Q1. 'Market,' as used in the phrase 'lower of cost or market' for valuing inventory, refers to the price at which the inventory is being offered for sale by its owner.
a. true
b. false
Q2. The party promising to pay a note at maturity is the payee.
a. true
b. false
Q3. The term 'inventory' indicates
a. merchandise held for sale in the normal course of business.
b. materials in the process of production or held for production.
c. both of these.
d. neither of these.
Q4. The use of the lower of cost or market method of inventory valuation increases the gross profit for the period in which the inventory replacement price declined.
a. true
b. false
Q5. A 60-day, 12% note for $15,000 dated May 1 is received from a customer on account. The maturity value of the note is
a. $15,300.
b. $15,000.
c. $14,700.
d. $16,800.
Q6. In reference to a promissory note, the person who makes the promise to pay is called the
a. maker.
b. payee.
c. seller.
d. receiver.
Q7. Calculate the cost of ending inventory using FIFO inventory cost method.
| 1/1 |
Beginning inventory |
10 units @ $10 per unit |
| 2/28 |
Purchases |
40 units @ $12 per unit |
| 5/10 |
Purchases |
50 units @ $14 per unit |
| 9/20 |
Purchases |
30 units @ $16 per unit |
| 12/31 |
Ending inventory |
50 units |
a. $800
b. $760
c. $580
d. $500
Q8. A 90-day, 8% note for $10,000 dated May 1 is received from a customer on account. The maturity value of the note is
a. $10,000.
b. $10,800.
c. $10,200.
d. $9,800.
Q9. When merchandise sold is assumed to be in the order in which the expenditures were made, the inventory method is called
a. first-in, last-out.
b. last-in, first-out.
c. first-in, first-out.
d. average cost.
Q10. Cost is a method of inventory valuation.
a. true
b. false
Q11. Receivables are usually a significant portion of
a. total current liabilities.
b. total liabilities.
c. total current assets.
d. total assets.
Q12. One of the weaknesses of the direct write-off method is that it
a. understates accounts receivable on the balance sheet.
b. violates the matching principle.
c. is too difficult to use for many companies.
d. is based on estimates.
Q13. During deflationary periods, the use of the LIFO method of costing inventory will result in a greater amount of net income than would result from the use of the FIFO method.
a. true
b. false
Q14. The amount of the promissory note plus the interest earned on the due date is called the
a. realizable value.
b. maturity value.
c. face value.
d. net realizable value.
Q15. The two methods of accounting for uncollectible receivables are the allowance method and the
a. equity method.
b. direct write-off method.
c. interest method.
d. cost method.
Q16. When the estimate based on analysis of receivables is used, income is reduced when a specific receivable is written off.
a. true
b. false
Q17. Inventory costing methods place primary emphasis on assumptions about
a. flow of goods.
b. flow of costs.
c. flow of goods or costs depending on the method.
d. flow of values.
Q18. Allowance for Doubtful Accounts is a contra-equity account.
a. true
b. false
Q19. A written promise to pay a sum of money on demand or at a definite time is called a(n)
a. default.
b. deferral.
c. accrual.
d. promissory note.
Q20. If merchandise inventory is being valued at cost and the price level is consistently rising, which method of costing will yield the largest gross profit?
a. Average cost
b. LIFO
c. FIFO
d. All methods will generate the same gross profit.
Q21. In reference to a promissory note, the person who is to receive payment is called the
a. maker.
b. payee.
c. seller.
d. payor.
Q22. The maturity value of a 12%, 60-day note for $5,000 is $5,100.
a. true
b. false
Q23. If merchandise inventory is being valued at cost and the price level is steadily rising, the method of costing that will yield the highest net income is
a. average cost.
b. LIFO.
c. FIFO.
d. All methods will generate the same net income.
Q24. Use the following data to calculate the cost of ending inventory under average cost method.
| September 1 |
Beginning Inventory |
15 units @ $20 |
| September 10 |
Purchases |
20 units @ $25 |
| September 20 |
Purchases |
25 units @ $28 |
| September 30 |
Ending Inventory |
30 units |
a. $825
b. $600
c. $675
d. $750
Q25. Allowance for Doubtful Accounts has an unadjusted balance of $400 at the end of the year, and uncollectible accounts expense is estimated at 1% of net sales. If net sales are $300,000, the amount of the adjustment to record the provision for doubtful accounts is
a. $400.
b. $3,400.
c. $3,000.
d. $2,600.
