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Multiple Choice

1. Which of the following is not considered an asset?

A. Equipment
B. Dividends
C. Accounts receivable
D. Inventory

Answer: _______________

2. These are selected account balances on December 31, 2010.

Land (location of the corporation's office building) $100,000
Land (held for future use) 150,000
Corporate Office Building 600,000
Inventory 200,000
Equipment 450,000
Office Furniture 100,000
Accumulated Depreciation 300,000

What is the total amount of property, plant, and equipment that will appear on the balance sheet?

A. $1,300,000
B. $1,100,000
C. $1,600,000
D. $950,000

Answer: _______________

3. Use the following data to calculate the current ratio.

Koonce Office Supplies
Balance Sheet
December 31, 2010

Cash $ 65,000 Accounts Payable $ 70,000
Prepaid Insurance 30,000 Salaries Payable 10,000
Accounts Receivable 50,000 Mortgage Payable 80,000
Inventory 70,000 Total Liabilities $160,000
Land held for Investment 75,000
Land 90,000
Building $100,000 Common Stock $120,000
Less Accumulated Retained Earnings 250,000
Depreciation (20,000) 80,000 Total Stockholders' Equity $370,000
Trademark 70,000 Total Liabilities and
Total Assets $530,000 Stockholders' Equity $530,000

A. 1.94 : 1.
B. 1.57 : 1.
C. 3.14 : 1.
D. 2.69 : 1.

Answer: _______________

4. A measure of profitability is the

A. current ratio.
B. debt to total assets ratio.
C. earnings per share.
D. working capital.

Answer: _______________

5. Earnings per share are calculated by dividing -

A. gross profit by average common shares outstanding.
B. (net income less preferred stock dividends) by average common shares outstanding.
C. net income by average common shares outstanding.
D. net sales by average common shares outstanding.

Answer: _______________

6. Which of the following is the least likely consideration that management uses when deciding whether to pay a dividend?

A. Does the company have more cash than it has opportunities?
B. Is the company's average number of common shares outstanding decreasing?
C. Does the company have uses for cash that will increase its value?
D. What are the company's cash needs?

Answer: _______________

7. The relationship between current assets and current liabilities is important in evaluating a company's

A. profitability.
B. liquidity.
C. market value.
D. solvency.

Answer: _______________

8. A short-term creditor is primarily interested in the __________ of the borrower.

A. liquidity
B. profitability
C. consistency
D. solvency

Answer: _______________

9. Generally accepted accounting principles

A. are accounting rules formulated by the Internal Revenue Service.
B. are sound in theory but rarely used in real life.
C. are accounting rules that are recognized as a general guide for financial reporting.
D. have eliminated all errors in accounting.

Answer: _______________

10. What organization issues U.S. accounting standards?

A. Security Exchange Commission.
B. International Accounting Standards Committee.
C. International Auditing Standards Committee.
D. Financial Accounting Standards Board.

Answer: _______________

11. Adherence to the procedure of choosing the accounting method that will be least likely to overstate assets and income is an example of the constraint of:

A. relevance.
B. reliability.
C. conservatism.
D. comparability.

Answer: _______________

12. A company can change to a new method of accounting if management can justify that the new method results in

A. more meaningful financial information.
B. a higher net income.
C. a lower net income for tax purposes.
D. less likelihood of clerical errors.

Answer: _______________

13. The economic entity assumption states that economic events

A. of different entities can be combined if all the entities are corporations.
B. must be reported to the Securities and Exchange Commission.
C. of a sole proprietorship cannot be distinguished from the personal economic events of its owners.
D. of every entity can be separately identified and accounted for.

Answer: _______________

14. The concept that a business has a reasonable expectation of remaining in business for the foreseeable future is called the

A. economic entity assumption.
B. monetary unit assumption.
C. time period assumption.
D. going concern assumption.

Answer: _______________

15. 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

Answer: _______________

16 . A corporation has which of the following set of characteristics?

