Revision
Part 1
2018/2019
Chapter 5 reveiw and MCQ
Chapter 7 MCQ
By Mariam Refaat
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BY Mariam Refaat
Chapter 5
1- Explain the uses and limitations of a statement of financial position.
The statement of financial position provides information about the nature and
amounts of investments in a company’s resources, obligations to creditors, and
equity.
The statement of financial position contributes to financial reporting by
providing a basis for
(1) computing rates of return,
(2) evaluating the capital structure of the enterprise, and
(3) assessing the liquidity, solvency, and financial flexibility of the enterprise.
Three limitations of a statement of financial position are as follows.
(1) The statement of financial position generally does not reflect fair value
because accountants use a historical cost basis in valuing and reporting most
assets and liabilities.
(2) Companies must use judgments and estimates to determine certain amounts,
such as the collectibility of receivables and the useful life of long-term tangible
and intangible assets.
(3) The statement of financial position omits many items that are of financial
value to the business but cannot be recorded objectively, such as human
resources, customer base and reputation.
2- Identify the major classifications of the statement of financial
position.
The general elements of the statement of financial position are assets, equity,
and liabilities. The major classifications of assets are non-current assets; longterm investments; property, plant, and equipment; intangible assets; other
assets; and current assets. The major classifications of liabilities are noncurrent and current liabilities. The statement of financial position of a
corporation generally classifies equity as share capital, share premium, and
retained earnings.
3- Prepare a classified statement of financial position using the report
and account formats.
The report form lists equity and liabilities directly below assets on the same
page. The account form lists assets, by sections, on the left side, and equity and
liabilities, by sections, on the right-side.
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BY Mariam Refaat
4- Indicate the purpose of the statement of cash flows.
The primary purpose of a statement of cash flows is to provide relevant
information about a company’s cash receipts and cash payments during a period.
Reporting the sources, uses, and net change in cash enables financial statement
readers to know what is happening to a company’s most liquid resource.
5 5- Identify the content of the statement of cash flows.
In the statement of cash flows, companies classify the period’s cash receipts
and cash payments into three different activities.
(1) Operating activities: Involve the cash effects of transactions that enter
into the determination of net income.
(2) Investing activities: Include making and collecting loans, and acquiring and
disposing of investments (both debt and equity) and of property, plant, and
equipment.
(3) Financing activities: Involve liability and equity items. Financing activities
include (a) obtaining capital from owners and providing them with a return on
their investment, and (b) borrowing money from creditors and repaying the
amounts borrowed.
6 6- Prepare a basic statement of cash flows.
The information to prepare the statement of cash flows usually comes from
comparative statements of financial position, the current income statement,
and selected transaction data. Companies follow four steps to prepare the
statement of cash flows from these sources.
(1) Determine the net cash provided by (or used in) operating activities.
(2) Determine the net cash provided by (or used in) investing and financing
activities.
(3) Determine the change (increase or decrease) in cash during the period.
(4) Reconcile the change in cash with the beginning and ending cash balances.
7-Understand the usefulness of the statement of cash flows.
Creditors examine the cash flow statement carefully because they are
concerned about being paid. The net cash flow provided by operating activities
in relation to the company’s liabilities is helpful in making this assessment. Two
ratios used in this regard are the current cash debt coverage and the cash
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BY Mariam Refaat
debt coverage. In addition, the amount of free cash flow provides creditors and
shareholders with a picture of the company’s financial flexibility.
8- Determine additional information requiring note disclosure.
In addition to a complete set of financial statements, IFRS also requires
additional reporting in the notes to the financial statements.
Disclosure in the notes includes (1) accounting policies and (2) expanded
disclosures and detailed schedules related to such items as property, plant, and
equipment; receivables; liabilities and provisions; and equity.
9-Describe the major disclosure techniques for the statement of financial
position. Companies use two methods to disclose pertinent information in the
statement of financial position.
(1) Parenthetical explanations: Parenthetical information provides additional
information or description following the item.
(2) Cross-reference and contra items: Companies “cross-reference” a direct
relationship between an asset and a liability on the statement of financial
position.
IFRS also provides guidelines related to offsetting amounts (generally not
permitted), consistency in application of accounting policies, and “true and fair”
presentation.
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BY Mariam Refaat
MULTIPLE CHOICE—Conceptual
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21.
Which of the following is a limitation of the balance sheet?
a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
c. Current fair value is not reported.
d. All of these
22.
The balance sheet is useful for analyzing all of the following except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.
23.
Balance sheet information is useful for all of the following except to
a. compute rates of return
b. analyze cash inflows and outflows for the period
c. evaluate capital structure
d. assess future cash flows
24.
Balance sheet information is useful for all of the following except
a. assessing a company's risk
b. evaluating a company's liquidity
c. evaluating a company's financial flexibility
d. determining free cash flows.
25.
A limitation of the balance sheet that is not also a limitation of the income statement is
a. the use of judgments and estimates
b. omitted items
c. the numbers are affected by the accounting methods employed
d. valuation of items at historical cost
26.
The balance sheet contributes to financial reporting by providing a basis for all of the following except
a. computing rates of return.
b. evaluating the capital structure of the enterprise.
c. determining the increase in cash due to operations.
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BY Mariam Refaat
d. assessing the liquidity and financial flexibility of the enterprise.
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27.
One criticism not normally aimed at a balance sheet prepared using current accounting and reporting
standards is
a. failure to reflect current value information.
b. the extensive use of separate classifications.
c. an extensive use of estimates.
d. failure to include items of financial value that cannot be recorded objectively.
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28.
The amount of time that is expected to elapse until an asset is realized or otherwise converted into
cash is referred to as
a. solvency.
b. financial flexibility.
c. liquidity.
d. exchangeability.
29.
The net assets of a business are equal to
a. current assets minus current liabilities.
b. total assets plus total liabilities.
c. total assets minus total stockholders' equity.
d. none of these.
30.
The correct order to present current assets is
a. cash, accounts receivable, prepaid items, inventories.
b. cash, accounts receivable, inventories, prepaid items.
c. cash, inventories, accounts receivable, prepaid items.
d. cash, inventories, prepaid items, accounts receivable.
31.
The basis for classifying assets as current or noncurrent is conversion to cash within
a. the accounting cycle or one year, whichever is shorter.
b. the operating cycle or one year, whichever is longer.
c. the accounting cycle or one year, whichever is longer.
d. the operating cycle or one year, whichever is shorter.
32.
The basis for classifying assets as current or noncurrent is the period of time normally required by the
accounting entity to convert cash invested in
a. inventory back into cash, or 12 months, whichever is shorter.
b. receivables back into cash, or 12 months, whichever is longer.
c. tangible fixed assets back into cash, or 12 months, whichever is longer.
d. inventory back into cash, or 12 months, whichever is longer.
33.
The current assets section of the balance sheet should include
a. machinery.
b. patents.
c. goodwill.
d. inventory.
34.
Which of the following is a current asset?
a. Cash surrender value of a life insurance policy of which the company is the bene-ficiary.
b. Investment in equity securities for the purpose of controlling the issuing company.
c. Cash designated for the purchase of tangible fixed assets.
d. Trade installment receivables normally collectible in 18 months.
35.
Which of the following should not be considered as a current asset in the balance sheet?
a. Installment notes receivable due over 18 months in accordance with normal trade practice.
b. Prepaid taxes which cover assessments of the following operating cycle of the business.
c. Equity or debt securities purchased with cash available for current operations.
d. The cash surrender value of a life insurance policy carried by a corporation, the beneficiary, on its
president.
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36.
Equity or debt securities held to finance future construction of additional plants should be classified
on a balance sheet as
a. current assets.
b. property, plant, and equipment.
c. intangible assets.
d. long-term investments.
37.
When a portion of inventories has been pledged as security on a loan,
a. the value of the portion pledged should be subtracted from the debt.
b. an equal amount of retained earnings should be appropriated.
c. the fact should be disclosed but the amount of current assets should not be affected.
d. the cost of the pledged inventories should be transferred from current assets to noncurrent assets.