Q26. What type of depreciation occurs when an asset can no longer provide services at the level originally intended?
a. Physical depreciation
b. Market depreciation
c. Cost depreciation
d. Functional depreciation
Q27. A company sold office furniture costing $16,500 with accumulated depreciation of $14,000 for $1,800 cash. The entry to record the sale would include
a. a loss for $700.
b. an increase in accumulated depreciation for $14,000.
c. a decrease in office furniture for $2,500.
d. a decrease in cash for $1,800.
Q28. A company purchased an oil well for $25 million with a residual value of $500,000. It is estimated that 10 million barrels can be extracted from the well. Determine depletion expense assuming 3 million barrels are extracted and sold.
a. $7,350,000
b. $7,500,000
c. $5,000,000
d. $7,650,000
Q29. A company sold a delivery truck for $18,000 cash. The truck cost $47,500 and had accumulated depreciation of $36,000 as of the date of sale. The entry to record the sale would include
a. an increase in accumulated depreciation for $36,000.
b. a decrease in delivery truck for $11,500.
c. a loss for $6,500.
d. a gain for $6,500.
Q30. Long-lived assets that are intangible in nature, used in the operations of the business, and not held for sale in the ordinary course of business are called fixed assets.
a. true
b. false
Q31. Book value is defined as
a. current market value less residual value.
b. cost less residual value.
c. current market value less accumulated depreciation.
d. cost less accumulated depreciation.
Q32. A company acquired some land for $80,000 to construct a new office complex. Legal fees paid were $2,300, delinquent taxes assumed were $3,400, and $5,850 was paid to remove an old building from which salvaged materials sold for $1,950. What is the cost basis for the land?
a. $93,500
b. $91,550
c. $85,700
d. $89,600
Q33. The removal of an old building to make the land ready for its intended use is charged to
a. land.
b. land improvements.
c. buildings.
d. operating expenses.
Q34. Expenditures that add to the utility of fixed assets for more than one accounting period are
a. committed expenditures.
b. revenue expenditures.
c. current expenditures.
d. capital expenditures.
Q35. The cost of a patent should be amortized
a. over 20 years.
b. over its economic life.
c. over 20 years or its economic life, whichever is shorter.
d. only if an impairment occurs.
Q36. The process of transferring the cost of metal ores and other minerals removed from the earth to an expense account is called
a. depletion.
b. deferral.
c. amortization.
d. depreciation.
Q37. Accelerated depreciation is primarily used for
a. the financial statements of large companies.
b. the financial statements of small companies.
c. income tax purposes.
d. both financial reporting and income taxes by most companies.
Q38. A current asset account must be increased for revenue expenditures since they only benefit the current period.
a. true
b. false
Q39. Depletion is the process of transferring the cost of intangible assets to an expense account.
a. true
b. false
Q40. All amounts paid to get an asset in place and ready for use are referred to as
a. capital expenditures.
b. revenue expenditures.
c. residual value.
d. cost of an asset.
Q41. Amortization refers to the systematic transfer of fixed assets to expense accounts.
a. true
b. false
Q42. A patent was purchased for $670,000 with a legal life of 20 years. Management estimates that the patent has an 12-year economic life. The entry to record amortization would include
a. an increase in amortization expense for $33,500.
b. an increase in research and development expense for $670,000.
c. a decrease in patent for $55,833.
d. an increase in accumulated amortization for $670,000.
Q43. Salvage value has a similar meaning as
a. residual value.
b. scrap value.
c. book value.
d. both residual value and scrap value.
Q44. A fully depreciated asset must be
a. removed from the books.
b. kept on the books until sold or discarded.
c. disclosed only in the notes to the financial statements.
d. recognized on the income statement as a loss.
Q45. If an asset is discarded, a loss is recognized equal to the salvage value.
a. true
b. false
Q46. The exclusive right to use a certain name or symbol is called a
a. franchise.
b. patent.
c. trademark.
d. copyright.
