000.
c. $24,000.
d. $49,000.

4. Which of the following would not be represented in the financing section of the statement
of cash flows?

a. long-term bonds payable issued

b. issuing of equity securities
c. purchase of treasury stock
d. make a loan to a supplier

5. The collection of a loan payment from a stockholder would appear in which section of the
statement of cash flows?

a. operating
b. investing
c. financing
d. other
6. Wilguess Company began the current year with an Accounts Receivable balance of
$15,000. During the year, Wilguess Company had credit sales of $110,000. At the end of
the year the balance in the Accounts Receivable account was $5,000. How much cash did
Wilguess Company generate from collections from customers?

a. $120,000
b. $115,000
c. $110,000
d. $100,000

7. A decrease in operating assets would appear in which section of the statement of cash
flows?

a. operating
b. investing
c. financing
d. other

8. The records of Williams Corporation showed a net loss of $10,000; depreciation expense of
$15,000; and an increase in accounts receivable of $6,000. The amount of cash provided by
(used in) operating activities, assuming no other charges in accounts, is

a. $(4,000).
b. $(1,000).
c. $ 5,000.
d. $11,000.

Solution

1. a 6. a

2. c 7. b

3. a 8. b

4. d 5. b
Chapter 6 – Accounting for Sales

1. Cedarwood Apartments received 6 months' rent in advance on December 1, 20X2. Under

the accrual basis of accounting the income should be recognized

a. on December 31, 20X2.

b. proportionately each month.
c. at the end of the 6-month period.
d. when received.
e. when the tenant moves in.

2. The entry to record the return of goods from a customer would include

a. debit to Sales.
b. credit to Sales.
c. debit to Sales Returns and Allowances.
d. credit to Sales Returns and Allowances.
e. debit to Purchases Returns and Allowances.
f. credit to Purchases Returns and Allowances.

3. Joshua, Inc., offers two trade discounts for all of its products. A 10% discount is allowed
for wholesalers, and an additional 5% for retailers. If Joshua, Inc., sells merchandise priced
at $45,000 to a wholesaler, at what amount should the sale be recorded?

a. $49,500
b. $40,500
c. $47,250
d. $42,750

4. A sale on October 1 with terms of n/20 EOM is due to be collected by

a. October 21.
b. October 31.
c. November 1.
d. November 20.

5. Buffy sold goods to Biff on December 1, 20X2, for $10,000. The invoice was marked
2/10/net60. If Biff pays the bill on December 10, 20X2, how much will Buffy receive?

a. $14,000
b. $19,400
c. $20,000
d. $20,600
6. Brady, Inc., had credit card sales of $50,000 for the month of July. The credit card
company charges a 3% service cost for processing the sale. How much will Brady, Inc.,
receive when payment is received from the credit card company?

a. $48,500
b. $50,000
c. $51,500
d. need more information to solve

7. Which of the following would not be considered cash?

a. paper money and coins

b. money orders
c. checks
d. 60-day note receivable

8. Which of the following is true regarding the control of cash in a business?

a. The employee who authorizes a check should not sign the check.
b. The employee who authorizes a check should sign the check if under $100.
c. The employees who handle the cash should also be responsible for bank
reconciliations.
d. Prenumbered checks should never be used.

9. Melissa Company uses the specific write-off method to recognize bad debts. The entry to
write off an uncollectible account would be recorded by

a. a debit to Allowance for Uncollectible Accounts and a credit to Accounts

Receivable.
b. a debit to Bad Debt Expense and a credit to Accounts Receivable.
c. a debit to Bad Debt Expense and a credit to Allowance for Uncollectible
Accounts.
d. a debit to Allowance for Uncollectible Accounts and a credit to Bad Debt
Expense.

10. Under the allowance method of accounting for bad debts, the journal entry to record the
write-off of an uncollectible account would

a. debit Allowance for Uncollectible Accounts.

b. debit Bad Debt Expense.
c. credit Allowance for Uncollectible Accounts.
d. debit Accounts Receivable.

11. SAY Co. had $900,000 of sales during 20X2, $400,000 of which were on credit. The
balances in its Accounts Receivable and its Allowance for Uncollectible Accounts on
December 31, 20X2 were $80,000 and $20,000, respectively. Past experience indicates that
5% of all credit sales will not be collected. What is the correct amount for SAY Co. to debit
to Bad Debt Expense?
 a. $35,000
b. $25,000
c. $15,000
d. $20,000

12. There is a debit balance of $2,000 before adjustments in Yetmar Company's

Allowance for Uncollectible Accounts. Based on the aging schedule prepared at the
end of the accounting period, Yetmar estimates that $40,000 of receivables are
uncollectible. The amount of bad debt expense to be recognized is

a. $42,000.
b. $40,000.
c. $38,000.
d. $ 2,000.

