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ACC 210 Final (Questions)

Accounting is the process of identifying, measuring, recording, and communicating financial information about a company’s business activities so decision makers can make informed decisions (T/F)
True
A company pays a dividend to its stockholders
(Financing, Operating, or Investing)
Financing Activity
A company receives $10,000 cash from each of its owners to get started as a business
(Financing, Operating, or Investing)
Financing Activity
A company pays cash for the purchase of equipment to be used in its business. The equipment will be used for ten years
(Financing, Operating, or Investing)
Investing Activity
A company pays the utilities costs to run its facilities
(Financing, Operating, or Investing)
Operating Activity
A company pays its employees their weekly wages
(Financing, Operating, or Investing)
Operating Activity
A company borrows $40,000 from its local bank
(Financing, Operating, or Investing)
Financing Activity
A company receives cash for services performed to customers
(Financing, Operating, or Investing)
Operating Activity
When preparing financial statements, what is the correct order they should be prepared in? (Balance Sheet, Income Statement & Statement of Stockholder’s Equity)
1. Income Statement
2. Statement of Stockholder’s Equity
3. Balance Sheet
Indicate the location on the balance sheet of the following account:
Inventory
Asset Section
Indicate the location on the balance sheet of the following account:
Retained Earnings
Owner’s Equity Section
Indicate the location on the balance sheet of the following account:
Common Stock
Owner’s Equity Section
Indicate the location on the balance sheet of the following account:
Land
Asset Section
Indicate the location on the balance sheet of the following account:
Notes Payable
Liability Section
Indicate the location on the balance sheet of the following account:
Accounts Payable
Liability Section
Indicate the location on the balance sheet of the following account:
Accounts Receivable
Asset Section
Indicate the location on the balance sheet of the following account:
Cash
Asset Section
Indicate whether the financial statement reports account balances for a “period of time” or reports account balances “at a point in time”:
Income Statement
Reports balances for a period of time
Indicate whether the financial statement reports account balances for a “period of time” or reports account balances “at a point in time”:
Balance Sheet
Reports balances at a set point in time
Indicate whether the financial statement reports account balances for a “period of time” or reports account balances “at a point in time”:
Statement of Retained Earnings
Reports balances for a period of time
Which of the following types of items would find its account balance reported on a company’s income statement? (all that apply)
Select one or more:
a. Liabilities
b. Assets
c. Dividends declared
d. Expenses
e. Revenues
f. Common stock
d. Expenses
e. Revenues
Revenues are the amounts earned from the sale of products or services to customers (T/F)
True
Dividends are a return of the owners’ original contributions (T/F)
False

Dividends are a return of the profits earned by the corporation

Information is said to possess the enhancing qualitative characteristic of ______ when independent parties can reach a consensus on the measurement of the activity.
Select one:
a. materially
b. comparability
c. consistency
d. understandability
e. verifiability
e. verifiability
The cost constraint suggests that, even when the cost of providing accounting information exceeds its benefit, the financial accounting information should always be provided (T/F)
False
Which of the assumptions which underlie GAAP states that, unless there is evidence to the contrary, it is assumed that a company will continue to operate indefinitely?
Select one:
a. economic entity assumption
b. going concern assumption
c. monetary unit assumption
d. periodicity assumption (also known as the time-period assumption)
b. going concern assumption
An amount is considered to be material if its omission from or misstatement in a company’s financial statements could influence a user’s decision about a company (T/F)
True
If total debits equal total credits on a trial balance, a company can be confident that it made no mistakes during the accounting process (T/F)
False
Indicate whether the following account has its balance increased with a debit or a credit:
Unearned Revenue
Credit

DEA|LOR

Indicate whether the following account has its balance increased with a debit or a credit:
Supplies Expense
Debit

DEA|LOR

Indicate whether the following account has its balance increased with a debit or a credit:
Land
Debit

DEA|LOR

Indicate whether the following account has its balance increased with a debit or a credit:
Accounts Receivable
Debit

DEA|LOR

Indicate whether the following account has its balance increased with a debit or a credit:
Notes Payable
Credit

DEA|LOR

Indicate whether the following account has its balance increased with a debit or a credit:
Prepaid Insurance
Debit

DEA|LOR

Indicate whether the following account has its balance increased with a debit or a credit:
Cash
Debit

DEA|LOR

Indicate whether the following account has its balance increased with a debit or a credit:
Service Revenue
Credit

DEA|LOR

Indicate whether the following account has its balance increased with a debit or a credit:
Dividends
Debit

DEA|LOR

Indicate whether the following account has its balance increased with a debit or a credit:
Common Stock
Credit

DEA|LOR

The “Dividends” account balance is reported on which financial statement?
Select one:
a. balance sheet
b. income statement
c. statement of stockholders’ equity (or statement of retained earnings)
c. statement of stockholder’s equity (or statement of retained earnings)
When preparing a journal entry for a transaction that affects retained earnings, the “Retained Earnings” account should not be debited or credited. Instead, the account which ultimately affects retained earnings should be debited or credited (T/F)
True
A trial balance is one of the financial statements (T/F)
False
Which step in the accounting cycle is the following statement?
Determine whether the transaction results in a debit or credit to the applicable account balances and record the transaction in the form of a journal entry in the general journal
Second Step

1. Using source documents, identify which accounts are affected by a transaction and identify the impact of the transaction on the accounting equation
2. Determine whether the transaction results in a debit or credit to the applicable account balances and record the transaction in the form of a journal entry in the general journal
3.Post the journal entries to the general ledger (T-accounts) and compute account balances

Which step in the accounting cycle is the following statement?
Post the journal entries to the general ledger (T-accounts) and compute account balances
Third Step

1. Using source documents, identify which accounts are affected by a transaction and identify the impact of the transaction on the accounting equation
2. Determine whether the transaction results in a debit or credit to the applicable account balances and record the transaction in the form of a journal entry in the general journal
3.Post the journal entries to the general ledger (T-accounts) and compute account balances

Which step in the accounting cycle is the following statement?
Using source documents, identify which accounts are affected by a transaction and identify the impact of the transaction on the accounting equation
First Step

1. Using source documents, identify which accounts are affected by a transaction and identify the impact of the transaction on the accounting equation
2. Determine whether the transaction results in a debit or credit to the applicable account balances and record the transaction in the form of a journal entry in the general journal
3.Post the journal entries to the general ledger (T-accounts) and compute account balances

Journal entries are written in a certain format in the general journal. When writing a journal entry, which of the following is/are always true? (check all that apply)
Select one or more:
a. Amounts written in the debit and credit columns for a journal entry represent dollar amounts.
b. The account to be credited is listed below and indented to the right of the debited account.
c. A reference, often a date, should be written along with the journal entry
d. The account to be debited is listed first starting with the debited account name followed by the amount being debited.
All options are true

a. Amounts written in the debit and credit columns for a journal entry represent dollar amounts.
b. The account to be credited is listed below and indented to the right of the debited account.
c. A reference, often a date, should be written along with the journal entry
d. The account to be debited is listed first starting with the debited account name followed by the amount being debited.

All account balances are increased with debits (T/F)
False
In a journal entry, the sum of the total debit amounts should be greater than the sum of the total credit amounts (T/F)
False
Measuring a company’s business transactions and communicating those measurements for decision-making purposes are two key functions of financial accounting. The full set of procedures used to accomplish both of these key functions is called the:
Select one:
a. auditing cycle.
b. accounting cycle.
c. sales cycle.
d. tax cycle.
e. business cycle
b. accounting cycle
A comprehensive list of all account names used by a company to record its transactions is called a:
Select one:
a. balance sheet.
b. trial balance.
c. chart of accounts.
c. chart of accounts
A company received $1,000 from a cash sale to a customer. However, when the transaction was journalized, the accountant accidentally debited Cash and credited Service Revenue for $100 each.
Assuming there were no other errors, which of the following statements is/are true? (check all that apply)
Select one or more:
a. The balance sheet equation will be in balance.
b. The balance sheet equation will not be in balance.
c. Total debits and total credits on the trial balance will still be equal.
d. Total debits and total credits on the trial balance will not be equal.
e. The account balances for cash and service revenue will still be correct.
f. The account balances for cash and service revenue will be incorrect
a. The balance sheet equation will be in balance.
c. Total debits and total credits on the trial balance will still be equal.
f. The account balances for cash and service revenue will be incorrect
Repurchased shares which a company has bought back from stockholders with the intention of reissuing at a later date are known as:
Select one:
a. inventory shares.
b. unissued shares.
c. preferred shares.
d. treasury shares.
e. capital shares
d. treasury shares
Which of the following are common reasons for why a particular company would buy back its own stock? (check all that apply)

Select one or more:
a. To increase the number of shares outstanding.
b. To decrease the market price of its stock.
c. To decrease earnings per share.
d. To decrease the par value per share.
e. To raise the market price of its stock.
f. To satisfy employee stock ownership plans.
g. To distribute excess cash to existing stockholders without paying them a dividend.
h. To increase earnings per share.

e. To raise the market price of its stock.
f. To satisfy employee stock ownership plans.
g. To distribute excess cash to existing stockholders without paying them a dividend.
h. To increase earnings per share.
On October 1, Hawking Corp. had 25,000 shares of $3 par value common stock outstanding before it declared a 2-for-1 stock split. At that time, its stock was selling for $150 per share.

Question: After the split, how many shares of common stock are outstanding and what is their par value per share?
Answer: After the split, the number of shares outstanding is ________________ and the par value per share is _____________.

Answer: After the split, the number of shares outstanding is _50,000_ and the par value per share is _$1.50_.
Indicate whether the following attributes is an advantage or disadvantage of the corporate form of business when compared to sole proprietorship and partnerships:
Limited legal liability
Advantage
Indicate whether the following attributes is an advantage or disadvantage of the corporate form of business when compared to sole proprietorship and partnerships:
Volume of paperwork supplied to outside entities
Disadvantage
Indicate whether the following attributes is an advantage or disadvantage of the corporate form of business when compared to sole proprietorship and partnerships:
Ability to raise capital
Advantage
Indicate whether the following attributes is an advantage or disadvantage of the corporate form of business when compared to sole proprietorship and partnerships:
Taxation
Disadvantage
Indicate whether the following attributes is an advantage or disadvantage of the corporate form of business when compared to sole proprietorship and partnerships:
The ease in which ownership can be transferred
Advantage
From the corporation’s perspective, the issuance of its stock is an example of which type of business activity?
Select one:
a. financing
b. operating
c. investing
a. financing
Both publicly-held and privately-held corporations are required to file their financial statements with the Securities and Exchange Commission (SEC) (T/F)
False
Which of the following types of information is required to be included in a corporation’s articles of incorporation (also known as its corporate charter)? (select all that apply)
Select one or more:
a. the nature of the corporation’s primary business activities
b. information regarding the board of directors
c. the number and types of shares to be issued
All of the answers are correct
a. the nature of the corporation’s primary business activities
b. information regarding the board of directors
c. the number and types of shares to be issued
Highland Inc. and Morrison Corp. have a return on equity of 28.5% and 30%, respectively.
When comparing their return on equity percentages, which of the following statements is true?
Select one:
a. Highland Inc. has more shares outstanding than Morrison Corp.
b. Morrison Corp. paid a higher dividend per share than Highland Inc.
c. For every $1 of investors’ resources, Morrison Corp. earned more on the dollar than Highland Inc.
d. Highland Inc.’s stock is trading at a higher market price than Morrison Corp.’s.
e. Highland Inc.’s stock is trading at a lower market price than Morrison Corp.’s.
f. For every $1 of investors’ resources, Highland Inc. earned more on the dollar than Morrison Corp.
c. For every $1 of investors’ resources, Morrison Corp. earned more on the dollar than Highland Inc.
The total number of shares a corporation may sell or issue is known as:
Select one:
a. the unissued number of shares.
b. the authorized number of shares.
c. the issued number of shares.
d. the cumulative number of shares.
e. the outstanding number of shares
b. the authorized number of shares
Dividends return earnings made by the corporation back to its stockholders (T/F)
True
When stock is issued for more than its par value, the excess is considered to be an additional owner contribution and should be reported in the stockholders’ equity section of the balance sheet (T/F)
True
Instead of distributing a dividend in the form of cash to its stockholders, some companies distribute additional shares of stock (T/F)
True
A type of corporation which avoids double taxation is a:
Select one:
a. preferred corporation.
b. S corporation.
c. C corporation.
d. publicly-held corporation.
e. angel corporation
b. S corporation
When comparing common and preferred stock, indicate whether the following statement is true or false:
For purposes of electing the company’s board of directors, only common shareholders usually have a vote
True
When comparing common and preferred stock, indicate whether the following statement is true or false:
Preferred shareholders are not guaranteed to receive a higher dividend amount than common shareholders
True
When comparing common and preferred stock, indicate whether the following statement is true or false:
In the event the corporation is dissolved, preferred stockholders receive their share of assets before common stockholders
True
When comparing common and preferred stock, indicate whether the following statement is true or false:
In a year in which dividends are declared, preferred stockholders receive their portion of dividends after common stockholders receive theirs
False
The main reason a company declares a stock split is to lower the market price per share of its stock (T/F)
True
For the situation described below, indicate whether the bond should be issued at face value, at a premium, or at a discount:
If the bond’s face interest rate is greater than the market rate of interest, it will be issued at
Premium
For the situation described below, indicate whether the bond should be issued at face value, at a premium, or at a discount:
If the bond’s face interest rate is equal to the market rate of interest, it will be issued at
Face Value
For the situation described below, indicate whether the bond should be issued at face value, at a premium, or at a discount:
If the bond’s face interest rate is less than the market rate of interest, it will be issued at
Discount
There are certain patterns we should expect to see on a bond amortization table. Complete the following statement regarding these patterns:
Assuming a term bond is issued at either a premium or a discount, the carrying value on the issuance date should be equal to the bond’s ______________ (face value or issue price).
Issue Price
There are certain patterns we should expect to see on a bond amortization table. Complete the following statement regarding these patterns:
Assuming a term bond is issued at a discount, the cash interest payment calculated every period should _______________ (increase, decrease, stay the same).
Stay the same
There are certain patterns we should expect to see on a bond amortization table. Complete the following statement regarding these patterns:
Assuming a term bond is issued at a discount, the carrying value over time should be _______________ (increasing, decreasing, stay the same).
Increasing
There are certain patterns we should expect to see on a bond amortization table. Complete the following statement regarding these patterns:
Assuming a term bond is issued at a discount, the interest expense amount calculated every period using the effective interest method should be ________________ (increasing, decreasing, stay the same).
Increasing
There are certain patterns we should expect to see on a bond amortization table. Complete the following statement regarding these patterns:
Assuming a term bond is issued at a premium, the carrying value over time should be ______________ (increasing, decreasing, stay the same).
Decreasing
There are certain patterns we should expect to see on a bond amortization table. Complete the following statement regarding these patterns:
Assuming a term bond is issued at either a premium or a discount, the carrying value on the bond’s maturity date, right before the final cash payment, should be equal to the bond’s ___________________ (face value or issue price).
Face value
There are certain patterns we should expect to see on a bond amortization table. Complete the following statement regarding these patterns:
Assuming a term bond is issued at a premium, the interest expense amount calculated every period using the effective interest method should be __________________ (increasing, decreasing, stay the same).
Decreasing
All else being equal, as a company’s debt to equity ratio increases, the higher the risk of bankruptcy (T/F)
True
Bonds which require the full face value (principal) amount to be paid back on the bond’s maturity date are called:
Select one:
a. convertible bonds.
b. secured bonds.
c. serial bonds.
d. term bonds.
e. debenture bonds.
f. callable bonds.
d. term bonds
With respect to installment notes where the installment payment stays the same over time, there is a pattern we should expect to see with respect to the portion of each payment allocated towards interest compared to the portion allocated towards the outstanding loan balance.

