Question 1. Interest is compounded quarterly on a $12,000 note payable for 1 year at 12%. Calculate total interest on the note.
a. $1,338. b. $1,286.
c. $1,440. d. $1,506
Question 2. Interest revenue for 120 days on a 6%, 180-day note receivable with a face value of $20,000 is
a. $1,800. b. $ 900.
c. $ 600. d. $ 400.
Question 3. Which timing of payments is true for an ordinary annuity?
a. All payments occur at the beginning of the first year.
b. Payments begin immediately and occur once per year on the last day of each year.
c. Payments occur at the end of each period.
d. Payments occur at the beginning of each period.
Question 4. How much would you deposit today in a savings account that earns 11%, in order that you can make equal annual withdrawals of $800 each at the end of each of the next 15 years?
a. $5,194 d. $2,508
b. $6,385 e. $5,753
c. $27,524
Question 5. Present value is
a. how much today's money will be worth in the future.
b. the amount of money that must be invested now to produce a known future value.
c. always larger than the future value.
d. the total cost of interest over several years.
Question 6. Calculate the future value of equal semi-annual payments of $9,000 at 14% compounded semiannually for 3 years. The answer is
a. $91,039.
b. $54,380.
c. $40,001.
d. $64,380.
Question 7. A statement that "the financial statements were prepared in accordance with generally accepted accounting principles" is found in the
a. customer's letter.
b. auditor's report.
c. footnotes to the balance sheet.
d. president's letter to the shareholders.
Question 8. Footnotes to financial statements
a. prescribe high ethical standards for a company.
b. verify the integrity of the company's financial statements.
c. list the company's assets and liabilities.
d. more fully explain certain items in the financial statements.
Question 9. The Japanese and Western Europe accounting model is oriented to the needs of
a. investors.
b. satisfying government requirements.
c. countries in the communist bloc.
d. banks.
Question 10. Liabilities may be described as
a. amounts that will be used for future growth.
b. the amount invested in the firm by its owners.
c. the total measured past growth of a firm less the amount distributed to the owners.
d. the amount owed that must be paid in the future.
Question 11. A bank that loans money to a firm is called
a. a supplier.
b. a purchaser.
c. an equity investor.
d. an auditor.
e. a creditor.
Question 12. GAAP is an acronym for
a. General Asset Accounting Procedures.
b. Government Agency Accounting Procedures.
c. Generally Accepted Accounting Principles.
d. Global Accounting Activity Principles.
Question 13. Jonton Company has total assets and total liabilities of $38,000 and $20,000, respectively. Retained earnings amounts to $12,000. How much is total stockholders' equity?
a. $18,000 b. $12,000
c. $6,000 d. $58,000
Question 14. Plant and equipment may include which of the following?
a. Land and office buildings
b. Inventory and equipment
c. Buildings and cash
d. Factories and patents
Question 15. The expense associated with the use of patents is
a. interest.
b. depreciation.
c. cost of goods sold.
d. amortization.
Question 16. On the balance sheet, a company should report the cost of intangible assets
a. in the current assets section.
b. as an amount owed to shareholders.
c. as part of long-term assets.
d. in the current maturities of long-term debt section.
Question 17. The major accounting difference between interest paid to creditors and dividends paid to owners is interest paid
a. decreases retained earnings and dividends paid increases retained earnings.
b. is on the income statement and dividends paid are not.
c. is not on the income statement while dividends paid are.
d. increases retained earnings and dividends paid decrease retained earnings.
Question 18. Why are liabilities separated into current and long-term?
a. The SEC requires companies to do so.
b. Users want to know which amounts will be paid using current assets.
c. This format helps a company determine how much profit was made.
d. It is easier to determine which customers may not pay their bills.
Question 19. The price-earnings ratio is
a. the market price of an equity share divided by earnings per share.
b. the amount of a company's retained earnings.
c. the purchase price of a firm's assets divided by net income.
d. used to measure the speed with which the company sells its inventories.
Question 20. Which of the following is a reason a company's reported book value and its true value may differ?
a. Statements do not reflect the company's prospects within its business environment.
b. GAAP requires too many estimates.
c. Statements are forward-looking.
d. Statements frequently omit the historical costs of the company's assets.
