Chapter 01 - Introducing Accounting in Business
Chapter 01
Introducing Accounting in Business
True / False Questions
[Question]
1. Accounting is an information and measurement system that identifies records and
communicates financial information to users.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C1
[Question]
2. Bookkeeping is the sole purpose of accounting.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C1
[Question]
3. Accounting is one way important information about businesses are reported to decision
makers.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C2
1-1
Chapter 01 - Introducing Accounting in Business
[Question]
4. Managerial accounting is an area of accounting that provides internal reports to assist the
decision making needs of internal users.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C2
[Question]
5. The internal operating functions of businesses include research and development,
distribution and human resources.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C2
[Question]
6. The primary objective of financial accounting is to provide general-purpose financial
statements to help external users analyze and interpret an organization's activities.
Answer: True
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C2
1-2
Chapter 01 - Introducing Accounting in Business
[Question]
7. An external audit report is a professional opinion about whether the financial statements are
prepared according to generally accepted accounting principles.
Answer: True
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C2
[Question]
8. Internal users of accounting information include lenders, shareholders, brokers and
managers.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C2
[Question]
9. Auditors are banned from direct investments with their clients.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-3
Chapter 01 - Introducing Accounting in Business
[Question]
10. Ownership of a corporation is divided into units called shares or stock.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C4
[Question]
11. The Financial Accounting Standards Board is a private group that sets both broad and
specific accounting principles.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C4
[Question]
12. Generally accepted accounting principles are the basic assumptions, concepts and
guidelines for preparing financial statements.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C4
1-4
Chapter 01 - Introducing Accounting in Business
[Question]
13. The business entity assumption requires that a business be accounted for separately from
other business entities, including its owner or owners.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C4
[Question]
14. Unlimited liability is an advantage of all sole proprietorships.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
15. Understanding generally accepted accounting principles is not necessary when using and
interpreting financial statements.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-5
Chapter 01 - Introducing Accounting in Business
[Question]
16. The International Accounting Standards Board (IASB) has the authority to impose its
standards on companies around the world.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
17. According to the cost principle, it is preferable for managers to report the most current
estimate of an asset's value.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
18. The International Accounting Standards Board (IASB) is the government group that
establishes reporting requirements for companies that issue stock to the public.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-6
Chapter 01 - Introducing Accounting in Business
[Question]
19. The International Accounting Standards Board (IASB) issues International Financial
Reporting Standards (IFRS) that identify preferred accounting practices.
Answer: True
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
20. The Securities and Exchange Commission (SEC) is an agency of the federal government
that establishes reporting requirements for companies that issue stock to the public.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C4
[Question]
21. The three major activities of a business are operating, investing and financing.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C5
1-7
Chapter 01 - Introducing Accounting in Business
[Question]
22. Planning refers to defining an organization's ideas, goals and actions.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C5
[Question]
23. Investing activities are the acquiring and selling of resources that an organization uses in
its everyday operations.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C5
[Question]
24. Owner financing refers to resources contributed by creditors or lenders.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C5
1-8
Chapter 01 - Introducing Accounting in Business
[Question]
25. Revenues are increases in retained earnings from a company's earnings activities.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
[Question]
26. A net loss arises when revenues exceed expenses.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
[Question]
27. Expenses decrease retained earnings and are the costs acquired to earn revenues.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
1-9
Chapter 01 - Introducing Accounting in Business
[Question]
28. Assets are the resources owned or controlled by a business.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
[Question]
29. Dividends are expenses of a business.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
[Question]
30. The accounting equation can be restated as: Assets - Equity = Liabilities.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
1-10
Chapter 01 - Introducing Accounting in Business
[Question]
31. The accounting equation implies that: Assets + Liabilities = Equity.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
[Question]
32. The legitimate claims of a business's creditors take precedence over the claims of its
stockholders.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A1
[Question]
33. Every business transaction should leave the accounting equation in balance.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A2
1-11
Chapter 01 - Introducing Accounting in Business
[Question]
34. The Retained earnings is increased when cash is received from customers in payment of
previously recorded accounts receivable.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A2
[Question]
35. An owner's investment in a business always creates an asset (cash), a liability (note
payable) and an equity (common stock).
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A2
[Question]
36. Return on assets is useful to decision makers for evaluating management, analyzing and
forecasting profits and in planning activities.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A3
1-12
Chapter 01 - Introducing Accounting in Business
[Question]
37. Reebok's net income of $119 million and average assets of $1,400 million results in a
return on assets of 8.5%.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A3
[Question]
38. Risk is the amount of uncertainty about the return we expect to earn in the future.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: Easy
Learning Objective: 01-A3
[Question]
39. The balance sheet shows whether or not the firm achieved its primary objective of earning
a profit.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
1-13
Chapter 01 - Introducing Accounting in Business
[Question]
40. The four basic financial statements include the balance sheet, income statement, statement
of retained earnings and statement of cash flows.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
[Question]
41. A balance sheet covers a period of time, such as a month or year.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
[Question]
42. The income statement is a financial statement that shows revenues earned and expenses
incurred during a specified period of time.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
1-14
Chapter 01 - Introducing Accounting in Business
[Question]
43. The statement of cash flows shows the net effect of revenues and expenses for a reporting
period.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
[Question]
44. The income statement shows the financial position of a business on a specific date.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
[Question]
45. The first section of the income statement reports cash from operations.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
1-15
Chapter 01 - Introducing Accounting in Business
[Question]
46. The balance sheet is based on the accounting equation.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
47. Owner's investments and dividends are reported on the income statement.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
48. Investing activities involve the buying and selling of assets such as land and equipment
that are held for long-term use in the business.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-16
Chapter 01 - Introducing Accounting in Business
[Question]
49. Operating activities include long-term borrowing and repaying cash from lenders and cash
investments by owners or dividends to the owner.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
50. The purchase of supplies must appear on the statement of cash flows as an investing
activity because it involves the purchase of assets.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
51. The income statement reports on operating activities at a specific point in time.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-17
Chapter 01 - Introducing Accounting in Business
[Question]
52. The statement of cash flows reports on cash flows separated into operating, investing and
financing activities over a period of time.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
[Question]
53. Chuck Taylor invested $175,000 in cash in Fast-Forward. This amount would be reported
in the statement of cash flows under financing activities.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
[Question]
54. Fast-Forward paid $6,000 in dividends. This amount should be included as an expense on
the income statement.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-18
Chapter 01 - Introducing Accounting in Business
Multiple Choice Questions
[Question]
55. Which of the following is the primary purpose of accounting?
A. To establish a business
B. To identify, record and communicate business transactions
C. To deceive stockholders
D. To keep from paying taxes
E. To establish credit for a company
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C1
[Question]
56. Technological advancement
A. Has replaced accounting
B. Has not changed the work that accountants do
C. Has freed accounting professionals to concentrate more on the analysis and interpretation
of information
D. In accounting has replaced the need for decision makers
E. In accounting is only available to large corporations
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C1
1-19
Chapter 01 - Introducing Accounting in Business
[Question]
57. Identifying business activities requires selecting transactions and events relevant to an
organization. Which of the following events would be recorded in the accounting records of
Acme Car Wash?
A. Acme washes 500 cars
B. J.B. Smith, a customer, buys lunch at the restaurant next door to Acme while waiting for
her car to be washed
C. Clean Company, a supplier, sells 50 pounds of soap to ABC Company
D. Sudsey Company, a supplier, goes out of business
E. Acme hires Andrea as a receptionist
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C1
[Question]
58. Internal users of accounting information include:
A. Shareholders
B. Customers
C. Creditors
D. Government regulators
E. Line Supervisor
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C2
1-20
Chapter 01 - Introducing Accounting in Business
[Question]
59. The primary objective of financial accounting is:
A. To serve the decision-making needs of internal users
B. To provide financial statements to help external users analyze and interpret an
organization's activities
C. To monitor and control company activities
D. To provide information on both the costs and benefits of managing products and services
E. To know what, when and how much to produce
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C2
[Question]
60. Internal users of accounting information always include:
A. Shareholders
B. Managers
C. Lenders
D. Suppliers
E. Customers
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C2
1-21
Chapter 01 - Introducing Accounting in Business
[Question]
61. The area of accounting aimed at serving the decision making needs of internal users is:
A. Financial accounting
B. Managerial accounting
C. External auditing
D. SEC reporting
E. Governmental accounting
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C2
[Question]
62. The financing functions of a business include:
A. Research and development
B. Purchasing
C. Marketing
D. Distribution
E. Selling common stock
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C5
1-22
Chapter 01 - Introducing Accounting in Business
[Question]
63. Which of the following statements is true of external information users?
A. They are directly involved in managing the organization
B. Their needs are met by the managerial area of accounting
C. They have limited access to an organization's accounting information
D. They use accounting information to help improve the efficiency and effectiveness of an
organization
E. They are the only users of accounting information who rely on internal controls to monitor
company activities
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C2
[Question]
64. Which accounting assumption assumes that all accounting information is reported
monthly or yearly?
A. Business entity assumption
B. Monetary unit assumption
C. Value assumption
D. Cost assumption
E. Time period assumption
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C4
1-23
Chapter 01 - Introducing Accounting in Business
[Question]
65. Which of the following accounting principles dictates when expenses are recognized?
A. Revenue recognition principle
B. Monetary unit principle
C. Business entity principle
D. Matching principle
E. Full disclosure principle
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C4
[Question]
66. Which of the following is the correct sequence for the heading for ABC Company’s 2010
Balance Sheet?
A. ABC Company, For the year ended 12/31/10, Balance Sheet
B. For the year ended 12/31/10, Balance Sheet, ABC Company
C. Balance Sheet, 12/31/10, ABC Company
D. 12/31/10, ABC Company, Balance Sheet
E. ABC Company, Balance Sheet, 12/31/10
Answer: E
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C5
1-24
Chapter 01 - Introducing Accounting in Business
[Question]
67. Which of the following elements are found on the income statement?
A. Cash
B. Accounts Receivable
C. Common Stock
D. Retained Earnings
E. Salaries Expense
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
68. An Asset is:
A. only acquired with cash
B. something the company owns
C. only contributed by stockholders
D. a company’s obligation to pay
E. is also called contributed capital
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
1-25
Chapter 01 - Introducing Accounting in Business
[Question]
69. Ethical behavior requires:
A. That an auditors' pay not depend on the figures in the client's reports
B. Auditors to invest in businesses they audit
C. Analysts to report information favorable to their companies
D. Managers to use accounting information to benefit themselves
E. That an auditor provides a favorable opinion
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C4
[Question]
70. Social responsibility:
A. Is a concern for the impact of one's actions on society as a whole
B. Is a code that helps in dealing with confidential information
C. Is required by the SEC
D. Requires that all businesses conduct social audits
E. Is mandated by the federal government
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Diversity
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-26
Chapter 01 - Introducing Accounting in Business
[Question]
71. Which of the following elements are found on the Balance Sheet?
A. Service Revenue
B. Net Income
C. Operating Activities
D. Utilities Expense
E. Retained Earnings
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Diversity
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C4
[Question]
72. The accounting guideline prescribing that financial statement information be supported by
independent, unbiased evidence other than someone's belief or opinion is the:
A. Business entity principle
B. Monetary unit principle
C. Going-concern principle
D. Cost principle
E. Measurement principle
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C4
1-27
Chapter 01 - Introducing Accounting in Business
[Question]
73. Businesses can take all of the following forms except:
A. Sole proprietorship
B. Common stock
C. Partnership
D. Corporation
E. Limited Liability Corporation
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
74. A corporation:
A. Is a legal entity separate and distinct from its owners
B. Must have many owners
C. Has shareholders who have unlimited liability for the acts of the corporation
D. Is the same as a limited liability partnership
E. Does not have to pay taxes
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-28
Chapter 01 - Introducing Accounting in Business
[Question]
75. Generally Accepted Accounting Principles:
A. Focus on the review of a situation
B. Does not require financial statements
C. Never change
D. Intend to make information on the financial statements relevant, reliable and comparable
E. Oversees Security and Exchange Commission
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
76. The organization that attempts to create more harmony among the accounting practices of
different countries by identifying preferred practices and encouraging their worldwide
acceptance is the:
A. AICPA
B. FASB
C. CAP
D. SEC
E. IASB
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Diversity
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-29
Chapter 01 - Introducing Accounting in Business
[Question]
77. The private board that currently has the authority to establish U.S. generally accepted
accounting principles is the:
A. APB
B. FASB
C. AAA
D. AICPA
E. SEC
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
78. Which of the following statements best describes the relationship of U.S. GAAP and
IFRS?
A. They are identical
B. They are entirely different conceptual frameworks
C. They are similar but not identical
D. Neither has anything to do with accounting
E. They both relate only to publicly traded companies
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-30
Chapter 01 - Introducing Accounting in Business
[Question]
79. The principle prescribing that financial statements reflect the assumption that the business
will continue operating instead of being closed or sold, unless evidence shows that it will not
continue is the:
A. Going-concern principle
B. Business entity principle
C. Objectivity principle
D. Cost Principle
E. Monetary unit principle
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
80. A parcel of land is: offered for sale at $150,000, assessed for tax purposes at $95,000,
recognized by its purchasers as being worth $140,000 and purchased for $137,000. The land
should be recorded in the purchaser's books at:
A. $95,000
B. $137,000
C. $138,500
D. $140,000
E. $150,000
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-31
Chapter 01 - Introducing Accounting in Business
[Question]
81. To include the personal assets and transactions of a business's owner in the records and
reports of the business would be in conflict with the:
A. Objectivity principle
B. Realization principle
C. Business entity principle
D. Going-concern principle
E. Revenue recognition principle
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
82. The accounting principle that requires accounting information to be based on actual cost
and requires assets and services to be recorded initially at the amount of cash or cashequivalent given in exchange is the:
A. Accounting equation
B. Cost principle
C. Going-concern principle
D. Realization principle
E. Business entity principle
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-32
Chapter 01 - Introducing Accounting in Business
[Question]
83. Recording the items on the financial statements in dollars is:
A. Objectivity principle
B. Monetary unit principle
C. Revenue recognition principle
D. Going-concern principle
E. Cost principle
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
84. The objectivity principle:
A. Means that information is supported by independent, unbiased evidence
B. Means that information can be based on what the preparer thinks is true
C. Means that financial statement should contain information that is optimistic
D. Means that a business may not recognize revenue until cash is received
E. Means the assets acquired must be recorded and what the company paid for them
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-33
Chapter 01 - Introducing Accounting in Business
[Question]
85. The principle that (1) requires revenue to be recognized at the time it is earned, (2) allows
the inflow of assets associated with revenue to be in a form other than cash and (3) measures
the amount of revenue as the cash plus the cash equivalent value of any non-cash assets
received from customers in exchange for goods or services is called the:
A. Going-concern principle
B. Cost principle
C. Revenue recognition principle
D. Objectivity principle
E. Business entity principle
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
86. The question of when revenue should be recognized on the income statement (according
to GAAP) is addressed by the:
A. Revenue recognition principle
B. Going-concern principle
C. Objectivity principle
D. Business entity principle
E. Cost principle
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-34
Chapter 01 - Introducing Accounting in Business
[Question]
87. The International Accounting Standards Board (IASB)
A. Hopes to create harmony among accounting practices of different countries
B. Is the government group that establishes reporting requirements for companies that issue
stock to the public
C. Has the authority to impose its standards on companies
D. Is the only source of U.S. generally accepted accounting principles (GAAP)
E. Applies only to companies that are members of the European Union
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Diversity
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
88. The Maximum Experience Company acquired a building for $500,000. Maximum
Experience had an appraisal done and found that the building was worth $575,000. The seller
had paid $300,000 for the building 6 years ago. Which accounting principle would prescribe
that Maximum Experience record the building on its records at $500,000?
A. Monetary unit principle
B. Going-concern principle
C. Cost principle
D. Business entity principle
E. Revenue recognition principle
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-35
Chapter 01 - Introducing Accounting in Business
[Question]
89. On December 15, 2010, Myers Legal Services signed a $50,000 contract with a client to
provide legal services to the client in 2011. Which accounting principle would require Myers
Legal Services to record the legal fees revenue in 2011 and not 2010?
A. Monetary unit principle
B. Going-concern principle
C. Cost principle
D. Business entity principle
E. Revenue recognition principle
Answer: E
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
90. Marian Mosely is the owner of Mosely Accounting Services. Which accounting
assumption requires Marian to keep her personal financial information separate from the
financial information of Mosely Accounting Services?
A. Monetary unit assumption
B. Going-concern assumption
C. Cost assumption
D. Business entity assumption
E. None of these. Since Marian is a sole proprietor, she is not required to separate her
personal financial information from the financial information of Mosely Accounting Services
Answer: D
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-36
Chapter 01 - Introducing Accounting in Business
[Question]
91. Congress passed the Sarbanes-Oxley Act to
A. Provide jobs to U.S. accountants and limit the number of jobs sent outside the country
B. Impose penalties on CEO's and CFO's who knowingly sign off on bogus accounting
reports, although at this time the penalties are token amounts
C. Help curb financial abuses at companies that issue their stock to the public
D. Force auditors to attest to the absolute accuracy of the financial statements
E. Require that all companies publicly disclose their internal control plans
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C4
[Question]
92. A limited partnership:
A. Includes a general partner with unlimited liability
B. Is subject to double taxation
C. Has owners called stockholders
D. Is the same as a corporation
E. Must only have two partners
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C4
1-37
Chapter 01 - Introducing Accounting in Business
[Question]
93. A partnership:
A. Is also called a sole proprietorship
B. Has unlimited liability
C. Has to have a written agreement in order to be legal
D. Is a legal organization separate from its owners
E. Has owners called shareholders
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C4
[Question]
94. According to generally accepted accounting principles, a company's balance sheet should
show the company's assets at:
A. The cash equivalent value of what was given up
B. The current market value of the assets at the balance sheet date
C. The cash paid to acquire them, even if something other than cash was given in the
exchange
D. The best estimate from a certified internal auditor
E. The objective value to external users
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C4
1-38
Chapter 01 - Introducing Accounting in Business
[Question]
95. The amounts reported in the accounts for assets used in operations are based on their
costs. This practice is best justified by the:
A. Cost principle
B. Going-concern principle
C. Objectivity principle
D. Business entity principle
E. Revenue recognition principle
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C4
[Question]
96. Which of the following accounting principles would prescribe that all goods and services
purchased is recorded at cost?
A. Going-concern principle
B. Continuing-concern principle
C. Cost principle
D. Business entity principle
E. Consideration principle
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C4
1-39
Chapter 01 - Introducing Accounting in Business
[Question]
97. Revenue is properly recognized:
A. When the customer's order is received
B. Only if the transaction creates an account receivable
C. At the end of the accounting period
D. Upon completion of the sale or when services have been performed and the business
obtains the right to collect the sale price
E. When cash from a sale is received
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C4
[Question]
98. An example of a financing activity is:
A. Buying office supplies
B. Obtaining a long-term loan
C. Buying office equipment
D. Selling inventory
E. Buying land
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C5
1-40
Chapter 01 - Introducing Accounting in Business
[Question]
99. An example of an operating activity is:
A. Paying wages
B. Purchasing office equipment
C. Borrowing money from a bank
D. Selling stock
E. Paying off a loan
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C5
[Question]
100. Planning activities:
A. Are the means organizations must use to pay for resources
B. Involve the acquiring and disposing of resources that an organization uses to acquire and
sell its products or services
C. Involve defining the ideas, goals and actions of an organization
D. Are the carrying out of an organization's plans
E. Involve using resources to research, develop, purchase, produce and market products and
services
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C5
1-41
Chapter 01 - Introducing Accounting in Business
[Question]
101. Operating activities:
A. Are the means organizations must use to pay for resources like land, buildings and
equipment
B. Involve using resources to research, develop, purchase, produce, distribute and market
products and services
C. Involve acquiring and disposing of resources that a business uses to acquire and sell its
products or services
D. Are also called asset management
E. Are also called strategic management
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C5
[Question]
102. The major activities of a business include:
A. Operating, Investing, Making a Profit
B. Investing, Making a Profit, Operating
C. Making a Profit, Operating, Borrowing
D. Operating, Investing, Financing
E. Investing, Making a Profit Financing
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C5
1-42
Chapter 01 - Introducing Accounting in Business
[Question]
103. An example of an investing activity is:
A. Paying wages of employees
B. Paying dividends
C. Purchasing land
D. Selling inventory
E. Contribution from owner
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C5
[Question]
104. Net Income:
A. Decreases equity
B. Represents the amount of assets owners put into a business
C. Equals assets minus liabilities
D. Is the excess of revenues over expenses
E. Represents the owners' claims against assets
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
1-43
Chapter 01 - Introducing Accounting in Business
[Question]
105. If equity is $300,000 and liabilities are $192,000, then assets equal:
A. $108,000
B. $192,000
C. $300,000
D. $492,000
E. $792,000
Answer: D
Feedback: Assets = $192,000 + $300,000 = $492,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
[Question]
106. Resources owned or controlled by a company that are expected to yield benefits are:
A. Assets
B. Revenues
C. Liabilities
D. Stockholder's Equity
E. Expenses
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
1-44
Chapter 01 - Introducing Accounting in Business
[Question]
107. Increases in retained earnings from a company's earnings activities are:
A. Assets
B. Revenues
C. Liabilities
D. Stockholder's Equity
E. Expenses
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
[Question]
108. Net income is:
A. Assets minus liabilities
B. The excess of revenues over expenses
C. An asset
D. The same as revenue
E. The excess of expenses over retained earnings
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
1-45
Chapter 01 - Introducing Accounting in Business
[Question]
109. The difference between a company's assets and its liabilities or its net assets is:
A. Net income
B. Expense
C. Equity
D. Revenue
E. Net loss
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
[Question]
110. Creditors' claims on the assets of a company are called:
A. Net losses
B. Expenses
C. Revenues
D. Equity
E. Liabilities
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
1-46
Chapter 01 - Introducing Accounting in Business
[Question]
111. Decreases in retained earnings that represent costs of assets or services that are used to
earn revenues are called:
A. Liabilities
B. Equity
C. Withdrawals
D. Expenses
E. Contributed Capital
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
[Question]
112. The description of the relation between a company's assets, liabilities and equity, which
is expressed as Assets = Liabilities + Equity is known as the:
A. Income statement equation
B. Accounting equation
C. Business equation
D. Return on equity ratio
E. Net income
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
1-47
Chapter 01 - Introducing Accounting in Business
[Question]
113. Assets = Liabilities + Equity is known as the:
A. Income statement equation
B. Cost principle
C. Objectivity principle
D. Accounting equation
E. Transaction principle
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
[Question]
114. Expenses:
A. Increase retained earnings
B. Are increases in retained earnings from a company's earning activity
C. Are the costs of assets or services used to earn revenues
D. Occur when retained earnings exceed revenue
E. Are creditor's claims on assets
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
1-48
Chapter 01 - Introducing Accounting in Business
[Question]
115. Net income:
A. Occurs when revenues exceed expenses
B. Is the same as revenue
C. Equals resources owned or controlled by a company
D. Occurs when expenses exceed assets
E. Represents assets taken from a company for an owner's personal use
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
[Question]
116. Revenues are:
A. The same as net income
B. The excess of expenses over assets
C. Resources owned or controlled by a company
D. Increases in retained earnings from a company's earning activities
E. The costs of assets or services used
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
1-49
Chapter 01 - Introducing Accounting in Business
[Question]
117. If liabilities are $51,500 and assets are $173,425, then equity equals:
A.
B.
C.
D.
E.
$224,925
$51,500
$173,425
$121,925
$103,000
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
[Question]
118. If assets are $99,000 and liabilities are $32,000, then equity equals:
A. $32,000
B. $67,000
C. $99,000
D. $131,000
E. $198,000
Answer: B
Feedback: Equity = $99,000 - $32,000 = $67,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
1-50
Chapter 01 - Introducing Accounting in Business
[Question]
119. Another name for equity is:
A. Net income
B. Expenses
C. Net assets
D. Revenue
E. Net loss
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
[Question]
120. The excess of expenses over revenues for a period is:
A. Net assets
B. Equity
C. Net loss
D. Net income
E. A liability
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
1-51
Chapter 01 - Introducing Accounting in Business
[Question]
121. Which of the following statements is not true about assets?
A. They are economic resources owned or controlled by the business
B. They are expected to provide future benefits to the business
C. They appear on the balance sheet
D. They appear on the statement of retained earnings
E. Claims on them are shared between creditors and owners
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
[Question]
122. The distribution of assets to stockholders is called a(n):
A. Liability
B. Dividend
C. Expense
D. Contribution
E. Investment
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
1-52
Chapter 01 - Introducing Accounting in Business
[Question]
123. Distributions of assets by a business to its stockholders are called:
A. Dividends
B. Expenses
C. Assets
D. Retained earnings
E. Net Income
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
[Question]
124. The balance sheet equation is:
A. Revenues minus expenses equal net income
B. Debits equal credits
C. The bookkeeping phase of accounting
D. Another name for the accounting equation
E. Assets minus liabilities and equity
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
1-53
Chapter 01 - Introducing Accounting in Business
[Question]
125. The assets of a company total $700,000; the liabilities, $200,000. What are the total
claims of the owners?
A. $900,000
B. $700,000
C. $500,000
D. $200,000
E. It is impossible to determine unless the amount of owners' investment is known
Answer: C
Feedback: $700,000 - $200,000 = $500,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
[Question]
126. Our company has three times as many assets as it does liabilities. If total liabilities are
$55,000, what is the amount of owners' equity?
A. $55,000
B. $110,000
C. $165,000
D. $220,000
E. Cannot be determined from the given information
Answer: B
Feedback:
Assets = 3 (55,000) = 165,000
Assets 165,000 - Liabilities 55,000 = Owners' Equity 110,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A1
1-54
Chapter 01 - Introducing Accounting in Business
[Question]
127. A company has twice as much owner's equity as it does liabilities. If total liabilities are
$50,000, what amounts of assets are owned by the company?
A. $50,000
B. $100,000
C. $150,000
D. $200,000
E. Cannot be determined from the given information
Answer: C
Feedback:
Owners' Equity = 2 (50,000) = 100,000
Assets = Liabilities 50,000 + Owners' Equity 100,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A1
[Question]
128. Which of the following statements regarding account classification is true?
A. Assets and revenues are the same thing
B. If employees have not yet been paid for their work, the company has wages payable
C. Retained earnings equal cash which the company has earned and kept
D. Revenue is another term for profit
E. Revenue minus expense equals retained earnings
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A1
1-55
Chapter 01 - Introducing Accounting in Business
[Question]
129. If assets are $365,000 and equity is $120,000, then liabilities are:
A. $120,000
B. $245,000
C. $365,000
D. $485,000
E. $610,000
Answer: B
Feedback: Liabilities = $365,000 - $120,000 = $245,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A2
[Question]
130. Assets created by selling goods and services on credit are:
A. Accounts payable
B. Accounts receivable
C. Liabilities
D. Expenses
E. Equity
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A2
1-56
Chapter 01 - Introducing Accounting in Business
[Question]
131. An exchange of value between two entities is called:
A. The accounting equation
B. Recordkeeping or bookkeeping
C. A business transaction
D. An asset
E. Net Income
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A2
[Question]
132. Photometer Company paid off $30,000 of its accounts payable in cash. What would be
the effects of this transaction on the accounting equation?
A. Assets, $30,000 increase; liabilities, no effect; equity, $30,000 increase
B. Assets, $30,000 decrease; liabilities, $30,000 decrease; equity, no effect
C. Assets, $30,000 decrease; liabilities, $30,000 increase; equity, no effect
D. Assets, no effect; liabilities, $30,000 decrease; equity, $30,000 increase
E. Assets, $30,000 decrease; liabilities, no effect; equity $30,000 decrease
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A2
1-57
Chapter 01 - Introducing Accounting in Business
[Question]
133. How would the accounting equation of Boston Company be affected by the billing of a
client for $10,000 of consulting work completed?
A. +$10,000 accounts receivable, -$10,000 accounts payable
B. +$10,000 accounts receivable, +$10,000 accounts payable
C. +$10,000 accounts receivable, +$10,000 cash
D. +$10,000 accounts receivable, +$10,000 consulting revenue
E. +$10,000 accounts receivable, -$10,000 consulting revenue
Answer: D
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A2
[Question]
134. Apatha Company has assets of $600,000, liabilities of $250,000 and equity of $350,000.
It buys office equipment on credit for $75,000. The effects of this transaction include:
A. Assets increase by $75,000 and expenses increase by $75,000
B. Assets increase by $75,000 and expenses decrease by $75,000
C. Liabilities increase by $75,000 and expenses decrease by $75,000
D. Assets decrease by $75,000 and expenses decrease by $75,000
E. Assets increase by $75,000 and liabilities increase by $75,000
Answer: E
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A2
1-58
Chapter 01 - Introducing Accounting in Business
[Question]
135. Viscount Company collected $42,000 cash on its accounts receivable. How does this
transaction affect the company's accounting equation?
A. Assets decrease and equity increases
B. Both assets and liabilities decrease
C. Assets, liabilities and equity are unchanged
D. Both assets and equity are unchanged and liabilities increase
E. Assets increase and equity decreases
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A2
[Question]
136. If the liabilities of a business increased $75,000 during a period of time and the equity in
the business decreased $30,000 during the same period, the assets of the business must have:
A. Decreased $105,000
B. Decreased $45,000
C. Increased $30,000
D. Increased $45,000
E. Increased $105,000
Answer: D
Feedback:
Change in Assets = Change in Liabilities + Change in Equity
Change in Assets = $75,000 + (-$30,000) = +$45,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A2
1-59
Chapter 01 - Introducing Accounting in Business
[Question]
137. If the assets of a business increased $89,000 during a period of time and its liabilities
increased $67,000 during the same period, equity in the business must have:
A. Increased $22,000
B. Decreased $22,000
C. Increased $89,000
D. Decreased $156,000
E. Increased $156,000
Answer: A
Feedback:
Change in Assets = Change in Liabilities + Change in Equity
Change in Assets = + $89,000 - $67,000 = +$22,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A2
[Question]
138. If the assets of a business increased $15,000 during a period of time and its equity
decreased $4,000 during the same period, liabilities in the business must have:
A. Increased $11,000
B. Decreased $11,000
C. Increased $19,000
D. Decreased $19,000
E. Increased $61,000
Answer: C
Feedback: Change in Assets = Change in (Liabilities + Equity) +15,000 = x -4,000
x = +19,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A2
1-60
Chapter 01 - Introducing Accounting in Business
[Question]
139. Beta Corporation purchased $100,000 worth of land by paying 10,000 cash and signing a
$90,000 mortgage. Immediately prior to this transaction the corporation had assets, liabilities
and owners' equity in the amounts of $150,000; $30,000; and $120,000 respectively. What is
the total amount of Beta Corporation's assets after this transaction has been recorded?
A. $240,000
B. $250,000
C. $160,000
D. $40,000
E. $260,000
Answer: A
Feedback: 150,000 (assets prior to transaction) + 100,000 (land) - (10,000) cash = 240,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A2
[Question]
140. A corporation purchased a $40,000 delivery truck by paying 4,000 cash and signing a
$36,000 note payable. Immediately prior to this transaction the corporation had assets,
liabilities and owners' equity in the amounts of $75,000; $52,000; and $23,000 respectively.
What is the total amount of the corporation's assets after this transaction has been recorded?
A. $115,000
B. $111,000
C. $79,000
D. $71,000
E. $75,000
1-61
Chapter 01 - Introducing Accounting in Business
Answer: B
Feedback: 75,000 (assets prior to transaction) + 40,000 (truck) - 4,000 (cash) = 111,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A2
[Question]
141. Return on assets is:
A. Also called rate of return
B. Computed by dividing net income by beginning assets plus ending assets divided by two
C. Computed by multiplying net income by total assets
D. Used in helping evaluate expenses
E. Found on the balance sheet
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Moderate
Learning Objective: 01-A3
1-62
Chapter 01 - Introducing Accounting in Business
[Question]
142. Reebok had income of $150 million and average assets of $1,800 million. Its return on
assets is:
A. 8.33%
B. 83.3%
C. 12.0%
D. 120%
E. 16.7%
Answer: A
Feedback: $150 million/$1,800 million = 8.33%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A3
[Question]
143. Nike had income of $350 million and average assets of $2,000 million. Its return on
assets is:
A. 1.8%
B. 35%
C. 17.5%
D. 5.7%
E. 3.5%
Answer: C
Feedback: $350 million/$2,000 million = 17.5%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A3
1-63
Chapter 01 - Introducing Accounting in Business
[Question]
144. Fast-Forward has net income of $18,955 and assets at the beginning of the year of
$200,000. Its assets at the end of the year total $246,000. Compute its return on assets.
A. 7.7%
B. 8.5%
C. 9.5%
D. 11.8%
E. 13.0%
Answer: B
Feedback: $18,955/[($200,000 +$246,000)/2] = $18,955/$223,000 = 8.5%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A3
[Question]
145. Compute return on assets given net income of $13,764, beginning assets of $120,000 and
ending assets of $176,000.
A. 4.65%
B. 7.82%
C. 9.3%
D. 11.47%
E. 21.51%
Answer: C
Feedback: $13,764/[($120,000 +$176,000)/2] = $13,764/$148,000 = 9.3%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A3
1-64
Chapter 01 - Introducing Accounting in Business
[Question]
146. U.S. government bonds are:
A. High-risk and high-return investments
B. Low-risk and low-return investments
C. High-risk and low-return investments
D. Low-risk and high-return investments
E. High risk and no-return investments
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A3
[Question]
147. Risk is:
A. Net income divided by average total assets
B. The reward for investment
C. The uncertainty about the expected return that will be earned from an investment
D. Unrelated to expected return
E. Derived from the idea of getting something back from an investment
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A3
1-65
Chapter 01 - Introducing Accounting in Business
[Question]
148. Consider the risk of the following investments. Choose the answer that lists the
investments in order from highest expected return to lowest expected return.
A. Drilling exploration to discover oil, stock in a secure "blue chip" corporation, government
bonds
B. Stock in a secure "blue chip" corporation, government bonds, drilling exploration to
discover oil
C. Government bonds, drilling exploration to discover oil, stock in a secure "blue chip"
corporation
D. Drilling exploration to discover oil, government bonds, stock in a secure "blue chip"
corporation
E. Government bonds, stock in a secure "blue chip" corporation, drilling exploration to
discover oil
Answer: A
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A3
[Question]
149. The statement of cash flows reports on cash flows for:
A. Operating activities
B. Revenue activities
C. Expense activities
D. Planning activities
E. Equity activities
Answer: A
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
1-66
Chapter 01 - Introducing Accounting in Business
[Question]
150. A company purchases supplies on account, what is the effect on the accounting
equation?
A. assets decrease; equity increases
B. assets decrease; equity decreases
C. liabilities decrease; equity decreases
D. liabilities increase; equity increases
E. liabilities increase; assets increase
Answer: E
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Moderate
Learning Objective: 01-P1
[Question]
151. The statement of cash flows reports information on:
A. Revenue activities
B. Expense activities
C. Financing activities
D. Equity activities
E. Asset activities
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
1-67
Chapter 01 - Introducing Accounting in Business
[Question]
152. The statement of retained earnings:
A. Reports how retained earnings changes at a point in time
B. Reports how retained earnings changes over a period of time
C. Reports on cash flows for operating, financing and investing activities over a period of
time
D. Reports on cash flows for operating, financing and investing activities at a point in time
E. Reports on amounts for assets, liabilities and equity at a point in time
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
[Question]
153. The financial statement that reports whether the business earned a profit and also lists the
types and amounts of the revenues and expenses is called a(n):
A. Balance sheet
B. Statement of retained earnings
C. Statement of cash flows
D. Income statement
E. Statement of financial position
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-68
Chapter 01 - Introducing Accounting in Business
[Question]
154. A balance sheet lists:
A. The types and amounts of the revenues and expenses of a business
B. Only the information about what happened to retained earnings during a time period
C. The types and amounts of assets, liabilities and equity of a business as of a specific date
D. The cash inflows and outflows during the period
E. The assets and liabilities of a company, but not the equity
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
155. A financial statement providing information that helps users understand a company's
financial status and which lists the types and amounts of assets, liabilities and equity as of a
specific date is called a(n):
A. Balance sheet
B. Income statement
C. Statement of cash flows
D. Statement of retained earnings
E. Financial status statement
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-69
Chapter 01 - Introducing Accounting in Business
[Question]
156. The financial statement that describes where a company's cash came from and where it
went during the period is the:
A. Statement of financial position
B. Statement of cash flows
C. Balance sheet
D. Income statement
E. Statement of retained earnings
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
157. The financial statement that shows: beginning and ending retained earnings balances and
the effects of net income (loss) and a dividend for the period is the:
A. Statement of financial position
B. Statement of cash flows
C. Balance sheet
D. Income statement
E. Statement of retained earnings
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-70
Chapter 01 - Introducing Accounting in Business
[Question]
158. Cash investments by owners in exchange for stock are listed on which of the following
statements?
A. Balance sheet
B. Income statement
C. Statement of retained earnings
D. Statement of cash flows
E. Statement of Cash Received
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
159. Accounts payable appear on which of the following statements?
A. Balance sheet
B. Income statement
C. Statement of retained earnings
D. Statement of cash flows
E. Transaction statement
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-71
Chapter 01 - Introducing Accounting in Business
[Question]
160. The income statement reports all of the following except:
A. Revenues earned by a business
B. Expenses incurred by a business
C. Assets owned by a business
D. Net income or loss earned by a business
E. The time period over which the earnings occurred
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
161. Use the following information as of December 31 to determine equity.
Liabilities…………………….
Cash…………………………
Equipment…………………..
Buildings……………………
$141,000
57,000
206,000
175,000
A. $57,000
B. $141,000
C. $297,000
D. $438,000
E. $579,000
Answer: C
Feedback:
Assets = $57,000 + $206,000 + $175,000 = $438,000
Equity = $438,000 - $141,000 = $297,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-72
Chapter 01 - Introducing Accounting in Business
[Question]
162. Determine the net income of a company for which the following information is available.
Employee salaries expense……………..
$180,000
Interest expense…………………………
10,000
Rent expense…………………………….
20,000
Consulting revenue……………………..
400,000
A. $190,000
B. $210,000
C. $230,000
D. $400,000
E. $610,000
Answer: A
Feedback:
Expenses: $180,000 + $10,000 + $20,000 = $210,000
Net income = $400,000 - $210,000 = $190,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
163. A company acquires equipment for $75,000 cash. This represents a(n):
A. Operating activity
B. Investing activity
C. Financing activity
D. Revenue activity
E. Expense activity
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-73
Chapter 01 - Introducing Accounting in Business
[Question]
164. A company borrows $125,000 from the Eastside Bank and receives the loan proceeds in
cash. This represents a(n):
A. Revenue activity
B. Operating activity
C. Expense activity
D. Investing activity
E. Financing activity
Answer: E
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
165. Fast-Forward had cash inflows from operations of $62,500; cash outflows from investing
activities of $47,000; and cash inflows from financing of $25,000. The net change in cash
was:
A. $40,500 increase
B. $40,500 decrease
C. $134,500 decrease
D. $134,000 increase
E. $9,500 increase
Answer: A
Feedback: $62,500 - $47,000 + $25,000 = $40,500 increase
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-74
Chapter 01 - Introducing Accounting in Business
[Question]
166. Use the following information as of December 31 to determine equity.
Accounts Payable………………………… $ 800
Accounts Receivable…………………….
700
Cash……………………………………… 2,300
Wages Expense…………………………
9,000
Wages Payable………………………
1,200
A. $1,000
B. $3,000
C. $5,000
D. $10,000
E. $11,000
Answer: A
Feedback:
Assets:
Liabilities:
Equity:
$700 + $2,300 = $3,000
$800 + $1,200 = $2,000
$3,000 - $2,000 = $1,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-75
Chapter 01 - Introducing Accounting in Business
[Question]
167. Fast-Forward has beginning equity of $257,000, net income of $51,000, dividends of
$40,000 and investments by owners in exchange for stock of $6,000. Its ending equity is:
A. $223,000
B. $240,000
C. $268,000
D. $274,000
E. $208,000
Answer: D
Feedback: $257,000 + $51,000 - $40,000 + $6,000 = $274,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
[Question]
168. Acme Company had equity of $55,000 at the end of the current year. During the year the
company had a $2,000 net loss and investments by owners in exchange for stock of $7,000.
Compute equity as of the beginning of the year.
A. $5,000
B. $46,000
C. $50,000
D. $52,000
E. $64,000
Answer: C
Feedback:
x - $2,000 + $7000 = 55,000
x = 50,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-76
Chapter 01 - Introducing Accounting in Business
[Question]
169. Rent expense that is paid with cash appears on which of the following statements?
A. Balance sheet
B. Income statement
C. Statement of retained earnings
D. Schedule of Accounts Receivable
E. Statement of Cash Received
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
[Question]
170. Fees earned (but not yet received in cash) by a business in exchange for services that it
has provided appear on which of the following statements?
A. Balance sheet
B. Statement of Cash Received
C. Statement of retained earnings
D. Statement of cash flows
E. Schedule of Accounts Receivable
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-77
Chapter 01 - Introducing Accounting in Business
[Question]
171. A company's balance sheet shows: cash $22,000, accounts receivable $16,000, office
equipment $50,000 and accounts payable $17,000. What is the amount of equity?
A. $17,000
B. $29,000
C. $71,000
D. $88,000
E. $105,000
Answer: C
Feedback:
Assets = $22,000 + $16,000 + $50,000 = $88,000
Liabilities = $17,000
Equity = $88,000 - $17,000 = $71,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-78
Chapter 01 - Introducing Accounting in Business
[Question]
172. A company reported total equity of $145,000 on its December 31, 2010, balance sheet.
The following information is available for the year ended December 31, 2011:
2011 Revenues……………..
$210,000
2011 Expenses……………….
165,000
Liabilities, at December 31, 2011…. 92,000
What are the total assets of the company at December 31, 2011?
A. $45,000
B. $92,000
C. $190,000
D. $210,000
E. $282,000
Answer: E
Feedback:
2011 net income = $210,000 - $165,000 = $45,000
2011 year-end equity = $145,000 + $45,000 = $190,000
2011 year-end assets = $92,000 + $190,000 = $282,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-79
Chapter 01 - Introducing Accounting in Business
[Question]
173. A company had total equity of $89,000 on January 1, 2011. The following information is
available for the year ended December 31, 2011:
2011 Revenues
2011 Expenses
Liabilities, at December 31, 2011
$350,000
403,000
27,000
What are the total assets of the company at December 31, 2011?
A. $27,000
B. $36,000
C. $53,000
D. $63,000
E. $350,000
Answer: D
Feedback:
2011 net loss = $350,000 - $403,000 = ($53,000)
2011 year-end equity = $89,000 - $53,000 = $36,000
2011 year-end assets = $27,000 + $36,000 = $63,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-80
Chapter 01 - Introducing Accounting in Business
[Question]
174. If Beginning Retained Earnings was $184,300, the company distributed $46,000 in
dividends and Ending Retained Earnings was $345,000, what was the net income for the
period?
A. $154,700
B. $206,700
C. $114,700
D. $575,300
E. $160,700
Answer: B
Feedback: 345,000+46,000-184,300 = 206,700
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
[Question]
175. If Beginning Retained Earnings was $184,300, net income for the period was $200,000
and Ending Retained Earnings was $322,000, what was the total amount of dividend
distributed for the period?
A. $62,300
B. $306,300
C. $337,700
D. $706,300
E. $137,700
Answer: A
Feedback: 184,300+200,000-322,000 = 62,300
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-81
Chapter 01 - Introducing Accounting in Business
[Question]
176. If net income for the period was $134,250, dividends distributed were $76,530 and
Ending Retained Earnings was $862,520, what was the Beginning Retained Earnings for the
period?
A. $1,073,300
B. $651,740
C. $804,800
D. $920,240
E. $728,270
Answer: C
Feedback: 862,520+76,530-134,250 = 804,800
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P
[Question]
177. Beginning Assets were $437,600, Beginning Liabilities were $262,560, Common Stock
sold during the year totaled $45,000, Revenue for the year was $414,250, Expenses for the
year were $280,000, Dividends declared was $22,700, and Ending Liabilities is $$350,000.
What was the Beginning Equity for the year?
A. $700,160
B. $787,600
C. $187,600
D. $612,560
E. $175,040
1-82
Chapter 01 - Introducing Accounting in Business
Answer: E
Feedback: 437,600-262,560 = 175,040
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
178. Beginning Assets were $437,600, Beginning Liabilities were $262,560, Common Stock
sold during the year totaled $45,000, Revenue for the year was $414,250, Expenses for the
year were $280,000, Dividends declared was $22,700, and Ending Liabilities is $$350,000.
What is the Ending Equity for the year?
A. $700,160
B. $331,590
C. $134,250
D. $612,560
E. $175,040
Answer: B
Feedback: (437,600 - 262,560) + 45,000 + 414,250 - 280,000 - 22,700 = 331,590
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-83
Chapter 01 - Introducing Accounting in Business
[Question]
179. Beginning Assets were $437,600, Beginning Liabilities were $262,560, Common Stock
sold during the year totaled $45,000, Revenue for the year was $414,250, Expenses for the
year were $280,000, Dividends declared was $22,700, and Ending Liabilities is $$350,000.
What is Net Income for the year?
A. $700,160
B. $331,590
C. $134,250
D. $612,560
E. $175,040
Answer: C
Feedback: 414,250 - 280,000 = 134,250
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
180. Beginning Assets were $437,600, Beginning Liabilities were $262,560, Common Stock
sold during the year totaled $45,000, Revenue for the year was $414,250, Expenses for the
year were $280,000, Dividends declared was $22,700, and Ending Liabilities is $$350,000.
What are the Ending Assets for the year?
A. $ 700,160
B. $ 612,560
C. $ 787,600
D. $ 681,590
E. $1,159,410
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Chapter 01 - Introducing Accounting in Business
Answer: D
Feedback: (437,600 – 262,560) + 45,000 + 414,250-280,000-22,700 = 331,590 (end. Equity)
+ 350,000 = 681,590
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
181. Beginning Assets were $700,000, Beginning Equity was $225,000, Revenue for the year
was $523,000, Common Stock sold during the year totaled $320,000, Expenses for the year
were $392,000, Ending Equity is $751,000, and Ending Assets are $963,000.
What is Net Income for the year?
A. $475,000
B. $998,000
C. $131,000
D. $203,000
E. $308,000
Answer: C
Feedback: 523,000 – 392,000 = 131,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-85
Chapter 01 - Introducing Accounting in Business
[Question]
182. Beginning Assets were $700,000, Beginning Equity was $225,000, Revenue for the year
was $523,000, Common Stock sold during the year totaled $320,000, Expenses for the year
were $392,000, Ending Equity is $751,000, and Ending Assets are $963,000.
What were the total dividends declared?
A. $75,000
B. $998,000
C. $131,000
D. $203,000
E. $308,000
Answer: A
Feedback: 751,000+392,000-523,000-320,000-225,000 = 75,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
[Question]
183. Beginning Assets were $700,000, Beginning Equity was $225,000, Revenue for the year
was $523,000, Common Stock sold during the year totaled $320,000, Expenses for the year
were $392,000, Ending Equity is $751,000, and Ending Assets are $963,000.
What were the Beginning Liabilities for the year?
A. $738,000
B. $998,000
C. $131,000
D. $203,000
E. $475,000
Answer: E
Feedback: 700,000-225,000 = 475,000
1-86
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
184. Beginning Assets were $700,000, Beginning Equity was $225,000, Revenue for the year
was $523,000, Common Stock sold during the year totaled $320,000, Expenses for the year
were $392,000, Ending Equity is $751,000, and Ending Assets are $963,000.
What are the Ending Liabilities for the year?
A. $738,000
B. $998,000
C. $212,000
D. $203,000
E. $475,000
Answer: C
Feedback: 963,000 – 751,000 = 212,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-87
Chapter 01 - Introducing Accounting in Business
[Question]
185. Ending Liabilities are 67,000, Beginning Equity was $87,000, Common Stock sold
during year totaled $31,000, Expenses for the year were $22,000, Dividends declared totaled
$13,000, Ending Equity for the year is $181,000 and Beginning Assets for the year were
$222,000.
What are the Ending Assets for the year?
A. $154,000
B. $134,000
C. $212,000
D. $248,000
E. $155,000
Answer: D
Feedback: 67,000 + 181,000 = 248,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
186. Ending Liabilities are 67,000, Beginning Equity was $87,000, Common Stock sold
during year totaled $31,000, Expenses for the year were $22,000, Dividends declared totaled
$13,000, Ending Equity for the year is $181,000 and Beginning Assets for the year were
$222,000.
What was Beginning Liabilities for the year?
A. $154,000
B. $155,000
C. $212,000
D. $248,000
E. $135,000
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Chapter 01 - Introducing Accounting in Business
Answer: E
Feedback: 222,000 -87,000 = 135,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
187. Ending Liabilities are 67,000, Beginning Equity was $87,000, Common Stock sold
during year totaled $31,000, Expenses for the year were $22,000, Dividends declared totaled
$13,000, Ending Equity for the year is $181,000 and Beginning Assets for the year were
$222,000.
What was Revenue for the year?
A. $154,000
B. $155,000
C. $ 53,000
D. $ 98,000
E. $135,000
Answer: D
Feedback: 181,000+13,000+22,000-31,000-87,000 = 98,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-89
Chapter 01 - Introducing Accounting in Business
[Question]
188. Ending Liabilities are 67,000, Beginning Equity was $87,000, Common Stock sold
during year totaled $31,000, Expenses for the year were $22,000, Dividends declared totaled
$13,000, Ending Equity for the year is $181,000 and Beginning Assets for the year were
$222,000.
What was Net Income for the year?
A. $ 41,000
B. $ 76,000
C. $ 53,000
D. $ 98,000
E. $ 35,000
Answer: B
Feedback: 181,000+13,000+22,000-31,000-87,000 = 98,000 (rev.) – 22,000 = 76,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-90
Chapter 01 - Introducing Accounting in Business
[Question]
189. Below is accounting information for Cascade Company for 2010:
Revenue
Cash
Common Stock
Expenses
Equipment
Accounts Receivable
Notes Payable
Notes Receivable
$416,000
$120,000
$200,000
$300,000
$240,000
$35,000
$50,000
$62,000
What was Net Income for the year?
A. $320,000
B. $296,000
C. $100,000
D. $457,000
E. $116,000
Answer: E
Feedback: 416,000 – 300,000 = 116,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-91
Chapter 01 - Introducing Accounting in Business
[Question]
190. Below is accounting information for Cascade Company for 2010:
Revenue
Cash
Common Stock
Expenses
Equipment
Accounts Receivable
Notes Payable
Notes Receivable
$416,000
$120,000
$200,000
$300,000
$240,000
$35,000
$50,000
$62,000
What was Total Equity for the year?
A. $320,000
B. $296,000
C. $316,000
D. $457,000
E. $116,000
Answer: C
Feedback: 416,000 – 300,000 = 116,000 + 200,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-92
Chapter 01 - Introducing Accounting in Business
[Question]
191. Below is accounting information for Cascade Company for 2010:
Revenue
Cash
Common Stock
Expenses
Equipment
Accounts Receivable
Notes Payable
Notes Receivable
$416,000
$120,000
$200,000
$300,000
$240,000
$35,000
$50,000
$62,000
What were the Total Assets for the year?
A.
B.
C.
D.
E.
$320,000
$296,000
$316,000
$457,000
$116,000
Answer: D
Feedback: 120,000+35,000+62,000+240,000 = 457,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-93
Chapter 01 - Introducing Accounting in Business
Matching Questions
[Question]
192. Match the following terms with the appropriate definition.
1. An information and measurement system that
identifies records and communicates relevant, reliable
and comparable information about an organization's
business activities
2. The use of resources to research, develops, purchase,
produce, distribute and market products and services
3. . The acquisition and disposing of resources that an
organization uses to acquire and sell products and
services
4. The idea that accounting information is based on
actual cost
5. Provide the means organizations use to pay for
resources such as land, buildings and equipment to carry
out plans
6. Persons using accounting information who are not
directly involved in the running of the organization
7. The part of accounting that involves recording
transactions and events, either electronically or manually
8. Beliefs that distinguish right from wrong
9. Persons using accounting information who are directly
involved in managing the organization
10. Concern for the impact of actions on society
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Diversity
AACSB: Ethics
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective:01- C1
Learning Objective: 01-C2.
Learning Objective: 01-C3
Learning Objective: 01-C4
Learning Objective:01- C5
1-94
Accounting 1
Recordkeeping 7
External users 6
Internal users 9
Operating
activities
Investing
activities
Financing
activities
Ethics
Social
responsibility
Cost principle
2
3
5
8
10
4
Chapter 01 - Introducing Accounting in Business
[Question]
193. Match each of the following terms with the most appropriate definition.
1. Amount received from selling products and services
2. Those happenings that affect an entity's accounting
equation and can be reliably measured
3. Area of accounting aimed at serving external users
4. Costs of assets or services used to earn revenues
5. The uncertainty about the expected return to be earned
6. Defining the idea, goals and actions of an
organization
7. A financial ratio useful in evaluating management,
analyzing and forecasting profits and planning activities
8. Area of accounting aimed at serving the decision
making needs of internal users
9. Creditor's claims on a company's assets
10. The excess of revenue over expenses
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01- A1.
Learning Objective: 01-C1
Learning Objective: 01-C2
Learning Objective:01- C3
1-95
Risk
Managerial
accounting
Return on
Assets
Liabilities
Expenses
5
8
7
9
4
Planning 6
Financial
accounting 3
Net income 10
Events 2
Revenues 1
Chapter 01 - Introducing Accounting in Business
[Question]
194. The following is a list of selected users of accounting information. Match the appropriate
user a through e to the following information needs.
1. Monitor costs and ensure quality
2. Judge the soundness of a customer before making
sales on credit
3. Measuring risk and return of loans
4. Assessing employment opportunities
5. Assessing the risk and return of acquiring shares
Production
Managers 1
Suppliers
Employees
Lenders
Shareholders
2
4
3
5
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk analysis
Difficulty: Easy
Learning Objective: 01-C2
[Question]
195. Match each of the following transactions and events to the accounting principle
applicable to recording and reporting them.
1. An insurance company receives insurance premiums
for six future month's worth of coverage
2. Helen Cho, a sole proprietor, pays for her daughter's
preschool out of business funds
3. Mayan Imports receives a shipment from Mexico,
which contains an invoice that is stated in pesos
4. A building is for sale at $480,000. An appraisal is given
for $450,000
5. To make the balance sheet look better, Helen Cho
added several thousand dollars to the Equipment account
that she believed was undervalued
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C4
1-96
Revenue
recognition
principle 1
Cost principle 4
Business entity
principle 2
Monetary unit
principle 3
Objectivity
principle 5
Chapter 01 - Introducing Accounting in Business
[Question]
196. Match the following definitions with terms 1 through 8. Place the letter that identifies the
best definition in the blank space next to the term.
1. Revenues
2. Going-concern
principle
3. Statement of
retained earnings
4. Net assets
5. Dividends
6. Objectivity
principle
7. Cost principle
8. Assets
Resources owned or controlled by a company that are
expected to yield future benefits.
A principle that requires financial statements to reflect
the assumption that the business will continue operating
instead of being closed or sold.
A financial statement that reports the changes in
retained earnings over the reporting period; including
increases from net income and for decreases such as
dividends or net loss.
Another term for equity.
A principle that requires the information in financial
statements to be supported by independent unbiased
evidence.
The accounting principle that requires assets and
services to be recorded initially at the cash or cashequivalent amount given in exchange.
The distribution of assets to stockholders.
Increases in retained earnings from a company's
earnings activities.
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
Learning Objective: 01-C4
Learning Objective: 01-P1
1-97
8
2
3
4
6
7
5
1
Chapter 01 - Introducing Accounting in Business
[Question]
197. Match the following definitions with the terms 1 through 9. Place the letter that identifies
the best definition in the blank space next to the term.
1. Monetary unit
principle
2. Expenses
3. Statement of
retained earnings
4. Business entity
principle
5. Statement of
cash flows
6. Liabilities
7. Revenue
recognition
principle
8. Business
transaction
9. Accounting
equation
A financial statement that lists cash inflows (receipts)
and cash outflows (payments); the cash flows are arranged
by operating, investing and financing activities.
An exchange of value between two parties.
The principle that assumes transactions and events can be
expressed in money units.
The principle that requires a business to be accounted for
separately from its owners.
5
8
1
4
The principle that revenue is recognized when earned. 7
The relation between a company's assets, liabilities and
equity. 9
A financial statement that reports the changes in retained
earnings over the reporting period; adjusted for increases
from net income and for decreases such as dividends or net
loss. 3
The cost of assets or services used to earn revenue. 2
Creditor's claims on assets. 6
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
Learning Objective: 01-C4
Learning Objective: 01-P1
1-98
Chapter 01 - Introducing Accounting in Business
[Question]
198. Match each of the following with the appropriate section of the Statement of Cash Flows
1. Paid utilities expenses
2. Sale of used equipment
3. Paid employee wages
4. Purchase of land
5. Dividends paid to stockholders
6. Borrowed money from a bank on a long-term note
Operating
Financing
Investing
Investing
Financing
Operating
1
5
4
2
6
3
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
[Question]
199. Match each of the following items with the financial statement in which each item would
most likely appear. An item may appear on more than one statement.
1. Revenues
2. Cash from investing activities
3. Assets
4. Cash from operating activities
5. Total equity
6. Liabilities
7. Cash dividends paid
8. Costs and expenses
Balance sheet
Statement of retained earnings
Income statement
Statement of cash flows
Income statement
Balance sheet
Statement of cash flows
Balance sheet
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
1-99
3
7
1
2
8
6
4
5
Chapter 01 - Introducing Accounting in Business
[Question]
200. Select the appropriate financial statement(s) for each of the following accounts.
Some items may appear on more than one financial statement.
1. Accounts receivable
2. Cash
3. Fees earned
4. Notes payable
5. Common Stock
6. Cash dividends paid
7. Rent Expense
8. Supplies Expense
Balance sheet
Statement of retained earnings, Statement of cash
flows
Balance sheet
Income statement
Balance sheet
Balance sheet
Income statement
Income statement
2
6
4
3
5
1
7
8
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
201. Select the appropriate financial statement(s) for each of the following items.
Some items may appear on more than one financial statement.
1.
2.
3.
4.
5.
6.
7.
8.
Cash investments by stockholders
Cash dividends paid
Cash payments to purchase equipment
Cash proceeds from a long-term loan
Supplies
Common stock
Consulting Revenue
Advertising expense
Balance sheet
Statement of retained earnings
Balance Sheet
Income statement
Statement of cash flows
Statement of cash flows
Income statement
Statement of cash flows
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-100
5
2
6
8
3
1
7
4
Chapter 01 - Introducing Accounting in Business
[Question]
202. Classify the following activities according to the appropriate section of the statement of
cash flows.
1. Cash received from a one-time sale of used office
equipment
2. Cash received from customers
3. Cash paid for utilities
4. Cash paid for dividends
5. Cash paid for a delivery van to be used in the business
6. Cash received from stockholders from issuance of
stock
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-101
Investing
activity
Financing
activity
Operating
activity
Financing
activity
Operating
activity
Investing
activity
1
4
2
6
3
5
Chapter 01 - Introducing Accounting in Business
Essay Questions
[Question]
203. Explain the role of accounting in the information age.
Answer: Accounting is an information and measurement system. It identifies, records and
communicates relevant, reliable and comparable information about business activities.
Accounting also includes the crucial process of analysis and interpretation.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C1
[Question]
204. What is the balance sheet? What is its purpose?
Answer: The balance sheet is a listing of the types and amounts of assets, liabilities and
equity of a business at a specified point in time. The statement's purpose is to provide
information that helps users assess the financial condition of the business. This statement is
said to be a financial snapshot of the business.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C1
1-102
Chapter 01 - Introducing Accounting in Business
[Question]
205. Identify the users and uses of accounting information.
Answer: There are two general types of users of accounting information. (1) Internal users
are managers and officers of the business. They require information about business activities
in order to make decisions about planning, monitoring and control. (2) External users rely on
financial statements to make business decisions. These users include lenders and shareholders.
Lenders need information for measuring the risk and return of loans. Shareholders need
information for assessing the risk and return for owning shares.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C2
[Question]
206. What are two questions that an owner might be able to answer by looking at accounting
information?
Answer: Some possible questions are: 1) How, what, when and how much must be
purchased? 2) What are the projected sales and costs? 3) What are the costs and benefits of
particular products and services? 4) What were the payroll costs last month? 5) What is the
projected number of employees needed in the next month? Many other questions are possible.
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C2
1-103
Chapter 01 - Introducing Accounting in Business
[Question]
207. Identify several opportunities in accounting and its related fields.
The traditional areas of accounting include financial accounting, managerial accounting and
tax accounting. Work in related fields includes lending, underwriting, market research and
business valuation.
