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Accounting Concepts

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1. Notes or accounts receivables that result from sales transactions are often called
a Sales receivables.
b Non-trade receivables.
c Trade receivables.
d Merchandise receivables.

2. Which one of the following is not a primary problem associated with accounts receivable?
a Depreciating accounts receivable
b Recognizing accounts receivable
c Valuing accounts receivable
d Disposing of accounts receivable

3. Which of the following would require a compound journal entry?
a To record merchandise returned that was previously purchased on account.
b To record sales on account.
c To record purchases of inventory when a discount is offered for prompt payment.
d To record collection of accounts receivable when a cash discount is taken.

4. On the statement of cash flows using the indirect method, patent amortization expense will
a Be added to net income in the operating section.
b Be deducted from net income in the operating section.
c Appear as an inflow of cash in the investing section.
d Appear as an outflow of cash in the investing section.

5. If $500,000 of bonds are issued during the year but $300,000 of old bonds are retired during the year, the statement of cash flows will show a(n)
a Net increase in cash of $200,000.
b Net decrease in cash of $200,000.
c Increase in cash of $500,000 and a decrease in cash of $300,000.
d Net gain on retirement of bonds of $200,000.

6. The cash debt coverage ratio is computed by dividing net cash provided by operating activities by
a Average current liabilities.
b Net sales.
c Average long-term liabilities.
d Average total liabilities.
Use the following information for questions 7 - 8.
A customer charges a treadmill at Fred's Sport Shop. The price is $1,000 and the financing charge is 18% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and a finance charge is added to the customer's account.

7. What is the amount of the finance charge?
a $30
b $15
c $180
d $6

8. The accounts affected by the journal entry made by Fred's Sport Shop to record the finance charge are
a Dr: Accounts Receivable
Cr: Cash
b Dr: Cash
Cr: Finance Receivable
c Dr: Accounts Receivable
Cr: Interest Payable
d Dr: Accounts Receivable
Cr: Interest Revenue

9. Hardy Clinic purchases land for $90,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Hardy Clinic record as the cost for the land?
a $92,200.
b $90,000.
c $94,700.
d $92,500.

10. Goodwill
a Is only recorded when generated internally.
b Can be sold individually.
c Can be identified only with the business as a whole.
d Is the excess of cost over the fair market value of total assets.

11. A computer company has $4,000,000 in research and development costs. Before accounting for these costs, the net income of the company is $2,500,000. What is the amount of net income or loss after these research and development costs are accounted for?
a $1,500,000 loss.
b $2,500,000 net income.
c $0.
d Cannot be determined from the information provided.

12. On July 1, 2003, Morrow Company purchased a patent for $81,000. The patent had a remaining legal life of 12 years. It is estimated that the patent will have a useful life of 5 years with an estimated salvage value of $6,000. The amount of Amortization Expense recognized for the year 2003 would be
a $16,200.
b $7,500.
c $6,750.
d $3,375.

13. Which of the following is not an intangible asset arising from a government grant?
a Goodwill
b Patent
c Trademark
d Trade name

14. In the balance sheet, the account, Premium on Bonds Payable, is
a Added to bonds payable.
b Deducted from bonds payable.
c Classified as a stockholders' equity account.
d Classified as a revenue account.

15. Bond discount should be amortized to comply with
a The historical cost principle.
b The matching principle.
c The revenue recognition principle.
d Conservatism.

16. The per share amount normally assigned by the board of directors to a large stock dividend is
a The market value of the stock on the date of declaration.
b The average price paid by stockholders on outstanding shares.
c The par or stated value of the stock.
d Zero.

17. Identify the effect the declaration of a stock dividend has on the par value per share and book value per share.
Par Value per Share Book Value Per Share
a Increase Decrease
b No effect Increase
c Decrease Decrease
d No effect Decrease

18. If a corporation declares a 10% stock dividend on its common stock, the account to be debited on the date of declaration is
a Common Stock Dividends Distributable.
b Common Stock.
c Paid-in Capital in Excess of Par.
d Retained Earnings.

19. Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections:
Total Assets Total Liabilities Total Stockholders' Equity
a Increase Decrease No Change
b No change Increase Decrease
c Decrease Increase Decrease
d Decrease No Change Increase

20. Long-term creditors are usually most interested in evaluating
a Liquidity and solvency.
b Solvency and marketability.
c Liquidity and profitability.
d Profitability and solvency.

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This solution explains the basic concepts of accounting like principles of accounting and journal entries.

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