Complete the following sentence:

“As time goes by, the interest portion of each of installment payment should _____________ (increase, decrease, stay the same).”

Decrease
From the corporation’s perspective, the issuance of long-term debt is most likely an example of which type of business activity?
Select one:
a. operating
b. investing
c. financing
c. financing
Bluebird Corp. retirement its bonds early which resulted in a gain of $15,000.

Question: In the journal entry to record the retirement, how should the gain be shown, and what will be the effect of the gain on the company’s net income?

Answer: A “Gain” account should be ____________ , and the gain will cause the company’s net income to ___________________.

A “Gain” account should be _credited_ , and the gain will cause the company’s net income to _increase_.
Bonds which are collateralized by specific assets in the event the borrowing company defaults on bond payments are called:
Select one:
a. convertible bonds.
b. serial bonds.
c. secured bonds.
d. callable bonds.
e. common bonds.
f. debenture bonds
c. secured bonds
When deciding on whether to finance its operations through the issuance of stock or through the issuance of bonds, companies often consider tax effects.

True or False: Both interest expense related to bonds as well as dividends paid are tax deductible

False
The times interest earned ratio measures how many times interest is compounded during the year (T/F)
False
For accounting purposes, there are two types of leases. The accounting differs depending on which type of lease the company has entered into.

Question: Which type of lease is considered to be a form of financing whereby the lessee essentially purchases an asset through a borrowing in the form of a lease arrangement?
Select one:
a. an operating lease
b. a capital lease

b. a capital lease
On 1/1/X1, Redmond Corp. pays $45,000 to retire its bonds early. At the time of the retirement, the bonds have a face value of $40,000 and a carrying value of $42,000.

Question: What should be the amount of gain or loss, if any, the company will record as a result of the early retirement?

A $3,000 loss
Bonds which permit the bondholder to convert the bond into shares of stock are called:
Select one:
a. callable bonds.
b. convertible bonds.
c. serial bonds.
d. debenture bonds.
e. preferred bonds.
f. secured bonds
b. convertible bonds
The “depreciable cost” of equipment used in a company’s business is equal to the asset’s:
Select one:
a. cost minus residual value.
b. cost plus accumulated depreciation.
c. cost.
d. cost minus accumulated depreciation.
e. cost plus residual value.
a. cost minus residual value
Holden Mills purchased a new machine for its factory.
The following lists shows the various expenditures for the machine during its first year:
– Base purchase price, $25,000
– Sales tax incurred at the time of purchase, $1,000
– Installation charges for the machine, $500
– Insurance costs incurred while the machine was being shipped, $200
– Insurance costs for the first year of the machine’s service life, $500
– Repairs and maintenance costs during the first year of the machine’s service life, $1,200

Question: What should be the capitalized cost of the machine?

$26,700

Costs incurred after the asset is placed into service are not capitalized unless the cost significantly extends the asset’s useful life (ex. extraordinary repair), or is an addition or improvement. In this example, the first four costs would be capitalized

Allocating the cost of an operating asset, such as machinery, to the time periods in which it helps the company earn revenues is an application of the ______________ principle.
Matching principle
Assume a company has chosen the double-declining balance (DDB) depreciation method.

For the useful life, indicate the correct DDB rate.

If the useful life is 4 years, the DDB rate is __________.

50%

DDB rate = 2 x straight-line life expressed as a percentage. Another quick formula to determine the percentage is to divide 200% by the straight-line life in terms of years

Assume a company has chosen the double-declining balance (DDB) depreciation method.

For the useful life, indicate the correct DDB rate.

If the useful life is 5 years, the DDB rate is ____________.

40%

DDB rate = 2 x straight-line life expressed as a percentage. Another quick formula to determine the percentage is to divide 200% by the straight-line life in terms of years

Assume a company has chosen the double-declining balance (DDB) depreciation method.

For the useful life, indicate the correct DDB rate.

If the useful life is 10 years, the DDB rate is ___________.

20%

DDB rate = 2 x straight-line life expressed as a percentage. Another quick formula to determine the percentage is to divide 200% by the straight-line life in terms of years

Indicate whether the following cost should be capitalized or expensed as incurred:
Goodwill purchased as part of a company’s acquisition of another company
Capitalized
Indicate whether the following cost should be capitalized or expensed as incurred:
Legal costs to successfully defend a patent
Capitalized
Indicate whether the following cost should be capitalized or expensed as incurred:
Research and development costs which eventually result in a patent for a product
Expense as incurred
Indicate whether the following cost should be capitalized or expensed as incurred:
The cost to purchase a copyright
Capitalized
Assuming a company has already established that an impairment on a long-term asset exists, the amount of the impairment is the difference in the book value of the asset over the asset’s fair market value (T/F)
True
At the end of a depreciable asset’s useful life, the book value (or carrying value) of the asset should equal the asset’s ) ___________.
Residual Value
A company’s return on assets can be found by multiplying its profit margin by its asset turnover (T/F)
True
Which of the following ratios measures how much in net income a company earns for every $1 invested in assets?
Select one:
a. asset turnover
b. return on assets
c. profit margin
b. return on assets
Peters Inc. purchased a machine to use in its business. The machine is estimated to have an economic life of 5 (five) years before it becomes obsolete. The company expects to use the machine for 4 (four) years before it disposes of it. Peters uses the straight-line depreciation method.

Question: Over how many years should Peters depreciate this asset over?

4 years
An account whose balance is reported on the asset side of the balance sheet and reduces total assets is called a:
Select one:
a. contra-expense.
b. contra-revenue.
c. contra-owners’ equity.
d. contra-asset.
e. contra-liability.
d. contra-asset
The total amount of depreciation taken over the life of a depreciable asset should be more if the double-declining balance depreciation method is used than if the straight-line method is used (T/F)
False

Total depreciation, regardless of depreciation method, should be the same

The double-declining-balance method (DDB) will yield a lower depreciation expense than the straight-line method in each year of an asset’s life (T/F)
False

The DDB method will yield a higher depreciation expense in only the earlier years. It will eventually yield a lower depreciation expense than the straight-line method.

Goodwill represents the value of a company as a whole which exceeds the value of its identifiable net assets (T/F)
True
From the corporation’s perspective, the purchase and sale of the property, plant, and equipment used in its business is an example of which type of business activity?
Select one:
a. investing
b. operating
c. financing
a. investing
For a particular asset, a company may not use the straight-line depreciation method for financial reporting and use an accelerated method for its tax return (T/F)
False
Indicate which of the following assets should have its cost be allocated over time through the process called depreciation.
Select one or more:
a. Machinery
b. Copyright
c. Vehicles
d. Inventory
e. Goodwill
f. Timber
g. Patents
h. Buildings
i. Supplies
j. Furniture and Fixtures
k. Land
l. Oil Reserves
m. Land Improvements
a. machinery
c. vehicles
h. buildings
j. furniture and fixtures
m. land improvements

Only tangible, man-made operating assets are depreciated. Natural resources, other than land, are depleted. Intangible assets with determinable lives are amortized.

Below is a list of common control activities. Which of these activities would be considered an example of a detective control activity rather than a preventive control activity? (check all that apply)
Select one or more:
a. Performance reviews
b. E-commerce controls
c. Audits
d. Reconciliations
e. Proper authorization
f. Separation of duties
g. Employee management
h. Physical controls
a. performance reviews
c. audits
d. reconciliations
Which element of the fraud triangle does a company have the greatest influence and ability to eliminate?
Select one:
a. Motive (or pressure)
b. Opportunity
c. Rationalization
b. opportunity
Which type of control activities are designed to detect errors or fraud which have already occurred?
Select one:
a. preventive controls
b. detective controls
b. detective controls
The ethical tone set by a company’s top management rarely has any effect on a company’s internal control environment (T/F)
False
When a company’s net income provides a good indicator of future performance, its earnings quality is said to be low (T/F)
False
For financial reporting purposing, which of the following items should be included in the “Cash and Cash Equivalents” total on the balance sheet? (check all that apply)
Select one or more:
a. Savings account balances
b. Inventory which the company currently owns but expects to sell for cash within one day of the balance sheet date
c. NSF check from a customer
d. Short-term investments with a maturity date less than three months from the date of purchase
e. Short-term investments with a maturity date between three months and six months from the company’s balance sheet date
f. Checks received from customers but not yet deposited as of the balance sheet date
g. Currency and coins
h. Accounts receivable balances with a due date of less than one month from the balance sheet date
i. Note receivable balances with a due date of less than three months from the balance sheet date
j. Checking account balances
a. savings account balances
d. Short-term investments with a maturity date less than three months from the date of purchase
f. Checks received from customers but not yet deposited as of the balance sheet date
g. Currency and coins
j. Checking account balances
Companies should have internal control procedures in place to: (check all that apply)
Select one or more:
a. safeguard the company’s assets.
b. improve the accuracy and reliability of accounting information.
Both answers are correct

a. safeguard the company’s assets.
b. improve the accuracy and reliability of accounting information.

For the scenario being described, indicate the most likely control activity being described.

The company physically counts its inventory at the end of each year and compares the physical count to its accounting records

Reconciliations
For the scenario being described, indicate the most likely control activity being described.

Most inventory items are fitted with a tag which can only be removed by a salesperson when the inventory item is sold.

Physical Controls
For the scenario being described, indicate the most likely control activity being described.

The clothing buyer places inventory orders but a different person pays for the order.

Separation of Duties
For the scenario being described, indicate the most likely control activity being described.

When an employee is first hired, he or she is given clear instructions regarding the company’s internal control procedures as well as how to report any irregular activities the employee discovers

Employee Management
For the scenario being described, indicate the most likely control activity being described.

The cashier is required to call for assistance when a customer wishes to pay for their order using a check in excess of $300.