A. Shared control, tax advantages, increased skills and resources
B. Simple to set up and maintains control with founder
C. Easier to transfer ownership and raise funds, no personal liability
D. Harder to raise funds and gives owner control

Answer: _______________

17 . The right to receive money in the future is called a(n)

A. account payable.
B. account receivable.
C. liability.
D. revenue.

Answer: _______________

18 . The cost of assets consumed or services used is also known as

A. a revenue.
B. an expense.
C. a liability.
D. an asset.

Answer: _______________

19 . Which financial statement is prepared first?

A. Balance sheet
B. Income statement
C. Retained earnings statement
D. Statement of cash flows

Answer: _______________

20 . Finney Company began the year by issuing $20,000 of common stock for cash. The company recorded revenues of $185,000, expenses of $160,000, and paid dividends of $10,000. What was Finney's net income for the year?

A. $15,000
B. $35,000
C. $25,000
D. $45,000

Answer: _______________

21 . 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.

Answer: _______________

22. If total liabilities increased by $14,000 during a period of time and stockholders' equity decreased by $6,000 during the same period, then the amount and direction (increase or decrease) of the period's change in total assets is a(n)

A. $14,000 increase.
B. $20,000 increase.
C. $8,000 decrease.
D. $8,000 increase.

Answer: _______________

23 . Liabilities

A. are future economic benefits.
B. are debts and obligations.
C. possess service potential.
D. are things of value owned by a business.

Answer: _______________

24 . Stockholders' equity can be described as claims of

A. creditors on total assets.
B. owners on total assets.
C. customers on total assets.
D. debtors on total assets.

Answer: _______________

25. Elston Company compiled the following financial information as of December 31, 2010:
Revenues $140,000
Common stock 30,000
Equipment 40,000
Expenses 125,000
Cash 35,000
Dividends 10,000
Supplies 5,000
Accounts payable 20,000
Accounts receivable 15,000
Retained earnings, 1/1/10 75,000

Elston's assets on December 31, 2010 are:
A. $235,000
B. $170,000
C. $ 80,000
D. $ 95,000

Answer: _______________

26 . A company spends $20 million dollars for an office building. Over what period should the cost be written off?

A. When the $20 million is expended in cash
B. All in the first year
C. Over the useful life of the building
D. After $20 million in revenue is earned

Answer: _______________

27. On April 1, 2010, nPropel Corporation paid $48,000 cash for equipment that will be used in business operations. The equipment will be used for four years. nPropel records depreciation expense of $9,000 for the calendar year ending December 31, 2010. Which accounting principle has been violated? Why?

A. Depreciation principle, because depreciation expense is $12,000 per year.
B. No principle has been violated because P has correctly matched the expense for using the equipment to the period it generated revenue.
C. Matching principle because the cash was paid in 2010 and should be expensed in 2010.
D. Matching principle because depreciation expense should be $8,000.

Answer: _______________

28 . Given the data below, determine net income under the accrual basis of accounting.

Revenue earned $14,000
Accounts receivable 3,000
Expenses incurred 7,250
Accounts payable (related to expenses) 750
Supplies purchased 1,800
A. $6,750
B. $9,000
C. $4,500
D. $7,200

Answer: _______________

29 . Adjusting entries are made to ensure that:

A. expense are recognized in the period in which they are incurreD.
B. revenues are recorded in the period in which they are earneD.
C. balance sheet and income statement accounts have correct balances at the end of an accounting perioD.
D. All of the above.

Answer: _______________

30 . A law firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause:

A. expenses to be overstateD.
B. net income to be overstateD.
C. liabilities to be understateD.
D. revenues to be understateD.

Answer: _______________

31 . The Village Laundry Company purchased $6,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $2,000 on hand. The adjusting entry that should be made by the company on June 30 is:

A. debit Laundry Supplies Expense, $2,000; credit Laundry Supplies, $2,000.
B. debit Laundry Supplies, $2,000; credit Laundry Supplies Expense, $2,000.
C. debit Laundry Supplies, $4,500; credit Laundry Supplies Expense, $4,500.
D. debit Laundry Supplies Expense, $4,500; credit Laundry Supplies, $4,500.

