Accouting Review Test
True/False
Indicate whether the sentence or statement is true or false.
____
1. Accounting is the process of recording, analyzing, and interpreting the economic activities of a business.
____
2. A transaction occurs, in an accounting sense, when something of value is exchanged for something that does not
have value.
____
3. The accounting function of recording and keeping track of past transactions helps in the prediction of sales
figures for a business.
____
4. If individual shareholders were to sell shares for a price lower than what they paid for it, their loss would be
categorized as a capital gain.
____
5. Financial statements are those documents that summarize the financial performance of a business.
____
6. Financial information from statements, such as a balance sheet, is available to the owners of a business but not
to the shareholders of that same business.
____
7. Financial statements are presented to shareholders and potential investors in the form of an annual report.
____
9. A fiscal year, sometimes referred to as a fiscal period, begins on the first of January and ends on the 31st of
December of each year.
____ 10. Cost of goods sold is calculated by adding the ending inventory to the inventory purchased and then adjusting it
with the beginning inventory figure.
____ 11. If the cost of goods sold, together with the related business expenses, is subtracted from gross profit, then a
businesses net profit can be determined.
____ 16. A balance sheet provides a snapshot of a business at any given moment in time. It is highly unlikely that a
balance sheet prepared for a business today will resemble one that may have been prepared yesterday or one that
will be prepared tomorrow.
____ 17. Liquidity is a term that applies to the debts of a business because it represents the money that is owed to other
businesses.
____ 18. An account payable is an example of a current liability, while an account receivable is an example of a current
asset.
____ 19. The accounting equation helps determine how much equity the owner(s) have in the business and is calculated
by adding total assets to total liabilities.
____ 20. An income statement, unlike a balance sheet, provides a snapshot of the business's financial position.
____ 21. The matching principle in accounting attempts to match the costs of doing business during a period of time with
the actual revenue that was generated during that same period of time.
____ 22. The rate of return on sales is the difference between the cost of the product and its selling price.
____ 23. Gross profit percentage is calculated by dividing the total revenue by the gross profit and then multiplying the
result by 100 to convert the result to a percentage figure.
____ 24. Cash flow is a process of determining how much money will be flowing in and out of a business over a given
period of time. This process helps a business predict whether it will be able to meet its obligations.
Completion
Complete each sentence or statement.
26. ____________________ means that employees who handle or have access to cash are responsible for it and
must explain any losses or discrepancies.
27. The income that occurs whenever you sell a stock for a price that is higher than what you paid for it is called a(n)
____________________.
28. A(n) _________________________ is where the financial statements and other information about a business is
presented to shareholders and potential investors.
29. The 12-month accounting period that may or may not correspond to a calendar year is known as a(n)
____________________.
30. ______________________________ is calculated by adding the inventory that is purchased throughout the
year to the beginning inventory, then subtracting the inventory that is left at the end of the year.
31. Net profit is determined by subtracting ____________________ from the gross profit figure.
32. Direct labour and indirect labour both represent costs to a business; however, ____________________ labour is
the one that is not included as a cost of the product.
33. ____________________ is the process of converting assets into cash, such as the collection of accounts
receivable.
34. The formula for the calculation of working capital is to subtract current ____________________ from current
assets.
35. Accurate reporting can only be achieved if all of the costs in a particular time period are linked up with the
revenue for that same time period. This process in accounting is known as the
______________________________.
36. By recording transactions in a business, the principle of ____________________ is maintained because there is
evidence of something being recorded.
37. ____________________ for a business is calculated by subtracting the cost of goods sold from the sales
revenue total.
38. Things that have value in a business, including money that is owed to that business, are classified as
____________________.
39. By using a working capital formula calculation, a business can quickly gauge its ability to pay off any
____________________ debts that it may have outstanding.
40. ____________________ is the movement of money in and out of a business. It can be used to help predict
short-term financial problems that may arise.
41. The record keeping process that is done in accounting so that estimates of sales and expenses can be made
accurately is known as ____________________.
42. A(n) ____________________ business is the type of business that has the simplest form of accounting.
43. The financial statement that gives a snapshot of the financial condition of a business at a specific moment in
time is called a _________________________.
44. The formula for the accounting equation is ____________________ = ____________________ +
_________________________.
45. The formula for the calculation of the gross profit percentage is ___________________________________.
46. ____________________ is the process of recording, analyzing, and interpreting the economic activities of a
business.
47. Materials that are only partially processed in a manufacturing operation are referred to as
_________________________.
48. The _________________________ is the part of the balance sheet that shows the owner's investment in the
business.
50.
Why is the recording of transactions so important to the accounting process?
Short Answer
51. What is the purpose of an annual report?
52. Why is the accounting for a service business easier than that of a manufacturing business?
53. Why is a balance sheet considered the financial statement that gives a snapshot of a business?
54. What is the difference between a current asset and a long-term asset? Give an example of each in your answer.
55. What is the formula for the calculation of working capital? Why is this an important calculation for an owner to
make?