Q47. A fixed asset with a cost of $30,000 and accumulated depreciation of $25,000 is sold for $3,500. What is the amount of the gain or loss on disposal of the fixed asset?
a. $2,500 loss
b. $1,500 loss
c. $2,500 gain
d. $1,500 gain
Q48. Goodwill equals the purchase price of a company over the fair market value of its net assets.
a. true
b. false
Q49. Recording depreciation
a. decreases net income and cash flows.
b. decreases net income and has no effect on cash flows.
c. decreases net income, assets, and cash flows.
d. decreases net income and has no effect on assets and cash flows.
Q50. The acquisition costs of property, plant, and equipment should include all normal, reasonable, and necessary costs to get the asset in place and ready for use.
a. true
b. false
Q51. One of the prerequisites required to pay a cash dividend is formal action by the board of directors.
a. true
b. false
Q52. When are contingent liabilities required to be recorded?
a. When the liability is probable
b. When the amount is reasonably estimable
c. When the liability becomes legally enforceable
d. Both the liability must be probable and the amount must be reasonably estimable before the contingent liability is recorded.
Q53. Before a stock dividend can be declared or paid, there must be sufficient cash.
a. true
b. false
Q54. The amount of capital paid in by the stockholders of the corporation is called legal capital.
a. true
b. false
Q55. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 60,000 shares were originally issued and 5,000 were subsequently reacquired. What is the number of shares outstanding?
a. 5,000
b. 100,000
c. 60,000
d. 55,000
Q56. FICA tax is a payroll tax that is paid by both the employee and the employer.
a. true
b. false
Q57. A company sold 200 shares of common stock with a par vale of $5 at a price of $12 per share. Which section of the statement of cash flows will contain this transaction?
a. Operating activities
b. Investing activities
c. Financing activities
d. Sale of stock will not appear on the statement of cash flows.
Q58. Obligations that depend on past events and that are based on future transactions are contingent liabilities.
a. true
b. false
Q59. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 40,000 shares were originally issued and 5,000 were subsequently reacquired. What is the number of shares outstanding?
a. 5,000
b. 35,000
c. 45,000
d. 55,000
Q60. For accounting purposes, stated value is treated the same way as par value.
a. true
b. false
Q61. When the contract rate of interest on bonds is higher than the market rate of interest, the bonds sell at
a. a premium.
b. their face value.
c. their maturity value.
d. a discount.
Q62. If the market rate of interest is greater than the contractual rate of interest, bonds will sell
a. at a premium.
b. at face value.
c. at a discount.
d. only after the stated rate of interest is increased.
Q63. Gross earnings for a payroll period less payroll deductions are referred to as
a. overtime pay.
b. bonus pay.
c. gross pay.
d. net pay.
Q64. Federal unemployment compensation tax is a tax that is paid only by employers.
a. true
b. false
Q65. Which of the following accounts is reported in the noncurrent liabilities section of the corporate balance sheet?
a. Bonds Payable
b. Common Stock
c. Dividends Payable
d. Cash
Q66. Preferred stockholders must receive their current-year dividends before the common stockholders can receive any dividends.
a. true
b. false
Q67. When the market rate of interest is less than the contract rate for a bond, the bond will sell for a discount.
a. true
b. false
Q68. On June 5 Glover Co. issued a $60,000, 6%, 120-day note payable to Jones Co. How much will Glover Co. have to pay at maturity?
a. $63,600
b. $58,800
c. $60,000
d. $61,200
Q69. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 75,000 shares were originally issued and 5,000 were subsequently reacquired. What is the number of shares outstanding?
a. 10,000
b. 70,000
c. 50,000
d. 60,000
Q70. When a corporation issues bonds, it executes a contract with the bondholders known as a bond debenture.
a. true
b. false
Q71. A corporation has 10,000 shares of $100 par value stock outstanding. If the corporation issues a 4-for-1 stock split, the number of shares outstanding after the split will be 40,000.
a. true
b. false
Q72. FICA tax is a payroll tax that is paid only by employers.
a. true
b. false
Q73. If $1,000,000 of 8% bonds are issued at 102, the amount of cash received from the sale is
a. $1,060,000.
b. $1,020,000.
c. $1,000,000.
d. $1,030,000.
