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Multiple Choice

1.
Which of the following is the most appropriate and modern definition of accounting?

A)
The information system that identifies, records, and communicates the economic events of an organization to interested users

B)
A means of collecting information

C)
The interconnected network of subsystems necessary to operate a business

D)
Electronic collection, organization, and communication of vast amounts of information.

2.
Which of the following groups uses accounting information primarily to insure the entity is operating within prescribed rules?

A)
Taxing authorities

B)
Regulatory agencies

C)
Labor Unions

D)
Management

3.
Which of the following would not be considered an internal user of accounting data for a company?

A)
The president of a company

B)
The controller of a company

C)
Creditor of a company

D)
Salesperson of a company

4.
Stockholders' equity is increased by

A)
dividends.

B)
revenues.

C)
expenses.

D)
liabilities.

5.
The left side of an account is

A)
blank.

B)
a description of the account.

C)
the debit side.

D)
the balance of the account.

6.
Which one of the following is not a part of an account?

A)
Credit side

B)
Trial balance

C)
Debit side

D)
Title

7.
The right side of an account

A)
is the correct side.

B)
reflects all transactions for the accounting period.

C)
shows all the balances of the accounts in the system.

D)
is the credit side.

8.
The normal balance of any account is the

A)
left side.

B)
right side.

C)
side which increases that account.

D)
side which decreases that account.

9.
The double-entry system requires that each transaction must be recorded

A)
in at least two different accounts.

B)
in two sets of books.

C)
in a journal and in a ledger.

D)
first as a revenue and then as an expense.

10.
A credit is not the normal balance for which account listed below?

A)
Common Stock account

B)
Revenue account

C)
Liability account

D)
Dividends account

11.
Which accounts normally have debit balances?

A)
Assets, expenses, and revenues.

B)
Assets, expense, and retained earnings.

C)
Assets, liabilities, and dividends.

D)
Assets, expenses, and dividends.

12.
Which accounts normally have credit balances?

A)
Revenues, liabilities, and dividends.

B)
Revenues, liabilities, and assets.

C)
Revenues, liabilities, and retained earnings.

D)
Revenues, liabilities, and expenses.

13.
External users want answers to all of the following questions except

A)
Is the company earning satisfactory income?

B)
Will the company be able to pay its debts as they come due?

C)
Will the company be able to afford employee pay raises this year?

D)
How does the company compare in profitability with competitors?

14.
Borrowing money is an example of a(n)

A)
delivering activity.

B)
financing activity.

C)
investing activity.

D)
operating activity.

15.
Debt securities sold to investors that must be repaid at a particular date some years in the future are called

A)
accounts payable.

B)
notes receivable.

C)
taxes payable.

D)
bonds payable.

16.
Debt and obligations of a business are referred to as

A)
assets.

B)
equities.

C)
liabilities.

D)
expenses.

17.
The financial statement that summarizes the changes in retained earnings for a specific period of time is the

A)
balance sheet.

B)
income statement.

C)
statement of cash flows.

D)
retained earnings statement.

18.
To show how successfully your business performed during a period of time, you would report its revenues and expense in the

A)
balance sheet.

B)
income statement.

C)
statement of cash flows.

D)
retained earnings statement.

19.
Net income results when

A)
Assets > Liabilities.

B)
Revenues = Expenses.

C)
Revenues > Expenses.

D)
Revenues < Expenses.

20.
Net income will result during a time period when:

A)
assets exceed liabilities.

B)
assets exceed revenues.

C)
expenses exceed revenues.

D)
revenues exceed expenses.

21.
Retained earnings at the end of the period is equal to

A)
retained earnings at the beginning of the period plus net income minus liabilities.

B)
retained earnings at the beginning of the period plus net income minus dividends.

C)
net income.

D)
assets plus liabilities.

22.
Which of the following financial statements is concerned with the company at a point in time?

A)
Balance sheet.

B)
Income statement.

C)
Retained Earnings statement.

D)
Statement of cash flows.

23.
The retained earnings statement would not show

A)
the retained earnings beginning balance.

B)
revenues and expenses.

C)
dividends.

D)
the ending retained earning balance.

24.
A balance sheet shows

A)
revenues, liabilities, and stockholders' equity.

B)
expenses, dividends, and stockholders' equity.

C)
revenues, expenses, and dividends.

D)
assets, liabilities, and stockholders' equity.

25.
The accounting equation may be expressed as:

A)
Assets = Stockholders' Equity ¿ Liabilities.