Question 21. Assessing a company's inventory turnover helps assess the
a. effectiveness of a company's collection activities.
b. speed at which inventories move through operations.
c. ability of a company to use inventory to generate profit.
d. efficiency of a company.
Question 22. Financial flexibility is
a. a good indicator of a company's ability to grow through operations.
b. the ability to generate cash from sources other than regular operations.
c. the ability to convert existing assets into money.
d. evident when a company's assets are greater than its liabilities.
Question 23. Return on equity helps assess a company's
a. profitability.
b. solvency.
c. marketability.
d. leverage.
Question 24. The current ratio is
a. total assets divided by total liabilities.
b. current liabilities divided by current assets.
c. current assets divided by total liabilities.
d. current assets divided by current liabilities.
Question 25. Net realizable value may be defined as the
a. cash price of the asset when purchased.
b. discounted future cash flows.
c. amount of cash expected to be collected.
d. current input cost.
Question 26. Most companies prepare annual financial statements
a. with a fiscal ending date of June 30.
b. every month.
c. at a different date each year.
d. on the calendar year.
Question 27. Why must measures of performance and financial position be available on a timely basis?
a. For the SEC to determine the amount of income taxes a company must pay
b. For the users of the financial information to make decisions
c. FASB requires this information to be submitted to them for approval
d. For management to have time to manipulate income
Question 28. Which one of the following is violated when a firm measures accounts receivable at its face amount even though knowing some customers may not pay the amounts due?
a. Consistency b. Conservatism
c. Matching d. Revenue recognition criteria
Question 29. The stockholders' equity section of the balance sheet is
a. valued at the market value of the company's stock.
b. a residual interest based on the book value of the company.
c. valued at the present value of the dividends paid to shareholders.
d. the difference between the fair market value and the original cost of the company's assets.
Question 30. Not recognizing the economic effects of inflation on the accounting financial statements is justified by the
a. economic entity assumption.
b. going concern assumption.
c. fiscal period assumption.
d. stable dollar assumption.
Question 31. Which of the following changes describes the payment of $1,000 for cash dividends?
a. Assets and owners' equity increase by $1,000.
b. Assets and owners' equity decrease by $1,000.
c. Assets and liabilities increase by $1,000.
d. Assets and liabilities decrease by $1,000.
e. No changes in total assets, liabilities, or owners' equity.
Question 32. When making adjustments to plant asset accounts,
a. the total dollar amount in the accumulated depreciation account will determine the amount of depreciation expense for the current accounting period.
b. depreciation expense is capitalized in the plant asset account.
c. depreciation expense reduces reported net income.
d. the current market value of the long-lived asset determines the amount of depreciation expense.
e. the accrual system is ignored.
Question 33. A company sold vacant land that it had owned for three years. The difference between the amount of cash receipts and the original cost of land owned by the company
a. is reported as a revenue or expense on the income statement.
b. increases the amount of dividends paid to stockholders.
c. represents the amount of gain or loss associated with the asset sold.
d. should be debited or credited directly to retained earnings.
Question 34. The statement of retained earnings is a record of activity over a period of time of the
a. contributed capital accounts.
b. balance sheet.
c. cash account.
d. retained earnings account.
Question 35. Closing entries result in net income being transferred to the
a. revenue account.
b. dividends account.
c. common stock account.
d. retained earnings account.
Question 36. Diggers Corp. received several invoices in the mail for oil changes performed on the company trucks during the last week of April. The total of the invoices was $600 and all are due on May 13. What entry should Diggers make at April 30 as a result of receiving the invoices?
a. Debit Accounts Receivable and credit Cash for $600.
b. Debit Accounts Payable and credit Maintenance Expense for $600.
c. Debit Maintenance Expense and credit Accounts Payable for $600.
d. Debit Maintenance Expense and credit Cash for $600.
Question 37. If a firm with working capital of $125,200 pays $1,000 of accounts payable, then its working capital will
a. increase.
b. decrease.
c. remain the same.
d. Not enough information to determine
Question 38. If a company decreases its cash discount offer from 3/10, n/30 to 2/10, n/60, then it would expect its accounts receivable collection period to
a. increase.
b. decrease.
c. remain the same.
