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Accounting Multiple Choice Practice Set: Ratios, Adjustments, Balances, Ect.

1. Zelma Company's last financial statements provided the following ratios:
Current ratio 3:2
Quick ratio 1:2
Accounts receivable turnover 9.0 times
Inventory turnover 8.0 times
Net income percentage 12.5%
Return on equity 22.6%
Return on assets 9.8%

To the nearest day, what is the operating cycle for Zelma?
a) 80 days
b) 86 days
c) 172 days
d) 129 days

2. The following events have been projected:
A. Cash sales and collections from customers totaling $980,000
B. Cash payments for operating expenses of $560,000
C. Cash payments for income taxes and interest expense of $45,000
D. Cash payments of prior period accruals of $80,000
E. Borrowed $50,000 cash by issuing a note payable
F. Cash dividends of $20,000

The beginning balance of cash is $45,000. What is the budgeted ending balance of cash?
a. $325,000
b. $370,000
c. $275,000
d. $245,000

3. On January 1, a business exchanged a plant asset with a cost of $18,000 and accumulated depreciation of $16,500 for a similar asset that had a list price of $23,000. The business received a trade-in allowance of $2,100 on the old plant asset. What was the result of the exchange?

a. A $600 gain on the disposal of a plant asset.
b. A $1,000 unrecognized gain on the exchange of a plant asset.
c. A cost basis of $22,400 for the new plant asset
d. A cost basis of $23,600 for the new plant asset

4. 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

5. A company's past experience indicates that 60% of its credit sales are collected in the month of sale, 30% in the next month, and 5 % in the second month after the sale; the remainder is never collected. Budgeted credit sales were:

July $120,000
August 72,000
September 180,000

The cash inflow in the month of September is expected to be
a. $135,600
b. $102,600
c. $108,000
d. $129,600

6. A check for $275 is incorrectly recorded by a company as $257. On the bank reconciliation, the $18 error should be
a. Added to the balance per books.
b. Deducted from the balance per book.
c. Added to the balance per bank.
d. Deducted from the balance per bank.

7. The Allowance for Doubtful Accounts is necessary because
a. when recording uncollectible accounts expense, it is not possible to know which specific accounts will not pay.
b. uncollectible accounts that are written off must be accumulated in a separate account.
c. a liability results when a credit sale is made.
d. management needs to accumulate all the credit losses over the years.

8. Under the direct write-off method of accounting for uncollectible accounts, Bad Debts Expense is debited
a. when a credit sale is past due.
b. at the end of each accounting period.
c. whenever a pre-determined amount of credit sales have been made.
d. when an account is determined to be uncollectible

9. Manning Company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $200,000 and credit sales are $1,000,000. Management estimates that 5% of accounts receivable will be uncollectible. What adjusting entry will Manning Company make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment?

a. Bad Debts Expense 10,000
Allowance for Doubtful Accounts 10,000
b. Bad Debts Expense 8,000
Allowance for Doubtful Accounts 8,000
c. Bad Debts Expense 8,000
Accounts Receivable 8,000
d. Bad Debts Expense 10,000
Accounts Receivable 10,000

10. The receivables turnover ratio
a. Is computed by dividing net credit sales for the accounting period by the cash realizable value of accounts receivable on the last day of the accounting period.
b. Can be used to compute the average collection period.
c. Is a method of evaluating the solvency of net accounts receivable.
d. Is only important to internal users of accounting information.

11. A measure of a company's solvency is the
a. acid-test ratio.
b. current ratio.
c. times interest earned ratio.
d. asset turnover ratio.

12. The times interest earned ratio is computed by dividing
a. net income by interest expense.
b. income before income taxes by interest expense.
c. income before interest expense by interest expense.
d. income before interest expense and income taxes by interest expense.

13. The 2007 financial statements of Shadow Co. contain the following selected data (in millions).
Current Assets $ 75
Total Assets 120
Current Liabilities 40
Total Liabilities 85
Cash 8
Interest Expense 5
Income Taxes 10
Net Income 16
The debt to total assets ratio is
a. 70.8%
b. 53.3%
c. 1.41%
d. 6.2 times

14. The statement "Bond prices vary inversely with changes in the market rate of interest" means that if the
a. market rate of interest increases, the contractual interest rate will decrease.
b. contractual interest rate increases, then bond prices will go down.
c. market rate of interest decreases, then bond prices will go up.
d. contractual interest rate increases, the market rate of interest will decrease.

