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True/False Questions
1. Accounting information is used only by external users with a financial interest in a business enterprise.
A.) True
B.) False
2. The dividends account is a subdivision of the returned earnings account and appears as an expense on the income statement.
A.) True
B.) False
3. Information is relevant if it provides a basis for predicting future earnings.
A.) True
B.) False
4. The safeguarding of assets is an objective of a company’s system of internal control.
A.) True
B.) False
5. The ledger is merely a bookkeeping device and therefore does not provide much useful data for management.
A.) True
B.) False
6. The basic accounting equation is in balance when the creditor and ownership claims against the business equal the assets.
A.) True
B.) False
7. Comparisons of company data with industry averages can provide some insight into the company’s relative position in the industry.
A.) True
B.) False
8. The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.
A.) True
B.) False
9. Adjusting entries are an optional bookkeeping procedure.
A.) True
B.) False
10. Internal control consists of the plan of organization and all of the related methods and measures adopted within a business to
(a) safeguard its assets, and (b) enhance the accuracy and reliability of its accounting records.
A.) True
B.) False
11. Generally accepted accounting principles are uniform throughout the world.
A.) True
B.) False
12. Current assets are listed in the order of liquidity.
A.) True
B.) False
Multiple Choice Questions
13. The use of computers in recording business events
a. has made the recording process more efficient.
b. does not use the same principles as manual accounting systems.
c. has greatly impacted the identification stage of the accounting process.
d. is economical only for large businesses.
Use the following information for questions 14-15.
The income statement and balance sheet columns of Pine Company’s worksheet
reflects the following totals:
Income Statement Balance Sheet
Dr. Cr. Dr. Cr.
Totals $58,000 $48,000 $34,000 $44,000
14. The net income (or loss) for the period is
a. $48,000 income.
b. $10,000 income.
c. $10,000 loss.
d. not determinable.
15. To enter the net income (or loss) for the period into the above worksheet
requires an entry to the
a. income statement debit column and the balance sheet credit column.
b. income statement credit column and the balance sheet debit column.
c. income statement debit column and the income statement credit
column.
d. balance sheet debit column and the balance sheet credit column.

16. Under accrual-basis accounting
a. cash must be received before revenue is recognized.
b. net income is calculated by matching cash outflows against cash
inflows.
c. events that change a company’s financial statements are recognized in
the period they occur rather than in the period in which cash is paid or
received.
d. the ledger accounts must be adjusted to reflect a cash basis of
accounting before financial statements are prepared under generally
accepted accounting principles.

17. An example of an expired cost is
a. inventory.
b. sales salaries.
c. prepaid expenses.
d. plant assets.

18. Companies that are subject to, but fail to comply with, the Sarbanes-Oxley
Act of 2002
a. may do so legally by obtaining an exemption.
b. will be automatically dissolved.
c. may be subject to fines and officer imprisonment.
d. may be forced to sell their foreign subsidiaries.

19. Which of the following correctly identifies normal balances of accounts?
a. Assets Debit
Liabilities Credit
Stockholders’ Equity Credit
Revenues Debit
Expenses Credit
b. Assets Debit
Liabilities Credit
Stockholders’ Equity Credit
Revenues Credit
Expenses Credit
c. Assets Credit
Liabilities Debit
Stockholders’ Equity Debit
Revenues Credit
Expenses Debit
d. Assets Debit
Liabilities Credit
Stockholders’ Equity Credit
Revenues Credit
Expenses Debit

20. Costs become expenses
a. when they are paid.
b. when they are charged against revenues.
c. when they are purchased.
d. at the end of the accounting period.