Question 39. Platter Company uses the aging method to estimate bad debts. The bookkeeper provided the following schedule as of June 30th, 2001:
Account Age Balance Balance Noncollection Probability
Current $80,000 1%
1?30 days past due 30,000 5%
31?60 days past due 20,000 9%
Over 60 days past due 10,000 20%
Compute the dollar amount of receivables deemed uncollectible.
a. $3,800 b. $6,100
c. $4,100 d. $130,000
Question 40. On July 10, Cluck Company made a $30,000 credit sale under the terms 2/10, n/30. If Cluck receives full payment of the account on July 18, the amount of cash received is
a. $29,400. b. $29,970.
c. $27,000. d. $26,400.
Question 41. Accounts used to cover day-to-day office expenses are referred to as
a. compensating balances.
b. bad debts.
c. cash restrictions.
d. petty cash.
Question 42. A company's operating cycle may be described as
a. the period of time which begins when a customer charges on account through the date the customer pays the amount due.
b. the period of time from the beginning of operations until a firm liquidates all of its assets.
c. always a one-year time period.
d. the period of time that is typically required for a firm to convert cash into inventory and inventory into cash.
Question 43. If a firm with a current ratio of 2.0 pays $1,000 of its accounts payable, then its current ratio will
a. increase.
b. decrease.
c. remain the same.
d. Not enough information to determine
Question 44. Under the allowance method of accounting for bad debts, the actual write-off of an account receivable determined to be uncollectible
a. decreases current assets.
b. increases current assets.
c. has no effect on current assets.
d. occurs in the same accounting period as the sale.
Question 45. A company that maintains a cash balance of more than is necessary for its day-to-day needs
a. is likely to have cash flow problems.
b. is not operating at its full potential.
c. is likely to have a very low solvency.
d. has a problem with physical controls.
Question 46. Sing Company uses the direct write-off method of accounting for bad debts. During December, 2001, Bill Clinton's account was written off as uncollectible. The write-off of Clinton's account
a. decreases both the current and quick ratios.
b. decreases the current ratio and has no effect on the quick ratio.
c. increases both the current and quick ratios.
d. increases the current ratio and has no effect on the quick ratio.
e. has no effect on the current and quick ratios.
Question 47. During a period of rising prices and inventories, which method causes cash flows to be stronger?
a. FIFO
b. LIFO
c. Averaging
d. The company would be indifferent as to which cost flow assumption is adopted.
Question 48. Monico Company fraudulently overstated its 12/31/01 and 12/31/02 inventory by $5,000 and $10,000, respectively. As a result of these overstatements,
a. 2001 income is overstated by $5,000 and 2002 income is overstated by $5,000.
b. 2001 income is overstated by $5,000 and 2002 income is overstated by $10,000.
c. 2001 income is understated by $5,000 and 2002 income is correct.
d. 2001 and 2002 incomes are not affected.
Question 49. Which one of the following companies would likely carry the largest percentage of inventory as compared to its other assets?
a. Wal-Mart
b. Merrill Lynch Investment Brokers
c. The Magic Kingdom at Disney World
d. Chicago Electric Authority
Question 50. Specific identification is a method of accounting for inventory
a. which eliminates the need for tracking the cost of inventory items.
b. that allocates the oldest cost to the first units sold.
c. that often allows a manager to manipulate net income in the ending inventory value.
d. commonly used in periods of rising prices.
Question 51. Mandale Company counted $200 of inventory twice in its 12/31/01 inventory. On December 31, 2002, it mistakenly omitted $500 of merchandise from its inventory. As a result of these errors
a. net income is overstated by $200 in 2001 and understated by $500 in 2002.
b. net income in understated by $200 in 2001 and overstated by $500 in 2002.
c. net income is overstated by $200 in 2001 and understated by $700 in 2002.
d. total net income for 2001 and 2002 is correct.
Question 52. The Wharton Company counted $4,000 of inventory twice during its 12/31/01 physical inventory count. Its 12/31/02 inventory amount is correct. As a result of this error,
a. 2001 ending inventory is overstated by $4,000.
b. 2001 income is understated by $4,000.
c. 2002 income is overstated by $4,000.
d. 2002 cost of goods sold is understated by $4,000.