Proper Authorization
On its bank reconciliation for the month of December, Pack Corp. noted that it had made an accounting error. It recorded the payment for supplies previously purchased on account as $59 instead of the actual amount of $95.
Question: In Pack Corp.’s month-end journal entry to record this reconciling item, which of the following is true?
Select one:
a. The “Supplies” account should be credited for $36.
b. The “Accounts Payable” account should be credited for $36.
c. The “Supplies” account should be debited for $36.
d. The “Accounts Payable” account should be debited for $36.
e. The “Accounts Receivable” account should be debited for $36.
f. The “Accounts Receivable” account should be credited for $36.
d. The “Accounts Payable” account should be debited for $36.

In its original entry, the company debited Accounts Payable and credited Cash for $59. This is $36 too little. Both the Accounts Payable and Cash account balances are overstated by $36. To correct this error, the company should debit Accounts Payable and credit Cash for $36.

For the following transaction, indicate whether the cash flow is an operating, investing, or financing activity for purposes of preparing a statement of cash flows. In addition, be specific with respect to whether the activity leads to an inflow of cash or an outflow of cash.

A company issues common stock for cash

Financing Activity – Inflow of Cash
For the following transaction, indicate whether the cash flow is an operating, investing, or financing activity for purposes of preparing a statement of cash flows. In addition, be specific with respect to whether the activity leads to an inflow of cash or an outflow of cash.

A company makes a cash purchase of land to be used in its business

Investing Activity – Outflow of Cash
For the following transaction, indicate whether the cash flow is an operating, investing, or financing activity for purposes of preparing a statement of cash flows. In addition, be specific with respect to whether the activity leads to an inflow of cash or an outflow of cash.

A company pays back the principal on a bank loan evidenced by a promissory note

Financing Activity – Outflow of Cash
For the following transaction, indicate whether the cash flow is an operating, investing, or financing activity for purposes of preparing a statement of cash flows. In addition, be specific with respect to whether the activity leads to an inflow of cash or an outflow of cash.

A company pays for supplies it previously purchased on account.

Operating Activity – Outflow of Cash
For the following transaction, indicate whether the cash flow is an operating, investing, or financing activity for purposes of preparing a statement of cash flows. In addition, be specific with respect to whether the activity leads to an inflow of cash or an outflow of cash.

A company collects cash from a sale of inventory

Operating Activity – Inflow of Cash
For the following transaction, indicate whether the cash flow is an operating, investing, or financing activity for purposes of preparing a statement of cash flows. In addition, be specific with respect to whether the activity leads to an inflow of cash or an outflow of cash.

A company sells land previously used in its business for cash.

Investing Activity – Inflow of Cash
Below is a list of various procedures a local retailer has regarding its cash receipts. Which control has the greatest chance of leading to errors or fraud?
Select one:
a. The company deposits checks and cash on hand into the bank account daily.
b. The company verifies the bank deposit slip against the accounting records.
c. The company picks up its mail daily from the post office but requires it to be opened only weekly.
d. The company encourages its employees to accept credit or debit cards from customers
c. The company picks up its mail daily from the post office but requires it to be opened only weekly.
Which company asset is most often involved with fraudulent activities?
Select one:
a. Cash
b. Prepaid Insurance
c. Equipment
d. Supplies
e. Accounts Receivable
f. Inventory
a. Cash
One of the major provisions of the Sarbanes-Oxley Act (SOX) requires a company’s management to hire the company’s outside audit firm (T/F)
False

The audit committee hires the auditors

Which financial statement summarizes a company’s cash receipts and cash disbursements for a period of time?
Select one:
a. Statement of Cash Flows
b. Income Statement
c. Statement of Stockholders’ Equity
d. Balance Sheet
a. Statement of Cash Flows
Below is a list of various procedures a local retailer has regarding its cash disbursements. Which procedure has the greatest chance of leading to errors or fraud?
Select one:
a. The company reconciles the debit and credit card statements against the purchase receipts.
b. The company does not permit employees who are allowed to make cash disbursements to also be in charge of cash receipts.
c. The company requires all cash expenditures to be authorized before the cash disbursement.
d. The company makes sure its checks are numbered sequentially and it uses them in sequential order.
e. The company uses its petty cash only for large cash disbursements.
e. The company uses its petty cash only for large cash disbursements.
On its bank reconciliation for the month of December, Pack Corp. noted its bank collected on a note receivable due from one of Pack’s customers. A total of $450 was collected out of which $400 represented principal and $50 represented interest.
Question: In Pack Corp.’s month-end journal entry to record this reconciling item, which of the following is (are) true? (check all that apply)
Select one or more:
a. The “Note Receivable” account should be debited for $450.
b. The “Interest Revenue” account should be debited for $50.
c. The “Note Receivable” account should be credited for $450.
d. The “Interest Revenue” account should be credited for $50.
e. The “Note Receivable” account should be credited for $400.
f. The “Note Receivable” account should be debited for $400.
e. The “Note Receivable” account should be credited for $400.
The Sarbanes-Oxley Act applies to both publicly and privately-held companies (T/F)
False

SOX only applies to publicly-held companies

A company is more likely to experience a decrease in its profits in the future when:
Select one:
a. the trend in free cash flow is upward while the trend in net income is downward.
b. the trend in free cash flow and net income are both upward.
c. the trend in free cash flow is downward while the trend in net income is upward.
c. the trend in free cash flow is downward while the trend in net income is upward.
Assuming a company uses the perpetual inventory system, indicate whether the following transaction would cause the inventory account balance to increase, decrease, or not change.

The company purchases new inventory.

Increase
Assuming a company uses the perpetual inventory system, indicate whether the following transaction would cause the inventory account balance to increase, decrease, or not change.

The company pays freight charges related to an inventory purchase

Increase
Assuming a company uses the perpetual inventory system, indicate whether the following transaction would cause the inventory account balance to increase, decrease, or not change.

The company returns merchandise back to its supplier.

Decrease
Assuming a company uses the perpetual inventory system, indicate whether the following transaction would cause the inventory account balance to increase, decrease, or not change.

The company grants a customer a sales discount

Not Change
Assuming a company uses the perpetual inventory system, indicate whether the following transaction would cause the inventory account balance to increase, decrease, or not change.

The company records the cost of inventory it has just sold

Decrease
Assuming a company uses the perpetual inventory system, indicate whether the following transaction would cause the inventory account balance to increase, decrease, or not change.

The company receives a purchase discount from its supplier

Decrease
Assuming a company uses the perpetual inventory system, indicate whether the following transaction would cause the inventory account balance to increase, decrease, or not change.

The company purchases new equipment to be used in the business

Not Change
Assuming a company uses the perpetual inventory system, indicate whether the following transaction would cause the inventory account balance to increase, decrease, or not change.

The company pays freight charges related to an inventory sale to one of its customers

Not Change
When applying the lower-of-cost-or-market method to inventories, the cost of the inventory should be compared to its ______.
Select one:
a. replacement cost
b. selling price
a. replacement cost
From a merchandiser’s perspective, the purchase and sale of its inventory is an example of which type of activity?
Select one:
a. investing
b. operating
c. financing
b. operating
For the account, indicate the specific location on either the balance sheet (ex. asset or liability section) or multi-step income statement (ex. operating or nonoperating section) where the account’s balance should appear.

Gain on sale of machinery

Income statement – Nonoperating income section
For the account, indicate the specific location on either the balance sheet (ex. asset or liability section) or multi-step income statement (ex. operating or nonoperating section) where the account’s balance should appear.

Sales Discounts

Income statement – Operating income section
For the account, indicate the specific location on either the balance sheet (ex. asset or liability section) or multi-step income statement (ex. operating or nonoperating section) where the account’s balance should appear.

Accounts Payable

Balance sheet – Liability section
For the account, indicate the specific location on either the balance sheet (ex. asset or liability section) or multi-step income statement (ex. operating or nonoperating section) where the account’s balance should appear.

Cost of Goods Sold

Income statement – Operating income section
For the account, indicate the specific location on either the balance sheet (ex. asset or liability section) or multi-step income statement (ex. operating or nonoperating section) where the account’s balance should appear.

Bad Debts Expense

Income statement – Operating income section
For the account, indicate the specific location on either the balance sheet (ex. asset or liability section) or multi-step income statement (ex. operating or nonoperating section) where the account’s balance should appear.

Salaries expense

Income statement – Operating income section
For the account, indicate the specific location on either the balance sheet (ex. asset or liability section) or multi-step income statement (ex. operating or nonoperating section) where the account’s balance should appear.

Inventory

Balance sheet – Asset section
For the account, indicate the specific location on either the balance sheet (ex. asset or liability section) or multi-step income statement (ex. operating or nonoperating section) where the account’s balance should appear.

Accounts Receivable

Balance sheet – Asset section
For the account, indicate the specific location on either the balance sheet (ex. asset or liability section) or multi-step income statement (ex. operating or nonoperating section) where the account’s balance should appear.

Freight-out Expense

Income statement – Operating income section
For the account, indicate the specific location on either the balance sheet (ex. asset or liability section) or multi-step income statement (ex. operating or nonoperating section) where the account’s balance should appear.

Interest expense

Income statement – Nonoperating income section
Wolfpack Inc. purchased inventory and the invoice indicates the terms are 3/15, n/45.

Wolfpack should interpret these terms as follows:

They will receive a discount of _________ on the amount paid within _________ days of the invoice date, otherwise, the amount owed is due within _________ days.

They will receive a discount of _3%_ on the amount paid within _15_ days of the invoice date, otherwise, the amount owed is due within _45_ days.
When a company is granted a discount for its prompt payment of inventory previously purchased on account, the discount is called a ___________.
Purchase Discount
When a company grants a discount to its customer for the customer’s prompt payment of a previous sale on account, the discount is called a ____________.
Sales Discount
An ending inventory error occurring in year one will affect net income in year one and year two (T/F)
True
What is often described as the “cost of goods (or inventory) available for sale” is equal to:
Select one:
a. Net Purchases – Ending inventory
b. Cost of Goods Sold
c. Beginning Inventory + Net Purchases
d. Ending Inventory
e. Net Purchases
f. Beginning Inventory
c. Beginning Inventory + Net Purchases
If a company uses the FIFO method for financial statement purposes, it must use the FIFO method for income tax purposes as well (T/F)
False

The LIFO Conformity Rules states that if the LIFO method is used for income tax purposes, it must be used for financial statement purposes as well. There is no such rule for the FIFO method. If a company uses the FIFO method for financial statement purposes, it could use the weighted-average cost method for tax purposes.

Assume that due to an error during the count of its physical inventory, a company overstated the cost of its ending inventory at the end of 20X5.

As a result of this error, indicate how each of the following items are affected on the company’s 20X5 income statement and balance sheet.

1) Its net income for 20X5 will: _______________
2) Its ending retained earnings balance for 20X5 will: ___________
3) Its cost of goods sold for 20X5 will: _______________

1) Its net income for 20X5 will: ___be overstated___

2) Its ending retained earnings balance for 20X5 will: ____be overstated___

3) Its cost of goods sold for 20X5 will: ___be understated___

At the end of its first year of business, a local company wishes to apply the lower-of-cost-or-market method to its inventory.

An analysis reveals the inventory’s cost to be $50,000 while its market value is $48,000.

Fill-in-the-blank: The year-end journal entry to record the write-down of its inventory should include a debit to _________________ and a credit to _____________, both for ____________.

.

The year-end journal entry to record the write-down of its inventory should include a debit to __Cost of goods sold__ and a credit to __Inventory__, both for __$48,000__.
When inventory is shipped F.O.B. shipping point and we are doing the accounting from the standpoint of the seller of these goods, title passes at the _____________ and our company ____________ (should/should not) be responsible for the freight charges.
When inventory is shipped F.O.B. shipping point and we are doing the accounting from the standpoint of the seller of these goods, title passes at the __shipping point__ and our company __should not__ be responsible for the freight charges.
A company is permitted to regularly switch its inventory costing methods from year to year (T/F)
False
Which of the following formulas can be used to compute cost of goods sold?
Select one:
a. Ending Inventory + Net Purchases – Beginning Inventory = Cost of Goods Sold
b. Beginning Inventory + Ending Inventory = Cost of Goods Sold
c. Beginning Inventory – Net Purchases – Ending Inventory = Cost of Goods Sold
d. Beginning Inventory + Net Purchases – Ending Inventory = Cost of Goods Sold
e. Beginning Inventory – Ending Inventory = Cost of Goods Sold
f. Net Purchases + Ending Inventory = Cost of Goods Sold
g. Net Purchases + Beginning Inventory = Cost of Goods Sold
d. Beginning Inventory + Net Purchases – Ending Inventory = Cost of Goods Sold
Wolfpack Inc. uses the perpetual inventory system.