Q74. The excess of issue price over par of common stock is termed a(n)
a. discount.
b. income.
c. deficit.
d. premium.
Q75. The primary purpose of a stock split is to
a. increase paid-in capital.
b. reduce the market price of the stock per share.
c. increase the market price of the stock per share.
d. increase retained earnings.
Q76. The Sarbanes-Oxley Act of 2002 requires companies to maintain strong and effective internal controls over recording transactions and preparing financial statements.
a. true
b. false
Q77. Which of the following would be deducted from the balance per books on a bank reconciliation?
a. Service charges
b. Outstanding checks
c. Deposits in transit
d. Notes collected by the bank
Q78. An element of internal control is
a. risk assessment.
b. journals.
c. subsidiary ledgers.
d. controlling accounts.
Q79. Internal control does NOT consist of policies and procedures that
a. guarantee the company will not go bankrupt.
b. ensure that laws and regulations are being followed.
c. protect assets from misuse.
d. ensure that business information is accurate.
Q80. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the balance per bank statement.
a. true
b. false
Q81. A business that requires that all cash payments be made by check CANNOT use a petty cash system.
a. true
b. false
Q82. Money market accounts, commercial paper, and U.S. Treasury Bills are examples of cash equivalents.
a. true
b. false
Q83. For a strong internal control system over cash, it is important to have the duties related to cash receipts and cash payments divided among different employees.
a. true
b. false
Q84. A minimum cash balance maintained in a bank account is called a line of credit.
a. true
b. false
Q85. A voucher system is an example of an internal control procedure over cash payments.
a. true
b. false
Q86. A credit memorandum received with a bank statement means the bank account has been increased.
a. true
b. false
Q87. Which of the following elements of internal control focuses upon locating weaknesses and improving control effectiveness?
a. The control environment
b. Risk assessment
c. Control procedures
d. Monitoring
Q88. The amount of the 'adjusted balance' appearing on the bank reconciliation as of a given date is the amount that is shown on the balance sheet for that date after all adjusting entries have been entered.
a. true
b. false
Q89. The Sarbanes-Oxley Act of 2002 applies to all publicly held companies.
a. true
b. false
Q90. A check for $456 was erroneously charged by the bank as $654. In order for the bank reconciliation to balance, you must deduct $198 from the bank statement balance.
a. true
b. false
Q91. When a firm uses internal auditors, it is adhering to which of the following internal control elements?
a. Risk assessment
b. Proofs and security measures
c. Monitoring
d. Separating responsibilities for related operations
Q92. A minimum cash balance required by a bank is called
a. cash in bank.
b. cash equivalent.
c. compensating balance.
d. EFT.
Q93. Cash equivalents include
a. checks.
b. coins and currency.
c. money market accounts and commercial paper.
d. stocks and short-term bonds.
Q94. Employing internal auditors is part of which element of internal control?
a. Monitoring
b. Control procedures
c. Risk assessment
d. The control environment
Q95. A voucher is the notification accompanying the check issued to a creditor that indicates the specific invoice being paid.
a. true
b. false
Q96. Outstanding checks are checks that have been issued but have NOT cleared the bank.
a. true
b. false
Q97. An element of internal control is
a. generally accepted accounting principles.
b. control procedures.
c. concepts.
d. principles.
Q98. A voucher
a. is received from customers to explain the purpose of a payment.
b. is normally prepared in the Accounting Department.
c. system is used to control cash receipts.
d. system is an internal control procedure to verify that the assets in the records are the ones the company owns.
Q99. Internal controls are important because they
a. prevent fraud and misleading financial statements.
b. eliminate fraud.
c. deter fraud and prevent theft and other abuses.
d. guarantee accurate financial statements.
Q100. Which of the following reflects a weak internal control system?
a. All employees are well supervised.
b. A single employee is responsible for comparing a receiving report to an invoice.
c. All employees must take their vacations.
d. A single employee is responsible for the collecting and recording of cash.