Question 53. If a company desires to decrease its inventory, then it would
a. sell more goods than it purchases during the period.
b. purchase more goods than it sells during the period.
c. purchase the same amount of goods that it sells.
d. go out of business immediately.
Question 54. Which one of the following correctly reflects the effects on the financial statements caused by an increase in the market price of trading securities?
a. Current ratio and earnings per share decrease.
b. Current ratio and earnings per share increase.
c. Current ratio is unchanged and earnings per share increases.
d. Current ratio increases and earnings per share is unchanged.
Question 55. Which one of the following correctly reflects the effects on the financial statements caused by a decrease in the market price of available-for-sale securities?
a. Current ratio and earnings per share decrease.
b. Current ratio and earnings per share increase.
c. Current ratio is unchanged but earnings per share decreases.
d. Current ratio may increase and earnings per share remains unchanged.
Question 56. Hillary Corp. owns 45% of Bill Company's outstanding voting stock. Hillary should account for its long-term equity investment in Bill Company using the
a. equity method.
b. cost method.
c. consolidation procedure.
d. market value method.
Question 57. Zantelli, Inc. purchased $100,000 of 5% bonds from Zinker Corporation. Zantelli, Inc. intends to hold the bonds until the end of their 5-year maturity period. Zantelli, Inc. will classify the bonds as
a. available-for-sale securities.
b. held-to-maturity securities.
c. trading securities.
d. equity securities.
Question 58. Available-for-sale securities are
a. readily marketable investments that management intends to convert into cash in the very near future.
b. long-term investments in common stock.
c. current or non-current investments that are not trading securities.
d. Both a and b are correct.
Question 59. Trading securities were purchased on December 20 for $600. On December 31, the market value of those securities is $450. Which of the following adjusting journal entries is appropriate?
a. Unrealized Loss on Trading Securities 150
Trading Securities 150
b. Realized Loss on Trading Securities 150
Trading Securities 150
c. Unrealized Price Decrease on Trading Sec. 150
Trading Securities 150
d. No entry is required.
Question 60. When a plant asset is traded in for a similar asset, the valuation of the new plant asset should be
a. at the original cost of the old asset.
b. at the fair market value of the asset given up, or the asset received, whichever is more clearly evident.
c. at the replacement cost of the old asset.
d. at the value at which the new asset received was carried in the accounting records of the manufacturer.
Question 61. Which one of the following is not one of the questions asked when accounting for long-lived assets?
a. Over what period of time should this cost allocated?
b. How much will a replacement asset cost?
c. At what rate should this cost be allocated?
d. What dollar amount should be included in the capitalized cost of the long-lived asset?
Question 62. Equipment with a cost of $15,000 and accumulated depreciation of $9,000 was retired with a gain of $3,000. The cash received from the disposition of equipment is
a. $5,000.
b. $9,000.
c. $12,000.
d. $1,000.
Question 63. When companies construct their own long-lived assets, all costs required to get the asset into operating condition must be
a. expensed immediately.
b. included in the long-lived asset's cost.
c. recognized as a maintenance cost.
d. treated as a cost necessary to maintain the plant asset's current level of productivity.
Question 64. During 2001, Darst, Inc. developed a new process for packaging products. Darse paid its employees $120,000 over the past five years in developing this process. On January 1, 2002, Darst paid $51,000 to register the packaging patent. The company believes the patent will produce profits for 10 years. The patent has a 17-year legal life. How much amortization expense should be recognized during 2002?
a. $3,000
b. $6,000
c. $5,100
d. $10,200
Question 65. Once a plant asset becomes fully depreciated, the
a. asset may no longer be used.
b. cost of the asset must been removed from the accounting records.
c. asset should be retired.
d. asset may still be used.
Question 66. Accounts payable typically arise because
a. cash is received from a customer which will be paid back in the future.
b. cash is received from customers prior to the rendering of services or delivery of products.
c. the firm temporarily borrows cash for operations.
d. amounts due were not paid by the end of the accounting period.
Question 67. Contingent liabilities whose ultimate payment is highly probable must be
a. recorded in the body of the balance sheet.
b. disclosed only in the footnotes to the financial statements.
c. ignored until actual payment is made.
d. disclosed in the auditor's report.