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C3
[Question]
208. Explain why ethics are an integral part of accounting?
The purpose of accounting is to provide useful information to decision makers. For
information to be useful, it must be trusted. This requires ethical behavior by accountants and
managers in all phases of gathering, analyzing and reporting financial information so that
good and informed decisions can be made.
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C3
1-104
Chapter 01 - Introducing Accounting in Business
[Question]
209. Describe the three important guidelines for revenue recognition.
The three important guidelines for revenue recognition include: (1) Revenue is recognized
when earned. (2) Assets received from selling products and services do not need to be in cash.
(3) Revenue recognized is measured by cash received plus the cash equivalent of other assets
received.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
210. Identify the three basic forms of business organizations.
Answer: The three basic forms of business organizations are sole proprietorships,
partnerships and corporations.
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-105
Chapter 01 - Introducing Accounting in Business
[Question]
211. How does the objectivity principle support ethical behavior?
Answer: The objectivity principle supports ethical behavior since it requires that financial
information be documented by independent, unbiased evidence. Consequently, the impact of
beliefs and opinions on the recording and reporting of business transactions and events is
lessened.
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
212. Why should assets be recorded at historical cost?
Assets should be recorded at historical cost to provide users with reliable and objective
information regarding completed business transactions.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-106
Chapter 01 - Introducing Accounting in Business
[Question]
213. Identify the two main groups involved in establishing generally accepted accounting
principles in the U.S.
Answer: The FASB is the private group that establishes GAAP. The SEC establishes
reporting requirements for companies that issue stock to the public.
Bloom’s Taxonomy: Remember
AACSB: Communication
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C4
[Question]
214. How does the going-concern principle affect the reported asset values of a business?
Answer: The going-concern principle means that financial statements reflect an assumption
that the business continues in operation instead of being closed or sold. Assets are therefore
reported at historical cost rather than at liquidation value.
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C4
1-107
Chapter 01 - Introducing Accounting in Business
[Question]
215. Identify and describe the three major activities of a business organization.
Answer: The three major activities of a business are operating, financing and investing.
Operating activities use resources to research, develop, purchase, produce, distribute and
market products and services. Financing activities provide the means organizations use to pay
for resources like land, buildings and equipment. Investing activities are the acquiring and
disposing of long-term assets that are used to operate the business.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C5
[Question]
216. How do revenues and expenses affect net income?
Answer: Revenues are the increases in retained earnings from a company's earnings
activities. Expenses are the costs of assets or services used to earn revenues. Net income is the
excess of revenues over expenses.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
1-108
Chapter 01 - Introducing Accounting in Business
[Question]
217. Explain the accounting equation and define its terms.
Answer: The accounting equation is stated as: Assets = Liabilities + Equity. Assets are
resources owned or controlled by a business. Creditors' claims on assets are called liabilities.
The owner's claim on assets is called equity. The accounting equation shows that the
ownership of business assets can be shared between creditors and owners.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A1
[Question]
218. What distinguishes liabilities from equity?
Answer: Liabilities are creditors' claims on assets. They reflect obligations to transfer assets
or provide products or services to others. Equity is the owners' claim to assets. Equity is also
called net assets or residual interest.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A1
1-109
Chapter 01 - Introducing Accounting in Business
[Question]
219. What is the purpose of return on assets as an analytical tool?
Answer: Return on assets is useful in evaluating management, analyzing and forecasting
profits and planning activities.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-A2
[Question]
220. Discuss the relationship of risk to return.
Answer: Net income is related to return. Risk is the uncertainty about the amount of the
expected return. In general, the lower the risk of an investment, the lower the expected return.
Higher return is expected in exchange for accepting higher risk.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: Hard
Learning Objective: 01-A3
1-110
Chapter 01 - Introducing Accounting in Business
[Question]
221. Describe the three types of activities reported on the statement of cash flows.
Answer: The three types of activities reported on the statement of cash flows are (1)
operating, which are the cash inflows and outflows from operations; (2) financing, which are
the cash inflows and outflows related to owner investments and withdrawal and long-term
borrowing and repaying cash from lending; and, (3) investing, which are the cash inflows and
outflows from the purchase and sale of long-term assets.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
[Question]
222. Bert and John Jacobs are the owners of the Life is good T-shirt company. If they also
own a personal collection of vintage bobble heads valued at $25,000, how would the bobble
heads be reflected on the company books? State the accounting concept or principle which
supports your answer.
Answer: The personal assets of Bert and John are not shown on the books of Life is good.
The business entity principles states that the activities of a business are accounted for
separately from the activities of its owners.
Bloom’s Taxonomy: Applys
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-111
Chapter 01 - Introducing Accounting in Business
[Question]
223. Identify and describe the four basic financial statements.
Answer: The four basic financial statements are the balance sheet, income statement,
statement of retained earnings and statement of cash flows. The balance sheet describes the
company's financial position and lists the types and amounts of assets, liabilities and equity at
a point in time. The income statement describes the company's revenues, expenses and net
income over a period of time. The statement of retained earnings explains changes in retained
earnings from net income or loss and dividends over a period of time. The statement of cash
flows reports on cash flows for operating, investing and financing activities over a period of
time.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-112
Chapter 01 - Introducing Accounting in Business
Short Answer Questions
[Question]
224. The characteristics below apply to at least one of the forms of business organization.
a. Is a separate legal entity?
b. Is allowed to be owned by one person only?
c. Owner or owners are personally liable for debts of the business
d. Is a taxable entity?
e. Is a business entity?
f. May have a contract specifying the division of profits among the owners?
g. Has an unlimited life.
Use the following format to indicate (with a "yes" or "no") whether or not a characteristic
applies to each type of business organization.
Proprietorship
Partnership
Corporation
Partnership
no
no
yes
no
yes
yes
no
Corporation
yes
Yes
no
yes
yes
no
yes
a
b
c
d
e
f
g
Answer:
a
b
c
d
e
f
g
Proprietorship
no
yes
yes
no
yes
no
no
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-113
Chapter 01 - Introducing Accounting in Business
[Question]
225. A parcel of land is offered for sale at $600,000 is assessed for tax purposes at $500,000
is recognized by its purchasers as easily being worth $575,000 and is purchased for $570,000.
At what amount should the land be recorded in the purchaser's books? What accounting
principle supports your answer?
Answer: $570,000. The cost principle requires the acquisition of an asset to be recorded in
the accounting records at cost.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
[Question]
226. Prior to purchasing a tract of land, Fast-Forward had the land appraised at $300,000. The
management of Fast-Forward purchased the land for $275,000. At what amount should the
land be recorded on Fast-Forward's books? What accounting principle supports your answer?
Answer: $275,000; The cost principle.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C4
1-114
Chapter 01 - Introducing Accounting in Business
[Question]
227. You are reviewing the accounting records of Cathy's Antiques, Inc. owned by Cathy
Miller. You have uncovered the following situations. Compose a memo to Ms. Miller that
cites the appropriate accounting principle and the suggested action for each separate situation.
In August, a check for $500 was written to Wee Day Care Center. This amount represents
child care for her son Brandon.
Cathy plans a Going out of Business Sale for May, since she will be closing her business for a
month-long vacation in June. She plans to reopen July 1 and will continue operating Cathy's
Antiques indefinitely.
Cathy received a shipment of pine furniture from Quebec, Canada. The invoice was stated in
Canadian dollars.
Joseph Clark paid $1,500 for a dining table. The amount was recorded as revenue. The table
will be delivered to Mr. Clark in six weeks.
Answer:
1. Business entity principle. Cathy Miller should refund the $350 to the business or record it
as a dividend. In the future, she should use a personal check to pay for day care.
2. Going-concern principle. Cathy's Antiques is not going out of business. The business is just
closing for vacation. She should hold an inventory reduction sale or other appropriate sale.
3. Monetary unit principle. The invoice should be restated in U.S. dollars for accounting
purposes.
4. Revenue recognition principle. Since the table has not been delivered, revenue should not
be recognized. The $1,500 should be placed in an account such as Deposits Received from
Customers (a type of unearned revenue) until the table is delivered.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C4
1-115
Chapter 01 - Introducing Accounting in Business
[Question]
228. Lorton's Web Services has assets of $265,000 and liabilities of $130,000. Calculate the
amount of equity.
Answer: Equity = $265,000 - $130,000 = $135,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
[Question]
229. A company has liabilities of $475,000 and $925,000 of equity. What is the amount of its
assets?
Answer: Assets = $475,000 + $925,000 = $1,400,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
1-116
Chapter 01 - Introducing Accounting in Business
[Question]
230. A company has assets of $500,000 and equity of $350,000. What is the amount of
liabilities?
Answer: Liabilities = $500,000 - $350,000 = $150,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-A1
[Question]
231. At the beginning of the year, a company had $120,000 worth of liabilities. During the
year, assets increased by $160,000 and at year-end they equaled $360,000. Liabilities
decreased $20,000 during the year. Calculate the beginning and ending values of equity.
Answer:
Beginning equity = $80,000
Ending equity = $260,000
Feedback:
Assets
Beginning
Change
Ending
Liabilities
$200,000 =
+160,000 =
$360,000 =
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A1
1-117
Equity
$120,000+
(20,000$100,000+
$ 80,000
180,000
$260,000
Chapter 01 - Introducing Accounting in Business
[Question]
232. The accounts of Garfield Company listed with the increases or decreases that occurred
during the past year are as follows.
Account
Cash
Accounts receivable
Accounts payable
Notes payable
Increase
Decrease
$25,000
$ (5,000)
(11,000)
16,000
The only items affecting the equity accounts are: net income, an investment of $3,000 by the
owner in exchange for stock and dividends of $11,000. Using the balance sheet equation,
compute net income for the past year.
Answer: $23,000
Feedback: Change in assets = $25,000 - $5,000 = $20,000
Change in liabilities = -$11,000 + $16,000 = $5,000
Change in equity = $20,000 - $5,000 = $15,000
Change in equity = $15,000 = NI + $3,000 - $11,000
NI = $23,000
To maintain the balance sheet equation, Assets = Liabilities + Equity, net income must be
$23,000.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A1
1-118
Chapter 01 - Introducing Accounting in Business
[Question]
233. Annie's Attic has the following account balances for the dates given:
September 1
September 30
$40,000
60,000
40,000
38,000
6,000
?
Cash
Accounts Receivable
Accounts Payable
Its net income for September 1 through September 31 was $20,000 and there were no
investments by the owners or dividends paid. Determine the equity at both September 1 and
September 30.
Answer:
Beginning Equity 9/1: $74,000
Ending Equity 9/30: $94,000
Feedback: Total assets:
Cash
Accounts Receivable
Total assets
September 1
September 30
$40,000
$60,000
40,000
38,000
$80,000
$98,000
At September 1: Assets = Liabilities + Equity
80,000 = 6,000 + Equity
Equity = $74,000
At September 30:
Equity, September 1
Plus September net income
Equity, September 30
$74,000
20,000
$94,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A1; 01-P1
1-119
Chapter 01 - Introducing Accounting in Business
[Question]
234. On May 1, Chuck Taylor formed Fast-Forward, a shoe consulting business as a
corporation. To start the business he invested $750,000 in cash. Enter the appropriate amounts
reflecting the transaction into the accounting equation format shown below.
Assets =
Liabilities +
Equity
Assets =
+$750,000 =
Liabilities +
$0 +
Equity
+$750,000
Answer:
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
[Question]
235. A company spent $52,000 in cash for this period's advertising activities. Enter the
appropriate amounts that reflect this transaction into the accounting equation format shown
below.
Assets =
Liabilities +
Equity
Assets =
-$52,000 =
Liabilities +
$0 +
Equity
-$52,000
Answer:
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
1-120
Chapter 01 - Introducing Accounting in Business
[Question]
236. A company purchased $7,000 of supplies and testing equipment on credit. Enter the
appropriate amounts that reflect this transaction into the accounting equation format shown
below.
Assets =
Liabilities +
Equity
Assets =
+$7,000 =
Liabilities +
- $7,000 +
Equity
$0
Answer:
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
[Question]
237. A company performed testing services for a client. The client paid the company $3,000
in cash. Enter the appropriate amounts that reflect this transaction into the company's
accounting equation format shown below.
Assets =
Liabilities +
Equity
Assets =
+$3,000 =
Liabilities +
$0 +
Equity
+$3,000
Answer:
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
1-121
Chapter 01 - Introducing Accounting in Business
[Question]
238. A company paid its employees $90,000 in cash for wages earned during the past two
weeks. Enter the appropriate amounts that reflect this transaction into the accounting equation
format shown below.
Assets =
Liabilities +
Equity
Assets =
-$90,000 =
Liabilities +
$0 +
Equity
-$90,000
Answer:
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
[Question]
239. If the liabilities of a business increased $86,000 during a period of time and equity in the
business decreased $23,000 during the same period, enter the appropriate amounts reflecting
this activity in the accounting equation format shown below.
Assets =
Liabilities +
Equity
Answer: Assets would have increased $63,000.
Assets =
+$63,000 =
Liabilities +
$86,000 +
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-122
Equity
-$23,000
Chapter 01 - Introducing Accounting in Business
[Question]
240. If the liabilities of a company increased $92,000 during a period of time and equity in the
business decreased $30,000 during the same period, did the assets of the company increase or
decrease and by what amount?
Answer: Assets increased $62,000.
Feedback: Assets = Liabilities + Equity + $62,000 = +$92,000 - $30,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
[Question]
241. If Madiera Company paid $42,000 of its accounts payable in cash, what would be the
effect of this transaction on assets, liabilities and equity?
Answer: Assets would decrease $42,000, liabilities would decrease $42,000 and equity would
not change.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-123
Chapter 01 - Introducing Accounting in Business
[Question]
242. Halley Burton began a Web Consulting practice as a corporation and completed these
transactions during September of the current year.
Sept
1
2
3
4
8
15
20
30
30
Invested $100,000 of his personal savings into a checking account opened in
the name of the business and received stock in the corporation.
Rented office space and paid $1,200 cash for the month of September.
Purchased office equipment for $30,000, paying $8,000 cash and agreeing to
pay the balance in one year.
Purchased office supplies for $750 cash.
Completed work for a client and immediately collected $2,700 cash for the
services.
Completed $3,600 services for a client on credit.
Received $3,600 from a client for the work completed on September 15.
Paid the office secretary's monthly salary, $3,000 cash.
Web Consulting paid a $2,000 cash dividend.
Show the effects of the above transactions on the accounting equation of Web Consulting.
Use the following format for your answers. The first item is shown as an example.
Increase = I Decrease = D No effect = N
Date
Example:
September 1
Assets
Liabilities
Equity
I
N
I
1-124
Chapter 01 - Introducing Accounting in Business
Answer:
Date
September 1
September 2
September 3
September 4
September 8
September 15
September 20
September 30
September 30
Assets
I
D
I,D
I,D
I
I
I,D
D
D
Liabilities
N
N
I
N
N
N
N
N
N
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-125
Equity
I
D
N
N
I
I
N
D
D
Chapter 01 - Introducing Accounting in Business
[Question]
243. For each of the following transactions for a corporation, identify the effects on the
accounting equation. Use "+" to indicate an increase and "-" to indicate a decrease. Use "A",
"L" and "E" to indicate assets, liabilities and equity, respectively. Part A has been completed
as an example.
a.
b.
c.
d.
e.
f.
g.
L. Berryman invested $100,000 in the
new corporation in exchange for stock.
Land was purchased for $50,000. A
down payment of $15,000 cash was
made and a note was signed for the
balance.
Services were rendered to customers
for cash.
A building was purchased for cash.
Supplies were purchased for cash.
Paid the office secretary’s salary.
The amount owed on the land from
part (b) was paid.
Answer:
A. +A +E
B. +A +L
C. +A +E
D. +A - A
E. +A - A
F. -A - E
G. -A - L
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-126
+A
+E
Chapter 01 - Introducing Accounting in Business
[Question]
244. Sara Bloom has prepared the following analysis of September transactions for her
business, Blooming Florist. Unfortunately, she has lost some information. Determine the
missing amounts (a) through (c) below.
Date
Balances
9/5
9/10
Cash
30,000
-10,000
-3,500
Accounts
Receivable
30,100
0
0
Accounts
Payable
(a)
(b)
0
Notes
Payable
8,500
0
0
Common
Stock
10,000
0
0
Retained
Earnings
30,000
Accounts
Receivable
30,100
0
0
Accounts
Payable
(a) 11,600
(b) -10,000
0
Notes
Payable
8,500
0
0
Common
Stock
10,000
0
0
Retained
Earnings
30,000
(c)
Answer:
Date
Balances
9/5
9/10
Cash
30,000
-10,000
-3,500
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-127
(c) -3,500
Chapter 01 - Introducing Accounting in Business
[Question]
245. The following schedule reflects the first month's transactions of the Blue Real Estate
Company.
Cash +
Accounts
Receivable +
1. -20,000
2. -5,000
3.
4. +3,000
5. +1,000
6.
-750
7.
+500
8.
9. -2,000
Supplies +
Equipment -
Accounts
Payable +
Common Retained
Stock + Earnings
+20,000
-5,000
+1,500
+1,500
+3,000
+2,500
+1,500
-750
-500
-400
-400
-2,000
Provide descriptions for each transaction.
Answer:
1. Investment of cash in business by owner in exchange for stock.
2. Purchased equipment for cash.
3. Purchased supplies on credit.
4. Performed services for cash.
5. Performed services for both cash and on credit.
6. Paid accounts payable.
7. Received cash for an account receivable.
8. Used supplies in business.
9. Paid dividend or paid expense of business.
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-128
Chapter 01 - Introducing Accounting in Business
[Question]
246. A company paid its landlord $15,000 cash for this month's rent. Enter the appropriate
amounts that reflect this transaction into the accounting equation format shown below.
Assets =
Liabilities +
Equity
Assets =
-$15,000
Liabilities +
0
Equity
-$15,000
Answer:
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-129
Chapter 01 - Introducing Accounting in Business
[Question]
247. The accountant of Magic Video Games prepared a balance sheet immediately after each
transaction was recorded. During September, the first month of operation, the following
balance sheets were prepared:
MAGIC VIDEO GAMES
Balance Sheet
September 1
Assets
Cash
Total assets
Assets
Cash
Land
Building
Total assets
Equity
$60,000 Common Stock
$60,000 Total liabilities and
equity
MAGIC VIDEO GAMES
Balance Sheet
September 5
Liabilities
$48,000 Notes payable
10,000 Equity Common
Stock
20,000
$78,000 Total liabilities and
equity
$60,000
$60,000
$18,000
60,000
$78,000
MAGIC VIDEO GAMES
Balance Sheet
September 9
Assets
Cash
Office supplies
Land
Building
Total assets
Liabilities
$48,000 Accounts payable
2,000 Notes payable
10,000 Equity Common
Stock
20,000
$80,000 Total liabilities and
Equity
1-130
$ 2,000
18,000
60,000
$80,000
Chapter 01 - Introducing Accounting in Business
MAGIC VIDEO GAMES
Balance Sheet
September 11
Assets
Cash
Office supplies
Land
Building
Office furniture
Total assets
Liabilities
$42,000 Accounts payable
2,000 Notes payable
10,000 Equity Common
Stock
20,000
6,000
$80,000 Total liabilities and
Equity
$ 2,000
18,000
60,000
$80,000
MAGIC VIDEO GAMES
Balance Sheet
September 15
Assets
Cash
Office supplies
Land
Building
Office furniture
Total assets
Liabilities
$32,000 Accounts payable
2,000 Notes payable
10,000 Equity Common
Stock
20,000
6,000
$70,000 Total liabilities and
Equity
$ 2,000
8,000
60,000
$70,000
Required: Describe the nature of each of these five transactions for the month of September.
Sept.
1
5
9
11
15
1-131
Chapter 01 - Introducing Accounting in Business
Answer:
Sept.
1
5
Stockholders invested $60,000 cash in the company.
Land and building were purchased for $12,000 cash and an $18,000 note
payable.
9 Office supplies were purchased for $2,000 on account.
11 Office furniture was purchased for $6,000 cash.
15 $10,000 of the note payable was paid in cash.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
[Question]
248. Fast-Forward reported net income of $17,500 for the past year. At the beginning of the
year the company had $200,000 in assets. By the end of the year, assets had increased to
$300,000. Calculate the return on assets.
Answer: $17,500/[(200,000 + $300,000)/2] = $17,500/$250,000 = 7%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A2
1-132
Chapter 01 - Introducing Accounting in Business
[Question]
249. Quick Computer Service had net income for the year of $30,000. Its assets at the
beginning of the year were $400,000. At the end of the year assets were worth $450,000.
Calculate its return on assets.
Answer: $30,000/[($400,000 + $450,000)/2] = $30,000/$425,000 = 7.1%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-A2
1-133
Chapter 01 - Introducing Accounting in Business
[Question]
250. Identify the risk and the return in each of the following examples.
A. Investing $500 in a CD at 4.5% interest
B. Placing a $100 bet on an NBA game
C. Investing $10,000 in Microsoft stock
D. Borrowing $20,000 in student loans
Answer:
A. The risk involved is that the investor may need the money in the CD before the CD
matures and would have to give up the interest. The return is the 4.5% interest on the $500
invested in the CD
B. The risk is that the team bet on may not beat the point spread and the bet would be lost.
The return would be any winnings based on the odds
C. The risk is that the value of Microsoft stock could go down. The return would come from
increase in the value of the stock and from any dividends received
D. The risk is that the student might not be able to find a job that pays enough to live on, and
therefore not be able to pay the loan. The return is that the student would be able to finance an
education and earn higher wages
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk analysis
Difficulty: Hard
Learning Objective: 01-A3
[Question]
251. ParFour's total liabilities are $130,000 and its equity is $340,000. Calculate the
company's total assets.
Answer: Total assets = $130,000 + $340,000 = $470,000.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
1-134
Chapter 01 - Introducing Accounting in Business
[Question]
252. Della's Donuts has revenues of $83,000 and expenses of $64,000. Calculate its net
income.
Answer: Net income = $83,000 - $64,000 = $19,000.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-P1
[Question]
253. Cool Tours had beginning equity of $72,000; net income of $25,000 and dividends of
$9,000. Calculate the ending equity.
Answer: Ending equity = $72,000 + $25,000 - $9,000 = $88,000.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-135
Chapter 01 - Introducing Accounting in Business
[Question]
254. Della's Donuts had cash inflows from operating activities of $27,000; cash outflows from
investing activities of $22,000 and cash outflows from financing activities of $12,000.
Calculate the net increase or decrease in cash.
Answer: $27,000 - $22,000 - $12,000 = $7,000 decrease in cash.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-136
Chapter 01 - Introducing Accounting in Business
[Question]
255. Presented below is selected financial information for Stanley's Bike Shop. Using the
appropriate information, prepare the income statement for 2011.
Total Assets at December 31, 2011
2011 Expenses
Total Equity at December 31, 2010
Total Liabilities at December 31, 2010
2011 Revenues
$91,000
38,000
48,000
35,000
46,000
Answer:
Stanley’s Bike Shop
Income Statement
For the year ended December 31, 2011
Revenues
Expenses
Net income
$46,000
(38,000)
$ 8,000
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-137
Chapter 01 - Introducing Accounting in Business
[Question]
256. Prepare a November 30 balance sheet in proper form for Green Bay Delivery Service
from the following alphabetical list of the accounts at November 30:
Accounts receivable
Accounts payable
Building
Common stock
Cash
Notes payable
Office equipment
Retained earnings
Trucks
$10,000
18,000
28,000
30,000
8,000
45,000
12,000
?
55,000
Answer:
GREEN BAY DELIVERY SERVICE
Balance Sheet
November 30
Assets
Liabilities
Cash
$8,000 Accounts payable
Accounts receivable
10,000 Notes payable
Office equipment
12,000 Total liabilities
Building
28,000
Trucks
55,000 Common stock
Retained earnings
Total equity
Total assets
$113,000 Total liabilities and
Equity
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-138
$18,000
45,000
63,000
30,000
20,000
50,000
$113,000
Chapter 01 - Introducing Accounting in Business
[Question]
257. Prepare a December 31 balance sheet in proper form for Surety Insurance from the
following items and amounts:
Commissions earned
Accounts payable
Accounts receivable
Office equipment
Advertising expense
Cash
Land
Note payable
Office supplies
Salaries expense
Salaries payable
Building
Common stock
Retained earnings
$40,000
3,500
5,000
10,000
3,200
7,500
35,000
50,000
500
12,000
1,000
100,000
40,000
63,500
Answer:
SURETY INSURANCE
Balance Sheet
December 31
Assets
Cash
Accounts Receivable
Office supplies
Land
Building
Office Equipment
Total assets
Liabilities
Accounts payable
Salaries payable
Note payable
Total liabilities
Common stock
Retained earnings
Total equity
$158,000 Total liabilities and
Equity
$ 7,500
5,000
500
35,000
100,000
10,000
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-139
$ 3,500
1,000
50,000
54,500
40,000
63,500
103,500
$158,000
Chapter 01 - Introducing Accounting in Business
[Question]
258. Maslow's Consulting Inc. had retained earnings of $172,500 at December 31, 2010. Net
income for 2011 amounted to $56,400. Dividends during 2009 were $48,000. Prepare the
statement of retained earnings for 2011.
Answer:
Maslow Consulting, Inc.
Statement of Retained Earnings
For year ended December 31, 2011
Retained earnings, December 31, 2010
Plus net income
Less dividends
Retained earnings, December 31, 2011
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-140
$172,500
56,400
228,900
(48,000)
$180,900
Chapter 01 - Introducing Accounting in Business
[Question]
259. From the information given, prepare a November income statement.
On November 1 of the current year, Lois Bell began Lois Bell, Interior Design as a
corporation with an initial investment of $50,000 cash. On November 30 her records showed
the following (alphabetically arranged) selected accounts and amounts:
Accounts payable
Accounts receivable
Cash
Fees earned
Notes payable
$12,000
23,000
17,200
30,000
4,250
Office furnishings
Dividends
Rent expense
Salaries expense
Telephone expense
$40,000
6,000
3,600
6,200
250
Answer:
LOIS BELL, INTERIOR DESIGN, INC.
Income Statement
For Month Ended November 30
Revenue
Fees earned
Operating expenses
Rent expense
Salaries expense
Telephone expense
Net income
$30,000
$3,600
6,200
250
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-P1
1-141
10,050
$19,950
Chapter 01 - Introducing Accounting in Business
[Question]
260. From the information given, prepare a November statement of retained earnings.
On November 1 of the current year, Lois Bell began Lois Bell, Interior Design as a
corporation with an initial investment of $50,000 cash. On November 30 her records showed
the following (alphabetically arranged) selected accounts and amounts:
Accounts payable
Accounts receivable
Cash
Fees earned
Notes payable
$12,000
23,000
17,200
30,000
4,250
Office furnishings
Dividends
Rent expense
Salaries expense
Telephone expense
$40,000
6,000
3,600
6,200
250
Answer:
LOIS BELL, INTERIOR DESIGN
Statement of Retained earnings
For Month Ended November 30
Retained earnings, November 1
Plus net income
$
0
19,950
19,950
(6,000)
$13,950
Less dividends
Retained earnings, November 30
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-142
Chapter 01 - Introducing Accounting in Business
[Question]
261. From the information given, prepare a November 30 balance sheet.
On November 1 of the current year, Lois Bell began Lois Bell, Interior Design as a
corporation with an initial investment of $50,000 cash. On November 30 her records showed
the following (alphabetically arranged) selected accounts and amounts:
Accounts Payable
Accounts Receivable
Cash
Fees earned
Notes payable
$12,000
23,000
17,200
30,000
4,250
Office furnishings
Dividends
Rent expense
Salaries expense
Telephone expense
$40,000
6,000
3,600
6,200
250
Answer:
LOIS BELL, INTERIOR DESIGN, INC.
Balance Sheet
November 30
Assets
Liabilities
Cash
$17,200 Accounts payable
Accounts
receivable
Office furnishings
Total assets
23,000 Notes payable
$12,000
4,250
40,000 Total liabilities
$16,250
Common stock
50,000
Retained earnings
13,950
Total equity
63,950
$80,200 Total liabilities
and equity
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-143
$80,200
Chapter 01 - Introducing Accounting in Business
[Question]
262. Presented below is selected financial information for Stanley's Bike Shop. Using the
appropriate information, prepare its balance sheet at December 31, 2011.
Total Assets at December 31, 2011
2011 Expenses
Total Equity at December 31, 2010
Total Liabilities at December 31, 2011
2011 Revenues
$91,000
38,000
48,000
35,000
46,000
Answer:
Assets
Total Asses
Stanley’s Bike Shop
Balance Sheet
December 31, 2011
$91,000 Liabilities
______ Equity
$91,000 Total liabilities and
equity
2011 Net income = $46,000 - $38,000 = $8,000
2011 Equity = $48,000 + $8,000 = $56,000
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-144
$35,000
56,000
$91,000
Chapter 01 - Introducing Accounting in Business
[Question]
263. The following information is available for the Skate and Boards Rental.
Assets at December 31, 2011
2011 Cash inflows from operating activities
2011 Cash outflows from financing activities
2011 Cash outflows from investing activities
2011 Expenses
Retained earnings at December 31, 2010
Liabilities at December 31, 2011
Common stock at December 31, 2011
2011 Revenues
2011 Dividends
$152,000
105,000
(44,000)
(84,000)
(43,000)
50,000
28,000
12,000
135,000
(30,000)
Using the above information prepare an Income Statement, Statement of Retained Earnings
and Statement of Cash Flows for the Skate and Boards Rental for 2011. Also, prepare its
Balance Sheet as of December 31, 2011. Assume that the 12/31/10 cash balance is $70,000.
Answer:
Skate and Boards Rental
Income Statement
For the year ended December 31, 2011
Revenues
Expenses
Net Income
$135,000
43,000
$92,000
Skate and Boards Rental
Statement of Retained Earnings
For the year ended December 31, 2011
Retained earnings, December 31, 2010
Add net income
Less dividends
Retained earnings, December 31, 2011
Skate and Boards Rental
Balance Sheet
December 31, 2011
Assets
Liabilities
Common stock
Retained earnings
Total equity
Total liabilities and equity
1-145
$ 50,000
92,000
(30,000)
$112,000
$152,000
$ 28,000
12,000
112,000
124,000
$152,000
Chapter 01 - Introducing Accounting in Business
Skate and Boards Rental
Cash Flow Statement
For the year ended December 31, 2011
Cash inflow from operating activities
Cash outflow from investing activities
Cash outflow from financing activities
Net decrease in cash
Beginning cash balance 70,000
Ending cash balance $47,000
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-146
$105,000
(84,000)
(44,000)
$(23,000)
Chapter 01 - Introducing Accounting in Business
[Question]
264. Data for Madison Realty are as follows:
Total assets at December 31, 2010
Total liabilities at December 31, 2010
Total revenues 2011
Total expenses for 2011
Common stock at December 31, 2010
$100,000
35,000
79,000
47,000
20,000
Madison Realty paid dividends of $30,000 during 2011. From the above data, prepare
Madison Realty's statement of retained earnings for the year ended December 31, 2011.
Answer:
MADISON REALTY
Statement of Retained Earnings
For year Ended December 31, 2011
Retained earnings, December 31, 2010*
Plus net income*
Less dividends
Retained earnings, December 31, 2011
Supporting computations:
Total assets, December 31, 2010
Total liabilities, December 31, 2010
Total equity, December 31, 2010
Common stock, December 31, 2010
Retained earnings, December 31, 2010
Revenues
Expenses
Net Income
$ 45,000
32,000
77,000
(30,000)
$ 47,000
$100,000
35,000
65,000
(20,000)
$ 45,000
$ 79,000
47,000
$32,000
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-147
Chapter 01 - Introducing Accounting in Business
[Question]
265. Fast-Forward has the following beginning cash balance and cash transactions for the
month of January. Using this information prepare a statement of cash flows.
a.
b.
c.
d.
e.
f.
g.
h.
i.
Beginning cash balance
Cash investment by stockholders
Cash payment toward long-term loan
Cash payment of rent
Purchased equipment for cash
Purchased store supplies for cash
Cash collected from customers
Cash dividends paid
Cash payment of wages
$ 3,200
15,000
1,000
1,800
7,500
1,500
7,750
2,000
4,000
Answer:
FastForward
Statement of Cash Flows
For Month Ended January 31
Cash flows from operating activities
Cash collected from customers
Cash paid for supplies
Cash paid for rent
Cash paid for wages
Cash flows from operating activities
Cash flows from financing activities
Purchase of equipment
Cash flows from financing activities
Investment by stockholders
Dividends
Payment of loan
Cash flows from financing activities
Net increase in cash
Beginning cash balance
Ending cash balance
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-148
$ 7,750
(1,500)
(1,800)
(4,000)
$
450
(7,500)
15,000
(2,000)
(1,000)
12,000
$ 4,950
3,200
$ 8,150
Chapter 01 - Introducing Accounting in Business
[Question]
266. The records of Skymaster Airplane Rentals show the following information as of
December 31, 2011
Accounts payable
Insurance expense
Accounts receivable
Retained earnings,
December 31, 2010
Airplanes
Notes payable
Hangar
$ 36,000 2011 Wages expense
2,000 2011 Advertising expense
24,000 Cash
Common stock
130,000 Office furniture
150,000 2011 Maintenance expense
47,000 2011 Revenues
60,000
$75,000
22,000
11,000
20,000
15,000
39,000
217,000
Dividends of $52,000 were paid during 2011.
Using the above information, prepare an income statement for 2011.
Answer:
SKYMASTER AIRPLANE RENTALS
Income Statement
For Year Ended December 31, 2011
Revenues
Expenses
Insurance expense
Wages expense
Advertising expense
Maintenance expense
Total expenses
Net income
$217,000
$ 2,000
75,000
22,000
39,000
138,000
$ 79,000
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-149
Chapter 01 - Introducing Accounting in Business
[Question]
267. The records of Skymaster Airplane Rentals show the following information as of
December 31, 2011
Accounts payable
Insurance expense
Accounts receivable
Retained earnings,
December 31, 2010
Airplanes
Notes payable
Hangar
$36,000 2011 Wages expense
2,000 2011 Advertising expense
24,00 Cash
Common stock
130,000 Office furniture
150,000 2011 Maintenance expense
47,000 2011 Revenues
60,000
$75,000
22,000
11,000
20,000
15,000
39,000
217,000
Dividends of $52,000 were paid during 2011.
Using the above information, prepare a statement of retained earnings for 2011
Answer:
SKYMASTER AIRPLANE RENTALS
Statement of Retained Earnings
For Year Ended December 31, 2011
Retained earnings, December 31, 2010
Add: Net income
Less: Dividends
Retained earnings, December 31, 2011
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-150
$130,000
79,000
209,000
(52,000)
$157,000
Chapter 01 - Introducing Accounting in Business
268. The records of Skymaster Airplane Rentals show the following information as of
December 31, 2011
Accounts payable
Insurance expense
Accounts receivable
Retained earnings,
December 31, 2010
Airplanes
Notes payable
Hangar
$36,000 2011 Wages expense
2,000 2011 Advertising expense
24,000 Cash
Common stock
130,000 Office furniture
150,000 2011 Maintenance expense
47,000 2011 Revenues
60,000
$75,000
22,000
11,000
20,000
15,000
39,000
217,000
Dividends of $52,000 were paid during 2011.
Using the above information, prepare a balance sheet at December 31, 2011.
Answer:
SKYMASTER AIRPLANE RENTALS
Balance Sheet
December 31, 2011
Assets
Liabilities
Cash
$ 11,000 Accounts payable
Accounts receivable
24,000 Notes payable
Airplane
150,000 Total liabilities
Hangar
60,000 Common stock
Retained earnings
Office furniture
15,000 Total equity
Total assets
$260,000 Total liabilities and
Equity
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-P1
1-151
$ 36,000
47,000
83,000
20,000
157,000
177,000
$260,000
Chapter 01 - Introducing Accounting in Business
Fill in the Blank Questions
[Question]
269. __________________________ is the recording of transactions or events and is just one
part of accounting.
Answer: Recordkeeping (or bookkeeping)
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C1
[Question]
270. Accounting is a ______________________ that identifies, records and communicates
relevant, reliable and comparable information about an organization's economic activities.
Answer: Information and measurement system (or information system)
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 01-C1
1-152
Chapter 01 - Introducing Accounting in Business
[Question]
271. A ____________________ is a non-corporate business that is owned by only one
person.
Answer: Sole proprietorship
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 01-C2
[Question]
272. ______________ users of accounting information are users that are not directly involved
in running the organization.
Answer: External
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C2
[Question]
273. ______________ is the area of accounting aimed at serving external users.
Answer: Financial accounting
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C2
1-153
Chapter 01 - Introducing Accounting in Business
[Question]
274. Shareholders are the owners of a corporation and typically elect
______________________ to oversee their interests within the corporation.
Answer: A board of directors (or directors)
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 01-C2
[Question]
275. ______________________ are procedures set up to protect company property and
equipment, ensure reliable accounting reports, promote efficiency and encourage adherence to
company policies.
Answer: Internal controls
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: Medium
Learning Objective: 01-C2
1-154
Chapter 01 - Introducing Accounting in Business
Chapter 02
Analyzing and Recording Transactions
True / False Questions
[Question]
1. Accounting records are also referred to as the books.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C1
[Question]
2. The first step in the analyzing and recording process is to analyze each transaction and
event from source documents.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C1
1-155
Chapter 01 - Introducing Accounting in Business
[Question]
3. Preparation of a trial balance is the first step in the analyzing and recording process.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C1
[Question]
4. Source documents provide evidence of business transactions and are the basis for
accounting entries.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C2
[Question]
5. Items such as sales slips, invoices, checks and purchase orders are source documents.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C2
1-156
Chapter 01 - Introducing Accounting in Business
[Question}
6. An account is a record of increases and decreases in a specific asset, liability, equity,
revenue or expense item.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C2
[Question]
7. According to the seller, a customer's promise to pay is called an account payable.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C2
[Question]
8. Dividends are a type of business expense.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C2
1-157
Chapter 01 - Introducing Accounting in Business
[Question]
9. As prepaid expenses are used up, the costs of these assets become expenses.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
[Question]
10. Land and buildings are generally recorded in the same ledger account.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
[Question]
11. It is not necessary to keep separate accounts for all items of importance for business
decisions.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
1-158
Chapter 01 - Introducing Accounting in Business
[Question]
12. Unearned revenues are classified as liabilities.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
[Question]
13. Cash dividends should be treated as an expense to the business.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
[Question]
14. When a company provides services for which cash will not be received until some future
date, the company should record unearned revenue for the amount charged to the customer.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-C2
1-159
Chapter 01 - Introducing Accounting in Business
[Question]
15. The chart of accounts is a list of all the accounts used by a company and a corresponding
identification number.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C3
[Question]
16. An account balance is the difference between the debits and credits for an account
including any beginning balance.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C4
[Question]
17. Debit means the right-hand side of any account.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C4
1-160
Chapter 01 - Introducing Accounting in Business
[Question]
18. In a double-entry accounting system, total amount debited must always equal total amount
credited.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C4
[Question]
19. Increases in liability accounts are recorded as debits.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C4
[Question]
20. Debits increase both asset and expense accounts.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C4
1-161
Chapter 01 - Introducing Accounting in Business
[Question]
21. Credits always increase account balances.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
[Question]
22. Crediting an expense account decreases it.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
[Question]
23. Double entry accounting requires that the impact of each transaction be recorded in at
least two accounts.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
1-162
Chapter 01 - Introducing Accounting in Business
[Question]
24. A revenue account normally has a debit balance.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
[Question]
25. Accounts are normally decreased by debits.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
[Question]
26. The dividends account normally has a credit balance since it is an equity account.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
1-163
Chapter 01 - Introducing Accounting in Business
[Question]
27. Asset accounts normally have credit balances and expense accounts normally have debit
balances.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
[Question]
28. Common Stock normally has a debit balance.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
[Question]
29. A debit entry is always favorable.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-C4
1-164
Chapter 01 - Introducing Accounting in Business
[Question]
30. A transaction that decreases an asset account and increases a liability account must also
affect one or more other accounts.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-C4
[Question]
31. A transaction that increases an asset and decreases a liability must also affect one or more
other accounts.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-C4
[Question]
32. If insurance coverage for the next three years is paid for in advance, the amount of the
payment is debited to an asset account called Prepaid Insurance.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
1-165
Chapter 01 - Introducing Accounting in Business
[Question]
33. The purchase of supplies on credit should be recorded with a debit to Supplies and a credit
to Accounts Payable.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
[Question]
34. If a company pays cash to purchase land, the journal entry to record this transaction will
include a debit to Cash.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
[Question]
35. If a company provides services to a customer on credit the service provider company
should credit Accounts Receivable.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
1-166
Chapter 01 - Introducing Accounting in Business
[Question]
36. When a company bills a customer for $600 for services rendered, the journal entry to
record this transaction will include a $600 debit to Services Revenue.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
[Question]
37. The debt ratio reflects the risk of a company to both its owners and creditors.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-A2
[Question]
38. The higher the debt ratio, the higher risk of a company not being able to meet its
obligations.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
1-167
Chapter 01 - Introducing Accounting in Business
[Question]
39. The debt ratio is calculated by dividing total assets by total liabilities.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
[Question]
40. A company that finances a relatively large portion of its assets with liabilities is said to
have a high degree of financial leverage.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
[Question]
41. If a company is highly leveraged, this means that it has relatively low risk of not being
able to repay its debt.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
1-168
Chapter 01 - Introducing Accounting in Business
[Question]
42. Hamilton Industries has liabilities of $105 million and total assets of $350 million. Its debt
ratio is 33.3%.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A2
[Question]
43. High financial leverage is always bad for a company's owners.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A2
[Question]
44. A compound journal entry affects no more than two accounts.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P1
1-169
Chapter 01 - Introducing Accounting in Business
[Question]
45. Posting is the transfer of the information from each journal entry to the ledger.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P1
[Question]
46. Transactions are first recorded in the ledger.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P1
[Question]
47. The journal is known as a book of original entry.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P1
1-170
Chapter 01 - Introducing Accounting in Business
[Question]
48. A journal gives a complete record of each transaction in one place and shows the debits
and credits for each transaction.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P1
[Question]
49. The journal is known as the book of final entry because financial statements are prepared
from it.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P1
[Question]
50. A trial balance that balances is not proof of complete accuracy in recording transactions.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P2
1-171
Chapter 01 - Introducing Accounting in Business
[Question]
51. IFRS requires that companies report four financial statements with explanatory notes:
Balance Sheet; Income Statement; Statement of Changes in Equity and Statement of Cash
Flows.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P2
[Question]
52. Generally, the ordering of accounts in a trial balance typically follows their identification
number from the chart of accounts: assets, liabilities, equity, revenues and expenses.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P2
[Question]
53. The trial balance can serve as a replacement for the balance sheet, since debits must
balance with credits.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P2
1-172
Chapter 01 - Introducing Accounting in Business
[Question]
54. A trial balance that is in balance is proof that no errors were made in journalizing the
transactions, posting to the ledger and preparing the trial balance.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P2
[Question]
55. If cash was incorrectly debited for $100 instead of correctly credited for $100, the cash
account is out of balance by $100.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P2
[Question]
56. The balance sheet provides a link between beginning and ending income statements.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P3
1-173
Chapter 01 - Introducing Accounting in Business
[Question]
57. The heading on each financial statement lists the three W's - Who (the name of the
organization), What (the name of the statement) and Where (the organization's address)
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P3
[Question]
58. Other names for the income statement are the earnings statement, statement of operations
or a profit and loss statement.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P3
[Question]
59. Another name for the balance sheet is the statement of financial position.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P3
1-174
Chapter 01 - Introducing Accounting in Business
Multiple Choice Questions
[Question]
60. The accounting process begins with:
A. Analysis of business transactions and events
B. Preparation of financial statements and other reports
C. Summarizing the recorded effects of business transactions
D. Presentation of financial information to decision-makers
E. Preparation of the trial balance
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C1
[Question]
61. Which of the following list of events properly reflects the early steps taken in the
accounting process?
A. Record relevant transactions, Post journal information to ledger accounts Analyze each
transaction, Prepare and analyze the trial balance
B. Post journal information to ledger accounts, Analyze each transaction, Post journal
information to ledger accounts, Prepare and analyze the trial balance
C. Prepare and analyze the trial balance, Analyze each transaction, Post journal information to
ledger accounts, Record relevant transactions
D. Analyze each transaction, Post journal information to ledger accounts, Record relevant
transactions, Prepare and analyze the trial balance
E. Analyze each transaction, Record relevant transactions, Post journal information to ledger
accounts, Prepare and analyze the trial balance
Answer: E
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-C1
1-175
Chapter 01 - Introducing Accounting in Business
[Question]
62. A sales invoice:
A. Is a type of use document
B. Is used by sellers for recording purposes
C. Is not needed by buyers
D. Gives rise to an entry in the accounting process
E. Is not necessary in accounting
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C2
[Question]
63. Source documents include all of the following except:
A. Sales tickets
B. Ledgers
C. Checks
D. Purchase orders
E. Bank statements
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
1-176
Chapter 01 - Introducing Accounting in Business
[Question]
64. Source documents:
A. Include the ledger
B. Are the sources of accounting information
C. Must be in electronic form
D. Are based on accounting entries
E. Include the chart of accounts
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
[Question]
65. Various types of documents and other papers that companies use when they conduct their
business:
A. Are called source documents
B. Can include sales tickets
C. Are the source of information for recording accounting entries
D. Can be in electronic form
E. All of the above
Answer: E
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
1-177
Chapter 01 - Introducing Accounting in Business
[Question]
66. For what reason do most sellers require customers to have their receipts in order to
exchange or return purchased items?
A. The receipt contains coded information which the seller needs to prepare and analyze the
trial balance
B. Sellers wish to ensure that the sale in question was rung up on the register in the first place
C. This is a legal requirement mandated by a federal law
D. The receipt is serving as a promissory note
E. To create an environment in which customer’s do not want to return items.
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-C2
[Question]
67. A record of the increases and decreases in a specific asset, liability, equity, revenue or
expense is a(n):
A. Journal
B. Posting
C. Trial balance
D. Account
E. Chart of accounts
Answer: D
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C2
1-178
Chapter 01 - Introducing Accounting in Business
[Question]
68. An account used to record the owner's investments in the business is called:
A. Dividends
B. Common Stock
C. Revenue
D. Expense
E. Liability
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
[Question]
69. The account used to record the transfers of assets from a business to its stockholders is:
A. A revenue account
B. The retained earnings account
C. Common stock account
D. An expense account
E. A liability account
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
1-179
Chapter 01 - Introducing Accounting in Business
[Question]
70. Which of the following statements is correct?
A. When a future expense is paid in advance, the payment is normally recorded in a liability
account called Prepaid Expense
B. Promises of future payment are called accounts payable
C. Increases and decreases in cash are always recorded in the retained earnings account
D. An account called Land is commonly used to record increases and decreases in both the
land and buildings owned by a business
E. Accrued liabilities include accounts receivable
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
[Question]
71. Unearned revenues are:
A. Revenues that have been earned and received in cash
B. Revenues that have been earned but not yet collected in cash
C. Liabilities created when a customer pays in advance for products or services before the
revenue is earned
D. Recorded as an asset in the accounting records
E. Increases to retained earnings
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
1-180
Chapter 01 - Introducing Accounting in Business
[Question]
72. Prepaid expenses are:
A. Payments made for products and services that do not ever expire
B. Classified as liabilities on the balance sheet
C. Decreases in retained earnings
D. Assets that represent prepayments of future expenses
E. Promises of payments by customers
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
[Question]
73. A written promise to pay a definite sum of money on a specific future date is a(n):
A. Unearned revenue
B. Prepaid expense
C. Credit account
D. Note payable
E. Account receivable
Answer: D
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
1-181
Chapter 01 - Introducing Accounting in Business
[Question]
74. A collection of all accounts (with account balances) used by a business is called a:
A. Journal
B. Book of original entry
C. General Journal
D. Balance column journal
E. Ledger
Answer: E
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
[Question]
75. A ledger is:
A. A record containing all accounts (with amounts) for a business
B. A journal in which transactions are first recorded
C. A collection of documents that describe transactions and events during the accounting
process
D. A list of all accounts with their debit balances at a point in time
E. A list of all accounts a company uses and includes an identification number assigned to
each account
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
1-182
Chapter 01 - Introducing Accounting in Business
[Question]
76. Which of the following statements about the Cash account are true?
A. Because most companies earn their fees in cash, the cash account is categorized as revenue
B. For any given transaction Accounts Receivable and Cash can be used interchangeably
because both accounts are measured in terms of cash
C. The cash account includes the value of any medium of exchange that a bank accepts for
deposit
D. Both A and B are true statements
E. Both B and C are true statements
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-C2
[Question]
77. A list of all accounts used by a company and the identification number assigned to each
account is called a:
A. Ledger
B. Journal
C. Trial balance
D. Chart of accounts
E. General Journal
Answer: D
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C3
1-183
Chapter 01 - Introducing Accounting in Business
[Question]
78. The general ledger of a business
A. Is a collection of all accounts used in a company's information system
B. Must be kept in a computer file
C. A and B
D. Is a set standard not affected by a company's size and diversity
E. A, B and D
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-C3
[Question]
79. A debit is:
A. An increase in an account
B. The right-hand side of a T-account
C. A decrease in an account
D. The left-hand side of a T-account
E. An increase to a liability account
Answer: D
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C4
1-184
Chapter 01 - Introducing Accounting in Business
[Question]
80. The right side of a T-account is a(n):
A. Debit
B. Increase
C. Credit
D. Decrease
E. Account balance
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C4
[Question]
81. Which of the following statements is incorrect?
A. The normal balance of accounts receivable is a debit
B. The normal balance of dividends is a debit
C. The normal balance of unearned revenues is a credit
D. The normal balance of an expense account is a credit
E. The normal balance of common stock is a credit
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C4
1-185
Chapter 01 - Introducing Accounting in Business
[Question]
82. A credit is used to record:
A. An increase in an expense account
B. An increase in an asset account
C. An increase in an unearned revenue account
D. A decrease in a revenue account
E. A decrease to retained earnings
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
[Question]
83. A simple account form widely used in accounting to illustrate how debits and credits work
is called a:
A. Dividend account
B. Common stock account
C. Drawing account
D. T-account
E. Balance column sheet
Answer: D
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C4
1-186
Chapter 01 - Introducing Accounting in Business
[Question]
84. Which of the following statements is correct?
A. The left side of a T-account is the credit side
B. Debits decrease asset and expense accounts and increase liability, equity and revenue
accounts
C. The left side of a T-account is the debit side
D. Credits increase asset and expense accounts and decrease liability, equity and revenue
accounts
E. In certain circumstances the total amount debited need not equal the total amount credited
for a particular transaction
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C4
[Question]
85. An account balance is:
A. The total of the credit side of the account
B. The total of the debit side of the account
C. The difference between the total debits and total credits for an account including the
beginning balance
D. Assets = liabilities + equity
E. Always a credit
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
1-187
Chapter 01 - Introducing Accounting in Business
[Question]
86. Of the following accounts, the one that normally has a credit balance is:
A. Cash
B. Office Equipment
C. Sales Salaries Payable
D. Dividends
E. Sales Salaries Expense
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
[Question]
87. A debit is used to record:
A. A decrease in an asset account
B. A decrease in an expense account
C. An increase in a revenue account
D. An increase in the balance of common stock
E. A decrease in the balance of retained earnings
Answer: E
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
1-188
Chapter 01 - Introducing Accounting in Business
[Question]
88. A credit entry:
A. Increases asset and expense accounts and decreases liability, common stock and revenue
accounts
B. Is always a decrease in an account
C. Decreases asset and expense accounts and increases liability, common stock and revenue
accounts
D. Is recorded on the left side of a T-account
E. Is always an increase in an account
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
[Question]
89. Double-entry accounting is an accounting system:
A. That records each transaction twice
B. That records the effects of transactions and other events in at least two accounts with equal
debits and credits
C. In which the impact of each transaction is recorded in two or more accounts but that could
include two debits and no credits
D. That may only be used if T-accounts are used
E. That insures that errors never occur
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-C4
1-189
Chapter 01 - Introducing Accounting in Business
[Question]
90. Which of the following is a true statement regarding debits and credits?
A. If a company earned a profit, debits will not equal credits
B. For a business, debits are better than credits
C. A company's books are not in balance if they have a current period loss
D. Assets and expenses are both increased with a debit
E. Liabilities and equity are both increased with a debit
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-C4
[Question]
91. Rocky Industries received its telephone bill in the amount of $300 and immediately paid
it. Rocky's general journal entry to record this transaction will include a
A. Debit to Telephone Expense for $300
B. Credit to Accounts Payable for $300
C. Debit to Cash for $300
D. Credit to Telephone Expense for $300
E. Debit to Accounts Payable for $300
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-A1
1-190
Chapter 01 - Introducing Accounting in Business
[Question]
92. Management Services, Inc. provides services to clients. On May 1, a client prepaid
Management Services $60,000 for 6-months contract in advance. Management Services'
general journal entry to record this transaction will include a
A. Debit to Unearned Management Fees for $60,000
B. Credit to Management Fees Earned for $60,000
C. Credit to Cash for $60,000
D. Credit to Unearned Management Fees for $60,000
E. Debit to Management Fees Earned for $60,000
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-A1
[Question]
93. Wisconsin Rentals purchased office supplies on credit. The general journal entry made by
Wisconsin Rentals will include a:
A. Debit to Accounts Payable
B. Debit to Accounts Receivable
C. Credit to Cash
D. Credit to Accounts Payable
E. Credit to Retained Earnings
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
1-191
Chapter 01 - Introducing Accounting in Business
[Question]
94. An asset created by prepayment of an expense is:
A. Recorded as a debit to an unearned revenue account
B. Recorded as a debit to a prepaid expense account
C. Recorded as a credit to an unearned revenue account
D. Recorded as a credit to a prepaid expense account
E. Not recorded in the accounting records until the earnings process is complete
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
1-192
Chapter 01 - Introducing Accounting in Business
[Question]
95. Robert Haddon contributed $70,000 in cash and some land worth $130,000 to open a new
business, RH Consulting. Which of the following general journal entries will RH Consulting
make to record this transaction?
A.
Assets
Common Stock
200,000
200,000
B.
Cash and Land
200,000
Common Stock
200,000
C.
Cash
70,000
Land
130,000
Common Stock
200,000
D.
Common Stock
200,000
Cash
70,000
Land
130,000
E.
Common Stock
Assets
200,000
200,000
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
1-193
Chapter 01 - Introducing Accounting in Business
[Question]
96. A liability created by the receipt of cash from customers in payment for products or
services that have not yet been delivered to the customers is:
A. Recorded as a debit to an unearned revenue account
B. Recorded as a debit to a prepaid expense account
C. Recorded as a credit to an unearned revenue account
D. Recorded as a credit to a prepaid expense account
E. Not recorded in the accounting records until the earnings process is complete
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
[Question]
97. On September 30, the Cash account of Value Company had a normal balance of $5,000.
During September, the account was debited for a total of $12,200 and credited for a total of
$11,500. What was the balance in the Cash account at the beginning of September?
A. A $0 balance
B. A $4,300 debit balance
C. A $4,300 credit balance
D. A $5,700 debit balance
E. A $5,700 credit balance
Answer: B
Feedback: Normal balance = debit
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
1-194
Chapter 01 - Introducing Accounting in Business
[Question]
98. On October 31, a company's Cash account had a normal balance of $7,000. During
October, the account was debited for a total of $4,250 and credited for a total of $5,340. What
was the balance in the Cash account at the beginning of October?
A. $0 balance
B. $1,090 debit balance
C. $2,590 credit balance
D. $8,090 debit balance
E. $9,590 credit balance
Answer: D
Feedback: Normal balance = debit
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
[Question]
99. On April 30, Holden Company had an Accounts Receivable balance of $18,000. During
the month of May, total credits to Accounts Receivable were $52,000 from customer
payments. The May 31 Accounts Receivable balance was $13,000. What was the amount of
credit sales during May?
A. $5,000
B. $47,000
C. $52,000
D. $57,000
E. $32,000
Answer: B
Feedback: Normal balance = debit
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
1-195
Chapter 01 - Introducing Accounting in Business
[Question]
100. On November 30, a company had an Accounts Receivable balance of $5,100. During the
month of December, total credits to Accounts Receivable were $76,000 from customer
payments. The December 31 Accounts Receivable balance was $43,000. What was the
amount of credit sales during December?
A. $8,100
B. $27,900
C. $70,900
D. $76,000
E. $113,900
Answer: E
Feedback: Normal balance = debit
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
[Question]
101. The Fireside Country Inn is a very popular destination for tourists. The Inn requires
guests to make reservations at least two months in advance of their stay. A twenty percent
down payment is required at the time the reservation is made. When should this inn recognize
room rental revenue?
A. On the date the reservation is received
B. On the date the money for the reservation is received
C. On the date the guests stay in the inn
D. On the date the guests pay the remaining eighty percent due
E. Once all cash has been received
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
1-196
Chapter 01 - Introducing Accounting in Business
[Question]
102. During the month of February, Hoffer Company had cash receipts of $7,500 and cash
disbursements of $8,600. The February 28 cash balance was $1,800. What was the January 31
beginning cash balance?
A. $700
B. $1,100
C. $2,900
D. $0
E. $4,300
Answer: C
Feedback: X + $7,500 - $8,600 = $1,800
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
[Question]
103. During March, a company had cash receipts of $2,300 and cash disbursements of $6,600.
The March 31 cash balance was $2,780. What was the March 1 beginning cash balance?
A. $1,520
B. $7,080
C. $4,300
D. $8,900
E. $11,680
Answer: B
Feedback: X + $2,300 - $6,600 = $2,780
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
1-197
Chapter 01 - Introducing Accounting in Business
[Question]
104. The following transactions occurred during July:
Received $900 cash for services provided to a customer during July.
Received $2,200 cash investment from Barbara Hanson, the owner of the business.
Received $750 from a customer in partial payment of his account receivable, which arose
from sales in June.
Provided services to a customer on credit, $375.
Signed a promissory note for a $6,000 bank loan.
Received $1,250 cash from a customer for services to be rendered next year.
What was the amount of revenue for July?
A. $900
B. $1,275
C. $2,525
D. $3,275
E. $11,100
Answer: B
Feedback: 900 + 375 = 1,275
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
[Question]
105. Jones Hardware, Inc. pays a cash dividend of $6,000, what is the necessary entry to
record this transaction:
A. Debit Cash, Credit Retained Earnings
B. Debit Dividends, Credit Cash
C. Debit Common Stock, Credit Cash
D. Debit Cash, Credit Common Stock
E. Debit Cash, Credit Dividend Income
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
1-198
Chapter 01 - Introducing Accounting in Business
[Question]
106. These transactions were completed by the art gallery opened by Zed Bennett.
Bennet started the gallery, Artery, by investing $40,000 cash and equipment valued at
$18,000 in exchange for common stock.
Purchased $70 of office supplies on credit.
Paid $1,200 cash for the receptionist's salary.
Sold a painting for an artist and collected a $4,500 cash commission on the sale.
Completed an art appraisal and billed the client $200.
What was the balance of the cash account after these transactions were posted?
A. $12,230
B. $12,430
C. $43,300
D. $43,430
E. $61,430
Answer: C
Feedback: $40,000 - $1,200 + $4,500 = $43,300
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
[Question]
107. The debt ratio is used:
A. To measure the amount of equity relative to the expenses
B. To reflect the risk associated with a company's debts
C. Only by banks when a business applies for a loan
D. To determine how much debt a firm should pay off
E. To determine who a company owes
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
1-199
Chapter 01 - Introducing Accounting in Business
[Question]
108. Which of the following formulas can be used to calculate the debt ratio?
A. Total Equity/Total Liabilities
B. Total Liabilities/Total Equity
C. Total Liabilities/Total Assets
D. Total Assets/Total Liabilities
E. Total Equity/Total Assets
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
[Question]
109. Which of the following statements is incorrect?
A. Higher financial leverage involves higher risk
B. Risk is higher if a company has more liabilities
C. Risk is higher if a company has higher assets
D. The debt ratio is one measure of financial risk
E. Lower financial leverage involves lower risk
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
1-200
Chapter 01 - Introducing Accounting in Business
[Question]
110. Stride Rite has total assets of $425 million. Its total liabilities are $110 million. Its equity
is $315 million. Calculate the debt ratio.
A. 38.6%
B. 13.4%
C. 34.9%
D. 25.9%
E. 14.9%
Answer: D
Feedback: $110/$425 = 25.9%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
[Question]
111. A company has total assets of $385 million. Its total liabilities are $100 million and its
equity is $285 million. Calculate its debt ratio.
A. 35.1%
B. 26.0%
C. 38.5%
D. 28.5%
E. 58.8%
Answer: B
Feedback: $100/$385 = 26.0%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
1-201
Chapter 01 - Introducing Accounting in Business
[Question]
112. A company has total liabilities of $550 million and total equity of $300 million.
Calculate this company's debt ratio.
