The business entity assumption requires that a business be accounted for separately from other business entities, including its owner or owners. 2. The four basic financial statements include the balance sheet, income statement, statement of retained earnings and statement of cash flows. 3. A balance sheet covers a period of time, such as a month or year. 4. The income statement shows the financial position of a business on a specific date. Chapter 2 5. Debit means the right-hand side of any account. 6. In a double-entry accounting system, total amount debited must always equal total amount credited. . A debit entry is always favorable. 8. Posting is the transfer of the information from each journal entry to the ledger. Chapter 04 9. Merchandise inventory is reported in the long-term assets section of the balance sheet. 10. The acid-test ratio is also called the quick ratio. 11. Cost of goods sold is reported on both the income statement and the balance sheet. 12. Credit terms include the specifics regarding the amount owed and timing of payments from a buyer to a seller. 13. In a perpetual inventory system, the merchandise inventory account reflects the cost of goods available for sale. 4. A perpetual inventory system continually updates accounting records for inventory transactions. Chapter 05 15. For a merchandising business, an increase in sales will probably also result in a higher inventory turnover rate. 16. The consistency principle requires a company to use the same accounting methods period after period, so that financial statements are comparable across periods. 17. In a period of rising prices, FIFO usually gives a lower taxable income, which leads to an advantage when it comes to paying income tax. 18.
An advantage of LIFO is that it assigns the most recent costs to cost of goods sold and does a better job of matching current costs with revenues on the income statement. 19. An understatement of ending inventory will cause an understatement of assets and equity on the balance sheet. 20. Three key variables determine the dollar value of inventory: (1) inventory quantity, (2) costs of inventory and (3) cost flow assumption. 21. In applying the lower of cost or market method to inventory valuation, market is defined as the current replacement cost. Chapter 06 22.
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The principles of internal control include: establish responsibilities, maintain adequate records, insure assets, separate recordkeeping from custody of assets and perform regular and independent reviews. 23. Cash equivalents are short-term highly liquid investment assets that are easily converted to cash and have maturities of one year. 24. Liquidity refers to a company’s ability to pay its short-term obligations. 25. Checking accounts are also called demand deposits. 26. The journal entry for petty cash reimbursement involves a debit to the appropriate expenses and a credit to Petty Cash. 7. A bank reconciliation explains any differences between the balance of a checking account on the depositor’s records and the balance reported on the bank statement. Chapter 07 28. A promissory note is a written promise to pay a specified amount of money either on demand or at a definite future date. 29. The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable when the company determines it to be uncollectible. 30. The matching principle requires use of the direct write-off method of accounting for bad debts. 1. The advantage of the allowance method of accounting for uncollectible accounts is that it identifies the specific customers who do not pay their bills. 32. The accounts receivable method to estimate bad debts obtains the estimated balance in the Allowance for Doubtful Accounts in one of two ways: (1) the percent uncollectible from the total accounts receivable or (2) aging accounts receivable. 33. The aging method of determining bad debts expense is based on the knowledge that the longer a receivable is past due, the lower the likelihood of collection. 34.
It is never good practice to accept a note receivable in exchange for an overdue account receivable. Chapter 01 35. Which of the following accounting principles dictates when expenses are recognized? A. Revenue recognition principle B. Business entity principle C. Matching principle D. Full disclosure principle 36. Which of the following elements are found on the income statement? A. Cash B. Accounts Receivable C. Retained Earnings D. Salaries Expense 37. Which of the following elements are found on the Balance Sheet? A. Service Revenue B. Net Income C. Utilities Expense D. Retained Earnings 38.
A parcel of land is: offered for sale at $150,000, assessed for tax purposes at $95,000, recognized by its purchasers as being worth $140,000 and purchased for $137,000. The land should be recorded in the purchaser’s books at: A. $95,000 B. $137,000 C. $140,000 D. $150,000 39. Revenues are: A. The same as net income B. Resources owned or controlled by a company C. Increases in retained earnings from a company’s earning activities D. The costs of assets or services used Chapter 02 40. A ledger is: A. A record containing increases and decreases in a specific asset, liability, equity, revenue or expense item
B. A journal in which transactions are first recorded C. A collection of documents that describe transactions and events during the accounting process D. A list of all accounts with their debit balances at a point in time 41. An account balance is: A. The total of the credit side of the account B. The total of the debit side of the account C. The difference between the total debits and total credits for an account including the beginning balance D. Always a credit 42. The Fireside Country Inn is a very popular destination for tourists.
The Inn requires guests to make reservations at least two months in advance of their stay. A twenty percent down payment is required at the time the reservation is made. When should this inn recognize room rental revenue? A. On the date the reservation is received B. On the date the money for the reservation is received C. On the date the guests stay in the inn D. Once all cash has been received 43. Businesses can take all of the following forms except: A. Sole proprietorship B. Common stock C. Partnership D. Corporation Chapter 04 44. A company had sales of $375,000 and its gross profit was $157,500.
