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Solving Accounting Multiple Choice Questions

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23. Freije Refrigeration Company has an inventory of raw materials and parts consisting of thousands of different items which are of small dollar value individually but significant in total. A fundamental control requirement of Freije's inventory system is that:
a) Perpetual inventory records be maintained for all inventory items
b) The taking of physical inventories be conducted on a cycle basis rather than at year end
c) The storekeeping function not be combined with the production and inventory record keeping functions
d) Material requisitions be approved by an officer of the company

24. The sales department bookkeeper has been crediting house account sales to her brother-in law, an outside salesman. Commissions are paid on outside sales but not on house-account sales. This might have been prevented by requiring that:
a) Sales order forms be prenumbered and accounted for by the sales department bookkeeper
b) Sales commission statements be supported by sales order forms and approved by the sales manager
c) Aggregate sales entries be prepared by the general accounting department
d) Disbursement vouchers for sales commissions be reviewed by the internal audit department and checked to sales commission statements

25. The voucher system requires that invoices be compared with receiving reports and express bills before a voucher is prepared and approved for payment.
a) Unrecorded checks appear in the bank statement
b) The treasurer takes funds by preparing a fictitious voucher charging "Miscellaneous General Expenses"
c) An employee in the purchasing department sends through fictitious invoices and receives payment
d) A cash shortage is covered by underfooting outstanding checks on the bank reconciliation
e) A cash shortage is covered by omitting some of the outstanding checks from the bank reconciliation

26. Both cash and credit customers are educated to expect a sales ticket. Tickets are serially numbered. All numbers are accounted for daily.
a) Customers complain that their monthly bills contain items that have been paid
b) Some customers have the correct change for the merchandise purchased; they pay and do not wait for a sales ticket
c) Customers complain that they are billed for goods they did not purchase
d) Customers complain that goods ordered are not received
e) Salesclerks destroy duplicate sales tickets for the amount of cash stolen

27. At a movie theater box office, all tickets are prenumbered. At the end of each day, the beginning ticket number is subtracted from the ending number to give the number of tickets sold. Cash is counted and compared with the number of tickets sold.
a) The box office gives too much change
b) The ticket taker admits his friends without a ticket
c) The manager gives theater passes for personal expenses, which is against company policy
d) A test check of customers entering the theater does not reconcile with ticket sales
e) Tickets from a previous day are discovered in the ticket taker's stub box despite the fact that tickets are stamped "Good on Date of Purchase Only"
28. The duties of cashier and accounts receivable bookkeeper should be separated.
a) There are two cashiers. At the end of a certain day, there is a sizable cash shortage; each cashier blames the other and it is impossible to fix responsibility
b) A cash shortage is covered by overfooting (overadding) cash in transit on the bank reconciliation
c) A cash shortage is covered by charging it to "Miscellaneous General Expenses"
d) Customers who paid their accounts in cash complain that they still receive statements of balances due
e) The accounts receivable bookkeeper charges off the accounts of friends to "Allowance for Uncollectible Accounts"

29. Regarding COBIT, which of the statements is true?
a) COBIT means Cost Objectives for Information and Related Technology
b) COBIT rejects the definition of internal control from the COSO report
c) COBIT states that a company's management should play a minor role in establishing an internal control system
d) COBIT classifies people as one of the primary resources managed by various IT processes

30. The component of an internal control system that concerns itself with the way a company's management assigns authority and responsibility is called:
a) Monitoring
b) Control environment
c) Risk assessment
d) Information

31. Suppose a company established training programs that teach employees to perform their job functions more efficiently and effectively. This is an example of which type of control?
a) Detective
b) Preventive
c) Corrective
d) none of the above

32 Many organizations have an internal audit function that makes periodic reviews of each department within the organization. The focus of these reviews is to:
a) Conduct an investigation of each department to be sure fraud is not taking place
b) Evaluate the efficiency and effectiveness of the department
c) Evaluate the performance of the manager of the department
d) Report to the organization's top managers and board of directors

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Which of the following statements best represents what finance is about?