A. 64.7%
B. 100%
C. 54.5%
D. 1.83 to 1
E. The debt ratio cannot be determined without additional information
Answer: A
Feedback: $550/($550 + $300) = 64.7%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A2
[Question]
113. Which of the following statements is false with regard to the debt ratio?
A. It is of use to both internal and external users of accounting information
B. A relatively high ratio is always desirable
C. The dividing line for a high and low ratio varies from industry to industry
D. Many factors such as the company's age, stability, profitability and cash flow influence the
determination of what would be interpreted as a high versus a low ratio
E. The ratio might be used to help determine if a company is capable of increasing its income
by obtaining further debt
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A2
1-202
Chapter 01 - Introducing Accounting in Business
[Question]
114. The process of transferring general journal information to the ledger is:
A. Double-entry accounting
B. Posting
C. Balancing an account
D. Journalizing
E. Not required unless debits do not equal credits
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P1
[Question]
115. A column in journals and ledger accounts used to cross reference journal and ledger
entries is the:
A. Account balance column
B. Debit column
C. Posting reference column
D. Credit column
E. Description column
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P1
1-203
Chapter 01 - Introducing Accounting in Business
[Question]
116. The record in which transactions are first recorded is the:
A. Account balance
B. Ledger
C. Journal
D. Trial balance
E. Cash account
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P1
[Question]
117. What is another name for the general journal?
A. The book
B. The ledger
C. The book of original entry
D. The record
E. The account book
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P1
1-204
Chapter 01 - Introducing Accounting in Business
[Question]
118. A balance column ledger account is:
A. An account entered on the balance sheet
B. An account with debit and credit columns for posting entries and another column for
showing the balance of the account after each entry is posted
C. An alternate name for the retained earnings account
D. An account used to record the transfers of assets from a business to its stockholders
E. A simple form of account that is widely used in accounting to illustrate the debits and
credits required in recording a transaction
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P1
[Question]
119. A general journal is:
A. A ledger in which amounts are posted from a balance column account
B. Not required if T-accounts are used
C. A complete record of each transaction in the place from which transaction amounts are
posted to the ledger accounts
D. Not necessary in electronic accounting systems
E. A book of final entry because financial statements are prepared from it
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P1
1-205
Chapter 01 - Introducing Accounting in Business
[Question]
120. According to IFRS, comparative information on financial statements is:
A. Not required
B. Required for publicly traded companies only
C. Required for the preceding period only
D. Required for the last five years
E. Not required, but considered a hallmark for companies of excellence
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P1
1-206
Chapter 01 - Introducing Accounting in Business
[Question]
121. A company had the following account balances at year-end:
Cash…………………………………………$30,000
Accounts receivable………………………… 32,000
Accounts payable…………………………… 20,000
Fees earned…………………………………. .65,000
Rent expense…………………………………15,000
Insurance expense……………………………..4,800
Supplies………………………………………..5,000
Common Stock……………………………….. 5,000
Retained Earnings………………………… ..14,800
Dividends…………………………………… 18,000
If all of the accounts have normal balances, what are the totals for the trial balance?
A. $45,200
B. $67,000
C. $104,800
D. $209,600
E. $186,600
Answer: C
Feedback:
Debits
Cash
Accounts receivable
Rent expense
Insurance expense
Supplies
Dividends
Credits
$ 30,000
32,000
15,000
4,800
5,000
18,000
$104,800
Accounts payable
Fees earned
Common stock
Retained earnings
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P1
Learning Objective: 02-P2
1-207
$ 20,000
65,000
5,000
14,800
$104,800
Chapter 01 - Introducing Accounting in Business
[Question]
122. Listed below are two pieces of information. Where is the best place to locate this
information, in the journal or the ledger?
Details of a transaction which took place on October 3rd
All of the sales activity which took place during the current month
A. 1. Journal 2. Journal
B. 1. Journal 2. Ledger
C. 1. Ledger 2. Ledger
D. 1. Ledger 2. Journal
E. This information is only available on the financial statements
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P1
[Question]
123. A report that lists accounts and their balances, in which the total debit balances should
equal the total credit balances is called a(n):
A. Account balance
B. Trial balance
C. Ledger
D. Chart of accounts
E. General Journal
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P2
1-208
Chapter 01 - Introducing Accounting in Business
[Question]
124. Which of the following statements are true?
A. If the trial balance is in balance, it proves that no errors have been made in recording and
posting transactions
B. The trial balance is a book of original entry
C. Another name for trial balance is chart of accounts
D. The trial balance is a list of all accounts from the ledger with their balances at a point in
time
E. The trial balance is another name for the balance sheet as long as debits balance with
credits
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P2
[Question]
125. A company failed to post a $50 debit to the Office Supplies account. The effect of this
error will be that:
A. The Office Supplies account balance will be overstated
B. The trial balance will not balance
C. The error will overstate the debits listed in the journal
D. The total debits in the trial balance will be larger than the total credits
E. All of the above effects will be caused by the error
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P2
1-209
Chapter 01 - Introducing Accounting in Business
[Question]
126. A $15 credit to Sales was posted as a $150 credit. By what amount is Sales in error?
A. $150 understated
B. $135 overstated
C. $150 overstated
D. $15 understated
E. $135 understated
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P2
[Question]
127. A trial balance taken at year-end showed total credits exceeding total debits by $4,950.
This discrepancy could have been caused by:
A. An error in the general journal where a $4,950 increase in Accounts Receivable was
recorded as an increase in Cash
B. A net income of $4,950
C. The balance of $49,500 in Accounts Payable being entered in the trial balance as $4,950
D. The balance of $5,500 in the Office Equipment account being entered on the trial balance
as a debit of $550
E. An error in the general journal where a $4,950 increase in Accounts Payable was recorded
as a decrease in Accounts Payable
Answer: D
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P2
1-210
Chapter 01 - Introducing Accounting in Business
[Question]
128. In which of the following situations would the trial balance not balance?
A. A $1,000 collection of an account receivable was erroneously posted as a debit to
Accounts Receivable and a credit to Cash
B. The purchase of office supplies on account for $3,250 was erroneously recorded in the
journal as $2,350 debit to Office Supplies and credit to Accounts Payable
C. A $50 cash receipt for the performance of a service was not recorded at all
D. The purchase of office equipment for $1,200 was posted as a debit to Office Supplies and a
credit to Cash for $1,200
E. The cash payment of a $750 account payable was posted as a debit to Accounts Payable
and a debit to Cash for $750
Answer: E
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P2
1-211
Chapter 01 - Introducing Accounting in Business
[Question]
129. The credit purchase of a delivery truck for $4,700 was posted to Delivery Trucks as a
$4,700 debit and to Accounts Payable as a $4,700 debit. What effect would this error have on
the trial balance?
A. The total of the Debit column of the trial balance will exceed the total of the Credit column
by $4,700
B. The total of the Credit column of the trial balance will exceed the total of the Debit column
by $4,700
C. The total of the Debit column of the trial balance will exceed the total of the Credit column
by $9,400
D. The total of the Credit column of the trial balance will exceed the total of the Debit column
by $9,400
E. The total of the Debit column of the trial balance will equal the total of the Credit column
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P2
[Question]
130. If the Debit and Credit column totals of a trial balance are equal, then:
A. All transactions have been recorded correctly
B. All entries from the journal have been posted to the ledger correctly
C. All ledger account balances are correct
D. The total debit entries and total credit entries are equal
E. The balance sheet would be correct
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P2
1-212
Chapter 01 - Introducing Accounting in Business
[Question]
131. Accountants at Amalgamated Corporation incorrectly journalized a $50,000 equipment
purchase as a debit to Buildings. This error was not discovered before the journal entry was
posted. What is the correcting entry?
A. Debit Buildings and Credit Equipment for $50,000 each
B. Debit Equipment and Credit Buildings for $50,000 each
C. Debit Buildings and Credit Equipment for $100,000 each
D. Debit Equipment and Credit Buildings for $100,000 each
E. Debit Equipment for $100,000 and Credit Buildings for $50,000
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P2
[Question]
132. A $72,000 receipt of cash from a customer paying on their account was recorded as a
$72,000 debit to Accounts Receivable. Assuming this journal entry was posted, what
correcting entry (if any) is needed?
A. Debit Cash and Credit Accounts Receivable for $72,000 each
B. Debit Cash and Credit Accounts Receivable for $144,000 each
C. Credit Cash and Debit Accounts Receivable for $72,000 each
D. Credit Cash and Debit Accounts Receivable for $144,000 each
E. No correcting entry is needed for this transaction
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P2
1-213
Chapter 01 - Introducing Accounting in Business
[Question]
133. Of the following errors, which one on its own will cause the trial balance to be out of
balance?
A. A $200 cash salary payment posted as a $200 debit to Cash and a $200 credit to Salaries
Expense
B. A $100 cash receipt from a customer in payment of his account posted as a $100 debit to
Cash and a $10 credit to Accounts Receivable
C. A $75 cash receipt from a customer in payment of his account posted as a $75 debit to
Cash and a $75 credit to Cash
D. A $50 cash purchase of office supplies posted as a $50 debit to Office Equipment and a
$50 credit to Cash
E. An $800 prepayment from a customer for services to be rendered in the future was posted
as an $800 debit to Unearned Revenue and an $800 credit to Cash
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P2
[Question]
134. A $130 credit to Office Equipment was credited to Fees Earned by mistake. By what
amounts are the accounts under or overstated as a result of this error?
A. Office Equipment, understated $130; Fees Earned, overstated $130
B. Office Equipment, understated $260; Fees Earned, overstated $130
C. Office Equipment, overstated $130; Fees Earned, overstated $130
D. Office Equipment, overstated $130; Fees Earned, understated $130
E. Office Equipment, overstated $260; Fees Earned, understated $130
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P2
1-214
Chapter 01 - Introducing Accounting in Business
[Question]
135. Which of the following accounts is a balance sheet account?
A. Wages Payable
B. Operating Activities
C. Revenues
D. Dividends
E. Expenses
Answer: A
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P3
[Question]
136. Which of the following is a TRUE statement concerning a company's financial
statements?
A. Balance Sheet and Income Statement data combined contain the complete financial picture
of a given company
B. A Trial Balance is another name for a Balance Sheet
C. Another name for the Income Statement is the Earnings Statement
D. Dividends paid to a company's shareholders are shown on the Income Statement
E. The Balance Sheet shows the financial position of a company for a period of time
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P3
1-215
Chapter 01 - Introducing Accounting in Business
[Question]
137. Which of the following is the appropriate journal entry if a company performs a service
and then bills the customer?
A. Debit to Cash, Debit to Revenue
B. Debit to Cash, Credit to Revenue
C. Debit to Accounts Receivable, Credit to Cash
D. Debit to Revenue, Credit to Accounts Receivable
E. Debit to Accounts Receivable, Credit to Revenue
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P1
[Question]
138. Which of the following is the appropriate journal entry if a company performs a service
and is paid immediately?
A. Debit to Cash, Debit to Revenue
B. Debit to Cash, Credit to Revenue
C. Debit to Accounts Receivable, Credit to Cash
D. Debit to Revenue, Credit to Accounts Receivable
E. Debit to Accounts Receivable, Credit to Revenue
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P1
1-216
Chapter 01 - Introducing Accounting in Business
[Question]
139. Which of the following is the appropriate journal entry if a company hires a new
employee?
A. Debit to Cash, Credit to Revenue
B. No entry should be made
C. Debit to Wages Expense, Credit to Cash
D. Debit to Cash, Credit to Wages Expense
E. Debit to Wages Payable, Credit to Wages Expense
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P1
[Question]
140. Which of the following is the appropriate journal entry if a company purchases
equipment costing $100,000 by paying cash of $10,000?
A. Debit to Cash, Debit to Equipment, Credit to Accounts Payable
B. No entry should be made
C. Debit to Equipment, Credit to Notes Payable, Credit to Cash
D. Debit to Cash, Debit to Notes Payable, Credit to Equipment
E. Debit to Equipment, Debit to Notes Payable, Credit to Cash
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P1
1-217
Chapter 01 - Introducing Accounting in Business
[Question]
141. What would be the account balance in the cash ledger account after the following
transactions?
Owner investment
Purchased Supplies with cash
$100,000
$20,000
Received bill for one month of rent
$2,200
Paid wages
$800
Billed customer for services performed services performed $1,250
A. $124,250
B. $80,150
C. $78,250
D. $79,200
E. $80,450
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P1
1-218
Chapter 01 - Introducing Accounting in Business
[Question]
142. What would be the account balance in the accounts receivable ledger account after the
following transactions?
Performed services and left a bill
Performed services and collected immediately
$4,200
$3,500
Performed services and billed customer
$2,200
Performed services on account
Received partial payment on account
$6,000
$1,500
A. $17,400
B. $10,900
C. $14,400
D. $ 4,500
E. $ 2,000
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P1
1-219
Chapter 01 - Introducing Accounting in Business
[Question]
143. What would be the account balance in the revenue ledger account after the following
transactions?
Performed services and left a bill
$4,200
Performed services and collected immediately
Performed services and billed customer
$3,500
$2,200
Performed services on account
Received partial payment on account
$6,000
$1,500
A. $17,400
B. $10,900
C. $14,400
D. $ 9,000
E. $15,900
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P1
1-220
Chapter 01 - Introducing Accounting in Business
[Question]
144. What would be the account balance in the revenue ledger account after the following
transactions?
Performed services and left a bill
Performed services and collected immediately
$4,200
$3,500
Performed services and billed customer
$2,200
Performed services on account
Received partial payment on account
$6,000
$1,500
A. $17,400 Credit
B. $14,400 Credit
C. $14,400 Debit
D. $15,900 Credit
E. $15,900 Debit
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P1
1-221
Chapter 01 - Introducing Accounting in Business
[Question]
145. What are the total assets for Shiver Ice House?
Common Stock……$120,000
Cash……………….$116,640
Supplies………… $ 1,500
Prepaid Rent……....$ 3,200
Revenue………….. $ 20,000
Retained Earnings...$ 30,000
Accounts Payable…...$25,000
Accounts Receivable..$22,450
Office Equipment…...$23,300
Unearned Revenue….$ 4,152
Utilities Expense…....$ 422
Shaving Equipment…$31,640
A. $291,340
B. $106,962
C. $198,730
D. $218,730
E. $221,580
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
1-222
Chapter 01 - Introducing Accounting in Business
[Question]
146. What is ending retained earnings for Shiver Ice House?
Common Stock….$120,000
Cash……………..$116,640
Supplies………....$ 1,500
Prepaid Rent…….$ 3,200
Revenue…………$ 20,000
Retained Earnings.$ 30,000
Accounts Payable…...$25,000
Accounts Receivable..$22,450
Office Equipment…...$23,300
Unearned Revenue….$ 4,152
Utilities Expense…....$ 422
Shaving Equipment…$31,640
A. $19,578
B. $29,578
C. $23,728
D. $49,578
E. $45,000
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
1-223
Chapter 01 - Introducing Accounting in Business
[Question]
147. What is net income for Shiver Ice House?
Common Stock….$120,000
Cash……………..$116,640
Supplies…………$ 1,500
Prepaid Rent…….$ 3,200
Revenue…………$ 20,000
Retained Earnings.$ 30,000
Accounts Payable…...$25,000
Accounts Receivable..$22,450
Office Equipment…...$23,300
Unearned Revenue….$ 4,152
Utilities Expense…....$ 422
Shaving Equipment…$31,640
A. $19,578
B. $20,528
C. $23,728
D. $49,578
E. $24,578
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
1-224
Chapter 01 - Introducing Accounting in Business
[Question]
148. What is total for the debits on the Trial Balance for Shiver Ice House?
Common Stock….$120,000
Cash……………..$116,640
Supplies…………$ 1,500
Prepaid Rent…….$ 3,200
Revenue…………$ 20,000
Retained Earnings.$ 30,000
Accounts Payable…...$25,000
Accounts Receivable..$22,450
Office Equipment…...$23,300
Unearned Revenue….$ 4,152
Utilities Expense…....$ 422
Shaving Equipment…$31,640
A. $291,340
B. $106,964
C. $199,152
D. $193,390
E. $203.152
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P2
[Question]
149. Find net income using the following transactions.
1.
2.
3.
4.
5.
6.
7.
Bill Co. paid $2,000 for one month rent
Bill Co. paid $1,200 for two weeks wages
Bill Co. performed $5,200 in consulting services on account
Bill Co billed a customer $1,500 for services performed
Bill Co. received $5,200 in payment for item 3
Bill Co performed services and immediately collected $2,000
Bill Co. paid $500 for advertising in the local paper
1-225
Chapter 01 - Introducing Accounting in Business
A. $10,200
B. $ 5,000
C. $ 8,700
D. $13,900
E. $ 7,000
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
[Question]
150. What would be the appropriate entry for the following transaction?
Bill Co. performed $5,200 in consulting services on account
A. Credit to Cash, Debit to Accounts Receivable
B. Debit to Revenue, Debit to Cash
C. Debit to Accounts Receivable, Credit to Cash
D. Debit to Revenue, Credit to Cash
E. Debit to Accounts Receivable, Credit to Revenue
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P1
1-226
Chapter 01 - Introducing Accounting in Business
Matching Questions
[Question]
151. Match the following definitions and terms by placing the number that identifies the best
definition in the blank space next to the term.
1. Credit
2. Journal
3. Account
4. Ledger
5. Source
documents
6. Accounting
records
7. Debit
8. T-account
9. Posting
10. Double-entry
accounting
The sources of accounting information.
An increase in an asset, dividend and expense account
and decrease in a liability, common stock and revenue
account; recorded on the left side of a T-account
The process of transferring journal entry information to
the ledger
An accounting system where the impact of each
transaction is recorded in at least two accounts; the sum of
the debits for each entry must equal its credits
A file containing all accounts of a company and their
balances
A company's record of all transactions in one place that
shows debits and credits for each transaction
A record of the increases and decreases in a specific
asset, liability, equity, revenue or expense item
Decrease in an asset, dividend and expense account and
increase in a liability, common stock and revenue account;
recorded on the right side of a T-account
A simple account form used as a helpful tool in
showing the effects of transactions and events on specific
accounts
Another name for the accounting books or simply the
books
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2, 02-C2
1-227
5
7
9
10
4
2
3
1
8
6
Chapter 01 - Introducing Accounting in Business
[Question]
152. Match the following definitions and terms by placing the number that identifies the best
definition in the blank space next to the term.
1. Balance column
account
2. Debt ratio
3. Account balance
4. Chart of accounts
5. Ledger
6. Journal
7. Note payable
8. Trial balance
9. Credit
10. Debit
An increase in an asset, dividend and expense
account and a decrease in a liability, common stock
and revenue account; recorded on the left side of a
T-account
A written promise to pay a definite sum of
money on a specified future date
A file containing all accounts of a company and
their balances
A complete record of all transactions in one
place that shows debits and credits for each
transaction
The ratio of total liabilities to total assets; used
to reflect the risk associated with the company's
debts
A list of all accounts used by a company and the
identification number assigned to each account
A list of accounts and their balances at a point in
time; the total debit balances should equal the total
credit balances
A decrease in an asset, dividend and expense
account and an increase in a liability, common stock
and revenue account; recorded on the right side of a
T-account
The difference between total debits and total
credits for an account including the beginning
balance
An account with debit and credit columns for
recording entries and a third column for showing
the balance of the account after each entry
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
Learning Objective: 02-C1-02-C4
Learning Objective: 02-P1
Learning Objective: 02-P2
1-228
10
7
5
6
2
4
8
9
3
1
Chapter 01 - Introducing Accounting in Business
[Question]
153. Match the following definitions and terms by placing the number that identifies the best
definition in the blank space next to the term.
1. Unearned revenues
2. Chart of accounts
3. Note receivable
4. Posting reference
column
5. Posting
6. Trial Balance
7. Compound journal
entry
8. Account
9. T-account
10. General journal
The most flexible type of journal, it can be used to
record any kind of transaction
A list of all accounts used by a company and the
identification number assigned to each account
A written promise from a customer to pay a definite
sum of money on a specified future date
A simple form used as a helpful tool in
understanding the effect of transactions and events on
specific accounts
Liabilities created when customers pay in advance
for products or services; satisfied by delivering the
products or services in the future
A journal entry that affects at least three accounts
A column in journals where individual account
numbers are entered when entries are posted to ledger
accounts
The process of transferring journal entry information
to the ledger
A record of the increases and decreases in a specific
asset, liability, equity, revenue or expense item
A list of accounts and their balances at a point in
time; the total debit balances should equal the total
credit balances
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C1-02-C4
Learning Objective: 02-P1
1-229
10
2
3
9
1
7
4
5
8
6
Chapter 01 - Introducing Accounting in Business
[Question]
154. Identify each of the following accounts as a revenue (R), expense (E), asset (A), liability
(L) or equity (OE) by placing initials (R, E, A, L or OE) in the blanks.
1. Salary Expense
2. Accounts Payable
3. Prepaid Insurance
4. Unearned Fee Revenue
5. Fees Revenue
6. Accounts Receivable
7. Common Stock
8. Supplies
9. Retained Earnings
10. Cash
11. Equipment
12. Dividends
1. E
2. L
3. A
4. L
5. R
6. A
7. OE
8. A
9. OE
10. A
11. A
12. OE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C2
1-230
Chapter 01 - Introducing Accounting in Business
[Question]
155. The following accounts appear on either the Income Statement (IS) or Balance Sheet
(BS). In the space provided next to each account write the letters is or BS, that identify the
statement on which the account appears.
1. Accounts Payable
2. Unearned Fees Revenues
3. Office Equipment
4. Rent Expense
5. Fees Revenue
6.Wages Payable
7. Rent Expense
8. Cash
9. Common Stock
10. Notes Receivable
1. BS
2. BS
3. BS
4. IS
5. IS
6. BS
7. IS
8. BS
9. BS
10. BS
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
1-231
Chapter 01 - Introducing Accounting in Business
Essay Questions
[Question]
156. Vicki Lake is a computer consultant. Shown below are (a) several accounts in her ledger
with each account preceded by an identification number and (b) several transactions
completed by Lake. Indicate the accounts debited and credited when recording each
transaction by placing the proper account identification numbers to the right of each
transaction.
1.
2.
3.
4.
5.
6.
Accounts Payable
Accounts Receivable
Cash
Consulting Fees Earned
Office Supplies
Office Supplies Expense
7.
8.
9.
10.
11.
12.
Telephone Expense
Unearned Consulting Fees
Common Stock
Dividends
Insurance Expense
Prepaid Insurance
B
Example
Completed consulting work for a client
who will pay at a later date
Received cash in advance from a customer
for designing a software package
Purchased office supplies on credit
C
Paid for the supplies purchased in B
D
Received the telephone bill of the business
and immediately paid it
Paid for a 3-year insurance policy
A
E
1-232
Debit
Credit
2
4
Chapter 01 - Introducing Accounting in Business
Answer:
A
B
C
D
E
Debit
3
5
1
7
12
Credit
8
1
3
3
3
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
1-233
Chapter 01 - Introducing Accounting in Business
[Question]
157. David Roberts is a real estate appraiser. Shown below are (a) several accounts in his
ledger with each account preceded by an identification number and (b) several transactions
completed by Roberts. Indicate the accounts debited and credited when recording each
transaction by placing the proper account identification numbers to the right of each
transaction.
1.
2.
3.
4.
5.
6.
7.
Accounts Payable
Accounts Receivable
Appraisal Fees Earned
Cash
Insurance Expense
Office Equipment
Office Supplies
8.
9.
10.
11.
12.
13.
14.
Example
Completed an appraisal for a client who promised to
pay at a later date.
A. Received cash in advance for appraising an office
building.
B. Purchased office supplies on credit.
C. Paid a cash dividend
D. Received the telephone bill of the business and
immediately paid it.
E. Paid the salary of the office assistant.
F. Paid for the supplies purchased in transaction B.
G. Completed an appraisal for a client and
immediately collected cash for the work done
Answer:
1-234
Office Supplies Expense
Prepaid Insurance
Salaries Expense
Telephone Expense
Unearned Appraisal Fees
Common Stock
Dividends
Debit
2
Credit
3
Chapter 01 - Introducing Accounting in Business
A
B
C
D
E
F
G
Debit
4
7
14
11
10
1
4
Credit
12
1
4
4
4
4
3
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
[Question]
158. List the steps in processing transactions.
Answer: Business transactions and events are the starting point. Source documents are
analyzed for the effects of the transactions and events on the accounting records. The
information is recorded into the journal. The information is then posted to the accounts and a
trial balance is prepared. The final step is the preparation of financial statements and reports
for decision makers.
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C1
1-235
Chapter 01 - Introducing Accounting in Business
[Question]
159. Describe source documents and their purpose.
Answer: Source documents are the sources of information that identify and describe
transactions and events. They provide objective and reliable evidence about transactions and
their amounts. Examples of source documents include checks, invoices, sales receipts, credit
card statements and bank statements. They can be in hard copy or electronic form.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
[Question]
160. Explain how accounts are used in recording information about transactions.
Answer: Accounts are classified into three general categories: assets, liabilities and equity.
Accounts are records of increases and decreases of specific items in these categories. The
accounts serve as the information resource for financial statements and reports.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
1-236
Chapter 01 - Introducing Accounting in Business
[Question]
161. Explain the difference between a ledger and a chart of accounts.
Answer: A ledger is a record containing all of the accounts of a business and their balances.
The chart of accounts is a list of all of the accounts in the ledger that includes an identification
number for the accounts.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C3
[Question]
162. Explain debits and credits and their role in the accounting system.
Answer: Debit refers to the left side of an account and credit refers to the right side of an
account, both are part of the double-entry accounting system. This system is based on the
concept that all transactions and events affect at least two accounts. The double entry system
is organized around the accounting equation which states that assets = liabilities + equity.
Assets, expenses and dividends have normal debit balances and liabilities, common stock and
revenues have normal credit balances
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-C4
1-237
Chapter 01 - Introducing Accounting in Business
[Question]
163. Explain the debt ratio and its use in analyzing a company's financial condition.
Answer: The debt ratio is calculated by dividing total liabilities by total assets. It reveals the
percentage of the company's assets that are financed by creditors. The higher the ratio, the
more risk a company has in trying to repay the debt with interest.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
[Question]
164. Explain the recording and posting processes.
Answer: Information from business transactions and events is recorded in the journal in the
form of journal entries. The journal entries include the date, the account titles and debit and
credit amounts. Journal entries may also include a further description of the transaction.
During the posting process the debit and credit amounts recorded in the journal are transferred
to the individual accounts in the ledger.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P1
1-238
Chapter 01 - Introducing Accounting in Business
[Question]
165. What is a trial balance? What is its purpose?
Answer: The trial balance is a list of all of the accounts in the ledger with balances at a point
in time. The list is organized by debit and credit balances. The purpose of the trial balance is
to summarize the account totals and to verify the accuracy of the total debits and credits. If the
total debits and credits are not equal, then the trial balance is out of balance which indicates
an error in the accounting records. However, even if debits do equal credits this is no
guarantee that no errors were made in recording and posting transactions.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P2
[Question]
166. Susie and Katie Shea founded CitySlips. What are some accounting challenges they
faced when starting her business?
Answer: They had to account for many activities such as product costs, office expenses,
supplier payments and patent fees. They also expanded sales.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
1-239
Chapter 01 - Introducing Accounting in Business
Short Answer Questions
[Question]
167. Identify which of the following items would likely serve as a source document by
marking an X in the appropriate column. The first one is done as an example
Ex.
a.
b.
c.
d.
e.
f.
g.
h.
Yes
No
X
Yes
No
X
Credit card
Credit card receipt
Purchase order
Invoice
Balance sheet
Bank statement
Journal entry
Electric power bill
Employee earnings record
Answer:
Ex.
a.
b.
c.
d.
e.
f.
g.
h.
Credit card
Credit card receipt
Purchase order
Invoice
Balance sheet
Bank statement
Journal entry
Electric power bill
Employee earnings record
X
X
X
X
X
X
X
X
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C2
1-240
Chapter 01 - Introducing Accounting in Business
[Question]
168. Indicate whether a debit or credit entry would be made to record the following changes
in each account.
a. To decrease Cash
b. To increase Common Stock
c. To decrease Accounts Payable
d. To increase Salaries Expense
e. To decrease Supplies
f. To increase Revenue.
g. To decrease Accounts Receivable
h. To increase Retained Earnings
Answer: a. Credit, b. Credit, c. Debit, d. Debit, e. Credit, f. Credit, g. Credit, h. Credit
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
1-241
Chapter 01 - Introducing Accounting in Business
[Question]
169. The following is a list of accounts and identification letters A through J for Shannon
Management Co.:
A.
B.
C.
D.
E.
Common Stock
Interest Payable
Land
Dividends
Fees Earned
F.
G.
H.
I.
J.
Prepaid Rent
Advertising Expense
Unearned Rent Revenue
Commissions Earned
Notes Receivable
Use the form below to identify the type of account and its normal balance. The first item is
filled in as an example.
Asset
Type of Account
Liability
Asset
Type of Account
Liability
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
Equity
X
Normal Balance
Debit
Credit
X
Answer:
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
Equity
X
X
X
X
X
X
X
X
X
X
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
1-242
Normal Balance
Debit
Credit
X
X
X
X
X
X
X
X
X
X
Chapter 01 - Introducing Accounting in Business
[Question]
170. Dolly Barton began Barton Office Services in October and during the month completed
the following transactions:
a. Invested $10,000 cash and $15,000 of computer equipment in exchange for common stock
b. Paid $500 cash for an insurance premium covering the next 12 months
c. Completed a word processing assignment for a customer and collected $1,000 cash
d. Paid $200 cash for office supplies
e. Paid $2,000 for October's rent.
Prepare journal entries to record the above transactions. Explanations are unnecessary.
Answer:
a.
Cash
Computer Equipment
Common Stock
10,000
15,000
25,000
b.
Prepaid Insurance
Cash
500
500
c.
Cash
Office Services Revenue
1,000
1,000
d.
Office Supplies
Cash
200
200
e.
Rent Expense
Cash
2,000
2,000
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-A1
1-243
Chapter 01 - Introducing Accounting in Business
[Question]
171. A company sends a $1,500 bill to a customer for delivery services rendered. Set up the
necessary T-accounts below and show how this transaction would be recorded directly in
those accounts.
Answer:
Accounts Receivable
1,500
Delivery Fees Earned
1,500
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
1-244
Chapter 01 - Introducing Accounting in Business
[Question]
172. A company paid $2,500 cash to satisfy a previously recorded account payable. Set up the
necessary T-accounts below and show how this transaction would be recorded directly in
those accounts.
Answer:
Accounts Payable
2,500
Cash
2,500
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
1-245
Chapter 01 - Introducing Accounting in Business
[Question]
173. A business paid a $100 cash dividend. Set up the necessary T-accounts below and show
how this transaction would be recorded directly in those accounts.
Answer:
Dividends
100
Cash
100
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
1-246
Chapter 01 - Introducing Accounting in Business
[Question]
174. On December 3, the Matador Company paid $5,400 cash in salaries to office personnel.
Prepare the general journal entry to record this transaction.
Answer:
12/3
Office Salaries Expense
Cash
5,400
5,400
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
[Question]
175. On February 5, Textron Stores purchased a van that had a cost of $35,000. The firm
made a down payment of $5,000 cash and signed a long-term note payable for the balance.
Show the general journal entry to record this transaction.
Answer:
2/5
Van
Cash
Note Payable
35,000
5,000
30,000
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
1-247
Chapter 01 - Introducing Accounting in Business
[Question]
176. On October 1, 2011, Smith invested $20,000 cash, office equipment costing $15,000,
and drafting equipment costing $12,000 into the company in exchange for common stock.
Show the general journal entry to record this transaction.
Answer:
10/1/2011
Cash
Office Equipment
Drafting Equipment
Common Stock
20,000
15,000
12,000
47,000
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
[Question]
177. Krenz Car Care, which is owned and operated by Karl Krenz, began business as a
corporation in September of the current year. Karl, a master mechanic, had no experience with
keeping a set of books. As a result, Karl entered all of September's transactions directly to the
ledger accounts. When he tried to locate a particular entry he found it to be confusing and
time consuming. He has hired you to improve his accounting procedures. The accounts in his
General Ledger are as follows:
9/01
9/11
9/15
Cash
(a) 4,200 9/4 (b)
(d) 150
(e) 190
Common Stock
9/1
550
9/1
9/4
(a) 5,000
1-248
Equipment
(a) 800
(b) 2,550
Notes Payable
9/4
(b) 2,000
Chapter 01 - Introducing Accounting in Business
Accounts Receivable
(c) 275 9/15 (c)
9/9
190
Repair Revenue
9/9 (c)
9/11 (d)
275
150
Prepare the general journal entries, in chronological order (a) through (e), from the T-account
entries shown. Include a brief description of the probable nature of each transaction.
Answer:
a.
Sept. 1
Cash
Equipment
Common Stock
4,200
800
5,000
To record initial investment
b.
4 Equipment
Cash
Notes Payable
2,550
550
2000
To record purchase of equipment, paying$550 in cash and signing a
$2,000 note payable for the balance due
c.
9 Accounts Receivable
Repair Revenue
275
275
To record credit sale of services
d.
11 Cash
Repair Revenue
150
150
To record cash sale of services
e.
15 Cash
Accounts Receivable
190
190
To record collection from customer
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
1-249
Chapter 01 - Introducing Accounting in Business
[Question]
178. Flora Accounting Services completed these transactions in February:
a. Purchased office supplies on account, $300
b. Completed work for a client on credit, $500
c. Paid cash for the office supplies purchased in (a)
d. Completed work for a client and received $800 cash
e. Received $500 cash for the work described in (b).
f. Received $1,000 from a client for accounting services to be performed in March.
Prepare journal entries to record the above transactions. Explanations are not necessary.
Answer:
a.
Office Supplies
Accounts Payable
300
300
b.
Accounts Receivable
Accounting Services Revenue
c.
Accounts Payable
Cash
d.
Cash
Accounting Services Revenue
e.
Cash
Accounts Receivable
f.
Cash
Unearned Accounting Service Revenue
500
500
300
300
800
800
500
500
1,000
500
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A1
1-250
Chapter 01 - Introducing Accounting in Business
[Question]
179. Leonard Matson completed these transactions during December of the current year:
Dec
1 Began a financial services practice by investing $15,000 cash and office
equipment having a $5,000 value in exchange for common stock.
2 Purchased $1,200 of office equipment on credit.
3 Purchased $300 of office supplies on credit.
4 Completed work for a client and immediately received a payment of
$900 cash.
8 Completed work for Acme Loan Co. on credit. $1,700
10 Paid for the supplies purchased on December 3.
14 Paid for the annual $960 premium on an insurance policy.
18 Received payment in full from Acme Loan Co. for the work completed
on December 8.
27 Paid a $650 cash dividend.
30 Paid $175 cash for the December utility bills
30 Received $2,000 from a client for financial services to be rendered next
year.
Prepare general journal entries to record these transactions.
Answer:
1-251
Chapter 01 - Introducing Accounting in Business
Dec. 1
Cash
Office Equipment
Common Stock
15,000
5,000
20,000
Owner invested in business
2
Office Equipment
Accounts Payable
1,200
1,200
Purchased office equipment on credit
3
Office Supplies
Accounts Payable
300
300
Purchased office supplies on credit
4
Cash
Fees Earned
900
900
Rendered services for cash
8
Accounts Receivable
Fees Earned
1,700
1,700
Rendered services on account
10
Accounts Payable
Cash
300
300
Paid amount owed for supplies
14
Prepaid Insurance
Cash
960
960
Paid insurance premium for one year
18
Cash
Accounts Receivable
1,700
1,700
Received payment on account
27
Dividends
Cash
650
650
Cash dividend paid
30
Utility Expense
Cash
175
175
Paid utility bills
30
Cash
Unearned Fees
2,000
2,000
1-252
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
[Question]
180. Maria Sanchez began business as Sanchez Law Firm on November 1. Record the
following November transactions by making entries directly to the T-accounts provided.
Then, prepare a trial balance, as of November 30.
a. Sanchez invested $15,000 cash and a law library valued at $6,000 in exchange for common
stock.
b. Purchased $7,500 of office equipment from Johnson Bros. on credit.
c. Completed legal work for a client and received $1,500 cash in full payment.
d. Paid Johnson Bros. $3,500 cash in partial settlement of the amount owed.
e. Completed $4,000 of legal work for a client on credit.
f. Paid a $2,000 cash dividend.
g. Received $2,500 cash as partial payment for the legal work completed for the client in (e).
h. Paid $2,500 cash for the legal secretary's salary.
Cash
Office Equipment
Dividends
Accounts Receivable
Accounts Payable
Legal Fees Earned
1-253
Chapter 01 - Introducing Accounting in Business
Law Library
Common Stock
Salaries Expense
Answer:
Cash
(a) 15,000 (d) 3,500
(c) 1,500 (f) 2,000
(g) 2,500 (h) 2,500
11,000
Office Equipment
(b) 7,500
Accounts Receivable
Accounts Payable
(a) 4,000 (g) 2,500 (d) 3,500 (b) 7,500
1,500
4,000
Law Library
(e) 6,000
Common Stock
(a) 21,000
1-254
Dividends
(f) 2,000
Legal Fees Earned
(c) 1,500
(e) 4,000
5,500
Salaries Expense
(h) 2,500
Chapter 01 - Introducing Accounting in Business
Sanchez Law Firm
Trial Balance
November 30
Account
Cash
Accounts Receivable
Law Library
Office Equipment
Accounts Payable
Common Stock
Dividends
Legal Fees Earned
Salaries Expense
Totals
Debit
Credit
$ 11,000
1,500
6,000
7,500
$ 4,000
21,000
2,000
5,500
2,500
______
$30,500
$30,500
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
Learning Objective: 02-P3
1-255
Chapter 01 - Introducing Accounting in Business
[Question]
181. Josephine's Bakery had the following assets and liabilities at the beginning and end of
the current year:
Assets
$114,000
135,000
Beginning of the year
End of the year
Liabilities
$68,000
73,000
If the owners made no investments in the business and no dividends were paid during the
year, what was the amount of net income earned by Josephine's Bakery during the current
year?
Answer:
Beginning owner's equity = $114,000 - $68,000 = $46,000
Ending owner's equity = $135,000 - $73,000 = $62,000
Increase in owner's equity = $62,000 - $46,000 = $16,000
Since there were no investments or dividends during the year, the net income is $16,000.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
Learning Objective: 02-P3
1-256
Chapter 01 - Introducing Accounting in Business
[Question]
182. Josephine's Bakery had the following assets and liabilities at the beginning and end of
the current year:
Beginning of the year
End of the year
Assets
$114,000
135,000
Liabilities
$68,000
73,000
If the owners invested an additional $12,000 in the business during the year, but no dividends
were paid, what was the amount of net income earned by Josephine's Bakery during the
current year?
Answer:
Beginning owner's equity = $114,000 - $68,000 = $46,000
Ending owner's equity = $135,000 - $73,000 = $62,000
Increase in owner's equity = $62,000 - $46,000 = $16,000
Net income = $16,000 - $12,000 = $4,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
Learning Objective: 02-P3
1-257
Chapter 01 - Introducing Accounting in Business
[Question]
183. Josephine's Bakery had the following assets and liabilities at the beginning and end of
the current year:
Beginning of the year
End of the year
Assets
$114,000
135,000
Liabilities
$68,000
73,000
If the owners made no investments and dividends of $5,000 were paid during the year, what
was the amount of net income earned by Josephine's Bakery during the current year?
Answer:
Beginning owner's equity = $114,000 - $68,000 = $46,000
Ending owner's equity = $135,000 - $73,000 = $62,000
Increase in owner's equity = $62,000 - $46,000 = $16,000
Net income = $16,000 + $5,000 = $21,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
Learning Objective: 02-P3
1-258
Chapter 01 - Introducing Accounting in Business
[Question]
184. Josephine's Bakery had the following assets and liabilities at the beginning and end of
the current year:
Beginning of the year
End of the year
Assets
$114,000
135,000
Liabilities
$68,000
73,000
If the owners invested an additional $12,000 in the business and dividends of $5,000 were
paid during the year, what was the amount of net income earned by Josephine's Bakery during
the current year?
Answer:
Beginning owner's equity = $114,000 - $68,000 = $46,000
Ending owner's equity = $135,000 - $73,000 = $62,000
Increase in owner's equity = $62,000 - $46,000 = $16,000
Net income = $16,000 - $12,000 + $5,000 = $9,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
Learning Objective: 02-P3
[Question]
185. A company had total assets of $350,000; total liabilities of $101,500; and total equity of
$248,500. Calculate its debt ratio.
Answer:
$101,500/$350,000 = 29%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
1-259
Chapter 01 - Introducing Accounting in Business
[Question]
186. Montgomery Marketing Co. had assets of $475,000; liabilities of $275,500; and equity
of $199,500. Calculate its debt ratio.
Answer: $275,500/$475,000 = 58%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
[Question]
187. List all the necessary steps for recording transactions.
Answer:
1. Analyze transactions and source documents.
2. Apply double-entry accounting.
3. Record the journal entry.
4. Post entry to ledger.
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P1
1-260
Chapter 01 - Introducing Accounting in Business
[Question]
188. For each of the following errors, indicate on the table below the amount by which the
trial balance will be out of balance and which trial balance column (debit or credit) will have
the larger total as a result of the error.
a. $100 debit to Cash was debited to the Cash account twice
b. $1,900 credit to Sales was posted as a $190 credit
c. $5,000 debit to Office Equipment was debited to Office Supplies
d. $625 debit to Prepaid Insurance was posted as a $62.50 debit
e. $520 credit to Accounts Payable was not posted
Error
Amount Out of
Balance
Column Having
Larger Total
Amount Out of
Balance
$100
$1,710
0
$562.50
$520
Column Having
Larger Total
Debit
Debit
N/A
Credit
Debit
a.
b.
c.
d.
e.
Answer:
Error
a.
b.
c.
d.
e.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P2
1-261
Chapter 01 - Introducing Accounting in Business
[Question]
189. After preparing an (unadjusted) trial balance at year-end, G. Chu of Chu Design
Company discovered the following errors:
1. Cash payment of the $225 telephone bill for December was recorded twice.
2. Cash payment of a note payable was recorded as a debit to Cash and a debit to Notes
Payable for $1,000.
3. A $900 cash dividend was recorded to the correct accounts as $90.
4. An additional investment of $5,000 cash by the owner was recorded as a debit to Common
Stock and a credit to Cash.
5. A credit purchase of office equipment for $1,800 was recorded as a debit to the Office
Equipment account with no offsetting credit entry.
Using the form below, indicate whether the error would cause the trial balance to be out of
balance by placing an X in either the yes or no column.
Error
1.
2.
3.
4.
5.
Yes
No
Yes
No
X
Answer:
Error
1.
2.
3.
4.
5.
X
X
X
X
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P2
1-262
Chapter 01 - Introducing Accounting in Business
[Question]
190. The balances for the accounts of Mike's Maintenance, Inc. for the year ended December
31 are shown below. Each account shown had a normal balance.
Accounts payable
Accounts receivable
Cash
Maintenance supplies
Building
Supplies expense
Common Stock
Maintenance revenue
$ 6,500
7,000
?
1,200
125,000
21,500
50,000
175,000
Wages expense
Rent expense
Retained Earnings
$36,000
6,000
68,700
Land
Unearned maintenance fees
50,000
4,000
Dividends
48,000
Calculate the correct balance for Cash and prepare a trial balance.
Answer:
MIKE’S MAINTENANCE, INC.
Trial Balance
For the year ended December 31
Cash**……………………………………………………………….
Accounts receivable………………………………………………...
Maintenance supplies……………………………………………….
Land…………………………………………………………………
Building……………………………………………………………...
Accounts payable……………………………………………………
Unearned maintenance fees…………………………………………
Common stock………………………………………………………
Retained earnings……………………………………………………
Dividends……………………………………………………………
Maintenance revenue………………………………………………..
Wage expense……………………………………………………….
Rent expense………………………………………………………...
Supplies expense………………………………………….................
Totals
** Total credits
Total debits (excluding cash)
Cash
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P2
1-263
$9,500
7,000
1,200
50,000
125,000
48,000
36,000
6,000
21,500
$6,500
4,000
50,000
68,700
175,000
$304,200 $304,200
$304,200
294,700
$9,500
Chapter 01 - Introducing Accounting in Business
[Question]
191. The balances for the accounts of Lance’s Consulting Firm, Inc. for the year ended
December 31 are shown below. Each account shown had a normal balance.
Accounts payable
Accounts receivable
Cash
Office Supplies
Building
Supplies expense
Consulting Revenue
$ 6,400
7,000
10,000
1,000
99,000
15,000
150,000
Wages expense
Rent expense
Retained Earnings
Land
Unearned Revenue
Dividends
Common Stock
$35,000
5,000
68,700
53,000
7,000
20,000
12,900
Calculate Net Income.
Answer: $150,000- 15,000-35,000-5,000 = $95,000 Net Income
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P3
[Question]
192. The balances for the accounts of Lance’s Consulting Firm, Inc. for the year ended
December 31 are shown below. Each account shown had a normal balance.
Accounts payable
Accounts receivable
Cash
Office Supplies
Building
Supplies expense
Consulting Revenue
$ 6,400
7,000
10,000
1,000
99,000
15,000
150,000
Wages expense
Rent expense
Retained Earnings
Land
Unearned Revenue
Dividends
Common Stock
Calculate Ending Retained Earnings.
Answer: $68,700 + 95,000 – 20,000 =$143,700
1-264
$35,000
5,000
68,700
53,000
7,000
20,000
12,900
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P3
[Question]
193. The balances for the accounts of Lance’s Consulting Firm, Inc. for the year ended
December 31 are shown below. Each account shown had a normal balance.
Accounts payable
Accounts receivable
Cash
Office Supplies
Building
Supplies expense
Consulting Revenue
$ 6,400
7,000
10,000
1,000
99,000
15,000
150,000
Wages expense
Rent expense
Retained Earnings
Land
Unearned Revenue
Dividends
Common Stock
$35,000
5,000
68,700
53,000
7,000
20,000
12,900
Calculate Total Assets.
Answer: $7,000+10,000+1,000+99,000+53,000 = $170,000
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P3
[Question]
194. The balances for the accounts of Lance’s Consulting Firm, Inc. for the year ended
December 31 are shown below. Each account shown had a normal balance.
Accounts payable
Accounts receivable
Cash
Office Supplies
Building
Supplies expense
Consulting Revenue
$ 6,400
7,000
10,000
1,000
99,000
15,000
150,000
Wages expense
Rent expense
Retained Earnings
Land
Unearned Revenue
Dividends
Common Stock
1-265
$35,000
5,000
68,700
53,000
7,000
20,000
12,900
Chapter 01 - Introducing Accounting in Business
Calculate the Debt Ratio.
Answer: $13,400/$170,000 = .0788: 7.9%
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
1-266
Chapter 01 - Introducing Accounting in Business
195. At year-end, Harris Cleaning Service noted the following errors in its trial balance:
It understated the total debits to the Cash account by $500 when computing the account
balance.
1. A credit sale for $311 was recorded as a credit to the revenue account, but the offsetting
debit was not posted.
2. A cash payment to a creditor for $2,600 was never recorded.
3. The $680 balance of the Prepaid Insurance account was listed in the credit column of the
trial balance.
4. A $24,900 truck purchase for cash was recorded as a $24,090 debit to Vehicles and a
$24,090 credit to Notes Payable.
5. A purchase of office supplies for $150 was recorded as a debit to Office Equipment. The
offsetting credit entry was correct.
6. An additional investment of $4,000 by Del Harris was recorded as a debit to Common
Stock and as a credit to Cash.
7. The cash payment of the $510 utility bill for December was recorded (but not paid) twice.
8. A revenue account balance of $79,817 was listed on the trial balance as $97,817.
9. A $1,000 cash dividend was recorded as a $100 debit to Dividends and $100 credit to cash.
Using the form below, indicate whether each error would cause the trial balance to be out of
balance, the amount of any imbalance and whether a correcting journal entry is required.
Error
Would the error cause the trial
balance to be out of balance?
Yes
No
Amount of
Imbalance
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Answer:
1-267
Correcting Journal Entry
Required
Yes
No
Chapter 01 - Introducing Accounting in Business
Error
1
2.
3.
4.
5.
6.
7.
8.
9.
10.
Would the error cause the trial
balance to be out of balance?
Yes
No
X
X
X
X
X
X
X
X
X
X
Amount of
Imbalance
$500
311
0
1,360
0
0
0
0
18,000
0
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P2
1-268
Correcting Journal Entry
Required
Yes
No
X
X
X
X
X
X
X
X
X
X
Chapter 01 - Introducing Accounting in Business
[Question]
196. The following trial balance was prepared from the general ledger of Hal's Auto Repair.
HAL’S AUTO REPAIR
Trial Balance
October 31
Debit
Cash
Accounts receivable
Supplies
Repair equipment
Office equipment
Accounts payable
Common stock
Retained earnings
Dividends
Repair fees earned
Supplies expense
Totals
Credit
$
975
3,800
500
13,000
6,600
$ 4,510
10,000
13,000
4,200
10,875
8,600
$37,675
$38,385
Since the trial balance did not balance, you decided to examine the accounting records. You
found that the following errors had been made:
1. A purchase of supplies on account for $245 was posted as a debit to Supplies and as a debit
to Accounts Payable.
2. An investment of $500 cash by the owner was debited to Common Stock and credited to
Cash.
3. In computing the balance of the Accounts Receivable account, a debit of $600 was omitted
from the computation.
4. One debit of $300 to the Dividends account was posted as a credit.
5. Office equipment purchased for $800 was posted to the Repair Equipment account.
6. One entire entry was not posted to the general ledger. The transaction involved the receipt
of $125 cash at the time repair services were performed.
Prepare a corrected trial balance for the Hal's Auto Repair as of October 31.
Answer:
1-269
Chapter 01 - Introducing Accounting in Business
HAL’S AUTO REPAIR
Trial Balance
October 31
Debit
Casha
Accounts receivableb
Supplies
Repair equipmentc
Office equipmentd
Accounts payablee
Common stockf
Retained earnings
Dividendsg
Repair fees earnedh
Supplies expense
Totals
Credit
$ 2,100
4,400
500
12,200
7,400
$ 5,000
11,000
13,000
4,800
11,000
8,600
$40,000
a. Cash: Balance $975 + $1,000 (2) + 125 (6) = $2,100
b. Accounts Receivable: Bal. $3,800 + 600 (3) = $4,400
c. Repair Equipment: Bal. $13,000 - 800 (5) = $12,200
d. Office Equipment: Bal. $6,600 + 800 (5) = $7,400
e. Accounts Payable: Bal $4,510 + 490 (1) = $5,000
f. Common Stock = Bal. $10,000 + 1,000 (2) = $11,000
g. Dividends: Bal. $4,200 + 600 (4) = $4,800
h. Repair fees earned: Bal $10,875 + 125 (6) = $11,000
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-P2
1-270
$40,000
Chapter 01 - Introducing Accounting in Business
[Question]
197. The following are all of the accounts of Flaherty Company that have a balance at the end
of August. All accounts have normal balances:
Accounts receivable
Equipment
Service revenues earned
Rent expense
Office supplies
Notes payable
$36,000
59,000
75,000
3,600
1,500
22,000
Cash
Advertising expense
Accounts payable
Dividends
Salaries expense
Common stock
Retained earnings
$27,000
5,000
31,000
24,000
30,000
20,000
58,100
a. Calculate net income
b. Determine the amount of retained earnings to be shown on the August 31 balance sheet.
Answer:
a.
$75,000
(3,600)
(5,000)
(30,000)
$36,400
Service revenues earned
Rent expense
Advertising expense
Salaries expense
Net income
$58,100
36,400
(24,000)
$70,500
Retained earnings (beginning)
Net income
Dividends
Retained earnings
b.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P3
1-271
Chapter 01 - Introducing Accounting in Business
[Question]
198. Based on the following trial balance for Sal's Beauty Shop, prepare an income statement,
statement of retained earnings and a balance sheet. Sal made no additional investments in the
company during the year.
Sal’s Beauty Shop
Trial Balance
December 31
Cash
Accounts receivable
Beauty supplies
Beauty shop equipment
Accounts payable
Common stock
Retained earnings
Dividends
Revenue earned
Beauty supplies expense
Rent expense
Wages expense
Totals
$ 6,500
475
2,500
17,000
$ 745
10,000
11,155
36,000
72,000
3,425
6,000
22,000
$93,900
Answer:
1-272
$93,900
Chapter 01 - Introducing Accounting in Business
Sal’s Beauty Shop
Income Statement
For the year ended December 31
Revenue earned
Expenses:
Beauty supplies expense
Rent expense
Wages expense
Total expenses
Net Income
$72,000
$ 3,425
6,000
22,000
31,425
$40,575
Sal’s Beauty Shop
Statement of Retained Earnings
For the year ended December 31
Retained earnings, January 1
Add: Net income
Less: Dividends
Retained earnings, December 31
$11,155
40,575
(36,000)
$15,730
Sal’s Beauty Shop
Balance Sheet
At December 31
Assets
Cash
Accounts receivable
Beauty supplies
Beauty shop equipment
Total assets
Liabilities
$ 6,500 Accounts payable
475
2,500
Equity
17,000 Common stock
Retained earnings
Total equity
$26,475 Total liabilities and equity
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P3
1-273
$ 745
$10,000
15,730
25,730
$26,475
Chapter 01 - Introducing Accounting in Business
Fill in the Blank Questions
[Question]
199. ____________________________ and _____________________ are the starting points
for the analyzing and recording process.
Answer: Business transactions; events
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C1
[Question]
200. The second step in the analyzing and recording process is to record the transactions and
events in the _____________________________.
Answer: Journal
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C1
[Question]
201. The third step in the analyzing and recording process is to post the information to
_________________________.
Answer: Ledger accounts.
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C1
1-274
Chapter 01 - Introducing Accounting in Business
[Question]
202. _________________ identify and describe transactions and events and provide objective
evidence and amounts for recording.
Answer: Source documents
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
[Question]
203. Revenues and expenses are two categories of ____________________ accounts.
Answer: Equity
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C2
[Question]
204. The _______________________ is a record containing all accounts (with balances) used
by a company.
Answer: General ledger (or ledger)
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C2
1-275
Chapter 01 - Introducing Accounting in Business
[Question]
205. The three general categories of accounts in a general ledger are __________________,
_________________ and __________________________.
Answer: Assets, liabilities, equity
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C2
[Question]
206. ___________________ is a promise of payment from customers to sellers.
Answer: Accounts receivable
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C2
[Question]
207. Unearned revenue is classified as _______________ that is satisfied by delivering
products or services in the future.
Answer: A Liability
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
1-276
Chapter 01 - Introducing Accounting in Business
[Question]
208. The four categories of equity accounts are _____________________,
__________________, ______________________ and ______________________.
Answer: Common stock; dividends; revenues; expenses
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C2
[Question]
209. A _______________ is a list of all the accounts used by a company and their
identification codes.
Answer: Chart of accounts
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C3
[Question]
210. A ___________________ is a record containing all accounts for a company along with
their balances.
Answer: Ledger
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
1-277
Chapter 01 - Introducing Accounting in Business
[Question]
211. _____________________________ requires that the impact of each transaction be
recorded in at least two accounts. It also means that total amounts debited must equal total
amounts credited for each transaction.
Answer: Double-entry accounting
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C4
[Question]
212. The difference between total debits and total credits for an account, including any
beginning balance is the ________________________.
Answer: Account balance
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-C4
[Question]
213. Increases in assets are _______________, while increases in liabilities are
_______________.
Answer: Debited, credited
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-C4
1-278
Chapter 01 - Introducing Accounting in Business
[Question]
214. FastForward purchased $25,000 of equipment for cash. The Equipment asset account is
_______________ for $25,000 and the cash account is _______________ for $25,000.
Answer: Debited, credited
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 02-A1
[Question]
215. Stride Rite had total liabilities of $130 million and total assets of $375 million. Its debt
ratio was _______________.
Answer: $130 million/$375 million = 34.7%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-A2
[Question]
216. _______________ is the process of transferring journal entry information to the ledger.
Answer: Posting
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P1
1-279
Chapter 01 - Introducing Accounting in Business
[Question]
217. A ___________________________ gives a complete record of each transaction in one
place and shows debits and credits for each transaction.
Answer: Journal
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 02-P1
[Question]
218. An account format that is similar to a T-account in that it has columns for debits and
credits, but that is different in that it has columns for transaction date, explanation and the
account balance is the ___________________________________.
Answer: Balance column account
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P1
[Question]
219. The posting process is the link between the _______________ and the _____________.
Answer: Journal; ledger
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 02-P1
1-280
Chapter 01 - Introducing Accounting in Business
Chapter 03
Adjusting Accounts and Preparing Financial Statements
True / False Questions
[Question]
1. A company's fiscal year must correspond with the calendar year.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-C1
[Question]
2. The time period principle assumes that an organization's activities can be divided into
specific time periods.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-C1
1-281
Chapter 01 - Introducing Accounting in Business
[Question]
3. Interim statements report a company's business activities for a 1-year period.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C1
[Question]
4. Adjusting entries are made after the preparation of financial statements.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-C2
[Question]
5. Adjusting entries result in a better matching of revenues and expenses.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-C2
1-282
Chapter 01 - Introducing Accounting in Business
[Question]
6. The matching principle and the full closure principle are the two main accounting
principles used in accrual accounting.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-C2
[Question]
7. Adjusting entries are used to record the effects of internal economic (financial) transactions
and events.
TRUE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
[Question]
8. The matching principle requires that revenue not be assigned to the accounting period in
which it is earned.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
1-283
Chapter 01 - Introducing Accounting in Business
[Question]
9. The revenue recognition principle is the basis for making adjusting entries that pertain to
unearned and accrued revenues.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
[Question]
10. Under the cash basis of accounting, no adjustments are made for prepaid, unearned and
accrued items.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
[Question]
11. Since the revenue recognition principle requires that revenues be earned, there are no
unearned revenues in accrual accounting.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
1-284
Chapter 01 - Introducing Accounting in Business
[Question]
12. The matching principle requires that expenses get recorded in the same accounting period
as the revenues that are earned as a result of the expenses, not when cash is paid.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
[Question]
13. The cash basis of accounting is an accounting system in which revenues are reported
when cash is received and expenses are reported when cash is paid.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
1-285
Chapter 01 - Introducing Accounting in Business
[Question]
14. The cash basis of accounting requires that revenues be recognized when cash payments
from customers are received.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
[Question]
15. The accrual basis of accounting is an accounting system in which revenues are reported as
earned when cash is received.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
[Question]
16. Recording revenues before they are earned overstates current-period income; recording
revenues in periods after they have been earned understates the recording period’s income.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
1-286
Chapter 01 - Introducing Accounting in Business
[Question]
17. Prior to recording adjusting entries at the end of an accounting period, some accounts may
not show proper financial statement amounts even though all transactions were correctly
recorded.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-C2
[Question]
18. A company paid $6,000 for a six-month insurance policy. The policy coverage began on
February 1. On February 28, $100 of insurance expense must be recorded.
Answer: FALSE
Feedback: Expense = $6,000/6 = $1,000
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-C2
1-287
Chapter 01 - Introducing Accounting in Business
[Question]
19. On October 15, a company received $15,000 cash as a down payment on a consulting
contract. The amount was credited to Unearned Consulting Revenue. By October 31, 10% of
the services required by the contract were completed. The company will record consulting
revenue of $1,500 from this contract for October.
Answer: TRUE
Feedback: Revenue = $15,000 x 10% = $1,500
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-C2
[Question]
20. The accrual basis of accounting is a system of accounting in which the adjustments are
needed to assign revenues to periods in which they are earned and to match expenses with
revenues.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-C2
1-288
Chapter 01 - Introducing Accounting in Business
[Question]
21. The first five steps in the accounting cycle include analyzing transactions, journalizing,
posting, preparing an unadjusted trial balance and recording adjusting entries.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C3
[Question]
22. The last four steps in the accounting cycle include preparing the adjusted trial balance,
preparing financial statements and recording closing and adjusting entries.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-C3
[Question]
23. A classified balance sheet organizes assets and liabilities into important subgroups that are
not found on an unclassified balance sheet.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-C4
1-289
Chapter 01 - Introducing Accounting in Business
[Question]
24. Current assets and current liabilities are expected to be used up or come due within one
year or the company's operating cycle whichever is longer.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-C4
[Question]
25. Intangible assets are long-term resources that benefit business operations, usually lack
physical form and have uncertain benefits.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-C4
1-290
Chapter 01 - Introducing Accounting in Business
[Question]
26. Plant assets and intangible assets are usually long-term assets that are used to produce or
sell products and services.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C4
[Question]
27. Current liabilities include accounts receivable, unearned revenues and salaries payable.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C4
[Question]
28. For a corporation, the equity section is divided into two main accounts: Common Stock
and Retained Earnings.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C4
1-291
Chapter 01 - Introducing Accounting in Business
[Question]
29. Before an adjusting entry is made to recognize insurance expired, Prepaid Insurance and
Insurance Expense are both overstated.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-A1
[Question]
30. Before an adjusting entry is made to accrue employee salaries, Salaries Expense and
Salaries Payable are both understated.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-A1
[Question]
31. Failure to record depreciation expense will overstate the asset and understate the expense.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-A1
1-292
Chapter 01 - Introducing Accounting in Business
[Question]
32. Profit margin can also be called return on sales.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-A2
[Question]
33. Profit margin is calculated by dividing net sales by net income.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-A2
[Question]
34. Ben and Jerry's had total assets of $149,501,000, net income of $6,242,000 and net sales
of $209,203,000. Its profit margin was 2.98%.
