Question 1. A business organized as a corporation
a. is not a separate legal entity in most states.
b. requires that stockholders be personally liable for the debts of the business.
c. is owned by its stockholders.
d. has tax advantages over a proprietorship or partnership.
Question 2. Which of the following is the most appropriate and modern definition of accounting?
a. The information system that identifies, records, and communicates the economic events of an organization to interested users
b. A means of collecting information
c. The interconnected network of subsystems necessary to operate a business
d. Electronic collection, organization, and communication of vast amounts of information.
Question 3. The right to receive money in the future is called a(n)
a. account payable.
b. account receivable.
c. liability.
d. revenue.
Question 4. An income statement
a. summarizes the changes in retained earnings for a specific period of time.
b. reports the changes in assets, liabilities, and stockholders’ equity over a period of time.
c. reports the assets, liabilities, and stockholders’ equity at a specific date.
d. presents the revenues and expenses for a specific period of time.
Question 5. An intangible asset
a. derives its value from the rights and privileges it provides the owner.
b. is worthless because it has no physical substance.
c. is converted into a tangible asset during the operating cycle.
d. cannot be classified on the balance sheet because it lacks physical substance.
Use the following information to answer questions 6:
Acme Auto Supplies
Balance Sheet
December 31, 2007
Cash $60,000 Accounts Payable $ 65,000
Prepaid Insurance 40,000 Salaries Payable 10,000
Accounts Receivable 50,000 Mortgage Payable 90,000
Inventory 70,000 Total Liabilities $165,000
Land held for investment 80,000
Land 95,000
Building $100,000 Common Stock $120,000
Less Accumulated Retained Earnings 250,000
Depreciation (30,000) 70,000 Total stockholders' equity $370,000
Trademark 70,000 Total Liabilities and
Total Assets $535,000 Stockholders' Equity $535,000
Question 6. The total dollar amount of assets to be classified as current assets is
a. $220,000.
b. $150,000.
c. $300,000.
d. $180,000.
Use the following information to answer question 7–8:
Cain Auto Supplies
Balance Sheet
December 31, 2007
Cash $50,000 Accounts Payable $ 55,000
Prepaid Insurance 30,000 Salaries Payable 10,000
Accounts Receivable 40,000 Mortgage Payable 90,000
Inventory 70,000 Total Liabilities $155,000
Land held for investment 80,000
Land 75,000
Building $110,000 Common Stock $120,000
Less Accumulated Retained Earnings 250,000
Depreciation (20,000) 90,000 Total stockholders' equity $370,000
Trademark 70,000 Total Liabilities and
Total Assets $525,000 Stockholders' Equity $525,000
Question 7. The total amount of working capital is
a. $205,000.
b. $125,000.
c. $50,000.
d. $80,000.
Question 8. The current ratio is
a. 1.85 : 1.
b. 2.92 : 1.
c. 4.15 : 1.
d. 1.07 : 1.
Question 9. The revenue recognition principle dictates that revenue should be recognized in the accounting records
a. when cash is received.
b. when it is earned.
c. at the end of the month.
d. in the period that income taxes are paid.
Question 10. Under the accrual basis of 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.
Use the following information to answer questions 11 and 12.
Sheepskin Company had the following transactions during 2006.
• Sales of $4,500 on account
• Collected $2,000 for services to be performed in 2007
• Paid $625 cash in salaries
• Purchased airline tickets for $250 in December for a trip to take place in 2007
Question 11. What is Sheepskin’s 2006 net income using accrual accounting?
a. $3,875
b. $5,875
c. $5,625
d. $3,625
Question 12. What is Sheepskin’s 2006 net income using cash basis accounting?
a. $5,875
b. $1,375
c. $5,625
d. $1,125
Question 13. When a perpetual inventory system is used, which of the following is a purpose of taking a physical inventory?
a. To check the accuracy of the perpetual inventory records
b. To determine cost of goods sold for the accounting period
c. To compute inventory ratios
d. All are a purpose of taking a physical inventory when a perpetual inventory system is used.
Use the following information for question 14.
A company just starting business made the following four inventory purchases in June:
June 1 150 units $825
June 10 200 units 1,120
June 15 200 units 1,140
June 28 150 units 885
$3,970
A physical count of merchandise inventory on June 30 reveals that there are 250 units on hand.
Question 14. Using the FIFO inventory method, the amount allocated to ending inventory for June is
a. $1,385.
b. $1,425.
c. $1,455.
d. $1,475.
Question 15. The selection of an appropriate inventory cost flow assumption for an individual company is made by
a. the external auditors.
b. the SEC.
c. the internal auditors.
d. management.
Question 16. Isaac Company developed the following information about its inventories in applying the lower of cost or market (LCM) basis in valuing inventories:
Product Cost Market
A $55,000 $60,000
B 40,000 38,000
C 80,000 81,000
If Isaac applies the LCM basis, the value of the inventory reported on the balance sheet would be
a. $175,000.
b. $171,000.
c. $173,000.
d. $181,000.
Question 17. If a check correctly written and paid by the bank for $626 is incorrectly recorded on the company's books for $662, the appropriate treatment on the bank reconciliation would be to
a. add $36 to the book's balance.
b. subtract $36 from the book's balance.
c. deduct $36 from the bank's balance.
d. deduct $626 from the book's balance.
Question 18. The following information was taken from Chavez Company cash budget for the month of November:
Beginning cash balance $48,000
Cash receipts 58,000
Cash disbursements 80,000
If the company has a policy of maintaining an end-of-the-month cash balance of $40,000, the amount the company would have to borrow is
a. $22,000.
b. $0.
c. $14,000.
d. $40,000.
Question 19. Which one of the following would be classified as an extraordinary item?
a. Expropriation of property by a foreign government
b. Losses attributed to a labor strike
c. Write-down of inventories
d. Gains or losses from sales of equipment
Question 20. Wonka Candy Company sold its lollipop division resulting in a loss of $30,000. Assuming a tax rate of 25%, the loss on this disposal will be reported on the income statement at what amount?
a. $37,500
b. $7,500
c. $30,000
d. $22,500