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Study questions

1. The recording process becomes more efficient and informative if all transactions are recorded in one account.
2. Under the double-entry system, revenues must always equal expenses.

3. A journal is also known as a book of original entry.

4. A trial balance does not prove that all transactions have been recorded or that the ledger is correct.

5. Depreciation and amortization policies can be justified on the basis of the going concern assumption.

6. The revenue recognition principle dictates that revenue should be recognized in the accounting period in which cash is received

7. The matching principle dictates that expenses be recognized when cash is paid or when the work is performed.

8. Rate of return on assets is calculated by dividing net income by total assets.

9. Rent received in advance and credited to a rent revenue account, which is still unearned at the end of the period, will require an adjusting entry crediting a liability account for the amount still unearned.

10. Accrued revenues are revenues that have been earned and received before financial statements have been prepared.

11. Accumulated Depreciation is a liability account and has a credit normal account balance.

12. A company's operating cycle and fiscal year are usually the same length of time.

13. The amounts appearing on an income statement should agree with the amounts appearing on the post-closing trial balance

14. Closing the Dividends account to Retained Earnings is not necessary if net income is greater than dividends during the period.

15. The gross profit section for a merchandising company appears on both the multiple-step and single-step forms of an income statement.

16. Gross profit is a measure of the overall profitability of a company.

17. The steps in the accounting cycle are different for a merchandiser than for a service enterprise.

18. Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.

19. The matching principle requires that the cost of goods sold be matched against the ending merchandise inventory in order to determine income.

20. After closing entries have been journalized and posted, all temporary accounts in the ledger should have zero balances.

Multiple Choice
1. A debit to an asset account indicates
a. an error.
b. a credit was made to a liability account.
c. a decrease in the asset.
d. an increase in the asset.

2. 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

3. The usual sequence of steps in the recording process is to
a. analyze each transaction, enter the transaction in the journal, and transfer the information to the ledger accounts.
b. analyze each transaction, enter the transaction in the ledger, and transfer the information to the journal.
c. analyze each transaction, enter the transaction in the book of accounts, and transfer the information to the journal.
d. analyze each transaction, enter the transaction in the book of original entry, and transfer the information to the journal.

4. "Generally accepted" in the phrase generally accepted accounting principles means that the principles
a. are proven theories of accounting.
b. have substantial authoritative support.
c. have been approved by the Internal Revenue Service.
d. have been approved for use by the managements of business firms.

5. Accounting principles must be
a. proven and tested.
b. hypothesized and theorized.
c. developed or decreed.
d. universally accepted.

6. Prior to the establishment of FASB, accounting principles were developed
a. by each company individually.
b. on a problem-by-problem basis.
c. by each industry individually.
d. by the SEC.

7. The organization that is working toward uniformity in accounting practices throughout the world is the
a. Securities and Exchange Commission.
b. United Nations.
c. International Accounting Standards Committee.
d. Financial Accounting Standards Board.

8. The profit margin percentage is calculated by dividing
a. gross profit by net sales.
b. net sales by gross profit.
c. net sales by net income.
d. net income by net sales.

9. Adjustments would not be necessary if financial statements were prepared to reflect net income from
a. monthly operations.
b. fiscal year operations.
c. interim operations.
d. lifetime operations.

10. If unearned revenues are initially recorded in revenue accounts and have not all been earned at the end of the accounting period, then failure to make an adjusting entry will cause
a. liabilities to be overstated.
b. revenues to be understated.
c. revenues to be overstated.
d. accounts receivable to be overstated.

11. A work sheet can be thought of as a(n)
a. permanent accounting record.
b. optional device used by accountants.
c. part of the general ledger.
d. part of the journal.

12. In order to close the Dividends account, the
a. Income Summary account should be debited.
b. Income Summary account should be credited.
c. Retained Earnings account should be credited.
d. Retained Earnings account should be debited.

13. Detailed records of goods held for resale are not maintained under a
a. perpetual inventory system.
b. periodic inventory system.
c. double entry accounting system.
d. single entry accounting system.

14. A perpetual inventory system would likely be used by a(n)

a. automobile dealership.
b. hardware store.
c. drugstore.
d. convenience store.

15. A recommended internal control procedure for taking physical inventories is that the counting should be done by employees who do not have custodial responsibility for the inventory. This is an example of what type of internal control procedure?
a. Establishment of responsibility
b. Documentation procedure
c. Independent internal verification
d. Segregation of duties

16. If beginning inventory is understated by $10,000, the effect of this error in the current period is
Cost of Goods Sold Net Income
a. Understated Understated
b. Overstated Overstated
c. Understated Overstated
d. Overstated Understated

17. Selection of an inventory costing method by management does not usually depend on
a. the fiscal year end.
b. income statement effects.
c. balance sheet effects.
d. tax effects.

18. If the total debit column exceeds the total credit column of the income statement columns on a work sheet, then the company has
a. earned net income for the period.
b. an error because debits do not equal credits.
c. suffered a net loss for the period.
d. to make an adjusting entry.

19. A merchandiser that sells directly to consumers is a
a. retailer.
b. wholesaler.
c. broker.
d. service enterprise.

20. In order for accounting information to be relevant, it must
a. have very little cost.
b. have predictive or feedback value.
c. not be reported to the public.
d. be used by a lot of different firms.


113. Match the items below by entering the appropriate code letter in the space provided.

A. Relevance H. Current ratio
B. Feedback value I. Profit margin percentage
C. Comparability J. Earnings per share
D. Consistency K. Return on assets
E. Time period assumption L. Materiality
F. Going concern assumption M Economic entity assumption
G. Working capital N. Multinational corporations

1. Net income divided by common shares outstanding.
2. Current assets divided by current liabilities.
3. Information that has a bearing on a decision.
4. Net income divided by total assets.
5. An item important enough to influence a prudent investor.
6. Same accounting principles and methods used from year to year within a company.
7. Economic events can be identified with a particular business.
8. Economic life of business can be divided into artificial time periods.
9. Provides justification for depreciation policy and current/noncurrent classifications in the balance sheet.
10. Firms that conduct their operations in more than one country.
11. When information confirms or corrects prior expectations.
12. The excess of current assets over current liabilities.
13. Net income divided by net sales.
14. Different companies using the same accounting principles.

Financial Statements

The adjusted trial balance of Payne Financial Planners appears below and using the information from the adjusted trial balance, you are to prepare for the month ending December 31:
1. an income statement,
2. a retained earnings statement, and
3. a balance sheet.

Adjusted Trial Balance
December 31, 2003
Debit Credit
Cash $ 5,300
Accounts Receivable 2,200
Office Supplies 1,800
Office Equipment 15,000
Accumulated Depreciation-Office Equipment $ 4,000
Accounts Payable 4,200
Unearned Service Revenue 5,000
Common Stock 10,000
Retained Earnings 4,400
Dividends 2,500
Service Revenue 4,300
Office Supplies Expense 600
Depreciation Expense 2,500
Rent Expense 2,000
$31,900 $31,900

For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item.
Code: O = item is overstated
U = item is understated
NA = item is not affected
Stockholders' Cost of Net
Events Assets Equity Goods Sold Income
1. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice.

2. The ending inventory in the previous period was overstated.
3. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.
4. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December31.
5. The internal auditors discovered that the ending inventory in the previous period was understated $15,000 and that the ending inventory in the current period was overstated $25,000.