Its cost of goods sold equal: A. $375,000 B. $157,500 C. $217,500 D. $532,500 The current period’s ending inventory is: A. The next period’s beginning inventory B. The current period’s cost of goods sold C. The prior period’s beginning inventory D. The current period’s net purchases 45. The credit terms 2/10, n/30 are interpreted as: A. 2% cash discount if the amount is paid within 10 days, with the balance due in 30 days B. 30% discount if paid within 2 days C. 30% discount if paid within 10 days D. 2% discount if paid within 30 days 46. Sales less sales discounts less sales returns and allowances equals:
A. Cost of goods sold B. Net sales C. Gross profit D. Net income 47. Herald Company had sales of $135,000, sales discounts of $2,000 and sales returns of $3,200. Herald Company’s net sales equals: A. $129,800 B. $133,000 C. $135,000 D. $140,200 48. Selling Expenses are: A. Expenses of displaying and advertising merchandise to customers. B. Expenses to support company’s overall operations (often called “overhead”) C. Part of the marketing distribution chain. D. Expense of buying merchandise and preparing it for sale. 49. Multiple-step income statements: A. Are required by the FASB B.
Contain more detail than a simple listing of revenues and expenses C. Are required for the perpetual inventory system D. List cost of goods sold as an operating expense Chapter 05 50. Physical inventory counts: A. Are not necessary under the perpetual system B. Are necessary to measure and adjust for inventory shrinkage C. Must be taken at least once a month D. Are not necessary under the cost-to benefit constraint 51. Which inventory valuation method assigns a value to the inventory on the balance sheet that approximates current cost and also mimics the actual flow of goods for most businesses? A. FIFO B.
Weighted average C. LIFO D. Specific identification 52. The inventory valuation method that results in the lowest taxable income in a period of inflation is: A. LIFO method B. FIFO method C. Weighted-average cost method D. Specific identification method 53. The consistency principle: A. Requires a company to consistently use the same accounting method of inventory valuation unless a change will improve financial reporting B. Requires a company to use one method of inventory valuation exclusively C. Requires that all companies in the same industry use the same accounting methods of inventory valuation
D. Is also called the full disclosure principle 54. The inventory turnover ratio: A. Is used to analyze profitability B. Is used to measure solvency C. Measures how quickly a company turns over its merchandise inventory D. Calculation depends on the company’s inventory valuation method Days’ sales in inventory: A. Is also called days’ stock on hand B. Focuses on average inventory rather than ending inventory C. Is used to measure solvency D. Is calculated by dividing cost of goods sold by ending inventory An overstatement of ending inventory will cause A. An overstatement of assets and equity on the balance sheet B.
An understatement of assets and equity on the balance sheet C. An overstatement of assets and an understatement of equity on the balance sheet D. An understatement of assets and an overstatement of equity on the balance sheet 55. A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, they purchased 20 units at $12 each. 12 units are sold on June 5. Using the FIFO perpetual inventory method, what is the cost of the 12 units that were sold? A. $120 B. $124 C. $128 D. $130 56. A company has inventory of 15 units at a cost of $12 each on August 1.
On August 5, they purchased 10 units at $13 per unit. On August 12 they purchased 20 units at $14 per unit. On August 15, they sold 30 units. Using the FIFO perpetual inventory method, what is the value of the inventory on August 12 after the sale? A. $140 B. $160 C. $210 D. $380 57. Generally accepted accounting principles require that the inventory of a company be reported at: A. Market value B. Historical cost C. Lower of cost or market D. Replacement cost Chapter 06 58. Which of the following are risks of e-commerce? A. Firewalls, fraud and computer viruses B.
Encryption, stolen credit card numbers and fraud C. Stolen credit card numbers, computer viruses and impersonation D. Computer viruses, encryption and stolen credit card numbers 59. Cash equivalents: A. Are short-term, highly liquid investments B. Include 6-month CDs C. Include checking accounts D. Include money orders 60. The number of days’ sales uncollected: A. Is used to evaluate the liquidity of receivables B. Is calculated by dividing accounts receivable by sales C. Measures a company’s ability to pay its bills on time D. Measures a company’s debt to income 61. The Cash Over and Short account: A.
Is used to record a credit balance in the cash account B. Is an income statement account used for recording the income effects of cash overages and cash shortages from errors in making change and from missing petty cash receipts C. Is not necessary in a computerized accounting system D. Can never have a debit balance 62. The entry necessary to establish a petty cash fund should include: A. A debit to Cash and a credit to Petty Cash B. A debit to Cash and a credit to Cash Over and Short C. A debit to Petty Cash and a credit to Cash D. A debit to Petty Cash and a credit to Accounts Receivable 3. The entry to record reimbursement of the petty cash fund for postage expense should I include: A. A debit to Postage Expense B. A debit to Petty Cash C. A debit to Cash D. A debit to Cash Short and Over 64. When completing a bank reconciliation, what action should you take regarding “Outstanding Checks”. A. Add the item to the Bank’s side B. Subtract the item from the Bank’s side. C. Add the item to the company Book’s balance D. Subtract the item from the company’s Book balance. 65. When completing a bank reconciliation, what action should you take regarding “Deposits- In-Transit”.