38.
Which of the following is not a long-term investment?
a. Cash surrender value of life insurance
b. Franchise
c. Land held for speculation
d. A sinking fund
39.
A generally accepted method of valuation is
1. trading securities at market value.
2. accounts receivable at net realizable value.
3. inventories at current cost.
a. 1
b. 2
c. 3
d. 1 and 2
40.
Which item below is not a current liability?
a. Unearned revenue
b. Stock dividends distributable
c. The currently maturing portion of long-term debt
d. Trade accounts payable
41.
Working capital is
a. capital which has been reinvested in the business.
b. unappropriated retained earnings.
c. cash and receivables less current liabilities.
d. none of these.
42.
An example of an item which is not an element of working capital is
a. accrued interest on notes receivable.
b. goodwill.
c. goods in process.
d. temporary investments.
43.
Long-term liabilities include
a. obligations not expected to be liquidated within the operating cycle.
b. obligations payable at some date beyond the operating cycle.
c. deferred income taxes and most lease obligations.
d. all of these.
44.
Which of the following should be excluded from long-term liabilities?
a. Obligations payable at some date beyond the operating cycle
b. Most pension obligations
c. Long-term liabilities that mature within the operating cycle and will be paid from a sinking fund
d. None of these
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45.
Treasury stock should be reported as a(n)
a. current asset.
b. investment.
c. other asset.
d. reduction of stockholders' equity.
46.
Which of the following should be reported for capital stock?
a. The shares authorized
b. The shares issued
c. The shares outstanding
d. All of these
47.
Which of the following would be classified in a different major section of a balance sheet from the
others?
a. Capital stock
b. Common stock subscribed
c. Stock dividend distributable
d. Stock investment in affiliate
48.
The stockholders' equity section is usually divided into what three parts?
a. Preferred stock, common stock, treasury stock
b. Preferred stock, common stock, retained earnings
c. Capital stock, additional paid-in capital, retained earnings
d. Capital stock, appropriated retained earnings, unappropriated retained earnings
49.
Which of the following is not an acceptable major asset classification?
a. Current assets
b. Long-term investments
c. Property, plant, and equipment
d. Deferred charges
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50.
Which of the following is a contra account?
a. Premium on bonds payable
b. Unearned revenue
c. Patents
d. Accumulated depreciation
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51.
Which of the following balance sheet classifications would normally require the greatest amount of
supplementary disclosure?
a. Current assets
b. Current liabilities
c. Plant assets
d. Long-term liabilities
52.
The presentation of long-term liabilities in the balance sheet should disclose
a. maturity dates.
b. interest rates.
c. conversion rights.
d. All of the above.
53.
Which of the following is not a required supplemental disclosure for the balance sheet?
a. Contingencies
b. Financial forecasts
c. Accounting policies
d. Contractual situations
54.
Typical contractual situations that are disclosed in the notes to the balance sheet include all of the
following except
a. debt covenants
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BY Mariam Refaat
b. lease obligations
c. advertising contracts
d. pension obligations
55.
Accounting policies disclosed in the notes to the financial statements typically include all of the
following except
a. the cost flow assumption used
b. the depreciation methods used
c. significant estimates made
d. significant inventory purchasing policies
56.Which of the following best exemplifies a contingency that is reported in the notes to the financial
statements?
a. Losses from potential future lawsuits
b. Loss from a lawsuit settled out of court prior to the end of the fiscal year
c. Warranty claims on future sales
d. Estimated loss from an ongoing lawsuit
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57.
Which of the following is not a method of disclosing pertinent information?
a. Supporting schedules
b. Parenthetical explanations
c. Cross reference and contra items
d. All of these are methods of disclosing pertinent information.
58.
Significant accounting policies may not be
a. selected on the basis of judgment.
b. selected from existing acceptable alternatives.
c. unusual or innovative in application.
d. omitted from financial-statement disclosure.
59.
A general description of the depreciation methods applicable to major classes of depreci-able assets
a. is not a current practice in financial reporting.
b. is not essential to a fair presentation of financial position.
c. is needed in financial reporting when company policy differs from income tax policy.
d. should be included in corporate financial statements or notes thereto.
60.
It is mandatory that the essential provisions of which of the following be clearly stated in the notes to
the financial statements?
a. Stock option plans
b. Pension obligations
c. Lease contracts
d. All of these
61.
A generally accepted account title is
a. Prepaid Revenue.
b. Appropriation for Contingencies.
c Earned Surplus.
d. Reserve for Doubtful Accounts.
62.
The financial statement which summarizes operating, investing, and financing activities of an entity
for a period of time is the
a. retained earnings statement.
b. income statement.
c. statement of cash flows.
d. statement of financial position.
63.
The statement of cash flows provides answers to all of the following questions except
a. where did the cash come from during the period?
b. what was the cash used for during the period?
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c. what is the impact of inflation on the cash balance at the end of the year?
d. what was the change in the cash balance during the period?
64.
The statement of cash flows reports all of the following except
a. the net change in cash for the period.
b. the cash effects of operations during the period.
c. the free cash flows generated during the period.
d. investing transactions.
65.
The statement of cash flows helps meet one of the objectives of financial reporting, which is to assess
all of the following except the
a. amount of future cash flows.
b. source of future cash flows.
c. timing of future cash flows.
d. uncertainty of future cash flows.
66.
If common stock was issued to acquire an $8,000 machine, how would the transaction appear on the
statement of cash flows?
a. It would depend on whether you are using the direct or the indirect method.
b. It would be a positive $8,000 in the financing section and a negative $8,000 in the investing
section.
c. It would be a negative $8,000 in the financing section and a positive $8,000 in the investing
section.
d. It would not appear on the statement of cash flows but rather on a schedule of noncash investing
and financing activities.
67.
Which of the following events will appear in the cash flows from financing activities section of the
statement of cash flows?
a. Cash purchases of equipment.
b. Cash purchases of bonds issued by another company.
c. Cash received as repayment for funds loaned.
d. Cash purchase of treasury stock.
68.
Making and collecting loans and disposing of property, plant, and equipment are
a. operating activities.
b. investing activities.
c. financing activities.
d. liquidity activities.
69.
In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would
be classified as a(n)
a. operating activity.
b. financing activity.
c. extraordinary activity.
d. investing activity.
70.
In preparing a statement of cash flows, cash flows from operating activities
a. are always equal to accrual accounting income.
b. are calculated as the difference between revenues and expenses.
c. can be calculated by appropriately adding to or deducting from net income those items in the
income statement that do not affect cash.
d. can be calculated by appropriately adding to or deducting from net income those items in the
income statement that do affect cash.
71.
In preparing a statement of cash flows, which of the following transactions would be considered an
investing activity?
a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of a cash dividend
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BY Mariam Refaat
d. Issuance of bonds payable at a discount
72.
Preparing the statement of cash flows involves all of the following except determining the
a. cash provided by operations.
b. cash provided by or used in investing and financing activities.
c. change in cash during the period.
d. cash collections from customers during the period.
73.
The cash debt coverage ratio is computed by dividing net cash provided by operating activities by
a. average long-term liabilities.
b. average total liabilities.
c. ending long-term liabilities.
d. ending total liabilities.
74.
The current cash debt coverage ratio is often used to assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.
75.
A measure of a company’s financial flexibility is the
a. cash debt coverage ratio.
b. current cash debt coverage ratio.
c. free cash flow.
d. cash debt coverage ratio and free cash flow.
76.
Free cash flow is calculated as net cash provided by operating activities less
a. capital expenditures.
b. dividends.
c. capital expenditures and dividends.
d. capital expenditures and depreciation.
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77.
One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility.
Which of the following explanations is a description of financial flexibility?
a. The nearness to cash of assets and liabilities.
b. The firm's ability to respond and adapt to financial adversity and unexpected needs and
opportunities.
c. The firm's ability to pay its debts as they mature.
d. The firm's ability to invest in a number of projects with different objectives and costs.