Question 68. One of McDonald's employees invented an automatic coffee lid that cools coffee as you drink it in order to prevent burns. Two children ordered coffee and burned their mouths after failing to properly secure the lids. The children's parents sued McDonald's. Lawyers believe that it is highly probable that judgement will be rendered against McDonald's and it is likely a payment in excess of $5 million will be incurred. The proper accounting treatment of the lawsuit will
a. increase total liabilities.
b. decrease total liabilities.
c. increase the current ratio.
d. require accountants to wait until the suit is settled to account for the event.
Question 69. Accruing warranty expense will
a. increase the debt/equity ratio.
b. increase the current ratio.
c. reduce uncollectible accounts during the period.
d. increase inventory turnover.
Question 70. If a loss contingency related to a lawsuit against a firm is deemed to have a high probability of requiring ultimate payment, then the proper accounting treatment of the loss contingency will
a. decrease the debt/equity ratio.
b. decrease the debt/asset ratio.
c. decrease earnings per share.
d. increase net income.
Question 71. What business transaction must occur in order to reduce Estimated Warranty Payable?
a. Sale of goods on account
b. Warranty costs accrued at the end of the accounting period
c. Goods under warranty repaired in the period after the sale
d. Customers return defective goods
_________________________________________________________________________
Briny Bay, Inc.
Briny Bay, Inc. reported the following on its December 31, 2001, balance sheet:
Current liabilities: 2001 2000
One-year short-term notes payable,
net of discount of $9,800 $6,400
$600 and $400, respectively
Accrued interest on notes payable 340 280
Current portion of long-term debt 1,250 2,340
Trade accounts payable 460 820
_________________________________________________________________________
Question 72. Refer to Briny Bay, Inc. Which statement is true concerning Briny Bay's interest?
a. Briny paid a total of $60 interest during 2001.
b. The 'accrued interest on notes payable' amount relates to the one-year short-term notes payable.
c. Interest of $3,200 was accrued and paid during 2001.
d. Interest was incurred during the year on more than one note.
Question 73. The amount of unamortized bond premium is
a. added to interest expense on the income statement.
b. deducted from bonds payable on the balance sheet.
c. added to bonds payable on the balance sheet.
d. added to the present value of bonds.
Question 74. Which one of the following is not a financial instrument?
a. Note receivable
b. Short-term investment equity securities
c. Bonds payable
d. Future anticipated profits
Question 75. If a company issues a note payable when the market rate of interest is equal to the stated rate, then
a. the cash received will exceed the maturity value of the note.
b. the cash received will be equal to the maturity value of the note.
c. the note will be issued at a premium.
d. the note will be issued at a discount.
Question 76. If the maximum debt/equity ratio as specified by a debt covenant is close to being violated, which of the following actions would increase the likelihood of violating the debt covenant?
a. Acquire money by issuing a non-interest-bearing note payable
b. Skip current cash dividends
c. Increase selling prices of inventory items
d. Acquire money by collecting accounts receivable
Question 77. A non-interest-bearing obligation
a. is an example of an installment obligation.
b. requires recognition of interest expense over the life of the obligation.
c. requires collateral.
d. is free of interest expense.
Question 78. A capital lease requires the lessor to
a. depreciate the leased asset.
b. record rental revenue as each lease payment is received.
c. use the effective interest method to amortize interest over the life of a lease.
d. transfer ownership to the lessee.
Question 79. If a firm issues a non-interest-bearing note payable, then
a. no interest expense will be recognized over the life of the note.
b. no interest payments will be made over the life of the note.
c. a gain associated with interest savings is recognized when the note is issued.
d. the covenants should be rewritten to conform to GAAP.
Question 80. A 50% stock dividend
a. decreases earnings per share.
b. increases net income.
c. decreases return on net worth.
d. does not impact the debt/equity ratio.
Question 81. Which one of the following events increases the debt/equity ratio?
a. Purchase of treasury stock
b. Sale of treasury stock for more than its cost
c. Sale of treasury stock for less than its cost
d. Payment of cash dividends which were previously declared
Question 82. If a corporation uses retention of earnings to finance the purchase of property instead of contributed capital or debt, then
a. leverage is being used.
b. it will pay more dividends.
c. it will have a lower debt/equity ratio.
d. a company's earnings per share will decrease.