Answer: TRUE
Feedback: $6,242,000/$209,203,000 = 2.98%
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-A2
1-293
Chapter 01 - Introducing Accounting in Business
[Question]
35. The current ratio is computed by dividing current liabilities by current assets.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-A3
[Question]
36. A contra account is an account linked with another account; it is added to that account to
show the proper amount for the item recorded in the associated account.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P1
[Question]
37. Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of
an asset.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P1
1-294
Chapter 01 - Introducing Accounting in Business
[Question]
38. In accrual accounting, accrued revenues are recorded as liabilities.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P1
[Question]
39. Depreciation expense is an example of an accrued expense.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P1
[Question]
40. Earned but uncollected revenues that are recorded during the adjusting process with a
credit to a revenue account and a debit to an expense account are referred to as accrued
expenses.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-295
Chapter 01 - Introducing Accounting in Business
[Question]
41. Net income for a period will be overstated if accrued salaries are not recorded at the end
of the accounting period.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
[Question]
42. An unadjusted trial balance is a listing of accounts and their balances prepared before
adjustments are recorded.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P2
[Question]
43. The account form of the balance sheet matches the accounting equation. That is, assets are
on the left side of the statement and liabilities and equity are on the right side of the
statement.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P3
1-296
Chapter 01 - Introducing Accounting in Business
[Question]
44. In preparing statements from the adjusted trial balance, the balance sheet must be prepared
first.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P3
[Question]
45. An expense account is normally closed by debiting Income Summary and crediting the
expense account.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P4
[Question]
46. The dividends account is normally closed by debiting it.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P4
1-297
Chapter 01 - Introducing Accounting in Business
[Question]
47. The Income Summary account is closed to the retained earnings account.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P4
[Question]
48. When expenses exceed revenues, there is a net loss and the Income Summary account
would have a credit balance.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P4
[Question]
49. The Income Summary account is used to close the permanent accounts at the end of an
accounting period.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Med
Learning Objective: 03-P4
1-298
Chapter 01 - Introducing Accounting in Business
[Question]
50. A post-closing trial balance is a list of permanent accounts and their balances from the
ledger after all closing entries are journalized and posted.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P5
[Question]
51. It is acceptable to record prepayment of expenses as debits to expense accounts.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P6
[Question]
52. It is acceptable to credit cash received in advance to revenue accounts when cash is
received.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P6
1-299
Chapter 01 - Introducing Accounting in Business
[Question]
53. Adjustments must be entered in the journal and posted to the ledger after the work sheet is
prepared.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P7
[Question]
54. All necessary numbers to prepare the income statement can be taken from the income
statement columns of the work sheet, including the net income or net loss.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
[Question]
55. If all columns balance upon completion of a work sheet, you can be sure that no errors
were made in preparing the work sheet.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
1-300
Chapter 01 - Introducing Accounting in Business
[Question]
56. Closing entries are normally entered in the general journal and then posted to the work
sheet.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
[Question]
57. Adjusting entries are normally entered in the general journal prior to being posted to the
work sheet.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
[Question]
58. On the work sheet, net income is entered in the Income Statement Credit column as well
as the Balance Sheet Debit column.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
1-301
Chapter 01 - Introducing Accounting in Business
[Question]
59. Since it is an important financial statement, the trial balance must be prepared according
to specified accounting procedures.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
Multiple Choice Questions
[Question]
60. Which of the following identifies the proper order of the accounting cycle?
A. Analyze, Journalize, Unadjusted Trial Balance
B. Analyze, Post, Unadjusted Trial Balance
C. Journalize, Post, Adjusted Trial Balance
D. Unadjusted Trial Balance, Adjusted Trial Balance, Close
E. Adjusted Trial Balance, Adjustments, Financial Statements
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-C1
1-302
Chapter 01 - Introducing Accounting in Business
[Question]
61. A broad principle that requires identifying the activities of a business with specific time
periods such as months, quarters or years is the:
A. Operating cycle of a business
B. Time period principle
C. Going-concern principle
D. Matching principle
E. Accrual basis of accounting
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C1
[Question]
62. Interim financial statements refer to financial reports:
A. That cover less than one year, usually spanning one, three or six-month periods
B. That are prepared before any adjustments have been recorded
C. That show the assets above the liabilities and the liabilities above the equity
D. Where revenues are reported on the income statement when cash is received and expenses
are reported when cash is paid
E. Where the adjustment process is used to assign revenues to the periods in which they are
earned and to match expenses with revenues
Answer: A
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C1
1-303
Chapter 01 - Introducing Accounting in Business
[Question]
63. The 12-month period that ends when a company's activities are at their lowest point is
called the:
A. Fiscal year
B. Calendar year
C. Natural business year
D. Accounting period
E. Interim period
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C1
[Question]
64. The length of time covered by a set of periodic financial statements is referred to as the:
A. Fiscal cycle
B. Natural business year
C. Accounting period
D. Business cycle
E. Operating cycle
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C1
1-304
Chapter 01 - Introducing Accounting in Business
[Question]
65. Western Company has an annual reporting period that runs from July 1st through
June 30th. Based on this information which of the following is a true statement?
A. Western probably has little seasonal variation in their sales
B. Western has violated the time period principle
C. Western must prepare financial statements as of December 31 each year
D. Western has adopted a fiscal year
E. Western does not have an accountant
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-C1
[Question]
66. The accounting principle that requires revenue to be reported when earned is the:
A. Matching principle
B. Revenue recognition principle
C. Time period principle
D. Accrual reporting principle
E. Going-concern principle
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-C2
1-305
Chapter 01 - Introducing Accounting in Business
[Question]
67. Adjusting entries:
A. Affect only income statement accounts
B. Affect only balance sheet accounts
C. Affect both income statement and balance sheet accounts
D. Affect only cash flow statement accounts
E. Affect only equity accounts
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-C2
[Question]
68. The main purpose of adjusting entries is to:
A. Record external transactions and events
B. Record internal transactions and events
C. Recognize assets purchased during the period
D. Recognize debts paid during the period
E. Correct errors
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
1-306
Chapter 01 - Introducing Accounting in Business
[Question]
69. The broad principle that requires expenses to be reported in the same period as the
revenues that were earned as a result of the expenses is the:
A. Recognition principle
B. Cost principle
C. Cash basis of accounting
D. Matching principle
E. Time period principle
Answer: D
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
70. The system of preparing financial statements based on recognizing revenues when the
cash is received and reporting expenses when the cash is paid is called:
A. Accrual basis accounting
B. Operating cycle accounting
C. Cash basis accounting
D. Revenue recognition accounting
E. Current basis accounting
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
1-307
Chapter 01 - Introducing Accounting in Business
[Question]
71. Which of the following accounts would not be impacted by adjusting journal entries?
A. Accounts Receivable
B. Consulting Fee Earned
C. Unearned Consulting Fees
D. Cash
E. Wages Payable
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-A1
[Question]
72. The approach to preparing financial statements based on recognizing revenues when they
are earned and matching expenses to those revenues is:
A. Cash basis accounting
B. The matching principle
C. The time period principle
D. Accrual basis accounting
E. Revenue basis accounting
Answer: D
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
1-308
Chapter 01 - Introducing Accounting in Business
[Question]
73. Prepaid expenses, depreciation, accrued expenses, unearned revenues and accrued
revenues are all examples of:
A. Items that require contra accounts
B. Items that require adjusting entries
C. Asset and equity
D. Asset accounts
E. Income statement accounts
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C2
[Question]
74. The accrual basis of accounting:
A. Is generally accepted for external reporting since it is more useful for most business
decisions
B. Is flawed because it gives complete information about cash flows
C. Recognizes revenues when received in cash
D. Recognizes expenses when paid in cash
E. Eliminates the need for adjusting entries at the end of each period
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-C2
1-309
Chapter 01 - Introducing Accounting in Business
[Question]
75. Which of the following statements is incorrect?
A. Prepaid expenses, depreciation and unearned revenues involve previously recorded assets
and liabilities
B. Accrued expenses and accrued revenues involve assets and liabilities that were not
previously been recorded
C. Adjusting entries can be used to record both accrued expenses and accrued revenues
D. Prepaid expenses, depreciation and unearned revenues often require adjusting entries to
record the effects of the passage of time
E. Adjusting entries affect the cash account
Answer: E
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-C2
76. The recurring steps performed each accounting period, starting with analyzing and
recording transactions in the journal and continuing through the post-closing trial balance, are
referred to as the:
A. Accounting period
B. Operating cycle
C. Accounting cycle
D. Closing cycle
E. Natural business year
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C3
1-310
Chapter 01 - Introducing Accounting in Business
[Question]
77. Which of the following is the usual final step in the accounting cycle?
A. Journalizing transactions
B. Preparing an adjusted trial balance
C. Preparing a post-closing trial balance
D. Preparing the financial statements
E. Preparing a work sheet
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C3
78. Each letter below contains three of the steps found in the accounting cycle. Which
presents the given steps in the proper sequence, first to last?
A. Adjust, Analyze transactions, Close
B. Analyze transactions, Adjust, Close
C. Prepare post-closing trial balance, Prepare statements, Close
D. Prepare statements, Post, Close
E. Prepare adjusted trial balance, Journalize, Close
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-C3
1-311
Chapter 01 - Introducing Accounting in Business
79. A classified balance sheet:
A. Measures a company's ability to pay its bills on time
B. Organizes assets and liabilities into important subgroups
C. Presents revenues, expenses and net income
D. Reports operating, investing and financing activities
E. Reports the effect of profit and dividends on retained earnings
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-C4
[Question]
80. The asset section of a classified balance sheet usually includes:
A. Current assets, investments, plant assets and intangible assets
B. Current assets, long-term assets, revenues and intangible assets
C. Current assets, investments, plant assets and equity
D. Current liabilities, investments, plant assets and intangible assets
E. Current assets, liabilities, plant assets and intangible assets
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-C4
1-312
Chapter 01 - Introducing Accounting in Business
[Question]
81. What is the difference between GAAP and IFRS presentations of the current assets section
on the balance sheet?
A. Under IFRS it is mandatory to present current assets first while under GAAP it is
customary (but not required) to present noncurrent assets first.
B. Both IFRS and GAAP require that current assets are listed first
C. Under GAAP it is mandatory to present current assets first while under IFRS it is
customary (but not required) to present noncurrent assets first.
D. It is customary (but not required) under both IFRS and GAAP to present noncurrent assets
first
E. GAAP requires that current assets be presented first while IFRS requires that current assets
be presented last
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-C4
1-313
Chapter 01 - Introducing Accounting in Business
[Question]
82. IFRS tends to be more principles-based compared to GAAP which is viewed as more
rules-based. Which of the following is a true statement about a principles-based system?
A. A principles-based system eliminates the need for internal controls
B. A principles-based system is significantly weaker than a rules-based system
C. A principles-based system will eliminate all fraud
D. A principles-based system is a way to calculate interest receivable or payable
E. A principles-based system depends heavily on control procedures to reduce the potential
for fraud or misconduct.
Answer: E
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-C4
[Question]
83. Due to an oversight, a company made no adjusting entry for accrued and unpaid employee
wages of $24,000 on December 31. This oversight would:
A. Understate net income by $24,000
B. Overstate net income by $24,000
C. Have no effect on net income
D. Overstate assets by $24,000
E. Understate assets by $24,000
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-A1
1-314
Chapter 01 - Introducing Accounting in Business
[Question]
84. If a company forgot to record depreciation on office equipment at the end of an
accounting period, the financial statements prepared at that time would show:
A. Assets overstated and equity understated
B. Assets and equity both understated
C. Assets overstated, net income understated and equity overstated
D. Assets, net income and equity understated
E. Assets, net income and equity overstated
Answer: E
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-A1
85. If a company failed to make the end-of-period adjustment to remove the amount earned
from the Unearned Management Fees account, there would be:
A. An overstatement of net income
B. An overstatement of assets
C. An overstatement of liabilities
D. An overstatement of equity
E. An understatement of liabilities
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-A1
1-315
Chapter 01 - Introducing Accounting in Business
[Question]
86. A company records the fees for legal services paid in advance by its clients in an account
called Unearned Legal Fees. If the company fails to make the end-of-period adjusting entry to
record the portion of these fees that has been earned, one effect will be:
A. An overstatement of equity
B. An understatement of equity
C. An understatement of assets
D. An understatement of liabilities
E. An overstatement of assets
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-A1
[Question]
87. A publishing company records the subscriptions paid in advance by its customers in an
account called Unearned Subscription Revenue. If the company fails to make the end-ofperiod adjusting entry to record the portion of the subscriptions that have been earned, one
effect will be:
A. An overstatement of equity
B. An overstatement of liabilities
C. An understatement of assets
D. An understatement of liabilities
E. An overstatement of assets
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-A1
1-316
Chapter 01 - Introducing Accounting in Business
[Question]
88. Profit margin is defined as:
A. Revenues divided by net sales
B. Net sales divided by assets
C. Net income divided by net sales
D. Net income divided by assets
E. Assets divided by net sales
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-A2
[Question]
89. A company earned $2,000 in net income for October. Its net sales for October were
$10,000. Its profit margin is:
A. 2%
B. 20%
C. 200%
D. 500%
E. $8,000
Answer: B
Feedback: $2,000/$10,000 = 20%
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-A2
1-317
Chapter 01 - Introducing Accounting in Business
[Question]
90. Which of the following accounts would be closed at the end of the accounting period?
A. Accounts Receivable
B. Unearned Consulting Fees
C. Fees Earned
D. Retained Earnings
E. Land
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P4
[Question]
91. A company had $7,000,000 in net income for the year. Its net sales were $11,200,000 for
the same period. Calculate its profit margin.
A. 17.5%
B. 28%
C. 62.5%
D. 160%
E. $18.2 million
Answer: C
Feedback: $7,000,000/$11,200,000 = 62.5%
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-A2
1-318
Chapter 01 - Introducing Accounting in Business
[Question]
92. Compute profit margin ratio given the following information.
Cost of Goods Sold $28,000
Net Income 21,400
Gross Profit 400,000
A. 5%
B. 7%
C. 1.65%
D. 6.64%
E. 76.42%
Answer: A
Feedback: Gross Profit + Cost of Goods Sold = Net Sales
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-A2
1-319
Chapter 01 - Introducing Accounting in Business
[Question]
93. Compute profit margin ratio given the following information.
Cost of Goods Sold $53,000
Net Income 60,000
Gross Profit 800,000
A. 6.63%
B. 7.03%
C. 93.8%
D. 6.2%
E. 88.33%
Answer: B
Feedback: Gross Profit + Cost of Goods Sold = Net Sales
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-A2
[Question]
94. The current ratio:
A. Is used to measure a company's profitability
B. Is used to measure the relation between assets and long-term debt
C. Measures the effect of operating income on profit
D. Is used to help evaluate a company's ability to pay its short-term obligations
E. Is calculated by dividing current assets by equity
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-A3
1-320
Chapter 01 - Introducing Accounting in Business
[Question]
95. Which of the following accounts would not be on the post closing trial balance?
A. Accounts Payable
B. Accounts Receivable
C. Common Stock
D. Dividends
E. Retained Earnings
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P4
[Question]
96. On June 30, 2011, Apricot Co. paid $5,000 cash for management services to be performed
over a two-year period. Apricot follows a policy of recording all prepaid expenses to asset
accounts at the time of cash payment.
On June 30, 2011 Apricot should record:
A. A credit to an expense for $5,000
B. A debit to an expense for $5,000
C. A credit to a prepaid expense for $5,000
D. A debit to a prepaid expense for $5,000
E. A debit to Cash for $5,000
Answer: D
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P1
1-321
Chapter 01 - Introducing Accounting in Business
[Question]
97. On June 30, 2011, Apricot Co. paid $5,000 cash for management services to be performed
over a two-year period. Apricot follows a policy of recording all prepaid expenses to asset
accounts at the time of cash payment.
The adjusting entry on December 31, 2011 for Apricot would include:
A. A debit to an expense for $1,250
B. A debit to a prepaid expense for $1,250
C. A credit to an expense for $3,750
D. A debit to a prepaid expense for $3,750
E. A credit to a liability for $1,250
Answer: A
Feedback: $5,000 x 6/24 = $1,250
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P1
1-322
Chapter 01 - Introducing Accounting in Business
[Question]
98. Which of the following is true of accrued revenues:
A. At the end of one accounting period often result in cash receipts from customers in the
next period
B. At the end of one accounting period often result in cash payments in the next period
C. Are also called unearned revenues
D. Are listed on the balance sheet as liabilities
E. Are recorded at the end of an accounting period because cash has already been received for
revenues earned
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-323
Chapter 01 - Introducing Accounting in Business
[Question]
99. An account linked with another account that has an opposite normal balance and that is
subtracted from the balance of the related account is a(n):
A. Accrued expense
B. Contra account
C. Accrued revenue
D. Intangible asset
E. Adjunct account
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
[Question]
100. The total amount of depreciation recorded against an asset or group of assets during the
entire time the asset or assets have been used in the day to day operations of the business:
A. Is referred to as depreciation expense
B. Is referred to as accumulated depreciation
C. Is shown on the income statement of the final period
D. Is only recorded when the asset is disposed of
E. Is referred to as an accrued asset
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-324
Chapter 01 - Introducing Accounting in Business
[Question]
101. The periodic expense created by allocating the cost of plant and equipment to the periods
in which they are used, representing the expense of using the assets is called:
A. Accumulated depreciation
B. A contra account
C. The matching principle
D. Depreciation
E. An accrued account
Answer: D
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
[Question]
102. Prior to recording adjusting entries, the Office Supplies account had a $359 debit
balance. A physical count of the supplies showed $105 of unused supplies available. The
required adjusting entry is:
A. Debit Office Supplies $105 and credit Office Supplies Expense $105
B. Debit Office Supplies Expense $105 and credit Office Supplies $105
C. Debit Office Supplies Expense $254 and credit Office Supplies $254
D. Debit Office Supplies $254 and credit Office Supplies Expense $254
E. Debit Office Supplies $105 and credit Supplies Expense $254
Answer: C
Feedback: $359 - $105 = $254 The amount which has been consumed.
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-325
Chapter 01 - Introducing Accounting in Business
[Question]
103. If throughout an accounting period the fees for legal services paid in advance by clients
are recorded in an account called Unearned Legal Fees, the end-of-period adjusting entry to
record the portion of those fees that has been earned is:
A. Debit Cash and credit Legal Fees Earned
B. Debit Cash and credit Unearned Legal Fees
C. Debit Unearned Legal Fees and credit Legal Fees Earned
D. Debit Legal Fees Earned and credit Unearned Legal Fees
E. Debit Unearned Legal Fees and credit Accounts Receivable
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
[Question]
104. On April 1, 2011, a company paid the $1,350 premium on a three-year insurance policy
with benefits beginning on that date. What will be the insurance expense on the annual
income statement for the year ended December 31, 2011?
A. $1,350
B. $450
C. $1,012.50
D. $337.50
E. $37.50
Answer: D
Feedback: $1,350 x 9/36 = $337.50
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-326
Chapter 01 - Introducing Accounting in Business
[Question]
105. A company had no office supplies available at the beginning of the year. During the year,
the company purchased $250 worth of office supplies. On December 31, $75 worth of office
supplies remained. How much should the company report as office supplies expense for the
year?
A. $75
B. $125
C. $175
D. $250
E. $325
Answer: C
$250 - $75 = $175
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-327
Chapter 01 - Introducing Accounting in Business
106. On January 1 a company purchased a five-year insurance policy for $1,800 with
coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account
and the company records adjustments only at year-end, the adjusting entry at the end of the
first year is:
A. Debit Prepaid Insurance, $1,800; credit Cash, $1,800
B. Debit Prepaid Insurance, $1,440; credit Insurance Expense, $1,440
C. Debit Prepaid Insurance, $360; credit Insurance Expense, $360
D. Debit Insurance Expense, $360; credit Prepaid Insurance, $360
E. Debit Insurance Expense, $360; credit Prepaid Insurance, $1,440
Answer: D
$1,800/5 years = $360 the amount of prepaid which has expired
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
[Question]
107. Unearned revenue is reported on the financial statements as:
A. A revenue on the balance sheet
B. A liability on the balance sheet
C. An unearned revenue on the income statement
D. An asset on the balance sheet
E. An operating activity on the statement of cash flows
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-328
Chapter 01 - Introducing Accounting in Business
[Question]
108. Which of the following assets is not depreciated?
A. Store fixtures
B. Computers
C. Land
D. Buildings
E. Vehicles
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
[Question]
109. Which of the following does not require an adjusting entry at year-end?
A. Accrued interest on notes payable
B. Supplies used during the period
C. Cash investments by stockholders
D. Accrued wages
E. Expired portion of prepaid insurance
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-329
Chapter 01 - Introducing Accounting in Business
[Question]
110. On April 30, 2011, a three-year insurance policy was purchased for $18,000 with
coverage to begin immediately. What is the amount of insurance expense that would appear
on the company's income statement for the year ended December 31, 2011?
A. $500
B. $4,000
C. $6,000
D. $14,000
E. $18,000
Answer: B
Feedback: $18,000 x 8/36 = $4,000
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
[Question]
111. ABC Co. leased a portion of its store to another company for eight months beginning on
October 1, 2011 at a monthly rate of $800. This other company paid the entire $6,400 cash on
October 1, which ABC Co. recorded as unearned revenue. The journal entry made by ABC
Co. at year-end on December 31, 2011 would include:
A. A debit to Rent Earned for $2,400
B. A credit to Unearned Rent for $2,400
C. A debit to Cash for $6,400
D. A credit to Rent Earned for $2,400
E. A debit to Unearned Rent for $4,000
Answer: D
Feedback: $6,400 x 3/8 = $2,400
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-330
Chapter 01 - Introducing Accounting in Business
[Question]
112. On May 1, 2011, Giltus Advertising Company received $1,500 from Julie Bee for
advertising services to be completed April 30, 2012. The cash receipt was recorded as
unearned fees. At December 31, 2011, $500 of the fees had been earned. The adjusting entry
on December 31, 2011 should include:
A. A debit to Unearned Fees for $500
B. A credit to Unearned Fees for $500
C. A credit to Earned Fees for $1,000
D. A debit to Earned Fees for $1,000
E. A debit to Earned Fees for $500
Answer: A
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
[Question]
113. Expenses incurred but unpaid that are recorded during the adjusting process with a debit
to an expense and a credit to a liability are:
A. Intangible expenses
B. Prepaid expenses
C. Unearned expenses
D. Net expenses
E. Accrued expenses
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-331
Chapter 01 - Introducing Accounting in Business
[Question]
114. The adjusting entry to record the earned but unpaid salaries of employees at the end of an
accounting period is:
A. Debit Unpaid Salaries and credit Salaries Payable
B. Debit Salaries Payable and credit Salaries Expense
C. Debit Salaries Expense and credit Cash
D. Debit Salaries Expense and credit Salaries Payable
E. Debit Cash and credit Salaries Expense
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
[Question]
115. A company pays each of its two office employees each Friday at the rate of $100 per day
each for a five-day week that begins on Monday. If the monthly accounting period ends on
Tuesday and the employees worked on both Monday and Tuesday, the month-end adjusting
entry to record the salaries earned but unpaid is:
A. Debit Unpaid Salaries $600 and credit Salaries Payable $600
B. Debit Salaries Expense $400 and credit Salaries Payable $400
C. Debit Salaries Expense $600 and credit Salaries Payable $600
D. Debit Salaries Payable $400 and credit Salaries Expense $400
E. Debit Salaries Expense $400 and credit Cash $400
Answer: B
Feedback: 2 employees x 2 days x $100/employee/day = $400
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-332
Chapter 01 - Introducing Accounting in Business
[Question]
116. On January 1, Denton Mabrey College received $1,200,000 in Unearned Tuition
Revenue from its students for the spring semester, which spans four months beginning on
January 2. What amount of tuition revenue should the college recognize on January 31?
A. $300,000
B. $600,000
C. $800,000
D. $900,000
E. $1,200,000
Answer: A
Feedback: $1,200,000/4 = $300,000
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-333
Chapter 01 - Introducing Accounting in Business
[Question]
117. An adjusting entry was made on December 31, 2011 to accrue a salary expense of
$1,200. Which of the following entries would be prepared to record the next payment of
salaries on January, 2012 in the amount of $3,000?
A.
Salaries Expense
Cash
3,000
3,000
B.
Salaries Payable
Cash
3,000
C.
Salaries Payable
Cash
1,200
D.
Salaries Expense
Salaries Payable
1,200
E.
Salaries Payable
Salaries Expense
Cash
1,200
1,800
3,000
1,200
1,200
3,000
Answer: E
Feedback: $3,000 (total) - $1,200 (accrued) = $1,800 expense
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-334
Chapter 01 - Introducing Accounting in Business
[Question]
118. The difference between the cost of an asset and the accumulated depreciation for that
asset is called
A. Depreciation Expense
B. Unearned Depreciation
C. Prepaid Depreciation
D. Depreciation Value
E. Book Value
Answer: E
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
[Question]
119. A company purchased a new truck at a cost of $42,000 on July 1, 2011. The truck is
estimated to have a useful life of 6 years and a salvage value of $3,000. How much
depreciation expense will be recorded for the truck for the year ended December 31, 2011?
A. $3,250
B. $3,500
C. $4,000
D. $6,500
E. $7,000
Answer: A
Feedback: [$42,000 - $3,000/6] x 1/2 = $3,250
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P1
1-335
Chapter 01 - Introducing Accounting in Business
[Question]
120. A company's Office Supplies account shows a beginning balance of $600 and an ending
balance of $400. If office supplies expense for the year is $3,100, what amount of office
supplies was purchased during the period?
A. $2,700
B. $2,900
C. $3,300
D. $3,500
E. $3,700
Answer: B
Feedback: $600 + Supplies Purchased - $3,100 = $400
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P1
[Question]
121. If a company records prepayment of expenses in an asset account, the adjusting entry
would:
A. Result in a debit to an expense and a credit to an asset account
B. Cause an adjustment to prior expense to be overstated and assets to be understated
C. Cause an accrued liability account to exist
D. Result in a debit to a liability and a credit to an asset account
E. Decrease cash
Answer: A
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P1
1-336
Chapter 01 - Introducing Accounting in Business
[Question]
122. A company recorded 2 days of accrued salaries of $1,400 for its employees on January
31. On February 9, it paid its employees for these accrued salaries and for other salaries
earned through February 9. The January 31 and February 9 journal entries are:
A
1/31 Salaries Expense
1,400
Salaries Payable
1,400
2/9
Salaries Payable
7,000
Salaries Expense
1,400
Cash
7,000
B.
1/31 Salaries Payable
1,400
Salaries Expense
1,400
2/9
Salaries Expense
5,600
Salaries Payable
1,400
Cash
7,000
C.
1/31 Salaries Expense
1,400
Cash
1,400
2/9
Salaries Expense
7,000
Cash
7,000
D.
1/31 Salaries Expense
1,400
Salaries Payable
1,400
2/9
Salaries Expense
7,000
Cash
7,000
E.
1/31 Salaries Expense
1,400
Salaries Payable
1,400
2/9
Salaries Expense
5,600
Salaries Payable
1,400
Cash
7,000
Answer: E
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P1
1-337
Chapter 01 - Introducing Accounting in Business
[Question]
123. If accrued salaries were recorded on December 31 with a credit to Salaries Payable, the
entry to record payment of these wages on the following January 5 would include:
A. A debit to Cash and a credit to Salaries Payable
B. A debit to Cash and a credit to Prepaid Salaries
C. A debit to Salaries Payable and a credit to Cash
D. A debit to Salaries Payable and a credit to Salaries Expense
E. No entry would be necessary on January 5
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P1
[Question]
124. On December 31, the balance in the Prepaid Insurance account was $4,500, which is the
remaining balance of a twelve-month policy purchased on October 31 in the current year.
How much did this policy originally cost?
A. $5,400
B. $3,750
C. $4,909
D. $4,500
E. $6,000
Answer: A
Feedback: Two months have expired, the remaining balance covers ten more months.
$4,500/10 = $450 per month
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P1
1-338
Chapter 01 - Introducing Accounting in Business
[Question]
125. On December 31, the balance in the Prepaid Subscription account was $648. This is the
remaining balance of a twelve-month subscription purchased on September 30 in the current
year. How much did this subscription originally cost?
A. $72
B. $648
C. $7,776
D. $864
E. $1,512
Answer: D
Feedback: 3 months have expired, the remaining balance covers 9 more months. $648/9 = $72
per month
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P1
[Question]
126. On December 31, the balance in the Prepaid Advertising account was $176,000, which is
the remaining balance of a twelve-month advertising campaign purchased on August 31 in the
current year. Assuming the cost is spread equally over each month how much did this
advertising campaign cost in total?
A. $286,000
B. $176,000
C. $264,000
D. $154,000
E. $22,000
Answer: C
Feedback: 4 months have expired, the remaining balance covers 8 more months. $176,000/8 =
$22,000 per month
1-339
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P1
[Question]
127. Which of the following statements is incorrect?
A. An income statement reports revenues earned less expenses incurred
B. An unadjusted trial balance shows the account balances after they have been revised to
reflect the effects of end-of-period adjustments
C. Interim financial reports can be based on one-month or three-month accounting periods
D. The fiscal year is any 12 consecutive months (or 52 weeks) used by a business as its annual
accounting period
E. Property, plant and equipment are referred to as plant assets
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P2
1-340
Chapter 01 - Introducing Accounting in Business
[Question]
128. A trial balance prepared after adjustments have been recorded is called a(n):
A. Balance sheet
B. Adjusted trial balance
C. Unadjusted trial balance
D. Classified balance sheet
E. Unclassified balance sheet
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P2
[Question]
129. A trial balance prepared before any adjustments have been recorded is:
A. An adjusted trial balance
B. Used to prepare financial statements
C. An unadjusted trial balance
D. Correct with respect to proper balance sheet and income statement amounts
E. Only prepared once a year
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P2
1-341
Chapter 01 - Introducing Accounting in Business
[Question]
130. The adjusted trial balance contains information pertaining to:
A. Asset accounts only
B. Balance sheet accounts only
C. Income statement accounts only
D. All general ledger accounts
E. Revenue accounts only
Answer: D
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P2
[Question]
131. Financial statements are typically prepared in the following order:
A. Balance sheet, statement of retained earnings, income statement
B. Statement of retained earnings, balance sheet, income statement
C. Income statement, balance sheet, statement of retained earnings
D. Income statement, statement of retained earnings, balance sheet
E. Balance sheet, income statement, statement of retained earnings
Answer: D
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P3
1-342
Chapter 01 - Introducing Accounting in Business
[Question]
132. A balance sheet that places the assets above the liabilities and equity is called a(n):
A. Report form balance sheet
B. Account form balance sheet
C. Classified balance sheet
D. Unadjusted balance sheet
E. Unclassified balance sheet
Answer: A
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P3
[Question]
133. Which of the following statements regarding financial statement preparation is false?
A. Financial statements can be prepared from information in the adjusted trial balance
B. The Sarbanes-Oxley Act requires that financial statements filed with the Securities and
Exchange Commission include declarations by the CEO and CFO of the company
C. It makes sense to prepare the balance sheet first because it contains information needed on
the income statement
D. When preparing financial statements an adjusted trial balance is easier to work with than
the entire ledger
E. The income statement is prepared first.
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P3
1-343
Chapter 01 - Introducing Accounting in Business
[Question]
134. The special account used only in the closing process to temporarily hold the amounts of
revenues and expenses before the net difference is added to (or subtracted from) the retained
earnings account is the:
A. Income Summary account
B. Closing account
C. Balance column account
D. Contra account
E. Nominal account
Answer: A
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P4
1-344
Chapter 01 - Introducing Accounting in Business
[Question]
135. Awn Services paid a dividend of $8,700 during the current year. The entry to close the
dividend account at the end of the year is:
A.
Dividends
Cash
B.
Retained earnings
Dividends
8,700
8,700
8,700
8,700
C.
Dividends
Retained earnings
8,700
D.
Common Stock
Dividends
8,700
E.
Income Summary
Retained earnings
8,700
8,700
8,700
8,700
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P4
1-345
Chapter 01 - Introducing Accounting in Business
[Question]
136. A company had revenues of $75,000 and expenses of $62,000 for the accounting period.
Which of the following entries could not be a closing entry?
A.
Income Summary
13,000
Retained earnings
13,000
B.
Income Summary
Revenues
75,000
C.
Revenues
Income Summary
75,000
D.
Expenses
Income Summary
62,000
75,000
75,000
62,000
E. All of the above are possible closing entries
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P4
1-346
Chapter 01 - Introducing Accounting in Business
[Question]
137. The following information is available for the Travis Travel Agency. After the closing
entries have been journalized and posted, what will be the balance in the Retained Earnings
account?
Total revenues
Total expenses
Retained earnings
Dividends
$125,000
60,000
80,000
15,000
A. $65,000
B. $80,000
C. $130,000
D. $145,000
E. $280,000
Answer: C
Feedback: $80,000 + $125,000 - $60,000 - $15,000 = $130,000
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P4
1-347
Chapter 01 - Introducing Accounting in Business
[Question]
138. The Retained Earnings account has a credit balance of $17,000 before closing entries are
made. If total revenues for the period are $55,200, total expenses are $39,800 and dividends
are $9,000, what is the ending balance in the Retained Earnings account after all closing
entries are made?
A. $8,000
B. $15,400
C. $23,400
D. $17,000
E. $32,400
Answer: C
Feedback: $17,000 + $55,200 - $39,800 - $9,000 = $23,400
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P4
[Question]
139. The Income Summary account is used:
A. To adjust and update asset and liability accounts
B. To close the revenue and expense accounts
C. To determine the appropriate dividend amount
D. In some situations to replace the income statement
E. To replace the retained earnings account in some businesses
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P4
1-348
Chapter 01 - Introducing Accounting in Business
[Question]
140. Kader Co. paid a total of $35,000 in dividends during the current year. The entry needed
to close the dividends account is:
A. Debit Income Summary and credit Cash for $35,000
B. Debit Dividends and credit Cash for $35,000
C. Debit Income Summary and credit Dividends for $35,000
D. Debit Retained Earnings and credit Dividends for $35,000
E. Debit Dividends and credit Retained earnings for $35,000
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P4
1-349
Chapter 01 - Introducing Accounting in Business
[Question]
141. A company's ledger accounts and their end-of-period balances before closing entries are
posted are shown below. What amount will be posted to Retained Earnings in the process of
closing the Income Summary account? (Assume all accounts have normal balances.)
Retained earnings
Dividends
Revenue
Rent expense
Salaries expense
Insurance expense
Depr. Expense – equipment
Accum depr. – equipment
$ 7,000
9,600
29,000
3,600
7,200
920
500
1,500
A. $16,780 debit
B. $7,180 credit
C. $16,780 credit
D. $18,280 credit
E. $23,780 credit
Answer: C
Feedback: Items closed to Income Summary:
$29,000
3,600
7,200
920
500
$16,780
Credit
Debit
Debit
Debit
Debit
credit, closed with a debit of $16,780; credit to Retained earnings
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P4
1-350
Chapter 01 - Introducing Accounting in Business
[Question]
142. Shown below are a company's ledger accounts and their end-of-period balances before
closing entries are posted. What amount will be posted to Retained Earnings in the process of
closing the Income Summary account? (Assume all accounts have normal balances.)
Retained earnings
Dividends
Sales Revenue
Rent expense
Salaries expense
Insurance expense
Depr. Expense – equipment
Accum depr. - equipment
$ 14,000
19,200
58,000
7,200
14,400
840
900
2,500
A. $16,780 debit
B. $15,460 credit
C. $48,660 credit
D. $34,660 credit
E. $17,960 credit
Answer: D
Feedback: Items closed to Income Summary:
$58,000
7,200
14,400
840
900
$34,660
Credit
Debit
Debit
Debit
Debit
credit, closed with a debit of $34,660; credit to Retained earnings
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P4
1-351
Chapter 01 - Introducing Accounting in Business
[Question]
143. A trial balance prepared after the closing entries have been journalized and posted is the:
A. Unadjusted trial balance
B. Post-closing trial balance
C. General ledger
D. Adjusted trial balance
E. Work sheet
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P5
[Question]
144. An error is indicated if the following account has a balance appearing on the post-closing
trial balance:
A. Office Equipment
B. Accumulated Depreciation-Office Equipment
C. Depreciation Expense-Office Equipment
D. Common Stock
E. Salaries Payable
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P5
1-352
Chapter 01 - Introducing Accounting in Business
[Question]
145. A post-closing trial balance includes:
A. All ledger accounts with balances, none of which can be temporary accounts
B. All ledger accounts with balances, none of which can be permanent accounts
C. All ledger accounts with balances, which include some temporary and some permanent
accounts
D. Only revenue and expense accounts
E. Only asset accounts
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P5
[Question]
146. Which of the following statements is true?
A. Retained earnings must be closed each accounting period
B. A post-closing trial balance should include only permanent accounts
C. Information on the work sheet can be used in place of preparing financial statements
D. By using a work sheet to prepare adjusting entries you need not post these entries to the
ledger accounts
E. Closing entries are only necessary if errors have been made
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P5
1-353
Chapter 01 - Introducing Accounting in Business
[Question]
147. A post-closing trial balance is prepared
A. Immediately after all closing entries have been recorded and posted
B. Immediately before all closing entries have been recorded and posted
C. Immediately before a business ceases to exist
D. Immediately before a business starts operations
E. At different times in the accounting cycle depending on the nature of the business and the
complexity of the accounting records
Answer: A
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P5
1-354
Chapter 01 - Introducing Accounting in Business
[Question]
148. Under the alternative method for accounting for unearned revenues, which of the
following pairs of journal entry formats is correct?
Initial Entry
Adjusting Entry
A.
Cash
Unearned Consulting Revenue
Unearned Consulting Revenue
Consulting Revenue
B.
Cash
Consulting Revenue
Consulting Revenue
Unearned Revenue
C.
Cash
Unearned Revenue
Unearned Revenue
Cash
D.
Consulting Revenue
Cash
Unearned Revenue
Consulting Revenue
E.
Cash
Unearned Revenue
Consulting Revenue
Unearned Revenue
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P6
1-355
Chapter 01 - Introducing Accounting in Business
[Question]
149. Under the alternative method for recording prepaid expenses, which is the correct set of
journal entries?
Initial Entry
Adjusting Entry
A.
Insurance Expense
Cash
Prepaid Insurance
Insurance Expense
B.
Cash
Insurance Expense
Prepaid Insurance
Insurance Expense
C.
Prepaid Expense
Cash
Prepaid Insurance
Insurance Expense
D.
Prepaid Expense
Cash
Insurance Expense
Prepaid Insurance
E.
Prepaid Expense
Insurance Expense
Cash
Prepaid Insurance
A. Option A
B. Option B
C. Option C
D. Option D
E. Option E
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P6
1-356
Chapter 01 - Introducing Accounting in Business
[Question]
150. The alternative method of accounting for prepayments
A. Initially records all prepaid expenses with debits to expense accounts
B. Initially records all prepaid expenses with credits to expense accounts
C. Requires an adjusting entry because expenses are understated
D. Requires an adjusting entry if the prepaid is consumed during the period
E. Requires an adjusting entry because net income is understated
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P6
[Question]
151. The Unadjusted Trial Balance columns of a company's work sheet show the balance in
the Office Supplies account as $750. The Adjustments columns show that $425 of these
supplies were used during the period. The amount shown as Office Supplies in the Balance
Sheet columns of the work sheet is:
A. $325 debit
B. $325 credit
C. $425 debit
D. $750 debit
E. $750 credit
Answer: A
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Easy
Learning Objective: 03-P7
1-357
Chapter 01 - Introducing Accounting in Business
[Question]
152. A 10-column spreadsheet used to draft a company's unadjusted trial balance, adjusting
entries, adjusted trial balance and financial statements and which is an optional tool in the
accounting process is a(n):
A. Adjusted trial balance
B. Work sheet
C. Post-closing trial balance
D. Unadjusted trial balance
E. General ledger
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
[Question]
153. Accumulated Depreciation, Accounts Receivable and Service Fees Earned would be
sorted to which respective columns in completing a work sheet?
A. Balance Sheet-Credit; Balance Sheet Debit; and Income Statement-Credit
B. Balance Sheet-Debit; Balance Sheet and Income Statement-Credit
C. Income Statement-Debit; Balance Sheet-Debit; and Income Statement-Credit
D. Income Statement-Debit; Income Statement-Debit; and Balance Sheet-Credit
E. Balance Sheet-Credit; Income Statement-Debit; and Income Statement-Credit
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
1-358
Chapter 01 - Introducing Accounting in Business
[Question]
154. Which of the following statements is incorrect?
A. Working papers are useful aids in the accounting process
B. On the work sheet, the effects of the accounting adjustments are shown on the account
balances
C. After the work sheet is completed, it can be used to help prepare the financial statements
D. On the work sheet, the adjusted amounts are sorted into columns according to whether the
accounts are used in preparing the unadjusted trial balance or the adjusted trial balance
E. A worksheet is not a substitute for financial statements
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
[Question]
155. A company shows a $600 balance in Prepaid Insurance in the Unadjusted Trial Balance
columns of the work sheet. The Adjustments columns show expired insurance of $200. This
adjusting entry results in:
A. $200 less in net income
B. $200 more in net income
C. $200 difference between the debit and credit columns of the Unadjusted Trial Balance
D. $200 of prepaid insurance
E. An error in the financial statements
Answer: A
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
1-359
Chapter 01 - Introducing Accounting in Business
[Question]
156. Statements that show the effects of proposed transactions as if the transactions had
already occurred are called:
A. Pro forma statements
B. Professional statements
C. Simplified statements
D. Temporary statements
E. Interim statements
Answer: A
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
[Question]
157. When preparing a work sheet an adjusted trial balance amount is mistakenly sorted to the
wrong work sheet column. The Balance Sheet columns will balance on completing the work
sheet but with the wrong net income, if the amount sorted in error is:
A. An expense amount placed in the Balance Sheet Credit column
B. A revenue amount placed in the Balance Sheet Debit column
C. A liability amount placed in the Income Statement Credit column
D. An asset amount placed in the Balance Sheet Credit column
E. A liability amount placed in the Balance Sheet Debit column
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
1-360
Chapter 01 - Introducing Accounting in Business
[Question]
158. If the Balance Sheet columns of a work sheet fail to balance when the amount of the net
income is added to the Balance Sheet Credit column, the cause could be:
A. An expense amount entered in the Balance Sheet Debit column
B. A revenue amount entered in the Balance Sheet Credit column
C. An asset amount entered in the Income Statement Debit column
D. A liability amount entered in the Income Statement Credit column
E. An expense amount entered in the Balance Sheet Credit column
Answer: E
Bloom’s Taxonomy: Apply
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
1-361
Chapter 01 - Introducing Accounting in Business
[Question]
159. The following items appeared on a company's December 31 work sheet for the current
period. Based on the following information, what is net income for the current period?
Cash
Prepaid insurance
Supplies
Equipment
Accounts payable
Unearned fees
Common stock
Retained earnings
Dividends
Fees earned
Rent expense
Salaries expense
Utilities expense
Insurance expense
Supplies expense
Depreciation expense – equipment
Accumulated depreciation – equipment
Salaries payable
Accounts receivable
Totals
Unadjusted
Trial Balance
Adjustments
Debit
Credit
Debit
Credit
975
3,600
150
180
70
10,320
1,140
4,500
375
5,000
4,180
1,650
5,850
375
300
1,200
2,400
315
345
_____
150
70
190
190
315
300
_____
20,670
20,670
1,400
1,400
A. $1,400
B. $1,855
C. $1,905
D. $2,060
E. $4,670
Answer: B
1-362
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
[Question]
160. Which of the following errors would cause the Balance Sheet columns of a work sheet to
be out of balance?
A. Entering an asset amount in the Income Statement Debit column
B. Entering a liability amount in the Income Statement Credit column
C. Entering an expense amount in the Balance Sheet Debit column
D. Entering a revenue amount in the Balance Sheet Debit column
E. Entering a liability amount in the Balance Sheet Credit column
Answer: D
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
1-363
Chapter 01 - Introducing Accounting in Business
[Question]
161. The Unadjusted Trial Balance columns of a work sheet total $84,000. The Adjustments
columns contain entries for the following:
Office supplies used during the period, $1,200.
Expiration of prepaid rent, $700.
Accrued salaries expense, $500.
Depreciation expense, $800.
Accrued service fees receivable, $400.
The Adjusted Trial Balance columns total is:
A. $80,400
B. $84,000
C. $85,700
D. $85,900
E. $87,600
Answer: C
Feedback:
Balance
1. Supplies Expense
Supplies
2. Rent Expense
Prepaid rent
3. Salaries Expense
Salaries payable
4. Depr. Expense
Accum. Depr
5. Accts. Receivable
Fees earned
Adjusted total
Debit
$84,000
$1,200
(1,200)
700
(700)
500
Credit
$84,000
500
800
800
400
_______
$85,700
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P7
1-364
400
$85,700
Chapter 01 - Introducing Accounting in Business
[Question]
162. On January 1, Able Company purchased equipment costing $135,000 with an estimated
salvage value of $10,500, and an estimated useful life of five years. What is the amount that
should be recorded as depreciation on December 31?
A.
B.
C.
D.
E.
$27,000
$24,900
$29,100
$135,000
$10,500
Answer: B
Feedback: 135,000-10,500 = 124,500/5 = $24,900
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
[Question]
163. On January 1, Able Company purchased equipment costing $195,000 with an estimated
salvage value of $15,000, and an estimated useful life of eight years. What is the amount that
should be recorded as depreciation on December 31?
A.
B.
C.
D.
E.
$22,900
$26,250
$22,500
$195,000
$180,000
Answer: C
Feedback: 195,000-15,000 = 180,000/8 = $22,500
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-365
Chapter 01 - Introducing Accounting in Business
[Question]
164. A company had revenue of $250,000, rent expense of $10,000, utility expense of
$3,500, salary expense of $18,500, depreciation expense of $9,000, advertising expense of
$4,500, dividends in the amount of $18,000, and a beginning balance in retained earnings of
$17,900. What is the amount in the income summary account before it is closed for the
period?
A. $250,000
B. $45,500
C. $204,500
D. $222,400
E. $232,100
Answer: C
Feedback: 250,000-10,000-3,500-18,500-9,000-4,500 = 204,500
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P4
[Question]
165. A company had revenue of $250,000, rent expense of $10,000, utility expense of
$3,500, salary expense of $18,500, depreciation expense of $9,000, advertising expense of
$4,500, dividends in the amount of $18,000, and a beginning balance in retained earnings of
$17,900. What is the balance in retained earnings for the end of the period?
A. $250,000
B. $204,400
C. $204,500
D. $222,400
E. $232,100
Answer: B
Feedback: 250,000-10,000-3,500-18,500-9,000-4,500 = 204,500+17,900-18000=204,400
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P4
1-366
Chapter 01 - Introducing Accounting in Business
[Question]
166. A company had revenue of $550,000, rent expense of $100,000, utility expense of
$10,000, salary expense of $125,500, depreciation expense of $39,000, advertising expense of
$40,200, dividends in the amount of $183,000, and an ending balance in retained earnings of
$402,300. What is the beginning retained earnings for the period?
A. $250,000
B. $235,300
C. $314,700
D. $367,000
E. $350,000
Answer: E
Feedback: 550,000-314,700=235,300: X+235,300-183,000-402,300 = $350,000
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P4
[Question]
167. A company had revenue of $550,000, rent expense of $100,000, utility expense of
$10,000, salary expense of $125,500, depreciation expense of $39,000, advertising expense of
$40,200, dividends in the amount of $183,000, and an ending balance in retained earnings of
$402,300. What is the appropriate journal entry to close income summary?
A. Income Summary…………….$235,300
Retained Earnings………………..$235,300
B. Retained Earnings……………$235,300
Income Summary………………..$235,300
C. Income Summary…………….$52,300
Retained Earnings………………..$52,300.
D. Retained Earnings…………….$52,300
Income Summary………………...$52,300
E. Income Summary……………...$314,700
Retained Earnings…………………$314,700
Answer: A
Feedback: (Revenue) 550,000- (Total expenses)314,700 = (Net Income )235,300. This
amount is closed to retained earnings
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P4
1-367
Chapter 01 - Introducing Accounting in Business
[Question]
168. Based on the following information, what would be the total on the Credit side of a post
closing trial balance, assuming all accounts have a normal balance?
Cash
Accounts receivable
Office supplies
Land
Office equipment
Accounts payable
Common stock
A.
B.
C.
D.
E.
$6,754
13,733
2,625
37,153
14,535
6,463
54,490
Dividends
Consulting fees earned
Rent expense
Salaries expense
Telephone expense
Miscellaneous expense
Retained Earnings
$2,000
13,718
3,673
6,642
560
280
?
$61,516
$74,671
$74,800
$87,955
$81,263
Answer: C
Feedback: 6,463+54,490+13,284+563
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P5
[Question]
169. Based on the following information, what would be the beginning balance in the
Retained Earnings Account, assuming all accounts have a normal balance?
Cash
Accounts receivable
Office supplies
Land
Office equipment
Accounts payable
Common stock
A.
B.
C.
D.
E.
$6,754
13,733
2,625
37,153
14,535
6,463
54,490
Dividends
Consulting fees earned
Rent expense
Salaries expense
Telephone expense
Miscellaneous expense
Retained Earnings
$0
$13,718
$13,155
$13,284
$2,563
Answer: D
Feedback: Total Debits 87,955 – Total Credits 74,671 = RE 13,284
1-368
$2,000
13,718
3,673
6,642
560
280
?
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P4
[Question]
170. Based on the following information, what would be the ending balance in the Retained
Earnings Account, assuming all accounts have a normal balance?
Cash
Accounts receivable
Office supplies
Land
Office equipment
Accounts payable
Common stock
A.
B.
C.
D.
E.
$6,754
13,733
2,625
37,153
14,535
6,463
54,490
Dividends
Consulting fees earned
Rent expense
Salaries expense
Telephone expense
Miscellaneous expense
Retained Earnings
$2,000
13,718
3,673
6,642
560
280
?
$15,847
$13,718
$13,155
$13,284
$13,847
Answer: E
Feedback: Total Debits 87,955 – Total Credits 74,671 = RE 13,284 + Change in RE 563 =
13,847 Ending RE
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Hard
Learning Objective: 03-P4
1-369
Chapter 01 - Introducing Accounting in Business
[Question]
171. Based on the following information, determine the current ratio, assuming all accounts
have a normal balance?
Cash
Accounts receivable
Office supplies
Land
Office equipment
Accounts payable
Common stock
A.
B.
C.
D.
E.
$6,754
13,733
2,625
37,153
14,535
6,463
54,490
Dividends
Consulting fees earned
Rent expense
Salaries expense
Telephone expense
Miscellaneous expense
Retained Earnings
$2,000
13,718
3,673
6,642
560
280
?
1.23
3.58
11.57
1.23
1.57
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-A3
[Question]
172. Based on the following information, determine the current assets, assuming all accounts
have a normal balance?
Cash
Accounts receivable
Office supplies
Land
Office equipment
Accounts payable
Common stock
A.
B.
C.
D.
E.
$6,754
13,733
2,625
37,153
14,535
6,463
54,490
Dividends
Consulting fees earned
Rent expense
Salaries expense
Telephone expense
Miscellaneous expense
Retained Earnings
$74,800
$37,647
$60,265
$23,112
$60,953
Answer: D
1-370
$2,000
13,718
3,673
6,642
560
280
?
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Analyze
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-A3
Matching Questions
[Question]
173. Match the following terms with the appropriate definition.
1. The expense created by allocating the cost of plant and
equipment to the periods in which they are used
Prepaid expenses
2. The principle that requires expenses to be reported in
the same period as the revenues that were earned as a
Straight-line
result of the expenses
depreciation
Time period
3. Items paid for in advance of receiving their benefits
principle
4. Allocates equal amounts of an asset's cost (less any
salvage value) to depreciation expense during its useful
Matching
life
principle
5. The accounting system that recognizes revenues when
Accrual basis
earned and expenses when incurred
accounting
6. A principle that assumes that an organization's
activities can be divided into specific time periods such as
months, quarters or years
Depreciation
7. Revenues earned in a period that are both unrecorded
Accrued
and not yet received in cash or other assets
revenues
Cash basis
8. Net income divided by net sales
accounting
9. The accounting system where revenues are recognized
when cash is received and expenses are recorded when
cash is paid
Profit margin
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-A2
Learning Objective: 03-C1
Learning Objective: 03-C2
Learning Objective: 03-P1
1-371
3
4
6
2
5
1
7
9
8
Chapter 01 - Introducing Accounting in Business
[Question]
174. Match the following terms with the appropriate definition.
1. Statements that show the effects of proposed
transactions as if the transactions had already occurred
2. Entries recorded at the end of each accounting period
to transfer end-of-period balances in revenue, expense
and dividends accounts to retained earnings
3. A spreadsheet used to draft an unadjusted trial balance,
adjusting entries, adjusted trial balance and financial
statements
4. The time span from when cash is used to acquire goods
and services until cash is received from the sale of those
goods and services
5. Accounts that are used to record transactions and
events for one accounting period only; they include
revenues, expenses and dividends
6. Accounts that reflect on activities related to one or
more future periods; they include all balance sheet
accounts
7. Recurring steps performed each accounting period,
starting with analyzing and recording of transactions in
the journal and continuing through the post-closing trial
balance
8. Analyses and other informal reports prepared by
accountants when organizing the information presented
in reports and financial statements
9. A list of permanent accounts and their balances from
the ledger after all closing entries are journalized and
posted
10. A temporary account used only in the closing process
and to where the balances of revenue and expense
accounts are transferred
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P4
Learning Objective: 03-P5
Learning Objective: 03-P7
1-372
Working papers 8
Operating cycle
of a business 4
Income
summary 10
Work sheet 3
Post-closing trial
balance 9
Accounting
cycle 7
Closing entries 2
Pro forma
statements 1
Permanent
accounts 6
Temporary
accounts 5
Chapter 01 - Introducing Accounting in Business
[Question]
175. Match the following terms with the appropriate definition.
1. Entries recorded at the end of each accounting period
to transfer end-of-period balances in revenue, expense
and dividends accounts to retained earnings
2. Tangible long-lived assets used to produce or sell
products or services
3. A balance sheet that broadly groups assets, liabilities
and equity items
4. Long-term assets used to produce or sell products or
services; these assets usually lack physical form and their
benefits are uncertain
5. Obligations that are due to be paid or settled within one
year or the operating cycle of a business whichever is
longer
6. Cash or other assets that are expected to be sold,
collected or used within one year or the company's
operating cycle whichever is longer
7. The owner's claim on the assets of a company
8. A balance sheet that organizes the assets and liabilities
into important subgroups
9. A ratio that is used to help evaluate a company's ability
to pay its short-term obligations, calculated by dividing
current assets by current liabilities
10. Assets such as notes receivable or investments in
stocks which are held for the longer of one year or the
operating cycle of the company
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-A3
Learning Objective: 03-C4
Learning Objective: 03-P4
1-373
Equity 7
Plant assets 2
Current assets 6
Closing entries 1
Intangible assets 4
Long-term
investments 10
Classified
balance sheet 8
Current
liabilities 5
Unclassified
balance sheet 3
Current ratio 9
Chapter 01 - Introducing Accounting in Business
[Question]
176. Classified balance sheets commonly include the following categories:
Indicate the typical classification of each item listed below by placing the correct balance
sheet category in the blank space next to the item.
1. Prepaid insurance
2. Common Stock
3. Buildings used in business operations
4. Wages payable
5. Accounts payable
6. Retained earnings
7. Current portion of long-term debt
8. Land held for future plant expansion
9. Cash
10. Long-term note payable
11. Accounts Receivable
12. Patents
Plant assets
Equity
Investments
Long-term liabilities
Current assets
Equity
Current liabilities
Current liabilities
Intangible assets
Current liabilities
Current assets
Current assets
3
6
8
10
11
2
5
7
12
4
1
9
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Med
Learning Objective: 03-C4
[Question]
177. Match the following types of accounts with each of the following transactions.
1. Used to record revenue earned but not received
2. Used to record wages owed, but not paid
3. Used to record expiration of prepaid insurance
4. Used to record revenue received in advance
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 03-P1
1-374
Accrued expense
Accrued revenue
Prepaid expense
Unearned revenue
2
1
3
4
Chapter 01 - Introducing Accounting in Business
Essay Questions
[Question]
178. Discuss the importance of periodic reporting and the time period principle.
Answer: For information to be valuable to decision makers, it must be presented in a timely
fashion. To provide timely information for decision making, accounting systems are designed
to prepare periodic reports at regular intervals. The time period principle assumes that an
organization's activities can be divided into specific time periods such as months, quarters or
years.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-C1
[Question]
179. Discuss how accrual accounting enhances the usefulness of financial statements.
Answer: The accrual accounting method recognizes revenue when earned and expenses when
incurred. In this way, accrual accounting better reflects business performance than
information about cash receipts and payments. Accrual accounting also increases the
comparability of financial statements from one period to another.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-C2
1-375
Chapter 01 - Introducing Accounting in Business
[Question]
180. Identify the differences between accrual accounting and cash basis accounting.
Answer: Accrual accounting records revenues in the period earned and expenses in the period
incurred. The cash basis, on the other hand records revenues when cash is received and
expenses when cash is paid.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-C2
[Question]
181. List the steps in the accounting cycle.
Answer: The accounting cycle consists of ten steps: (1) analyze transactions, (2) journalize
entries, (3) post information to the ledgers, (4) prepare an unadjusted trial balance, (5) prepare
adjusting entries, (6) prepare an adjusted trial balance, (7) prepare financial statement, (8)
close the temporary accounts, (9) prepare a post-closing trial balance and (10) prepare
reversing entries (optional).
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-C3
1-376
Chapter 01 - Introducing Accounting in Business
[Question]
182. How is a classified balance sheet different from an unclassified balance sheet? List the
order of the usual classifications on a classified balance sheet.
Answer: An unclassified balance sheet broadly groups assets, liabilities and equity. A
classified balance sheet organizes assets, liabilities and equity into important subgroups that
provide more useful information to decisions makers. Classified balance sheets usually report
four groups of assets: current assets, long-term investments, plant assets and intangible assets.
Liabilities are usually divided into current and long-term. For sole proprietorships and
partnerships equity is reported under capital accounts. For corporations, the equity section is
divided into common stock and retained earnings.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-C4
[Question]
183. Explain how accounting adjustments affect financial statements.
Answer: Without accounting adjustments many accounts would have balances that do not
reflect the proper financial performances and financial condition of the company. For
example, a Prepaid Insurance account that was unadjusted would include an amount covering
the expired cost (expense) plus an amount for the unexpired cost (asset). Adjusting entries
thus enhance the accuracy of financial statements so that the amounts on the statements better
reflect the financial condition and performance of the company.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-A1
1-377
Chapter 01 - Introducing Accounting in Business
[Question]
184. How is the profit margin calculated? Discuss its use in analyzing a company's
performance.
Answer: Profit margin is calculated by dividing net income by net sales. The resulting
percent reflects the percent of profit a company makes for every dollar in sales. The profit
margin ratio is useful in comparing a company's performance to that of its competitors and as
a relative measure of the company's performance across periods.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-A2
[Question]
185. How is the current ratio calculated? How is it used to evaluate a company?
Answer: The current ratio is current assets divided by current liabilities. It is used to help
evaluate a company's ability to pay its short term obligations. It can be used by suppliers and
creditors to help them decide whether to allow a company to buy on credit and whether to
loan them money.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-A3
1-378
Chapter 01 - Introducing Accounting in Business
[Question]
186. Describe the types of entries required in later periods that result from accruals.
Answer: Accrued revenues in one period result in cash received in later periods. Accrued
expenses in one period result in cash payments made in later periods. When the cash for these
items is received or paid, journal entries must be made to recognize receipt, payment and the
removal of the accrued revenues or accrued expenses from the accounts.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 03-P1
[Question]
187. What are the types of adjusting entries used for prepaid expenses, depreciation and
unearned revenues?
Answer: Prepaid expenses are deferrals or expenses paid for in advance. The purpose of the
adjusting entry for prepaid expenses is to recognize the using up of the asset paid for in
advance. Depreciation is the recognition of the decline in usefulness of plant and equipment
assets. The adjusting entry for depreciation recognizes this event and treats it as an expense.
Unearned revenues represent cash paid in advance for products or services. The adjusting
entry for unearned revenues recognizes that revenue has been earned through the delivery of a
product or service.