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78.
Net cash provided by operating activities divided by average total liabilities equals the
a. current cash debt coverage ratio.
b. cash debt coverage ratio.
c. free cash flow.
d. current ratio.
Multiple Choice Answers—Conceptual
Item
21.
22.
23.
24.
25.
26.
27.
28.
29.
Ans.
d
c
b
d
d
c
b
c
d
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Item
30.
31.
32.
33.
34.
35.
36.
37.
38.
Ans.
b
b
d
d
d
d
d
c
b
Item
39.
40.
41.
42.
43.
44.
45.
46.
47.
Ans.
d
b
d
b
d
d
d
d
d
Item
48.
49.
50.
51.
52.
53.
54.
55.
56.
Ans.
c
d
d
d
d
b
c
d
d
Item
57.
58.
59.
60.
61.
62.
63.
64.
65.
Ans.
d
d
d
d
b
c
c
c
b
Item
66.
67.
68.
69.
70.
71.
72.
73.
74.
Ans.
d
d
b
b
c
a
d
b
b
Item
75.
76.
77.
78.
Ans.
d
c
b
b
BY Mariam Refaat
Solutions to those Multiple Choice questions for which the answer is “none of these.”
29. Total assets minus total liabilities.
41. Current assets less current liabilities.
44. Many answers are possible.
MULTIPLE CHOICE—Computational
79.
Fulton Company owns the following investments:
Trading securities (fair value)
Available-for-sale securities (fair value)
Held-to-maturity securities (amortized cost)
$60,000
35,000
47,000
Fulton will report investments in its current assets section of
a. $0.
b. exactly $60,000.
c. $60,000 or an amount greater than $60,000, depending on the circumstances.
d. exactly $95,000.
80.
For Grimmett Company, the following information is available:
Capitalized leases
$200,000
Trademarks
65,000
Long-term receivables
75,000
In Grimmett’s balance sheet, intangible assets should be reported at
a. $65,000.
b. $75,000.
c. $265,000.
d. $275,000.
81.
82.
Houghton Company has the following items: common stock, $720,000; treasury stock, $85,000;
deferred taxes, $100,000 and retained earnings, $313,000. What total amount should Houghton
Company report as stockholders’ equity?
a. $848,000.
b. $948,000.
c. $1,048,000.
d. $1,118,000.
Kohler Company owns the following investments:
Trading securities (fair value)
$ 60,000
Available-for-sale securities (fair value)
35,000
Held-to-maturity securities (amortized cost)
47,000
Kohler will report securities in its long-term investments section of
a. exactly $95,000.
b. exactly $107,000.
c. exactly $142,000.
d. $82,000 or an amount less than $82,000, depending on the circumstances.
83.
For Randolph Company, the following information is available:
Capitalized leases
$280,000
Trademarks
90,000
Long-term receivables
105,000
In Randolph’s balance sheet, intangible assets should be reported at
a. $90,000.
b. $105,000.
c. $370,000.
d. $385,000.
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BY Mariam Refaat
84.
Olmsted Company has the following items: common stock, $720,000; treasury stock, $85,000;
deferred taxes, $100,000 and retained earnings, $363,000. What total amount should Olmsted
Company report as stockholders’ equity?
a. $898,000.
b. $998,000.
c. $1,098,000.
d. $1,198,000.
85.
Presented below are data for Antwerp Corp.
Assets, January 1
Liabilities, January 1
Stockholders' Equity, Jan. 1
Dividends
Common Stock
Stockholders' Equity, Dec. 31
Net Income
2010
$2,800
1,680
?
560
504
?
560
2011
$3,360
?
?
420
448
?
448
2012
?
$2,016
2,100
476
500
1,596
?
2010
2011
2012
$5,400
3,240
?
1,080
972
?
1,080
$6,480
?
?
810
864
?
864
?
$3,888
4,050
918
920
3,078
?
2010
2011
2012
$3,800
2,280
?
760
684
?
760
$4,560
?
?
570
608
?
684
?
$2,736
2,850
646
650
2,166
?
Stockholders' Equity at January 1, 2010 is
a. $ 504.
b. $ 560.
c. $1,120.
d. $1,624.
86.Presented below are data for Bandkok Corp.
Assets, January 1
Liabilities, January 1
Stockholders' Equity, Jan. 1
Dividends
Common Stock
Stockholders' Equity, Dec. 31
Net Income
Stockholders' Equity at January 1, 2011 is
a. $1,890.
b. $1,998.
c. $3,132.
d. $3,186.
87.
Presented below are data for Caracas Corp.
Assets, January 1
Liabilities, January 1
Stockholders' Equity, Jan. 1
Dividends
Common Stock
Stockholders' Equity, Dec. 31
Net Income
Net income for 2012 is
a. $684 income.
b. $684 loss.
c. $38 income.
d. $38 loss.
88.
Lohmeyer Corporation reports:
Cash provided by operating activities
Cash used by investing activities
Cash provided by financing activities
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$250,000
110,000
140,000
BY Mariam Refaat
Beginning cash balance
70,000
What is Lohmeyer’s ending cash balance?
a. $280,000.
b. $350,000.
c. $500,000.
d. $570,000.
89.Keisler Corporation reports:
Cash provided by operating activities
Cash used by investing activities
Cash provided by financing activities
Beginning cash balance
$200,000
110,000
140,000
70,000
What is Keisler’s ending cash balance?
a. $230,000.
b. $300,000.
c. $450,000.
d. $520,000.
90.
During 2010 the DLD Company had a net income of $50,000. In addition, selected accounts showed
the following changes:
Accounts Receivable
$3,000 increase
Accounts Payable
1,000 increase
Building
4,000 decrease
Depreciation Expense
1,500 increase
Bonds Payable
8,000 increase
What was the amount of cash provided by operating activities?
a. $49,500
b. $50,000
c. $51,500
d. $59,500
91.
Harding Corporation reports the following information:
Net income
Depreciation expense
Increase in accounts receivable
$500,000
140,000
60,000
Harding should report cash provided by operating activities of
a. $300,000.
b. $420,000.
c. $580,000.
d. $700,000.
92.
Sauder Corporation reports the following information:
Net income
$250,000
Depreciation expense
70,000
Increase in accounts receivable
30,000
Sauder should report cash provided by operating activities of
a. $150,000.
b. $210,000.
c. $290,000.
d. $350,000.
93.Packard Corporation reports the following information:
Net cash provided by operating activities
Average current liabilities
Average long-term liabilities
Dividends declared
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$215,000
150,000
100,000
60,000
BY Mariam Refaat
Capital expenditures
Payments of debt
110,000
35,000
Packard’s cash debt coverage ratio is
a. 0.86.
b. 1.43.
c. 2.15.
d. 4.78.
94.
Packard Corporation reports the following information:
Net cash provided by operating activities
Average current liabilities
Average long-term liabilities
Dividends paid
Capital expenditures
Payments of debt
$215,000
150,000
100,000
60,000
110,000
35,000
Packard’s free cash flow is
a. $10,000.
b. $45,000.
c. $105,000.
d. $155,000.
95.
Pedigo Corporation reports the following information:
Net cash provided by operating activities
Average current liabilities
Average long-term liabilities
Dividends paid
Capital expenditures
Payments of debt
$255,000
150,000
100,000
60,000
110,000
35,000
Pedigo’s cash debt coverage ratio is
a. 1.02.
b. 1.70.
c. 2.55.
d. 3.00.
96.Norton Corporation reports the following information:
Net cash provided by operating activities
Average current liabilities
Average long-term liabilities
Dividends paid
Capital expenditures
Payments of debt
Norton’s free cash flow is
a. $50,000.
b. $85,000.
c. $145,000.
d. $195,000.
$255,000
150,000
100,000
60,000
110,000
35,000
Multiple Choice Answers—Computational
Item
79.
Ans.
c
15 | P a g e
Item
83.
Ans.
a
Item
87.
Ans.
d
Item
91.