15. A company would not acquire treasury stock

a. in order to reissue shares to officers.
b. as an asset investment.
c. in order to increase trading of the company's stock.
d. to have additional shares available to use in acquisitions of other companies.

16. Which of the following is the appropriate general journal entry to record the declaration of cash dividends?

a. Retained Earnings
Cash
b. Dividends Payable
Cash
c. Paid-in Capital
Dividends Payable
d. Retained Earnings
Dividends Payable

17. Allstate, Inc., has 10,000 shares of 6%, $100 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2007. If the board of directors declares a $50,000 dividend, the

a. preferred stockholders will receive 1/10th of what the common stockholders will receive.
b. preferred stockholders will receive the entire $50,000.
c. $50,000 will be held as restricted retained earnings and paid out at some future date.
d. preferred stockholders will receive $25,000 and the common stockholders will receive $25,000.

18. When a change in accounting principle occurs

a. prior years' financial statements should not be changed to reflect the newly adopted principle.
b. the new principle should be used in reporting the results of operations of the current year.
c. the cumulative effect of the change in principle should be reflected on the income statement as of the beginning of the next year.
d. the cumulative effect of the change in accounting principle should be classified as an extraordinary item on the income statement.

19. Which of the following is not an irregular item on the income statement?
a. Discontinued operations
b. Extraordinary items
c. Other revenues and expenses

20. Vertical analysis is a technique that expresses each item in a financial statement
a. in dollars and cents.
b. as a percent of the item in the previous year.
c. as a percent of a base amount.
d. starting with the highest value down to the lowest value.

Solution Preview

1. Zelma Company's last financial statements provided the following ratios:
Current ratio 3:2
Quick ratio 1:2
Accounts receivable turnover 9.0 times
Inventory turnover 8.0 times
Net income percentage 12.5%
Return on equity 22.6%
Return on assets 9.8%

To the nearest day, what is the operating cycle for Zelma?
a) 80 days
b) 86 days
c) 172 days
d) 129 days

The answer is b)86 days. The inventory turnover is the number of times during the year between the purchase and sale of inventory. Based on a 365 day year, if inventory turns over 8 times, it takes 365/8, or about 46 days, for an item which was purchased to be sold. The accounts receivable turnover is the number of times during the year between the origination of accounts receivable (i.e., the sale of an item) and the collection of that receivable. Based on a 365 day year, if accounts receivable turns over 9.0 times, it takes 365/9, or about 40 days, for the account to be collected. Thus, the operating cycle, the time from the outlay of cash for inventory to collection of cash from a sale, is about 86 days.

2. The following events have been projected:
A. Cash sales and collections from customers totaling $980,000
B. Cash payments for operating expenses of $560,000
C. Cash payments for income taxes and interest expense of $45,000
D. Cash payments of prior period accruals of $80,000
E. Borrowed $50,000 cash by issuing a note payable
F. Cash dividends of $20,000

The beginning balance of cash is $45,000. What is the budgeted ending balance of cash?
a. $325,000
b. $370,000
c. $275,000
d. $245,000

The answer is b)$370,000

Beginning Cash $ 45,000
Cash Sales & Collections 980,000
Cash Payments & Operating Expenses (560,000)
Cash Payments-Income Taxes & interest ( 45,000)
Cash Payments-Prior Year Accruals ( 80,000)
Borrowed on Note Payable 50,000
Cash Dividends ( 20,000)
Cash At End of Period $370,000

3. On January 1, a business exchanged a plant asset with a cost of $18,000 and accumulated depreciation of $16,500 for a similar asset that had a list price of $23,000. The business received a trade-in allowance of $2,100 on the old plant asset. What was the result of the exchange?

a. A $600 gain on the disposal of a plant asset.
b. A $1,000 unrecognized gain on the exchange of a plant asset.
c. A cost basis of $22,400 for the new plant asset
d. A cost basis of $23,600 for the new plant asset

The answer is a. A $600 gain on the disposal of a plant asset.

Fair Market Value of Asset Received $23,000
Trade-In Allowance 2,100
Total Credits $25,000

Cost of Asset Surrendered $18,000
Accumulated Depreciation ( 16,500)
Book Value of Surrendered Asset $ 1,500

Realized Gain On Disposal $23,500
Recognized Gain on Disposal ( 600)
Deferred Gain $22,900

4. 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 ...

Solution Summary

This solution contains discussions of the operating cycle, ratio analysis, the computation and journalization of the Allowance for Doubtful Accounts, the computation of the cash flows from sales on account, the recognition of gain on exchanged assets, the objective of a system of internal controls, a bank reconciliation question, and the presentation of items on financial statements.

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