Question 83. Dividends payable is recorded at the date of
a. issue. b. declaration.
c. record. d. payment.
Question 84. If dividends paid are recorded as an expense, then
a. income and retained earnings are understated.
b. only income is understated.
c. only retained earnings is understated.
d. the income statement and balance sheet are correct.
Question 85. If a corporation issues debt instead of common stock to finance the purchase of property, then
a. leverage is being used.
b. it will pay more dividends.
c. it will have a lower debt/equity ratio.
d. net assets will be larger.
Question 86. On the income statement, unusual OR infrequent income events are found in
a. operating revenues and expenses.
b. other revenues or expenses.
c. disposal of a business segment.
d. extraordinary gains or losses.
e. cumulative effects.
Question 87. On the income statement, selling expenses are reported as
a. operating revenues and expenses.
b. other revenues or expenses.
c. the disposal of a business segment.
d. an extraordinary gain or loss.
e. a cumulative effect
Question 88. On the income statement, the loss of equipment caused by the eruption of the Mount Saint Helen volcano in the Northwestern United States is found in
a. operating revenues and expenses.
b. other revenues or expenses.
c. disposal of a business segment.
d. extraordinary gains or losses.
e. cumulative effects.
Question 89. Comprehensive income
a. may be reported on a separate statement.
b. can be used as an alternative format of the traditional income statement.
c. includes some revenue and expense items that are part of continuing operations.
d. can be prepared instead of the stockholders' equity section of the balance sheet.
Question 90. One objective of financial reporting is to provide information that is
a. helpful in assessing the amounts, timing, and uncertainty of future cash flows.
b. useful for competitors who need to assess economic activities.
c. a forecast of future operations.
d. unavailable to management.
Question 91. On the income statement, interest revenue is found in
a. operating revenues and expenses.
b. other revenues or expenses.
c. the disposal of a business segment section.
d. the extraordinary gains or losses section.
e. the cumulative effects section.
Question 92. The sale of equipment is an event considered to be
a. usual and frequent.
b. unusual or infrequent.
c. unusual and infrequent.
d. an operating activity.
Question 93. Management of Fax Tax Corporation chose to classify its major losses as extraordinary items. Managers might be biased toward this approach because
a. it saves income taxes.
b. investors do not use extraordinary items when predicting future performance.
c. extraordinary losses are considered a good predictor of the company's future solvency.
d. extraordinary losses bypass net income and are reported directly as part of comprehensive income.
Question 94. Money paid for the acquisition of a building is
a. cash provided from operations.
b. cash used in operations.
c. cash provided from investing activities.
d. cash used for investing activities.
e. cash provided from financing activities.
Question 95. Which one of the following is subtracted from income in determining cash flows from operations?
a. Increase in inventory
b. Increase in accounts payable
c. Decrease in accounts receivable
d. Decrease in prepaid insurance
Question 96. Which one of the following is added to income in determining cash flows from operations?
a. Increase in inventory
b. Decrease in wages payable
c. Loss from sale of land
d. Gain from selling treasury stock above its original cost
Question 97. If an investor is interested in the solvency of a company, he/she should analyze the
a. balance sheet and income statement.
b. income statement, balance sheet, and statement of cash flows.
c. statement of cash flows only.
d. balance sheet and statement of cash flows.
Question 98. An increase in inventory is reported in a statement of cash flows using the indirect method as a(n)
a. addition to net income in arriving at net cash flows from operating activities.
b. deduction from net income in arriving at net cash flows from operating activities.
c. cash outflow from investing activities.
d. cash outflow from financing activities.
Question 99. A company uses the direct method of preparing the statement of cash flows. Current year depreciation expense can be found on the
a. balance sheet and income statement.
b. income statement and statement of cash flows.
c. statement of cash flows and balance sheet.
d. income statement only.
e. statement of cash flows only.
Question 100. Which of the following is subtracted from income in determining cash flows from operations?
a. Decrease in salaries payable
b. Depreciation
c. Cash dividends declared and distributed
d. Amounts loaned to employees