Ans.
c
Item
95.
Ans.
a
BY Mariam Refaat
80.
81.
82.
a
b
d
84.
85.
86.
b
c
c
88.
89.
90.
b
b
a
92.
93.
94.
c
a
b
96.
b
MULTIPLE CHOICE—CPA Adapted
97.
Stine Corp.'s trial balance reflected the following account balances at December 31, 2010:
Accounts receivable (net)
$24,000
Trading securities
6,000
Accumulated depreciation on equipment and furniture
15,000
Cash
11,000
Inventory
30,000
Equipment
25,000
Patent
4,000
Prepaid expenses
2,000
Land held for future business site
18,000
In Stine's December 31, 2010 balance sheet, the current assets total is
a. $90,000.
b. $82,000.
c. $77,000.
d. $73,000.
Use the following information for questions 98 through 100.
The following trial balance of Reese Corp. at December 31, 2010 has been properly adjusted except for the
income tax expense adjustment.
Reese Corp.
Trial Balance
December 31, 2010
Dr.
Cr.
Cash
$ 775,000
Accounts receivable (net)
2,695,000
Inventory
2,085,000
Property, plant, and equipment (net)
7,366,000
Accounts payable and accrued liabilities
$ 1,701,000
Income taxes payable
654,000
Deferred income tax liability
85,000
Common stock
2,350,000
Additional paid-in capital
3,680,000
Retained earnings, 1/1/10
3,450,000
Net sales and other revenues
13,360,000
Costs and expenses
11,180,000
Income tax expenses
1,179,000
$25,280,000
$25,280,000
Other financial data for the year ended December 31, 2010:

Included in accounts receivable is $1,200,000 due from a customer and payable in quarterly installments
of $150,000. The last payment is due December 29, 2012.

The balance in the Deferred Income Tax Liability account pertains to a temporary difference that arose in
a prior year, of which $20,000 is classified as a current liability.

During the year, estimated tax payments of $525,000 were charged to income tax expense. The current
and future tax rate on all types of income is 30%.
16 | P a g e
BY Mariam Refaat
In Reese's December 31, 2010 balance sheet,
98.
The current assets total is
a. $6,080,000.
b. $5,555,000.
c. $5,405,000.
d. $4,955,000.
99.
The current liabilities total is
a. $1,850,000.
b. $1,915,000.
c. $2,375,000.
d. $2,440,000.
100.
101.
The final retained earnings balance is
a. $4,451,000.
b. $4,536,000.
c. $4,976,000.
d. $4,905,000.
On January 4, 2010, Kiley Co. leased a building to Dodd Corp. for a ten-year term at an annual rental
of $75,000. At inception of the lease, Dodd received $300,000 covering the first two years' rent of
$150,000 and a security deposit of $150,000. This deposit will not be returned to Dodd upon expiration
of the lease but will be applied to payment of rent for the last two years of the lease. What portion of
the $300,000 should be shown as a current and long-term liability in Kiley's December 31, 2010
balance sheet?
a.
b.
c.
d.
102.
Current Liability
$0
$75,000
$150,000
$150,000
Long-term Liability
$300,000
$150,000
$150,000
$75,000
Which of the following facts concerning fixed assets should be included in the summary of significant
accounting policies?
a.
b.
c.
d.
Depreciation Method
No
Yes
Yes
No
Composition
Yes
Yes
No
No
103.
In a statement of cash flows, receipts from sales of property, plant, and equipment and other
productive assets should generally be classified as cash inflows from
a. operating activities.
b. financing activities.
c. investing activities.
d. selling activities.
104.
In a statement of cash flows, interest payments to lenders and other creditors should be classified as
cash outflows for
a. operating activities.
b. borrowing activities.
c. lending activities.
d. financing activities.
105.
In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash
inflows from
a. lending activities.
b. operating activities.
17 | P a g e
BY Mariam Refaat
c. investing activities.
d. financing activities.
106.
In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash
equivalents) should be classified as cash outflows for
a. operating activities.
b. investing activities.
c. financing activities.
d. lending activities.
Multiple Choice Answers—CPA Adapted
Item
97.
98.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
d
d
99.
100.
a
c
101.
102.
b
c
103.
104.
c
a
105.
106.
d
b
DERIVATIONS — Computational
No.
Answer
Derivation
79.
c
80.
a
81.
b
82.
d
83.
a
84.
b
$720,000 – $85,000 + $363,000 = $998,000.
85.
c
$2,800 – $1,680 = $1,120.
86.
c
($5,400 – $3,240) + $1,080 + $972 – $1,080 = $3,132.
87.
d
$2,850 – $646 – $2,166 = ($38).
88.
b
$70,000 + $250,000 – $110,000 + $140,000 = $350,000.
89.
b
$70,000 + $200,000 – $110,000 + $140,000 = $300,000.
90.
a
$50,000 – $3,000 + $1,000 + $1,500 = $49,500.
91.
c
$500,000 + $140,000 – $60,000 = $580,000.
92.
c
$250,000 + $70,000 – $30,000 = $290,000.
93.
a
$215,000 ÷ ($150,000 + $100,000) = 0.86.
94.
b
$215,000 – $60,000 – $110,000 = $45,000.
95.
a
$255,000 ÷ ($150,000 + $100,000) = 1.02.
96.
b
$255,000 – $60,000 – $110,000 = $85,000.
$720,000 – $85,000 + $313,000 = $948,000.
DERIVATIONS — CPA Adapted
No.
Answer
Derivation
97.
d
$24,000 + $6,000 + $11,000 + $30,000 + $2,000 = $73,000.
98.
d
$775,000 + [$2,695,000 – ($150,000 × 4)] + $2,085,000 = $4,955,000.
99.
a
$1,701,000 + ($654,000 – $525,000) + $20,000 = $1,850,000.
100.
c
$3,450,000 + $13,360,000 – $11,180,000 – ($1,179,000 – $525,000) = $4,976,000.
101.
b
Conceptual.
102.
c
Conceptual.
Answer
Derivation
103.
c
Conceptual.
104.
a
Conceptual.
105.
d
Conceptual.
No.
18 | P a g e
BY Mariam Refaat
106.
b
19 | P a g e
Conceptual.
BY Mariam Refaat
Chapter 7
20 | P a g e
BY Mariam Refaat
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BY Mariam Refaat
MULTIPLE CHOICE—Conceptual
21.
Which of the following is not considered cash for financial reporting purposes?
a. Petty cash funds and change funds
b. Money orders, certified checks, and personal checks
c. Coin, currency, and available funds
d. Postdated checks and I.O.U.'s
22.
Which of the following is considered cash?
a. Certificates of deposit (CDs)
b. Money market checking accounts
c. Money market savings certificates
d. Postdated checks
23.
Travel advances should be reported as
22 | P a g e
BY Mariam Refaat
a.
b.
c.
d.
P
S
supplies.
cash because they represent the equivalent of money.
investments.
none of these.
24.
Which of the following items should not be included in the Cash caption on the balance sheet?
a. Coins and currency in the cash register
b. Checks from other parties presently in the cash register
c. Amounts on deposit in checking account at the bank
d. Postage stamps on hand
25.
All of the following may be included under the heading of "cash" except
a. currency.
b. money market funds.
c. checking account balance.
d. savings account balance.
26.
In which account are post-dated checks received classified?
a. Receivables.
b. Prepaid expenses.
c. Cash.
d. Payables.
27.
In which account are postage stamps classified?
a. Cash.
b. Office supplies.
c. Receivables.
d. Inventory.
28.
What is a compensating balance?
a. Savings account balances.
b. Margin accounts held with brokers.
c. Temporary investments serving as collateral for outstanding loans.
d. Minimum deposits required to be maintained in connection with a borrowing arrangement.
29.
Under which section of the balance sheet is "cash restricted for plant expansion" reported?
a. Current assets.
b. Non-current assets.
c. Current liabilities.
d. Stockholders' equity.
30.
