Multiple Choice Answers

Question 1
The use of prenumbered checks is an example of
documentation procedures.
independent internal verification.
establishment of responsibility.
segregation of duties.

Question 2
What Is the rationale for the internal control principle, segregation of duties?
History has shown that employees are generally dishonest and thus cannot be entrusted with performing related duties.
The work of one employee should, without duplication of effort, provide a reliable basis for evaluating the work of another employee.
Control is most effective when only one person is responsible for a give task.
Segregation of duties causes companies to hire more employees and thus it supports the economy.

Question 3
Which of the following is an example of a bank reconciliation item that requires an adjusting entry?
NSF check
Deposit in transit
Bank error
None of these items requires an adjusting entry.

Question 4
Which of the following is not a suggested procedure to establish internal control over cash disbursements?
Anyone can sign the checks.
Different individuals approve and make the payments.
Blank checks are stored with limited access.
The bank statement is reconciled monthly.

Question 5
With respect to the income statement
contra revenue accounts do not appear on the income statement.
sales discounts increase the amount of sales.
contra revenue accounts increase the amount of operating expenses.
sales discounts are included in the calculation of gross profit.

Question 6
A perpetual inventory system would most likely be used by a(n)
automobile dealership.
hardware store.
drugstore.
convenience store.

Question 7
A decline in a company’s gross profit could be caused by all of the following except
selling products with a lower markup.
clearance of discontinued inventory.
paying lower prices to its suppliers.
increasing competition resulting in a lower selling price.

Question 8
Baxtor Company purchased merchandise inventory with an invoice price of $5,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Baxtor Company pays within the discount period?
$5,000
$4,920
$4,900
$4,000

Question 9
Which one of the following is not a justification for adjusting entries?
Adjusting entries are necessary to ensure that revenue recognition principles are followed.
Adjusting entries are necessary to ensure that the matching principle is followed.
Adjusting entries are necessary to enable financial statements to be in conformity with GAAP.
Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

Question 10
Dorting Company purchased a computer system for $3,600 on January 1, 2006. The company expects to use the computer system for 3 years. It has no salvage value. Monthly depreciation expense on the asset is:
$0
$100
$1,200
$3,600

Question 11
Adjusting entries affect at least
one revenue and one expense account.
one asset and one liability account.
one revenue and one balance sheet account.
one income statement account and one balance sheet account.

Question 12
Accumulated Depreciation is a(n)
expense account.
stockholders’ equity account.
liability account.
contra asset account.

Question 13
Use the following inventory information for the month of July.
July 1 Beginning inventory 10 units at $90
5 Purchases 60 units @ $84
14 Sale 40 units
21 Purchases 30 units at $87
30 Sale 28 units
Reference: Ref 6-16
Assuming that a perpetual inventory system is used, what is ending inventory (rounded) under the average cost method?
$2,750
$2,784
$2,406.
$2,772

Question 14
The lower of cost or market basis of valuing inventories is an example of
comparability.
the cost principle.
conservatism.
consistency.

Question 15
ABC Company is a retailer operating in an industry that experiences inflation (rising prices). ABC wants the most realistic cost of goods sold. Which inventory costing method should ABC consider using?
Average because all inventory costs will then represent an average amount.
Specific identification is the most realistic method because it involves the actual costs.
LIFO because cost of goods sold represents the latest costs.
FIFO because cost of goods sold represents the earliest costs.

Question 16
At May 1, 2007, Treeline Company had beginning inventory consisting of 100 units with a unit cost of $7. During May, the company purchased inventory as follows:
200 units at $7
300 units at $8
The company sold 500 units during the month for $12 per unit. Treeline uses the average cost method.
Reference: Ref 6-9
The value of Treeline’s inventory at May 31, 2007 is
$700
$750
$800
$4,500

Question 17
The net income reported on the income statement for the current year was $210,000. Depreciation was $25,000. Accounts receivable and inventories decreased by $5,000 and $15,000, respectively. Prepaid expenses and accounts payable increased, respectively, by $500 and $4,000. How much cash was provided by operating activities?
$240,500
$250,500
$258,500
$219,500

Question 18
The acquisition of land by issuing common stock is
a noncash transaction that is not reported in the body of a statement of cash flows.
a cash transaction and would be reported in the body of a statement of cash flows.
a noncash transaction and would be reported in the body of a statement of cash flows.
only reported if the statement of cash flows is prepared using the direct method.

Question 19
Wilton Company reported net income of $40,000 for the year. During the year, accounts receivable increased by $7,000, accounts payable decreased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is
$30,000.
$45,000.
$39,000.
$35,000

Question 20
Harbor Company reported net income of $60,000 for the year ended December 31, 2007. During the year, inventories decreased by $12,000, accounts payable decreased by $18,000, depreciation expense was $20,000 and a gain on disposal of equipment of $9,000 was recorded. Net cash provided by operating activities in 2007 using the indirect method was
$119,000.
$65,000.
$77,000.
$55.000.

Question 21
Spencer Corporation borrowed $300,000 from National Bank on May 31, 2006. The three-year, 7% note required annual payments of $114,315 beginning May 31, 2007.
Reference: Ref 10-14
Interest expense for the year ended December 31, 2006 was
$12,250.
$14,000.
$21,000.
$0.

Question 22
The current carrying value of Jensen’s $600,000 face value bonds is $597,750. If the bonds are retired at 102, what would be the amount Jensen would pay its bondholders?
$597,750
$600,000
$603,000
$612,000

Question 23
The amount of sales tax collected by a retail store when making sales is
a miscellaneous revenue for the store.
a current liability.
not recorded because it is a tax paid by the customer.
recorded as an operating expense.