B)
Assets = Liabilities + Stockholders' Equity.

C)
Assets + Liabilities = Stockholders' Equity.

D)
Assets + Stockholders' Equity = Liabilities.

26.
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.

27.
Using accrual accounting, expenses are recorded and reported only

A)
when they are incurred whether or not cash is paid.

B)
when they are incurred and paid at the same time.

C)
if they are paid before they are incurred.

D)
if they are paid after they are incurred.

28.
Which statement is correct?

A)
As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use.

B)
The use of the cash basis of accounting violates both the revenue recognition and matching principles.

C)
The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received.

D)
As long as management is ethical, there are no problems with using the cash basis of accounting.

29.
Which one of the following is not a tool in financial statement analysis?

A)
Horizontal analysis

B)
Circular analysis

C)
Vertical analysis

D)
Ratio analysis

30.
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%.

31.
Assume the following sales data for a company:

2008
$945,000

2007
780,000

2006
650,000

If 2006 is the base year, what is the percentage increase in sales from 2006 to 2007?

A)
25%

B)
20%

C)
125%

D)
143%

32.
Ratios are most useful in identifying

A)
trends.

B)
differences.

C)
causes.

D)
relationships.

33.
Return on assets ratio is most closely related to

A)
profit margin and debt to total assets ratio.

B)
profit margin and asset turnover ratio.

C)
times interest earned and debt to stockholders' equity ratio.

D)
profit margin and free cash flow.

34.
Return on common stockholders' equity ratio is most closely related to

A)
gross profit rate and operating expenses to sales ratio.

B)
profit margin and free cash flow.

C)
times interest earned and debt to stockholders' equity ratio.

D)
return on asset ratio and leverage (debt to total assets ratio).

35.
Which one of the following would be considered a long-term solvency ratio?

A)
Receivables turnover

B)
Return on total assets

C)
Current cash debt coverage ratio

D)
Debt to total assets ratio

36.
The current ratio is

A)
calculated by dividing current liabilities by current assets.

B)
used to evaluate a company's liquidity and short-term debt paying ability.

C)
used to evaluate a company's solvency and long-term debt paying ability.

D)
calculated by subtracting current liabilities from current assets.

37.
The current ratio is a

A)
liquidity ratio.

B)
profitability ratio.

C)
long-term solvency ratio.

D)
cash flow ratio.

38.
The receivables turnover and inventory turnover ratios are used to analyze

A)
long-term solvency.

B)
profitability.

C)
liquidity.

D)
leverage.

39.
The asset turnover ratio is

A)
net sales divided by net income.

B)
average total assets divided by net income.

C)
net sales divided by average total assets.

D)
average total assets divided by net sales.

40.
The assets turnover ratio measures

A)
how often a company replaces its assets.

B)
how efficiently a company uses its assets to generate sales.

C)
the portion of the assets that have been financed by creditors.

D)
the overall rate of return on assets.

41.
The profit margin ratio is calculated by dividing

A)
sales by cost of goods sold.

B)
gross profit by net sales.

C)
net income by stockholders' equity.

D)
net income by net sales.

42.
The debt to total assets ratio measures

A)
the company's profitability.

B)
whether interest can be paid on debt in the current year.

C)
the proportion of interest paid relative to dividends paid.

D)
the percentage of the total assets provided by creditors.

43.
Which one of the following is not an objective of a system of internal controls?

A)
Safeguard company assets

B)
Overstate liabilities in order to be conservative

C)
Enhance the accuracy and reliability of accounting records

D)
Reduce the risks of errors

44.
Internal control is defined, in part, as a plan that safeguards

A)
all balance sheet accounts.

B)
assets.

C)
liabilities.

D)
capital stock.

45.
Internal controls are not designed to safeguard assets from

A)
natural disasters.

B)
employee theft.

C)
robbery.

D)
unauthorized use.

46.
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.

47.
From an internal control standpoint, the asset most susceptible to improper diversion and use is

A)
prepaid insurance.

B)
cash.

C)
buildings.

D)
land.

48.
Internal controls are concerned with

A)
only manual systems of accounting.

B)
the extent of government regulations.

C)
safeguarding assets.

D)
preparing income tax returns.

49.
A consequence of separation of duties is that

A)
theft by employees becomes impossible.

B)
operations become extremely inefficient because of constant training of employees.

C)
more employees will need to be bonded.

D)
theft is still possible when several employees are involved.

50.
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

Solution Summary

The solution explains various multiple choice questions relating to accounting

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