Chapter 1
1) The financial statements most frequently provided include all of the
following except the
a. balance sheet.
b. income statement.
c. statement of cash flows.
d. statement of retained earnings.
2) Users of financial reports include all of the following except
a. creditors.
b. government agencies.
c. unions.
d. All of these are users.
3 ) Companies that are listed on a stock exchange are required to submit
their financial statements to the
a. AICPA.
b. APB
c. FASB.
d. SEC.
4) The major distinction between the Financial Accounting Standards
Board (FASB) and its
predecessor, the Accounting Principles Board (APB), is
a. the FASB issues exposure drafts of proposed standards.
b. all members of the FASB are fully remunerated, serve full time, and are
independent of any companies or institutions.
c. all members of the FASB possess extensive experience in financial
reporting.
d. a majority of the members of the FASB are CPAs drawn from public
practice.
5) The most significant current source of generally accepted accounting
principles is the
a. AICPA.
b. SEC.
c. APB.
d. FASB.
6) The purpose of the International Accounting Standards Board is to
a. issue enforceable standards which regulate the financial accounting and
reporting of multinational corporations.
b. develop a uniform currency in which the financial transactions of
companies throughout the world would be measured.
c. promote uniform accounting standards among countries of the world.
d. arbitrate accounting disputes between auditors and international
companies
7) Members of the Financial Accounting Standards Board are
a. employed by the American Institute of Certified Public Accountants
(AICPA).
b. part-time employees.
c. required to hold a CPA certificate.
d. independent of any other organization.
8) An organization that has not published accounting standards is the
a. American Institute of Certified Public Accountants.
b. Securities and Exchange Commission.
c. Financial Accounting Standards Board.
d. All of these have published accounting standards.
9) One objective of financial reporting is to provide
a. information about the investors in the business entity.
b. information about the liquidation values of the resources held by the
enterprise.
c. information that is useful in assessing cash flow prospects.
d. information that will attract new investors.
10) The body that has the power to prescribe the accounting practices and
standards to be employed by companies that fall under its jurisdiction is
the
a. FASB.
b. AICPA.
c. SEC.
d. APB.
Chapter 2
1) The underlying theme of the conceptual framework is
a. decision usefulness.
b. understandability.
c. reliability.
d. comparability.
2) Which of the following is not an objective of financial reporting?
a. To provide information about economic resources, the claims to those
resources, and the changes in them.
b. To provide information that is helpful to investors and creditors and
other users in assessing the amounts, timing, and uncertainty of future
cash flows.
c. To provide information that is useful to those making investment and
credit decisions.
d. All of these are objectives of financial reporting.
3) The quality of information that gives assurance that it is reasonably free
of error and bias and is a faithful representation is
a. relevance.
b. reliability.
c. verifiability.
d. neutrality.
4) During the lifetime of an entity, accountants produce financial
statements at arbitrary points in time in accordance with which basic
accounting concept?
a. Cost/benefit constraint
b. Periodicity assumption
c. Conservatism constraint
d. Matching principle
5) The assumption that a business enterprise will not be sold or liquidated
in the near future is known as the
a. economic entity assumption.
b. monetary unit assumption.
c. conservatism assumption.
d. none of these.
6) According to the FASB's conceptual framework, the process of reporting
an item in the financial statements of an entity is
a. recognition.
b. realization.
c. allocation.
d. matching.
7) Decision makers vary widely in the types of decisions they make, the
methods of decision making they employ, the information they already
possess or can obtain from other sources, and their ability to process
information. Consequently, for information to be useful there must be a
linkage between these users and the decisions they make. This link is
a. relevance.
b. reliability.
c. understandability.
d. materiality.
8) Revenue generally should be recognized
a. at the end of production.
b. at the time of cash collection.
c. when realized.
d. when realized or realizable and earned.
9) The characteristic that is demonstrated when a high degree of
consensus can be secured among independent measurers using the same
measurement methods is
a. relevance.
b. reliability.
c. verifiability.
d. neutrality.
10) A decrease in net assets arising from peripheral or incidental
transactions is called a(n)
a. capital expenditure.
b. cost.
c. loss.
d. expense.
Chapter 4
1) The single-step income statement emphasizes
a. the gross profit figure.
b. total revenues and total expenses.
c. extraordinary items and accounting changes more than these are
emphasized in the multiple-step income statement.
d. the various components of income from continuing operations.
