Multiple Choice Answers

Question 1

Which of the following is not one of the three forms of business organization?

a. corporations.
b. partnerships.
c. proprietorships.
d. investors.
Question 2

Most business enterprises in the United States are

a. proprietorships and partnerships.
b. partnerships.
c. corporations.
d. government units.
Question 3

A business organized as a separate legal entity is a

a. corporation.
b. proprietor.
c. government unit.
d. partnership.
Question 4

External users wants 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?
Question 5

Which of the following is not a principal type of business activity?

a. Operating
b. Investing
c. Financing
d. Delivering
Question 6

Debt and obligations of a business are referred to as

a. assets.
b. equities.
c. liabilities.
d. expenses.
Question 7

Net income results when

a. Assets > Liabilities.
b. Revenues = Expenses.
c. Revenues > Expenses.
d. Revenues < Expenses.
Question 8

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.
Question 9

The retained earnings statement would not show

a. the retained earnings beginning balance.
b. revenues and expenses.
c. dividends.
d. a.      the ending retained earning balance.
Question 10

Claire’ s Accessory Shop started the year with total assets of $70,000 and total liabilities of $40,000.  During the year the business recorded $110,000 in revenues, $55,000 in expenses, and dividends of $20,000.
Stockholders’ equity at the end of the year was:

a. $60,000.
b. $55,000.
c. $65,000.
d. $35,000.
Question 11

Claire’ s Accessory Shop started the year with total assets of $70,000 and total liabilities of $40,000.  During the year the business recorded $110,000 in revenues, $55,000 in expenses, and dividends of $20,000.
Net income reported by Claire’s Accessory Shop for the year was:

a. $40,000.
b. $50,000.
c. $65,000.
d. $55,000.
Question 12

Common stock is reported on the :

a. statement of cash flows.
b. retained earnings statement.
c. income statement.
d. balance sheet.
Question 13

A current asset is:

a. the last asset purchased by a business.
b. an asset which is currently being used to produce a product or service.
c. usually found as a separate classification in the income statement.
d. expected to be converted to cash or used in the business within a relatively short period of
time.
Question 14

Trademarks would appear in which balance sheet section?

a. Intangible assets
b. Investments
c. Property, plant, and equipment
d. Current assets
Question 15

The operating cycle of a company is the average time that is required to go from cash to :

a. sales in producing revenues.
b. cash in producing revenues.
c. inventory in producing revenues.
d. accounts receivable in producing revenues.
Question 16

Benton Office Supplies
Balance Sheet
December 31, 2007

Cash                                        $    65,000            Accounts Payable                         $  70,000
Prepaid Insurance                          30,000            Salaries Payable                               10,000
Accounts Receivable                     50,000            Mortgage Payable                             90,000
Inventory                                         70,000                 Total Liabilities                         $170,000
Land held for investment               75,000
Land                                               90,000
Building                   $100,000                                Common Stock                             $110,000
Less Accumulated                                             Retained Earnings                          250,000
Depreciation      (20,000)       80,000               Total stockholders’ equity          $360,000
Trademark                                     70,000                  Total Liabilities and
Total Assets                               $530,000                    Stockholders’ Equity             $530,000
16. The total dollar amount of assets to be classified as current assets is :

a. $290,000.
b. $215,000.
c. $180,000.
d. $145,000.
Question 17

Benton Office Supplies
Balance Sheet
December 31, 2007

Cash                                        $    65,000            Accounts Payable                         $  70,000
Prepaid Insurance                          30,000            Salaries Payable                               10,000
Accounts Receivable                     50,000            Mortgage Payable                             90,000
Inventory                                         70,000                 Total Liabilities                         $170,000
Land held for investment               75,000
Land                                               90,000
Building                   $100,000                                Common Stock                             $110,000
Less Accumulated                                             Retained Earnings                          250,000
Depreciation      (20,000)       80,000               Total stockholders’ equity          $360,000
Trademark                                     70,000                  Total Liabilities and
Total Assets                               $530,000                    Stockholders’ Equity             $530,000
17. The total dollar amount of assets to be classified as property, plant, and equipment is:

a. $320,000.
b. $170,000.
c. $245,000.
d. 190,000.
Question 18

Benton Office Supplies
Balance Sheet
December 31, 2007
Cash                                        $    65,000            Accounts Payable                         $  70,000
Prepaid Insurance                          30,000            Salaries Payable                               10,000
Accounts Receivable                     50,000            Mortgage Payable                             90,000
Inventory                                         70,000                 Total Liabilities                         $170,000
Land held for investment               75,000
Land                                               90,000
Building                   $100,000                                Common Stock                             $110,000
Less Accumulated                                             Retained Earnings                          250,000
Depreciation      (20,000)       80,000               Total stockholders’ equity          $360,000
Trademark                                     70,000                  Total Liabilities and
Total Assets                               $530,000                    Stockholders’ Equity             $530,000
The total dollar amount of assets to be classified as investments is:

a. $0.
b. $150,000.
c. $75,000.
d. $180,000.
Question 19

Benton Office Supplies
Balance Sheet
December 31, 2007
Cash                                        $    65,000            Accounts Payable                         $  70,000
Prepaid Insurance                          30,000            Salaries Payable                               10,000
Accounts Receivable                     50,000            Mortgage Payable                             90,000
Inventory                                         70,000                 Total Liabilities                         $170,000
Land held for investment               75,000
Land                                               90,000
Building                   $100,000                                Common Stock                             $110,000
Less Accumulated                                             Retained Earnings                          250,000
Depreciation      (20,000)       80,000               Total stockholders’ equity          $360,000
Trademark                                     70,000                  Total Liabilities and
Total Assets                               $530,000                    Stockholders’ Equity             $530,000
The total amount of working capital is:

a. $135,000.
b. $295,000.
c. $75,000.
d. $60,000.
Question 20

Benton Office Supplies
Balance Sheet
December 31, 2007
Cash                                        $    65,000            Accounts Payable                         $  70,000
Prepaid Insurance                          30,000            Salaries Payable                               10,000
Accounts Receivable                     50,000            Mortgage Payable                             90,000
Inventory                                         70,000                 Total Liabilities                         $170,000
Land held for investment               75,000
Land                                               90,000
Building                   $100,000                                Common Stock                             $110,000
Less Accumulated                                             Retained Earnings                          250,000
Depreciation      (20,000)       80,000               Total stockholders’ equity          $360,000
Trademark                                     70,000                  Total Liabilities and
Total Assets                               $530,000                    Stockholders’ Equity             $530,000
The current ratio is:

a. 1.94 : 1.
b. 1.57 : 1.
c. 3.14 : 1.
d. 2.69 : 1.
Question 21

Most companies use a(n)  _________ rather than a retained earnings statement.

a. balance sheet
b. income statement
c. statement of cash flows
d. statement of stockholders’ equity
Question 22

Reporting a net income of $95,000 will:

a. increase retained earnings.
b. decrease retained earnings.
c. increase common stock.
d. decrease common stock.
Question 23

The agency of the United States Government that oversees the U.S. financial markets is the:

a. Internal Revenue Service
b. Security Exchange Commission
c. Financial Accounting Standards Board.
d. International Auditing Standards Committee.
Question 24

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.
Question 25

If expenses are paid in cash, then:

a. assets will increase.
b. liabilities will decrease
c. stockholders’ equity will increase.
d. assets will decrease.
Question 26

Receiving payment of a portion of Accounts Receivable will:

a. not affect total assets.
b. increase liabilities.
c. increase stockholders’ equity.
d. decrease net income.
Question 27

Franklin Company provided consulting services and billed the client $2,500.  As a result of this event:

a. assets remained unchanged.
b. assets increased by $2,500.
c. equity increased by $2,500.
d. Both b and c.
Question 28

Are advanced receipts from customers treated as revenue at the time of receipt?  Why or why not?

a. Yes, they are treated as revenue at the time of receipt because the company has access to the cash.
b. No, the amount of revenue cannot be adequately determined until the company completes the work.
c. Yes, the intent of the company is to perform the work and the customer is confident that the services will be completed.
d. No, revenue cannot be recognized until the work is performed.
Question 29

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

a. Credit side
b. Trial balance
c. Debit side
d. Title
Question 30

A debit to an asset account indicates a(n):

a. error.
b. credit was made to a liability account.
c. decrease in the asset.
d. increase in the asset.
Question 31

Which of the following correctly identifies normal balances of accounts?