21. Which one of the following is primarily interested in the liquidity of a
company?
a. Federal government
b. Stockholders
c. Long-term creditors
d. Short-term creditors

22. The organization(s) primarily responsible for establishing generally accepted
accounting principles is(are) the
FASB SEC
a. no no
b. yes no
c. no yes
d. yes yes

23. Demaet Cruise Lines purchased a five-year insurance policy for its ships on
April 1, 2008 for $100,000. Assuming that April 1 is the effective date of
the policy, the adjusting entry on December 31, 2008 is
a. Prepaid Insurance……………………………………………….. 15,000
Insurance Expense ……………………………………….. 15,000
b. Insurance Expense ……………………………………………… 15,000
Prepaid Insurance…………………………………………. 15,000
c. Insurance Expense ……………………………………………… 20,000
Prepaid Insurance…………………………………………. 20,000
d. Insurance Expense ……………………………………………… 5,000
Prepaid Insurance…………………………………………. 5,000

24. Barns Company developed the following reconciling information in preparing
its September bank reconciliation:
Cash balance per bank, 9/30 $15,400
Note receivable collected by bank 8,400
Outstanding checks 12,600
Deposits in transit 6,300
Bank service charge 105
NSF check 1,680
Using the above information, determine the cash balance per books
(before adjustments) for the Barns Company.
a. $13,685
b. $21,700
c. $2,485
d. $21,000

25. On September 23, Pitts Company received a $350 check from Mike Moluf for
services to be performed in the future. The bookkeeper for Pitts Company
incorrectly debited Cash for $350 and credited Accounts Receivable for
$350. The amounts have been posted to the ledger. To correct this entry,
the bookkeeper should
a. debit Cash $350 and credit Unearned Service Revenue $350.
b. debit Accounts Receivable $350 and credit Unearned Service
Revenue $350.
c. debit Accounts Receivable $350 and credit Cash $350.
d. debit Accounts Receivable $350 and credit Service Revenue $350.

26. On August 13, 2008, Dudbury Enterprises purchased office equipment for
$1,000 and office supplies of $200 on account. Which of the following
journal entries is recorded correctly and in the standard format?
a. Office Equipment ………………………………………………… 1,000
Account Payable ……………………………………………. 1,200
Office Supplies……………………………………………………. 200
b. Office Equipment. ……………………………………………….. 1,000
Office Supplies……………………………………………………. 200
Accounts Payable…………………………………………… 1,200
c. Accounts Payable ……………………………………………….. 1,200
Office Equipment ……………………………………………. 1,000
Office Supplies ………………………………………………. 200
d. Office Equipment …………………………………………..1,000
Office Supplies……………………………………………………. 200
Accounts Payable…………………………………………… 1,200

27. Accounting information should be neutral in order to enhance
a. reliability.
b. predictive value.
c. feedback value.
d. relevancy.

28. Internal auditors
a. are hired by CPA firms to audit business firms.
b. are employees of the IRS who evaluate the internal controls of
companies filing tax returns.
c. evaluate the system of internal controls for the companies that employ
them.
d. cannot evaluate the system of internal controls of the company that
employs them because they are not independent.

29. Liabilities are generally classified on a balance sheet as
a. small liabilities and large liabilities.
b. present liabilities and future liabilities.
c. tangible liabilities and intangible liabilities.
d. current liabilities and long-term liabilities.

30. An expense is recorded under the cash basis only when
a. services are performed.
b. it is earned.
c. cash is paid.
d. it is incurred.

31. A bank reconciliation should be prepared
a. whenever the bank refuses to lend the company money.
b. when an employee is suspected of fraud.
c. to explain any difference between the depositor’s balance per books
and the balance per bank.
d. by the person who is authorized to sign checks.

32. The current assets should be listed on Cerner’s balance sheet in the
following order:
a. cash, accounts receivable, prepaid insurance, equipment.
b. cash, prepaid insurance, supplies, accounts receivable.
c. cash, accounts receivable, prepaid insurance, supplies.
d. equipment, supplies, prepaid insurance, accounts receivable, cash.

33. An extraordinary item is one that
a. occurs infrequently and is uncontrollable in nature.
b. occurs infrequently and is unusual in nature.
c. is material and is unusual in nature.
d. is material and is uncontrollable in nature.