On December 4, it purchased inventory costing $2,000 on account. No discount terms were offered.

On December 31, it returned one-half of this inventory back to the supplier. The inventory had not yet been paid for.

Question: What should be the journal entry to record the December 31 transaction?

Answer: The entry to record the December 31 transaction should include a debit to _____________ for ___________ and a credit to ___________ for ____________.

The entry to record the December 31 transaction should include a debit to __accounts payable__ for __$1,000_ and a credit to __Inventory__ for __$1,000__.
The amount called “net purchases” is calculated as follows (T/F):

Purchases – Freight In – Purchase Discounts + Purchase Returns and Allowances.

False

“Net Purchases” is equal to: Purchases + Freight In – Purchase Discounts – Purchase Returns and Allowances.

All else being equal, as a company’s inventory turnover ratio increases, the average number of days in inventory will ____________ (increase, decrease, stay the same).
Decrease
For the following statement regarding inventory systems, choose whether the periodic, perpetual, or both systems apply.

This inventory system computes and records sales revenue at the time of sale.

Both the perpetual and periodic systems
For the following statement regarding inventory systems, choose whether the periodic, perpetual, or both systems apply.

This inventory system computes and records the cost of goods sold at the time of sale

Perpetual system only
For the following statement regarding inventory systems, choose whether the periodic, perpetual, or both systems apply.

This inventory system computes and records the cost of goods sold only at the end of the period

Periodic system only
For the following statement regarding inventory systems, choose whether the periodic, perpetual, or both systems apply.

This inventory system requires that a physical inventory count be made at the end of the period.

Both the perpetual and periodic systems
Lopez Corp. and Gilmartin Inc. are in the same industry and are of similar size. During 20X5, Lopez and Gilmartin had inventory turnover ratios of 9 and 12, respectively.

Based on this information, which of the following statements is most likely true when comparing these two companies?

Select one:
a. Gilmartin is better at managing its inventory.
b. Lopez’s customers are quicker at paying off their accounts receivable.
c. Lopez is better at managing its inventory.
d. Gilmartin’s customers are quicker at paying off their accounts receivable

a. Gilmartin is better at managing its inventory.
Whereas a merchandiser usually has one inventory account, a manufacturer has which of the following? (check all that apply)
Select one or more:
a. Raw materials inventory
b. Work-in-process inventory
c. Finished goods inventory
All answers are correct

a. Raw materials inventory
b. Work-in-process inventory
c. Finished goods inventory

Graham Inc. is a merchandiser which uses the perpetual inventory system. On January 1, it sold inventory costing $1,000 for $4,000 on account.

Question: Assuming no other entries have yet occurred during the year, after making the required journal entry(ies) to record the above sale, what should be the account balances in the “Sales Revenue” and “Cost of Goods Sold” accounts?

Answer: The “Sales Revenue” account should have an account balance of $__________ and the “Cost of Goods Sold” account should have a balance of $___________.

.

The “Sales Revenue” account should have an account balance of $_4,000_ and the “Cost of Goods Sold” account should have a balance of $_1,000_.

Under the perpetual system, there are two separate entries to make at the time inventory is sold. The first entry records the sales revenue earned by debiting Cash or Accounting Receivable and crediting Sales Revenue for the total retail amount. The second entry records cost of goods sold by debiting Cost of Goods Sold and crediting Inventory by the inventory’s cost.

For the following statement, indicate whether the correct answer is FIFO, LIFO, or neither.

When inventory costs are rising, this method yields the lowest cost of goods sold.

FIFO
For the following statement, indicate whether the correct answer is FIFO, LIFO, or neither.

When inventory costs are declining, this method yields the lowest cost of ending inventory

FIFO
For the following statement, indicate whether the correct answer is FIFO, LIFO, or neither.

When inventory costs are rising, this method yields the lowest income tax expense.

LIFO
For the following statement, indicate whether the correct answer is FIFO, LIFO, or neither.

When inventory costs are declining, this method yields the highest gross margin

LIFO
For the following statement, indicate whether the correct answer is FIFO, LIFO, or neither.

When inventory costs are rising, this method yields the lowest sales revenue.

Neither
When a company accepts a return of inventory from one of its customers, it is called a ____________.
Sales return
When a company returns inventory back to its supplier, it is called a ___________.
Purchase return
The accounting principle which requires a company’s expenses to be recorded in the same period as the revenues they helped to generate is known as the:
Select one:
a. revenue recognition principle.
b. matching principle.
c. cost principle
b. matching principle
Assume a company has been in business for several years. Which “Retained Earnings” account balance should appear on its Adjusted Trial Balance?
Select one:
a. the Retained Earnings balance at the end of the year
b. the Retained Earnings balance at the beginning of the year
b. the Retained Earnings balance at the beginning of the year
A classified balance is one which separates the assets and liabilities into current and long-term categories (T/F)
True
On an adjusted trial balance and starting from the top, account balances should be shown in the following order (T/F):

revenues
expenses
dividends
liabilities
owners’ equity
assets

False

Accounts should be shown in what is called commonly referred to as “balance sheet order”. They should appear as follows:

assets
liabilities
owners’ equity
dividends
revenues
expenses

Adjusting journal entries typically include:
Select one:
a. an adjustment to only balance sheet accounts.
b. an adjustment to at least one balance sheet account and at least one income statement account.
c. an adjustment to only income statement accounts
b. an adjustment to at least one balance sheet account and at least one income statement account.
Two principles that underly the adjustment process are the revenue recognition and matching principles. (T/F)
True
Wolfpack Inc. is going to prepare its adjusting entries for the year ending December 31, 20X4, and has the following information available:

At the beginning of 20X4, the “Supplies” account had a balance of $150.
During 20X4, supplies costing $1,000 were purchased.
On December 31, 20X4, a physical count shows $75 of supplies to be on hand.

Question: What adjusting entry should Wolfpack make on 12/31/X4 related to the above? Do not use decimals or cents in the response.

Answer: Wolfpack should debit _________ for $___________ and credit ___________ for $____________.

Answer: Wolfpack should debit __supplies expense_ for $_1075_ and credit __supplies__ for $_1075_.

$150 beginning balance + $1,000 purchased – $75 still on hand = $1075 supplies used.

Wolfpack Inc. is going to prepare its adjusting entries for the year ending December 31, 20X4, and has the following information available:

Wolfpack has recorded and paid its utilities expense through the end of November. Utilities cost for December totals $900 and the bill will be paid on January 5, 20X5 (next year).
Question: What adjusting entry should Wolfpack make on 12/31/X4 related to the above? Do not include decimals or cents in the response.

Answer: Wolfpack should debit _____________ for $_____________ and credit ___________ for $__________.

Answer: Wolfpack should debit __utilities expense__ for $_900_ and credit __accounts payable__ for $_900_.

Wolfpack should accrue the $900 utilities cost at year-end.

Indicate the manner in which the account should be closed at year end.
If the account should not be closed at year-end, “not applicable”.

Advertising Expense

Close with a credit

Accounts that should be closed are called “temporary” accounts. All income statement accounts are temporary as is the Dividends account. To close out an account means to adjust it to zero. If the temporary account has a normal debit balance (expenses, contra-revenues, dividends), it must be closed with a credit. If it has a normal credit balance (revenues), it must be closed with a debit

Indicate the manner in which the account should be closed at year end.
If the account should not be closed at year-end, “not applicable”.

Unearned Revenue

Not applicable

Accounts that should be closed are called “temporary” accounts. All income statement accounts are temporary as is the Dividends account. To close out an account means to adjust it to zero. If the temporary account has a normal debit balance (expenses, contra-revenues, dividends), it must be closed with a credit. If it has a normal credit balance (revenues), it must be closed with a debit

Indicate the manner in which the account should be closed at year end.
If the account should not be closed at year-end, “not applicable”.

Dividends

Close with a credit

Accounts that should be closed are called “temporary” accounts. All income statement accounts are temporary as is the Dividends account. To close out an account means to adjust it to zero. If the temporary account has a normal debit balance (expenses, contra-revenues, dividends), it must be closed with a credit. If it has a normal credit balance (revenues), it must be closed with a debit

Indicate the manner in which the account should be closed at year end.
If the account should not be closed at year-end, “not applicable”.

Salaries Expense

Close with a credit

Accounts that should be closed are called “temporary” accounts. All income statement accounts are temporary as is the Dividends account. To close out an account means to adjust it to zero. If the temporary account has a normal debit balance (expenses, contra-revenues, dividends), it must be closed with a credit. If it has a normal credit balance (revenues), it must be closed with a debit

Indicate the manner in which the account should be closed at year end.
If the account should not be closed at year-end, “not applicable”.

Accumulated Depreciation

Not applicable

Accounts that should be closed are called “temporary” accounts. All income statement accounts are temporary as is the Dividends account. To close out an account means to adjust it to zero. If the temporary account has a normal debit balance (expenses, contra-revenues, dividends), it must be closed with a credit. If it has a normal credit balance (revenues), it must be closed with a debit

Indicate the manner in which the account should be closed at year end.
If the account should not be closed at year-end, “not applicable”.

Accounts Payable

Not applicable

Accounts that should be closed are called “temporary” accounts. All income statement accounts are temporary as is the Dividends account. To close out an account means to adjust it to zero. If the temporary account has a normal debit balance (expenses, contra-revenues, dividends), it must be closed with a credit. If it has a normal credit balance (revenues), it must be closed with a debit

Indicate the manner in which the account should be closed at year end.
If the account should not be closed at year-end, “not applicable”.

Interest Revenue

Close with a debit

Accounts that should be closed are called “temporary” accounts. All income statement accounts are temporary as is the Dividends account. To close out an account means to adjust it to zero. If the temporary account has a normal debit balance (expenses, contra-revenues, dividends), it must be closed with a credit. If it has a normal credit balance (revenues), it must be closed with a debit

Indicate the manner in which the account should be closed at year end.
If the account should not be closed at year-end, “not applicable”.

Cost of Goods Sold

Close with a credit

Accounts that should be closed are called “temporary” accounts. All income statement accounts are temporary as is the Dividends account. To close out an account means to adjust it to zero. If the temporary account has a normal debit balance (expenses, contra-revenues, dividends), it must be closed with a credit. If it has a normal credit balance (revenues), it must be closed with a debit

Indicate the manner in which the account should be closed at year end.
If the account should not be closed at year-end, “not applicable”.

Retained Earnings

Not applicable

Accounts that should be closed are called “temporary” accounts. All income statement accounts are temporary as is the Dividends account. To close out an account means to adjust it to zero. If the temporary account has a normal debit balance (expenses, contra-revenues, dividends), it must be closed with a credit. If it has a normal credit balance (revenues), it must be closed with a debit

Indicate the manner in which the account should be closed at year end.
If the account should not be closed at year-end, “not applicable”.

Service Revenue

Close with a debit

Accounts that should be closed are called “temporary” accounts. All income statement accounts are temporary as is the Dividends account. To close out an account means to adjust it to zero. If the temporary account has a normal debit balance (expenses, contra-revenues, dividends), it must be closed with a credit. If it has a normal credit balance (revenues), it must be closed with a debit

Indicate the manner in which the account should be closed at year end.
If the account should not be closed at year-end, “not applicable”.

Prepaid Insurance

Not applicable

Accounts that should be closed are called “temporary” accounts. All income statement accounts are temporary as is the Dividends account. To close out an account means to adjust it to zero. If the temporary account has a normal debit balance (expenses, contra-revenues, dividends), it must be closed with a credit. If it has a normal credit balance (revenues), it must be closed with a debit

Indicate the manner in which the account should be closed at year end.
If the account should not be closed at year-end, “not applicable”.

Sales Discounts

Close with a credit

Accounts that should be closed are called “temporary” accounts. All income statement accounts are temporary as is the Dividends account. To close out an account means to adjust it to zero. If the temporary account has a normal debit balance (expenses, contra-revenues, dividends), it must be closed with a credit. If it has a normal credit balance (revenues), it must be closed with a debit

Wolfpack Inc. is going to prepare its adjusting entries for the year ending December 31, 20X4, and has the following information available:

On April 1, 20X4, Wolfpack lent $12,000 cash to one of its employees. The employee signed a one-year, 6% promissory note.
Interest calculations are rounded to the nearest whole month.
No interest calculations have been made in 20X4.

Question: What adjusting entry should Wolfpack make on 12/31/X4 related to the above?

Answer: Wolfpack should debit ____________ for $___________ and credit _____________ for $____________.

Answer: Wolfpack should debit __Interest Receivable__ for $_540_ and credit __Interest Revenue__ for $_540_.

Accrued Interest Revenue = $12,000 x .06 x 9/12 = $540.

Wolfpack Inc. is going to prepare its adjusting entries for the year ending December 31, 20X4, and has the following information available:

On September 1, 20X4, Wolfpack received a $6,000 payment from a customer for services it will provide the customer evenly over the next twenty-four (24) months.