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P1
1-379
Chapter 01 - Introducing Accounting in Business
[Question]
188. What are the types of adjusting entries used for accrued expenses and accrued revenues?
Answer: Accrued expenses are expenses that have been incurred but not yet paid for.
Adjusting entries for accrued expenses increase expenses and also increase liabilities to
recognize that an expense has been incurred but not yet paid. Accrued revenues are revenues
that have been earned but not yet received in cash. The adjusting entry recognizes the revenue
and also establishes a receivable.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P1
[Question]
189. What is an adjusted trial balance? Why is it prepared?
Answer: An adjusted trial balance is a list of accounts and balances prepared after adjusting
entries are recorded and posted to the ledger. The purpose of the adjusted trial balance is to
ensure that total debits equal total credits for all accounts in the ledger.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 03-P2
1-380
Chapter 01 - Introducing Accounting in Business
[Question]
190. What is the usual order in which financial statements are prepared from the adjusted trial
balance? Why are they prepared in that order?
Answer: The income statement is prepared first. The amount of net income is then used in the
statement of retained earnings to calculate the ending balance in the retained earnings
account. The ending balance in the retained earnings account is then transferred to the balance
sheet. The statement of cash flows is usually prepared last.
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 03-P3
[Question]
191. What is the purpose of closing entries? Describe the closing process.
Answer: The purpose of closing entries is to transfer the end of period balances in the
temporary accounts to the equity account(s). The closing process has four steps: (1) Close
credit balances in revenue accounts to income summary, (2) close debit balances in expense
accounts to income summary, (3) close dividends to the retained earnings, (4) close income
summary to retained earnings.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P4
1-381
Chapter 01 - Introducing Accounting in Business
[Question]
192. What is the purpose of a post-closing trial balance?
Answer: A post-closing trial balance is a list of permanent accounts and their balances after
all the closing entries are journalized and posted. It is used to verify the equality of debits and
credits of the permanent account balances. It also verifies that the temporary accounts have
zero balances.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P5
[Question]
193. Describe the two alternate methods used to account for prepaid expenses.
Answer: The first method places all prepaid expenses in the expense accounts when cash is
paid. Adjusting entries are used to place unexpired amounts into the asset accounts. The
second method places all prepaid expenses into asset accounts when cash is paid. Adjusting
entries are used to recognize expired amounts which are placed into expense accounts.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P6
1-382
Chapter 01 - Introducing Accounting in Business
[Question]
194. Describe a worksheet and explain why it is useful.
Answer: A worksheet is a useful tool for organizing the preparation and analysis of financial
statements. It contains five pairs of debit and credit columns for the trial balance, adjusting
entries, adjusted trial balance, income statement accounts and balance sheet accounts.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P7
[Question]
195. List and explain the steps in preparing a 10-column worksheet.
Answer:
1 Enter the unadjusted trial balance. List all account titles that will be expected to appear on
the financial statements and enter their balances from the ledger.
2 Enter all adjustments.
3 Prepare the adjusted trial balance by combining the unadjusted trial balance columns with
the adjustments.
4 Sort the adjusted trial balance columns into the Income Statement columns and Balance
Sheet columns.
5 Total the Income Statement columns and Balance Sheet columns. The difference between
the Income Statement columns is the net income or net loss. The difference between the
Balance Sheet columns will also be the amount of the net income or net loss. Add the net
income to the Income Statement debit column and total the columns. Add the net income to
the Balance Sheet and credit column and total the columns.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P7
1-383
Chapter 01 - Introducing Accounting in Business
[Question]
196. What are some of the steps that Ben Huh took to control CheezBurger Network costs?
Answer: Ben closely monitored all business activities, including cash, revenues, receivables,
and payables. He seriously monitors the adjusting of accounts so that revenues and expenses
are properly reported.
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB:
1-384
Chapter 01 - Introducing Accounting in Business
Short Answer Questions
[Question]
197. Listed below are a number of accounts. Use the table below to classify each account.
Indicate whether it is a temporary or permanent account, whether it is included in the Income
Statement or Balance Sheet and if it is closed at the end of the accounting period and, if so,
how it is closed. The first one is done as an example.
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
u.
Account
Accounts payable
Accounts
receivable
Accumulated
depreciation.
Equipment
Advertising
expense
Cash
Unearned revenues
Depreciation
expense –
Equipment
Dividends
Equipment
Insurance expense
Interest expense
Miscellaneous
expense
Notes payable
Office supplies
Office supplies
expense
Prepaid expense
Rent expense
Common stock
Salaries expense
Salaries payable
Revenue
Permanent (P)
or
Temporary (T)
P
Income Statement Closed (C)
(IS) or Balance
or Not
Sheet (BS)
Closed (NC)
BS
NC
1-385
Closed with a
Debit (D) or
Credit (CR)
Chapter 01 - Introducing Accounting in Business
Answer:
Account
a. Accounts payable
b. Accounts receivable
c. Accumulated
depreciation.
Equipment
d. Advertising expense
e. Cash
f. Unearned revenues
g. Depreciation
expense –
Equipment
h. Dividends
i. Equipment
j. Insurance expense
k. Interest expense
l. Miscellaneous
expense
m. Notes payable
n. Office supplies
o. Office supplies
expense
p. Prepaid expense
q. Rent expense
r. Common stock
s. Salaries expense
t. Salaries payable
u. Revenue
Permanent (P)
or
Temporary (T)
P
P
P
Income Statement Closed (C)
(IS) or Balance
or Not
Sheet (BS)
Closed (NC)
BS
NC
BS
NC
BS
NC
Closed with a
Debit (Dr) or
Credit (CR)
T
P
P
T
IS
BS
BS
IS
C
NC
NC
C
Cr.
T
P
T
T
T
BS
IS
IS
IS
C
NC
C
C
C
Cr.
P
P
T
BS
BS
IS
NC
NC
C
P
T
P
T
P
T
BS
IS
BS
IS
BS
IS
NC
C
NC
C
NC
C
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P4
1-386
Cr.
Cr.
Cr.
Cr.
Cr.
Cr.
Cr.
Dr.
Chapter 01 - Introducing Accounting in Business
[Question]
198. The following are the steps in the accounting cycle. List them in the order in which they
are completed:
Prepare adjusted trial balance
Post transactions
Prepare an unadjusted trial balance
Journalize transactions
Prepare the financial statements
Close the temporary accounts
Adjust the ledger accounts
Prepare a post-closing trial balance
Analyze transactions
Answer:
1 Analyze transactions
2 Journalize transactions
3 Post transactions
4 Prepare an unadjusted trial balance
5 Adjust the ledger accounts
6 Prepare adjusted trial balance
7 Prepare the financial statements
8 Close the temporary accounts
9 Prepare a post-closing trial balance
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-C3
1-387
Chapter 01 - Introducing Accounting in Business
[Question]
199. Based on the adjusted trial balance shown below, prepare a classified balance sheet for
Focus Package Delivery.
Focus Package Delivery
Adjusted Trial Balance
December 31
Cash
Accounts receivable
Supplies
Long-term investments
Delivery equipment
Accumulated depreciation – Delivery equipment
Intangible assets
Accounts payable
Wages payable
Long-term notes payable*
Common stock
Retained earnings
Dividends
Delivery fees earned Rent expense
Wages expense
Supplies expense
Depreciation expense – Delivery equipment
Interest expense
Utilities expense
Totals
Debit
18,200
34,200
2,100
25,000
45,000
Credit
11,080
16,000
16,200
4,120
20,000
10,000
30,400
15,000
145,000
8,000
62,000
2,500
4,050
1,000
3,750
236,800
______
236,800
* $2,000 of the long-term note payable is due during the next year.
Feedback:
*Net income = $145,000 - $8,000 - $62,000 - $2,500 - $4,050 - $1,000 - $3,750 = $63,700
Retained earnings = $30,400 + $63,700 - $15,000 = $79,100
1-388
Chapter 01 - Introducing Accounting in Business
Answer:
Focus Package Delivery
Classified Balance Sheet
December 31
Assets
Current assets
Cash
Accounts receivable
Supplies
Total current assets
Long-term investments
Plant assets
Delivery equipment
Less: accumulated depreciation
Intangible assets
Total
Liabilities
Current liabilities
Current portion of long-term debt
Accounts payable
Wages payable
Total current liabilities
Long-term liabilities
Long-term note payable
Total liabilities
Equity
Common stock
Retained earnings*
Total equity
Total liabilities and equity
$ 18,200
34,200
2,100
$54,500
25,000
$ 45,000
11,080
33,920
16,000
$129,420
$ 2,000
16,200
4,120
$ 22,320
18,000
$ 40,320
10,000
79,100
89,100
$129,420
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-C4
1-389
Chapter 01 - Introducing Accounting in Business
[Question]
200. The calendar year-end adjusted trial balance for Acosta Co. follows:
ACOSTA CO.
Adjusted Trial Balance
December 31
Cash
Accounts receivable
Prepaid rent
Prepaid Insurance
Office supplies
Office equipment
Accumulated depreciation – Equipment
Building
Accumulated depreciation – Building
Land
Accounts payable
Salaries payable
Interest payable
Long-term note payable
Common stock
Retained earnings
Dividends
Service fees earned
Salaries expense
Insurance expense
Rent expense
Depreciation expense – Equipment
Depreciation expense – Building
Totals
$ 100,000
7,000
15,000
9,000
3,300
8,000
$
3,200
350,000
42,000
700,000
5,800
14,500
2,500
52,000
50,000
960,000
200,500
370,800
90,000
5,200
5,000
800
7,000
$1,500,800
$1,500,800
Required:
a. Prepare a classified year-end balance sheet. (Note: A $7,000 installment on the long-term
note payable is due within one year.)
b. Calculate the current ratio.
Answer:
1-390
Chapter 01 - Introducing Accounting in Business
(a)
ACOSTA CO.
Balance Sheet
December 31
Assets
Current assets:
Cash
Accounts receivable
Prepaid rent
Prepaid insurance
Office supplies
Total current assets
$100,000
7,000
15,000
9,000
3,300
$ 134,300
Plant assets:
Office equipment
Less accumulated depreciation
Building
Less accumulated depreciation
Land
Total plant assets
Total assets
$ 8,000
3,200
350,000
42,000
$
4,800
308,000
700,000
1,012,800
$1,147,100
Liabilities
Current liabilities:
Accounts payable
Salaries payable
Interest payable
Current installment of long-term note
Total current liabilities
$ 5,800
14,500
2,500
7,000
29,800
Long-term liabilities:
Notes payable
Total liabilities
45,000
$
74,800
Equity
Common stock
Retained earnings*
Total equity
Total liabilities and equity
$ 50,000
1,022,300
1,072,300
$1,147,100
b. ($134,300 / $29,800) = 4.5
*NI = $370,800 - $90,000 - $5,200 - $5,000 - $800 - $7,000 = $262,800
Retained earnings = $960,000 + $262,800 - $200,500 = $1,022,300
1-391
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-A3
Learning Objective: 03-C4
[Question]
201. On December 31, 2009, a company forgot to record $7,000 of depreciation on office
equipment. What would be the effect on the assets, net income and equity when it comes to
the 2009 financial statements?
Answer:
1 Assets are overstated by $7,000.
2 Net income is overstated by $7,000.
3 Equity is overstated by $7,000.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-A1
1-392
Chapter 01 - Introducing Accounting in Business
[Question]
202. Given the table below, indicate the impact of the following errors made during the
adjusting entry process. Use a "+" followed by the amount for overstatements, a "-" followed
by the amount for understatements and a "0" for no effect. The first one is done as an
example.
Ex. Failed to recognize that $600 of unearned revenues, previously recorded as liabilities, had
been earned by year-end.
1. Failed to accrue salaries expense of $1,200.
2. Forgot to record $2,700 of depreciation on office equipment.
3. Failed to accrue $300 of interest on a note receivable.
Error
Ex.
1.
2.
3.
Revenues
-$600
Expenses
0
Assets
0
Liabilites
$600
Equity
-$600
Revenues
0
0
-$300
Expenses
-$1,200
-$2,700
0
Assets
0
+$2,700
-$300
Liabilites
-$1,200
0
0
Equity
+$1,200
+$2,700
-$300
Answer:
Error
1.
2.
3.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-A1
1-393
Chapter 01 - Introducing Accounting in Business
[Question]
203. A company issued financial statements for the year ended December 31, but failed to
include the following adjusting entries:
A. Accrued service fees earned of $2,200
B. Depreciation expense of $8,000
C. Portion of office supplies (an asset) used, $3,100
D. Accrued salaries of $5,200
E. Revenues of $7,200, originally recorded as unearned, have been earned by the end of the
year
Determine the correct amounts for the December 31 financial statements by completing the
following table:
Assets
Liabilities
$350,000 $200,000
Reported amounts
Add (subtract) to correct for
item
A
B
C
D
E
Corrected amounts
$
$
Equity
$150,000
$
Net Income
$70,000
$
Answer:
Reported amounts
Add (subtract) to correct for
item
A
B
C
D
E
Corrected amounts
Assets
Liabilities
$350,000 $200,000
2,200
(8,000)
(3,100)
$341,100
5,200
(7,200)
$198,000
Bloom’s Taxonomy: Analyze
ACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-A1
1-394
Equity
$150,000
Net Income
$70,000
2,200
(8,000)
(3,100)
(5,200)
7,200
$143,100
2,200
(8,000)
(3,100)
(5,200)
7,200
$63,100
Chapter 01 - Introducing Accounting in Business
[Question]
204. Using the following table indicate the impact of the following errors made during the
adjusting entry process. Use a "+" for overstatements, a "-" for understatements and a "0" for
no effect. The first one is provided as an example
Error
Ex. Did not record depreciation for this
period
1.
Did not record unpaid utility bill
2.
Did not adjust unearned revenue
account for revenue earned this
period.
3.
Did not adjust office supplies for
supplies used this period.
4.
Did not accrue employees wages
for this period.
5.
Recorded rent expense with a debit
to salary expense and a credit to
rent payable.
Answer:
Revenues Expenses
0
-
Assets
+
Liabilities
0
Equity
+
Error
Ex. Did not record depreciation for this
period
1.
Did not record unpaid utility bill
2.
Did not adjust unearned revenue
account for revenue earned this
period.
3.
Did not adjust office supplies for
supplies used this period.
4.
Did not accrue employees wages
for this period.
5.
Recorded rent expense with a debit
to salary expense and a credit to
rent payable.
Revenues Expenses
0
-
Assets
+
Liabilities
0
Equity
+
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-A1
1-395
0
-
0
0
0
+
+
-
0
-
+
0
+
0
-
0
-
+
0
0
0
0
0
Chapter 01 - Introducing Accounting in Business
[Question]
205. Reebok's net income was $180,000; its total assets were $1,050,000; and its net sales
were $3,500,000. Calculate the company's profit margin ratio.
Answer: $180,000/$3,500,000 = 5.1%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Med
Learning Objective: 03-A2
[Question]
206. Nike's net income was $780,000; its net assets were $5,200,000; and its net sales were
$9,000,000. Calculate its profit margin ratio.
Answer: $780,000/$9,000,000 = 8.7%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-A2
1-396
Chapter 01 - Introducing Accounting in Business
[Question]
207. The following information is available for the Wooden Company:
2010
$ 2,630
36,500
400,000
Net income
Net Sales
Total assets
2009
$ 2,100
32,850
385,000
2008
$ 1,850
31,200
350,000
From the information provided, calculate Wooden's profit margin ratio for each of the three
years. Comment on the results, assuming that the industry average for the profit margin ratio
is 6% for each of the three years.
Answer:
Profit margin
NI
Sales
2010
$ 2,630
$ 36,500
2009
$ 2,100
$ 32,850
2008
$ 1,850
$ 31,200
7.2%
6.4%
5.9%
Analysis comment: The profit margin has increased in all three years and has exceeded the
industry average in the last two years. These results reflect positively on Wooden and its trend
in profitability.
Bloom’s Taxonomy: Evaluate
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-A2
1-397
Chapter 01 - Introducing Accounting in Business
[Question]
208. Calculate the current ratio in each of the following separate cases.
Current Assets
$ 75,000
$161,500
$ 45,000
$132,000
$ 99,000
Case 1
Case 2
Case 3
Case 4
Case 5
Current Liabilities
$ 30,000
$ 85,000
$ 53,000
$127,000
$110,000
Answer:
Case 1: 2.5
Case 2. 1.9
Case 3. 0.85
Case 4. 1.04
Case 5. 0.90
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-A3
[Question]
209. On December 14 Bench Company received $3,700 cash for consulting services that will
be performed in January. Bench records all such prepayments in a liability account. Prepare a
general journal entry to record the $3,700 cash receipt.
Answer:
Dec. 14
Cash
Unearned Consulting Fees
3,700
3,700
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 03-P1
1-398
Chapter 01 - Introducing Accounting in Business
[Question]
210. On December 31, Connelly Company had performed $5,000 of management services for
clients that had not yet been billed. Prepare Connelly's adjusting entry to record these fees
earned.
Answer:
Dec. 31 Accounts Receivable
5,000
Management Fees Earned
5,000
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 03-P1
[Question]
211. During the year, Able Co. purchased $23,750 worth of supplies, at the end of the year,
the supplies expense on the adjusted trial balance was $29,340 and the balance sheet showed a
balance of $810 in the supplies account. What was the supplies balance at the beginning of
the year?
Answer: X+23,750-29,340=810; x = 6400
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P1
1-399
Chapter 01 - Introducing Accounting in Business
[Question]
212. During the year, Able Co. purchased $39,600 worth of supplies, at the end of the year,
the balance sheet showed a balance of $1,760 in the supplies account. Prepare the necessary
adjusting entry.
Answer:
Supplies Expense……………. $37,840
Supplies……………………....$37,840
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 03-P1
[Question]
213. June 30, 2010, the end of the quarter is on a Wednesday. Employees get paid each
Friday for the week worked. Abel Co. has five employees who earn $100 per day each.
Make the necessary adjusting journal entry for June 30.
Answer:
Wages Expense……………. $1,500
Wages Payable……………………....$1,500
Feedback: 5 * $100 * 3 days = 1,500
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P1
1-400
Chapter 01 - Introducing Accounting in Business
[Question]
214. June 30, 2010, the end of the quarter is on a Wednesday. Employees get paid each
Friday for the week worked. Abel Co. has five employees who earn $100 per day each.
Assuming the proper adjusting journal entry was made on June 30, prepare the journal entry
to record the payment of wages on July 2.
Answer:
Wages Expense……………. $1,000
Wages Payable……………...$1,500
Cash……….……………………....$2,500
Feedback: 5 * $100 * 3 days = 1,500 (Wages Payable) 5*$100*2 days (Wages Expense)
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P1
[Question]
215. An asset that cost $50,000 was purchased on January 1. The asset has an estimated
useful life of three years and an estimated salvage value of $3,200. Prepare the necessary
adjusting journal entry for the end of the year.
Answer:
Depreciation Expense……………. $15,600
Accumulated Depreciation……………....$15,600
Feedback: (50,000-3,200)/3)=$15,600
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P1
1-401
Chapter 01 - Introducing Accounting in Business
[Question]
216. A company has 20 employees who each earn $500 per week for a 5-day week that begins
on Monday. December 31 of 2011 is a Monday and all 20 employees worked that day.
a. Prepare the required adjusting journal entry to record accrued salaries on December 31,
2011.
b. Prepare the journal entry to record the payment of salaries on January 4, 2012.
Answer:
a.
12/30/11
Salary Expense
Salaries Payable
2,000
2,000
(20 employees x $500/week x 1/5 week = $2,000 expense)
b.
1/4/12
Salary Expense
Salaries payable
Cash
8,000
2,000
10,000
(20 employees x $500/week x 4/5 week = $8,000 expense)
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P1
1-402
Chapter 01 - Introducing Accounting in Business
[Question]
217. Pfister Co. leases an office to a tenant at the rate of $5,000 per month. The tenant
contacted Pfister and arranged to pay the rent for December 2011 on January 8, 2012. Pfister
agrees to this arrangement.
a. Prepare the journal entry that Pfister must make at December 31, 2011 to record the
accrued rental revenue.
b. Prepare the journal entry to record the receipt of the rent on January 8, 2012.
Answer:
a.
12/31/11
Rent Receivable
Rent Revenue earned
5,000
Cash
Rent Receivable
5,000
5,000
b.
1/8/12
5,000
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P1
1-403
Chapter 01 - Introducing Accounting in Business
[Question]
218. Prior to recording adjusting entries on December 31, a company's Store Supplies account
had an $880 debit balance. A physical count of the supplies showed $325 of unused supplies
available as of December 31. Prepare the required adjusting entry.
Answer:
Dec. 31
Store Supplies Expense
Store Supplies
($880 - $325 = $555 used)
555
555
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P1
1-404
Chapter 01 - Introducing Accounting in Business
[Question]
219. Complete the following by filling in the blanks:
(1) The Prepaid Insurance account had a $455 debit balance at the beginning of the current
year; $650 of insurance premiums were paid during the year; and the year-end balance sheet
showed $420 of prepaid insurance; consequently, the income statement for the year must have
shown $______________ of insurance expense.
(2) The Office Supplies account began the current year with a $235 debit balance; the income
statement for the year showed $475 of office supplies expense; and the year-end balance sheet
showed the current asset, office supplies, at $225; consequently, if all supplies were
accounted for, $____________ of office supplies must have been purchased during the year.
Answer:
(1) $685 = $455 + $650 - $420
(2) $465 = $225 + $475 - $235
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P1
[Question]
220. Topflight Company had $1,500 of store supplies at the beginning of the current year.
During this year, Topflight purchased $8,250 worth of store supplies. On December 31,
$1,125 worth of store supplies remained. Calculate the amount of Topflight Company's store
supplies expense for the current year.
Answer: $1,500 + $8,250 - $1,125 = $8,625
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P1
1-405
Chapter 01 - Introducing Accounting in Business
[Question]
221. Prepare general journal entries on December 31 to record the following unrelated yearend adjustments.
a. Estimated depreciation on office equipment for the year, $4,000
b. The Prepaid Insurance account has a $3,680 debit balance before adjustment. An
examination of insurance policies shows $950 of insurance expired
c. The Prepaid Insurance account has a $2,400 debit balance before adjustment. An
examination of insurance policies shows $600 of unexpired insurance
d. The company has three office employees who each earn $100 per day for a five-day
workweek that ends on Friday. The employees were paid on Friday, December 26 and have
worked full days on Monday, Tuesday and Wednesday, December 29, 30 and 31
e. On November 1, the company received 6 months' rent in advance from a tenant whose rent
is $700 per month. The $4,200 was credited to the Unearned Rent account
f. The company collects rent monthly from its tenants. One tenant whose rent is $750 per
month has not paid his rent for December
Answer:
a.
Dec. 31
Depr. Expense – Office Equipment
Accum Depr. – Office Equipment
4,000
4.000
b.
31 Insurance Expense
Prepaid Insurance
950
950
c.
31 Insurance Expense
Prepaid Insurance
($2,400 - $600 = $1,800 expired)
1,800
1,800
d.
31 Office Salaries Expense
Office Salaries Payable
(3 Employees x 3 days x $100/day/employee = $900)
900
900
e.
31 Unearned Rent
Rent Earned
($700/mo x 2 months earned = $1,400)
1,400
1,400
f.
31 Accounts Receivable (or Rent Receivable)
Rent Earned
1-406
750
750
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P1
[Question]
222. Barnes Company has 20 employees who are each paid $80 per day for a 5-day
workweek. The employees are paid each Friday. This year the accounting period ends on
Tuesday. Prepare the December 31 year-end adjusting journal entry Barnes Company should
make to accrue salaries.
Answer:
Dec. 31 Salaries Expense
Salaries Payable
($80/day x 20 employees x 2 days = $3,200)
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P1
1-407
3,200
3,200
Chapter 01 - Introducing Accounting in Business
[Question]
223. Show the December 31 adjusting entry to record $750 of earned but unpaid salaries of
employees at the end of the current accounting period.
Answer:
Dec. 31 Salaries Expense
Salaries Payable
750
750
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P1
[Question]
224. Western Company had $500 of store supplies available at the beginning of the current
year. During the year Western Company purchased $2,750 worth of store supplies. On
December 31 of this year $375 worth of store supplies remained.
a. Calculate the amount of Western Company's store supplies expense for the current year.
(Show your calculations.)
b. Prepare the journal entry to adjust the supplies account.
Answer:
a.
Beginning Supplies
+ Purchases
Available
- Ending Supplies
Supplies used
$ 500
2,750
$3,250
375
$2,875
b.
12/31 Store Supplies expense
Store Supplies
2,875
2,875
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P1
1-408
Chapter 01 - Introducing Accounting in Business
[Question]
225. During the current year ended December 31, clients paid fees in advance for accounting
services amounting to $25,000. These fees were recorded in an account called Unearned
Accounting Fees. If $3,500 of these fees are still unearned on December 31 of this year
present the December 31 adjusting entry to bring the accounts up to date.
Answer:
Dec. 31 Unearned Accounting Fees
Accounting Fees Earned
($25,000 - $3,500 = $21,500)
21,500
21,500
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P1
1-409
Chapter 01 - Introducing Accounting in Business
[Question]
226. The following unadjusted and adjusted trial balances were taken from the current year's
accounting system for High Point, Inc.
High Point, Inc.
Trial Balances
For Year Ended December 31
Unadjusted Trial Balance
Debit
Credit
Cash
11,300
Accounts receivable
16,340
Office supplies
1,045
Prepaid advertising
1,100
Building
26,700
Accumulated depreciation -- Building
1,300
Accounts payable
3,320
Unearned services revenue
4,410
Common stock
10,000
Retained earnings
7,905
Services revenue
72,400
Salaries expense
34,500
Utilities expense
5,450
Advertising expense
2,900
Supplies expense
Depreciation expense – building
Totals
99,335
99,335
Adjusted Trial Balance
Debit
Credit
11,300
17,140
645
450
26,700
6,300
3,500
3,010
10,000
7,905
74,600
34,500
5,630
3,550
400
5,000
105,315
105,315
In general journal form, present the six adjusting entries that explain the changes in the
account balances from the unadjusted to the adjusted trial balance.
Answer:
1-410
Chapter 01 - Introducing Accounting in Business
a.
Dec. 31 Accounts Receivable
Services Revenue
To adjust for revenues earned but not yet collected.
800
800
b.
Dec. 31 Supplies Expense
Office Supplies
To adjust for supplies used.
400
400
c.
Dec. 31 Advertising Expense
Prepaid Advertising
To adjust for advertising services used.
650
650
d.
Dec. 31 Depreciation Expense – Building
Accumulated Depreciation Building
To record depreciation.
5,000
5,000
e.
Dec. 31 Utilities Expense
Accounts or Utilities Payable
To adjust for accrued utilities expense.
180
180
f.
Dec. 31 Unearned Services Revenue
Services Revenue
To adjust for earned revenue previously collected
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P1
Learning Objective: 03-P2
1-411
1,400
1,400
Chapter 01 - Introducing Accounting in Business
[Question]
227. Black Company's unadjusted and adjusted trial balances on December 31 of the current
year are as follows
Cash
Prepaid insurance
Equipment
Accumulated depreciation –
Equipment
Salaries payable
Unearned repair fees
Repair fees earned
Salaries expense
Depreciation expense – Equip
Insurance expense
Common stock
Retained earnings
Unadjusted Trial Balance
4,000
1,600
9,000
Adjusted Trial Balance
4,000
1,200
9,000
900
1,800
1,000
600
11,900
2,500
10,000
3,500
4,500
900
1,100
700
18,800
5,000
400
18,800
5,000
400
20,700
20,700
Present the four adjusting journal entries that were recorded by Black Company.
Answer:
Dec. 31 Insurance Expense
Prepaid Insurance
31 Depreciation Expense Equipment
Accum Depr. – Equipment
31 Salaries Expense
Salaries Payable
31 Unearned Repair Fees
Repair Fees Earned
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P1
Learning Objective: 03-P2
1-412
400
400
900
900
1,000
1,000
1,900
1,900
Chapter 01 - Introducing Accounting in Business
[Question]
228. In general journal form, record the December 31 adjusting entries for the following
transactions and events. Assume that December 31 is the end of the annual accounting period.
a. The Prepaid Insurance account shows a debit balance of $2,340, representing the cost of a
three-year fire insurance policy that was purchased on October 1 of the current year
b. The Office Supplies account has a debit balance of $400; a year-end inventory count
reveals $80 of supplies still on hand
c. On November 1 of the current year, Rent Earned was credited for $1,500. This amount
represented the rent earned for a three-month period beginning November 1
d. Estimated depreciation on office equipment is $600
e. Accrued salaries amount to $400
Answer:
(all entries dated December 31)
a.
Insurance Expense
Prepaid Insurance
($2,340/36 mo. = $65/mo; $65/mo x 3 mo expired - $195)
195
b.
Office Supplies Expense
Office Supplies ($400 - $80)
320
c.
Rent Earned
Unearned Rent ($1,500/3)
500
d.
Depreciation Expense – Office Equipment
Accumulated Depreciation – Office Equipment
600
e.
Salaries Expense
Salaries Payable
400
195
320
500
600
400
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P1
Learning Objective: 03-P4
1-413
Chapter 01 - Introducing Accounting in Business
[Question]
229. Based on the following information, prepare the adjusting journal entries for Bella's
Beauty Salon. Bella Beauty Salon's unadjusted trial balance for the current year follows:
Bella Beauty Salon
Trial Balance
December 31
Cash
Prepaid insurance
Shop supplies
Shop equipment
Accumulated depreciation – shop equipment
Building
Accumulated depreciation – building
Land
Unearned rent
Long-term notes payable
Common stock
Retained earnings
Rent earned
Fees earned
Wages expense
Utilities expense
Property taxes expense
Interest expense
Totals
$ 4,200
1,480
990
3,860
$
770
57,500
3,840
55,000
1,600
50,000
10,000
39,860
2,400
23,400
3,200
690
600
4,350
$131,870
$131,870
Additional information:
a. An insurance policy examination showed $1,240 of expired insurance
b. An inventory count showed $210 of unused shop supplies still available
c. Depreciation expense on shop equipment, $350
d. Depreciation expense on the building, $2,220
e. A beautician is behind on space rental payments and this $200 of accrued revenue was
unrecorded at the time the trial balance was prepared.
f. $800 of the Unearned Rent account balance was earned by year-end.
g. The one employee, a receptionist, works a five-day workweek at $50 per day. The
employee was paid last week but has worked four days this week for which she has not been
paid.
h. Three months' property taxes, totaling $450, have accrued. This additional amount of
property taxes expense has not been recorded.
i. One month's interest on the note payable, $600, has accrued but is unrecorded.
1-414
Chapter 01 - Introducing Accounting in Business
Answer:
a.
Insurance expense
Prepaid insurance
b.
Shop supplies expense
Shop supplies
(Calculation $990 – 210 = 780 used)
c.
Depreciation expense, Shop equipment
Accumulated depreciation – Shop equipment
d.
Depreciation expense, Building
Accumulated depreciation – Building
e.
Rent Receivable
Rent earned
f.
Unearned rent
Rent earned
g.
Wages expense
Wages payable
(Calculation: $50/day x 4 days = $200)
h.
Property taxes expense
Property taxes payable
i.
Interest expense
Interest payable
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P1
1-415
1,240
1,240
780
780
350
350
2,220
2,220
200
200
800
800
200
200
450
450
600
600
Chapter 01 - Introducing Accounting in Business
[Question]
230. Use the following information to prepare the adjusted trial balance for Bella's Beauty
Salon. Bella Beauty Salon's unadjusted trial balance for the current year follows:
Bella Beauty Salon
Trial Balance
December 31
Cash
Prepaid insurance
Shop supplies
Shop equipment
Accumulated depreciation – shop equipment
Building
Accumulated depreciation – building
Land
Unearned rent
Long-term notes payable
Common stock
Retained earnings
Rent earned
Fees earned
Wages expense
Utilities expense
Property taxes expense
Interest expense
Totals
$ 4,200
1,480
990
3,860
$
770
57,500
3,840
55,000
1,600
50,000
10,000
39,860
2,400
23,400
3,200
690
600
4,350
$131,870
$131,870
Additional information:
a. An insurance policy examination showed $1,240 of expired insurance
b. An inventory count showed $210 of unused shop supplies still available
c. Depreciation expense on shop equipment, $350
d. Depreciation expense on the building, $2,220
e. A beautician is behind on space rental payments and this $200 of accrued revenue was
unrecorded at the time the trial balance was prepared.
f. $800 of the Unearned Rent account balance was earned by year-end.
g. The one employee, a receptionist, works a five-day workweek at $50 per day. The
employee was paid last week but has worked four days this week for which she has not been
paid.
h. Three months' property taxes, totaling $450, have accrued. This additional amount of
property taxes expense has not been recorded.
i. One month's interest on the note payable, $600, has accrued but is unrecorded.
1-416
Chapter 01 - Introducing Accounting in Business
Answer:
Bella Beauty Salon
Adjusted Trial Balance
December 31
Cash
Rent receivable
Prepaid insurance
Shop supplies
Shop equipment
Accumulated depreciation – shop equipment
Building
Accumulated depreciation – building
Land
Wages payable
Property taxes payable
Interest payable
Unearned rent
Long-term notes payable
Common stock
Retained earnings
Rent earned
Fees earned
Wages expense
Utilities expense
Property taxes expense
Insurance expense
Shop supplies expense
Depreciation expense – shop equipment
Depreciation expense-building
Interest expense
Totals
$ 4,200
200
240
210
3,860
$
1,120
57,500
6,060
55,000
200
450
600
800
50,000
10,000
39,860
3,400
23,400
3,400
690
1,050
1,240
780
350
2,220
4,950
$135,890
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P2
1-417
$135,890
Chapter 01 - Introducing Accounting in Business
[Question]
231. Prepare an income statement from the adjusted trial balance of Hanson Storage.
HANSON STORAGE
Adjusted Trial Balance
December 31
Cash
Accounts receivable
Prepaid insurance
Office supplies
Office equipment
Accumulated depreciation – office equipment
Buildings
Accumulated depreciation – buildings
Land
Wages payable
Property taxes payable
Interest payable
Unearned rent
Long-term notes payable
Common stock
Retained earnings
Dividends
Rent earned
Wages expense
Utilities expense
Property taxes expense
Insurance expense
Office supplies expense
Depreciation expense – office equipment
Depreciation expense – buildings
Interest expense
Totals
1-418
$ 3,050
400
830
80
4,200
$
1,100
98,000
28,000
115,000
880
1,400
2,200
460
150,000
15,000
25,340
21,000
57,500
25,000
1,900
2,400
800
250
400
5,570
3,000
$281,880
$281,880
Chapter 01 - Introducing Accounting in Business
Answer:
HANSON STORAGE
Income Statement
For Year Ended December 31
Revenues
Rent earned
Operating expenses
Wages expense
Utilities expense
Property taxes expense
Insurance expense
Office supplies expense
Depreciation expense – office equipment
Depreciation expense – buildings
Interest expense
Total operating expenses
Net income
$57,500
$25,000
1,900
2,400
800
250
400
5,570
3,000
39,320
$18,180
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P3
1-419
Chapter 01 - Introducing Accounting in Business
[Question]
232. Prepare a statement of retained earnings from the adjusted trial balance of Hanson
Storage.
HANSON STORAGE
Adjusted Trial Balance
December 31
Cash
Accounts receivable
Prepaid insurance
Office supplies
Office equipment
Accumulated depreciation – office equipment
Buildings
Accumulated depreciation – buildings
Land
Wages payable
Property taxes payable
Interest payable
Unearned rent
Long-term notes payable
Common stock
Retained earnings
Dividends
Rent earned
Wages expense
Utilities expense
Property taxes expense
Insurance expense
Office supplies expense
Depreciation expense – office equipment
Depreciation expense – buildings
Interest expense
Totals
$ 3,050
400
830
80
4,200
$
98,000
28,000
115,000
880
1,400
2,200
460
150,000
15,000
25,340
21,000
57,500
25,000
1,900
2,400
800
250
400
5,570
3,000
$281,880
Answer:
HANSON STORAGE
Retained Earnings Statement
For the Year Ended December 31
Retained earnings, January 1
Add: Net income
Less: Dividends
Retained earnings, December 31
1-420
1,100
$25,340
18,180
(21,000)
$22,520
$281,880
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P3
[Question]
233. Prepare a balance sheet from the adjusted trial balance of Hanson Storage.
HANSON STORAGE
Adjusted Trial Balance
December 31
Cash
Accounts receivable
Prepaid insurance
Office supplies
Office equipment
Accumulated depreciation – office equipment
Buildings
Accumulated depreciation – buildings
Land
Wages payable
Property taxes payable
Interest payable
Unearned rent
Long-term notes payable
Common stock
Retained earnings
Dividends
Rent earned
Wages expense
Utilities expense
Property taxes expense
Insurance expense
Office supplies expense
Depreciation expense – office equipment
Depreciation expense – buildings
Interest expense
Totals
1-421
$ 3,050
400
830
80
4,200
$
1,100
98,000
28,000
115,000
880
1,400
2,200
460
150,000
15,000
25,340
21,000
57,500
25,000
1,900
2,400
800
250
400
5,570
3,000
$281,880
$281,880
Chapter 01 - Introducing Accounting in Business
Answer:
HANSON STORAGE
Balance Sheet
December 31
Assets
Cash
Accounts receivable
Prepaid insurance
Office supplies
Office equipment
Less: Accumulated depreciation
Buildings
Accumulated depreciation
Land
Total assets
$ 3,050
400
830
80
$ 4,200
$ 1,100
98,000
28,000
3,100
70,000
115,000
$192,460
Liabilities
Wages payable
Property taxes payable
Interest payable
Unearned rent
Long-term notes payable
Total Liabilities
$
880
1,400
2,200
460
150,000
$154,940
Equity
Common stock
Retained earnings
Total equity
Total Liabilities and Equity
$ 15,000
22,520
37,520
$192,460
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P3
1-422
Chapter 01 - Introducing Accounting in Business
[Question]
234. From the adjusted trial balance, prepare an income statement for Martin Sky Taxi
Services.
Martin Sky Taxi Services
Adjusted Trial Balance
For the year ended December 31
Cash
Accounts receivable
Office supplies
Airplanes
Accumulated depreciation – Airplanes
Accounts payable
Common stock
Retained earnings
Dividends
Fees earned
Rent expense
Office supplies expense
Utilities expense
Depreciation Expense – Airplanes
Salary expense
Fuel expense
Totals
$ 28,000
14,200
1,700
100,000
45,000
11,500
25,000
46,900
40,000
150,000
13,000
2,000
2,500
15,000
50,000
12,000
$278,400
$278,400
Answer:
Martin Sky Taxi Services
Income Statement
For the year ended December 31
Revenue:
Fees earned
Expenses:
Rent expense
Office supplies expense
Utilities expense
Depreciation expense – Airplanes
Salary expense
Fuel expense
Total expenses
Net income
$150,000
$13,000
2,000
2,500
15,000
50,000
12,000
94,500
$55,500
1-423
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P3
[Question]
235. Based on the adjusted trial balance, prepare a statement of retained earnings for Martin
Sky Taxi Services.
Martin Sky Taxi Services
Adjusted Trial Balance
For the year ended December 31
Cash
$ 28,000
Accounts receivable
14,200
Office supplies
1,700
Airplanes
100,000
Accumulated depreciation – Airplanes
45,000
Accounts payable
11,500
Common stock
25,000
Retained earnings
46,900
Dividends
40,000
Fees earned
150,000
Rent expense
13,000
Office supplies expense
2,000
Utilities expense
2,500
Depreciation Expense – Airplanes
15,000
Salary expense
50,000
Fuel expense
12,000
Totals
$278,400
$278,400
1-424
Chapter 01 - Introducing Accounting in Business
Answer:
Martin Sky Taxi Service
Retained Earnings Statement
For the Year Ended December 31
Retained earnings, January 1
Add: Net income
Less: Dividends
Retained earnings, December 31
$46,900
55,500
(40,000)
$62,400
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P3
[Question]
236. Based on the adjusted trial balance, prepare a balance sheet for Martin Sky Taxi
Services.
Martin Sky Taxi Services
Adjusted Trial Balance
For the year ended December 31
Cash
$ 28,000
Accounts receivable
14,200
Office supplies
1,700
Airplanes
100,000
Accumulated depreciation – Airplanes
45,000
Accounts payable
11,500
Common stock
25,000
Retained earnings
46,900
Dividends
40,000
Fees earned
150,000
Rent expense
13,000
Office supplies expense
2,000
Utilities expense
2,500
Depreciation Expense – Airplanes
15,000
Salary expense
50,000
Fuel expense
12,000
Totals
$278,400
$278,400
1-425
Chapter 01 - Introducing Accounting in Business
Answer:
Martin Sky Taxi Services
Balance Sheet
At December 31
Assets
Cash
Accounts receivable
Office supplies
Airplanes
Less: Accumulated depreciation – Airplanes
Total assets
Liabilities
Accounts payable
Equity
Common stock
Retained earnings
Total equity
Total liabilities and equity
$28,000
14,200
1,700
$100,000
(45,000)
55,000
$98,900
$11,500
$25,000
62,400
$87,400
$98,900
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P3
1-426
Chapter 01 - Introducing Accounting in Business
[Question]
237. The summary amounts below appear in the Income Statement and Balance Sheet
columns of a company's December 31 work sheet. Prepare the necessary closing entries.
Income Statement
Debit
Credit
Assets
Liabilities
Common stock
Retained earnings
Dividends
Revenue
Salaries expense
Other operating expenses
Totals
Net income
Totals
Balance Sheet
Debit
Credit
12,000
3,000
1,000
6,500
1,500
19,500
11,250
5,250
16,500
3,000
19,500
19,500
13,500
19,500
13,500
10,500
3,000
13,500
Answer:
Dec.
31
31
31
31
Revenue
Income Summary
19,500
Income Summary
Salaries Expense
Other Operating Expenses
16,500
19,500
11,250
5,250
Income Summary
Retained earnings
3,000
Retained earnings
Dividends
1,500
3,000
1,500
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 03-P4
1-427
Chapter 01 - Introducing Accounting in Business
[Question]
238. The adjusted trial balance of Sara's Web Services follows:
SARA’S WEB SERVICES
Adjusted Trial Balance
December 31
Cash
Supplies
Prepaid insurance
Computer equipment
Accumulated depreciation – Computer equipment
Accounts payable
Common stock
Retained earnings
Dividends
Services revenue
Salaries expense
Depreciation expense
Rent expense
Supplies expense
Utilities expense
Insurance expense
Totals
$ 1,170
1,930
600
20,600
$ 5,400
325
3,000
10,925
4,800
21,720
6,920
2,000
1,200
800
950
400
$41,370
$41,370
(a) Prepare the closing entries for Sara's Web Services.
(b) What is the balance of the retained earnings account after the closing entries are posted?
Answer:
a)
Closing entries:
Dec.
31
Services Revenue
Income Summary
31
21,720
21,720
Income Summary
Salaries Expense
Depreciation Expense
Rent Expense
Supplies Expense
Utilities Expense
Insurance Expense
12,270
6,920
2,000
1,200
800
950
400
1-428
Chapter 01 - Introducing Accounting in Business
31
31
Income Summary
Retained earnings
9,450
Retained earnings
Dividends
4,800
9,450
4,800
Balance of Retained earnings after closing entries:
b)
Beginning Balance
Add Net Income
Less Dividends
Ending Balance
$10,925
9,450
(4,800)
$15,575
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P4
[Question]
239. Following are selected accounts and their balances for a company after the adjustments
as of May 31, the end of its fiscal year. (All accounts have normal balances.)
Retained earnings
Dividends
Fees earned
Salaries expense
Insurance expense
Utilities expense
Supplies expense
Supplies
Salaries payable
Depreciation expense
$30,000
6,000
20,000
7,000
350
75
500
400
300
425
Prepare all the necessary closing entries for this company.
1-429
Chapter 01 - Introducing Accounting in Business
Answer:
Fees Earned
Income Summary
Income Summary
Salaries Expense
Insurance Expense
Utilities Expense
Supplies Expense
Depreciation Expense
Income Summary
Retained earnings
Retained earnings
Dividends
20,000
20,000
8,350
7,000
350
75
500
425
11,650
11,650
6,000
6,000
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P4
1-430
Chapter 01 - Introducing Accounting in Business
[Question]
240. The adjusted trial balance of the Thomas Company follows:
Thomas Company
Adjusted Trial Balance
December 31
Debit
8,000
2,400
18,000
Cash
Prepaid insurance
Equipment
Accumulated depreciation – Equipment
Salaries payable
Unearned repair fees
Common stock
Retained earnings
Dividends
Repair fees earned
Salaries expense
Depreciation expense
Insurance expense
Totals
Credit
3,600
2,000
1,200
4,000
7,400
4,000
27,500
10,000
1,800
1,500
45,700
45,700
Prepare the closing entries for Thomas Company.
Answer:
Dec.
31
31
31
31
Repair Fees Earned
Income Summary
27,500
Income Summary
Salaries Expense
Depreciation Expense
Insurance Expense
13,300
Income Summary
Retained earnings
14,200
27,500
10,000
1,800
1,500
14,200
Retained earnings
Dividends
4,000
4,000
1-431
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P4
[Question]
241. The items that follow appeared in the Income Statement columns of the work sheet
prepared for Armstrong Delivery Service at current year-end. In addition, Retained earnings
had a credit balance of $117,000 and Dividends had a debit balance of $30,000 at year end.
Prepare closing journal entries for this company.
Income Statement
Dr.
Cr.
$98,900
$28,100
14,400
1,200
1,900
6,000
$51,600
$98,900
47,300
$98,900
$98,900
Delivery Revenue
Office salaries expense
Rent expense
Insurance expense
Office supplies expense
Depreciation expense Office equipment
Totals
Net income
Totals
1-432
Chapter 01 - Introducing Accounting in Business
Answer:
Dec
31
31
31
31
Delivery Revenue
Income Summary
98,900
Income Summary
Office Salaries Expense
Rent Expense
Insurance Expense
Office Supplies Expense
Depr. Expense – Office Equipment
51,600
Income Summary
Retained earnings
47,300
Retained earnings
Dividends
30,000
98,900
28,100
14,400
1,200
1,900
6,000
47,300
30,000
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P4
1-433
Chapter 01 - Introducing Accounting in Business
[Question]
242. Presented below are the year-end balances at December 31 of Laura's Laundry Service.
(All accounts have normal balances.)
Accounts receivable
Accounts payable
Accumulated depreciation – Catering equipment
Advertising expense
Cash
Depreciation expense – Catering equipment
Insurance expense
Catering equipment
Catering service revenue
Notes payable
Common stock
Retained earnings
Dividends
Prepaid insurance
Salaries payable
Salary expense
Supplies
Supplies expense
Repair expense
Unearned catering service revenues
Utilities expense
a. Prepare the necessary closing entries at December 31.
b. Prepare a post-closing trial balance at December 31.
1-434
$ 12,000
25,000
30,000
4,000
42,000
12,000
3,000
125,000
200,000
65,000
3,000
14,000
18,000
1,500
4,000
97,000
1,500
9,000
7,000
500
9,500
Chapter 01 - Introducing Accounting in Business
Answer:
(a)
Dec
31
31
31
31
Catering Service Revenues
Income Summary
200,000
Income Summary
Advertising Expense
Depreciation Expense – Catering Equip.
Insurance Expense
Salaries Expense
Supplies Expense
Repair Expense
Utilities Expense
141,500
200,000
4,000
12,000
3,000
97,000
9,000
7,000
9,500
Income Summary
Retained earnings
58,500
Retained earnings
Dividends
18,000
58,500
18,000
(b)
Laura’s Catering Service
Post-Closing Trial Balance
December 31
Account
Cash
Accounts receivable
Prepaid insurance
Supplies
Catering equipment
Accumulated depreciation – catering equipment
Notes payable
Accounts payable
Salaries payable
Unearned service revenues
Common stock
Retained earnings ($14,000 + $58,500 - $18,000)
Totals
1-435
Debit
$ 42,000
12,000
1,500
1,500
125,000
$182,000
Credit
$ 30,000
65,000
25,000
4,000
500
3,000
54,500
$182,000
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P4
Learning Objective: 03-P5
[Question]
243. Below is Adventure Travel's adjusted trial balance as of the end of its annual accounting
period:
Adventure Travel
Adjusted Trial Balance
December 31
Cash
Accounts receivable
Office supplies
Office equipment
Accumulated depreciation – Office equipment
Long-term notes payable
Common stock
Retained earnings
Dividends
Fees earned
Salaries expense
Rent expense
Depreciation expense – Office equipment
Advertising expense
Office supplies expense
Totals
a. Prepare the necessary closing entries.
b. Prepare a post-closing trial balance.
Answer:
1-436
Dr.
$ 25,000
15,000
4,300
29,600
Cr.
$ 5,000
25,000
10,000
20,260
1,000
75,000
32,800
16,800
3,960
4,000
2,800
$135,260
$135,260
Chapter 01 - Introducing Accounting in Business
(a)
Fees Earned
Income Summary
75,000
Income Summary
Salaries Expense
Rent Expense
Depreciation Expense – Office Equip
Advertising Expense
Office Supplies Expense
60,360
Income Summary
Retained earnings
14,640
75,000
32,800
16,800
3,960
4,000
2,800
14,640
Retained earnings
Dividends
1,000
1,000
(b)
Account
Cash
Accounts receivable
Office supplies
Office equipment
Accumulated depreciation – Office equipment
Long-term notes payable
Common stock
Retained earnings ($20,260 + $14,640 - $1,000)
Totals
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P4
Learning Objective: 03-P5
1-437
Debit
$25,000
15,000
4,300
29,600
$73,900
Credit
$ 5,000
25,000
10,000
33,900
$73,900
Chapter 01 - Introducing Accounting in Business
[Question]
244. Manning, Co. collected 6-months' rent in advance from a tenant on November 1 of the
current year. When cash was collected, the following entry was made:
Nov. 01
Cash
Rent Revenue Earned
15,000
15,000
Prepare the required adjusting entry at December 31 of the current year.
Answer:
Dec. 31
Rent Revenue Earned
Unearned Rent Revenue
10,000
10,000
Feedback: ($15,000/6 mo. = $2,500/mo; 4 mo. unearned = 4 x $2,500 = $10,000)
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P6
1-438
Chapter 01 - Introducing Accounting in Business
[Question]
245. On October 1 of the current year, Morton Company paid $9,600 cash for a one-year
insurance policy that took effect on that day. On the date of the payment, Morton recorded the
following entry:
Oct. 01
Insurance Expense
Cash
9,600
9,600
Prepare the required adjusting entry at December 31 of the current year.
Answer:
Dec. 01
Prepaid Insurance
Insurance Expense
7,200
7,200
Feedback: ($9,600/12 mo. = $800/mo.; 9 mo. prepaid = 9 x $800 = $7,200)
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P6
1-439
Chapter 01 - Introducing Accounting in Business
[Question]
246. Use the following partial work sheet from Matthews Lanes to prepare its income
statement, statement of changes in retained earnings and a balance sheet
Account
Cash
Accounts Receivable
Office Supplies
Prepaid Insurance
Scoring Equipment
Accumulated depreciation –
Scoring equipment
Salaries payable
Common stock
Retained earnings
Dividends
Bowling revenue
Depreciation expense –
Scoring equipment
Salaries expense
Insurance expense
Rent expense
Office supplies expense
Repairs expense
Telephone expense
Totals
Net income
Totals
MATTHEWS LANES
Work Sheet
For Year Ended June 30
Income Statement
Dr
Cr
Balance Sheet
Dr
Cr
11,275
1,750
800
3,400
130,000
21,700
200
20,000
30,000
46,425
137,675
10,825
1,800
200
1,600
400
350
750
15,925
121,750
137,675
Answer:
1-440
137,675
193,650
137,675
193,650
71,900
121,750
193,650
Chapter 01 - Introducing Accounting in Business
MATTHEWS LANES
Income Statement
For Year Ended June 30
Bowling Revenue
Expenses:
Depreciation expense –
Scoring equipment
Salaries expense
Insurance expense
Rent expense
Office supplies expense
Repairs expense
Telephone expense
Total expenses
Net Income
$137,675
$10,825
1,800
200
1,600
400
350
750
15,925
$121,750
MATTHEW LANES
Retained Earnings Statement
For the Year Ended June 30
Retained earnings, January 1
Add: Net income
Less: Dividends
Retained earnings, December 31
$ 30,000
121,750
(46,425)
$105,325
MATTHEWS LANES
Balance Sheet
June 30
Cash
Accounts receivable
Office supplies
Prepaid Insurance
Auto-Score equipment
Accumulated depreciation –
Scoring equipment
Total assets
$11,275
1,750
800
3,400
$130,000
(21,700)
108,300
$125,525
Liabilities
Salaries payable
$
200
Equity
Common stock
Retained earnings
Total equity
Total liabilities and equity
$ 20,000
105,325
125,325
$125,525
1-441
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P7
[Question]
247. The adjusted trial balance of E. Pace, Consultant is entered on the partial work sheet
below. Complete the worksheet using the following information:
a. Salaries earned by employees that are unpaid and unrecorded, $500.
b. An inventory of supplies showed $800 of unused supplies still on hand.
c. Depreciation on equipment, $1,300.
Account
Cash
Supplies
Equipment
Accum.
Depr. –
Equip.
Accounts
payable
Salaries
payable
Common
Stock
Retained
earnings
Dividends
Fees Earned
Salary
expense
Rent expense
Supplies
expense
Depreciation
expense
Totals
E. Pace, Consulting
Work Sheet
For the year ended December 31
Unadjusted Trial
Adjustments
Adjusted Trial
Balance
Balance
Debit
Credit
Debit
Credit
Debit
Credit
$14,000
1,000
11,000
$2,000
500
2,000
4,500
1,500
30,000
7,500
4,000
$39,000
$39,000
1-442
Income Statement
Debit
Credit
Chapter 01 - Introducing Accounting in Business
Answer:
Account
Cash
Supplies
Equipment
Accum.
Depr. –
Equip.
Accounts
payable
Salaries
payable
Common
Stock
Retained
earnings
Dividends
Fees Earned
Salary
expense
Rent expense
Supplies
expense
Depreciation
expense
Totals
Net income
Totals
E. Pace, Consulting
Work Sheet
For the year ended December 31
Unadjusted Trial
Adjustments
Adjusted Trial
Income Statement
Balance
Balance
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
$14,000
14,000
1,000
(b) 200
800
11,000
11,000
$2,000
(c)1,300
3,300
500
500
(a) 500
500
2,000
2,000
4,500
4,500
1,500
1,500
30,000
7,500
30,000
(a) 500
8,000
8,000
(b) 200
4,000
200
4,000
200
(c)1,300
1,300
1,300
4,000
$39,000
$39,000
30,000
2,000
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P7
1-443
2,000
40,800
40,800
13,500
16,500
30,000
30,000
30,000
Chapter 01 - Introducing Accounting in Business
[Question]
248. A partially completed worksheet is shown below. The unadjusted trial balance columns
are complete. Complete the adjustments, adjusted trial balance, income statement and balance
sheet columns.
Account
Cash
Accounts receivable
Prepaid insurance
Supplies
Office equipment
Accum.Depr. – Office
equip.
Accounts payable
Rent payable
Common stock
Retained earnings
Dividends
Fees earned
Rent expense
Utilities expense
Insurance expense
Supplies expense
Deprec. exp – Office
equip.
Totals
Net income
Totals
Platen Company
Work Sheet
For the year ended December 31
Unadjusted
Adjustments
Adjusted Trial
Trial Balance
Balance
Debit
Credit Debit Credit
Debit
Credit
40
Income
Statement
Debit
Credit
25
14
340
Balance Sheet
Debit
Credit
8
340
45
57
57
100
32
100
32
35
35
300
380
60
20
90
10
45
534
534
1-444
Chapter 01 - Introducing Accounting in Business
Answer:
Account
Cash………………….
Accounts receivable...
Prepaid Insurance……
Supplies……………...
Office equipment……
Accum. Depr., Office
equipment………….
Accounts payable……
Rent payable………...
Common stock………
Retained earnings……
Dividends……………
Fees earned…………..
Rent expense………...
Utilities expense……..
Insurance expense…...
Supplies expense…….
Depr. Exp., Office
equipment………..
Totals………………...
Net income…………..
Unadjusted Trial
Balance
Debit
Credit
40
25
14
340
Platen Company
Work Sheet
For the year ended December 31
Adjusted Trial
Adjustments
Balance
Debit
Credit
Debit
Credit
40
(a) 80
80
(b) 10
15
(c) 6
8
340
45
57
(d) 45
(e) 30
90
57
30
100
32
35
300
60
20
(a) 80
(e) 30
_____
534
(d) 45
171
35
380
90
20
10
6
(b) 10
(c) 6
______
534
Balance
Sheet
Debit
Credit
40
80
15
8
340
90
57
30
100
32
100
32
35
Income
Statement
Debit
Credit
______
171
__45
689
380
90
20
10
6
_____
689
__45
171
209
380
_____
380
____
380
_____
518
____
518
Feedback: a Adjusted fees earned - unadjusted fees earned = adjustment to fees earned
$380 - $300 = $80; Debit Accounts receivable; credit Fees earned
b. Debit Insurance expense; credit Prepaid insurance
c. Unadjusted supplies - adjusted supplies = supplies expense
$14 - $8 = $6; Debit Supplies expense; credit Supplies
d. Debit Depreciation expense; credit Accumulated depreciation
e. Debit Rent expense; Credit Rent payable.
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P7
1-445
_____
309
209
518
Chapter 01 - Introducing Accounting in Business
[Question]
249. Shown below are selected data taken from the unadjusted and adjusted trial balances for
the Simonson Company for the current year ended December 31. Determine the items A
through H below.
Simonson Company
Trial Balances
December 31
Account
Unadjusted Trial
Balance
Debit
Credit
Cash
10,000
Accounts receivable
88,270
Office supplies
700
Prepaid insurance
(C)
Office equipment
49,600
Accumulated depreciation – Office
(E)
equipment
Accounts payable
36,400
Salaries payable
0
Common stock
(F)
Retained earnings
Revenue earned
(G)
Advertising expense
15,000
Depreciation expense – Office
0
equipment
Insurance expense
0
Office supplies expense
0
Rent expense
28,500
Salaries expense
462,000
1-446
Adjusted Trial
Balance
Debit
Credit
(A)
90,770
(B)
2,500
(D)
10,260
36,400
2,700
40,000
36,370
542,500
15,000
2,160
4,300
480
28,500
(H)
Chapter 01 - Introducing Accounting in Business
Answer:
Account
Cash
Accounts receivable
Office supplies
Prepaid insurance
Office equipment
Accumulated depreciation –
Office equipment
Accounts payable
Salaries payable
Common stock
Retained earnings
Revenue earned
Advertising expense
Depreciation expense – Office
equipment
Insurance expense
Office supplies expense
Rent expense
Salaries expense
Totals
Simonson Company
Trial Balances
December 31
Unadjusted Trial
Balance
Debit
Credit
10,000
88,270
700
(C) 6,800
49,600
(E) 8,100
Adjusted Trial
Balance
Debit
Credit
(A) 10,000
90,770
(B) 220
2,500
(D) 49,600
10,260
36,400
0
(F) 40,000
36,400
2,700
40,000
36,370
542,500
(G) 540,000
15,000
0
15,000
2,160
0
0
28,500
462,000
4,300
480
28,500
(H) 464,700
Feedback:
a. No adjustments to cash
b. $700 - Office supplies expense = $700 - 480 = 220
c. Unadjusted prepaid insurance - insurance expense = 2,500
Unadjusted prepaid insurance = $4,300 + $2,500 = $6,800
d. No adjustments to office equipment.
e. Unadjusted accumulated depreciation + depreciation expense = $10,260;
Unadjusted accumulated depreciation = $10,260 - $2,160 = $8,100
f. No adjustment to capital
g. Increase in accounts receivable = 2,500
Unadjusted revenue + $2,500 = $542,500; Unadjusted revenue = $542,500 - $2,500 =
$540,000
h. Unadjusted salary expense + salary payable accrued = Adjusted salary expense
$462,000 + $2,700 = $464,700
1-447
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-P7
Fill in the Blank Questions
[Question]
250. Companies experiencing seasonal variations in sales often choose a fiscal year
corresponding to their ________________________ year.
Answer: Natural business
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-C1
[Question]
251. ______________________ are required at the end of the accounting period because
certain internal transactions and events remain unrecorded.
Answer: Adjusting entries
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-C2
1-448
Chapter 01 - Introducing Accounting in Business
[Question]
252. Accrual accounting and the adjusting process rely on two principles: the
___________________ principle and the ________________________ principle.
Answer: Revenue recognition; matching
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-C2
[Question]
253. ______________________ basis accounting means that revenues are recognized when
cash is received and that expenses are recorded when cash is paid. ______________________
basis accounting means that the financial effects of revenues and expenses are recorded when
earned or incurred.
Answer: Cash; Accrual
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-C2
[Question]
254. The ______________ refers to the steps in preparing financial statements for users.
Answer: Accounting cycle
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 03-C4
1-449
Chapter 01 - Introducing Accounting in Business
[Question]
255. Intangible assets are long-term resources used to produce or sell products and services;
they generally lack ______________ and their benefits are highly ____________.