Question 24
A current liability is a debt that can reasonably be expected to be paid
within one year, or the operating cycle, whichever is longer.
between 6 months and 18 months.
out of currently recognized revenues.
out of cash currently on hand.

Question 25
A payment of a portion of accounts payable will
Answer
not affect total assets.
increase liabilities.
not affect stockholders’ equity.
decrease net income.

Question 26
On March 1, 2007, Dillon Company hires a new employee who will start to work on March 6. The employee will be paid on the last day of each month. Should a journal entry be made on March 6? Why or why not?
Yes, the company is now obligated to pay the employee, thus that event must be recorded.
No, hiring an employee is an important event, however it is not an economic event that should be recorded.
Yes, failure to record the event would cause the financial statements to be misleading.
No, the financial position of the company has been changed, however, the dollar amount of the transaction is not yet known.

Question 27
The usual sequence of steps in the recording process is to
analyze each transaction, enter the transaction in the journal, and transfer the information to the ledger accounts.
analyze each transaction, enter the transaction in the ledger, and transfer the information to the journal.
analyze each transaction, enter the transaction in the book of accounts, and transfer the information to the journal.
analyze each transaction, enter the transaction in the book of original entry, and transfer the information to the journal.

Question 28
An accounting record that includes a list of accounts and their balances at a given time is called a
trial balance.
general journal.
general ledger.
chart of accounts.

Question 29
Dexter 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 Dexter’s net income for the year?
$15,000
$35,000
$25,000
$45,000

Question 30
Cromwell Company began the year by issuing $30,000 of common stock for cash. The company recorded revenues of $275,000, expenses of $240,000, and paid dividends of $15,000. What was Cromwell’s net income for the year?
$20,000
$50,000
$35,000
$65,000

Question 31
Stockholders’ equity is comprised of
common stock and dividends.
common stock and retained earnings.
dividends and retained earnings.
net income and retained earnings.

Question 32
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.
Reference: Ref 1-2
The net income reported by Claire’s Accessory Shop for the year was
$40,000.
$50,000.
$65,000.
$55,000.

Question 33
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.
Reference: Ref 1-2
Stockholders’ equity at the end of the year was
$60,000.
$55,000.
$65,000.
$35,000.

Question 34
The maturity value of a $20,000, 9%, 40-day note receivable dated July 3 is
$20,000.
$22,000.
$21,800.
$20,200.

Question 35
Kline Corporation had net credit sales during the year of $800,000 and cost of goods sold of $500,000. The balance in receivables at the beginning of the year was $120,000 and at the end of the year was $180,000. What was the receivables turnover ratio?
5.33
6.67
4.44
3.33

Question 36
The interest on a $6,000, 10%, 1-year note receivable is
$6,000.
$50.
$600.
$6,600.

Question 37
The direct write-off method of accounting for bad debts
uses an allowance account.
uses a contra asset account.
does not require estimates of bad debt losses.
is the preferred method under generally accepted accounting principles.

Question 38
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 $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

Reference: Ref 2-1
The total dollar amount of assets to be classified as property, plant, and equipment is
$320,000.
$170,000.
$245,000.
$190,000.

Question 39
Which of the following is not classified properly as a current asset?
Supplies
Marketable securities
A fund to be used to purchase a building within the next year
A receivable from the sale of an asset to be collected in two years

Question 40
At December 31, 2007 Shorts Company had retained earnings of $2,184,000. During 2007 they issued stock for $98,000, and paid dividends of $34,000. Net income for 2007 was $402,000. The retained earnings balance at the beginning of 2007 was:
$2,552,000
$1,816,000
$1,914,000
$2,454,000

Question 41
Reporting a net income of $95,000 will
increase retained earnings.
decrease retained earnings.
increase common stock.
decrease common stock.

Question 42
The cost principle requires that when assets are acquired, they be recorded at
market value.
the amount paid for them.
selling price.
list price.

Question 43
A disadvantage of the corporate form of business is
its status as a separate legal entity.
continuous existence.
government regulation.
ease of transfer of ownership.

Question 44
A corporation records a dividend-related liability
on the record date.
on the payment date.
when dividends are in arrears.
on the declaration date.

Question 45
Two classifications appearing in the paid-in capital section of the balance sheet are
preferred stock and common stock.
paid-in capital and retained earnings.
capital stock and additional paid-in capital.
capital stock and treasury stock.

Question 46
Stockholders of a corporation directly elect
the president of the corporation.
the board of directors.
the treasurer of the corporation.
all of the employees of the corporation.

Question 47
Which of the following methods of computing depreciation is production based?
Straight-line
Declining-balance
Units-of-activity
None of these

Question 48
Edmonds Company purchases a new delivery van for $50,000. The sales taxes are $2,000. The logo of the company is painted on the side of the van for $1,200. The van’s annual license is $120. The van undergoes safety testing for $220. What does Edmonds record as the cost of the new van?
$53,540
$53,420
$52,000
$51,420

Question 49
Ace Corporation sold equipment for $12,000. The equipment had an original cost of $36,000 and accumulated depreciation of $18,000. As a result of the sale,
net income will increase $12,000.
net income will increase $6,000.
net income will decrease $6,000.
net income will decrease $12,000.

Question 50
Joe’s Quik Shop bought equipment for $25,000 on January 1, 2006. Joe estimated the useful life to be 5 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2007, Joe decides that the business will use the equipment for a total of 6 years. What is the revised depreciation expense for 2007?
$4,000
$2,000
$3,333
$5,000