Multiple Choice

True/False

1. Financing activities for corporations include borrowing money and selling
shares of their own stock.
A.) True
B.) False

2. Income will always be greater under the cash basis of accounting than
under the accrual basis of accounting.
A.) True
B.) False

3. If a company has sales of $110 in 2007 and $154 in 2006, the percentage
decrease in sales from 2006 to 2007 is 140%.
A.) True
B.) False

4. The statement of cash flows discloses significant events related to the
operating, investing, and financing activities of a business.
A.) True
B.) False

5. Under an effective system of internal control, errors occur only as a result
of fraud or dishonesty.
A.) True
B.) False

6. In horizontal analysis, the base year is the most current year being
examined.
A.) True
B.) False

7. The matching principle requires that efforts be related to
accomplishments.
A.) True
B.) False

8. All publicly traded U.S. companies must provide their shareholders with an
annual report each year.
A.) True
B.) False

Multiple Choice Questions: Each question is worth .25 points for a total of 4
points.

9. Which of the following is not an advantage of the corporate form of
business organization?
a. No personal liability
b. Easy to transfer ownership
c. Favorable tax treatment
d. Easy to raise funds

10. Which of the following would be considered an "Other Comprehensive
Income" item?
a. Net income
b. Gain on disposal of discontinued operations
c. Extraordinary loss related to flood
d. Unrealized loss on available-for-sale securities

11. Incron Corporation began the year with retained earnings of $217,000.
During the year, the company issued $294,000 of common stock,
recorded expenses of $840,000, and paid dividends of $56,000. If
Incron's ending retained earnings was $231,000, what was the company's
revenue for the year?
a. $854,000
b. $910,000
c. $1,148,000
d. $1,204,000

12. Javier's Tune-Up Shop follows the revenue recognition principle. Javier
services a car on August 31. The customer picks up the vehicle on
September 1 and mails the payment to Javier on September 5. Javier
receives the check in the mail on September 6. When should Javier show
that the revenue was earned?
a. August 31
b. August 1
c. September 5
d. September 6

13. 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.

14. Long-term creditors are usually most interested in evaluating
a. liquidity and profitability.
b. consistency and profitability.
c. liquidity and solvency.
d. consistency and solvency.
15. Accounting information should be verifiable in order to enhance
a. comparability.
b. reliability.
c. consistency.
d. relevance.

16. If year one equals $800, year two equals $840, and year three equals
$880, the percentage to be assigned for year three in a trend analysis,
assuming that year 1 is the base year, is
a. 110%.
b. 105%.
c. 95%.
d. 100%.

17. Which one of the following items would never appear on a cash budget?
a. Office salaries expense
b. Interest expense
c. Depreciation expense
d. Travel expense

18. The going concern assumption underlies the
a. cost principle.
b. monetary unit assumption.
c. time period assumption.
d. full disclosure principle.

19. Can financial statements be prepared directly from the adjusted trial
balance?
a. They cannot. The general ledger must be used.
b. Yes, adjusting entries have been recorded in the general journal and
posted to the ledger accounts.
c. No, the adjusted trial balance merely proves the equality of the total
debit and total credit balances in the ledger after adjustments are
posted. It has no other purpose.
d. They can because that is the only reason that an adjusted trial balance
is prepared.

20. Which of the following statements is true?
a. Publicly traded U.S. companies must provide an annual report to their
shareholders when operating conditions change significantly.
b. An unqualified independent auditor's report must be included in the
annual report.
c. Notes to the financial statements do not need to be included in the
annual report because that information is only for internal users.
d. All of the statements are false.

21. Employees at B Corporation are paid $5,000 cash every Friday for
working Monday through Friday. The calendar year accounting period
ends on Wednesday, December 31. How much salary expense should be
recorded two days later on January 2?
a. $5,000
b. $3,000
c. None, matching requires the weekly salary to be accrued on December
31.
d. $2,000

22. If a company has a current ratio of 1.2:1, what respective effects will the
borrowing of cash by short-term debt and collection of accounts receivable
have on the ratio?
Short-term Borrowing Collection of Receivable
a. Increase No effect
b. Increase Increase
c. Decrease No effect
d. Decrease Decrease

23. Which of the following is an example of a bank reconciliation item that
requires an adjusting entry?
a. NSF check
b. Deposit in transit
c. Bank error
d. None of these items requires an adjusting entry.

24. If the average collection period is 55 days, what is the receivables
turnover?
a. 6.64 times
b. 7.30 times
c. 3.65 times
d. None of the above

Fill-in-the-Blank Questions: Each question is worth .5 points for a total of 4
points.