Answer: Physical form; uncertain
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-C4
[Question]
256. The current portion of long-term debt is classified with the
_________________________.
Answer: Current Liabilities
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-C4
[Question]
257. If a prepaid expense account were not adjusted for the amount used, on the balance sheet
assets would be _______________ and equity would be __________.
Answer: Overstated, overstated
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 03-A1
1-450
Chapter 01 - Introducing Accounting in Business
[Question]
258. Profit margin = ___________________ divided by net sales.
Answer: Net income
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 03-A2
[Question]
259. A current ratio of 2:1 suggests that a company has ____________ current assets to cover
current liabilities.
Answer: Sufficient
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-A3
[Question]
260. The ________________________________ depreciation method allocates equal
amounts of an asset's cost to depreciation during its useful life.
Answer: Straight-line
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 03-P1
1-451
Chapter 01 - Introducing Accounting in Business
[Question]
261. __________________________ is the process of allocating the cost of plant assets to
their expected useful lives.
Answer: Depreciation
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 03-P1
[Question]
262. A _____________ account is an account linked with another account, having an opposite
normal balance and reported as a subtraction from that other account's balance.
Answer: Contra
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 03-P1
[Question]
263. __________________ expenses are those costs that are incurred in a period but are both
unpaid and unrecorded.
Answer: Accrued
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 03-P1
1-452
Chapter 01 - Introducing Accounting in Business
[Question]
264. A(n) _______________________ is a listing of all of the accounts in the ledger with
their account balances before adjustments are made.
Answer: Unadjusted trial balance.
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P2
[Question]
265. The _____________________ form of balance sheet lists the asset accounts on the left
side and the liabilities and equity accounts on the right side. The ______________________
form of balance sheet lists items vertically with assets followed by liabilities then equity
accounts.
Answer: Account; report
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P3
[Question]
266. A company's post-closing trial balance has a debit total of $475,000 and a credit total of
$457,000. This indicates that __________________________.
Answer: An error was made in the closing process.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 03-P5
1-453
Chapter 01 - Introducing Accounting in Business
[Question]
267. A ____________________ is useful in preparing interim statements and in showing the
effects of proposed transactions.
Answer: Worksheet
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 03-P7
1-454
Chapter 01 - Introducing Accounting in Business
Chapter 04
Reporting and Analyzing Merchandising Operations
True / False Questions
[Question]
1. Merchandise inventory consists of products that a company acquires to resell to customers.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C1
[Question]
2. A service company earns net income by buying and selling merchandise.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C1
1-455
Chapter 01 - Introducing Accounting in Business
[Question]
3. Gross profit is the same as gross margin.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C1
[Question]
4. Cost of goods sold is also called cost of sales.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C1
[Question]
5. A wholesaler is an intermediary that buys products from manufacturers or other
wholesalers and sells them to consumers.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C1
1-456
Chapter 01 - Introducing Accounting in Business
[Question]
6. A retailer is an intermediary that buys products from manufacturers and sells them to
wholesalers.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C1
[Question]
7. Cost of goods sold represents the cost of buying and preparing merchandise for sale.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C1
[Question]
8. A company had sales of $350,000 and cost of goods sold of $200,000, which means gross
profit is equal to $550,000.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C1
1-457
Chapter 01 - Introducing Accounting in Business
[Question]
9. A company had net sales of $545,000 and cost of goods sold of $345,000, which means its
gross margin is equal to $200,000.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C1
[Question]
10. A company had a gross profit of $300,000 based on sales of $400,000, which means its
cost of goods sold is equal to $700,000.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C1
[Question]
11. A merchandising company's operating cycle begins with the sale of merchandise and ends
with the collection of cash from the sale.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C2
1-458
Chapter 01 - Introducing Accounting in Business
[Question]
12. Merchandise inventory is reported in the long-term assets section of the balance sheet.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C2
[Question]
13. Cash sales shorten the operating cycle for a merchandiser; credit purchases lengthen
operating cycles.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C2
[Question]
14. Assets tied up in inventory are referred to as non productive assets.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-C2
1-459
Chapter 01 - Introducing Accounting in Business
[Question]
15. A perpetual inventory system requires updating of the inventory account only at the
beginning of an accounting period.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C2
[Question]
16. A perpetual inventory system continually updates accounting records for inventory
transactions.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C2
[Question]
17. Beginning merchandise inventory plus the net cost of purchases is equal to the
merchandise available for sale.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C4
1-460
Chapter 01 - Introducing Accounting in Business
[Question]
18. The acid-test ratio is also called the quick ratio.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-A1
[Question]
19. Quick assets include cash, inventory and current receivables.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-A1
[Question]
20. The acid-test ratio is defined as current assets divided by current liabilities.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A1
1-461
Chapter 01 - Introducing Accounting in Business
[Question]
21. A common rule of thumb is that a company's acid-test ratio should be at least 2 or a
company may face financial problems in the near future.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A1
[Question]
22. Successful use of a just-in-time inventory system can narrow the gap between the acid-test
and the current ratio.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A1
[Question]
23. A company's quick assets are $147,000 and its current liabilities are $143,000. This
company's acid-test ratio is 1.03.
Answer: TRUE
Feedback: $147,000/$143,000 = 1.03
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-A1
1-462
Chapter 01 - Introducing Accounting in Business
[Question]
24. A company's current ratio is 1.2 and its quick ratio is 0.25. This company is probably an
excellent credit risk because the ratios reveal no indication of liquidity problems.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-A1
[Question]
25. The gross margin ratio is defined as gross margin divided by net sales.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-A2
[Question]
26. The profit margin ratio is gross margin divided by total assets.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-A2
1-463
Chapter 01 - Introducing Accounting in Business
[Question]
27. The gross margin ratio reflects the relation between sales and cost of goods sold.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A2
[Question]
28. A company had net sales of $340,500, its cost of goods sold was $257,000 and its net
income was $13,750. The company's gross margin ratio equals 24.5%.
Answer: TRUE
Feedback: ($340,500 - $257,000)/$340,500 = 24.5%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-A2
[Question]
29. J.C. Penney had net sales of $24,750 million, cost of goods sold of $16,150 million and
net income of $837 million. Its gross margin ratio equals 3.4%.
Answer: FALSE
Feedback: ($24,750 - $16,150)/$24,750 = 34.7%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-A2
1-464
Chapter 01 - Introducing Accounting in Business
[Question]
30. The Merchandise Inventory account balance at the end of one period is equal to the
amount of beginning merchandise inventory for the next period.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P1
[Question]
31. Cost of goods sold is reported on both the income statement and the balance sheet.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P1
[Question]
32. Trade discounts are recorded in a Trade Discounts account in the accounting system.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P1
1-465
Chapter 01 - Introducing Accounting in Business
[Question]
33. Credit terms include the specifics regarding the amount owed and timing of payments
from a buyer to a seller.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P1
[Question]
34. Purchase returns refer to merchandise a buyer acquires but then returns to the seller.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P1
[Question]
35. Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P1
1-466
Chapter 01 - Introducing Accounting in Business
[Question]
36. Under the perpetual inventory system, the cost of merchandise purchased is recorded in
the Purchases account.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
[Question]
37. Under the perpetual inventory system, the cost of merchandise purchased is accumulated
in the Merchandise Inventory account.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
[Question]
38. With credit terms of 2/10, n/30 the seller is offering the purchaser a 2% cash discount if
the amount is paid within 10 days of the invoice date. Otherwise, the full amount is due in 30
days.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
1-467
Chapter 01 - Introducing Accounting in Business
[Question]
39. Sellers always offer a discount to buyers for prompt payment toward purchases made on
credit.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
[Question]
40. In a perpetual inventory system, the merchandise inventory account reflects the cost of
goods available for sale.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
[Question]
41. Purchase discounts are the same as trade discounts.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
1-468
Chapter 01 - Introducing Accounting in Business
[Question]
42. If a company sells merchandise with credit terms 2/10 n/60, the credit period is 10 days
and the discount period is 60 days.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
[Question]
43. The seller is responsible for paying shipping charges and bears the risk of damage or loss
in transit if goods are shipped FOB destination.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
[Question]
44. If goods are shipped FOB shipping point, the seller does not record revenue from the sale
until the goods arrive at their destination because the transaction is not complete until that
point.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
1-469
Chapter 01 - Introducing Accounting in Business
[Question]
45. A buyer did not take advantage of a supplier's credit terms of 2/10, n/30, but instead paid
the invoice in full at the end of 30 days. By not taking the discount the buyer lost the
equivalent of 18% annual interest on the amount of the purchase.
Answer: FALSE
Feedback: (365/(30-10)) x .02 = 36.5%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P1
[Question]
46. Each sales transaction of a seller that uses a perpetual system involves recognizing both
revenue and cost of merchandise sold.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P2
1-470
Chapter 01 - Introducing Accounting in Business
[Question]
47. Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving
cash and reducing future collections efforts.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P2
[Question]
48. When a credit customer returns merchandise a seller that uses the perpetual system would
debit Sales Returns and Allowances and credit Accounts Receivable and also debit
Merchandise Inventory and credit Cost of Goods Sold.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P2
1-471
Chapter 01 - Introducing Accounting in Business
[Question]
49. A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20 and a credit
to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for
early payment.
Answer: FALSE
Feedback: $20/$1,000 = 2% discount
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P2
[Question]
50. A perpetual inventory system is able to directly measure and monitor inventory
shrinkage.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P3
1-472
Chapter 01 - Introducing Accounting in Business
[Question]
51. Sales Discounts, Sales Returns and Allowances and Cost of Goods Sold are all closed to
the Income Summary account with debits.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P3
[Question]
52. In a perpetual inventory system, the merchandise inventory account must be closed at the
end of the accounting period.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P3
[Question]
53. The adjusting entry to reflect inventory shrinkage is a debit to Income Summary and a
credit to Inventory Shrinkage Expense.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P3
1-473
Chapter 01 - Introducing Accounting in Business
[Question]
54. A multiple-step income statement format shows detailed computations of net sales and
other costs and expenses and reports subtotals for various classes of items.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P4
[Question]
55. Operating expenses are classified into two categories: selling expenses and cost of goods
sold.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P4
[Question]
56. Accounting and reporting for merchandise purchases and sales are treated identically
under both GAAP and IFRS.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P4
1-474
Chapter 01 - Introducing Accounting in Business
[Question]
57. Generally accepted accounting principles require companies to use a specific format for
the financial statements.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P4
[Question]
58. A single-step income statement includes cost of goods sold as another expense and shows
only one subtotal for total expenses.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P4
[Question]
59. The periodic inventory system uses a temporary account called Purchases.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P5
1-475
Chapter 01 - Introducing Accounting in Business
[Question]
60. The periodic inventory system requires updating the inventory account only at the end of
the period to reflect the quantity and cost of both the goods available and the goods sold.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P5
[Question]
61. In a periodic inventory system, cost of goods sold is recorded as each sale occurs.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P5
[Question]
62. When preparing the unadjusted trial balance in a periodic inventory system, the amount
that appears as Merchandise Inventory is the ending inventory amount.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P5
1-476
Chapter 01 - Introducing Accounting in Business
Multiple Choice Questions
[Question]
63. A merchandising company:
A. Earns net income by buying and selling merchandise
B. Receives fees only in exchange for services
C. Earns profit from commissions only
D. Earns profit from fares only
E. Buys products from consumers
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C1
[Question]
64. Cost of goods sold:
A. Is another term for merchandise sales
B. Is the term used for the cost of buying and preparing merchandise for sale
C. Is another term for revenue
D. Is also called gross margin
E. Is a term only used by service firms
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C1
1-477
Chapter 01 - Introducing Accounting in Business
[Question]
65. A company had sales of $695,000 and its cost of goods sold of $278,000. Its gross margin
equals:
A. $(417,000)
B. $695,000
C. $278,000
D. $417,000
E. $973,000
Answer: D
Feedback: $695,000 - $278,000 = $417,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C1
[Question]
66. A company had sales of $375,000 and its gross profit was $157,500. Its cost of goods sold
equal:
A. $(217,000)
B. $375,000
C. $157,500
D. $217,500
E. $532,500
Answer: D
Feedback: $375,000 - $157,500 = $217,500
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C1
1-478
Chapter 01 - Introducing Accounting in Business
[Question]
67. A company had expenses other than cost of goods sold of $250,000. Determine sales and
gross profit given cost of goods sold was $100,000 and net income was $150,000.
A. Sales: $350,000; Gross Profit: $150,000
B. Sales: $350,000; Gross Profit: $50,000
C. Sales: $500,000; Gross Profit: $400,000
D. Sales: $500,000; Gross Profit: $50,000
E. Sales: $400,000; Gross Profit: $500,000
Answer: C
Feedback: 150,000 net income + 250,000 other expenses = 400,000 gross profit
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-C1
[Question]
68. A company had expenses other than cost of goods sold of $51,000. Determine sales and
gross profit given cost of goods sold was $25,000 and net income was $60,000.
A. Sales: $136,000; Gross Profit: $111,000
B. Sales: $136,000; Gross Profit: $85,000
C. Sales: $85,000; Gross Profit: $136,000
D. Sales: $111,000; Gross Profit: $136,000
E. Sales: $60,000; Gross Profit: $25,000
Answer: A
Feedback: 60,000 net income + 51,000 other expenses = 111,000 gross profit
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-C1
1-479
Chapter 01 - Introducing Accounting in Business
[Question]
69. A company had expenses other than cost of goods sold of $175,000. Determine sales and
gross profit given cost of goods sold was $622,000 and net loss was ($41,000).
A. Sales: $838,000: Gross Profit: $216,000
B. Sales: $756,000: Gross Profit: $134,000
C. Sales: $797,000: Gross Profit: $756,000
D. Sales: $756,000: Gross Profit: $797,000
E. Sales: $134,000: Gross Profit: $216,000
Answer: B
Feedback: 175,000 other expenses - 41,000 net loss = 134,000 gross profit
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-C1
[Question]
70. Merchandise inventory:
A. Is a long-term asset
B. Is a current asset
C. Includes supplies
D. Is classified with investments on the balance sheet
E. Must be sold within one month
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C2
1-480
Chapter 01 - Introducing Accounting in Business
[Question]
71. The operating cycle for a merchandiser that sells only for cash moves from:
A. Purchases of merchandise to inventory to cash sales
B. Purchases of merchandise to inventory to accounts receivable to cash sales
C. Inventory to purchases of merchandise to cash sales
D. Accounts receivable to purchases of merchandise to inventory to cash sales
E. Accounts receivable to inventory to cash sales
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-C2
[Question]
72. The current period's ending inventory is:
A. The next period's beginning inventory
B. The current period's cost of goods sold
C. The prior period's beginning inventory
D. The current period's net purchases
E. The current period's beginning inventory
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P3
1-481
Chapter 01 - Introducing Accounting in Business
[Question]
73. Beginning inventory plus net cost of purchases is:
A. Cost of goods sold
B. Merchandise available for sale
C. Ending inventory
D. Sales
E. Shown on the balance sheet
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P3
[Question]
74. A company's cost of goods sold was $4,000. Determine net purchases and ending
inventory given goods available for sale were $11,000 and beginning inventory was $5,000.
A. Net Purchases: $15,000; Ending Inventory: $7,000
B. Net Purchases: $10,000; Ending Inventory: $15,000
C. Net Purchases: $9,000; Ending Inventory: $6,000
D. Net Purchases: $6,000; Ending Inventory: $7,000
E. Net Purchases: $16,000; Ending Inventory: $20,000
Answer: D
Feedback: 11,000 - 5,000 = 6,000 net purchases
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P3
1-482
Chapter 01 - Introducing Accounting in Business
[Question]
75. The acid-test ratio:
A. Is also called the quick ratio
B. Measures profitability
C. Measures inventory turnover
D. Is generally greater than the current ratio
E. Is not used by merchandise companies
Answer: A
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-A1
[Question]
76. The quick assets are defined as:
A. Cash, short-term investments and inventory
B. Cash, short-term investments and current receivables
C. Cash, inventory and current receivables
D. Cash, noncurrent receivables and prepaid expenses
E. Accounts receivable, inventory and prepaid expenses
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-A1
1-483
Chapter 01 - Introducing Accounting in Business
[Question]
77. ABC Corporation had total quick assets $5,888,000, current assets $11,700,000 and
current liabilities $8,000,000. Its acid-test ratio equals:
A. 0.50
B. 0.68
C. 0.74
D. 1.50
E. 2.20
Answer: C
Feedback: $5,888,000/$8,000,000 = 0.74
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A1
[Question]
78. A company's current assets were $17,980, its quick assets were $11,420 and its current
liabilities were $12,190. Its quick ratio equals:
A. 0.94
B. 1.07
C. 1.48
D. 1.57
E. 2.40
Answer: A
Feedback: $11,420/$12,190 = 0.94
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A1
1-484
Chapter 01 - Introducing Accounting in Business
[Question]
79. Liquidity problems are likely to exist when a company's acid-test ratio:
A. Is less than the current ratio
B. Is 1 to 1
C. Is higher than 1 to 1
D. Is substantially lower than 1 to 1
E. Is higher than the current ratio
Answer: D
Bloom’s Taxonomy: Evaluate
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-A1
[Question]
80. The acid-test ratio differs from the current ratio in that:
A. Liabilities are divided by current assets
B. Prepaid expenses and inventory are excluded from the calculation of the acid-test ratio
C. The acid-test ratio measures profitability and the current ratio does not
D. The acid-test ratio excludes short-term investments from the calculation
E. The acid-test ratio is a measure of liquidity but the current ratio is not
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-A1
1-485
Chapter 01 - Introducing Accounting in Business
[Question]
81. The gross margin ratio:
A. Is also called the net profit ratio
B. Measures a merchandising firm's ability to earn a profit from the sale of inventory
C. Is also called the profit margin
D. Is a measure of liquidity
E. Should be greater than 1
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-A2
[Question]
82. A company's gross profit was $83,750 and its net sales were $347,800. Its gross margin
ratio equals:
A. 4.2%
B. 24.1%
C. 75.9%
D. $83,750
E. $264,050
Answer: B
Feedback: $83,750/$347,800 = 24.1%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-A2
1-486
Chapter 01 - Introducing Accounting in Business
[Question]
83. A company's net sales were $676,600, its cost of good sold was $236,810 and its net
income was $33,750. Its gross margin ratio equals:
A. 5%
B. 9.6%
C. 35%
D. 65%
E. 285.7%
Answer: D
Feedback: ($676,600 - $236,810)/$676,600 = 65%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-A2
[Question]
84. J.C. Penny had net sales of $28,496 million, its cost of goods sold was $19,092 million
and its net income was $997 million. Its gross margin ratio equals:
A. 3.5%
B. 5.2%
C. 33%
D. 67%
E. 149.3%
Answer: C
Feedback: ($28,496 - $19,092)/$28,496 = 33%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-A2
1-487
Chapter 01 - Introducing Accounting in Business
[Question]
85. A company had: net sales of $82,000; cost of goods sold of $70,000; and other expenses
of $2,000. Its gross margin ratio equals:
A. 85.37%
B. 2.44%
C. 14.63%
D. 16.67%
E. 683.33%
Answer: C
Feedback: ($82,000 - $70,000)/$82,000 = 14.63%
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-A2
[Question]
86. The credit terms 2/10, n/30 are interpreted as:
A. 2% cash discount if the amount is paid within 10 days, with the balance due in 30 days
B. 10% cash discount if the amount is paid within 2 days, with balance due in 30 days
C. 30% discount if paid within 2 days
D. 30% discount if paid within 10 days
E. 2% discount if paid within 30 days
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P1
1-488
Chapter 01 - Introducing Accounting in Business
[Question]
87. A trade discount is:
A. A term used by a purchaser to describe a cash discount given to customers for prompt
payment
B. A reduction in price below the list price
C. A term used by a seller to describe a cash discount granted to customers for prompt
payment
D. A reduction in price for prompt payment
E. Also called a rebate
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P1
[Question]
88. A company uses the perpetual inventory system and recorded the following entry:
Accounts Payable
Merchandise Inventory
Cash
2,500
50
2,450
This entry reflects a:
A. Purchase
B. Return
C. Sale
D. Payment of the account payable and recognition of a cash discount taken
E. Purchase and recognition of a cash discount taken
Answer: D
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
1-489
Chapter 01 - Introducing Accounting in Business
[Question]
89. A debit memorandum is:
A. Required whenever a journal entry is recorded
B. The source document for the purchase of merchandise inventory
C. Required when a purchase discount is granted
D. The document a buyer issues to inform the seller of a debit made to the seller's account in
the buyer's records
E. Not necessary in a perpetual inventory system
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
[Question]
90. A company purchased $1,800 of merchandise on December 5. On December 7, it returned
$200 worth of merchandise. On December 8, it paid the balance in full, taking a 2% discount.
The amount of the cash paid on December 8 equals:
A. $200
B. $1,564
C. $1,568
D. $1,600
E. $1,800
Answer: C
Feedback: ($1,800 - $200) x .98 = $1,568
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P1
1-490
Chapter 01 - Introducing Accounting in Business
[Question]
91. A company purchased $7,500 worth of merchandise. Transportation costs were an
additional $80. The company later returned $900 worth of merchandise and paid the invoice
within the 3% cash discount period. The total amount paid for this merchandise is:
A. $6,479.60
B. $6,482.00
C. $7,275.00
D. $7,355.00
E. $6,680.00
Answer: B
Feedback: [($7,500 - $900) x .97] + $80 = $6,482
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P1
[Question]
92. A company purchased $4,000 worth of merchandise. Transportation costs were an
additional $350. The company later returned $275 worth of merchandise and paid the invoice
within the 2% cash discount period. The total amount paid for this merchandise is:
A. $3,725.00
B. $3,925.00
C. $3,995.00
D. $4,000.50
E. $4,075.00
Answer: D
Feedback: [($4,000 - $275) x .98] + $350 = $4,000.50
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P1
1-491
Chapter 01 - Introducing Accounting in Business
[Question]
93. A company purchased $1,500 of merchandise on credit with terms 3/15, n/30. How much
will be debited to Accounts Payable if the company pays $485 cash on this account within ten
days?
A. $485
B. $500
C. Nothing will debited to Accounts Payable, the account should be credited in this situation
D. $470.45
E. $1,455
Answer: B
Feedback: 485/.97 = 500
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P1
[Question]
94. A company purchased $6,000 of merchandise on credit with terms 4/15, n/30. How much
will be debited to Accounts Payable if the company pays $800 cash on this account within ten
days?
A. $833.33
B. $800
C. Nothing will debited to Accounts Payable, the account should be credited in this situation
D. $5,760
E. $5,333.33
Answer: A
Feedback: 800/.96 = 833.33
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P1
1-492
Chapter 01 - Introducing Accounting in Business
[Question]
95. Sales returns:
A. Refer to merchandise that customers return to the seller after the sale
B. Refer to reductions in the selling price of merchandise sold to customers
C. Represent cash discounts
D. Represent trade discounts
E. Are not recorded under the perpetual inventory system until the end of each accounting
period
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P2
[Question]
96. A debit to Sales Returns and Allowances and a credit to Accounts Receivable:
A. Reflects an increase in amount due from a customer
B. Recognizes that a customer returned merchandise and/or received an allowance
C. Requires a debit memorandum to recognize the customer's return
D. Is recorded when a customer takes a discount
E. Reflects an increase in net sales
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P2
1-493
Chapter 01 - Introducing Accounting in Business
[Question]
97. Sales less sales discounts less sales returns and allowances equals:
A. Net purchases
B. Cost of goods sold
C. Net sales
D. Gross profit
E. Net income
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P2
[Question]
98. Herald Company had sales of $135,000, sales discounts of $2,000 and sales returns of
$3,200. Herald Company's net sales equals:
A. $5,200
B. $129,800
C. $133,000
D. $135,000
E. $140,200
Answer: B
Feedback: 135,000 - 2,000 - 3,200 = 129,800.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P2
1-494
Chapter 01 - Introducing Accounting in Business
[Question]
99. On October 1, Robertson Company sold merchandise in the amount of $5,800 to Alberts,
with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses the
perpetual inventory system. The journal entry or entries that Robertson will make on October
1 is:
A.
Sales
5,800
Accounts receivable
5,800
B.
Sales
Accounts receivable
Cost of goods sold
Merchandise Inventory
C.
Accounts receivable
Sales
D.
Accounts receivable
Sales
Cost of goods sold
Merchandise inventory
E.
Accounts receivable
Sales
5,800
5,800
4,000
4,000
5,800
5,800
5,800
5,800
4,000
4,000
4,000
4,000
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P2
1-495
Chapter 01 - Introducing Accounting in Business
[Question]
100. On October 1, Robertson Company sold merchandise in the amount of $5,800 to Alberts,
with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses the
perpetual inventory system. Alberts pays the invoice on October 8 and takes the appropriate
discount. The journal entry that Robertson makes on October 8 is:
A.
Cash
Accounts receivable
5,800
B.
Cash
Accounts receivable
4,000
C.
Cash
Sales discounts
Accounts receivable
3,920
80
D.
Cash
Accounts receivable
5,684
E.
Cash
Sales discounts
Accounts receivable
5,684
116
5,800
4,000
4,000
5,684
5,800
Answer: E
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P2
1-496
Chapter 01 - Introducing Accounting in Business
[Question]
101. On October 1, Robertson Company sold merchandise in the amount of $5,800 to Alberts,
with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses the
perpetual inventory system. On October 4, Alberts returns some of the merchandise. The
selling price of the merchandise is $500 and the cost of the merchandise returned is $350. The
entry or entries that Robertson must make on October 4 is:
A.
Sales returns and allowances
Accounts receivable
Merchandise inventory
Cost of goods sold
500
500
350
350
B.
Sales returns and allowances
Accounts receivable
500
C.
Accounts receivable
Sales returns and allowances
500
D.
Accounts receivable
Sales returns and allowances
Cost of goods sold
Merchandise inventory
E.
Sales returns and allowances
Accounts receivable
500
500
500
500
350
350
350
350
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P2
1-497
Chapter 01 - Introducing Accounting in Business
[Question]
102. Which of the following accounts would be closed out with a debit?
A. Sales Discounts
B. Sales Returns and Allowances
C. Cost of Goods Sold
D. Operating Expenses
E. Sales
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P3
[Question]
103. Which of the following statements are true regarding the closing process of a
merchandiser?
A. Sales Discounts, Sales Returns and Allowances and Cost of Goods sold should all be
credited during closing
B. Sales Discounts, Sales Returns and Allowances and Cost of Goods sold should all be
debited during closing
C. Sales Discounts and Sales Returns and Allowances should be debited; Cost of Goods Sold
should be credited during closing
D. Sales Discounts and Sales Returns and Allowances should be credited; Cost of Goods Sold
should be debited during closing
E. Sales Discounts and Sales Returns and Allowances are not closed. Cost of Goods Sold
should be credited
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P3
1-498
Chapter 01 - Introducing Accounting in Business
[Question]
104. An income statement that includes cost of goods sold as another expense and shows only
one subtotal for total expenses is a:
A. Balanced income statement
B. Single-step income statement
C. Multiple-step income statement
D. Combined income statement
E. Simplified income statement
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P4
[Question]
105. Expenses that support the overall operations of a business and include the expenses
relating to accounting, human resource management and financial management are called:
A. Cost of goods sold
B. Selling expenses
C. Purchasing expenses
D. General and administrative expenses
E. Non-operating activities
Answer: D
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P4
1-499
Chapter 01 - Introducing Accounting in Business
[Question]
106. Alpha Company had cash sales of $94,275, credit sales of $83,450, sales returns and
allowances of $1,700 and sales discounts of $3,475. Alpha's net sales for this period equal:
A. $94,275
B. $172,550
C. $174,250
D. $176,025
E. $177,725
Answer: B
Feedback: $94,275 + $83,450 - $1,700 - $3,475 = $172,550
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P4
[Question]
107. A company had cash sales of $49,527, credit sales of $38,540, sales returns and
allowances of $7,100 and sales discounts of $4,375. The company's net sales for this period
equal:
A. $80,967
B. $83,692
C. $88,067
D. $76,592
E. $99,542
Answer: D
Feedback: $49,527 + $38,540 - $7,100 - $4,375 = $76,592
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P4
1-500
Chapter 01 - Introducing Accounting in Business
[Question]
108. Multiple-step income statements:
A. Are required by the FASB
B. Contain more detail than a simple listing of revenues and expenses
C. Are required for the perpetual inventory system
D. List cost of goods sold as an operating expense
E. Can only be used in perpetual inventory systems
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P4
[Question]
109. An account used in the periodic inventory system that is not used in the perpetual
inventory system is
A. Merchandise Inventory
B. Sales
C. Sales Returns and Allowances
D. Accounts Payable
E. Purchases
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P5
1-501
Chapter 01 - Introducing Accounting in Business
[Question]
110. When preparing an unadjusted trial balance using a periodic inventory system, the
amount shown for Merchandise Inventory is:
A. The ending inventory amount
B. The beginning inventory amount
C. Equal to the cost of goods sold
D. Equal to the cost of goods purchased
E. Equal to the gross profit
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P5
1-502
Chapter 01 - Introducing Accounting in Business
[Question]
111. On October 1, Robertson Company sold merchandise in the amount of $5,800 to Alberts,
with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses the
periodic inventory system. The journal entry or entries that Robertson will make on October 1
is:
A.
Sales
Accounts receivable
B.
Sales
Accounts receivable
Cost of goods sold
Merchandise Inventory
C.
Accounts receivable
Sales
D.
Accounts receivable
Sales
Cost of goods sold
Merchandise inventory
E.
Accounts receivable
Sales
5,800
5,800
5,800
5,800
4,000
4,000
5,800
5,800
5,800
5,800
4,000
4,000
4,000
4,000
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P5
1-503
Chapter 01 - Introducing Accounting in Business
[Question]
112. On October 1, Robertson Company sold merchandise in the amount of $5,800 to Alberts,
with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses the
periodic inventory system. Alberts pays the invoice on October 8 and takes the appropriate
discount. The journal entry that Robertson makes on October 8 is:
A.
Cash
Accounts receivable
5,800
B.
Cash
Accounts receivable
4,000
C.
Cash
Sales discounts
Accounts receivable
3,920
80
D.
Cash
Accounts receivable
5,684
E.
Cash
Sales discounts
Accounts receivable
5,684
116
5,800
4,000
4,000
5,684
5,800
Answer: E
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P5
1-504
Chapter 01 - Introducing Accounting in Business
[Question]
113. On October 1, Robertson Company sold merchandise in the amount of $5,800 to Alberts,
with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses the
periodic inventory system. On October 4, Alberts returns some of the merchandise. The
selling price of the merchandise is $500 and the cost of the merchandise returned is $350. The
entry or entries that Robertson must make on October 4 is:
A.
Sales returns and allowances
Accounts receivable
Merchandise inventory
Cost of goods sold
500
500
350
350
B.
Sales returns and allowances
Accounts receivable
500
C.
Accounts receivable
Sales returns and allowances
500
500
500
D.
Accounts receivable
Sales returns and allowances
Cost of goods sold
Merchandise inventory
500
500
350
350
E.
Sales returns and allowances
Accounts receivable
350
350
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P5
1-505
Chapter 01 - Introducing Accounting in Business
[Question]
114. A company purchased merchandise inventory at a cost of $4,300 with credit terms 3/15,
net 45. If the company elects to pay within the discount period, what would be the
appropriate journal entry?
A.
Merchandise Inventory
4,300
Accounts Payable
4,300
B.
Accounts Payable
4,300
Merchandise Inventory
4,300
C.
Purchase Discount
4,171
Accounts Payable
4,171
D.
Accounts Payable
4,171
Cash
4,171
E.
Accounts Payable
Merchandise Inventory
Cash
4,300
129
4,171
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
1-506
Chapter 01 - Introducing Accounting in Business
[Question]
115. On July 22, a company purchased merchandise inventory at a cost of $5,250 with credit
terms 2/10, net 30. If the company pays for the purchase on August 1, what would be the
appropriate journal entry?
A.
Merchandise Inventory
Accounts Payable
B.
Accounts Payable
Merchandise Inventory
C.
Purchase Discount
Accounts Payable
D.
Accounts Payable
Cash
E.
Accounts Payable
Merchandise Inventory
Cash
5,250
5,250
5,250
5,250
5,145
5,145
5,145
5,145
5,250
105
5,145
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
1-507
Chapter 01 - Introducing Accounting in Business
[Question]
116. On July 22, a company purchased merchandise inventory at a cost of $5,250 with credit
terms 2/10, net 30. If the company pays for the purchase on August 7, what would be the
appropriate journal entry?
A.
Merchandise Inventory
Accounts Payable
B.
Accounts Payable
Merchandise Inventory
C.
Accounts Payable
Cash
D.
Accounts Payable
Cash
E.
Accounts Payable
Merchandise Inventory
Cash
5,250
5,250
5,250
5,250
5,250
5,250
5,145
5,145
5,250
105
5,145
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
1-508
Chapter 01 - Introducing Accounting in Business
[Question]
117. On July 22, a company purchased merchandise inventory at a cost of $5,250 with credit
terms 2/10, net 60. If the company borrows money at 12% to pay for the purchase on the last
day of the discount period and pays the loan off on the last day of the credit period, what
would be the net savings for the company?
A. $99.50
B. $-20.43
C. $84.57
D. $20.43
E. $-84.57
Answer: D
Feedback: amounts borrowed: (5,250*.98) = 5,145*.12*50/365 = 84.57, Discount received:
105, Net Savings: 20.43
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P1
1-509
Chapter 01 - Introducing Accounting in Business
[Question]
118. A company purchased merchandise inventory at a cost of $8,500 with credit terms 2/10,
net 60. If the company borrows $8,330 to pay for the purchase on the last day of the discount
period and pays the loan plus interest in the amount of $8,466.93 on the last day of the credit
period, what is the net savings?
A. $170.00
B. $-33.07
C. $136.93
D. $33.07
E. There is no savings to the company
Answer: D
Feedback: amounts borrowed: (8,500*.98) = 8,330*.12*50/365 = 136.93, Discount received:
170, Net Savings: 33.07
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P1
1-510
Chapter 01 - Introducing Accounting in Business
[Question]
119. A company purchased merchandise inventory at a cost of $8,500 with credit terms 2/10,
net 60. If the company borrows $8,330 to pay for the purchase on the last day of the discount
period and pays the loan plus interest in the amount of $8,466.93 on the last day of the credit
period, what is interest rate for borrowing money from the bank?
A. 12%
B. 13.5%
C. 11.5%
D. 16%
E. Can’t be determined from the information given
Answer: A
Feedback: 136.93/(8,330*50/365)=11.99982, 12%
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P1
[Question]
120. A company has sales of $1,500,000, sales discounts of $102,000, sales returns and
allowances of $123,000, shipping charges of $15,000, sales commissions of $34,000,net
income totaled $263,500, and cost of goods sold of $420,000. What is the net sales amount
for the period?
A. $1,500,000
B. $1,275,000
C. $1,725,000
D. $1,521,000
E. $1,479,000
Answer: B
Feedback: 1,500,000-102,000-123,000 = 1,275,000
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A2
1-511
Chapter 01 - Introducing Accounting in Business
[Question]
121. A company has sales of $1,500,000, sales discounts of $102,000, sales returns and
allowances of $123,000, shipping charges of $15,000, sales commissions of $34,000,net
income totaled $263,500, and cost of goods sold of $420,000. What is the gross
profit/margin for the period?
A. $ 806,000
B. $1,031,000
C. $1,182,000
D. $1,080,000
E. $ 855,000
Answer: E
Feedback: 1,500,000-102,000-123,000 = 1,275,000 – 420,000 = 855,000
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A2
[Question]
122. A company has sales of $1,500,000, sales discounts of $102,000, sales returns and
allowances of $123,000, shipping charges of $15,000, sales commissions of $34,000,net
income totaled $263,500, and cost of goods sold of $420,000. What is the gross
profit/margin ratio?
A. 72.0%
B. 53.7%
C. 67.1%
D. 81.7%
E. 17.6%
Answer: C
Feedback: 855,000/1,275,000 = 67.1%
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A2
1-512
Chapter 01 - Introducing Accounting in Business
[Question]
123. A company has net sales of $1,832,000, sales commissions in the amount of $194,000,
net income was $366,400, and the gross profit ratio is 60%, what is the amount of cost of
goods sold?
A. $ 538,800
B. $ 732,800
C. $ 655,200
D. $ 879,360
E. $1,099,200
Answer: B
Feedback: 1,832,000*(1-.60) = 732,800
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-A2
[Question]
124. A company has net sales of $1,500,000, sales commissions in the amount of $194,000,
net income was $366,400, and the gross profit ratio is 60%, what amount listed as gross profit
on the income statement for the period?
A. $ 563,760
B. $ 600,000
C. $ 783,600
D. $ 900,000
E. $1,119,840
Answer: D
Feedback: 1,500,000*.60 = 900,000
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A2
1-513
Chapter 01 - Introducing Accounting in Business
[Question]
125. A company has the following accounts. What is the acid test ratio?
Cash
Accounts receivable
Office supplies
Land
Office equipment
Accounts payable
$6,754
13,733
2,625
37,153
14,535
6,463
Dividends
Consulting fees earned
Rent expense
Salaries expense
Telephone expense
Miscellaneous expense
Common stock
54,490
Retained Earnings
$2,000
13,718
3,673
6,642
560
280
13,847
A. 3.58%
B. 3.17%
C. 1.80%
D. 4.00%
E. 2.68%
Answer: B
Feedback: (6,754+13733)/6463=3.17%
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A1
[Question]
126. A company has the following accounts. What is the acid test ratio?
Cash
Accounts receivable
Office supplies
Land
Office equipment
Accounts payable
Common stock
$10,000 Wages Payable
Consulting fees
20,500
earned
2,625 Rent expense
37,153 Salaries expense
14,535 Telephone expense
Miscellaneous
18,352
expense
54,490
1-514
$2,000
13,718
3,673
6,642
560
280
Chapter 01 - Introducing Accounting in Business
A. 4.50%
B. 2.30%
C. 1.75%
D. 4.00%
E. 1.50%
Answer: E
Feedback: (10,000+20,500)/(18,352+2000)=1.50%
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A1
[Question]
127. Total Company has current liabilities in the amount of $1,250,000 and an acid test ratio
of 3 and a current ratio of 7. What is the amount of quick assets that Total Company has on
the balance sheet?
A. $8,750,000
B. $ 416,667
C. $3,750,000
D. $1,250,000
E. $2,500,000
Answer: C
Feedback: 1,250,000*3 = 3,750,000
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A1
1-515
Chapter 01 - Introducing Accounting in Business
[Question]
128. Vital Company had net income on this period’s income statement in the amount of
$624,240, other expense in the amount of $381,480 and a gross profit ratio of 58%, what was
the amount of net sales on the income statement?
A. $1,836,000
B. $ 1,076,276
C. $1,734,000
D. Can’t be determined with the information given
E. $1,005,720
Answer: C
Feedback: 624,240+381,480 = 1,005,720/.58=1,734,000
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-A2
1-516
Chapter 01 - Introducing Accounting in Business
Matching Questions
[Question]
129. Match the following definitions and terms by placing number next to the term.
1. The abbreviation for free on board; refers to the
point when ownership of goods passes to the buyer
2. A ratio used to assess a company's ability to pay its
current liabilities; defined as quick assets divided by
current liabilities
3. Inventory losses that can occur as a result of theft or
deterioration
4. The catalog price of an item before any trade
discount is deducted
5. An income statement format that shows detailed
computations of net sales and other costs and expenses
and reports subtotals for various classes of items
6. An income statement format that shows only one
subtotal for total expenses
7. The abbreviation for end-of-month; used to describe
credit terms for some transactions
8. Products a company owns and intends to sell
9. The expenses of promoting sales by displaying and
advertising merchandise, making sales and delivering
goods to customers
10. Expenses that support overall operations and
includes expenses related to accounting, human
resource management and financial management
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A1
Learning Objective: 04-C2
Learning Objective: 04-P1
Learning Objective: 04-P3
Learning Objective: 04-P4
1-517
Acid-test ratio 2
Single-step income
statement 6
FOB 1
Merchandise
inventory 8
General and
administrative
expenses 10
EOM 7
Inventory
shrinkage 3
Multiple-step
income statement 5
List price 4
Selling expenses 9
Chapter 01 - Introducing Accounting in Business
[Question]
130. Match the following terms with the appropriate definition.
1. The description of the amounts and timing of
payments from a buyer to a seller
2. Net sales less cost of goods sold
3. The amount of time allowed before full payment is
due
4. An accounting method that continually updates
accounting records for merchandise transactions
5. A notification that the sender has debited the
recipient's account kept by the sender
6. A cash discount granted to customers for paying
within the discount period
7. The expenses of promoting sales, by displaying and
advertising merchandise, making sales and delivering
goods to customers
8. An accounting method that updates the accounting
records for merchandise transactions only at the end of a
period
9. The time period in which a cash discount is available
and a reduced payment can be made by the buyer
10. A notification that the sender has credited the
recipient's account kept by the sender
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C1
Learning Objective: 04-C2
Learning Objective: 04-P1
Learning Objective: 04-P2
1-518
Perpetual
inventory system 4
Periodic
inventory system 8
Discount period 9
Debit
memorandum 5
Selling expenses 7
Credit
memorandum 10
Sales discount 6
Gross profit 2
Credit terms 1
Credit period 3
Chapter 01 - Introducing Accounting in Business
Essay Questions
[Question]
131. Identify and explain the key components of income for a merchandising company.
Answer: The basic components of income begin with net sales. Cost of goods sold is
subtracted from net sales to get gross profit (also called gross margin). Operating expenses are
then subtracted from gross margin to determine net income.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C1
[Question]
132. Describe the difference between wholesalers and retailers.
Answer: A wholesaler is an intermediary that buys products from manufacturers and sells to
retailers or other wholesalers. A retailer is an intermediary that buys products from
manufacturers or wholesalers and sells them to consumers.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C1
1-519
Chapter 01 - Introducing Accounting in Business
[Question]
133. Describe the key attributes of inventory for a merchandising company.
Answer: Merchandise inventory is a current asset that represents products a company owns
and intends to sell. Its costs include all necessary expenses to buy the inventory and make it
ready for sale.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C2
[Question]
134. List the steps of the operating cycle for a merchandiser with credit sales.
Answer: The steps are: (1) cash purchases of merchandise; (2) inventory for sale; (3) credit
sales (4) accounts receivable; (5) cash collection.
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C2
1-520
Chapter 01 - Introducing Accounting in Business
[Question]
135. What is the difference between the periodic and perpetual inventory systems?
Answer: A periodic inventory system updates the inventory account only at the end of a
period. A perpetual inventory system continually updates accounting records for merchandise
transactions. The perpetual inventory system is increasing in popularity due to technological
advances and competitive pressures.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C2
[Question]
136. Explain the cost flows and operating activities of a merchandising company.
Answer: Beginning inventory plus the net cost of purchases is the merchandise available for
sale. As inventory is sold, its cost is recorded in cost of goods sold on the income statement.
What remains is the ending inventory on the balance sheet. A period's ending inventory
becomes the next period's beginning inventory.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P3
1-521
Chapter 01 - Introducing Accounting in Business
[Question]
137. What is the acid-test ratio? How does it measure a company's liquidity?
Answer: The acid-test ratio is calculated by dividing quick assets (cash, current receivables
and short-term investments) by current liabilities. The acid-test measures the ability of a firm
to pay its current liabilities. As a rule of thumb an acid test ratio less than 1 means that current
liabilities exceed quick assets and the company is likely to face near-term liquidity problems.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A1
[Question]
138. What is gross margin ratio? How is it used as an indicator of profitability?
Answer: The gross margin ratio is calculated by dividing gross margin (or net sales less cost
of goods sold) by net sales. The gross margin ratio measures a firm's profitability in selling its
inventory. The gross margin must be large enough to cover operating expenses and provide
sufficient net income to the owner(s).
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A2
1-522
Chapter 01 - Introducing Accounting in Business
[Question]
139. What does FOB stand for? Differentiate between FOB shipping point (or FOB factory)
and FOB destination?
Answer: FOB stands for free on board. If goods are shipped FOB shipping point, ownership
transfers to the buyer when the goods depart the seller's place of business and the seller
records revenue at that time. The buyer is then responsible for paying shipping costs and
bearing the risk of damage or loss when goods are in transit.
If goods are shipped FOB destination, ownership transfers to the buyer when the goods arrive
at the buyer's place of business. The seller is responsible for paying shipping costs and bears
the risk of damage or loss in transit. The seller does not record revenue until the goods arrive
at the destination because the transaction is not complete before that point.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
[Question]
140. Describe the recording process (including costs) for purchasing merchandise inventory
using a perpetual inventory system.
Answer: Purchases net of trade discounts are added (debited) to the Merchandise Inventory
account. Purchases discounts and purchases returns and allowances are subtracted (credited)
from Merchandise Inventory. Transportation-in costs are added (debited) to Merchandise
Inventory. The accounting procedures are recorded each time merchandise purchases occur.
In this way, merchandise inventory reflects all net purchases on a timely basis.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P1
1-523
Chapter 01 - Introducing Accounting in Business
[Question]
141. Describe the recording process (including costs) for sales of merchandise inventory using
a perpetual inventory system.
Answer: Sales are recorded at list price less any trade discounts. All costs of the items sold
are transferred from Merchandise Inventory to Cost of Goods Sold. Refunds or credits for
returned merchandise are recorded (debited) in Sales Returns and Allowances. When cash
discounts from the sales price are taken, the seller records (debits) the amount of the discounts
in Sales Discounts. These accounting processes are recorded each time sales transactions
occur. In this way, merchandise inventory, cost of sales, sales and receivables (or cash) reflect
sales transactions on a timely basis.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P2
[Question]
142. What is inventory shrinkage? How do managers account for shrinkage?
Answer: Inventory shrinkage is the loss of merchandise inventory due to theft or
deterioration or similar phenomena. Inventory shrinkage is typically added to the cost of
goods sold.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P3
1-524
Chapter 01 - Introducing Accounting in Business
[Question]
143. How do closing entries for a merchandising company that uses the perpetual inventory
system differ from the closing entries for a service company?
Answer: Merchandising companies have some accounts that must be closed that service
companies do not have. Generally, the revenue account for merchandising companies is called
Sales rather than Fees Earned. It is closed with a debit, as are other revenues. Service
companies do not have Sales Discounts, Sales Returns and Allowances and Cost of Goods
Sold that all appear in the accounts of merchandising companies. Each of these accounts must
be closed with a credit. The remaining closing entries - closing Income Summary to Retained
earnings and closing Dividends to Retained earnings - are identical whether the firm is a
merchandising firm or a service firm.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P3
[Question]
144. Explain the difference between the single-step and multiple-step income statements.
Answer: A single-step income statement format includes cost of goods sold as another
expense and shows only one subtotal for total expenses. A multiple-step income statement
format shows detailed computations of net sales and other costs and expenses and reports
subtotals for various classes of items.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P4
1-525
Chapter 01 - Introducing Accounting in Business
[Question]
145. Distinguish between selling expenses and general and administrative expenses.
Answer: Selling expenses include the expenses of promoting sales by displaying and
advertising merchandise, making sales and delivering goods to customers. General and
administrative expenses support a company's overall operations and include expenses related
to accounting, human resource management and financial management. Some expenses can
relate to both areas and are allocated between them.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P4
[Question]
146. What are the differences between the periodic and the perpetual inventory systems?
Answer: Under a perpetual system each purchase, purchase return and allowance, purchase
discount and transportation-in is recorded in the merchandise inventory account. Under a
periodic system, a separate temporary account is set up for each of these items. The perpetual
inventory system yields more timely information for managers to better monitor and control
inventory costs and levels.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P5
1-526
Chapter 01 - Introducing Accounting in Business
[Question]
147. Why does Selena and Khary Cuffe's company, Heritage Link Brands, use a perpetual
inventory system?
Answer: The use of a perpetual inventory system enables them to stock the right type and
amount of merchandise and to avoid the costs of out-of-stock and excess inventory.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P5
Short Answer Questions
[Question]
148. Scuba Company had net income on the current year’s income statement in the amount of
$800,000, other expense in the amount of $400,000 and a gross profit ratio of 58%, what was
the amount of net sales on the income statement?
Answer: $2,068,965.50
Feedback: 800,000+400,000 = 1,200,000/.58=2,068,965.50
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-A2
1-527
Chapter 01 - Introducing Accounting in Business
[Question]
149. A company has sales of $2,530,000, sales discounts of $200,000, sales returns and
allowances of $323,000, shipping charges of $115,000, sales commissions of $234,000, net
income totaled $863,500, and cost of goods sold of $1,012,000. What is the gross
profit/margin for the period?
Answer: $995,000
Feedback: 2,530,000-200,000-323,000-1,012,000=995,000
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A2
[Question]
150. A company has sales of $2,530,000, sales discounts of $200,000, sales returns and
allowances of $323,000, shipping charges of $115,000, sales commissions of $234,000, net
income totaled $863,500, and cost of goods sold of $1,012,000. What is the gross
profit/margin ratio?
Answer: 49.58%
Feedback: (2,530,000-200,000-323,000-1,012,000)/(2,530,000-200,000-323,000)=49.58%
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A2
1-528
Chapter 01 - Introducing Accounting in Business
[Question]
151. A company has net sales of $1,909,000, sales commissions in the amount of $250,000,
net income was $866,400, and the gross profit ratio is 60%, what is the amount of cost of
goods sold?
Answer: $763,600
Feedback: 1,909,000*(1-.60) = 763,600
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-A2
[Question]
152. Takita Company had net sales of $500,000 and cost of goods sold of $350,000. Calculate
Takita's gross profit.
Answer: $500,000 - $350,000 = $150,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C1
1-529
Chapter 01 - Introducing Accounting in Business
[Question]
153. Harriet's Toy Shop had net sales of $852,000. The gross profit was $230,000. Calculate
Harriet's cost of goods sold.
Answer: $852,000 - $230,000 = $622,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C1
1-530
Chapter 01 - Introducing Accounting in Business
[Question]
154. Fill in the blanks (a) through (g) for the Hendricks Company for each of the income
statements for 2009, 2010 and 2011.
Hendricks Company
Income Statements
For the years ended December 31
2009
$7,500
2010
$10,000
2011
(f)
(a)
2,400
(b)
2,770
(c)
3,750
$ 980
375
3,625
750
(d)
6,750
3,750
(e)
750
4,875
625
5,000
5,200
(g)
$ 2,500
Hendricks Company
Income Statements
For the years ended December 31
2009
$7,500
2010
$10,000
2011
(f) $10,200
(a) 745
2,400
(b) 375
2,770
(c) 4,730
3,750
$ 980
375
3,625
750
(d) 3,250
6,750
3,750
(e) $3,000
750
4,875
625
5,000
5,200
(g) 2,700
$ 2,500
Sales
Cost of goods sold
Merchandise inventory (beginning)
Total cost of merchandise purchases
Merchandise inventory (ending)
Cost of goods sold
Gross profit
Operating expenses
Net income
Answer:
Sales
Cost of goods sold
Merchandise inventory (beginning)
Total cost of merchandise purchases
Merchandise inventory (ending)
Cost of goods sold
Gross profit
Operating expenses
Net income
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-C1
1-531
Chapter 01 - Introducing Accounting in Business
[Question]
155. The following information is available for Trico and its two main competitors in the
industry (Duco and Unico):
Trico
$9,800
6,400
12,500
30,150
900
19,400
1,200
600
Cash
Short-term investments
Accounts receivable
Merchandise inventory
Prepaid expense
Accounts payable
Salaries payable
Other current payables
Duco
$10,500
8,200
8,500
40,000
6,750
13,750
3,500
1,200
Unico
$26,500
12,500
14,350
40,150
2,450
26,800
6,250
2,150
The industry standard for the current ratio is 1.8 and the industry standard for the acid-test
ratio is 1.
Required:
1. Calculate the current ratio and acid-test ratio for each firm.
2. Rank the firms in decreasing order of liquidity.
3. Comment on Trico's relative liquidity position.
Answer:
Part 1
Cash
Short-term investments
Accounts receivable
Merchandise inventory
Prepaid expense
Total current assets
Trico
$9,800
6,400
12,500
30,150
900
$59,750
Duco
$10,500
8,200
8,500
40,000
6,750
$73,950
Unico
$26,500
12,500
14,350
40,150
2,450
$95,950
Accounts payable
Salary payable
Other current payables
Total current liabilities
$19,400
1,200
600
$21,200
$13,750
3,500
1,200
$18,450
$26,800
6,250
2,150
$35,200
Current ratio
Trico
$59,750 = 2.82
$21,200
Duco
$73,950 = 4.01
$18,450
1-532
Unico
$95,950 = 2.73
$35,200
Chapter 01 - Introducing Accounting in Business
Trico
$9,800
6,400
12,500
$28,700
Cash
Short-term investments
Accounts receivable
Total quick assets
Acid-test ratio
Duco
$10,500
8,200
8,500
$27,200
Unico
$26,500
12,500
14,350
$53,350
Trico
$28,700 = 1.35
$21,200
Duco
$27,200 = 1.47
$18,450
Unico
$53,350 = 1.52
$35,200
4.01
2.82
2.73
1.8
Acid-test ratio
Unico
Duco
Trico
Industry average
1.52
1.47
1.35
1.00
Part 2: Rank order:
Current ratio
Duco
Trico
Unico
Industry average
Part 3: Trico's current ratio lags behind Duco's, but is ahead of both Unico and the industry
average. Trico's acid test ratio is behind both Unico and Duco but is ahead of the industry
average.
Bloom’s Taxonomy: Evaluate
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A1
1-533
Chapter 01 - Introducing Accounting in Business
[Question]
156. The following information refers to Annie's Attic and its competitors in the antiques
business.
Annie’s Attic
Bart’s Basement
Chisolm’s Collectibles
Martin’s Marbles
Industry Average
Current Ratio
2.0
1.5
1.8
1.9
2.0
Quick Ratio
0.95
1.00
1.20
0.80
1.00
Required:
Comment on the relative liquidity positions of these companies.
Answer:
Chisolm's Collectibles, Martin’s Marbles and Bart's Basement have acceptable levels of
liquidity. However, even though Annie's Attic and Martin's Marbles have acceptable current
ratios, their quick ratios indicate a potential liquidity problem. We should attempt to collect
additional information to support or refute the evidence of a potential liquidity problem.
Bloom’s Taxonomy: Evaluate
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A1
1-534
Chapter 01 - Introducing Accounting in Business
[Question]
157. A company reported the following year-end information:
Cash
Short-term investments
Accounts receivable
Inventory
Prepaid expenses
Accounts payable
Other current payables
$ 52,000
12,000
54,000
325,000
17,500
106,500
25,000
Required:
Explain the purpose of the acid-test ratio.
Calculate the acid-test ratio for this company.
What does the acid-test ratio reveal about this company?
Answer:
1. The acid-test ratio measures the ability of a firm to pay its current liabilities. It is a more
stringent test of liquidity as compared to the current ratio.
2.
Quick assets:
Cash
$ 52,000
Short-term investments
12,000
Accounts receivable
54,000
Total quick assets
$118,000
Current liabilities
Accounts payable
Other current payables
Quick assets
Current liabilities
118,000 = 0.90
131,500
$106,500
25,000
$131,500
3. This company does not have enough quick assets to be considered in a strong liquidity
position. The company may have too much money tied up in inventory or other less liquid
current (or noncurrent) assets. Additional analyses should be undertaken to verify or refute
this apparent liquidity concern.
Bloom’s Taxonomy: Evaluate
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A1
1-535
Chapter 01 - Introducing Accounting in Business
[Question]
158. Calculate the gross margin ratio for each of the following separate cases A through D:
A
B
C
D
Net sales
$135,000
$623,500
$37,800
$259,600
Cost of goods sold
83,600
249,200
13,230
127,204
Answer:
$135,000 $83,600
 38.1%
$135,000
$623,500 $249,200
B
 60%
623,500
$37,800 $13,230
C
 65%
$37,800
$259,600 $127,204
D
 51%
$259,600
A




Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-A2
1-536
Chapter 01 - Introducing Accounting in Business
[Question]
159. A company reported the following information for the month of November:
Sales
Sales discounts
Sales returns and allowances
Cost of goods sold
$50,475
235
2,840
33,975
Required: Calculate this company's gross margin ratio.
Answer:
Sales
Less: Sales discounts
Less: Sales returns and allowances
Net sales
Less: Cost of goods sold
Gross profit
$50,475
(235)
(2,840)
$47,400
(33,975)
$13,425
Gross margin ratio = $13,425/$47,400 – 28.32%

Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-A2
1-537
Chapter 01 - Introducing Accounting in Business
[Question]
160. The following information is for Trico and its competitor Unico.
Net sales
Cost of sales
Year 1
$347,850
121,747
Trico
Year 2
$365,418
146,167
Year 1
$579,750
318,862
Unico
Year 2
$664,395
312,265
Required:
Calculate the dollar amount of gross margin and the gross margin ratio to the nearest percent,
for each company for both years.
Which company had the more favorable ratio for each year?
Which company had the more favorable change in the gross margin ratio over this 2-year
period?
Answer:
1.
Trico
Year 2
$365,418
146,167
$219,251
Net sales
Cost of sales
Gross Margin
Year 1
$347,850
121,747
$226,103
Gross profit
Ratio
Trico
Year 1
Year 2
$226,103 = 65% $219,251 = 60%
$347,850
$365,418
Year 1
$579,750
318,862
$260,888
Unico
Year 2
$664,395
312,265
$352,130
Unico
Year 1
Year 2
$260,888 = 45% $352,130 = 53%
$579,750
$664,395
2. Trico had the more favorable ratio for each year.
3. Unico's gross margin ratio is increasing, while Trico's is decreasing. Moreover, these
changes appear significant and warrant further analysis.
Bloom’s Taxonomy: Evaluate
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-A2
1-538
Chapter 01 - Introducing Accounting in Business
[Question]
161. A company that uses the perpetual inventory system purchased $8,500 worth of
inventory on September 25. Terms of the purchase were 2/10, n/30. The invoice was paid in
full on October 4. Prepare the journal entries to record these merchandise transactions.
Answer:
September 25
October 4
Merchandise Inventory
Accounts Payable
Accounts Payable
Merchandise Inventory
Cash
Calculation: Discount = $8,500 x .02 = $170
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P1
1-539
8,500
8,500
8,500
170
8,330
Chapter 01 - Introducing Accounting in Business
[Question]
162. Roller Blade Company uses the perpetual inventory system and had the following
transactions during October:
Purchased $4,000 of inventory. The seller’s credit terms are 2/10,
n/30.
Returned $200 worth of defective units and received full credit.
Paid the amount due, less the returned items.
October 6:
October 8:
October 15:
Prepare journal entries to record each of the preceding transactions.
Answer:
October 6:
Merchandise Inventory
Accounts Payable
October 8: Accounts Payable
Merchandise Inventory
October 15: Accounts Payable
Merchandise Inventory
Cash
4,000
4,000
200
200
3,800
76
3,724
Calculation: Discount = ($4,000 - $200) x .02 = $76
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
1-540
Chapter 01 - Introducing Accounting in Business
[Question]
163. Ceres Computer Sales uses the perpetual inventory system and had the following
transactions during the month of December
Dec
1
3
4
5
11
15
18
23
24
31
Sold merchandise on credit for $5,000, terms 3/10, n/30. The items sold had a
cost of $3,500.
Purchased merchandise for cash, $720.
Purchased merchandise on credit for $2,600, term 1/20, n/30.
Issued a credit memorandum for $300 to a customer who returned merchandise
purchased November 29. The returned items had a cost of $210.
Received payment for merchandise sold December 1.
Received a credit memorandum for the return of faulty merchandise purchased on
December 4 for $600.
Paid freight charges of $200 for merchandise ordered last month. (FOB shipping
point).
Paid for the merchandise purchased December 4 less the portion that was
returned.
Sold merchandise on credit for $7,000, terms 2/10, n/30. The items had a cost of
$4,900.
Received payment for merchandise sold on December 24.
Required: Prepare the general journal entries to record these transactions.
Answer:
Dec
1
1
3
4
5
Accounts Receivable
Sales
5,000
Cost of goods sold
Merchandise Inventory
3,500
5,000
3,500
Merchandise Inventory
Cash
720
Merchandise Inventory
Accounts Payable
2,600
720
2,600
Sales Returns and Allowances
Accounts Receivable
300
300
1-541
Chapter 01 - Introducing Accounting in Business
5
11
15
18
23
24
24
31
Merchandise Inventory
Cost of goods sold
210
210
Cash (5,000 x .03)
Sales Discounts
Accounts Receivable
4,850
150
5,000
Accounts Payable
Merchandise Inventory
600
Merchandise Inventory
Cash
200
600
200
Accounts Payable ($2,600 - $600)
Merchandise Inventory ($2,000 x .01)
Cash
2,000
Accounts Receivable
Sales
7,000
Cost of goods sold
Merchandise Inventory
4,900
Cash
Sales Discounts (7,000 x .02)
Accounts Receivable
6,860
140
20
1,980
7,000
4,900
7,000
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P1
Learning Objective: 04-P2
1-542
Chapter 01 - Introducing Accounting in Business
[Question]
164. Steve's Skateboards uses the perpetual inventory system and had the following sales
transactions during April:
April 2
April 4
April 13
Sold merchandise to Happy Hobby Shop on credit for $4,800, terms 1/15,
n/60. The items sold had a cost of $2,700.