Question: What adjusting entry should Wolfpack make on 12/31/X4 related to the above? Do not use decimals or cents in the response.

Answer: Wolfpack should debit ____________ for $___________ and credit ___________ for $___________.

Answer: Wolfpack should debit __Unearned Revenue__ for $_1,000_ and credit __Service Revenue__ for $_1,000_.

$6,000 received in advance x 4/24 = $1,000 earned by year-end

What step in the accounting cycle is the following statement (out of 7):

Prepare and enter adjusting entries into the general journal and post to the general ledger.

Step 3

1. Using source documents, prepare and enter transactions into the general journal and post to the general ledger.
2. Prepare an Unadjusted Trial Balance.
3. Prepare and enter adjusting entries into the general journal and post to the general ledger.
4. Prepare an Adjusted Trial Balance.
5. Prepare year-end financial statements.
6. Prepare and enter closing entries into the general journal and post to the general ledger.
7. Prepare a Post-Closing Trial Balance.

What step in the accounting cycle is the following statement (out of 7):

Prepare an Adjusted Trial Balance

Step 4

1. Using source documents, prepare and enter transactions into the general journal and post to the general ledger.
2. Prepare an Unadjusted Trial Balance.
3. Prepare and enter adjusting entries into the general journal and post to the general ledger.
4. Prepare an Adjusted Trial Balance.
5. Prepare year-end financial statements.
6. Prepare and enter closing entries into the general journal and post to the general ledger.
7. Prepare a Post-Closing Trial Balance.

What step in the accounting cycle is the following statement (out of 7):

Prepare a Post-Closing Trial Balance.

Step 7

1. Using source documents, prepare and enter transactions into the general journal and post to the general ledger.
2. Prepare an Unadjusted Trial Balance.
3. Prepare and enter adjusting entries into the general journal and post to the general ledger.
4. Prepare an Adjusted Trial Balance.
5. Prepare year-end financial statements.
6. Prepare and enter closing entries into the general journal and post to the general ledger.
7. Prepare a Post-Closing Trial Balance.

What step in the accounting cycle is the following statement (out of 7):

Using source documents, prepare and enter transactions into the general journal and post to the general ledger.

Step 1

1. Using source documents, prepare and enter transactions into the general journal and post to the general ledger.
2. Prepare an Unadjusted Trial Balance.
3. Prepare and enter adjusting entries into the general journal and post to the general ledger.
4. Prepare an Adjusted Trial Balance.
5. Prepare year-end financial statements.
6. Prepare and enter closing entries into the general journal and post to the general ledger.
7. Prepare a Post-Closing Trial Balance.

What step in the accounting cycle is the following statement (out of 7):

Prepare year-end financial statements

Step 5

1. Using source documents, prepare and enter transactions into the general journal and post to the general ledger.
2. Prepare an Unadjusted Trial Balance.
3. Prepare and enter adjusting entries into the general journal and post to the general ledger.
4. Prepare an Adjusted Trial Balance.
5. Prepare year-end financial statements.
6. Prepare and enter closing entries into the general journal and post to the general ledger.
7. Prepare a Post-Closing Trial Balance.

What step in the accounting cycle is the following statement (out of 7):

Prepare an Unadjusted Trial Balance.

Step 2

1. Using source documents, prepare and enter transactions into the general journal and post to the general ledger.
2. Prepare an Unadjusted Trial Balance.
3. Prepare and enter adjusting entries into the general journal and post to the general ledger.
4. Prepare an Adjusted Trial Balance.
5. Prepare year-end financial statements.
6. Prepare and enter closing entries into the general journal and post to the general ledger.
7. Prepare a Post-Closing Trial Balance.

What step in the accounting cycle is the following statement (out of 7):

Prepare and enter closing entries into the general journal and post to the general ledger.

Step 6

1. Using source documents, prepare and enter transactions into the general journal and post to the general ledger.
2. Prepare an Unadjusted Trial Balance.
3. Prepare and enter adjusting entries into the general journal and post to the general ledger.
4. Prepare an Adjusted Trial Balance.
5. Prepare year-end financial statements.
6. Prepare and enter closing entries into the general journal and post to the general ledger.
7. Prepare a Post-Closing Trial Balance.

When revenue has been earned but cash has not yet been received, the company should record __________.
Accrued revenue
When cash is received before the related revenue has been earned, the company should record ___________.
Deferred revenue
When an expense has been incurred for which cash has not yet been paid, the company should record a(an) _____________.
Accrued expense
When cash is paid before the related expense has been incurred, the company should record a(an) ____________.
Deferred expense
Assume a company has been in business for several years. Which “Retained Earnings” account balance should appear on its Post-Closing Trial Balance?
Select one:
a. the Retained Earnings balance at the beginning of the year
b. the Retained Earnings balance at the end of the year
b. the Retained Earnings balance at the end of the year
Which definition below best describes financial accounting?
a. Process of measuring income taxes owed to the government.
b. System of maintaining communication with a company’s customers and suppliers.
c. Procedures designed to enhance the company’s image to potential investors.
d. Measuring business activities and communicating them to external parties.
d. Measuring business activities and communicating them to external parties.
The accounting equation is defined as:
a. Assets = Liabilities + Stockholders’ Equity.
b. Assets = Liabilities – Stockholders’ Equity.
c. Net Income = Revenues – Expenses.
d. Liabilities + Revenues = Assets.
a. Assets = Liabilities + Stockholders’ Equity.
Emmitt had the following final balances after the first year of operations: assets, $55,000;
stockholders’ equity, $25,000; dividends, $3,000; and net income, $10,000. What is the
amount of Emmitt’s liabilities?
a. $55,000.
b. $30,000.
c. $23,000.
d. $13,000.
b. $30,000
Stimpleton Company had the following cash payments in 2015:
Purchase equipment $2,000
Pay rent $500
Repay bank loan $5,000
Pay workers’ salaries $1,000

What is the total amount of cash paid for operating activities in 2015?
a. $6,000.
b. $2,000.
c. $7,000.
d. $1,500

d. $1,500

The operating activities are paying rent and our employees. Buying equipment is an investing
activity and repaying the loan is a financing activity.

One disadvantage of the corporate form of business is:
a. Limited liability.
b. Access to more capital.
c. Smaller in size.
d. Double taxation
d. double taxation

Corporate income is taxed and dividends (which are not tax deductible by the corporation)
are taxed again at the individual level.

Use the following amounts to calculate net income: Revenues, $12,000; Liabilities,
$5,000; Expenses, $4,000; Assets, $19,000; Dividends, $4,000.

a. $6,000.
b. $8,000.
c. $4,000.
d. $14,000.

b. $8,000
The full set of procedures used to accomplish the measurement/communication process
of financial accounting is referred to as the:
a. Trial balance
b. Accounting cycle
c. Chart of accounts
d. General ledger
b. accounting cycle
When cash payments are made to stockholders, what is the effect on the company’s
accounts?
a. Cash decreases and dividends increase.
b. Cash increases and dividends decrease.
c. Cash decreases and common stock decreases.
d. Cash increases and common stock increases.
a. cash decreases and dividends increase
Investments by stockholders have what effect on the accounting equation?
a. Assets increase and liabilities increase.
b. Expenses increase and liabilities increase.
c. Assets increase and revenues increase.
d. Assets increase and stockholders’ equity increases.
d. assets increase and stockholder’s equity increases
The Unearned Revenue account appears in which financial statement?
a. Income statement.
b. Statement of cash flows.
c. Balance sheet.
d. Statement of stockholders’ equity
c. balance sheet
Which of the following is NOT possible for a business transaction?
a. Increase assets and decrease revenue.
b. Decrease assets and increase expense.
c. Increase liabilities and increase expense.
d. Decrease liabilities and increase revenue
a. increase assets and decrease revenue
If the liabilities of a company increased by $55,000 during a month and the stockholders’
equity decreased by $21,000 during that same month, did assets increase or decrease and
by how much?
a. $34,000 increase.
b. $55,000 increase.
c. $34,000 decrease.
d. $76,000 increase
a. $34,000 increase
Which of the following stages of equity financing comes last in the traditional order of
progression?
a. Investment by friends and family of the founders.
b. Investment by the founders of the business.
c. Initial public offering (IPO).
d. Outside investment by “angel” investors and venture capital firms.
c. initial public offering (IPO)
Which of the following is the most likely to have voting rights?
a. Common Stock.
b. Preferred Stock.
c. Bonds.
d. They all have similar voting rights.
a. common stock
California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the
beginning of 2014. They also have shares of common stock outstanding. The company
was not able to pay dividends in 2014, but plans to pay dividends of $100,000 in 2015.
Assuming the preferred stock is cumulative, how much of the $100,000 dividend will be
paid to preferred stockholders and how much will be paid to common stockholders in
2015?

a. $40,000 to preferred stockholders and $60,000 to common stockholders.
b. $80,000 to preferred stockholders and $20,000 to common stockholders.
c. $20,000 to preferred stockholders and $80,000 to common stockholders.
d. $100,000 to preferred stockholders and $0 to common stockholders.

b. $80,000 to preferred stockholders and $20,000 to common stockholders.

Annual preferred dividend = 5,000 sh x ($100 par value x 8%) = $40,000.
Since the preferred stock is cumulative the company will need to pay both the 2014 and
2015 dividend ($40,000 x 2 = $80,000) to the preferred stockholders and then the remaining
$20,000 can be paid to the common stockholders.

When treasury stock is purchased, what is the effect on assets and stockholders’ equity?
a. Assets and stockholders’ equity increase.
b. Assets and stockholders’ equity decrease.
c. Assets increase and stockholders’ equity decrease.
d. Assets decrease and stockholders’ equity increase.
b. assets and stockholder’s equity decrease
The Common Stock account balance that appears on a company’s balance sheet is
measured as:
a. The number of common shares outstanding x the stock’s par value per share.
b. The number of common shares outstanding x the stock’s current market value per
share.
c. The number of common shares issued x the stock’s par value per share.
d. The number of common shares issued x the stock’s current market value per share
c. the number of common shares issued x the stock’s value per share
A series of equal periodic cash flows is referred to as:
a. The time value of money.
b. An annuity.
c. The future value.
d. Interest.
b. an annuity
Financial accounting:
a. Provides information primarily for external decision makers.
b. Provides information primarily for a company’s employees.
c. Provides information primarily for the use of managers of the company.
d. Is primarily used to compute a company’s tax obligation.
a. provides information primarily for external decision
Which statement below best describes the accounting equation?
a. The change in retained earnings equals net income less dividends.
b. Equality of revenue and expense transactions over time.
c. Resources of the company equal creditors’ and owners’ claims to those resources.
d. Financing activities equal investing and operating activities.
c. resources of the company equal creditor’s and owners’ claims to those resources
If a company has stockholders’ equity of $60,000 at the end of the year, which of the
following statements must be true?
a. The company’s assets exceed liabilities by $60,000.
b. The company has issued $60,000 of common stock.
c. Net income for the year equals $60,000.
d. Total revenues earned during the year equal $60,000.
a. The company’s assets exceed liabilities by $60,000.
Transactions related to the primary business activities of the company, such as selling
goods and services to customers, are referred to as:
a. Investing activities.
b. Operating activities.
c. Management activities.
d. Financing activities.
b. operating activities
Limited liability means:
a. Stockholders of a corporation are not obligated to pay the corporation’s debts out of
their own pocket.
b. Liabilities of a company cannot exceed its assets.
c. Companies are not allowed to borrow unless they are profitable.
d. Companies are less likely to be sued if they are formed as a corporation.
a. stockholder’s of a corporation are not obligated to pay the corporation’s debt out of their own pocket
When a company incurs employee salaries but does not pay them, how will the basic
accounting equation be affected?
a. Stockholders’ equity decreases.
b. Revenues decrease.
c. Expenses decrease.
d. Liabilities decrease
a. stockholder’s equity decreases
Receiving assets from customers before services are performed results in:
a. Prepaid Assets.
b. Service Revenue.
c. Unearned Revenues.
d. Accounts Receivable.
c. unearned revenue
Which of the following would increase assets and increase liabilities?
a. Provide services to customers on account.
b. Purchase office supplies on account.
c. Pay dividends to stockholders.
d. Receive a utility bill but do not pay it immediately
b. purchase office supplies on account
Consider the following transactions:

Issued common stock for cash.
Purchased equipment by signing a note payable.
Paid rent for the current month.
Collected cash from customers on account.