25. Assets that are expected to be converted to cash or used in the business
within a relatively short period of time are called _________ ________.

26. The times interest earned ratio is calculated by dividing _______________
before __________________ and __________________ by interest
expense.

27. If the inventory turnover ratio is 5 times, and the average inventory was
$600,000, the cost of goods sold during the year was $______________
and the average days to sell the inventory was ______________ days.
28. The _____________ _______________ assumption states that the
economic life of a business can be divided into artificial time periods.

29. The claims of owners on the assets of a corporation are known as
_____________ _______________.

30. In a service company, revenue is earned when the service is __________.

31. The principle of internal control that prevents one individual from being
responsible for all the related activities of a given task is ____________
_____ _______________.

32. Employees of a company who evaluate the effectiveness of the company's
system of internal controls on a year-round basis are called __________
_____________.

Short Answer/Essay Questions: Each question is worth 1 point for a total of
5 points.

33. The following data are taken from the financial statements of Dellmont
Company. The data are in alphabetical order.
Accounts payable $ 28,000 Net sales 500,000
Accounts receivable 65,000 Other current liabilities 20,000
Avg. common shares O/S 20,000 Salaries payable 7,000
Cash 56,000 Stockholders' equity 169,000
Gross profit 190,000 Total assets 325,000
Net income $ 50,000
Instructions
Compute the following:
(a) Current ratio.
(b) Working capital.
(c) Earnings per share.
(d) Debt to total assets ratio.

34. Sam Hill has worked for Dr. Lee Chang for several years. Sam
demonstrates a loyalty that is rare among employees. He hasn't taken a
vacation in the last three years. One of Sam's primary duties at the
medical office is to open the mail and list the checks received. He also
takes cash from patients at the cashier window as patients leave. At times
it is so hectic that Sam doesn't bother with giving patients a receipt for the
cash paid on their accounts. He assures them he will see to it that they
receive the proper credit. When the traffic is slow in the office Sam offers
to help Mary post the payments to the patients' accounts receivable. She
is always happy to receive his help, because he is a very conscientious
worker.

Instructions
Identify any principles of internal control that may be violated in this medical
office situation.

35. Ramon Diaz was reviewing his business activities at the end of the year
(2007) and decided to prepare a Retained Earnings Statement. At the
beginning of the year his assets were $550,000, liabilities were $140,000,
and common stock was $120,000. The net income for the year was
$350,000. Dividends of $220,000 were paid during the year.
Instructions
Prepare a Retained Earnings Statement in good form.

36. The comparative balance sheet of Stuart Company appears below:
STUART COMPANY
Comparative Balance Sheet
December 31,
____________________________________________________________________
Assets 2007 2006
Current assets ............................................................................. $ 340 $280
Plant assets ................................................................................. 675 520
Total assets ............................................................................ $1,015 $800
Liabilities and stockholders' equity
Current liabilities .......................................................................... $ 180 $120
Long-term debt ............................................................................ 250 160
Common stock ............................................................................ 325 320
Retained earnings ....................................................................... 260 200
Total liabilities and stockholders' equity ................................. $1,015 $800
Instructions
(a) Using horizontal analysis, show the percentage change for each balance
sheet item using 2006 as a base year.
(b) Using vertical analysis, prepare a common size comparative balance sheet.

37. Benson and Jencks is a manufacturing company that specializes in writing
instruments. The past year was a difficult one for the company, as it
sought to retain its share in a market in which the largest competitors were
also rapid innovators. Benson and Jencks introduced a new product late in
the year, even though testing was not complete. It was a pen designed
with two cartridges: one supplying ink and the other correction fluid. A
person could then switch easily between writing and correcting errors. It
was priced fairly high, and was never heavily advertised. Even so, the
Correct-O-Pen, as the product was named, was an overwhelming
success.
The success of the product has Fern Donald, the manager of the New Products
division, worried, however. She was concerned that quality problems would begin
occurring, since the longevity of the pen and stability of the correction fluid
formulation had not been tested. She did not want sales personnel to get the
bonuses that appeared to be indicated, since they might aggressively promote a
product that would fail in use. She preferred to complete testing of the pen first,
so that more confidence could be placed in the results.
Top management, however, declined the tests. Ms. Donald then instructed you,
the accountant, not to prorate payroll taxes or rent expense for the rest of the
year, but to show them as current expenses in total. In this way, the new product
would appear to be only slightly profitable.
Instructions
1. Describe the alternatives that you as an accountant would have in this
situation.
2. Indicate which alternative is best.