A cash equivalent is a short-term, highly liquid investment that is readily convertible into known
amounts of cash and
a. is acceptable as a means to pay current liabilities.
b. has a current market value that is greater than its original cost
c. bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation.
d. is so near its maturity that it presents insignificant risk of changes in interest rates.
31.
Bank overdrafts, if material, should be
a. reported as a deduction from the current asset section.
b. reported as a deduction from cash.
c. netted against cash and a net cash amount reported.
d. reported as a current liability.
32.
Deposits held as compensating balances
a. usually do not earn interest.
b. if legally restricted and held against short-term credit may be included as cash.
c. if legally restricted and held against long-term credit may be included among current assets.
d. none of these.
23 | P a g e
BY Mariam Refaat
33.
34.
The category "trade receivables" includes
a. advances to officers and employees.
b. income tax refunds receivable.
c. claims against insurance companies for casualties sustained.
d. none of these.
Which of the following should be recorded in Accounts Receivable?
a. Receivables from officers
b. Receivables from subsidiaries
c. Dividends receivable
d. None of these
S
35.
What is the preferable presentation of accounts receivable from officers, employees, or affiliated
companies on a balance sheet?
a. As offsets to capital.
b. By means of footnotes only.
c. As assets but separately from other receivables.
d. As trade notes and accounts receivable if they otherwise qualify as current assets.
S
36.
When a customer purchases merchandise inventory from a business organization, she may be given
a discount which is designed to induce prompt payment. Such a discount is called a(n)
a. trade discount.
b. nominal discount.
c. enhancement discount.
d. cash discount.
P
37.
Trade discounts are
a. not recorded in the accounts; rather they are a means of computing a price.
b. used to avoid frequent changes in catalogues.
c. used to quote different prices for different quantities purchased.
d. all of the above.
38.
If a company employs the gross method of recording accounts receivable from customers, then sales
discounts taken should be reported as
a. a deduction from sales in the income statement.
b. an item of "other expense" in the income statement.
c. a deduction from accounts receivable in determining the net realizable value of accounts
receivable.
d. sales discounts forfeited in the cost of goods sold section of the income statement.
39.
Why do companies provide trade discounts?
a. To avoid frequent changes in catalogs.
b. To induce prompt payment.
c. To easily alter prices for different customers.
d. Both a. and c.
40.
The accounting for cash discounts and trade discounts are
a. the same.
b. always recorded net.
c. not the same.
d. tied to the timing of cash collections on the account.
41.Of the
correct?
a.
b.
c.
d.
42.
approaches to record cash discounts related to accounts receivable, which is more theoretically
Net approach.
Gross approach.
Allowance approach.
All three approaches are theoretically correct.
All of the following are problems associated with the valuation of accounts receivable except for
24 | P a g e
BY Mariam Refaat
a.
b.
c.
d.
uncollectible accounts.
returns.
cash discounts under the net method.
allowances granted.
43.
Why is the allowance method preferred over the direct write-off method of accounting for bad debts?
a. Allowance method is used for tax purposes.
b. Estimates are used.
c. Determining worthless accounts under direct write-off method is difficult to do.
d. Improved matching of bad debt expense with revenue.
44.
Which of the following concepts relates to using the allowance method in accounting for accounts
receivable?
a. Bad debt expense is an estimate that is based on historical and prospective information.
b. Bad debt expense is based on the actual amounts determined to be uncollectible.
c. Bad debt expense is an estimate that is based only on an analysis of the receivables aging.
d. Bad debt expense is management's determination of which accounts will be sent to the attorney
for collection.
45.
How can accounting for bad debts be used for earnings management?
a. Determining which accounts to write-off.
b. Changing the percentage of sales recorded as bad debt expense.
c. Using an aging of the accounts receivable balance to determine bad debt expense.
d. Reversing previous write-offs.
46.
What is the normal journal entry for recording bad debt expense under the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
47.
What is the normal journal entry when writing-off an account as uncollectible under the allowance
method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
48.
Which of the following is included in the normal journal entry to record the collection of accounts
receivable previously written off when using the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.
49.
Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted
value of the cash to be received in the future, failure to follow this practice usually does not make the
balance sheet misleading because
a. most short-term receivables are not interest-bearing.
b. the allowance for uncollectible accounts includes a discount element.
c. the amount of the discount is not material.
d. most receivables can be sold to a bank or factor.
50.
Which of the following methods of determining bad debt expense does not properly match expense
and revenue?
a. Charging bad debts with a percentage of sales under the allowance method.
b. Charging bad debts with an amount derived from a percentage of accounts receivable under the
allowance method.
25 | P a g e
BY Mariam Refaat
c. Charging bad debts with an amount derived from aging accounts receivable under the allowance
method.
d. Charging bad debts as accounts are written off as uncollectible.
51.
Which of the following methods of determining annual bad debt expense best achieves the matching
concept?
a. Percentage of sales
b. Percentage of ending accounts receivable
c. Percentage of average accounts receivable
d. Direct write-off
52.
Which of the following is a generally accepted method of determining the amount of the adjustment
to bad debt expense?
a. A percentage of sales adjusted for the balance in the allowance
b. A percentage of sales not adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the balance in the
allowance
53.
The advantage of relating a company's bad debt expense to its outstanding accounts receivable is
that this approach
a. gives a reasonably correct statement of receivables in the balance sheet.
b. best relates bad debt expense to the period of sale.
c. is the only generally accepted method for valuing accounts receivable.
d. makes estimates of uncollectible accounts unnecessary.
54. At the beginning of 2009, Gannon Company received a three-year zero-interest-bearing $1,000 trade
note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade
note receivable on its 2009 year-end statement of financial position and $1,000 as sales revenue for 2009.
What effect did this accounting for the note have on Gannon's net earnings for 2009, 2010, 2011, and its
retained earnings at the end of 2011, respectively?
a. Overstate, overstate, understate, zero
b. Overstate, understate, understate, understate
c. Overstate, overstate, overstate, overstate
d. None of these
55.
What is imputed interest?
a. Interest based on the stated interest rate.
b. Interest based on the implicit interest rate.
c. Interest based on the average interest rate.
d. Interest based on the coupon rate.
56.
Why would a company sell receivables to another company?
a. To improve the quality of its credit granting process.
b. To limit its legal liability.
c. To accelerate access to amounts collected.
d. To comply with customer agreements.
57.
When should a transfer of receivables be recorded as a sale?
a. The transferred assets are isolated from the transferor.
b. The transferor does not maintain effective control over the transferred assets through an
agreement to repurchase or redeem them prior to their maturity.
c. The transferee has the right to pledge or exchange the transferred assets.
d. All of the above.
58.
What is "recourse" as it relates to selling receivables?
a. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.
b. The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay
26 | P a g e
BY Mariam Refaat
c. The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the
product related to the sale.
d. The obligation of the purchaser of the receivables to pay the seller if all of the receivables are
collected.
59.
Which of the following is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale, depending upon
the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to the factor by the owner of
the receivables.
c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the
receivables.
d. The financing cost (interest expense) should be recognized ratably over the collection period of
the receivables.
S
60. Which of the following statements is incorrect regarding the classification of accounts and notes
receivable?
a. Segregation of the different types of receivables is required if they are material.
b. Disclose any loss contingencies that exist on the receivables.
c. Any discount or premium resulting from the determination of present value in notes receivable
transactions is an asset or liability respectively.
d. Valuation accounts should be appropriately offset against the proper receivable accounts.
S
61.
Of the following conditions, which is the only one that is not required if the transfer of receivables with
recourse is to be accounted for as a sale?
a. The transferor is obligated to make a genuine effort to identify those receivables that are
uncollectible.
b. The transferor surrenders control of the future economic benefits of the receivables.
c. The transferee cannot require the transferor to repurchase the receivables.
d. The transferor's obligation under the recourse provisions can be reasonably estimated.
P
62.
The accounts receivable turnover ratio measures the
a. number of times the average balance of accounts receivable is collected during the period.
b. percentage of accounts receivable turned over to a collection agency during the period.
c. percentage of accounts receivable arising during certain seasons.
d. number of times the average balance of inventory is sold during the period.