How many of these four transactions increased the given company’s total assets?
a. One.
b. Two.
c. Three.
d. Four

b. two
Dividends have a normal _______ balance and appear in the ______________.
a. Debit; Statement of stockholders’ equity.
b. Debit; Income statement.
c. Credit; Balance sheet.
d. Debit; Balance Sheet.
Comments: Like expenses, Dividend
a. debit; statement of stockholder’s equity
Consider the following eight accounts:

Accounts Payable
Cash
Prepaid Rent
Common Stock
Salaries Payable
Equipment
Supplies
Rent Expense

How many of these accounts have a normal credit balance?
a. Two.
b. Three.
c. Four.
d. Five.

b. three

Liabilities, Stockholders’ Equity, and Revenue accounts

The owner of an office building should report rent collected in advance as a debit to
Cash and a credit to:
a. A liability.
b. An asset other than Cash.
c. Revenue.
d. Stockholders’ equity
a. a liability
The Accounts Receivable account has a beginning balance of $10,000 and the company
provides services of $50,000 on account during the month. The ending balance was
$12,000. How much did the company receive from customers during the month?
a. $50,000.
b. $52,000.
c. $48,000.
d. $62,000.
c. $48,000
Issued stock refers to the number of shares:
a. Outstanding plus treasury shares.
b. Authorized.
c. In the hand of stockholders.
d. That may be issued under state law.
a. outstanding shares plus treasury shares
Preferred stock is called preferred because it usually has two preferences over common
stock. These preferences relate to:
a. Dividends and voting rights.
b. Par value and dividends.
c. The preemptive right and voting rights.
d. Dividends and distribution of assets if the corporation is dissolved.
d. Dividends and distribution of assets if the corporation is dissolved.
CavCorp issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of
2014. All remaining shares are common stock. CavCorp was not able to pay dividends in
2014, but plans to pay dividends of $18,000 in 2015. Assuming the preferred stock is
cumulative, how much of the $18,000 dividend will be paid to preferred stockholders and
how much will be paid to common stockholders in 2015?

a. $6,000 to preferred stockholders and $12,000 to common stockholders.
b. $18,000 to preferred stockholders and $0 to common stockholders.
c. $12,000 to preferred stockholders and $6,000 to common stockholders.
d. $9,000 to preferred stockholders and $9,000 to common stockholders.

c. $12,000 to preferred stockholders and $6,000 to common stockholders.
When treasury stock is purchased, what is the effect on total stockholders’ equity?
a. Decrease.
b. Increase.
c. No effect.
d. Cannot tell—it depends upon whether the treasury stock was purchased for more than
or less than the original issue price.
a. decrease
Journal entries to record cash dividends are made on the:
a. Declaration date, record date, and payment date.
b. Record date and payment date.
c. Declaration date and payment date.
d. Declaration date and record date.
c. declaration date and payment date
Both cash dividends and stock dividends:
a. Reduce total assets.
b. Reduce total liabilities.
c. Reduce total stockholders’ equity.
d. Reduce retained earnings.
d. reduce retained earnings
The Common Stock account on a company’s balance sheet is measured as:
a. The number of common shares outstanding x the stock’s par value per share.
b. The number of common shares outstanding x the stock’s current market value per
share.
c. The number of common shares issued x the stock’s par value per share.
d. The number of common shares issued x the stock’s current market value per share.
c. The number of common shares issued x the stock’s par value per share.
Which of the following is not a true statement?
a. Companies that are believed to have high bankruptcy risk generally receive low credit ratings and
must pay a higher interest rate for borrowing.
b. As a company’s level of debt increases, the risk of bankruptcy increases.
c. Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are
both tax-deductible.
d. The mixture of liabilities and stockholders’ equity a business uses is called its capital structure.
c. Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are
both tax-deductible.
Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds.
Which is most common?
a. Secured and term.
b. Secured and serial.
c. Unsecured and term.
d. Unsecured and serial.
c. Unsecured and term.
A bond issue with a face value of $500,000 bears interest at the rate of 8% (coupon rate). The
current market rate of interest is 7%. These bonds will sell at a price that is:
a. Equal to $500,000.
b. More than $500,000.
c. Less than $500,000.
d. The answer cannot be determined from the information provided.
b. More than $500,000.
When bonds are issued at a discount, what happens to the carrying value and interest expense
over the life of the bonds?
a. Carrying value and interest expense increase.
b. Carrying value and interest expense decrease.
c. Carrying value decreases and interest expense increases.
d. Carrying value increases and interest expense decreases.
a. Carrying value and interest expense increase.

CV approaches face value (so increases for discount bonds). Interest expense = CV x market rate so
if CV is increasing, interest expense must also be increasing

When bonds are issued at a premium and the effective interest method is used for amortization, at
each subsequent interest payment date, the cash paid is:
a. Less than the interest expense.
b. Equal to the interest expense.
c. Greater than the interest expense.
d. More than if the bonds had been sold at a discount.
c. Greater than the interest expense.

Premium bonds require that we systematically reduce the CV to face value

Wolfpack, Inc. retires a $40 million bond issue when the carrying value of the bonds is $42 million,
but the market value of the bonds is $36 million. The entry to record the retirement will include:
a. A credit of $6 million to a gain account.
b. A debit of $6 million to a loss account.
c. No gain or loss on retirement.
d. A credit to cash for $42 million.
a. A credit of $6 million to a gain account.
NoleCo issues bonds on 1/1/2015 for $86,410. The bonds have a face value of $100,000, a coupon
rate of 6% and were issued when the market rate = 8%.

The bonds pay interest semi-annually on
6/30 and 12/31 each year.

How much interest expense will NoleCo recognize on 6/30/15?
a. $6,913.
b. $6,000.
c. $3,456.
d. $3,000.
e. $2,592.

c. $3,456

Interest expense = CV x market rate x time
Interest expense = $86,410 x .08 x 6/12 = $3,456

Interest Expense 3,456
Cash 3,000
B/P 456

NoleCo issues bonds on 1/1/2015 for $86,410. The bonds have a face value of $100,000, a coupon
rate of 6% and were issued when the market rate = 8%.

How much interest expense will NoleCo recognize on 12/31/15?
a. $3,475.
b. $3,456.
c. $3,438
d. $3,000.
e. $2,606.

a. $3,475.

New CV = $86,410 + $456 = $86,866
Interest expense = $86,866 x .08 x 6/12 = $3,475

The advantages of obtaining long-term funds by issuing bonds, rather than issuing additional
common stock, include which of the following?
a. Interest payments are tax deductible to the company, while dividends are not.
b. The risk of going bankrupt decreases.
c. Additional capital is obtained without surrendering ownership control.
d. Both a. and c. are correct.
d. Both a. and c. are correct.

Only b is incorrect. Bankruptcy risk increases with more debt

In each succeeding payment on an installment note:
a. The amount of interest expense increases.
b. The amount of interest expense decreases.
c. The amount of interest expense is unchanged.
d. The amounts paid for both interest and principal increase proportionately
b. The amount of interest expense decreases.

For each successive payment, more of each payment goes to principal and less to interest. This is
because we are reducing the principal balance owed with each payment

Wiley Company purchased new equipment for $60,000. Wiley paid cash for the equipment. Other
costs associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and
installation cost, $2,500. The cost recorded for the equipment was:
a. $60,000.
b. $61,000.
c. $64,000.
d. $66,500.
d. $66,500.

All four of these amounts would be capitalized in the equipment account

Morgan Pharmaceutical spends $50,000 this year in research and development for a new drug to
cure liver damage. By the end of the year, management feels confident that the new drug will gain
FDA approval and lead to higher future sales. What impact will the $50,000 spending have on this
year’s financial statements?
a. Increase assets.
b. Decrease revenues.
c. Increase expenses.
d. Increase revenues.
c. Increase expenses.

With limited exceptions, R&D expenditures are recognized as expenses

The purchase of a new cooling system for $150,000 to upgrade an office building owned by the
company would be accounted for as:
a. Goodwill.
b. An addition to the Buildings account.
c. An expense in the period incurred.
d. A patent
b. An addition to the Buildings account.

This upgrade will enhance the building for more than one period—so capitalize

An exclusive 20-year right to manufacture a product or to use a process is a:
a. Patent.
b. Copyright.
c. Trademark.
d. Franchise.
a. Patent.
The balance sheet of Cattleman’s Steakhouse shows assets of $86,400 and liabilities of $15,000. The
fair value of the assets is $90,000 and the fair value of its liabilities is $15,000. Longhorn paid
Cattleman’s $95,000 to acquire it. Longhorn should record goodwill on this purchase of:
a. $3,600.
b. $5,000.
c. $20,000.
d. $23,600
c. $20,000.

Goodwill equals the excess of purchase price over the fair value of the net assets acquired.
$95,000 price – ($90,000 assets – $15,000 liabilities) = $20,000

Kansas Enterprises purchased equipment for $60,000 on January 1, 2015. The equipment is expected to
have a five-year life, with a residual value of $5,000 at the end of five years.

Using the straight-line method, depreciation expense for 2016 and the book value at December 31,
2016 would be:
a. $12,000 and $36,000.
b. $12,000 and $31,000.
c. $11,000 and $33,000.
d. $11,000 and $38,000.

d. $11,000 and $38,000.

SL depreciation = ($60,000 – $5,000)/5 years = $11,000/year
After two years, Acc. Depreciation = $22,000 and BV = $60,000 – $22,000 = $38,000

Kansas Enterprises purchased equipment for $60,000 on January 1, 2015. The equipment is expected to
have a five-year life, with a residual value of $5,000 at the end of five years.

Using the double-declining balance method, depreciation expense for 2016 would be:
a. $22,000.
b. $13,200.
c. $14,400.
d. $24,000.

c. $14,400.

2015 DDB = $60,000 BV x 2/5 = $24,000 depreciation expense
2016 DDB = $36,000 BV x 2/5 = $14,400 depreciation expense

On January 1, 2013, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line
depreciation method. The truck has a useful life of eight years and an estimated residual value of
$8,000. On December 31, 2015, Jacob Inc. sold the truck for $30,000. What amount of gain or (loss)
should Jacob Inc. record on December 31, 2015?
a. Gain, $22,000.
b. Loss, $(18,000).
c. Gain, $5,000.
d. Loss, $(3,000).
d. Loss, $(3,000).

SL depreciation = ($48,000 – $8,000)/8 years = $5,000/year
After three years BV = $33,000 ($48,000 cost – $15,000 Acc. Depreciation)
Loss = $30,000 cash proceeds – $33,000 BV = $(3,000) loss

Return on assets is equal to:
a. Profit margin plus asset turnover.
b. Profit margin minus asset turnover.
c. Profit margin times asset turnover.
d. Profit margin divided by asset turnover.
c. Profit margin times asset turnover.
In testing for recoverability of an operational asset, an impairment loss must be recognized if the:
a. Asset’s book value exceeds the present value of its expected future cash flows.
b. Expected future cash flows exceeds the asset’s book value.
c. Present value of expected future cash flows exceeds its carrying value.
d. Asset’s book value exceeds the expected future cash flows.
d. Asset’s book value exceeds the expected future cash flows.

A long-term asset is impaired when the future cash flows it will produce sum up to less than the
current BV of the asset.

Lewis Inc. had the following information taken from various accounts for 2015:

Sales discounts $41,000
Unearned revenues $32,000
Total sales $459,000
Sales allowances $35,000
Accounts receivable $205,000

What was Lewis Inc.’s net sales revenues in 2015?
a. $368,000.
b. $434,000.
c. $383,000.
d. $437,000.

c. $383,000.

Net sales revenue = Total sales less discounts and allowances (and returns, if any)
Net sales revenue = $459,000 – $41,000 – $35,000 = $383,000

On October 10, Wolfpack Lumber sold building materials to NoleCo Limited for $20,000 with
terms of 2/10, net 30. What amount did Wolfpack record as revenue on October 31 when NoleCo
paid for the building materials?
a. $20,000.
b. $19,600.
c. $20,400.
d. $0.
d. $0

Revenue is recognized on October 10—when the sale occurs. Collection of A/R is not earning
revenue

At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for doubtful
accounts of $600 (credit). An analysis of accounts receivable suggests that the allowance for doubtful
accounts should be 3% of accounts receivable. The amount of the adjustment for doubtful accounts
would be:
a. $6,540.
b. $7,800.
c. $7,140.
d. $7,740
a. $6,540.

Target balance in AFDA = $238,000 x .03 = $7,140. Since a $600 credit balance already exists, must
credit account for $6,540 to increase it to target balance

The Allowance for Doubtful Accounts is:
a. An expense account.
b. A contra asset account.
c. A contra revenue account.
d. A liability account
b. A contra asset account.
Richard LLC accounts for possible bad debts using the allowance method. When an actual bad debt
occurs, what effect does it have on the accounting equation?
a. Increases assets and increases stockholders’ equity.
b. Decreases assets and decreases stockholders’ equity.
c. Decreases assets and decreases liabilities.
d. No effect on the accounting equation.
d. No effect on the accounting equation
Transactions related to the primary business activities of the company, such as selling goods and
services to customers, are referred to as:
a. Investing activities.
b. Operating activities.
c. Management activities.
d. Financing activities
b. operating activities
Consider the following transactions:

Issued common stock for cash.
Purchased equipment by signing a note payable.
Paid rent for the current month.
Collected cash from customers on account.