Answer: _______________

32. 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.
Answer: _______________

33. All of the following are examples of internal control procedures except

A. using prenumbered documents.
B. reconciling the bank statement.
C. customer satisfaction surveys.
D. insistence that employees take vacations.

Answer: _______________

34. When two or more people get together for the purpose of circumventing prescribed controls, it is called

A. a fraud committee.
B. collusion.
C. a division of duties.
D. bonding of employees.

Answer: _______________

35 . 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.

Answer: _______________

36 . Which of the following statements is true?

A. Due to its liquid nature, cash is the easiest asset to steal.
B. A good system of internal control will ensure that employees will not be able to steal cash.
C. It takes two or more employees working together to be able to steal cash.
D. All statements are true.

Answer: _______________

37 . The use of prenumbered checks is an example of

A. documentation procedures.
B. independent internal verification.
C. establishment of responsibility.
D. segregation of duties.

Answer: _______________

38 . A weakness of the current ratio is

A. the difficulty of the calculation.
B. it uses year-end balances of current asset and current liability accounts.
C. it is rarely used by sophisticated analysts.
D. it can be expressed as a percentage, as a rate, or as a proportion.

Answer: _______________

39. Which of the following requires a debit?

A. Decrease in assets
B. Decrease in liabilities
C. Increase in liabilities
D. Increase in stockholders' equity

Answer: _______________

40. ABC Co. received $20,000 from investors and in return issued $20,000 of stock. As a result of this transaction, what journal entry is required?

A. debit cash $20,000 and credit contributed capital $20,000
B. debit cash $20,000 and debit contributed capital $20,000
C. credit cash $20,000 and credit contributed capital $20,000
D. Credit cash $20,000 and debit contributed capital $20,000

Answer: _______________

41. The accounting records for Red Corp. show credit card discounts of $500, sales returns and allowances of $400, sales revenues of $25,000, and sales discounts of 300. Its net sales is:

A. $25,000
B. $24,500
C. $24,100
D. $23,800

Answer: _______________

42. The accounting records of the National Corp. show the following:

selling, general, and administrative expenses
sales discounts
cost of goods sold
income tax
interest and other expenses $ 10,000

The gross profit for National Corp. is:

a. $18,000
b. $19,000
c. $29,000
d. $30,000

Answer: _______________

43. On which of the following financial statements would you expect to find financing, operating, and investing activities?

A. Balance sheet
B. Income Statement
C. Statement of cash flows
D. Statement of changes in equity

Answer: _______________

44. White Company had an $8,000 beginning balance in Retained Earnings and a $20,000 beginning balance in Common Stock. During the accounting period, White Company earned $45,000, borrowed $10,000 from the bank, and paid $6,000 in cash dividends. What is ending balance for the statement of changes in stockholders' equity (i.e., the ending amount of stockholders' equity)?

A. $20,000
B. $47,000
C. $67,000
D. $77,000

Answer: _______________

45. Which of the following transactions impacts the investing activities section of the statement of cash flows?

A. issued common stock for cash
B. paid cash dividends
C. purchased a building for cash
D. repaid a bank loan

Answer: _______________

You may submit a separate spreadsheet to answer complete this problem if you like
The following items are taken from the financial statements of Grove Company for 2010:
Accounts Payable $18,500
Accounts Receivable 4,000
Accumulated Depreciation 4,800
Bonds Payable 18,000
Cash 24,000
Common Stock 25,000
Cost of Goods Sold 13,000
Depreciation Expense 4,800
Dividends 5,300
Equipment 48,000
Interest Expense 2,500
Patents 7,500
Retained Earnings, January 1 16,000
Salaries Expense 5,200
Sales Revenue 36,500
Supplies 4,500

(a) Prepare an income statement and a classified balance sheet for Grove Company.
(b) Compute the following ratios and values:
1. Current ratio
2. Debt to total assets ratio
3. Working capital
4. Earnings per share (Grove's average number of shares outstanding during the year was 5,000.)

Solution Summary

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