56. What does it mean if a current ratio for a business is calculated to be is 3:1?
57. Why is an income statement not considered a snapshot of the financial position of a business?
58. What is the formula for calculating cost of goods sold? What is unique about the ending inventory figure that is
used in this calculation?
59. If the net profit of a business was $10 000 and the total revenue for that same time period was $100 000, what
was the rate of return on net sales? Is this a decent return for a business?
60. If a business shows a steady increase in its revenue, is that an indication of a successful operation? Explain why
or why not.
Problem
61. Determine the amount of the beginning inventory using the following figures from the cost of goods sold
section of an income statement.
Cost of Goods Sold
Inventory Purchased
Ending Inventory
= $125 000
= $88 000
= $65 000
62. If, as an investor, you were trying to determine the short-term financial position of a business by looking at the
balance sheet, what calculations could you use to assist you in your analysis?
Accouting Review Test
Answer Section
TRUE/FALSE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
T
F
T
F
T
F
T
F
F
F
F
T
F
T
F
T
F
T
F
F
T
F
T
T
F
COMPLETION
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
Accountability
capital gain
annual report
fiscal year
Cost of goods sold
expenses
indirect
Liquidity
liabilities
matching principle
accountability
Gross profit
assets
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
short-term
Cash flow
budgeting
service
balance sheet
Assets, Liabilities, Owner's Equity
(gross profit ÷ total revenue)  100
Accounting
goods in process
owner's equity
current ratio
SHORT ANSWER
50. Accounting transactions provide the business record of everything that takes place from a financial standpoint.
Every time something of value is exchanged for something else of value a transaction is processed, which then
can be used to help analyze and interpret financial data.
51. An annual report is a formal document used to report on what has taken place in the business over the past year.
It is a way for the board of directors and for the chief executive officer to communicate with the owners of the
business as well as potential investors.
52. Since a service business does not produce a product, it does not have to calculate the cost of goods sold, worry
about goods in process, or determine factory overhead.
53. A balance sheet constantly changes because of ongoing daily transactions. Every time cash flows in or out of a
business, there are changes to the accounting equation that affect the balance sheet. Today's balance sheet is
unique—it is different from the balance sheet prepared yesterday, and it is different from the one that will be
prepared tomorrow.
54. A current asset, such as an account receivable, is something that a business owns but will likely disappear in less
than one year. Long-term assets, such as equipment, are owned by the business and will be retained for longer
than a year.
55. The formula for working capital is Working Capital = Current Assets – Current Liabilities.
If the working capital is a positive figure, then the business should be able to meet all of its current
obligations—there should be enough money coming in to more than cover the debts that have to be paid over
the short term. Ignoring this calculation could put a business in financial difficulty.
56. The ratio of 3:1 means that there is $3 available of current assets to cover every $1 of current debt. If the ratio
gets too high, it means that there could be too much money tied up in accounts receivable or in inventory that is
not selling. It is a warning sign for a business to check why this is happening and to correct the potential
problem.
57. An income statement measures profit or loss over a period of time, that is, there is an accumulation of
information for this period to use in the calculations. That is why one line in the heading of an income statement
reads, "for the period ending...."
58. The formula for calculating cost of goods sold is Cost of Goods Sold = (Beginning Inventory + Purchases) –
Ending Inventory.
The ending inventory in the cost of goods sold section becomes the beginning inventory figure when the cost of
goods sold is calculated the next time.
59. Rate of return on net sales = (10 000 ÷ 100 000)  100. The rate equals 10%. Determining if this is an acceptable
return would mean checking on the past performance of the business. Comparing the return to industry
standards is another way of checking to see if the business is doing as well as or better than the competition.
Generally speaking, a 10% return would be quite healthy in most businesses.
60. It could be. However, the costs and expenses associated with generating the revenue must be taken into account.
If the costs and expenses are increasing faster, on a percentage basis, then the business could be losing money
even though it has a healthy revenue picture.
PROBLEM
61. This is a problem where working backwards is a key. Using the cost of goods sold figure and the ending
inventory figure, the cost of goods available for sale can be determined. ($125 000 + $65 000 = $190 000).
Then, using the cost goods available for sale figure less the inventory purchased will generate the missing
beginning inventory figure. ($190 000 – $88 000 = $102 000). The cost of goods sold section shown on page
181 of the text can be used as a guide in this calculation.
62. Working capital is one calculation that could be used to give an indication of the business's ability to pay its
short-term debts as they become due. If not enough money is available, it may mean having to borrow more
money and, as a result, increasing the debt load of the business. By using a current ratio calculation, an investor
could find out not only if enough money is available to pay short-term debts, but also if "too much" money is
available because extra funds are tied up in the current asset total. Further examination of current assets, such as
cash and accounts receivable, would be recommended.