Happy Hobby Shop returned merchandise that had a selling price of $200.
The cost of the merchandise returned was $110.
Happy Hobby Shop paid for the merchandise sold on April 2, taking any
appropriate discount earned.
Prepare the journal entries that Steve's Skateboards must make to record these transactions.
Answer:
April 2
April 4
April 13
Accounts receivable
Sales
Cost of goods sold
Merchandise inventory
Sales returns and allowances
Accounts receivable
Merchandise inventory
Cost of goods sold
Cash
Sales discounts
Accounts receivable
Calculation: Discount = ($4,800 - $200) x .01 = $46
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P2
1-543
4,800
4,800
2,700
2,700
200
200
110
110
4,554
46
4,600
Chapter 01 - Introducing Accounting in Business
[Question]
165. Maia's Bike Shop uses the perpetual inventory system and had the following transactions
during the month of May:
May 3
Sold merchandise to a customer on credit for $600, terms 2/10, n/30. The cost
of the merchandise sold was $350.
May 4
Sold merchandise to a customer for cash of $425. The cost of the merchandise
was $250.
May 6
Sold merchandise to a customer on credit for $1,300, terms 2/10, n/30. The
cost of the merchandise sold was $750.
May 8
The customer from May 3 returned merchandise with a selling price of $100.
The cost of the merchandise returned was $55.
May 15
The customer from May 6 paid the full amount due, less any appropriate
discounts earned.
May 31
The customer from May 3 paid the full amount due, less any appropriate
discounts earned.
Prepare the required journal entries that Maia's Bike Shop must make to record these
transactions.
Answer:
May 3
May 4
May 6
May 8
May 15
May 31
Accounts receivable
Sales
Cost of goods sold
Merchandise inventory
Cash
Sales
Cost of goods sold
Merchandise inventory
Accounts receivable
Sales
Cost of goods sold
Merchandise inventory
Sales returns and allowances
Accounts receivable
Merchandise inventory
Cost of goods sold
Cash
Sales discounts
Accounts receivable
Calculation Discount = $1,300 x .02 = $26
Cash
Accounts receivable
1-544
600
600
350
350
425
425
250
250
1,300
1,300
750
750
100
100
55
55
1,274
26
1,300
500
500
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P2
[Question]
166. Following is the year-end adjusted trial balance for Yakima's Sporting Goods for the
current year:
Yakima’s Sporting Goods
Adjusted Trial Balance
December 31
Dr
Cr
Cash
$ 67,400
Accounts receivable
46,000
Merchandise inventory
50,000
Office supplies
800
Accounts payable
16,000
Salaries payable
850
Common stock
50,000
Retained earnings
75,530
Dividends
5,000
Sales
500,000
Sales returns & allowances
4,500
Sales discounts
4,250
Cost of goods sold
382,450
Sales salaries expense
44,000
Advertising expense
8,150
Office salaries expense
24,325
Office supplies expense
450
Interest expense
5,055
Totals
$642,380
$642,380
Prepare the closing entries at December 31 for the current year.
Answer:
1-545
Chapter 01 - Introducing Accounting in Business
Dec. 31 Sales
Income Summary
500,000
500,000
31 Income Summary
Sales Returns and Allowances
Sales Discounts
Cost of goods sold
Sales Salaries Expense
Advertising Expense
Office Salaries Expense
Office Supplies Expense
Interest Expense
31 Income Summary
Retained earnings
473,180
4,500
4,250
382,450
44,000
8,150
24,325
450
5,055
26,820
26,820
31 Retained earnings
Dividends
5,000
5,000
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P3
1-546
Chapter 01 - Introducing Accounting in Business
[Question]
167. The year-end adjusted trial balance of ABC Supply for the current year is shown below:
ABC SUPPLY
Adjusted Trial Balance
December 31
Debit
$ 1,500
500
11,000
18,000
Cash
Office supplies
Merchandise inventory
Store equipment
Accum Depr. – store equipment
Accounts payable
Common stock
Retained earnings
Dividends
Sales
Cost of goods sold
Depreciation expense – Store equipment
Office supplies expense
Salaries expense
Rent expense
Credit
$ 3,000
6,000
10,000
40,000
22,000
60,500
48,000
1,000
1,500
14,000
2,000
$119,500
$119,500
Prepare closing entries at December 31 for the current year.
Answer:
Closing entries:
Dec.
31
31
31
Sales
Income Summary
60,500
Income Summary
Cost of goods sold
Salaries Expense
Rent Expense
Office Supplies Expense
Depreciation Expense – Store Equip
66,500
60,500
Retained Earnings
Income Summary
48,000
14,000
2,000
1,500
1,000
6,000
6,000
Retained Earnings
Dividends
22,000
22,000
1-547
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 04-P3
[Question]
168. From the adjusted trial balance for the Worker Products Company, prepare a multiplestep income statement in good form.
Worker Products Company
Adjusted Trial Balance
December 31
Cash
Accounts receivable
Merchandise inventory
Office supplies
Store equipment
Accumulated Depreciation – store equipment
Office equipment
Accumulated Depreciation – office equipment
Accounts payable
Notes payable
Common stock
Retained earnings
Dividends
Sales
Sales discounts
Sales returns and allowances
Cost of goods sold
Sales salaries expense
Depreciation expense – store equipment
Depreciation expense – office equipment
Office supplies expense
Interest expense
Totals
1-548
Debit
$ 9,400
25,000
36,000
900
75,000
Credit
$ 22,000
60,000
15,000
42,000
10,000
40,000
70,700
48,000
325,000
6,000
16,500
195,000
32,500
11,000
7,500
1,300
600
$524,700
$524,700
Chapter 01 - Introducing Accounting in Business
Answer:
Worker Products Company
Income Statement
For the year ended December 31
Sales
Less: Sales discounts
Sales returns and allowances
Net sales
Cost of goods sold
Gross profit
Operating expenses
Selling expenses
Sales salaries expense
Depreciation expense – store equipment
Total selling expenses
General and administrative expenses
Depreciation expense – office equipment
Office supplies expense
Total general and administrative expenses
Total operating expenses
Income from operations
Other expenses
Interest expense
Net income
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P4
1-549
$325,000
$ 6,000
16,500
22,500
$302,500
195,000
107,500
32,500
11,000
43,500
7,500
1,300
8,800
52,300
55,200
600
$ 54,600
Chapter 01 - Introducing Accounting in Business
[Question]
169 From the adjusted trial balance for Worker Products, prepare the necessary closing
entries.
Worker Products Company
Adjusted Trial Balance
December 31
Cash
Accounts receivable
Merchandise inventory
Office supplies
Store equipment
Accumulated Depreciation – store equipment
Office equipment
Accumulated Depreciation – office equipment
Accounts payable
Notes payable
Common stock
Retained earnings
Dividends
Sales
Sales discounts
Sales returns and allowances
Cost of goods sold
Sales salaries expense
Depreciation expense – store equipment
Depreciation expense – office equipment
Office supplies expense
Interest expense
Totals
Answer:
1-550
Debit
$ 9,400
25,000
36,000
900
75,000
Credit
$ 22,000
60,000
15,000
42,000
10,000
40,000
70,700
48,000
325,000
6,000
16,500
195,000
32,500
11,000
7,500
1,300
600
$524,700
$524,700
Chapter 01 - Introducing Accounting in Business
Dec. 31
Dec. 31
Dec. 31
Dec. 31
Sales
Income Summary
Income Summary
Sales discounts
Sales returns and allowances
Cost of goods sold
Sales salaries expense
Depreciation expense – store equipment
Depreciation expense – office equipment
Office supplies expense
Interest expense
Income Summary
Retained Earnings
Retained Earnings
Dividends
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P4
1-551
325,000
325,000
270,400
6,000
16,500
195,000
32,500
11,000
7,500
1,300
600
54,600
54,600
48,000
48,000
Chapter 01 - Introducing Accounting in Business
[Question]
170. Neutron uses a periodic inventory system. Prepare general journal entries to record the
following transactions for Neutron:
June
10
12
19
Neutron purchased merchandise on credit from Proton for $9,000, terms 2/10,
n/30. FOB destination. Transportation costs of $350 were paid by Proton.
Neutron returned $600 of merchandise from the June 10 purchase.
Neutron paid Proton for the June 10 purchase.
Answer:
June
10
12
19
Purchases
Accounts Payable
Accounts Payable
Purchases Returns and Allow
Accounts Payable
Cash
Purchases Discounts ($8,400 x .02)
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P5
1-552
9,000
9,000
600
600
8,400
8,232
168
Chapter 01 - Introducing Accounting in Business
[Question]
171. Steve's Skateboards uses the periodic inventory system and had the following sales
transactions during April:
April 2
April 4
April 13
Sold merchandise to Happy Hobby Shop on credit for $4,800, terms 1/15, n/60.
The items sold had a cost of $2,700.
Happy Hobby Shop returned merchandise that had a selling price of $200. The
cost of the merchandise returned was $110.
Happy Hobby Shop paid for the merchandise sold on Aril 2, taking any
appropriate discount earned
Prepare the journal entries that Steve's Skateboards must make to record these transactions.
Answer:
April 2
April 4
April 13
Accounts receivable
Sales
Sales returns and allowances
Accounts receivable
Cash
Sales discounts
Accounts receivable
Calculation: Discount = ($4,800 - $200) x .01 = $46
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P5
1-553
4,800
4,800
200
200
4,554
46
4,600
Chapter 01 - Introducing Accounting in Business
[Question]
172. Maia's Bike Shop uses the periodic inventory system and had the following transactions
during the month of May:
May 3
May 4
May 6
May 8
May 15
May 31
Sold merchandise to a customer on credit for $600, terms 2/10, n/30. The cost of the
merchandise sold was $350.
Sold merchandise to a customer for cash of $425. The cost of the merchandise was $250.
Sold merchandise to a customer on credit for $1,300, term 2/10, n/30. The cost of the
merchandise sold was $750.
The customer from May 3 returned merchandise with a selling price of $100. The cost of
merchandise returned was $55.
The customer from May 6 paid the full amount due, less any appropriate discounts earned.
The customer from May 3 paid the full amount due, less any appropriate discounts earned.
Prepare the required journal entries that Maia's Bike Shop must make to record these
transactions.
Answer:
May 3
May 4
May 6
May 8
May 15
May 31
Accounts receivable
Sales
Cash
Sales
Accounts receivable
Sales
Sales returns and allowances
Accounts receivable
Cash
Sales discounts
Accounts receivable
Calculation: Discount = $1,300 x .02 = $26
Cash
Accounts receivable
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P5
1-554
600
600
425
425
1,300
1,300
100
100
1,274
26
1,300
500
500
Chapter 01 - Introducing Accounting in Business
Fill in the Blank Questions
[Question]
173. A company had net sales of $741,800. Its cost of goods sold must have been _________
to yield a gross profit of $282,884.
Answer: $458,916
Feedback: $741,800 - $282,884 = $458,916
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C1
[Question]
174. A ___________ is an intermediary that buys products from manufacturers and sells to
retailers.
Answer: Wholesaler
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-C1
1-555
Chapter 01 - Introducing Accounting in Business
[Question]
175. A merchandising company's ___________ begins with the purchase of merchandise and
ends with the collection of cash from merchandise sales.
Answer: Operating cycle
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C2
[Question]
176. ________________________ refers to products that a company owns and intends to
sell.
Answer: Merchandise inventory
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C2
[Question]
177. A ___________ inventory system updates the accounting record for inventory only at the
end of a period.
Answer: Periodic
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C2
1-556
Chapter 01 - Introducing Accounting in Business
[Question]
178. The __________________ inventory system continually updates accounting records for
merchandise transactions for the amounts of inventory available for sale and inventory sold.
Answer: Perpetual
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-C2
[Question]
179. Beginning inventory plus the net cost of purchases is the _____________________.
Answer: Merchandise available for sale.
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P3
[Question]
180. A period's ___________________ becomes the next period's beginning inventory.
Answer: Ending inventory
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P3
1-557
Chapter 01 - Introducing Accounting in Business
[Question]
181. The acid-test ratio reflects the ___________ of a company.
Answer: Liquidity
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-A1
[Question]
182. The gross margin ratio equals net sales less ___________ divided by net sales.
Answer: Cost of goods sold
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-A2
[Question]
183. A company purchased $8,750 worth of merchandise, with terms of 2/10, n/30. The
invoice was paid within the cash discount period. Accordingly, the company received a cash
discount of _______________.
Answer: $175
Feedback: $8,750 x .02 = $175
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
1-558
Chapter 01 - Introducing Accounting in Business
[Question]
184. The agreement regarding the amounts and timing of payment from a buyer to a seller are
the ____________________.
Answer: Credit terms
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
[Question]
185. A _______________________ is a document the buyer issues to inform the seller of a
debit made to the seller's account in the buyer's records.
Answer: Debit memorandum
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
[Question]
186. FOB _________________ means the buyer accepts ownership when the goods depart
the seller's place of business. The buyer is responsible for paying shipping costs and bears the
risk of damage or loss when goods are in transit.
Answer: Shipping point or factory
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
1-559
Chapter 01 - Introducing Accounting in Business
[Question]
187. FOB _________________ means ownership of goods transfers to the buyer when the
goods arrive at the buyer's place of business. The seller is responsible for paying shipping
charges and bears the risk of damage or loss in transit.
Answer: Destination
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P1
[Question]
188. ____________________ refer to merchandise that customers return to the seller after a
sale.
Answer: Sales returns
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P2
[Question]
189. ___________________ refer to reductions in the selling price of merchandise sold to
customers, often involving damaged or defective merchandise that a customer is willing to
purchase with a decrease in the selling price.
Answer: Sales allowances
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P2
1-560
Chapter 01 - Introducing Accounting in Business
[Question]
190. A seller usually prepares a ____________________ to confirm a buyer's return or
allowance, that informs the buyer of the seller's credit to the buyer's Account Receivable on
the seller's books.
Answer: Credit memorandum
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P2
[Question]
191. Sales discounts can benefit a seller by decreasing the delay in receiving cash and
___________.
Answer: Reducing future collection efforts
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P2
[Question]
192. Inventory shrinkage can be computed by comparing the ___________ of inventory with
recorded quantities and amounts.
Answer: Physical count (or count)
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P3
1-561
Chapter 01 - Introducing Accounting in Business
[Question]
193. ___________ expenses are those expenses that support a company's overall operations
and include expenses related to accounting, human resource management and financial
management.
Answer: General and administrative
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 04-P4
[Question]
194. A _____________________ income statement format shows detailed computations of
net sales and other costs and expenses and reports subtotals for various classes of items.
Answer: Multiple-step
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P4
[Question]
195. A ______________________ income statement includes cost of goods sold as another
expense and shows only one subtotal for total expenses.
Answer: Single-step
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P4
1-562
Chapter 01 - Introducing Accounting in Business
[Question]
196. _______________________ are non-operating activities that include interest, dividend
and rent revenues and gains from asset disposals.
Answer: Other revenues and gains
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P4
[Question]
197. ______________________ are non-operating activities that include interest expense,
losses from asset disposals and casualty losses.
Answer: Other expenses and losses
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P4
[Question]
198. When a company has no reportable non-operating activities, its income from operations
is reported as ___________________.
Answer: Net income
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P4
1-563
Chapter 01 - Introducing Accounting in Business
[Question]
199. Under the ___________ system, each purchase, purchase return and allowance, purchase
discount and transportation-in transaction is recorded in a separate temporary account.
Answer: Periodic
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 04-P5
1-564
Chapter 01 - Introducing Accounting in Business
Chapter 05
Reporting and Analyzing Inventories
True / False Questions
[Question]
1. Goods in transit are automatically included in a company’s inventory account.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-C1
[Question]
2. If damaged and obsolete goods cannot be sold they are not included in inventory.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-C1
[Question]
3. Goods on consignment are goods shipped by their owner, called the consignee, to another
party called the consignor.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-C1
1-565
Chapter 01 - Introducing Accounting in Business
[Question]
4. If obsolete or damaged goods can be sold, they will be included in inventory at their net
realizable value.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-C1
[Question]
5. If the seller is responsible for paying freight charges, then ownership of inventory passes
when goods arrive at their destination.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-C1
[Question]
6. Net realizable value for damaged or obsolete goods is equal to the sales price plus the cost
of making the sale.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-C1
1-566
Chapter 01 - Introducing Accounting in Business
[Question]
7. The cost of an inventory item includes its invoice cost and any added or incidental costs
necessary to make it saleable less any discount.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-C2
[Question]
8. When taking a physical count of inventory, the use of pre-numbered inventory tickets
assists in the control process.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: Easy
Learning Objective: 05-C2
[Question]
9. Incidental costs most commonly added to the costs of inventory include import duties,
freight, storage and insurance.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-C2
1-567
Chapter 01 - Introducing Accounting in Business
[Question]
10. The Inventory account is a controlling account for the inventory subsidiary ledger that
contains a separate record for each individual product.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-C2
[Question]
11. Not many companies take a physical count of inventory each year as they rely primarily
on inventory records alone to determine the inventory value.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: Medium
Learning Objective: 05-C2
[Question]
12. All incidental costs of inventory acquisition and handling whether necessary or not, are
assigned to inventory.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-C2
1-568
Chapter 01 - Introducing Accounting in Business
[Question]
13. The matching principle is used by some companies to avoid allocating incidental
inventory costs to cost of goods sold.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-C2
[Question]
14. The consistency principle requires a company to use the same accounting methods period
after period, so that financial statements are comparable across periods.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A1
[Question]
15. A company can change its inventory costing method without mentioning this change in its
financial statements since it is a decision made by internal management.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A1
1-569
Chapter 01 - Introducing Accounting in Business
[Question]
16. Whether prices are rising or falling, FIFO always will yield the highest gross profit and
net income.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A1
[Question]
17. An advantage of the weighted-average inventory method is that it tends to smooth out the
effects of price changes.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Marketing
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-A1
[Question]
18. In a period of rising prices, FIFO usually gives a lower taxable income, which leads to an
advantage when it comes to paying income tax.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-A1
1-570
Chapter 01 - Introducing Accounting in Business
[Question]
19. LIFO is the preferred inventory costing method when costs are rising and managers have
incentives to report higher income. The reasons for doing this is for a bonus plan, job security
and reputation.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-A1
[Question]
20. LIFO inventory value is often less than the inventory's replacement cost because LIFO
inventory is valued using the oldest purchase cost.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-A1
[Question]
21. The full disclosure principle requires that the notes to the financial statements report a
change in accounting method for inventory costing.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A1
1-571
Chapter 01 - Introducing Accounting in Business
[Question]
22. An advantage of LIFO is that it assigns the most recent costs to cost of goods sold and
does a better job of matching current costs with revenues on the income statement.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A1
[Question]
23. According to IRS requirements, companies are allowed to use FIFO for financial reporting
and LIFO for tax reporting.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A1
[Question]
24. GAAP and IFRS differ on the rules regarding LIFO as GAAP allows LIFO to assign costs
to inventory and IFRS does not.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A2
1-572
Chapter 01 - Introducing Accounting in Business
[Question]
25. Errors in the period-end inventory balances only have an impact on the current period's
records and financial statements.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A2
[Question]
26. An inventory error is sometimes said to be self-correcting because it causes an offsetting
error in the next period.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-A2
[Question]
27. Managers are able to make important decisions correctly using erroneous inventory
balances because inventory errors are self-correcting and as a result, are less serious.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-A2
1-573
Chapter 01 - Introducing Accounting in Business
[Question]
28. An understatement of the ending inventory balance will understate cost of goods sold and
overstate net income.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A2
[Question]
29. Neither GAAP nor IFRS allow inventory to be adjusted upward beyond the original cost.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Global
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A2
[Question]
30. An understatement of ending inventory will cause an understatement of assets and equity
on the balance sheet.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A2
1-574
Chapter 01 - Introducing Accounting in Business
[Question]
31. An overstatement of ending inventory will cause an overstatement of assets and an
understatement of equity on the balance sheet.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A2
[Question]
32. A company's ability to pay its short-term obligations depends on many factors including
how quickly it is able to sell its merchandise inventory.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: Easy
Learning Objective: 05-A3
[Question]
33. The inventory turnover ratio is computed by dividing average merchandise inventory by
cost of goods sold.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: Medium
Learning Objective: 05-A3
1-575
Chapter 01 - Introducing Accounting in Business
[Question]
34. The days' sales in inventory ratio is computed by dividing ending inventory by cost of
goods sold and multiplying the result by 365.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: Medium
Learning Objective: 05-A3
[Question]
35. There is no simple rule for inventory turnover, except that a high ratio is preferable
provided inventory is adequate to meet demand.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: Medium
Learning Objective: 05-A3
[Question]
36. It can be expected that companies that sell perishable goods have higher inventory
turnover than companies that sell nonperishable goods.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: Medium
Learning Objective: 05-A3
1-576
Chapter 01 - Introducing Accounting in Business
[Question]
37. A company's cost of goods sold was $15,500 and its average merchandise inventory was
$4,500. Its inventory turnover equals 3.4.
Answer: TRUE
Feedback: 15,500/4,500 = 3.4
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A3
[Question]
38. Toys "R" Us had cost of goods sold of $8,321 million and its ending inventory was $2,027
million. Based on this, its days' sales in inventory is equal to 89 days.
Answer: TRUE
Feedback: (2,027/8,321) x 365 = 89 days
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A3
[Question]
39. One of the most important decisions in accounting for inventory is determining the unit
costs assigned to each inventory item.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P1
1-577
Chapter 01 - Introducing Accounting in Business
[Question]
40. The four methods of inventory valuation are SIFO, FIFO, LIFO and average cost.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P1
[Question]
41. When units are purchased at different costs over time, it is simple to determine the cost
per unit assigned to inventory.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P1
[Question]
42. LIFO assumes that inventory costs flow in the order they were incurred.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P1
1-578
Chapter 01 - Introducing Accounting in Business
[Question]
43. The assignment of costs to cost of goods sold and inventory using weighted average
usually yields different results depending on whether a perpetual or periodic system is used
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
[Question]
44. The FIFO inventory method assumes that costs for the most recently purchased items are
the first to be charged to the cost of goods sold.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
[Question]
45. Three key variables determine the dollar value of inventory: (1) inventory quantity, (2)
costs of inventory and (3) cost flow assumption.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-579
Chapter 01 - Introducing Accounting in Business
[Question]
46. The assignment of costs to cost of goods sold and to inventory using specific
identification is the same for both the perpetual and periodic systems.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
[Question]
47. The dollar value assigned to goods purchased will differ under the different inventory
valuation methods of specific identification, FIFO, LIFO and weighted average.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
[Question]
48. The assignment of costs to the cost of goods sold and to inventory under the FIFO is the
same for both the perpetual and periodic inventory systems.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-580
Chapter 01 - Introducing Accounting in Business
[Question]
49. Under LIFO, the most recent costs are assigned to ending inventory.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
[Question]
50. The matching principle requires that the inventory valuation method follow the physical
flow of inventory.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
51. The choice of an inventory valuation method can have a major impact on gross profit and
cost of sales.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
1-581
Chapter 01 - Introducing Accounting in Business
[Question]
52. In applying the lower of cost or market method to inventory valuation, market is defined
as the current replacement cost.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P2
[Question]
53. In applying the lower of cost or market method to inventory valuation, market is defined
as the current selling price.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P2
[Question]
54. A company has inventory with a market value of $217,000 and a cost of $241,000.
According to the lower of cost or market, the inventory should be written down to $217,000.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P2
1-582
Chapter 01 - Introducing Accounting in Business
[Question]
55. The lower of cost or market rule for inventory valuation must be applied to each
individual unit separately and not to major categories of inventory or to the entire inventory.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P2
[Question]
56. The conservatism principle requires that when more than one estimate of the amounts that
are to be received or paid in the future exist and these estimates are about equally likely, then
the less optimistic amount is used.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: Medium
Learning Objective: 05-P2
[Question]
57. A company's total cost of inventory was $305,000 and its market value is $297,000.
Under the lower cost or market, the amount reported should be $305,000.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P2
1-583
Chapter 01 - Introducing Accounting in Business
[Question]
58. A company's cost of inventory was $317,500. Due to phenomenal demand for this
product, the market value of its inventory increased to $323,000. According to the consistency
principle, this company should write up the value of its inventory.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P2
[Question]
59. When LIFO is used with the periodic inventory system, cost of goods sold is assigned
costs from the most recent purchases at the point of each sale, rather than from the most
recent purchases for the period.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P3
[Question]
60. Monthly or quarterly statements are called interim statements because they are prepared
between the traditional annual statement dates.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P4
1-584
Chapter 01 - Introducing Accounting in Business
[Question]
61. The retail inventory method estimates the cost of ending inventory by applying the gross
profit ratio to net sales.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P4
[Question]
62. The reasoning behind the retail inventory method is that if an accurate estimate of the
cost-to-retail ratio is made, it can be multiplied by the ending inventory at retail to estimate
ending inventory at cost.
Answer: TRUE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P4
[Question]
63. The reliability of the gross profit method depends on a good estimate of the gross profit
ratio.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P4
1-585
Chapter 01 - Introducing Accounting in Business
[Question]
64. In the retail inventory method of inventory valuation, the retail amount of inventory refers
to the dollar amount measured by looking at the selling prices of inventory items.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P4
[Question]
65. To avoid the time-consuming process of taking an inventory each year, the majority of
companies use the gross profit method to estimate ending inventory.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: Medium
Learning Objective: 05-P4
[Question]
66. Using the retail inventory method, if the cost to retail ratio is 60% and ending inventory at
retail is $45,000, then estimated ending inventory at cost is $27,000.
Answer: TRUE
Feedback: 45,000 x .6 = 27,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P4
1-586
Chapter 01 - Introducing Accounting in Business
Multiple Choice Questions
[Question]
67. Damaged and obsolete goods:
A. Are never included in inventory
B. Are included in inventory at their full cost
C. Are included in inventory at their net realizable value
D. Should be disposed of immediately
E. Are assigned a value of zero
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-C1
[Question]
68. Merchandise inventory includes:
A. All goods owned by a company and held for sale
B. All goods in transit
C. All goods on consignment
D. Only damaged goods
E. Only items that are on the shelf
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-C1
[Question]
69. Goods in transit are included in a purchaser's inventory:
A. At any time during transit
B. When the purchaser is responsible for paying freight charges
C. When the supplier is responsible for freight charges
D. If the goods are shipped FOB destination
E. After the half-way point between the buyer and seller
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
1-587
Chapter 01 - Introducing Accounting in Business
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-C1
[Question]
70. Goods on consignment:
A. Are goods shipped by the owner to the consignee who sells the goods for the owner
B. Are reported in the consignee's books as inventory
C. Are goods shipped to the consignor who sells the goods for the owner
D. Are not reported in the consignor's inventory since they do not have possession of the
inventory
E. Are always paid for by the consignee when they take possession of the goods
Answer: A
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-C1
[Question]
71. Given the following items and costs as of the balance sheet date, determine the value of
Faltron Company's merchandise inventory.
$1,000 goods sold by Faltron to another company. The goods are in transit and shipping
terms are FOB destination.
$2,000 goods sold by another company to Faltron. The goods are in transit and shipping
terms are FOB destination.
$3,000 owned by Faltron but in the possession of another company the consignee.
Damaged goods owned by Faltron which originally cost $4,000, but which now have a $500
net realizable value.
A. $10,000
B. $6,500
C. $5,500
D. $5,000
E. $4,500
Answer: E
Feedback: 1,000 + 3,000 + 500
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-C1
1-588
Chapter 01 - Introducing Accounting in Business
[Question]
72. Given the following items and costs as of the balance sheet date, determine the value of
Light Company's merchandise inventory.
$2,000 goods sold by Light to another company. The goods are in transit and shipping terms
are FOB shipping point.
$3,000 goods sold by another company to Light. The goods are in transit and shipping terms
are FOB shipping point.
$4,000 owned by Light but in the possession of another company the consignee.
Damaged goods owned by Light which originally cost $5,000, but which now have an $800
net realizable value.
A. $7,000
B. $7,800
C. $9,800
D. $9,000
E. $6,800
Answer: B
Feedback: 3,000 + 4,000 + 800 = 7,800
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-C1
[Question]
73. Physical inventory counts:
A. Are not necessary under the perpetual system
B. Are necessary to measure and adjust for inventory shrinkage
C. Must be taken at least once a month
D. Require the use of hand-held portable computers
E. Are not necessary under the cost-to benefit constraint
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA BB: Resource Management
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: Medium
Learning Objective: 05-C2
1-589
Chapter 01 - Introducing Accounting in Business
[Question]
74. During a period of steadily rising costs, the inventory valuation method that yields the
lowest reported net income is:
A. Specific identification method
B. Average cost method
C. Weighted-average method
D. FIFO method
E. LIFO method
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A1
[Question]
75. The inventory valuation method that tends to smooth out erratic changes in costs is:
A. FIFO
B. Weighted average
C. LIFO
D. Specific identification
E. WIFO
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A1
[Question]
76. Which inventory valuation method assigns a value to the inventory on the balance sheet
that approximates current cost and also mimics the actual flow of goods for most businesses?
A. FIFO
B. Weighted average
C. LIFO
D. Specific identification
E. First In Still Here
Answer: A
1-590
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A1
[Question]
77. The inventory valuation method that results in the lowest taxable income in a period of
inflation is:
A. LIFO method
B. FIFO method
C. Weighted-average cost method
D. Specific identification method
E. Gross profit method
Answer: A
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-A1
[Question]
78. The consistency principle:
A. Requires a company to consistently use the same accounting method of inventory
valuation unless a change will improve financial reporting
B. Requires a company to use one method of inventory valuation exclusively
C. Requires that all companies in the same industry use the same accounting methods of
inventory valuation
D. Is also called the full disclosure principle
E. Is also called the matching principle
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-A1
1-591
Chapter 01 - Introducing Accounting in Business
[Question]
79. The full disclosure principle:
A. Requires that when a change in inventory valuation method is made, the notes to the
financial statements report the type of change, why it was made and its effect on net income
B. Requires that companies use the same accounting method for inventory valuation period
after period
C. Is not subject to the materiality principle
D. Is only applied to retailers
E. Is also called the consistency principle
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A1
[Question]
80. An error in the period-end inventory causes an offsetting error in the next period and
therefore:
A. Managers can ignore the error
B. It is sometimes said to be self-correcting
C. It affects only income statement accounts
D. If affects only balance sheet accounts
E. Is immaterial for managerial decision making
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-A2
[Question]
81. The understatement of the ending inventory balance causes:
A. Cost of goods sold to be overstated and net income to be understated
B. Cost of goods sold to be overstated and net income to be overstated
C. Cost of goods sold to be understated and net income to be understated
D. Cost of goods sold to be understated and net income to be overstated
E. Cost of goods sold to be overstated and net income to be correct
1-592
Chapter 01 - Introducing Accounting in Business
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A2
[Question]
82. The understatement of the beginning inventory balance causes:
A. Cost of goods sold to be understated and net income to be understated
B. Cost of goods sold to be understated and net income to be overstated
C. Cost of goods sold to be overstated and net income to be overstated
D. Cost of goods sold to be overstated and net income to be understated
E. Cost of goods sold to be overstated and net income to be correct
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A2
[Question]
83. An overstatement of ending inventory will cause
A. An overstatement of assets and equity on the balance sheet
B. An understatement of assets and equity on the balance sheet
C. An overstatement of assets and an understatement of equity on the balance sheet
D. An understatement of assets and an overstatement of equity on the balance sheet
E. No effect on the balance sheet
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A2
1-593
Chapter 01 - Introducing Accounting in Business
[Question]
84. The inventory turnover ratio:
A. Is used to analyze profitability
B. Is used to measure solvency
C. Measures how quickly a company turns over its merchandise inventory
D. Validates the acid-test ratio
E. Calculation depends on the company's inventory valuation method
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A3
[Question]
85. Days' sales in inventory:
A. Is also called days' stock on hand
B. Focuses on average inventory rather than ending inventory
C. Is used to measure solvency
D. Is calculated by dividing cost of goods sold by ending inventory
E. Is a substitute for the acid-test ratio
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A3
[Question]
86. The inventory turnover ratio is calculated as:
A. Cost of goods sold divided by average merchandise inventory
B. Sales divided by cost of goods sold
C. Ending inventory divided by cost of goods sold
D. Cost of goods sold divided by ending inventory
E. Cost of goods sold divided by ending inventory times 365
Answer: A
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
1-594
Chapter 01 - Introducing Accounting in Business
Learning Objective: 05-A3
[Question]
87. Days' sales in inventory is calculated as:
A. Ending inventory divided by sales times 365
B. Cost of goods sold divided by ending inventory
C. Ending inventory divided by cost of goods sold times 365
D. Cost of goods sold divided by ending inventory times 365
E. Ending inventory divided by cost of goods sold
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-A3
[Question]
88. Toys "R" Us had cost of goods sold of $9,421 million, ending inventory of $2,089 million
and average inventory of $1,965 million. The inventory turnover equals:
A. 0.21
B. 4.51
C. 4.79
D. 76.1 days
E. 80.9 days
Answer: C
Feedback: $9,421/$1,965 = 4.79
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A3
[Question]
89. A company had gross profit of $134,200 on net sales of $205,000. If ending inventory was
$8,000 and average inventory was $7,080, what is the company's inventory turnover?
A. 10.0
B. 8.85
C. 16.77
D. 18.95
E. 28.95
Answer: A
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
1-595
Chapter 01 - Introducing Accounting in Business
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A3
[Question]
90. Toys "R" Us had cost of goods sold of $9,421 million, ending inventory of $2,089 million
and average inventory of $1,965 million. Its days' sales in inventory equals:
A. 0.21
B. 4.51
C. 4.79
D. 76.1 days
E. 80.9 days
Answer: E
Feedback: ($2,089/$9,421) x 365 = 80.9 days
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A3
[Question]
91. The inventory valuation method that identifies the invoice cost of each item in ending
inventory to determine the cost assigned to that inventory is the:
A. Weighted-average inventory method
B. First-in, first-out method
C. Last-in, first-out method
D. Specific identification method
E. Retail inventory method
Answer: D
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-596
Chapter 01 - Introducing Accounting in Business
[Question]
92. A company had the following purchases during the current year:
January:
February:
May:
September:
November:
10 units at $120
20 units at $130
15 units at $140
12 units at $150
10 units at $160
On December 31, there were 26 units remaining in ending inventory. These 26 units consisted
of 2 from January, 4 from February, 6 from May, 4 from September and 10 from November.
Using the specific identification method, what is the cost of the ending inventory?
A. $3,500
B. $3,800
C. $3,960
D. $3,280
E. $3,640
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
[Question]
93. A company had inventory on November 1 of 5 units at a cost of $20 each. On November
2, they purchased 10 units at $22 each. On November 6 they purchased 6 units at $25 each.
On November 8, 8 units were sold for $55 each. Using the LIFO perpetual inventory method,
what was the value of the inventory on November 8 after the sale?
A. $304
B. $296
C. $288
D. $280
E. $276
Answer: E
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-597
Chapter 01 - Introducing Accounting in Business
[Question]
94. A company had inventory on November 1 of 5 units at a cost of $20 each. On November
2, they purchased 10 units at $22 each. On November 6 they purchased 6 units at $25 each.
On November 8, 8 units were sold for $55 each. Using the FIFO perpetual inventory method,
what was the value of the inventory on November 8 after the sale?
A. $304
B. $296
C. $288
D. $280
E. $276
Answer: A
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
[Question]
95. A company had inventory on November 1 of 5 units at a cost of $20 each. On November
2, they purchased 10 units at $22 each. On November 6 they purchased 6 units at $25 each.
On November 5, 8 units were sold for $55 each. Using the Weighted Average perpetual
inventory method, what was the value of the inventory on November 30?
A. $304.00
B. $404.00
C. $299.33
D. $280.00
E. $276.00
Answer: C
Feedback:
date
Purchases
Sales
Unit cost
1-Nov
5
20
5
100
2-Nov
10
22
15
320
7
149.33
13
299.33
5-Nov
6-Nov
Units
8
6
Unit cost
Ending Inventory
Units
21.33333
Total $ sold
170.67
25
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-598
Units
Total EI $
Chapter 01 - Introducing Accounting in Business
[Question]
96. Acme-Jones Corporation uses a weighted-average perpetual inventory system.
August 2, 10 units were purchased at $12 per unit.
August 18, 15 units were purchased at $14 per unit.
August 29, 12 units were sold.
What was the amount of the cost of goods sold for this sale?
A. $148.00
B. $150.50
C. $158.40
D. $210.00
E. $330.00
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
[Question]
97. Acme-Jones Corporation uses a FIFO perpetual inventory system.
August 2, 25 units were purchased at $12 per unit.
August 5, 10 units were purchased at $13 per unit
August 15, 12 units were sold at $25 per unit.
August 18, 15 units were purchased at $14 per unit.
What was the amount of the ending inventory for the month of August?
A. $496.00
B. $486.00
C. $492.57
D. $300.00
E. $510.00
Answer: A
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-599
Chapter 01 - Introducing Accounting in Business
[Question]
98. Acme-Jones Corporation uses a LIFO perpetual inventory system.
August 2, 25 units were purchased at $12 per unit.
August 5, 10 units were purchased at $13 per unit
August 15, 12 units were sold at $25 per unit.
August 18, 15 units were purchased at $14 per unit.
What was the amount of the ending inventory for the month of August?
A. $496.00
B. $486.00
C. $492.57
D. $300.00
E. $510.00
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
[Question]
99. Acme-Jones Corporation uses a LIFO perpetual inventory system.
August 2, 25 units were purchased at $12 per unit.
August 5, 10 units were purchased at $13 per unit
August 15, 12 units were sold at $25 per unit.
August 18, 15 units were purchased at $14 per unit.
What was the amount of the Cost of Goods Sold?
A. $184.53
B. $163.00
C. $174.43
D. $154.00
E. $144.00
Answer: D
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-600
Chapter 01 - Introducing Accounting in Business
[Question]
100. A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, they
purchased 20 units at $12 each. 12 units are sold on June 5. Using the FIFO perpetual
inventory method, what is the cost of the 12 units that were sold?
A. $120
B. $124
C. $128
D. $130
E. $140
Answer: B
Feedback: (10 units x $10) + (2 units x $12) = $124
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
[Question]
101. A company has inventory of 15 units at a cost of $12 each on August 1. On August 5,
they purchased 10 units at $13 per unit. On August 12 they purchased 20 units at $14 per unit.
On August 15, they sold 30 units. Using the FIFO perpetual inventory method, what is the
value of the inventory on August 15 after the sale?
A. $140
B. $160
C. $210
D. $380
E. $590
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-601
Chapter 01 - Introducing Accounting in Business
[Question]
102. A company had inventory of 5 units at a cost of $20 each on November 1. On November
2, they purchased 10 units at $22 each. On November 6 they purchased 6 units at $25 each.
On November 8, they sold 18 units for $54 each. Using the LIFO perpetual inventory method,
what was the cost of the 18 units sold?
A. $395
B. $410
C. $450
D. $510
E. $520
Answer: B
Feedback: (6 x $25) + (10 x $22) + (2 x $20) = $410
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
[Question]
103. A company markets a climbing kit and uses the perpetual inventory system to account
for its merchandise. The beginning balance of the inventory and its transactions during
January were as follows:
January 1:
Beginning balance of 18 units at $13 each.
January 12:
Purchased 30 units at $14 each.
January 19:
Sold 24 units at $30 selling price each.
January 20:
Purchased 24 units at $17 each.
January 27:
Sold 27 units at $30 selling price each.
If the ending inventory is reported at $276, which inventory method was used?
A. LIFO method
B. FIFO method
C. Weighted-average method
D. Specific identification method
E. Retail inventory method
Answer: A
1-602
Chapter 01 - Introducing Accounting in Business
Feedback:
Purchases
Date
Units
Unit
cost
Jan 1
Jan 12 30
$14
Total
24
$17
Jan 27
Unit
cost
Total
$420
Jan 19
Jan 20
Sales
Units
24
$14
$336
24
3
$17
$14
$408
$ 42
$408
Balance
Units
Unit
cost
18
$13
18
$13
30
$14
18
$13
6
$14
18
$13
6
$14
24
$17
18
$13
3
$14
21
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
104. Acme-Jones Company uses a weighted-average perpetual inventory system.
August 2: 10 units were purchased at $12 per unit.
August 18: 15 units were purchased at $15 per unit.
August 29: 20 units were sold.
August 31: 14 units were purchased at $16 per unit.
What is the per-unit value of ending inventory on August 31?
A. $12.00
B. $13.80
C. $15.42
D. $16.00
E. $17.74
Answer: C
1-603
Total
$234
$234
$420
$234
$84
$234
$84
$408
$234
$ 42
$276
Chapter 01 - Introducing Accounting in Business
Feedback: *$345/25 units = $13.80/unit
**$293/19 units = $15.42/unit
Purchases
Cost of goods sold
Balance
Units
Unit
Total
Units
Unit
Total
Units
Unit cost Total
cost
cost
Aug. 2
10
$12
$120
10
$12.00
$120
Aug.18
15
$15
$225
25 $13.80*
$345
Aug.20
20 $13.80
$276
5
$13.80
$69
Aug.31
14
$16
$224
19 $15.42**
$293
Date
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
105. Given the following events, what is the per-unit value of ending inventory on November
30 if this company uses a weighted-average perpetual inventory system?
November 1: 5 units were purchased at $6 per unit.
November 12: 10 units were purchased at $7.50 per unit.
November 14: 7 units were sold for $14 per unit.
November 24: 12 units were purchased at $10 per unit.
A. $6.00
B. $7.00
C. $8.80
D. $13.00
E. $21.80
Answer: C
Feedback: * $105/15 units = $7.00/unit
**$176/20 units = $8.80/unit
1-604
Chapter 01 - Introducing Accounting in Business
Purchases
Cost of goods sold
Balance
Date
Units
Unit
Total
Units
Unit
Total
Units
Unit
Total
cost
cost
cost
Nov.1
5
$6.00
$30
5
$6.00
$30
Nov.12
10
$7.50
$75
15 $7.00*
$105
Nov.14
7
$7.00
$49
8
$7.00
$56
Nov.24
12 $10.00
$120
20 $8.80**
$176
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
106. Given the following information, determine the cost of ending inventory at June 30 using
the LIFO perpetual inventory method. Assume this is the first month of the company's
operations.
June 1: 15 units were purchased at $20 per unit.
June 15: 12 units were sold.
June 29: 8 units were purchased for $25 per unit.
A. $200
B. $220
C. $260
D. $275
E. $300
Answer: C
Feedback:
Date
June 1
June 15
June 29
Purchases
Cost of goods sold
Balance
Unit
Total
Units
Unit
Total
Units
Unit
Total
cost
cost
cost
15
$20
$300
15
$20
$300
12
$20
$240
3
$20
$60
8
$25
$200
3
$20
$60
8
$25
$200
11
$260
Units
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
1-605
Chapter 01 - Introducing Accounting in Business
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
107. Given the following information, determine the cost of ending inventory at December 31
using the weighted-average perpetual inventory method. Assume this is the first month of the
company's operations.
December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.
December 12: 2 units were sold.
A. $17.20
B. $111.80
C. $129.00
D. $94.00
E. $8.60
Answer: B
Feedback: * $129/15 units = $8.60 per unit
Date
Dec. 2
Dec. 9
Dec. 12
Purchases
Cost of goods sold
Balance
Units Unit
Total
Units
Unit
Total
Unit Unit
Total
cost
cost
s
cost
5
$7
$35
5
$7
$35
10
$9.40
$94
15 $8.60*
$129
2
$8.60 $17.20
13
$8.60 $111.80
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
1-606
Chapter 01 - Introducing Accounting in Business
[Question]
108. Given the following information, determine the cost of ending inventory at December 31
using the FIFO perpetual inventory method.
December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.
December 11: 12 units were sold at $35 per unit
December 15: 20 units were purchased at $10.15 per unit
December 22: 18 units were sold at $35 per unit
A. $51.75
B. $83.22
C. $41.30
D. $94.00
E. $50.75
Answer: E
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
109. Given the following information, determine the cost of ending inventory at December 31
using the LIFO perpetual inventory method.
December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.
December 11: 12 units were sold at $35 per unit
December 15: 20 units were purchased at $10.15 per unit
December 22: 18 units were sold at $35 per unit
A. $51.75
B. $83.22
C. $41.30
D. $94.00
E. $50.75
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
1-607
Chapter 01 - Introducing Accounting in Business
[Question]
110. Given the following information, determine the cost of ending inventory at December 31
using the Weighted Average perpetual inventory method.
December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.
December 11: 12 units were sold at $35 per unit
December 15: 20 units were purchased at $10.15 per unit
December 22: 18 units were sold at $35 per unit
A. $51.75
B. $83.22
C. $41.30
D. $49.75
E. $50.75
Answer: D
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
111. Given the following information, determine the cost of goods sold for December 31
using the FIFO perpetual inventory method.
December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.
December 11: 12 units were sold at $35 per unit
December 15: 20 units were purchased at $10.15 per unit
December 22: 18 units were sold at $35 per unit
A. $282.15
B. $332.10
C. $281.25
D. $290.70
E. $210.30
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
1-608
Chapter 01 - Introducing Accounting in Business
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
112. Given the following information, determine the cost of goods sold at December 31 using
the LIFO perpetual inventory method.
December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.
December 11: 12 units were sold at $35 per unit
December 15: 20 units were purchased at $10.15 per unit
December 22: 18 units were sold at $35 per unit
A. $282.15
B. $332.10
C. $281.25
D. $290.70
E. $210.30
Answer: D
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
113. Given the following information, determine the cost of goods sold at December 31 using
the Weighted Average perpetual inventory method.
December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.
December 11: 12 units were sold at $35 per unit
December 15: 20 units were purchased at $10.15 per unit
December 22: 18 units were sold at $35 per unit
A. $282.15
B. $332.10
C. $281.25
D. $290.70
E. $210.30
Answer: A
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
1-609
Chapter 01 - Introducing Accounting in Business
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
114. In applying the lower of cost or market method to inventory valuation, market is defined
as:
A. Historical cost
B. Current replacement cost
C. Current sales price
D. FIFO
E. LIFO
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P2
[Question]
115. Generally accepted accounting principles require that the inventory of a company be
reported at:
A. Market value
B. Historical cost
C. Lower of cost or market
D. Replacement cost
E. Retail value
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Technology
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P2
1-610
Chapter 01 - Introducing Accounting in Business
[Question]
116. The conservatism principle:
A. Requires that when there are more than one equally likely estimate of amounts expected to
be received or paid in the future, then the less optimistic amount should be used
B. Requires that a company use the same accounting methods period after period
C. Requires that revenues and expenses be reported in the period in which they are earned or
incurred
D. Requires that all items of a material nature be included in financial statements
E. Requires that all inventory items be reported at full cost
Answer: A
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P2
[Question]
117. A company normally sells its product for $20 per unit. However, the selling price has
fallen to $15 per unit. This company's current inventory consists of 200 units purchased at $16
per unit. Replacement cost has now fallen to $13 per unit. Calculate the value of this
company's inventory at the lower of cost or market.
A. $2,550
B. $2,600
C. $2,700
D. $3,000
E. $3,200
Answer: B
Feedback: 200 units @ $13 per unit = $2,600
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P2
1-611
Chapter 01 - Introducing Accounting in Business
[Question]
118. A company normally sells its product for $40 per unit. However, the selling price has
fallen to $30 per unit. This company's current inventory consists of 200 units purchased at $32
per unit. Replacement cost has now fallen to $26 per unit. Calculate the value of this
company's inventory at the lower of cost or market.
A. $5,200
B. $6,400
C. $6,000
D. $8,000
E. $7,000
Answer: A
Feedback: 200 units @ $26 per unit = $5,200
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P2
[Question]
119. A company has the following per unit original costs and replacement costs for its
inventory:
Part A: 50 units with a cost of $5 and replacement cost of $4.50
Part B: 75 units with a cost of $6 and replacement cost of $6.50
Part C: 160 units with a cost of $3 and replacement cost of $2.50
Under the lower of cost or market method, the total value of this company's ending inventory
is:
A. $1,180.00
B. $1,075.00
C. $1,112.50 or $1075.00, depending upon whether LCM is applied to individual items or the
inventory as a whole
D. $1,112.50
E. $1180.00 or $1075.00, depending upon whether LCM is applied to individual items or to
the inventory as a whole
Answer: C
Feedback:
A
B
C
Per unit
Total
LCM applied to
Units Cost Market Cost
Market
Items
Whole
50
$5
$4.50
$ 250
$ 225.00
$225
75
$6
$6.50
450
487.50
450
160
$3
$2.50
480
400.00
400
$1,180 $1,112.50 $1,075 $1,112.50
1-612
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P2
[Question]
120. A company has the following per unit original costs and replacement costs for its
inventory:
Part A: 10 units with a cost of $3 and replacement cost of $2.50
Part B: 40 units with a cost of $9 and replacement cost of $9.50
Part C: 75 units with a cost of $8 and replacement cost of $7.50
Under the lower of cost or market method, the total value of this company's ending inventory
is:
A. $990.00
B. $947.50
C. $967.50 or $947.50, depending upon whether LCM is applied to individual items or the
inventory as a whole
D. $967.50
E. $990.00 or $947.50, depending upon whether LCM is applied to individual items or to the
inventory as a whole
Answer: C
Feedback:
A
B
C
Per unit
Total
LCM applied to
Units Cost Market Cost
Market
Items
Whole
10
$3
$2.50
$ 30.00
$ 25.00
$ 25.00
40
$9
$9.50
360.00
380.00
360.00
75
$8
$7.50
600.00
562.50
562.50
$990.00
$967.50
$947.50
$967.50
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P2
1-613
Chapter 01 - Introducing Accounting in Business
[Question]
121. A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, they
purchased 20 units at $12 each. 12 units are sold on June 5. Using the FIFO periodic
inventory method, what is the cost of the 12 units that were sold?
A. $120
B. $124
C. $128
D. $130
E. $140
Answer: B
Feedback: (10 units x $10) + (2 units x $12) = $124
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P3
[Question]
122. Given the following information, determine the cost of goods sold for December 31
using the FIFO periodic inventory method.
December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.
December 11: 12 units were sold at $35 per unit
December 15: 20 units were purchased at $10.15 per unit
December 22: 18 units were sold at $35 per unit
A. $282.15
B. $332.10
C. $281.25
D. $297.00
E. $284.70
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P3
1-614
Chapter 01 - Introducing Accounting in Business
[Question]
123. Given the following information, determine the cost of goods sold at December 31 using
the LIFO periodic inventory method.
December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.
December 11: 12 units were sold at $35 per unit
December 15: 20 units were purchased at $10.15 per unit
December 22: 18 units were sold at $35 per unit
A. $284.70
B. $332.10
C. $281.25
D. $290.70
E. $297.00
Answer: E
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P3
[Question]
124. Given the following information, determine the cost of goods sold at December 31 using
the Weighted Average periodic inventory method.
December 2: 5 units were purchased at $7 per unit.
December 9: 10 units were purchased at $9.40 per unit.
December 11: 12 units were sold at $35 per unit
December 15: 20 units were purchased at $10.15 per unit
December 22: 18 units were sold at $35 per unit
A. $282.15
B. $332.10
C. $284.70
D. $290.70
E. $210.30
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
1-615
Chapter 01 - Introducing Accounting in Business
Learning Objective: 05-P3
[Question]
125. A company has inventory of 15 units at a cost of $12 each on August 1. On August 5,
they purchased 10 units at $13 per unit. On August 12 they purchased 20 units at $14 per unit.
On August 15, they sold 30 units. Using the FIFO periodic inventory method, what is the
value of the inventory at August 15 after the sale?
A. $140
B. $160
C. $210
D. $380
E. $590
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P3
[Question]
126. A company had inventory of 5 units at a cost of $20 each on November 1. On November
2, they purchased 10 units at $22 each. On November 6 they purchased 6 units at $25 each.
On November 8, they sold 18 units for $54 each. Using the LIFO perpetual inventory method,
what was the cost of the 18 units sold?
A. $395
B. $410
C. $450
D. $510
E. $520
Answer: B
Feedback: (6 x $25) + (10 x $22) + (2 x $20) = $410
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P3
1-616
Chapter 01 - Introducing Accounting in Business
[Question]
127. A company uses the periodic inventory system and had the following activity during the
current monthly period.
November 1:
November 5:
November 8:
November 16:
November 19:
Beginning inventory
Purchased
Purchased
Sold
Purchased
100 units @ $20
100 units @ $22
50 units @ $23
200 units @ $45
50 units @ $25
Using the weighted-average inventory method, the company's ending inventory would be
reported at:
A. $2,000
B. $2,200
C. $2,250
D. $2,400
E. $4,400
Answer: B
Feedback:
100 @ $20
11/5
100 @ $22
11/8
50 @ $23
11/19
50 @ $25
Total
300
6,600/300 = 22*100 = 2,200
$2,000
2,200
1,150
1,250
$6,600
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P3
1-617
Chapter 01 - Introducing Accounting in Business
[Question]
128. A company sells a climbing kit and uses the periodic inventory system to account for its
merchandise. The beginning balance of the inventory and its transactions during January were
as follows:
January 1:
January 12:
January 19:
January 20:
January 27:
Beginning balance of 18 units at $13 each
Purchased 30 units at $14 each
Sold 24 units at a selling price of $30 each
Purchased 24 units at $17 each
Sold 27 units at a selling price of $30 each
If the ending inventory is reported at $357, what inventory method was used?
A. LIFO
B. FIFO
C. Weighted average
D. Specific identification
E. Retail inventory method
Answer: B
Feedback:
1/12
1/20
Total
Sold
EI
18 @ $13
30 @ $14
24 @ $17 =
72
51
21 @ $17 = $357
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P3
1-618
$234
420
408
$1,062
Chapter 01 - Introducing Accounting in Business
[Question]
129. Interim statements:
A. Are required by the Congress
B. Are necessary to achieve full disclosure about a business's operations
C. Are usually monthly or quarterly statements prepared in between the traditional, annual
statement dates
D. Require the use of the perpetual method for inventories
E. Cannot be prepared if the company follows the conservatism principle
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Easy
Learning Objective: 05-P4
[Question]
130. A company's warehouse was destroyed by a tornado on March 15. The following
information was the only information that was salvaged:
Inventory, beginning: $28,000
Purchases for the period: $17,000
Sales for the period: $55,000
Sales returns for the period: $700
The company's average gross profit ratio is 35%. What is the estimated cost of the lost
inventory?
A. $9,705
B. $25,995
C. $29,250
D. $44,000
E. $45,000
Answer: A
Feedback:
$28,000 Beginning inventory
17,000 Purchases
45,000 Goods available
(35,295) COGS (54,300 x .65)
$ 9,705 Cost of lost inventory
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P4
1-619
Chapter 01 - Introducing Accounting in Business
[Question]
131. A company reported the following information regarding its inventory.
Beginning inventory: cost is $70,000; retail is $130,000
Net purchases: cost is $65,000; retail is $120,000
Sales at retail: $145,000
The year-end inventory showed $105,000 worth of merchandise available at retail prices.
What is the cost of the ending inventory?
A. $48,300
B. $56,700
C. $56,441
D. $78,300
E. $105,000
Answer: B
Feedback:
Beginning inventory
Purchases
Goods available
At cost
At retail
$ 70,000
$130,000
65,000
120,000
$135,000
$250,000
Cost / retail ratio
EI at cost
$135,000/$250,000 = 54%
$105,000 x 54% = $56,700
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P4
1-620
Chapter 01 - Introducing Accounting in Business
[Question]
132. On September 30 a company needed to estimate its ending inventory to prepare its third
quarter financial statements. The following information is available:
Beginning inventory, July 1: $4,000
Net sales: $40,000
Net purchases: $41,000
The company's gross margin ratio is 15%. Using the gross profit method, the cost of goods
sold would be:
A. $4,000
B. $5,000
C. $21,000
D. $25,000
E. $34,000
Answer: E
Feedback: 40,000 x .85 = 34,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P4
1-621
Chapter 01 - Introducing Accounting in Business
[Question]
133. On June 30 a company needed to estimate its ending inventory to prepare its second
quarter financial statements. The following information is available:
Beginning inventory, April 1: $6,000
Net sales: $70,000
Net purchases: $36,000
The company's gross margin ratio is 12%. Using the gross profit method, the cost of goods
sold would be:
A. $8,400
B. $34,000
C. $61,600
D. $40,000
E. $35,200
Answer: C
Feedback: 70,000 x .88 = 61,600
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P4
1-622
Chapter 01 - Introducing Accounting in Business
[Question]
134. A company that has operated with a 30% average gross profit ratio for a number of years
had $100,000 in sales during the first quarter of this year. If it began the quarter with $18,000
of inventory at cost and purchased $72,000 of inventory during the quarter, its estimated
ending inventory using the gross profit method is:
A. $30,000
B. $21,000
C. $20,000
D. $18,000
E. $27,000
Answer: C
Feedback:
Beginning inventory
+ Purchases
- COGS
= Ending Inventory
18,000
72,000
(70,000)
20,000
(100,000 x .70)
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P4
1-623
Chapter 01 - Introducing Accounting in Business
[Question]
135. On December 31, a company needed to estimate its ending inventory to prepare its fourth
quarter financial statements. The following information is currently available:
Inventory as of October 1: $12,500
Net sales for fourth quarter: $40,000
Net purchases for fourth quarter: $27,500
The company typically achieves a gross profit ratio of 15%. Ending Inventory under the gross
profit method would be:
A. $4,000
B. $6,000
C. $10,000
D. $16,000
E. $34,000
Answer: B
Feedback:
Beginning inventory
+ Purchases
- COGS
= Ending Inventory
12,500
27,500
(34,000)
6,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P4
1-624
(40,000 x .85)
Chapter 01 - Introducing Accounting in Business
[Question]
136. Use the following information to estimate the third quarter ending inventory under the
gross profit method. This company's gross profit ratio is 20%.
Third quarter beginning inventory: $54,000
Net sales for third quarter: $85,000
Net purchases for third quarter: $21,000
A. $101,000
B. $58,000
C. $35,000
D. $7,000
E. $14,000
Answer: D
Feedback:
Beginning inventory
+ Purchases
- COGS
= Ending Inventory
54,000
21,000
(68,000)
7,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P4
1-625
(85,000 x .80)
Chapter 01 - Introducing Accounting in Business
Matching Questions
[Question]
137. Match each of the following terms with the appropriate definition.
1. The number of times a company's inventory is sold
Conservatism
during a period
principle
2. A method for estimating an ending inventory based
on the ratio of the amount of goods for sale at cost to
Net realizable
the amount of goods for sale at retail price
value
3. The expected sales price of an item minus the cost of
Retail inventory
making the sale
method
4. An inventory pricing method that assumes the unit
prices of the beginning inventory and of each purchase
are weighted by the number of units of each in
inventory; the calculation occurs at the time of each
Days' sales in
sale
inventory
5. The accounting principle that aims to select the less
optimistic estimate when two or more estimates are
Weighted average
about equally likely
inventory method
6. Financial statements prepared for periods of less than
one year
Interim statements
7. An inventory valuation method that assumes costs for
the most recent items purchased are sold first and
charged to cost of goods sold
LIFO method
8. An inventory valuation method that assumes that
Specific
inventory items are sold in the order acquired
identification method
9. An inventory valuation method where the purchase
cost of each item in ending inventory is identified and
used to determine the cost assigned to inventory
FIFO method
10. An estimate of days needed to convert the inventory Inventory
at the end of the period into receivables or cash
turnover
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 05-A1
Learning Objective: 05-C1
Learning Objective: 05-P1
Learning Objective: 05-P2
Learning Objective: 05-P4
1-626
5
3
2
10
4
6
7
9
8
1
Chapter 01 - Introducing Accounting in Business
[Question]
138. Match the following terms with the appropriate definition.
1. The required method of reporting inventory at market
when market is lower than cost
Consignor
2. One who receives and holds goods owned by another
Gross profit
for purposes of selling the goods for the owner
method
3. The principle that aims to select the less optimistic
estimate when two or more estimates are about equally
Consistency
likely
principle
4. The accounting principle that says a company uses the
same accounting methods period after period so that the
financial statements of succeeding periods will be
Days' sales in
comparable
inventory
5. A procedure for estimating inventory where the past
gross profit rate is used to estimate the cost of goods
sold, which is then subtracted from the cost of goods
available for sale to determine the estimated ending
inventory
Consignee
Specific
6. An owner of goods who ships them to another party identification
who will then sell the goods for the owner
method
7. The method of assigning costs to inventory where the
purchase cost of each item in inventory is identified and
Inventory
used to determine the cost of inventory
turnover
8. An estimate of days needed to convert the inventory
Lower of cost or
available at the end of the period into receivables or cash market
9. The number of times a company's average inventory is Retail inventory
sold during an accounting period
method
10. A method for estimating inventory based on the ratio
of the amount of goods for sale at cost to the amount of
Conservatism
goods for sale at retail prices
principle
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 05-A3
Learning Objective: 05-C1
Learning Objective: 05-P1
Learning Objective: 05-P2
Learning Objective: 05-P4
1-627
6
5
4
8
2
7
9
1
10
3
Chapter 01 - Introducing Accounting in Business
Essay Questions
[Question]
139. Identify the inventory valuation method that is being described for each situation below.
In all cases, assume a period of rising prices. Use the following to identify the inventory
valuation method:
FIFO
LIFO
SI
WA
First in, first out
Last in, first out
Specific identification
Weighted average
a. The method that can only be used if each inventory item can be matched with a specific
purchase and its invoice
b. The method that will cause the company to have the lowest income taxes
c. The method that will cause the company to have the lowest cost of goods sold
d. The method that will assign a value to inventory that approximates its current cost
e. The method that will tend to smooth out erratic changes in costs.