Which of the following statements best represents what finance is about?

a. How political, social, and economic forces affect corporations

b. Maximizing profits

c. Creation and maintenance of economic wealth

d. Reducing risk

Why is maximizing shareholder wealth a better goal than maximizing profits?

a. Maximizing shareholder wealth places greater emphasis on the short term.

b. Maximizing profits ignores the uncertainty that is related to expected profits.

c. Maximizing shareholder wealth gives superior consideration to the entire portfolio of shareholder investments.

d. Maximizing profits gives too much weight to the tax position of shareholders.

Which of the following is not a reason why financial analysts use ratio analysis?

a. Ratios help to pinpoint a firm's strengths.

b. Ratios restate accounting data in relative terms.

c. Ratios are ideal for smoothing out the differences that may exist when comparing firms that use different accounting practices.

d. Some of a firm's weaknesses can be identified through the usage of ratios.

If you were given the components of current assets and of current liabilities, what ratio(s) could you compute?

a. Quick ratio

b. Average collection period

c. Current ratio

d. Both a and c

e. All of the above

Table 1

Smith Company Balance Sheet


Cash and marketable securities $300,000

Accounts receivable 2,215,000

Inventories 1,837,500

Prepaid expenses 24,000

Total current assets $3,286,500

Fixed assets 2,700,000

Less: accumulated depreciation 1,087,500

Net fixed assets $1,612,500

Total assets $4,899,000


Accounts payable $240,000

Notes payable 825,000

Accrued taxes 42,500

Total current liabilities $1,107,000

Long-term debt 975,000

Owner's equity 2,817,000

Total liabilities and owner's equity $4,899,000

Net sales (all credit) $6,375,000

Less: Cost of goods sold 4,312,500

Selling and administrative expense 1,387,500

Depreciation expense 135,000

Interest expense 127,000

Earnings before taxes $412,500

Income taxes 225,000

Net income $187,500

Common stock dividends $97,500

Change in retained earnings $90,000

Based on the information in Table 1, the current ratio is:

a. 2.97.

b. 1.46.

c. 2.11.

d. 2.23.

Based on the information in Table 1, and using a 360-day year, the average collection period is:

a. 71 days.

b. 84 days.

c. 64 days.

d. 125 days.

Based on the information in Table 1, the debt ratio is:

a. 0.70.

b. 0.20.

c. 0.74.

d. 0.42.

Based on the information in Table 1, the net profit margin is:

a. 4.61%.

b. 2.94%.

c. 1.97%.

d. 5.33%.

Based on the information in Table 1, the inventory turnover ratio is:

a. 0.29 times.

b. 2.35 times.

c. 0.43 times.

d. 3.47 times.

The money market is usually thought of as dealing with long-term debt instruments issued by firms with excellent credit ratings. True ___ False ___

Corporate profits play a part in the choice firms make between using internal versus external capital. True ___ False ___

The key ingredient in a firm's financial planning is the sales forecast.

True ___ False ___

Which of the following is always a non-cash expense?

a. Income taxes

b. Salaries

c. Depreciation

d. None of the above

The future value of an investment increases as the number of years of compounding at a positive rate of interest declines. True ___ False ___

One characteristic of an annuity is that an equal sum of money is deposited or withdrawn each period. True ___ False ___

16. Fixed costs include all of the following EXCEPT:

a. administrative salaries.

b. property taxes.

c. sales commissions.

d. insurance.

Financial leverage means financing some of a firm's assets with:

a. commercial paper.

b. preferred stock.

c. corporate bonds.

d. all of the above.

The NPV method:

a. is consistent with the goal of shareholder wealth maximization.

b. recognizes the time value of money.

c. uses cash flows.

d. all of the above.

Disadvantages of using current liabilities as opposed to long-term debt include:

a. greater risk of illiquidity.

b. uncertainty of interest costs.

c. higher cash flow exposure.

d. both a and b.

e. all of the above.

Which of the following types of financing offers the firm the greatest degree of flexibility?

a. Bonds

b. Preferred stock

c. Short-term lines of credit

d. Long-term notes payable

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