63.
The accounts receivable turnover ratio is computed by dividing
a. gross sales by ending net receivables.
b. gross sales by average net receivables.
c. net sales by ending net receivables.
d. net sales by average net receivables.
64.
Which of the following items should be included in accounts receivable reported on the balance sheet?
a. Notes receivable.
b. Interest receivable.
c. Allowance for doubtful accounts.
d. Advances to related parties and officers.
65.
How is days to collect accounts receivable determined?
a. 365 days divided by accounts receivable turnover.
b. Net sales divided by 365.
c. Net sales divided by average net trade receivables.
d. Accounts receivable turnover divided by 365 days.
66.
What is a possible reason for accounts receivable turnover to increase from one year to the next year
a. Decreased credit sales during a recession.
b. Write-off uncollectible receivables.
c. Granting credit to customers with lower credit quality.
27 | P a g e
BY Mariam Refaat
d. Improved collection process.
*67.
Which of the following is an appropriate reconciling item to the balance per bank in a
bank reconciliation?
a. Bank service charge.
b. Deposit in transit.
c. Bank interest.
d. Chargeback for NSF check.
*68.
Which of the following is not true?
a. The imprest petty cash system in effect adheres to the rule of disbursement by check.
b. Entries are made to the Petty Cash account only to increase or decrease the size of the fund or
to adjust the balance if not replenished at year-end.
c. The Petty Cash account is debited when the fund is replenished.
d. All of these are not true.
*69.
A Cash Over and Short account
a. is not generally accepted.
b. is debited when the petty cash fund proves out over.
c. is debited when the petty cash fund proves out short.
d. is a contra account to Cash.
*70.
The journal entries for a bank reconciliation
a. are taken from the "balance per bank" section only.
b. may include a debit to Office Expense for bank service charges.
c. may include a credit to Accounts Receivable for an NSF check.
d. may include a debit to Accounts Payable for an NSF check.
*71.
When preparing a bank reconciliation, bank credits are
a. added to the bank statement balance.
b. deducted from the bank statement balance.
c. added to the balance per books.
d. deducted from the balance per books.
Multiple Choice Answers—Conceptual
Item
21.
22.
23.
P
24.
25.
26.
27.
28.
Ans.
d
b
d
d
b
a
b
d
Item
29.
30.
31.
32.
33.
34.
S
35.
S
36.
S
Ans.
b
d
d
d
d
d
c
d
Item
P
37.
38.
39.
40.
41.
42.
43.
44.
Ans.
d
a
d
c
a
c
d
a
Item
45.
46.
47.
48.
49.
50.
51.
52.
Ans.
b
c
a
d
c
d
a
b
Item
53.
54.
55.
56.
57.
58.
59.
S
60.
Ans.
a
d
b
c
d
a
c
c
Item
S
61.
62.
63.
64.
65.
66.
*67.
*68.
P
Ans.
Item
Ans.
a
a
d
c
a
d
b
c
*69.
*70.
*71.
c
b
c
Solutions to those Multiple Choice questions for which the answer is “none of these.”
23. As receivables.
32. Many answers are possible.
33. Open accounts resulting from short-term extensions of credit to customers.
34. Open accounts resulting from short-term extensions of credit to customers.
54. Overstate, understate, understate, zero.
MULTIPLE CHOICE—Computational
72.
Consider the following: Cash in Bank – checking account of $13,500, Cash on hand of $500, Postdated checks received totaling $3,500, and Certificates of deposit totaling $124,000. How much
should be reported as cash in the balance sheet?
28 | P a g e
BY Mariam Refaat
a.
b.
c.
d.
$ 13,500.
$ 14,000.
$ 17,500.
$131,500.
73.
On January 1, 2010, Lynn Company borrows $2,000,000 from National Bank at 11% annual interest.
In addition, Lynn is required to keep a compensatory balance of $200,000 on deposit at National Bank
which will earn interest at 5%. The effective interest that Lynn pays on its $2,000,000 loan is
a. 10.0%.
b. 11.0%.
c. 11.5%.
d. 11.6%.
74.
Kennison Company has cash in bank of $10,000, restricted cash in a separate account of $3,000,
and a bank overdraft in an account at another bank of $1,000. Kennison should report cash of
a. $9,000.
b. $10,000.
c. $12,000.
d. $13,000.
75.
Kaniper Company has the following items at year-end:
Cash in bank
Petty cash
Short-term paper with maturity of 2 months
Postdated checks
$20,000
300
5,500
1,400
Kaniper should report cash and cash equivalents of
a. $20,000.
b. $20,300.
c. $25,800.
d. $27,200.
76.
Lawrence Company has cash in bank of $15,000, restricted cash in a separate account of $4,000,
and a bank overdraft in an account at another bank of $2,000. Lawrence should report cash of
a. $13,000.
b. $15,000.
c. $18,000.
d. $19,000.
77.Steinert Company has the following items at year-end:
Cash in bank
Petty cash
Short-term paper with maturity of 2 months
Postdated checks
$30,000
500
8,200
2,100
Steinert should report cash and cash equivalents of
a. $30,000.
b. $30,500.
c. $38,700.
d. $40,800.
78.
If a company purchases merchandise on terms of 1/10, n/30, the cash discount available is equivalent
to what effective annual rate of interest (assuming a 360-day year)?
a. 1%
b. 12%
c. 18%
d. 30%
29 | P a g e
BY Mariam Refaat
79.
AG Inc. made a $10,000 sale on account with the following terms: 1/15, n/30. If the company uses
the net method to record sales made on credit, how much should be recorded as revenue?
a. $ 9,800.
b. $ 9,900.
c. $10,000.
d. $10,100.
80.
AG Inc. made a $10,000 sale on account with the following terms: 1/15, n/30. If the company uses
the gross method to record sales made on credit, what is/are the debit(s) in the journal entry to record
the sale?
a. Debit Accounts Receivable for $9,900.
b. Debit Accounts Receivable for $9,900 and Sales Discounts for $100.
c. Debit Accounts Receivable for $10,000.
d. Debit Accounts Receivable for $10,000 and Sales Discounts for $100.
81.
AG Inc. made a $10,000 sale on account with the following terms: 2/10, n/30. If the company uses
the net method to record sales made on credit, what is/are the debit(s) in the journal entry to record
the sale?
a. Debit Accounts Receivable for $9,800.
b. Debit Accounts Receivable for $9,800 and Sales Discounts for $200.
c. Debit Accounts Receivable for $10,000.
d. Debit Accounts Receivable for $10,000 and Sales Discounts for $200.
82.
Wellington Corp. has outstanding accounts receivable totaling $2.54 million as of December 31 and
sales on credit during the year of $12.8 million. There is also a debit balance of $6,000 in the
allowance for doubtful accounts. If the company estimates that 1% of its net credit sales will be
uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end
adjustment to record bad debt expense?
a. $ 25,400.
b. $ 31,400.
c. $122,000.
d. $134,000.
Wellington Corp. has outstanding accounts receivable totaling $6.5 million as of December 31 and
sales on credit during the year of $24 million. There is also a credit balance of $12,000 in the
allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables will
be uncollectible, what will be the amount of bad debt expense recognized for the year?
a. $ 532,000.
b. $ 520,000.
c. $1,920,000.
d. $ 508,000.
83.
84.
Wellington Corp. has outstanding accounts receivable totaling $3 million as of
December 31 and sales on credit during the year of $15 million. There is also a debit balance of
$12,000 in the allowance for doubtful accounts. If the company estimates that 8% of its outstanding
receivables will be uncollectible, what will be the balance in the allowance for doubtful accounts after
the year-end adjustment to record bad debt expense?
a. $1,200,000.
b. $ 228,000.
c. $ 240,000.
d. $ 252,000.
85.