a. Assets                               Debit
Liabilities                           Credit
Common Stock                 Credit
Revenues                          Debit
Expenses                          Credit
b. Assets                              Debit
Liabilities                           Credit
Common Stock                 Credit
Revenues                          Credit
Expenses                          Credit
c. Assets                              Credit
Liabilities                           Debit
Common Stock                 Debit
Revenues                          Credit
Expenses                          Debit
d. Assets                              Debit
Liabilities                           Credit
Common Stock                 Credit
Revenues                          Credit
Expenses                          Debit
Question 32

In recording an accounting transaction in a double entry system:

a. the number of debit accounts must equal the number of credit accounts.
b. there must always be entries made on both sides of the accounting equation.
c. the amount of the debits must equal the amount of the credits.
d. there must only be two accounts affected by any transaction.
Question 33

A company that receives money in advance of performing a service:

a. debits cash and credits unearned fees.
b. debits unearned fees and credits accounts payable.
c. debits cash and credits prepaid fees.
d. debits cash and credits accounts receivable.
Question 34

Denton Company showed the following balances at the end of it’s first year:
Cash                                       $7,000
Prepaid insurance                        700
Accounts receivable                 3,500
Accounts payable                     2,800
Notes payable                           4,200
Common stock                         1,400
Dividends                                     700
Revenues                                21,000
Expenses                                17,500

What did Denton Company show as total credits on its trial balance?
a. $30,100
b. $29,400
c. $28,700
d. $30,800


Question 35

Management could determine the amounts due from customers by examining which ledger account?

a. Service Revenue
b. Accounts Payable
c. Accounts Receivable
d. Supplies
Question 36

A list of accounts and their balances at a given time is called a(n):

a. journal.
b. posting.
c. trial balance.
d. income statement.
Question 37

The revenue recognition principle dictates that revenue should be recognized in the accounting records:

a. when cash is received.
b. when it is earned.
c. at the end of the month.
d. in the period that income taxes are paid.
Question 38

In a service-type business, revenue is considered earned:

a. at the end of the month.
b. at the end of the year.
c. when the service is performed.
d. when cash is received.
Question 39

Sheepskin Company had the following transactions during 2006.
•         Sales of $4,500 on account
•         Collected $2,000 for services to be performed in 2007
•         Paid $625 cash in salaries
•         Purchased airline tickets for $250 in December for a trip to take place in 2007
What is Sheepskin’s 2006 net income using accrual accounting?

a. $3,875
b. $5,875
c. $5,625
d. $3,625
Question 40

Sheepskin Company had the following transactions during 2006.
•         Sales of $4,500 on account
•         Collected $2,000 for services to be performed in 2007
•         Paid $625 cash in salaries
•         Purchased airline tickets for $250 in December for a trip to take place in 2007
What is Sheepskin’s 2006 net income using cash basis accounting?

a. $5,875
b. $1,375
c. $5,625
d. $1,125
Question 41

Which one of the following is not a justification for adjusting entries?

a. Adjusting entries are necessary to ensure that revenue recognition principles are followed.
b. Adjusting entries are necessary to ensure that the matching principle is followed.
c. Adjusting entries are necessary to enable financial statements to be in conformity with GAAP.
d. Adjusting entries are necessary to bring the general ledger accounts in line with the budget.
Question 42

If a resource has been consumed but a bill has not been received at the end of the accounting period, then:

a. an expense should be recorded when the bill is received.
b. an expense should be recorded when the cash is paid out.
c. an adjusting entry should be made recognizing the expense.
d. it is optional whether to record the expense before the bill is received.
Question 43

Goods purchased for future use in the business, such as supplies, are called:

a. prepaid expenses.
b. revenues.
c. stockholders’ equity.
d. liabilities.
Question 44

Unearned revenues are:

a. received and recorded as liabilities before they are earned.
b. earned and recorded as liabilities before they are received.
c. earned but not yet received or recorded.
d. earned and already received and recorded.
Question 45

The Harris Company purchased a computer for $4,500 on December 1. It is estimated that annual depreciation on the computer will be $900. If financial statements are to be prepared on December 31, the company should make the following adjusting entry:

a. Debit Depreciation Expense, $900; Credit Accumulated Depreciation, $900.
b. Debit Depreciation Expense, $75; Credit Accumulated Depreciation, $75.
c. Debit Depreciation Expense, $3,600; Credit Accumulated Depreciation, $3,600.
d. Debit Office Equipment, $4,500; Credit Accumulated Depreciation, $4,500.
Question 46