2) Which of the following items will not appear in the retained earnings
statement?
a. Net loss
b. Prior period adjustment
c. Discontinued operations
d. Dividends
3) Income taxes are allocated to
a. extraordinary items.
b. discontinued operations.
c. prior period adjustments.
d. all of these.
Use the following information for questions 4 and 5
Meyer Corp. reports operating expenses in two categories: (1) selling and
(2) general and administrative. The adjusted trial balance at December 31,
2007, included the following expense accounts:
Accounting and legal fees $140,000
Advertising 120,000
Freight-out 75,000
Interest 60,000
Loss on sale of long-term investments 30,000
Officers' salaries 180,000
Rent for office space 180,000
Sales salaries and commissions 110,000
One-half of the rented premises is occupied by the sales department
4) How much of the expenses listed above should be included in Meyer's
selling expenses for 2007?
a. $230,000.
b. $305,000.
c. $320,000.
d. $395,000.
5) How much of the expenses listed above should be included in Meyer's
general and administrative expenses for 2007?
a. $410,000.
b. $440,000.
c. $470,000.
d. $500,000.
6) Joe Novak Corporation reports the following information:
Correction of overstatement of depreciation expense in prior years, net of
tax $ 215,000
Dividends declared 160,000
Net income 500,000
Retained earnings, 1/1/07, as reported 1,000,000
Joe Novak should report retained earnings, 12/31/07, at
a. $785,000.
b. $1,125,000.
c. $1,340,000.
d. $1,555,000.
7) Carpino Corporation has an extraordinary loss of $200,000, an unusual
gain of $140,000, and a tax rate of 40%. At what amount should Carpino
report each item?
Extraordinary loss
Unusual gain
a. $(200,000)
$140,000
b. (200,000)
84,000
c. (120,000)
140,000
d. (120,000)
84,000
8) Cole Company, with an applicable income tax rate of 30%, reported net
income of $210,000. Included in income for the period was an
extraordinary loss from flood damage of $30,000 before deducting the
related tax effect. The company's income before income taxes and
extraordinary items was
a. $240,000.
b. $300,000.
c. $330,000.
d. $231,000.
Use the following information for questions 9 and 10 .
At Hall Company, events and transactions during 2007 included the
following. The tax rate for all items is 30%.
(1) Depreciation for 2005 was found to be understated by $30,000.
(2) A strike by the employees of a supplier resulted in a loss of $25,000.
(3) The inventory at December 31, 2005 was overstated by $40,000.
(4) A flood destroyed a building that had a book value of $500,000. Floods
are very uncommon in that area.
9) The effect of these events and transactions on 2007 income from
continuing operations
net of tax would be
a. $17,500.
b. $38,500.
c. $66,500.
d. $416,500.
10) The effect of these events and transactions on 2007 net income net of
tax would be
a. $17,500.
b. $367,500.
c. $388,500.
d. $416,500.
Chapter 7
1) 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
2) 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.
3) 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
4) Horvath Company has the following items at year-end:
Cash in bank $20,000
Petty cash 300
Short-term paper with maturity of 2 months 5,500
Postdated checks 1,400
Horvath should report cash and cash equivalents of
a. $20,000.
b. $20,300.
c. $25,800.
d. $27,200.
5) Holtzman Corporation had a 1/1/07 balance in the Allowance for
Doubtful Accounts of $10,000. During 2007, 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 12/31/07, Holtzman estimates that 5% of accounts receivable
will prove to be uncollectible. What is Bad Debt Expense for 2007?
a. $2,000.
b. $7,100.
c. $9,200.
d. $12,000
6) Simpson Company has the following account balances at year-end:
Accounts receivable $60,000
Allowance for doubtful accounts 3,600
Sales discounts 2,400
Simpson should report accounts receivable at a net amount of
a. $54,000.
b. $56,400.
c. $57,600.
d. $60,000.
7) King Co.'s allowance for uncollectible accounts was $95,000 at the end
of 2007 and $90,000 at the end of 2006. For the year ended December 31,
2007, King reported bad debt expense of $13,000 in its income statement.
What amount did King debit to the appropriate account in 2007 to write
off actual bad debts?
a. $5,000
b. $8,000
c. $13,000
d. $18,000
8) Under the allowance method of recognizing uncollectible accounts, the
entry to write off an uncollectible account
a. increases the allowance for uncollectible accounts.
b. has no effect on the allowance for uncollectible accounts.
c. has no effect on net income.
d. decreases net income.
9) 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.
10) Nottingham 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.
c. 7.2.
d. 9.0