How many of these four transactions increased the given company’s total assets?
a. One.
b. Two.
c. Three.
d. Four.

b. two
At the end of the next four years, a new machine is expected to generate net cash flows of $8,000,
$12,000, $10,000, and $15,000, respectively. What are the cash flows worth today if a 3% annual
interest rate properly reflects the time value of money in this situation?
a. $41,557.
b. $47,700.
c. $32,403.
d. $38,108.
a. $41,557

$8,000 x .97087 = $7,767
$12,000 x .94260 = $11,311
$10,000 x .91514 = $9,151
$15,000 x .88849 = $13,327
$41,557

Which of the following definitions describes a term bond?
a. Matures on a single date.
b. Secured only by the “full faith and credit” of the issuing corporation.
c. Matures in installments.
d. Supported by specific assets pledged as collateral by the issuer
a. Matures on a single date.
A bond issue with a face value of $500,000 bears interest at the rate of 7% (coupon rate).
The current market rate of interest is 8%. These bonds will sell at a price that is:
a. Equal to $500,000.
b. More than $500,000.
c. Less than $500,000.
d. The answer cannot be determined from the information provided.
c. Less than $500,000

When the coupon rate < market rate these bonds are not attractive at face value. Why? Because if you pay face value you will earn the coupon rate of 7%. No one would do that when they can invest in other securities and earn 8%. These bonds will sell at a discount.

A bond issue with a face value of $250,000 sold for $265,000. Therefore, the bonds:
a. Sold at a premium because the stated interest rate was higher than the market rate.
b. Sold for the $250,000 face value plus $15,000 of accrued interest.
c. Sold at a discount because the stated interest rate was higher than the market rate.
d. Sold at a premium because the market interest rate was higher than the stated rate.
a. Sold at a premium because the stated interest rate was higher than the market rate.

Bonds sell at a price above face
value (at a premium) when the coupon rate is attractive. That is, when the coupon rate >
market rate

Which of the following leases is essentially the purchase of an asset with debt financing?
a. An operating lease.
b. A capital lease.
c. Both an operating and a capital lease.
d. Neither an operating lease nor a capital lease
b. A capital lease.
GT, Inc. issued a five-year corporate bond with a face value of $300,000 and a 5%
coupon interest rate for $290,000. What effect would the bond issuance have on GT,
Inc.’s fundamental accounting equation?

a. Increase assets and liabilities.
b. Increase and decrease assets.
c. Increase assets and stockholders’ equity.
d. Increase and decrease liabilities.

a. Increase assets and liabilities.
When bonds are issued at a premium, what happens to the carrying value and interest
expense over the life of the bonds?
a. Carrying value and interest expense increase.
b. Carrying value and interest expense decrease.
c. Carrying value decreases and interest expense increases.
d. Carrying value increases and interest expense decreases
b. Carrying value and interest expense decrease.
NoleCo retires a $20 million bond issue when the carrying value of the bonds is $18
million, but the market value of the bonds is $23 million. The journal entry to record the
retirement will include:
a. A debit of $5 million to a loss account.
b. A credit of $5 million to a gain account.
c. No gain or loss on retirement.
d. A credit to cash for $18 million.
a. A debit of $5 million to a loss account.

We spend $23 million to buy back these bonds (we have to pay the current
market value in order for the bond investor to sell them back to us). The liability is on our
books for $18 million (carrying value). We are spending an extra $5 million to make these
bonds go away—that’s a loss. The journal entry:

CavCo purchased land for $75,000 cash. They also incurred commissions of $4,500,
property taxes of $5,000, and title insurance of $800. The $5,000 in property taxes
includes $4,000 in back taxes paid by CavCo on behalf of the seller and $1,000 due for
the current year after the purchase date. For what amount should CavCo record the
land?
a. $83,500.
b. $84,300.
c. $85,300.
d. $75,000.
b. $84,300.

Everything except the $1,000 for current year property taxes should be
capitalized in the Land account. All of these amounts are considered costs incurred to
acquire the Land. The $1,000 of current year property taxes is an expense for the current
year (not an asset)

OHM purchased land, a building, and equipment for $800,000. The estimated fair values
of the land, building, and equipment are $100,000, $700,000, and $200,000, respectively.
At what amount would OHM record the land?
a. $80,000.
b. $90,000.
c. $100,000.
d. $800,000.
a. $80,000.

We use the relative fair values of the three assets to divide up the purchase price.
For the land: $100,000/($100,000 + $700,000 + $200,000) = 10%. $800,000 purchase price
for the three items combined x 10% = $80,000 allocated to land

The exclusive right to benefit from a creative work, such as a film, is a:
a. Patent.
b. Copyright.
c. Trademark.
d. Franchise.
b. Copyright.
Research and development costs should be:
a. Expensed in the period incurred.
b. Expensed in the period they are determined to be unsuccessful.
c. Deferred pending determination of success.
d. Expensed if unsuccessful, capitalized if successful
a. Expensed in the period incurred.
In accounting, goodwill
a. May be recorded whenever a company achieves a level of net income that exceeds the
industry average.
b. Is amortized over its useful life.
c. May be recorded when a company purchases another business.
d. Must be expensed in the period it is recorded because benefits from goodwill are
difficult to identify.
c. May be recorded when a company purchases another business.
Abbott Company purchased a computer that cost $10,000. It had an estimated useful
life of 5 years and no residual value. The computer was depreciated by the straight-line
method and was sold at the end of the fourth year of use for $3,000 cash. Abbott
should record:
a. a gain of $1,000.
b. a loss of $1,000.
c. neither a gain nor a loss – the computer was sold at its book value.
d. neither a gain nor a loss – the gain that occurred in this case would not be recognized.
a. a gain of $1,000.

After four years of straight-line depreciation the accumulated depreciation will
be $8,000 ($2,000/year x four years). The carrying value is $10,000 cost – $8,000 A/D =
$2,000. If sold for $3,000, we will have a gain of $1,000.

Return on assets is calculated as:
a. Net Income divided by total assets.
b. Net Income divided by average total assets.
c. Net Income divided by ending total assets.
d. Ending total assets divided by net income.
b. Net Income divided by average total assets
Wilson Inc. owns equipment for which it originally paid $70 million and has recorded
accumulated depreciation on the equipment of $12 million. Due to adverse economic
conditions, Wilson’s management determined that it should assess whether an
impairment should be recognized for the equipment. The estimated future cash flows to
be provided by the equipment total $60 million, and its fair value at that point totals $50
million. Under these circumstances, Wilson:
a. Would record no impairment loss on the equipment.
b. Would record an $8 million impairment loss on the equipment.
c. Would record a $20 million impairment loss on the equipment.
d. Would record a $2 million impairment loss on the equipment
a. Would record no impairment loss on the equipment.
On March 17, Jackal Lumber sold building materials to Fredo Limited for $15,000 with
terms of 3/10, net 20. What amount did Jackal record as sales revenue on March 25
when Fredo paid for the building materials?
a. $15,000.
b. $14,550.
c. $15,450.
d. $0.
d. $0.

Sales revenue
would be recognized on March 17 (when the sale occurred) not on March 25 when we
collected the cash from the customer

Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The
customer agreed to keep the paint upon being offered a 15% price reduction. The price
reduction is an example of a:
a. Sales revenue.
b. Sales discount.
c. Sales return.
d. Sales allowance.
d. Sales allowance
At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for
doubtful accounts (AFDA) of $600 (debit). An analysis of accounts receivable suggests
that the allowance for doubtful accounts should be 3% of accounts receivable. The
amount of the adjustment to the AFDA account would be:
a. $6,540.
b. $7,800.
c. $7,140.
d. $7,740.
d. $7,740

Target balance in AFDA = $238,000 x .03 = $7,140. The adjustment required to
produce this balance is to credit AFDA for $7,740 since there is an existing $600 debit
balance in the account. The $7,740 credit will wipe out the $600 debit and create a $7,140
credit balance as desired

Richard LLC accounts for possible bad debts using the allowance method. When an
actual bad debt occurs, what effect does it have on the fundamental accounting
equation?
a. Increases assets and increases stockholders’ equity.
b. Decreases assets and decreases stockholders’ equity.
c. Decreases assets and decreases liabilities.
d. No effect on the fundamental accounting equation
d. No effect on the fundamental accounting equation
Toppleson Manufacturing reports a receivables turnover ratio of 14.5. The industry
average is 10.7. What most likely is causing this difference?
a. Toppleson is selling to high-risk customers.
b. Toppleson has effective procedures related to selling goods on account.
c. Toppleson provides superior products and services.
d. Toppleson allows customers too long to pay.
b. Toppleson has effective procedures related to selling goods on account

A higher receivable turnover is good. This means that this company is doing a
better job of managing their receivables balance

The act of collusion refers to:
a. Top management and lower-level employees working together to share information necessary
for effective internal controls.
b. Two or more people acting in coordination to circumvent internal controls.
c. Management working with an auditor to prevent occupational fraud.
d. Middle-level managers taking full responsibility for effective internal controls.
b. Two or more people acting in coordination to circumvent internal controls.
Which of the following is considered cash for financial reporting purposes?
a. Accounts receivable.
b. Investments with maturity dates greater than three months.
c. Checks received from customers.
d. Accounts payable.
c. Checks received from customers.
When preparing a bank reconciliation, a deposit outstanding (in transit) would be:
a. Added to the company’s cash balance.
b. Added to the bank’s cash balance.
c. Subtracted from the company’s cash balance.
d. Subtracted from the bank’s cash balance
b. Added to the bank’s cash balance.
A minor amount of cash kept on hand to pay for small purchases is referred to as a:
a. Petty cash fund.
b. Cash receipts fund.
c. Cash payments fund.
d. Cookie jar fund.
a. Petty cash fund.
The following information was taken from the bank reconciliation for Mooner, Inc. at the end of
the year:

Bank balance: $8,000
Checks outstanding: $5,800
Note collected by the bank: $1,500
Service fee: $20
Deposits outstanding/in transit: $4,000
NSF check (bad check) returned for $300

What is the correct cash balance that should be reported in Mooner’s balance sheet at the end of
the year?
a. $10,200.
b. $7,400.
c. $6,200.
d. $6,160

c. $6,200.
Providing services to customers on account is considered a(n):
a. Operating cash flow.
b. Investing cash flow.
c. Financing cash flow.
d. Not a cash flow.
d. Not a cash flow.
Operating cash flows would exclude:
a. Payment of employee salaries.
b. Receipt of cash from customers.
c. Payment of dividends.
d. Payment for advertising.
c. Payment of dividends.
The cost of the goods that a company sold during a period is shown in its financial statements as
___________ and the cost of the goods that a company still has on hand at the end of the year is
shown in the financial statements as ____________.

a. Cost of goods sold; inventory.
b. Goods on hand; inventory expense.
c. Inventory; cost of goods sold.
d. Sales revenue; cost of goods sold

a. Cost of goods sold; inventory
Tyler Toys has beginning inventory for the year of $18,000. During the year, Tyler purchases
inventory for $230,000 and has cost of goods sold equal to $233,000. Tyler’s ending inventory
equals:
a. $15,000.
b. $18,000.
c. $21,000.
d. $19,000
a. $15,000
In a period when inventory costs are decreasing, the inventory method that most likely results in
the highest ending inventory is:
a. Lower-of-cost-or-market method.
b. Weighted-average cost.
c. FIFO.
d. LIFO
d. LIFO
Which of the following is true regarding LIFO and FIFO?
a. In a period of decreasing costs, LIFO results in lower total assets than FIFO.
b. In a period of decreasing costs, LIFO results in lower net income than FIFO.
c. In a period of rising costs, LIFO results in lower net income than FIFO.
d. The amount reported for COGS is based on market value of inventory if LIFO is used
c. In a period of rising costs, LIFO results in lower net income than FIFO.
The primary reason for the popularity of LIFO is that it gives:
a. Better matching of physical flow and cost flow.
b. A lower income tax obligation when inventory costs are rising.
c. Simplified recordkeeping.
d. A simpler method to apply
b. A lower income tax obligation when inventory costs are rising
In a perpetual inventory system, at the time of a sale the cost of inventory sold is:
a. Debited to Accounts Receivable.
b. Credited to Cost of Goods Sold.
c. Debited to Cost of Goods Sold.
d. Not recorded at the time.
c. Debited to Cost of Goods Sold
Merchandise sold FOB destination indicates that:
a. The seller holds title until the merchandise is received at the buyer’s location.
b. The merchandise has not yet been shipped.
c. The merchandise will not be shipped until payment has been received.
d. The seller transfers title to the buyer once the merchandise is shipped.
a. The seller holds title until the merchandise is received at the buyer’s location
Which of the following is not a characteristic of a liability?
a. It represents a probable, future sacrifice of economic benefits.
b. It must be payable in cash.
c. It arises from present obligations to other entities.
d. It results from past transactions or events.
b. It must be payable in cash
Brian Inc. borrowed $8,000 from First Bank and signed a promissory note. What entry should
Brian Inc. record?
a. Debit Cash, $8,000; Credit Notes Receivable, $8,000.
b. Debit Notes Receivable, $8,000; Credit Cash, $8,000.
c. Debit Cash, $8,000; Credit Notes Payable, $8,000.
d. Debit Notes Payable, $8,000; Credit Cash, $8,000.
c. Debit Cash, $8,000; Credit Notes Payable, $8,000.
On November 1, 2015, New Morning Bakery signed a $200,000, 6%, six-month note payable
with the amount borrowed plus accrued interest due six months later on May 1, 2016. New
Morning Bakery records the appropriate adjusting entry for the note on December 31, 2015.
What amount of cash will be needed to pay back the note payable plus any accrued interest on
May 1, 2016?
a. $200,000.
b. $202,000.
c. $204,000.
d. $206,000
d. $206,000
On September 1, 2015, Daylight Donuts signed a $100,000, 9%, six-month note payable with the
amount borrowed plus accrued interest due six months later on March 1, 2016.