At the close of its first year of operations, December 31, 2010, Ming Company had accounts
receivable of $540,000, after deducting the related allowance for doubtful accounts. During 2010, the
company had charges to bad debt expense of $90,000 and wrote off, as uncollectible, accounts
receivable of $40,000. What should the company report on its balance sheet at December 31, 2010,
as accounts receivable before the allowance for doubtful accounts?
a. $670,000
b. $590,000
c. $490,000
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BY Mariam Refaat
d. $440,000
86.
Before year-end adjusting entries, Dunn Company's account balances at December 31, 2010, for
accounts receivable and the related allowance for uncollectible accounts were $600,000 and $45,000,
respectively. An aging of accounts receivable indicated that $62,500 of the December 31 receivables
are expected to be uncollectible. The net realizable value of accounts receivable after adjustment is
a. $582,500.
b. $537,500.
c. $492,500.
d. $555,000.
87.
During the year, Kiner Company made an entry to write off a $4,000 uncollectible account. Before
this entry was made, the balance in accounts receivable was $50,000 and the balance in the
allowance account was $4,500. The net realizable value of accounts receivable after the write-off
entry was
a. $50,000.
b. $49,500.
c. $41,500.
d. $45,500.
88.The following information is available for Murphy Company:
Allowance for doubtful accounts at December 31, 2009
Credit sales during 2010
Accounts receivable deemed worthless and written off during 2010
$ 8,000
400,000
9,000
As a result of a review and aging of accounts receivable in early January 2011, however, it has been
determined that an allowance for doubtful accounts of $5,500 is needed at December 31, 2010. What
amount should Murphy record as "bad debt expense" for the year ended December 31, 2010?
a. $4,500
b. $5,500
c. $6,500
d. $13,500
Use the following information for questions 89 and 90.
A trial balance before adjustments included the following:
Debit
Sales
Sales returns and allowance
Accounts receivable
Allowance for doubtful accounts
Credit
$425,000
$14,000
43,000
760
89.
If the estimate of uncollectibles is made by taking 2% of net sales, the amount of the adjustment is
a. $6,700.
b. $8,220.
c. $8,500.
d. $9,740.
90.
If the estimate of uncollectibles is made by taking 10% of gross account receivables, the amount of
the adjustment is
a. $3,540.
b. $4,300.
c. $4,224.
d. $5,060.
91.
Lankton Company has the following account balances at year-end:
Accounts receivable
Allowance for doubtful accounts
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$60,000
3,600
BY Mariam Refaat
Sales discounts
2,400
Lankton should report accounts receivable at a net amount of
a. $54,000.
b. $56,400.
c. $57,600.
d. $60,000.
92.Smithson Corporation had a 1/1/10 balance in the Allowance for Doubtful Accounts of $10,000. During
2010, it wrote off $7,200 of accounts and collected $2,100 on accounts previously written off. The balance in
Accounts Receivable was $200,000 at 1/1 and $240,000 at 12/31. At 12/31/10, Smithson estimates that 5%
of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2010?
a. $2,000.
b. $7,100.
c. $9,200.
d. $12,000.
93.
Black Corporation had a 1/1/10 balance in the Allowance for Doubtful Accounts of $12,000. During
2010, it wrote off $8,640 of accounts and collected $2,520 on accounts previously written off. The
balance in Accounts Receivable was $240,000 at 1/1 and $288,000 at 12/31. At 12/31/10, Black
estimates that 5% of accounts receivable will prove to be uncollectible. What should Black report as
its Allowance for Doubtful Accounts at 12/31/10?
a. $5,760.
b. $5,880.
c. $8,280.
d. $14,400.
94.
Shelton Company has the following account balances at year-end:
Accounts receivable
Allowance for doubtful accounts
Sales discounts
$80,000
4,800
3,200
Shelton should report accounts receivable at a net amount of
a. $72,000.
b. $75,200.
c. $76,800.
d. $80,000.
95.
Vasguez Corporation had a 1/1/10 balance in the Allowance for Doubtful Accounts of $20,000. During
2010, it wrote off $14,400 of accounts and collected $4,200 on accounts previously written off. The
balance in Accounts Receivable was $400,000 at 1/1 and $480,000 at 12/31. At 12/31/10, Vasguez
estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense
for 2010?
a. $4,000.
b. $14,200.
c. $18,400.
d. $24,000.
96.
McGlone Corporation had a 1/1/10 balance in the Allowance for Doubtful Accounts of $15,000. During
2010, it wrote off $10,800 of accounts and collected $3,150 on accounts previously written off. The
balance in Accounts Receivable was $300,000 at 1/1 and $360,000 at 12/31. At 12/31/10, McGlone
estimates that 5% of accounts receivable will prove to be uncollectible. What should McGlone report
as its Allowance for Doubtful Accounts at 12/31/10?
a. $7,200.
b. $7,350.
c. $10,350.
d. $18,000.
Lester Company received a seven-year zero-interest-bearing note on February 22, 2010, in exchange
for property it sold to Porter Company. There was no established exchange price for this property and
97.
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BY Mariam Refaat
the note has no ready market. The prevailing rate of interest for a note of this type was 7% on February
22, 2010, 7.5% on December 31, 2010, 7.7% on February 22, 2011, and 8% on December 31, 2011.
What interest rate should be used to calculate the interest revenue from this transaction for the years
ended December 31, 2010 and 2011, respectively?
a. 0% and 0%
b. 7% and 7%
c. 7% and 7.7%
d. 7.5% and 8%
98.
On December 31, 2010, Flint Corporation sold for $75,000 an old machine having an original cost of
$135,000 and a book value of $60,000. The terms of the sale were as follows:
$15,000 down payment
$30,000 payable on December 31 each of the next two years
The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of
transaction. What should be the amount of the notes receivable net of the unamortized discount on
December 31, 2010 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at
9% for 2 years is 1.75911.)
a. $52,773.
b. $67,773.
c. $60,000.
d. $105,546.
99.
Assume Royal Palm Corp., an equipment distributor, sells a piece of machinery with a list price of
$800,000 to Arch Inc. Arch Inc. will pay $850,000 in one year. Royal Palm Corp. normally sells this
type of equipment for 90% of list price. How much should be recorded as revenue?
a. $720,000.
b. $765,000.
c. $800,000.
d. $850,000.
100.
Equestrain Roads sold $50,000 of goods and accepted the customer's $50,000 10%
1-year note receivable in exchange. Assuming 10% approximates the market rate of return, what
would be the debit in this journal entry to record the sale?
a. No journal entry until cash is collected.
b. Debit Notes Receivable for $50,000.
c. Debit Accounts Receivable for $50,000.
d. Debit Notes Receivable for $45,000.
101.
Equestrain Roads sold $50,000 of goods and accepted the customer's $50,000 10%
1-year note payable in exchange. Assuming 10% approximates the market rate of return, how much
interest would be recorded for the year ending December 31 if the sale was made on June 30?
a. $0.
b. $1,250.
c. $2,500.
d. $5,000.
Equestrain Roads accepted a customer's $50,000 zero-interest-bearing six-month note payable in a
sales transaction. The product sold normally sells for $46,000. If the sale was made on June 30, how
much interest revenue from this transaction would be recorded for the year ending December 31?
a. $0.
b. $2,000.
c. $4,000.
d. $5,000.
102.
103.
Assuming the market interest rate is 10% per annum, how much would Green Co. record as a note
payable if the terms of the loan with a bank are that it would have to make one $60,000 payment in
two years?
a. $60,000.
b. $54,422.
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BY Mariam Refaat
c. $54,545.
d. $49,587.
104.
Sun Inc. factors $2,000,000 of its accounts receivables without recourse for a finance charge of 5%.
The finance company retains an amount equal to 10% of the accounts receivable for possible
adjustments. Sun estimates the fair value of the recourse liability at $75,000. What would be recorded
as a gain (loss) on the transfer of receivables?
a. Loss of $100,000.
b. Gain of $175,000.
c. Loss of $375,000.
d. Loss of $75,000.
105.