A. Add the item to the Bank’s side B. Subtract the item from the Bank’s side. C. Add the item to the company Book’s balance D. Subtract the item from the company’s Book balance. Chapter 07 66. Acme Company has an agreement with a major credit card company which calls for cash to be received immediately upon deposit of Acme customers’ credit card sales receipts. The credit card company receives 3. 5% of card sales as its fee. If Acme has $2,000 in credit card sales, which of the following statements is true? A. Acme debits Cash $2,000 B. Acme debits Cash $1,930 C.
Acme debits Accounts Receivable – Credit Card Co $2,000 D. Acme debits Accounts Receivable – Credit Card Co $1,930 67. A promissory note: A. Is a short-term investment for the maker B. Is a written promise to pay a specified amount of money at a certain date C. Is a liability to the payee D. Is another name for an installment receivable 68. A company receives a 10%, 90-day note for $1,500. The total interest due upon the maturity date is: A. $37. 50 B. $150. 00 C. $75. 00 D. $50. 00 69. The quality of receivables refers to: A. The creditworthiness of sellers B. The speed of collection
C. The likelihood of collection without loss D. Sales turnover 70. The matching principle requires: A. That expenses be ignored if their effect on the financial statements are less important than revenues to the financial statement user B. The use of the direct write-off method for bad debts C. The use of the allowance method of accounting for bad debts D. That bad debts be disclosed in the financial statements 71. The materiality principle: A. States that an amount can be ignored if its effect on financial statements is unimportant to the user’s business decisions
B. Requires use of the allowance method for bad debts C. Requires use of the direct write-off method D. States that bad debts not be written off 72. The amount of bad debt expense can be estimated by: A. The percent of sales method B. The percent of accounts receivable method C. The aging of accounts receivable method D. Bad debt expense can be estimated by any of the three methods listed above 73. A method of estimating bad debts expense that involves a detailed examination of outstanding accounts and their length of time past due is the: A. Direct write-off method
B. Aging of accounts receivable method C. Percentage of sales method D. Aging of investments method |Sales |100,000 | |Sales Discounts | 5,000 | |Sales Returns & Allowances | 10,000 | |Cost of Goods Sold | 55,000 | |Admin & General Expenses | 10,000 | 74. Use any amounts needed (from above) to calculate “Gross Profit” 75. Use any amounts needed (from above) to calculate “Net Income”
Use this data to answer questions below: (1 pt ea = 6 points total) | JAN ‘11 Beg. Inv |20 units @ $ 200 each = |$ 4,000 | | MAR ‘11 Purchase |40 units @ $ 225 each = |$ 9,000 | | MAY ‘11 Purchase |30 units @ $ 250 each = |$ 7,500 | | NOV ‘11 Purchase |20 units @ $ 275 each = |$ 5,500 | | TOTAL |110 units |$ 26,000 |
Company SOLD 80 units. Ending Inventory is 30 units. 76. Calculate the Cost of Goods Sold using the FIFO method. 77. Calculate the Cost of Goods Sold using the LIFO method. 78. Calculate the Cost of Goods Sold using the Weighted Average method. 79. Calculate the Ending Inventory using the FIFO method. 80. Calculate the Ending Inventory using the LIFO method. 81. Calculate the Ending Inventory using the Weighted Average method. Journal Entries 82. A customer buys a new TV from you for $1,000 paying with a VISA card. VISA charges you a 4% fee. VISA pays you the cash immediately). 83. You sold an item for $500 to a customer who paid using a AMEX card. AMEX charges you a 6% fee. (AMEX will send you payment in full in 3 weeks. 84. Bob signs a $10,000, 8%, 90 day promissory note to you in payment of a past due account. 85. Bob pays the $10,000, 8%, 90 day note in full (on the due date) Note – you did not do any entries to accrue interest. 86. JCo has a -0- balance in the allowance account. JCo estimates that they must bring the balance to $5,000.
Prepare the entry. 87. Bob is a customer of JCo who owes $1,000. JCo has decided the write off the Bob account using the Direct Write-Off method. Prepare the entry. 88. FredCorp owed $1,400 for merchandise they bought last month. The terms of the purchase were 2/10/n30. FredCorp pays within the discount period. Prepare the netry for paying the 89. TomCo received a bill from UPS in the amount of $50 to pay for the shipping costs of the merchandise it sold. TomCo paid the freight bill. Prepare the entry.