Daylight Donuts should report interest payable at December 31, 2015, in the amount of:
a. $0.
b. $1,500.
c. $3,000.
d. $4,500.

c. $3,000
On September 1, 2015, Daylight Donuts signed a $100,000, 9%, six-month note payable with the
amount borrowed plus accrued interest due six months later on March 1, 2016.

. Daylight Donuts records the appropriate adjusting entry for the note on December 31, 2015. In
recording the payment of the note plus accrued interest at maturity on March 1, 2016, Daylight
Donuts would
a. Debit Interest Expense, $3,000.
b. Debit Interest Expense, $1,500.
c. Debit Interest Payable, $1,500.
d. Debit Interest Expense, $4,500.

b. Debit Interest Expense, $1,500.
Which of the following is not withheld from an employee’s salary?
a. FICA taxes.
b. Federal and state unemployment taxes.
c. Federal and state income taxes.
d. Employee portion of health insurance.
b. Federal and state unemployment taxes.
Away Travel filed suit against West Coast Travel seeking damages for copyright violations.
West Coast Travel’s legal counsel believes it is reasonably possible (a 50/50 chance) that West
Coast Travel will settle the lawsuit for an estimated amount of $200,000. How should West
Coast Travel report this litigation?
a. As a liability for $200,000.
b. As a liability for $100,000 since it is a 50% chance.
c. No recognition or disclosure is required.
d. As a disclosure only. No liability is reported.
d. As a disclosure only. No liability is reported.
Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of
Strikers’ goals will need repair under the warranty program. For the year, Strikers has sold 4,000
goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the
Warranty expense for the year?
a. $0.
b. $16,000.
c. $7,000.
d. $9,000
b. $16,000.
Which of the following is NOT a design feature of effective internal controls?
a. Allow greater reliance by investors on reported financial statements.
b. Prevent fraudulent or errant financial reporting.
c. Ensure the company’s price advantage over competitors.
d. Prevent misuse of company funds by employees
c. Ensure the company’s price advantage over competitors
What is the concept behind separation of duties in establishing internal controls?
a. The company’s financial accountant should not share information with the
company’s tax accountant.
b. Duties of middle-level managers should be clearly separated from those of top
executives.
c. Employee fraud is less likely to occur when access to assets and access to accounting
records are separated.
d. The external auditors of the company should have no contact with managers while
the audit is taking place.
c. Employee fraud is less likely to occur when access to assets and access to accounting
records are separated.
Consider the following cash flow items:

Pay amount owed to bank for previous borrowing.
Pay utility costs.
Purchase equipment to be used in operations.
Purchase office supplies.
Pay one year of rent in advance.
Pay workers’ salaries.
Pay for research and development costs.
Pay taxes to the IRS.
Sell common stock to investors.

How many of these cash flow items involve investing activities?
a. Zero.
b. One.
c. Two.
d. Three.

b. one

Only the purchase of equipment would be considered an investing activity

Consider the following cash flow items:

Pay amount owed to bank for previous borrowing.
Pay utility costs.
Purchase equipment to be used in operations.
Purchase office supplies.
Pay one year of rent in advance.
Pay workers’ salaries.
Pay for research and development costs.
Pay taxes to the IRS.
Sell common stock to investors.

How many of these cash flow items involve financing activities?
a. Zero.
b. One.
c. Two.
d. Three

c. Two

Paying back previously borrowed funds as while as selling common stock are both examples
of financing activities

After preparing the bank reconciliation, an NSF check would result in which of the
following when recording the adjustment to the company’s cash balance?
a. Debit to Service Fee Expense.
b. Credit to Accounts Payable.
c. Credit to Service Revenue.
d. Debit to Accounts Receivable.
d. Debit to Accounts Receivable

We would record this as an increase to A/R (we’re still owed the money from the customer)
and credit (reduce) cash

Payment of cash dividends to stockholders is considered a(n):
a. Operating cash flow.
b. Investing cash flow.
c. Financing cash flow.
d. Not a cash flow.
c. Financing cash flow.
Cost of goods sold equals:
a. Beginning inventory ? net purchases + ending inventory.
b. Beginning inventory + accounts payable ? net purchases.
c. Net purchases + ending inventory ? beginning inventory.
d. Beginning inventory + net purchases ? ending inventory.
d. Beginning inventory + net purchases ? ending inventory.
Given the information below, what is the gross profit?

Sales revenue $320,000
Accounts receivable 50,000
Ending inventory 100,000
Cost of goods sold 250,000
Sales Returns 20,000
a. $250,000.
b. $70,000.
c. $220,000.
d. $50,000.

d. $50,000

Gross Profit = Net Sales Revenue less COGS.
$320,000 – $20,000 = $300,000 Net Sales less $250,000 COGS = $50,000 Gross Profit.

In a period when inventory costs are rising, the inventory method that most likely results
in the highest ending inventory is:
a. Lower-of-cost-or-market method.
b. Weighted-average cost.
c. FIFO.
d. LIFO.
c. FIFO
The LIFO conformity rule states that if LIFO is used for:
a. One class of inventory, it must be used for all classes of inventory.
b. Tax purposes, it must be used for financial reporting.
c. One company in an affiliated group, it must be used by all companies in an affiliated
group.
d. Domestic companies, it must be used by foreign partners.
b. Tax purposes, it must be used for financial reporting

This is an important tax rule. The IRS only allows firms to use LIFO for tax when they also
use LIFO for financial reporting under GAAP.

Good, Inc. sold inventory for $1,200 that was purchased for $700. Good records which
of the following when it sells inventory using a perpetual inventory system?
a. No entry is required for cost of goods sold and inventory.
b. Debit Cost of Goods Sold $700; credit Inventory $700.
c. Debit Cost of Goods Sold $1,200; credit Inventory $1,200.
d. Debit Inventory $700; credit Cost of Goods Sold $700
b. Debit Cost of Goods Sold $700; credit Inventory $700.

Under a perpetual inventory system, a sale requires two journal entries. The first records the
sales revenue to be recognized and debits either cash or A/R. The second entry recognizes
the expense Cost of Goods Sold and reduces the inventory account balance for the cost of
the inventory sold

Ending inventory is equal to the cost of items on hand plus:
a. Items in transit sold FOB shipping point.
b. Sales discounts.
c. Items in transit sold FOB destination.
d. Advertising expense.
c. Items in transit sold FOB destination.
Consider the following inventory data:
Beginning inventory $150,000
Ending inventory 100,000
Purchases of inventory 310,000
What is the average number of days in inventory for the year?
a. 126.7 days.
b. 101.4 days.
c. 152.0 days.
d. 111.7 days
a. 126.7 days.

First, calculate COGS: $150,000 + $310,000 – $100,000 = $360,000. Next calculate,
inventory turnover: $360,000/($150,000 + $100,000)/2 = 2.88. Finally, days in inventory =
365/2.88 = 126.74 days.

If management can estimate the amount of loss that will occur due to litigation against
the company, and the likelihood of the loss is reasonably possible, a contingent liability
should be
a. Disclosed, but not reported as a liability.
b. Disclosed and reported as a liability.
c. Neither disclosed nor reported as a liability.
d. Reported as a liability, but not disclosed
a. Disclosed, but not reported as a liability.

Recognition of a contingent liability is only required when the likelihood of loss is judged to
be probable (and can be reasonably estimated). If the loss is only reasonably possible all that is
required is footnote disclosure discussing the contingency.

Which of the following is not an employer payroll cost?
a. FICA taxes.
b. Federal and state unemployment taxes.
c. Federal and state income taxes.
d. Employer contributions to a retirement plan.
c. Federal and state income taxes.

Income taxes are withheld from the employee’s gross salaries. They are not paid by the
employer—rather, they are paid by the employee. The employer just has to withhold them
from the employee’s pay checks and then send them on as appropriate when due.

On November 1, 2015, The Bagel Factory signed a $100,000, 6%, six-month note payable
with the amount borrowed plus accrued interest due six months later on May 1, 2016.

The Bagel Factory should report interest payable at December 31, 2015, in the amount
of:
a. $0.
b. $1,000.
c. $2,000.
d. $3,000.

b. $1,000.

Interest expense and interest payable at 12/31/15 = $100,000 x .06 x 2/12 (Nov – Dec) =
$1,000

Assume that The Bagel Factory records the appropriate adjusting entry for the note on
December 31, 2015. In recording the payment of the note plus accrued interest at
maturity on May 1, 2016, The Bagel Factory would
a. Debit Interest Expense, $2,000.
b. Debit Interest Expense, $1,000.
c. Debit Interest Payable, $2,000.
d. Debit Interest Expense, $3,000
a. Debit Interest Expense, $2,000.
Action Travel has 10 employees each working 40 hours per week and earning $20 an hour.
Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are
7.65% and unemployment taxes are 3.8%.

What is the actual cash paid to employees for payroll in the first full week of January?
a. $5,404.
b. $5,708.
c. $4,792.
d. $8,000.

b. $5,708

Gross pay = 10 x 40 x $20 = $8,000. Deductions for Federal taxes ($1,200), state taxes
($480), and FICA ($612) reduce gross pay to $5,708. Employees do not pay unemployment
taxes—those are payroll taxes paid by the employer only

Action Travel has 10 employees each working 40 hours per week and earning $20 an hour.
Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are
7.65% and unemployment taxes are 3.8%.

What is the total payroll tax expense for the first full week of January?
a. $612.
b. $1,224.
c. $916.
d. $304.

c. $916

Employer payroll tax expense = $612 FICA match plus unemployment taxes of $304

Suppose you buy dinner for $23.75 that includes an 8% sales tax. How much did the
restaurant charge you for the dinner (excluding any tax) and how much do they owe for
sales tax?
a. $23.75 for dinner and $1.90 for sales tax.
b. $23.75 for dinner and no sales tax.
c. $21.85 for dinner and $1.90 for sales tax.
d. $21.99 for dinner and $1.76 for sales tax
d. $21.99 for dinner and $1.76 for sales tax

Sales revenue = $23.75/1.08 = $21.99. Sales tax = $21.99 x 8% = $1.76

At the beginning of 2015, Angel Corporation began offering a 1-year warranty on its
products. The warranty program was expected to cost Angel 4% of net sales. Net sales
made under warranty in 2015 were $180 million. Five percent of the units sold were
returned in 2015 and repaired or replaced at a cost of $5.3 million. The amount of
warranty expense on Angel’s 2015 income statement is:
a. $ 5.3 million.
b. $ 7.2 million.
c. $ 1.9 million.
d. No expense is recognized in 2015.
b. $ 7.2 million.
Warranty expense is just $180 million sales revenue x 4% estimate of costs = $7.2 million.
The Warranty payable liability will be $7.2 – $5.3 spent = $1.9 million.
Discount Travel has the following current assets: cash, $102 million; receivables, $94
million; inventory, $182 million; and other current assets, $18 million. Discount Travel
also has the following liabilities: accounts payable, $98 million; current portion of longterm
debt, $35 million; and long-term debt, $23 million. Based on these amounts, what is
the current ratio?
a. 2.54.
b. 2.98.
c. 4.04.
d. 2.84
b. 2.98.

Current ratio = CA/CL. CA = $102 + $94 + $182 + $18 = $396. CL = $98 + $35 = $133.
Current ratio = $396/$133 = 2.98

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