The trial balance for Houley Corporation appears as follows:

Houley Corporation
Trial Balance
December 31, 2007
Cash                                                               $  300
Accounts Receivable                                        500
Prepaid Insurance                                               60
Supplies                                                             140
Office Equipment                                          4,000
Accumulated Depreciation,
Office Equipment                                                            $   800
Accounts Payable                                                                      300
Common Stock                                                                       1,000
Retained Earnings                                                                  1,400
Service Revenue                                                                     3,000
Salaries Expense                                           1,000
Rent Expense                                                     500
$6,500            $6,500
If on December 31, 2007, supplies on hand were $20, the adjusting entry would contain a:

a. debit to Supplies for $20.
b. credit to Supplies for $20.
c. debit to Supplies Expense for $120.
d. credit to Supplies Expense for $120.

Question 47

The trial balance for Houley Corporation appears as follows:

Houley Corporation
Trial Balance
December 31, 2007

Cash                                                               $  300
Accounts Receivable                                        500
Prepaid Insurance                                               60
Supplies                                                             140
Office Equipment                                          4,000
Accumulated Depreciation,
Office Equipment                                                            $   800
Accounts Payable                                                                      300
Common Stock                                                                       1,000
Retained Earnings                                                                  1,400
Service Revenue                                                                     3,000
Salaries Expense                                           1,000
Rent Expense                                                     500
$6,500            $6,500
If on December 31, 2007, the insurance still unexpired amounted to $10, the adjusting entry would contain a:

a. debit to Prepaid Insurance for $50.
b. credit to Prepaid Insurance for $10.
c. debit to Insurance Expense for $50.
d. debit to Prepaid Insurance for $10.
Question 48

The trial balance for Houley Corporation appears as follows:
Houley Corporation
Trial Balance
December 31, 2007

Cash                                                               $  300
Accounts Receivable                                        500
Prepaid Insurance                                               60
Supplies                                                             140
Office Equipment                                          4,000
Accumulated Depreciation,
Office Equipment                                                            $   800
Accounts Payable                                                                      300
Common Stock                                                                       1,000
Retained Earnings                                                                  1,400
Service Revenue                                                                     3,000
Salaries Expense                                           1,000
Rent Expense                                                     500
$6,500            $6,500
If the estimated depreciation for office equipment were $800, the adjusting entry would contain a:

a. credit to Accumulated Depreciation, Office Equipment for $800.
b. credit to Depreciation Expense, Office Equipment for $800.
c. debit to Accumulated Depreciation, Office Equipment for $800.
d. credit to Office Equipment for $800.
Question 49

The trial balance for Houley Corporation appears as follows:
Houley Corporation
Trial Balance
December 31, 2007
Cash                                                               $  300
Accounts Receivable                                        500
Prepaid Insurance                                               60
Supplies                                                             140
Office Equipment                                          4,000
Accumulated Depreciation,
Office Equipment                                                            $   800
Accounts Payable                                                                      300
Common Stock                                                                       1,000
Retained Earnings                                                                  1,400
Service Revenue                                                                     3,000
Salaries Expense                                           1,000
Rent Expense                                                     500
$6,500            $6,500

If as of December 31, 2007, rent of $100 for December had not been recorded or paid, the adjusting entry would include a:

a. credit to Accumulated Rent for $100.
b. credit to Cash for $100.
c. debit to Rent Payable for $100.
d. debit to Rent Expense for $100.
Question 50

The trial balance for Houley Corporation appears as follows:
Houley Corporation
Trial Balance
December 31, 2007

Cash                                                               $  300
Accounts Receivable                                        500
Prepaid Insurance                                               60
Supplies                                                             140
Office Equipment                                          4,000
Accumulated Depreciation,
Office Equipment                                                            $   800
Accounts Payable                                                                      300
Common Stock                                                                       1,000
Retained Earnings                                                                  1,400
Service Revenue                                                                     3,000
Salaries Expense                                           1,000
Rent Expense                                                     500
$6,500            $6,500

If service for $125 had been performed but not billed, the adjusting entry to record this would include a:

a. debit to Service Revenue for $125.
b. credit to Unearned Service Revenue for $125.
c. credit for Service Revenue for $125.
d. debit to Unearned Revenue for $125.