Sun Inc. factors $2,000,000 of its accounts receivables with recourse for a finance charge of 3%. The
finance company retains an amount equal to 10% of the accounts receivable for possible adjustments.
Sun estimates the fair value of the recourse liability at $100,000. What would be recorded as a gain
(loss) on the transfer of receivables?
a. Gain of $60,000.
b. Loss of 160,000.
c. Gain of $360,000.
d. Loss of $100,000.
106.
Sun Inc assigns $2,000,000 of its accounts receivables as collateral for a $1 million 8% loan with a
bank. Sun Inc. also pays a finance fee of 1% on the transaction upfront. What would be recorded as
a gain (loss) on the transfer of receivables?
a. Loss of $20,000.
b. Loss of $160,000.
c. Loss of $180,000.
d. $0.
107.
Moon Inc. factors $1,000,000 of its accounts receivables with recourse for a finance charge of 4%.
The finance company retains an amount equal to 8% of the accounts receivable for possible
adjustments. Moon estimates the fair value of the recourse liability at $100,000. What would be the
debit to Cash in the journal entry to record this transaction?
a. $1,000,000.
b. $960,000.
c. $880,000.
d. $780,000.
Moon Inc assigns $1,500,000 of its accounts receivables as collateral for a $1 million loan with a bank.
The bank assesses a 3% finance fee and charges interest on the note at 6%. What would be the
journal entry to record this transaction?
a. Debit Cash for $970,000, debit Finance Charge for $30,000, and credit Notes payable for
$1,000,000.
b. Debit Cash for $970,000, debit Finance Charge for $30,000, and credit Accounts Receivable for
$1,000,000.
c. Debit Cash for $970,000, debit Finance Charge for $30,000, debit Due from Bank for $500,000,
and credit Accounts Receivable for $1,500,000.
d. Debit Cash for $910,000, debit Finance Charge for $90,000, and credit Notes Payable for
$1,000,000.
108.
Use the following information for questions 109 and 110.
Geary Co. assigned $400,000 of accounts receivable to Kwik Finance Co. as security for a loan of $335,000.
Kwik charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During the
first month, Geary collected $110,000 on assigned accounts after deducting $380 of discounts. Geary
accepted returns worth $1,350 and wrote off assigned accounts totaling $2,980.
109.
The amount of cash Geary received from Kwik at the time of the transfer was
a. $301,500.
b. $327,000.
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BY Mariam Refaat
c. $328,300.
d. $335,000.
110.
Entries during the first month would include a
a. debit to Cash of $110,380.
b. debit to Bad Debt Expense of $2,980.
c. debit to Allowance for Doubtful Accounts of $2,980.
d. debit to Accounts Receivable of $114,710.
Use the following information for questions 111 and 112.
On February 1, 2010, Henson Company factored receivables with a carrying amount of $300,000 to Agee
Company. Agee Company assesses a finance charge of 3% of the receivables and retains 5% of the
receivables. Relative to this transaction, you are to determine the amount of loss on sale to be reported in
the income statement of Henson Company for February.
111.
Assume that Henson factors the receivables on a without recourse basis. The loss to be reported is
a. $0.
b. $9,000.
c. $15,000.
d. $24,000.
112.
Assume that Henson factors the receivables on a with recourse basis. The recourse obligation has a
fair value of $1,500. The loss to be reported is
a. $9,000.
b. $10,500.
c. $15,000.
d. $25,500.
Maxwell Corporation factored, with recourse, $100,000 of accounts receivable with Huskie Financing.
The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales
allowances. Maxwell estimates the recourse obligation at $2,400. What amount should Maxwell report
as a loss on sale of receivables?
a. $ -0-.
b. $3,000.
c. $5,400.
d. $10,400.
113.
114.
Wilkinson Corporation factored, with recourse, $300,000 of accounts receivable with Huskie
Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns,
and sales allowances. Wilkinson estimates the recourse obligation at $7,200. What amount should
Wilkinson report as a loss on sale of receivables?
a. $ -0-.
b. $9,000.
c. $16,200.
d. $31,200.
115.
Remington Corporation had accounts receivable of $100,000 at 1/1. The only transactions affecting
accounts receivable were sales of $600,000 and cash collections of $550,000. The accounts
receivable turnover is
a. 4.0.
b. 4.4.
c. 4.8.
d. 6.0.
116.
Laventhol Corporation had accounts receivable of $100,000 at 1/1. The only transactions affecting
accounts receivable were sales of $900,000 and cash collections of $850,000. The accounts
receivable turnover is
a. 6.0.
b. 6.6.
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BY Mariam Refaat
c. 7.2.
d. 9.0.
*117. If a petty cash fund is established in the amount of $250, and contains $150 in cash and $95 in
receipts for disbursements when it is replenished, the journal entry to record replenishment should
include credits to the following accounts
a. Petty Cash, $75.
b. Petty Cash, $100.
c. Cash, $95; Cash Over and Short, $5.
d. Cash, $100.
*118. If the month-end bank statement shows a balance of $36,000, outstanding checks are $12,000, a
deposit of $4,000 was in transit at month end, and a check for $500 was erroneously charged by the
bank against the account, the correct balance in the bank account at month end is
a. $27,500.
b. $28,500.
c. $20,500.
d. $43,500.
*119. In preparing its bank reconciliation for the month of April 2010, Henke, Inc. has available the following
information.
Balance per bank statement, 4/30/10
NSF check returned with 4/30/10 bank statement
Deposits in transit, 4/30/10
Outstanding checks, 4/30/10
Bank service charges for April
$39,140
450
5,000
5,200
20
What should be the correct balance of cash at April 30, 2010?
a. $39,370
b. $38,940
c. $38,490
d. $38,470
*120. Finley, Inc.’s checkbook balance on December 31, 2010 was $21,200. In addition, Finley held the
following items in its safe on December 31.
(1) A check for $450 from Peters, Inc. received December 30, 2010, which was not included in
the checkbook balance.
(2) An NSF check from Garner Company in the amount of $900 that had been deposited at the
bank, but was returned for lack of sufficient funds on December 29. The check was to be
redeposited on January 3, 2011. The original deposit has been included in the December 31
checkbook balance.
(3) Coin and currency on hand amounted to $1,450.
The proper amount to be reported on Finley's balance sheet for cash at December 31, 2010 is
a. $21,300.
b. $20,400.
c. $22,200.
d. $21,750.
*121. The cash account shows a balance of $45,000 before reconciliation. The bank statement does not
include a deposit of $2,300 made on the last day of the month. The bank statement shows a collection
by the bank of $940 and a customer's check for $320 was returned because it was NSF. A customer's
check for $450 was recorded on the books as $540, and a check written for $79 was recorded as
$97. The correct balance in the cash account was
a. $45,512.
b. $45,548.
c. $45,728.
d. $47,848.
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BY Mariam Refaat
*122. In preparing its May 31, 2010 bank reconciliation, Catt Co. has the following information available:
Balance per bank statement, 5/31/10
$30,000
Deposit in transit, 5/31/10
5,400
Outstanding checks, 5/31/10
4,900
Note collected by bank in May
1,250
The correct balance of cash at May 31, 2010 is
a. $35,400.
b. $29,250.
c. $30,500.
d. $31,750.
Multiple Choice Answers—Computational
Item
72.
73.
74.
75.
76.
77.
78.
79.
Ans.
b
d
b
c
b
c
c
b
37 | P a g e
Item
80.
81.
82.
83.
84.
85.
86.
87.
Ans.
c
a
c
d
c
b
b
d
Item
88.
89.
90.
91.
92.
93.
94.
95.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans
c
b
a
b
b
d
b
b
96.
97.
98.
99.
100.
101.
102.
103.
d
b
a
a
b
c
c
d
104.
105.
106.
107.
108.
109.
110.
111.
a
b
d
c
a
c
c
b
112.
113.
114.
115.
116.
*117.
*118.
*119.
b
c
c
c
c
d
b
b
*120.
*121.
*122.
c.
b
c
BY Mariam Refaat