Solution

1. b 6. a 11. b

2. c 7. d 12. a

3. b 8. a

4. d 9. b

5. b 10. a
Chapter 7 – Inventories and Cost of Goods Sold

1. Inventory becomes part of cost of goods sold when a company

a. sells the inventory.

b. purchases the inventory.
c. pays for the inventory.
d. receives the payment from the customer.

2. Accountants refer to the difference between sales and cost of goods sold as the

a. net sales.
b. holding gain.
c. goods available for sale.
d. gross profit.

3. The correct way of calculating cost of goods sold is

a. Beginning Inventory – Purchases + Ending Inventory = Cost of Goods Sold.

b. Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold.
c. Beginning Inventory + Purchases + Ending Inventory = Cost of Goods Sold.
d. none of the above.

4. The cost of goods sold in a periodic inventory system is found by

a. deducting the cost of the ending inventory from the net cost of purchases.
b. deducting the cost of the ending inventory from the cost of goods available
for sale.
c. deducting the cost of the beginning inventory from the cost of goods
available for sale.
d. adding the net cost of purchases to the ending inventory.

5. Under a perpetual inventory system, the purchase of goods for resale would result in

a. a debit to the Accounts Receivable account.

b. a debit to the Purchase account.
c. a debit to the Cost of Goods Sold account.
d. a debit to the Inventory account.

6. Which of the following is not acceptable for determination of inventory cost?

a. FIFO method
b. LIFO method
c. specific identification method
d. All of the above are acceptable.

7. During the period of falling prices, this inventory valuation method produces the lowest
reported net income:

a. FIFO method.
 b. LIFO method.
c. weighted-average method.
d. All produce the same net income.

8. Characteristics of the use of LIFO include which of the following?

a. allowing managers to manipulate net income

b. producing higher net income than FIFO during the period of rising prices
c. producing lower balance sheet valuation of inventory than FIFO during a
period of declining prices
d. a., b., and c.
e. b. and c.

Solution

1. a 6. d

2. d 7. a

3. b 8. a

4. b

5. d
Chapter 8 – Long-Lived Assets

1. Which of the following assets is carried indefinitely at its original cost?

a. Buildings
b. Equipment
c. Copyright
d. Land

2. Which of the following costs would not be included in the cost of the machinery?

a. Invoice price
b. Installation costs
c. Testing of machinery prior to its intended use
d. b and c
e. a, b, and c

3. The primary purpose of depreciation is to

a. show the fair market value of an asset on the balance sheet.

b. provide for the replacement of an asset.
c. allocate the cost of an asset over the periods benefited.
d. record a decline in the value of an asset based on changes in the current
replacement cost of that asset.

4. For financial reporting purposes, the most frequently used depreciation method is

a. double-declining balance.
b. straight-line.
c. modified accelerated cost recovery system.
d. unit depreciation.

5. Cross, Co., purchased a machine at the beginning of the year that cost $30,000 and has a
$3,000 salvage value and a 6-year life. The depreciation expense for the first year under the
straight-line method should be

a. $4,000.
b. $4,500.
c. $5,000.
d. $5,500.

6. Nicoll, Co., purchased a machine that cost $40,000 and has a $4,000 salvage value and a 4-
year life. The depreciation expense for the second year under the double-declining balance
should be

a. $9,000.
b. $10,000.
c. $11,000.
d. $20,000.
7. Depreciation expense is

a. the total amount of cash set aside to purchase new assets.

b. the allocation of the original cost of an asset to the periods in which it is used.
c. the total of all depreciation taken since the asset was first placed in service.
d. the difference between the original basis of an asset and accumulated
depreciation.

8. Cue, Co., purchased a new truck in 20X0 for $27,000. On January 1, 20X3, when
accumulated depreciation was $20,000, the truck was sold for $7,000 cash. What amount
of gain or loss should Cue report for this sale?

a. $ -0-
b. $ 7,000
c. $10,000
d. $14,000

Solution

1. d 6. b
2. e 7. b
3. c 8. a
4. b
5. b