Answer:
a. SI; b. LIFO; c. FIFO; d. FIFO; e. WA
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-A1
Learning Objective: 05-P1
1-628
Chapter 01 - Introducing Accounting in Business
[Question]
140. Identify the items that are included in merchandise inventory. (In your answer address
the special situations of goods in transit, consigned goods and damaged goods.)
Answer:
Merchandise inventory consists of goods owned by a company and held for resale. Three
special cases involving ownership decisions are goods in transit, consigned goods and
damaged goods. Goods in transit are included in the inventory of the company that owns the
goods. Consigned goods are included in the inventory of the consignor. Damaged goods are
valued at net realizable value.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-C1
[Question]
141. What costs are assigned to merchandise inventory?
Answer:
The costs of merchandise inventory include the invoice price minus any discounts, plus any
added or incidental costs necessary to put the inventory in a place and condition for sale.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-C2
1-629
Chapter 01 - Introducing Accounting in Business
[Question]
142. Describe the internal controls that must be applied when taking a physical count of
inventory.
Answer:
The internal controls should include (1) pre-numbered tickets that are all accounted for; (2)
counters who are not responsible for the inventory; (3) counters who must confirm the
validity of inventory's existence, amounts and quality; (4) a second count by a different
counter; and (5) confirmation that all inventories are ticketed only once by a manager.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: Hard
Learning Objective: 05-C2
[Question]
143. Explain the effects of inventory valuation methods on the cost of ending inventory,
income and income taxes.
Answer:
The specific identification method identifies the exact costs of the inventory items sold. The
weighted average method evens out changes in costs by "averaging" inventory costs.
However, LIFO and FIFO provide different amounts in periods of rising or falling costs. For
example, in periods of rising costs, LIFO provides a lower income and thus lower taxes. In
periods of falling costs, LIFO provides a higher income and thus higher taxes. FIFO
calculations provide both higher income and taxes in periods of rising costs and lower income
and taxes in periods of declining costs.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A1
1-630
Chapter 01 - Introducing Accounting in Business
[Question]
144. How do the consistency principle and the full disclosure principle affect inventory
valuation?
Answer:
The consistency principle requires that companies use the same accounting method for
inventory valuation from period to period so that the financial statements are comparable
across periods. The only exception is when a change for one method to another will improve
its financial reporting. The consistency principle does not require a company to use one
inventory valuation method for all categories of inventory.
If a company does change its inventory valuation method, the full disclosure principle
requires that the notes to the financial statements report the type of change, its justification
and its effect on net income.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A1
[Question]
145. What is the effect of an error in the ending inventory balance on the income statement?
Answer:
An inventory error causes misstatements in cost of good sold, gross profit, net income, current
assets and equity. It also causes misstatements in the next period's cost of goods sold and net
income. However, the inventory error is said to be self-correcting because the error in the first
period is offset by the error in the second period.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A2
1-631
Chapter 01 - Introducing Accounting in Business
[Question]
146. Explain how the inventory turnover ratio and the days' sales in inventory ratio are used to
evaluate inventory management.
Answer:
A merchandiser's ability to pay its short-term obligations depends, among other factors, on
how quickly it sells its merchandise inventory. The inventory turnover ratio reveals how many
times a company turns over (sells) its inventory during a period. A low ratio compared to
competitors suggests the company may be holding more inventory than necessary to support
its sales volume. On the other hand, a ratio that is too high compared to competitors may
suggest that the inventory level is too low and customers may have to back order
merchandise.
The days' sales in inventory ratio helps to better interpret inventory turnover. It can be
interpreted as the number of days one can sell from inventory if no new items are purchased
and can be viewed as a measure of the buffer against out-of-stock inventory.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
AICPA FN: Research
Difficulty: Medium
Learning Objective: 05-A3
[Question]
147. Identify and describe the four inventory valuation methods.
Answer:
The specific identification method assigns costs to each inventory item based on specific
invoice costs. The weighted average method assigns costs by using the total balance in
inventory and dividing it by the number of units to arrive at a cost per unit at each sale. The
first-in-first-out method assigns cost to items sold assuming that the first units purchased are
the first to be sold. The last-in-first-out method assumes that the last units purchased are the
first to be sold.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-632
Chapter 01 - Introducing Accounting in Business
[Question]
148. Explain why the lower of cost or market rule is used to value inventory.
Answer:
The principle of conservatism requires that if there is more than one estimate of the value of
an asset, then the lower of the two should be used. The lower of cost or market rule compares
the acquisition cost of inventory with the current replacement cost. The lower of these two
values is then selected as the amount to be reported.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P2
[Question]
149. Discuss the important accounting features of a periodic inventory system including
accounts and procedures used.
Answer:
Each purchase of merchandise is debited to the Purchases account. Cost of goods sold is not
recorded at the time of sale. Instead, a physical count of inventory at the end of the accounting
period is used to determine the amount of inventory sold. Certain costs of inventory such as
transportation-in, purchases discounts and purchases returns and allowances are recorded in
separate accounts. These separate accounts are then used to help compute inventory at the end
of the period.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P3
1-633
Chapter 01 - Introducing Accounting in Business
[Question]
150. Explain the difference between the retail inventory method and gross profit inventory
method for valuing inventory.
Answer:
The retail method is generally used to prepare interim statements. It uses the cost to retail ratio
to give an estimated ending inventory at cost. The gross profit method is typically used to
reconstruct the value of lost, stolen or destroyed inventory. It uses the (historical) gross profit
ratio to estimate cost of goods sold and the value of ending inventory.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P4
[Question]
151. Randy Hetrick founded Fitness Anywhere, Inc. Why is managing inventory an important
issue for his company?
Answer:
Inventory management is important to any company. He set up a perpetual inventory system
to account for inventory sales and purchases in real time. Randy insists that it is really
important to serve customers’ needs, which demands sound inventory accounting He will
need to maintain the right amount of goods in inventory and control inventory costs to enable
Fitness Anywhere, Inc to grow.
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
1-634
Chapter 01 - Introducing Accounting in Business
Short Answer Questions
[Question]
152. Monitor Company uses the LIFO method for valuing its ending inventory. The following
financial statement information is available for their first year of operation:
Monitor Company
Income Statement
For the year ended December 31
Sales
Cost of goods sold
Gross profit
Expenses
Income before taxes
$50,000
23,000
$27,000
13,000
$14,000
Monitor's ending inventory using the LIFO method was $8,200. Monitor's accountant
determined that had they used FIFO, the ending inventory would have been $8,500.
a. Determine what the income before taxes would have been, had Monitor used the FIFO
method of inventory valuation instead of LIFO
b. What would be the difference in income taxes between LIFO and FIFO, assuming a 30%
tax rate?
Answer:
a. If ending inventory is $300 higher using FIFO ($8,500 - $8,200), then the cost of goods
sold would be $300 lower, gross profit $300 higher and income before taxes would be $300
higher. Therefore, income before taxes would be $14,000 + $300 = $14,300.
b.
Income before taxes
Income taxes (30%)
LIFO
$14,000
$ 4,200
FIFO
Income taxes would be $90 higher using FIFO than LIFO.
Bloom’s Taxonomy: Evaluate
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A1
1-635
$14,300
$ 4,290
Chapter 01 - Introducing Accounting in Business
[Question]
153. Evaluate each inventory error separately and determine whether it overstates or
understates cost of goods sold and net income.
Inventory error:
Cost of goods sold is:
Net income is:
Understatement of beginning inventory
Understatement of ending inventory
Overstatement of beginning inventory
Overstatement of ending inventory
Answer:
Inventory error:
Understatement of beginning inventory
Understatement of ending inventory
Overstatement of beginning inventory
Overstatement of ending inventory
Cost of goods sold is:
Understated
Overstated
Overstated
Understated
Bloom’s Taxonomy: Evaluate
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A2
1-636
Net income is:
Overstated
Understated
Understated
Overstated
Chapter 01 - Introducing Accounting in Business
[Question]
154. The City Store reported the following amounts on their financial statements for 2009,
2010 and 2011:
Cost of goods sold
Net income
Total current assets
Equity
For the year ended December 31
2009
2010
2011
$75,000 $87,000
$77,000
22,000 25,000
21,000
155,000 165,000
110,000
287,000 295,000
304,000
It was discovered early in 2012 that the ending inventory on December 31, 2009 was
overstated by $6,000 and the ending inventory on December 31, 2010 was understated by
$2,500. The ending inventory on December 31, 2011 was correct. Ignoring income taxes,
determine the correct amounts of cost of goods sold, net income, total current assets and
equity for each of the years 2009, 2010 and 2011.
Answer:
2009:
2010:
2011:
Cost of goods sold = $75,000 - $6,000 = $81,000
Net income = $22,000 - $6,000 = $16,000
Total current assets = $155,000 - $6,000 = $149,000
Equity = $287,000 - $6,000 = $281,000
Cost of goods sold = $87,000 - $6,000 - $2,500 = $78,500
Net income = $25,000 + $6,000 + $2,500 = $33,500
Total current assets = $165,000 + $2,500 = $167,500
Equity = $295,000 + $2,500 = $297,500
Cost of goods sold = $77,000 + $2,500 = $79,500
Net income = $21,000 - $2,500 = $18,500
Total current assets = $110,000 (no error)
Equity = $304,000 (no error)
Cost of goods sold
Net income
Total current assets
Equity
For the year ended December 31
2008
2009
2010
$81,000 $78,500
$79,500
16,000 33,500
18,500
149,000 167,500
110,000
281,000 297,500
304,000
1-637
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Evaluate
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A2
[Question]
155. A company reported the following data:
Cost of goods sold
Average inventory
Year 1
Year 2
$347,600 $379,650
85,000
91,050
Year 3
$443,900
98,350
Required:
1. Calculate the company's merchandise inventory turnover for each year.
2. Comment on the company's efficiency in managing its inventory.
Answer:
1.
Year 1
$347,600
$ 85,000
4.09
Year 2
$379,650
$ 91,050
4.17
Year 3
$443,900
$ 98,350
4.51
2. The company's efficiency in managing its inventory is increasing as its sales increase. This
is a positive reflection on inventory management
Bloom’s Taxonomy: Evaluate
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-A3
1-638
Chapter 01 - Introducing Accounting in Business
[Question]
156. A company reported the following data:
Cost of goods sold
Ending inventory
Year 1
Year 2
$238,000 $375,000
120,000 150,000
Year 3
$495,000
180,000
Required:
1. Calculate the days' sales in inventory for each year.
2. Comment on the trend in inventory management.
Answer:
1.
Year 1
$120,000
 365  184 days
$238,000

Year 2
$150,000
 365  146 days
$375,000
Year 3
$180,000
 365  133 days
$495,000
2. The company has a trend of decreasing the number of days it takes to sell its inventory.

 provided there is sufficient inventory
This is a positive reflection
on inventory management
available to meet the sales demand.
Bloom’s Taxonomy: Evaluate
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-A3
1-639
Chapter 01 - Introducing Accounting in Business
[Question]
157. A company made the following purchases during the year:
Jan. 10
Mar. 15
Apr. 25
July 30
Oct. 10
15
25
10
20
15
units at
units at
units at
units at
units at
$360 each
$390 each
$420 each
$450 each
$480 each
On December 31, there were 28 units in ending inventory. These 28 units consisted of 1 from
the January 10 purchase, 2 from the March 15 purchase, 5 from the April 25 purchase, 15
from the July 30 purchase and 5 from the October 10 purchase. Using specific identification,
calculate the cost of the ending inventory.
Answer:
1x
2x
5x
15x
5x
$360
$390
$420
$450
$480
=
=
=
=
=
$
360
780
2,100
6,750
2,400
$12,390
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-640
Chapter 01 - Introducing Accounting in Business
[Question]
158. A company made the following merchandise purchases and sales during the month of
May:
May 1 purchased
May 5 purchased
May 10 sold
May 20 purchased
May 25 sold
380
270
400
300
400
units at
units at
units at
units at
units at
$15 each
$17 each
$50 each
$22 each
$50 each
There was no beginning inventory. If the company uses the weighted-average inventory
valuation method and the perpetual inventory method, what would be the cost of its ending
inventory?
Answer:
Date
5/1
5/5
5/10
5/20
5/25
Purchases
Units Per unit Total
380
$15 $5,700
270
$17 $4,590
Units
400
300
$22 $6,600
400
Sales
Per unit
Balance
Total Units Per unit
Total
380
$15.00 $5,700
650
$15.83 $10,290
$15.83 $6,332
250
$15.83 $ 3,958
550
$19.20 $10,558
$19.20 $7,680
150
$19.20 $ 2,878
(error due to rounding)
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-641
Chapter 01 - Introducing Accounting in Business
[Question]
159. A company made the following merchandise purchases and sales during the month of
July:
July 1 purchased
380
units at
$15 each
July 5 purchased
270
units at
$20 each
July 9 sold
500
units at
$55 each
July 14 purchased
300
units at
$24 each
July 20 sold
250
units at
$55 each
July 30 purchased
250
units at
$30 each
There was no beginning inventory. If the company uses the first-in, first-out perpetual
inventory method what would be the cost of the ending inventory?
Answer:
Purchases
Sales
Balance
Date
Units
Unit Total
Units
Unit Total
Units Unit Total
cost
cost
cost
7/1
380
$15
$5,700
380
$15 $5,700
7/5
270
$20
$5,400
7/9
7/14
380
120
300
$24
150
100
250
$30
$5,700
$2,400
$7,200
7/20
7/30
$15
$20
$20
$24
$7,500
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-642
$3,000
$2,400
380
270
650
$15
$20
$5,700
$5,400
$11,100
150
$20
$3,000
150
300
450
$20
$24
$3,000
$7,200
$10,200
200
$24
$4,800
200
250
450
$24
$30
$4,800
$7,500
$12,300
Chapter 01 - Introducing Accounting in Business
[Question]
160. A company made the following merchandise purchases and sales during the current
month:
July 1 purchased
380
units at
$15 each
July 5 purchased
270
units at
$20 each
July 9 sold
500
units at
$55 each
July 14 purchased
300
units at
$24 each
July 20 sold
250
units at
$55 each
July 30 purchased
250
units at
$30 each
There was no beginning inventory. If the company uses the last-in, first-out perpetual
inventory system, what would be the cost of the ending inventory?
Answer:
Purchases
Sales
Balance
Date
Units
Unit Total
Units
Unit Total
Units Unit Total
cost
cost
cost
7/1
380
$15
$5,700
380 $15
$5,700
7/5
270
$20
$5,400
7/9
7/14
270
230
300
$24
250
250
$30
$5,400
3,450
$7,200
7/20
7/30
$20
$15
$7,500
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-643
$24
$6,000
270
650
$20
$5,400
$11,100
150
$15
$2,250
150
300
450
$15
$24
$2,250
$7,200
$9,450
150
50
200
150
50
250
450
$15
$24
$ 2,550
1,200
$ 3,750
$ 2,250
1,200
7,500
$10,950
$15
$24
$30
Chapter 01 - Introducing Accounting in Business
[Question]
161. During January, a company that uses a perpetual inventory system had beginning
inventory, purchases and sales as follows. What was the FIFO cost of the company's January
31 inventory?
Cost
per
Units
Unit
100
$10
40
12
60
70
13
50
Beginning inventory
Jan.
5 purchase
10 sale
15 purchase
25 sale
Answer:
Date
1/1
1/5
Units
40
Purchases
Unit Total
cost
$12
Units
70
1/25
$13
Units
$480
1/10
1/15
Sales
Unit Total
cost
60
$10
$600
40
10
$10
$12
$400
120
$910
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-644
100
100
40
140
40
40
80
40
40
70
150
30
70
100
Balance
Unit Total
cost
$10
$1,000
$10
$1,000
$12
480
$1,480
$10
$ 400
$12
480
$ 880
$10
$ 400
$12
480
$13
910
$1,790
$12
$ 360
$13
910
$1,270
Chapter 01 - Introducing Accounting in Business
[Question]
162. During January, a company that uses a perpetual inventory system had beginning
inventory, purchases and sales as follows. What was the LIFO cost of the company's January
31 inventory?
Cost
per
Units
Unit
100
$10
40
12
60
70
13
50
Beginning inventory
Jan.
5 purchase
10 sale
15 purchase
25 sale
Answer:
Date
1/1
1/5
Units
40
Purchases
Unit Total
cost
$12
Units
40
20
60
70
1/25
$13
Units
$480
1/10
1/15
Sales
Unit Total
cost
$12
$10
$480
$200
$680
$910
50
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-645
$13
$650
100
100
40
140
80
80
70
150
80
20
100
Balance
Unit Total
cost
$10
$1,000
$10
$1,000
$12
480
$1,480
$10
$ 800
$10
$13
$10
$13
$ 800
$ 910
$1,710
$ 800
$ 260
$1,060
Chapter 01 - Introducing Accounting in Business
[Question]
163. During January, a company that uses a perpetual inventory system had beginning
inventory, purchases and sales as follows. What was the weighted average cost of the
company's January 31 inventory?
Cost
per
Units
Unit
100
$10
40
12
60
70
13
50
Beginning inventory
Jan.
5 purchase
10 sale
15 purchase
25 sale
Answer:
Date
1/1
1/5
1/10
1/15
1/25
Units
Purchases
Unit
cost Total
40
70
$12
$13
Units
Sales
Unit
cost
Total
$480
60 $10.57
$634
50 $11.71
$585
$910
* $1,480/140 units = $10.57/unit
**$1,756/150 units = $11.71/unit
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-646
Balance
Units
Unit cost
100
$10.00
140 $10.57*
80
$10.57
150 $11.71**
100
$11.71
Total
$1,000
$1,480
$ 846
$1,756
$1,171
Chapter 01 - Introducing Accounting in Business
[Question]
164. A company that uses a perpetual inventory system made the following cash purchases
and sales. There was no beginning inventory.
January 1:
February 5:
March 16:
Purchased 100 units at $10 per unit
Purchased 60 units at $12 per unit
Sold 40 Units for $16 per unit
Prepare general journal entries to record the March 16 sale using the FIFO inventory
valuation method.
Answer:
Mar. 16
16
Cash ($16 x 40)
Sales
Cost of Good Sold ($10 x 40)
Merchandise Inventory
640
640
400
400
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
[Question]
165. A company that uses a perpetual inventory system made the following cash purchases
and sales. There was no beginning inventory.
January 1:
February 5:
March 16:
Purchased 100 units at $10 per unit
Purchased 60 units at $12 per unit
Sold 40 Units for $16 per unit
Prepare the general journal entries to record the March 16 sale using the LIFO inventory
valuation method.
Answer:
Mar. 16
Mar. 16
Cash ($16 x 40)
Sales
Cost of goods sold ($12 x 40)
Merchandise Inventory
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
1-647
640
640
480
480
Chapter 01 - Introducing Accounting in Business
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
[Question]
166. A company that uses a perpetual inventory system made the following cash purchases
and sales. There was no beginning inventory.
January 1:
February 5:
March 16:
Purchased 100 units at $10 per unit
Purchased 60 units at $12 per unit
Sold 40 Units for $16 per unit
Prepare the general journal entry to record the March 16 sale, assuming the weighted average
method is used.
Answer:
Mar. 16
Cash ($16 x 40)
640
Sales
640
Mar. 16
Cost of goods sold ($10.75 x 40)
430
Merchandise Inventory
430
Calculation of cost of goods sold: [(100 x $10) + (60 x $12)] / 160 units = $10.75 / unit
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-648
Chapter 01 - Introducing Accounting in Business
[Question]
167. A company reported the following data related to its ending inventory:
Product
849
842
847
860
Units Available
100
75
60
40
Cost
$10
16
14
16
Market
$11
14
13
20
Calculate the lower-of-cost-or-market on the:
(a) Inventory as a whole and
(b) inventory applied separately to each product.
Answer:
Product
849
842
847
860
Units on
Hand
100
75
60
40
Per Unit
Cost
$10
16
14
16
Market
$11
14
13
20
(a) LCM, applied to inventory as a whole = $3,680
(b) LCM, applied separately to each product = $3,470
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P2
1-649
Total
Cost
$1,000
1,200
840
640
$3,680
Total
Market
$1,100
1,050
780
800
$3,730
LCM
$1,000
1,050
780
640
$3,470
Chapter 01 - Introducing Accounting in Business
[Question]
168. A company had the following ending inventory costs:
Product
A
B
C
Units Available
10
50
35
Cost
$5
8
10
Market
$6
7
11
Instructions:
(a) Calculate the lower of cost or market (LCM) value for the inventory as a whole.
(b) Calculate the lower of cost or market (LCM) value for each individual item.
Answer:
(a)
Product
A
B
C
TOTAL
Total Cost
$ 50
400
350
$800
Total Market
$ 60
350
385
$795
(b)
Product
A
B
C
TOTAL
By Item
$ 50
350
350
$750
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P2
1-650
LCM
$795
Chapter 01 - Introducing Accounting in Business
[Question]
169. A company uses the periodic inventory system and the following information is
available. All purchases and sales are on credit.
Units
Unit
Cost
10/01
10/06
10/11
10/16
Inventory Balance
Purchase
Purchase
Purchase
Goods available
30
70
45
50
195
10/12
10/20
Sale
Sale
Goods sold
100
60
160
10/31
Inventory Balance
Total
Cost
$3
4
5
6
Unit
Sales
Price
$ 90
280
225
300
$895
$10
11
35
1.) Prepare the general journal entries to record:
The October 6 purchase.
The October 12 sale.
2.) Assuming the periodic inventory system is used, determine both the cost of the ending
inventory and the cost of goods sold using the LIFO method for October.
Answer:
1. Journal entries:
Oct. 6
Oct. 12
Purchases
Accounts Payable
Accounts Receivable
Sales
280
280
1,000
1,000
2. Ending Inventory:
Ending Inventory:
30 units @ $3
5 units @ $4 =
35 units
$ 90
20
$110
Cost of goods sold:
Goods available
EI
COGS
$895
110
$785
1-651
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P3
[Question]
170. A company made the following merchandise purchases and sales during the month of
May:
May 1 purchased
May 5 purchased
May 10 sold
May 20 purchased
May 25 sold
380
270
400
300
400
units at
units at
units at
units at
units at
$15 each
$17 each
$50 each
$22 each
$50 each
There was no beginning inventory. If the company uses the weighted average periodic
method, what would be the cost of the ending inventory?
Answer:
380 units x $15 each =
270 units x $17 each =
300 units x $22 each =
950 units
800 units sold
150 units in ending inventory
$ 5,700
4,590
6,600
$16,890
Average cost = $16,890/950 units = $17.78 per unit
Cost of ending inventory = 150 units x $17.78 each = $2,667
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P3
1-652
Chapter 01 - Introducing Accounting in Business
[Question]
171. A company made the following merchandise purchases and sales during the month of
May:
May 1 purchased
May 5 purchased
May 10 sold
May 20 purchased
May 25 sold
380
270
400
300
400
units at
units at
units at
units at
units at
$15 each
$17 each
$50 each
$22 each
$50 each
There was no beginning inventory. If the company uses the LIFO periodic inventory method,
what would be the cost of the ending inventory?
Answer:
380 units x $15 each =
270 units x $17 each =
300 units x $22 each =
950 units
800 units sold
150 units in ending inventory
$ 5,700
4,590
6,600
$16,890
Cost of ending inventory = 150 x $15 each = $2,250
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P3
1-653
Chapter 01 - Introducing Accounting in Business
[Question]
172. A company made the following merchandise purchases and sales during the month of
May:
May 1 purchased
May 5 purchased
May 10 sold
May 20 purchased
May 25 sold
380
270
400
300
400
units at
units at
units at
units at
units at
$15 each
$17 each
$50 each
$22 each
$50 each
There was no beginning inventory. If the company uses the FIFO periodic inventory method,
what would be the cost of the ending inventory?
Answer:
380 units x $15 each =
270 units x $17 each =
300 units x $22 each =
950 units
800 units sold
150 units in ending inventory
$ 5,700
4,590
6,600
$16,890
Cost of ending inventory = 150 x $22 each = $3,300
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P3
[Question]
173. A company's store was destroyed by a fire on February 10 of this year. The only
information for the current period that could be salvaged included the following:
Beginning inventory, January 1: $34,000
Purchases to date: $118,000
Sales to date: $140,000
Historically, the company's gross profit ratio has been 30%. Estimate the value of the
destroyed inventory using the gross profit method.
Answer:
Beginning Inventory
Purchases
Goods available for sale
COGS ($140,000 x 70%)
Estimated Inventory at 2/10
$ 34,000
118,000
$152,000
98,000
$ 54,000
1-654
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P4
[Question]
174. Apply the retail method to the following company information to calculate the cost of the
ending inventory for the current period.
Beginning inventory
Net purchases
Sales
Cost
$20,224
59,508
Retail
$31,600
97,000
89,000
Answer:
At Cost
Goods available for sale:
Beginning inventory
Net purchases
Goods available for sale
$ 20,224
59,508
$79,732
Cost ratio: $79,732 / $128,600 = 62%
Sales at retail
Ending inventory at retail
At Retail
$ 31,600
97,000
$128,600
89,000
$ 39,600
Ending inventory at cost ($39,600 x 62%)
$24,552
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P4
1-655
Chapter 01 - Introducing Accounting in Business
[Question]
175. A company uses the retail inventory method and has the following information available
concerning its most recent accounting period:
Beginning-of-period inventory
Net purchases
Sales
At Cost
$148,600
677,400
At Retail
$ 245,200
1,229,800
1,200,000
(a) What is the cost-to-retail ratio using the retail method?
(b) What is the estimated cost of the ending inventory?
Answer:
(a)
Beginning inventory
Net purchases
Cost of goods available for sale
$148,600
677,400
$826,000
$ 245,200
1,229,800
$1,475,000
Cost to-retail ratio is 56% (826,000/1,475,000)
(b)
Sales
Ending inventory at retail
Estimated cost of ending
inventory (56% x $275,000)
$1,200,000
$ 275,000
$154,000
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P4
[Question]
176. Given the following information, determine the cost of ending inventory at November 30
using the FIFO perpetual inventory method.
November 3: 15 units were purchased at $8 per unit.
November 11: 18 units were purchased at $9.50 per unit.
November 15: 15 units were sold at $45 per unit
November 18: 30 units were purchased at $10.75 per unit
November 30: 20 units were sold at $55 per unit
Answer: 28@10.75 = $301
1-656
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
177. Given the following information, determine the cost of ending inventory at November 30
using the LIFO perpetual inventory method.
November 3: 15 units were purchased at $8 per unit.
November 11: 18 units were purchased at $9.50 per unit.
November 15: 15 units were sold at $45 per unit
November 18: 30 units were purchased at $10.75 per unit
November 30: 20 units were sold at $55 per unit
Answer: 10@$10.75 = 107.50
3 @ 9.50 =
28.50
15@$8.00= 120.00
Total
$256.00
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
178. Given the following information, determine the cost of ending inventory at November 30
using the Weighted Average perpetual inventory method.
November 3: 15 units were purchased at $8 per unit.
November 11: 18 units were purchased at $9.50 per unit.
November 15: 15 units were sold at $45 per unit
November 18: 30 units were purchased at $10.75 per unit
November 30: 20 units were sold at $55 per unit
Answer: 28@$10.03 = $280.84
Feedback: 15@8 =
120
COGS: 15@8.82 = $132.30
18@9.50 = 171
33
291 Average: $8.82
18@8.82 = 158.76
30@10.75 = 322.50
48
481.26 Average: $10.03
1-657
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
179. Given the following information, determine the cost of goods sold for November 30
using the FIFO perpetual inventory method.
November 3: 15 units were purchased at $8 per unit.
November 11: 18 units were purchased at $9.50 per unit.
November 15: 15 units were sold at $45 per unit
November 18: 30 units were purchased at $10.75 per unit
November 30: 20 units were sold at $55 per unit
Answer: 15@8 = 120.00
18@9.50 = 171.00
2@10.75 = 21.50
35
312.50
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
180. Given the following information, determine the cost of goods sold at November 30 using
the LIFO perpetual inventory method.
November 3: 15 units were purchased at $8 per unit.
November 11: 18 units were purchased at $9.50 per unit.
November 15: 15 units were sold at $45 per unit
November 18: 30 units were purchased at $10.75 per unit
November 30: 20 units were sold at $55 per
Answer: 20@10.75= 215.00
15@9.5=
142.50
35
357.50
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
1-658
Chapter 01 - Introducing Accounting in Business
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
[Question]
181. Given the following information, determine the cost of goods sold at November 30 using
the Weighted Average perpetual inventory method.
November 3: 15 units were purchased at $8 per unit.
November 11: 18 units were purchased at $9.50 per unit.
November 15: 15 units were sold at $45 per unit
November 18: 30 units were purchased at $10.75 per unit
November 30: 20 units were sold at $55 per
Answer: 15@8 =
120
18@9.50 = 171
33
291 Average: $8.82
18@8.82 = 158.76
30@10.75 = 322.50
48
481.26 Average: $10.03
COGS: 15@8.82 = $132.30
20@10.03 = 200.60
35
332.90
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P1
1-659
Chapter 01 - Introducing Accounting in Business
Fill in the Blank Questions
[Question]
182. If the _______________ is responsible for paying the freight, ownership of merchandise
inventory passes when goods are loaded on the transport vehicle.
Answer: Purchaser or buyer
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-C1
[Question]
183. If the _______________ is responsible for paying the freight, ownership of merchandise
inventory passes when the goods arrive at their destination.
Answer: Seller
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-C1
[Question]
184. Goods on consignment are goods that are shipped by the owner, who is referred to as the
_______________, to another party referred to as the ______________________.
Answer: Consignor; consignee
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-C1
[Question]
185. If damaged goods can be sold at a reduced price, they are included in inventory at their
________________________.
Answer: Net realizable value
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
1-660
Chapter 01 - Introducing Accounting in Business
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-C1
[Question]
186. _______________________ is the estimated sales price of damaged goods minus the
cost of making the sale.
Answer: Net realizable value
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-C1
[Question]
187. Some companies use the _________________ principle or the __________________
constraint to avoid assigning incidental costs of acquiring merchandise to inventory.
Answer: Matching; cost-to-benefit
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-C1
[Question]
188. The cost of an inventory item includes the _____________, plus ______________ costs
necessary to put it in a place and condition for sale.
Answer: Invoice price minus any discount; any added or incidental
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-C2
1-661
Chapter 01 - Introducing Accounting in Business
[Question]
189. When purchase costs regularly rise, the ___________________ method of inventory
valuation yields the highest gross profit and net income.
Answer: First in, first out (FIFO)
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A1
[Question]
190. When purchase costs regularly rise, the ___________________ method of inventory
valuation yields the lowest gross profit and net income, providing a tax advantage.
Answer: Last in, first out (LIFO)
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A1
[Question]
191. The ______________________ method of inventory valuation better matches current
costs with revenues in computing gross profit.
Answer: Last in, first out (LIFO)
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A1
1-662
Chapter 01 - Introducing Accounting in Business
[Question]
192. An advantage of the _________________ method of inventory valuation is that it tends
to smooth out the effect of erratic changes in costs.
Answer: Weighted average
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-A1
[Question]
193. An overstated beginning inventory will ______________ cost of goods sold and
_____________ net income.
Answer: Overstate; understate
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-A2
[Question]
194. The ____________________ ratio reflects how much inventory is available in terms of
days' sales.
Answer: Days' sales in inventory
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A3
1-663
Chapter 01 - Introducing Accounting in Business
[Question]
195. The _____________________ is a measure of how quickly a merchandiser sells its
merchandise inventory.
Answer: Inventory turnover
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-A3
[Question]
196. The ______________________ method of assigning costs to inventory and cost of
goods sold is usually only practical for companies with expensive, customer-made inventory.
Answer: Specific identification
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P1
[Question]
197. The _____________________ method of assigning costs to inventory and cost of goods
sold assumes that the inventory items are sold in the order acquired.
Answer: First in, first out (FIFO)
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P1
1-664
Chapter 01 - Introducing Accounting in Business
[Question]
198. The ______________________ method of assigning costs to inventory and cost of
goods sold assumes that the most recent purchases are sold first.
Answer: Last in, first out (LIFO)
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P1
[Question]
199. The ______________________ method of assigning costs to inventory and cost of
goods sold requires that the cost of goods available for sale be divided by the units of
inventory available when each sale takes place.
Answer: Weighted average (or average cost) perpetual method
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P1
[Question]
200. A major goal in accounting for inventory is ______________ costs against sales.
Answer: Matching
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
1-665
Chapter 01 - Introducing Accounting in Business
[Question]
201. Regardless of what inventory method or system is used, cost of goods available for sale
must be allocated between ___________________ and ___________________.
Answer: Cost of goods sold; ending inventory
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P1
[Question]
202. When applying the lower of cost or market method of inventory valuation, market is
defined as the ______________________.
Answer: Replacement cost
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 05-P2
[Question]
203. When the __________ method is used with a periodic inventory system, cost of goods
sold is assigned costs from the most recent purchases for the period.
Answer: LIFO
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 05-P3
1-666
Chapter 01 - Introducing Accounting in Business
[Question]
204. The _________________ method is commonly used to estimate the value of inventory
that has been destroyed, lost or stolen.
Answer: Gross profit
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Decision Making
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 05-P4
1-667
Chapter 01 - Introducing Accounting in Business
Chapter 06
Reporting and Analyzing Cash and Internal Controls
True / False Questions
[Question]
1. A properly designed internal control system is a key part of accounting information systems
design, analysis and performance.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C1
[Question]
2. The use of internal controls provides guaranteed protection against losses due to operating
activities.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C1
1-668
Chapter 01 - Introducing Accounting in Business
[Question]
3. Internal control policies and procedures are the same for all companies.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C1
[Question]
4. Maintaining adequate business records is an important internal control principle.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C1
[Question]
5. Proper internal control means that the responsibility for a task is clearly established and
assigned to one person.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C1
1-669
Chapter 01 - Introducing Accounting in Business
[Question]
6. Technology such as cash registers, check protectors, time clocks and personal identification
scanners can increase the strength of internal controls.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C1
[Question]
7. An internal control system refers to the policies and procedures companies use to protect
assets, ensure reliable accounting, promote efficient operations and urge adherence to
company policies.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C1
[Question]
8. Internal control systems used to monitor and control operations are a low priority for
managers within the company.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
1-670
Chapter 01 - Introducing Accounting in Business
[Question]
9. The principles of internal control include: establish responsibilities, maintain adequate
records, insure assets, separate recordkeeping from custody of assets and perform regular and
independent reviews.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
[Question]
10. Bonding does not discourage employees from stealing from the company as employees
know that bonding is an insurance policy against loss from theft.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
[Question]
11. Good internal control dictates that a person who controls an asset should also maintain the
accounting records for that asset.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
1-671
Chapter 01 - Introducing Accounting in Business
[Question]
12. Once a good system of internal control is in place, it rarely needs review.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
[Question]
13. Technologically advanced accounting systems do not need monitoring for errors because
computers always process transactions correctly.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
[Question]
14. Internal control in technologically advanced accounting systems depends more on the
design and operation of the information system and less on the analysis of its resulting
documents.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
1-672
Chapter 01 - Introducing Accounting in Business
[Question]
15. Two important limitations of internal control systems are (1) human error or human fraud
and (2) cost-benefit.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
[Question]
16. Collusion is when a person embezzles money from a company and tries to hide the
evidence.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-C1
1-673
Chapter 01 - Introducing Accounting in Business
[Question]
17. Separation of duties divides responsibility for a transaction or a series of transactions
between two or more individuals or departments. Separation of duties reduces the risk of error
and fraud.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-C1
[Question]
18. Cash includes currency, coins and the deposits in most checking accounts.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C2
[Question]
19. Cash equivalents are short-term highly liquid investment assets that are easily converted
to cash and have maturities of one year.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C2
1-674
Chapter 01 - Introducing Accounting in Business
[Question]
20. Liquidity refers to a company's ability to pay its short-term obligations.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C2
[Question]
21. Money orders, cashier's checks and certified checks are examples of cash equivalents.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C2
[Question]
22. Checking accounts are also called demand deposits.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C2
1-675
Chapter 01 - Introducing Accounting in Business
[Question]
23. The importance of cash is highlighted by the inclusion of a statement of cash flows in a
complete set of financial statements, which reports on the changes in cash.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C2
[Question]
24. Basic bank services such as bank accounts, bank deposits and checking contribute to the
control and safeguarding of cash.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C3
[Question]
25. The payee is the person who signs a check and authorizes payment.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C3
1-676
Chapter 01 - Introducing Accounting in Business
[Question]
26. Electronic funds transfer (EFT) is the use of electronic communication transfer of cash
from one party to another.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C3
[Question]
27. Cancelled checks are checks the bank has paid and deducted from the customer's account
during the period.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C3
[Question]
28. A check involves 3 parties: the maker who signs the check, the payee who is the recipient
and the bank on which the check is drawn.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C3
1-677
Chapter 01 - Introducing Accounting in Business
[Question]
29. Internal control devices for banking activities include signature cards, deposit tickets,
checks and bank statements.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C3
[Question]
30. On a bank statement, deposits are listed as debits because the bank increases its cash
account when the deposit is made.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-C3
[Question]
31. The days' sales uncollected ratio measures a company's ability to manage its debt.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-A1
1-678
Chapter 01 - Introducing Accounting in Business
[Question]
32. The days' sales uncollected ratio reflects on the liquidity of accounts receivable.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-A1
[Question]
33. The days' sales uncollected ratio is calculated by dividing accounts receivable by net sales
and multiplying this quotient by 365.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-A1
[Question]
34. A company must have a days' sales uncollected ratio of less than 30 days to conclude that
is has sufficient liquidity.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-A1
1-679
Chapter 01 - Introducing Accounting in Business
[Question]
35. When evaluating the days' sales uncollected ratio, generally the less time that money is
tied up in receivables often translates into increased profitability.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-A1
[Question]
36. A company had $12,000 in accounts receivable and $320,000 in net sales for the current
period. Its days' sales uncollected is equal to 13.7 days.
Answer: TRUE
Feedback: ($12,000/$320,000) x 365 = 13.7 days
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-A1
1-680
Chapter 01 - Introducing Accounting in Business
[Question]
37. Brouski had $750 million in accounts receivable and $2,900 million in net sales for the
current period. Its days' sales uncollected ratio equals 3.9 days.
Answer: FALSE
Feedback: ($750/$2,900) x 365 = 94.4 days
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-A1
[Question]
38. The internal controls of cash receipts aims to ensure that all cash received is properly
recorded and deposited.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P1
1-681
Chapter 01 - Introducing Accounting in Business
[Question]
39. A good voucher system includes a set of procedures and approvals designed to control
cash disbursements and the acceptance of obligations.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P1
[Question]
40. Controls of cash disbursements are important for companies as most large thefts occur
from payment of fictitious invoices.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P1
[Question]
41. If the Cash Over and Short account has a debit balance at the end of the period, the
amount is reported as miscellaneous revenue.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P1
1-682
Chapter 01 - Introducing Accounting in Business
[Question]
42. The clerk who has access to the cash in the cash register should not have access to the
cash register tape or file.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P1
[Question]
43. A voucher system's control over cash disbursements begins when a company incurs an
obligation that will result in eventual payment of cash.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P1
[Question]
44. A voucher system establishes procedures for verifying, approving and recording
obligations for eventual cash disbursement.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P1
1-683
Chapter 01 - Introducing Accounting in Business
[Question]
45. Receiving and paying for merchandise should be performed by one individual or
department to streamline a voucher system and simplify the procedures for purchasing.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P1
[Question]
46. Cash receipts by mail require only two people: One to open the mail and a second person
to deposit the cash in the bank and record the cash receipt in the accounting records.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P1
[Question]
47. For good internal controls over cash, all payments should be made from the petty cash,
except for very large payments.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P1
1-684
Chapter 01 - Introducing Accounting in Business
[Question]
48. A voucher is an internal document or file used to accumulate information to control cash
disbursements and to ensure that a transaction is properly recorded.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P1
[Question]
49. Vouchers should be used only for purchases. Other expenditures do not need to go
through the voucher system.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P1
[Question]
50. Assume that at the end of the day, the cash register tape shows a balance of $635.
However, the cash drawer has a balance of $650, this difference should be debited to
Miscellaneous Expense.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P1
1-685
Chapter 01 - Introducing Accounting in Business
[Question]
51. Assume that cash sales according to the register file total $705 but the amount of cash in
the register is $685. This cash shortage of $20 represents a Miscellaneous Expense.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P1
[Question]
52. An effective voucher system has limited ability in preventing a dishonest employee from
colluding with a dishonest supplier to fraudulently acquire cash payments for goods and
services not received.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P1
[Question]
53. The Petty Cash account is a separate checking account used for small amounts.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P2
1-686
Chapter 01 - Introducing Accounting in Business
[Question]
54. All disbursements from petty cash should be documented by a petty cash receipt.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
[Question]
55. The journal entry for petty cash reimbursement involves a debit to the appropriate
expenses and a credit to Petty Cash.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
[Question]
56. The petty cash fund should be reimbursed when it is nearing zero and at the end of the
accounting period when financial statements are prepared.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P2
1-687
Chapter 01 - Introducing Accounting in Business
[Question]
57. The entry to increase the balance in petty cash from $50 to $75 would be to credit the
Petty Cash account in the amount of $25.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P2
[Question]
58. A bank reconciliation explains any differences between the balance of a checking account
on the depositor's records and the balance reported on the bank statement.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P3
[Question]
59. Outstanding checks are checks the bank has paid and deducted from the customer's
account during the month.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P3
1-688
Chapter 01 - Introducing Accounting in Business
[Question]
60. Deposits in transit are deposits made and recorded by the depositor, but not yet recorded
on the bank statement.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P3
[Question]
61. It is not necessary for businesses to reconcile their checking accounts since banks keep
accurate records and provide internal control support for cash.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
[Question]
62. A bank reconciliation usually yields both an adjusted bank balance and an adjusted book
balance.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
1-689
Chapter 01 - Introducing Accounting in Business
[Question]
63. After preparing a bank reconciliation, adjustments must be made for items reconciling the
bank balance and items reconciling the book balance.
Answer: FALSE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
[Question]
64. An NSF check for $17.50 would be recorded as a debit to Cash and a credit to Accounts
Receivable.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
[Question]
65. The purposes and principles of internal control are fundamentally the same across the
globe. However, cultural differences sometimes suggest different emphasis on the mix of
control procedures.
Answer: TRUE
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
1-690
Chapter 01 - Introducing Accounting in Business
[Question]
66. The steps to reconcile the balance of the bank statement to the adjusted balance include
adding outstanding checks, deposits and bank service charges.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
[Question]
67. When merchandise is needed, a department manager must inform the purchasing
department of this need by preparing and signing a purchase requisition, which lists the
merchandise needed and requests that it be purchased.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P4
[Question]
68. An invoice is an itemized statement of goods prepared by the vendor listing the customer's
name, items sold, sales prices and terms of sale.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P4
1-691
Chapter 01 - Introducing Accounting in Business
[Question]
69. The voucher register is a journal that is used to record all approved vouchers within the
company.
Answer: TRUE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P4
[Question]
70. An invoice is a document that is used within a company to notify the appropriate persons
that ordered goods have been received and to describe the quantities and condition of the
goods.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P4
[Question]
71. Recording a purchase is initiated by an invoice approval, not an invoice.
Answer: TRUE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P4
1-692
Chapter 01 - Introducing Accounting in Business
[Question]
72. In order to streamline the purchasing process, department managers should place orders
directly with suppliers.
Answer: FALSE
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P4
[Question]
73. A purchase requisition is a document the purchasing department sends to the vendor to
place an order.
Answer: FALSE
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P4
1-693
Chapter 01 - Introducing Accounting in Business
[Question]
74. Assume that a buyer receives a shipment of MODEL SD010 with an invoice amount of
$780, although $870 worth of goods were received. The purchase order was for $870. Since
the difference was in the buyer's favor, the buyer's purchasing department should authorize
payment of $780.
Answer: FALSE
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P4
Multiple Choice Questions
[Question]
75. The main principles of internal control include which of the following:
A. Establish responsibilities
B. Maintain minimal records
C. Use only computerized systems
D. Bond all employees
E. Require automated sales systems
Answer: A
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C1
1-694
Chapter 01 - Introducing Accounting in Business
[Question]
76. A good system of internal control:
A. Urges adherence to prescribed managerial policies
B. Insures profitable operations
C. Eliminates the need for an audit
D. Requires the use of non-computerized systems
E. Is not necessary if the company uses a computerized system
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
[Question]
77. A company's internal control system:
A. Eliminates the risk of loss
B. Monitors and controls business activities
C. Eliminates human error
D. Eliminates the need for audits
E. Is not necessary in large companies
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
1-695
Chapter 01 - Introducing Accounting in Business
[Question]
78. When two clerks share the same cash register, which internal control principle is violated?
A. Establish responsibilities
B. Maintain adequate records
C. Insure assets
D. Bond key employees
E. Apply technological controls
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
[Question]
79. Pre-numbered printed checks are an example of which internal control principle?
A. Technological controls
B. Maintain adequate records
C. Perform regular and independent reviews
D. Establish responsibilities
E. Divide responsibility for related transactions
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
1-696
Chapter 01 - Introducing Accounting in Business
[Question]
80. The impact of technology on internal controls includes which of the following:
A. Reduced processing errors
B. Elimination of the need for regular audits
C. Elimination of the need to bond employees
D. More efficient separation of duties
E. Elimination of fraud
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-C1
[Question]
81. Which of the following is the most serious limitation of internal controls?
A. Computer error
B. Human fraud or human error
C. Cost-benefit principle
D. Cybercrime
E. Management fraud
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-C1
1-697
Chapter 01 - Introducing Accounting in Business
[Question]
82. Which of the following are risks of e-commerce?
A. Firewalls, fraud and computer viruses
B. Encryption, stolen credit card numbers and fraud
C. Stolen credit card numbers, computer viruses and impersonation
D. Computer viruses, encryption and stolen credit card numbers
E. Impersonation, encryption and firewalls
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-C1
[Question]
83. Cash, not including cash equivalents, includes:
A. Postage stamps
B. Coins, currency and checking accounts
C. IOUs
D. Two-year certificates of deposit
E. Money market funds
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C2
1-698
Chapter 01 - Introducing Accounting in Business
[Question]
84. Cash equivalents:
A. Are short-term, highly liquid investments
B. Include 6-month CDs
C. Include checking accounts
D. Are recorded in petty cash
E. Include money orders
Answer: A
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C2
[Question]
85. Cash equivalents:
A. Include savings accounts
B. Include checking accounts
C. Are short-term investments sufficiently close to their maturity date that their value is not
sensitive to interest rate changes
D. Include time deposits
E. Have no immediate value
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C2
1-699
Chapter 01 - Introducing Accounting in Business
[Question]
86. A check:
A. Involves the writer, the signers, the cashier and the bank
B. Involves the maker, the payee and the bank
C. Involves the maker and the payee
D. Involves the bookkeeper, the payee and the bank
E. Involves the signer, the cashier and the company
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C3
[Question]
87. A remittance advice is:
A. An explanation for a payment by check
B. A bank statement
C. A voucher
D. An EFT
E. A cancelled check
Answer: A
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C3
1-700
Chapter 01 - Introducing Accounting in Business
[Question]
88. For which item does a bank NOT issue a debit memorandum?
A. To notify a depositor of all withdrawals through an ATM
B. To notify a depositor of a deduction to a depositor's account
C. To notify a depositor of a bounced check
D. To notify a depositor of periodic payments arranged in advance, by a depositor
E. To notify a depositor of a deposit to their account
Answer: E
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-C3
[Question]
89. Why is it a matter of good internal control to deposit all cash receipts daily and make all
payments for goods and services by check?
A. When no paper documents are required there is increased convenience and lower cost
B. These actions control the access to cash and create an independent record of all cash
activities
C. These procedures result in a more extensive testing of a company's records
D. The Sarbanes-Oxley Act requires these steps be taken by each publicly traded company
E. These procedures allow management to determine if projected cash receipts and
disbursements came in over or under budgeted amounts
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-C3
1-701
Chapter 01 - Introducing Accounting in Business
[Question]
90. The number of days' sales uncollected:
A. Is used to evaluate the liquidity of receivables
B. Is calculated by dividing accounts receivable by sales
C. Measures a company's ability to pay its bills on time
D. Measures a company's debt to income
E. Is calculated by dividing sales by accounts receivable
Answer: A
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-A1
[Question]
91. The days' sales uncollected ratio is used to:
A. Measure how many days of sales remain until the end of the year
B. Determine the number of days that have passed without collecting on accounts receivable
C. Identify the likelihood of collecting sales on account
D. Estimate how much time is likely to pass before the amount of accounts receivable is
collected
E. Measure the amount of layaway sales for a period
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-A1
1-702
Chapter 01 - Introducing Accounting in Business
[Question]
92. The number of days' sales uncollected is calculated by:
A. Dividing accounts receivable by net sales
B. Dividing accounts receivable by net sales and then multiplying by 365
C. Dividing net sales by accounts receivable
D. Dividing net sales by accounts receivable and then multiplying by 365
E. Multiplying net sales by accounts receivable and dividing the result by 365
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-A1
[Question]
93. A company had net sales of $31,500 and ending accounts receivable of $2,700 for the
current period. Its days' sales uncollected is equal to:
A. 11.7 days
B. 23.3 days
C. 31.3 days
D. 42.5 days
E. 46.6 days
Answer: C
Feedback: ($2,700/$31,500) x 365 = 31.3 days
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-A1
1-703
Chapter 01 - Introducing Accounting in Business
[Question]
94. Mattel had net sales of $4,235 million and ending accounts receivable of $775 million its
days' sales uncollected is equal to:
A. 298 days
B. 66.8 days
C. 19.4 days
D. 81.8 days
E. 65.2 days
Answer: B
Feedback: ($775/$4,235) x 365 = 66.8 days
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-A1
1-704
Chapter 01 - Introducing Accounting in Business
[Question]
95. Which of the following statements is true given the data below?
Sales
Ending Accounts Receivable
Company A
$250,000
$55,000
Company B
$400,000
$55,000
A. Both companies have the same degree of liquidity with regard to their accounts receivables
B. Company A is likely to collect account receivables more quickly than Company B
C. Company B is likely to collect account receivables more quickly than Company A
D. Company A and Company B will likely collect account receivables at the same time
E. It is impossible to estimate how much time it will take for these companies to collect their
receivable based on the given information
Answer: C
Feedback:
Company A: ($55,000/$250,000) x 365 = 80.3 days
Company B: ($55,000/$400,000) x 365 = 50.2 days
Bloom’s Taxonomy: Evaluate
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-A1
1-705
Chapter 01 - Introducing Accounting in Business
[Question]
96. In Year 1 a company had net sales of $50,000 and ending accounts receivable of $2,000.
In Year 2 this company had net sales of $80,000 and ending accounts receivable of $4,000.
Use days' sales uncollected to determine which of the following statements is true
A. Days' sales uncollected in Year 1 is 14.6 days and in Year 2 is 18.25 days. This measure
indicates that the company's liquidity is declining
B. Days' sales uncollected in Year 1 is 14.6 days and in Year 2 is 18.25 days. This measure
indicates that the company's liquidity is improving
C. Days' sales uncollected in Year 1 is 25 days and in Year 2 is 20 days. This measure
indicates that the company's liquidity is declining
D. Days' sales uncollected in Year 1 is 25 days and in Year 2 is 20 days. This measure
indicates that the company's liquidity is improving
E. Days' sales uncollected in Year 1 is .04 days and in Year 2 is .05 days. This measure
indicates that the company's liquidity is improving
Answer: A
Feedback:
Year 1 (2,000/50,000) x 365 = 14.6 days
Year 2 (4,000/80,000) x 365 = 18.25 days
Bloom’s Taxonomy: Evaluate
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-A1
[Question]
97. An income statement account that is used to record cash overages and cash shortages
arising from omitted petty cash receipts and from errors in making change is called the:
A. Cash Lost account
B. Bank Reconciliation account
C. Petty Cash account
D. Cash Over and Short account
E. Cash Receivable account
Answer: D
1-706
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P1
[Question]
98. A set of procedures and approvals that is designed to control cash disbursements and the
acceptance of obligations is referred to as a(n):
A. Internal cash system
B. Petty cash system
C. Cash disbursement system
D. Voucher system
E. Cash control system
Answer: D
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P1
1-707
Chapter 01 - Introducing Accounting in Business
[Question]
99. The Cash Over and Short account:
A. Is used to record a credit balance in the cash account
B. Is an income statement account used for recording the income effects of cash overages and
cash shortages from errors in making change and from missing petty cash receipts
C. Is not necessary in a computerized accounting system
D. Can never have a debit balance
E. Can never have a credit balance
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
[Question]
100. A voucher is an internal file that:
A. Is prepared after an invoice is received
B. Is used as a substitute for an invoice
C. Is used to accumulate information needed to control cash disbursements and to ensure that
transactions are properly recorded
D. Takes the place of a bank check
E. Is prepared before the company orders goods
Answer: C
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P1
1-708
Chapter 01 - Introducing Accounting in Business
[Question]
101. Which of the following procedures would weaken the control over cash receipts that
arrive through the mail?
A. After the mail is opened, a list (in triplicate) of the money received is prepared with a
record of the sender's name, the amount and an explanation of why the money is sent
B. The bank reconciliation is prepared by a person who does not handle cash or record cash
receipts
C. For safety, only one person should open the mail and that person should immediately
deposit the cash received in the bank
D. The cashier should not also be the record keeper who records the amounts received in the
accounting records
E. All of the above are good internal control procedures over cash receipts that arrive through
the mail
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P1
1-709
Chapter 01 - Introducing Accounting in Business
[Question]
102. At the end of the day, the cash register's record shows $1,250, but the count of cash in
the cash register is $1,245. The correct entry to record the cash sales for the day is:
A.
Cash
Sales
1,245
1,245
B.
Cash
Cash over and short
Sales
1,245
5
1,250
C.
Cash
Sales
1,250
1,250
D.
Cash
Sales
Cash over and short
1,250
1,245
5
E.
Cash over and short
Sales
5
5
Answer: B
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P1
1-710
Chapter 01 - Introducing Accounting in Business
[Question]
103. At the end of the day, the cash register's record shows $1,000 but the count of cash in the
register is $1,035. The proper entry to record this excess includes a:
A. Credit to Cash for $35
B. Debit to Cash for $35
C. Credit to Cash Over and Short for $35
D. Debit to Cash Over and Short for $35
E. Debit to Petty Cash for $35
Answer: C
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P1
[Question]
104. The entry necessary to establish a petty cash fund should include:
A. A debit to Cash and a credit to Petty Cash
B. A debit to Cash and a credit to Cash Over and Short
C. A debit to Petty Cash and a credit to Cash
D. A debit to Petty Cash and a credit to Accounts Receivable
E. A debit to Cash and a credit to Petty Cash Over and Short
Answer: C
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P2
1-711
Chapter 01 - Introducing Accounting in Business
[Question]
105. The entry to record reimbursement of the petty cash fund for postage expense should
include:
A. A debit to Postage Expense
B. A debit to Petty Cash
C. A debit to Cash
D. A debit to Cash Short and Over
E. A debit to Supplies
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P2
[Question]
106. When a petty cash fund is in use:
A. Expenses paid with petty cash are recorded when the fund is replenished
B. Petty Cash is debited when funds are replenished
C. Petty Cash is credited when funds are replenished
D. Expenses are not recorded
E. Cash is debited when funds are replenished
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
1-712
Chapter 01 - Introducing Accounting in Business
[Question]
107. In reimbursing the petty cash fund:
A. Cash is debited
B. Petty Cash is credited
C. Petty Cash is debited
D. Appropriate expense accounts are debited
E. No expenses are recorded
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
[Question]
108. Assume that the custodian of a $450 petty cash fund has $62.50 in coins and currency
plus $382.50 in receipts at the end of the month. The entry to replenish the petty cash fund
will include:
A. A debit to Cash for $377.50
B. A credit to Cash Over and Short for $5.00
C. A debit to Petty Cash for $382.50
D. A credit to Cash for $387.50
E. A debit to Cash for $387.50
Answer: D
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P2
1-713
Chapter 01 - Introducing Accounting in Business
[Question]
109. A company plans to decrease a $200 petty cash fund to $75. The current balance in the
account includes $45 in receipts and $165 in currency. The entry to reduce the fund will
include a:
A. Debit to Cash Short and Over for $10
B. Debit to Cash for $90
C. Debit to Miscellaneous Expenses for $35
D. Credit to Petty Cash for $165
E. Credit to Cash for $90
Answer: B
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P2
[Question]
110. A company had $43 missing from petty cash which was not accounted for by petty cash
receipts. The correct procedure is to:
A. Debit Cash Over and Short for $43
B. Credit Cash Over and Short for $43
C. Debit Petty Cash for $43
D. Credit Petty Cash for $43
E. Credit Cash for $43
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P2
1-714
Chapter 01 - Introducing Accounting in Business
[Question]
111. An analysis that explains any differences between the checking account balance
according to the depositor's records and the balance reported on the bank statement is a (n):
A. Internal audit
B. Bank reconciliation
C. Bank audit
D. Trial reconciliation
E. Analysis of debits and credits
Answer: B
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P3
[Question]
112. On a bank reconciliation, an unrecorded debit memorandum for printing checks is:
A. Noted as a memorandum only
B. Added to the book balance of cash
C. Deducted from the book balance of cash
D. Added to the bank balance of cash
E. Deducted from the bank balance of cash
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
1-715
Chapter 01 - Introducing Accounting in Business
[Question]
113. Outstanding checks refer to checks that have been:
A. Written, recorded, sent to payees and received and paid by the bank
B. Written and not yet recorded in the company books
C. Held as blank checks
D. Written, then recorded on the company books and sent to the customer, supplier, or
creditor, but have not yet been paid by the bank
E. Issued by the bank
Answer: D
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
[Question]
114. What are some of the risks for a company converting from GAAP to IFRS?
A. Misstatement of financial information
B. Fraud
C. Ineffective communication of the impact of the change to investors and creditors
D. Management’s inability to certify the effectiveness of controls over financial reporting
E. All of the items listed above are risks that a company converting from GAAP to IFRS must
be aware of
Answer: E
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Global
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
1-716
Chapter 01 - Introducing Accounting in Business
[Question]
115. A check that was outstanding on last period's bank reconciliation was not included with
the cancelled checks returned by the bank this period. As a result, in preparing this period's
reconciliation, the amount of this check should be:
A. Added to the book balance of cash
B. Deducted from the book balance of cash
C. Added to the bank balance of cash
D. Deducted from the bank balance of cash
E. Ignored in preparing the period's bank reconciliation
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
[Question]
116. A deposit in transit on last period's bank reconciliation is shown as a deposit on the bank
statement this period. As a result, in preparing this period's reconciliation, the amount of this
deposit should be:
A. Added to the book balance of cash
B. Deducted from the book balance of cash
C. Added to the bank balance of cash
D. Deducted from the bank balance of cash
E. Not included as a reconciling item
Answer: E
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
1-717
Chapter 01 - Introducing Accounting in Business
[Question]
117. A company made a bank deposit on September 30 that did not appear on the bank
statement dated September 30. In preparing the September 30 bank reconciliation, the
company should:
A. Deduct the deposit from the bank statement balance
B. Send the bank a debit memorandum
C. Deduct the deposit from the September 30 book balance and add it to the October 1 book
balance
D. Add the deposit to the book balance of cash
E. Add the deposit to the bank statement balance
Answer: E
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
[Question]
118. A company wrote a check on September 30 that did not appear on the bank statement
dated September 30. In preparing the September 30 bank reconciliation, the company should:
A. Deduct the check from the bank statement balance
B. Send the bank a credit memorandum
C. Deduct the check from the September 30 book balance and add it to the October 1 book
balance
D. Add the check to the book balance of cash
E. Add the check to the bank statement balance
Answer: A
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
1-718
Chapter 01 - Introducing Accounting in Business
[Question]
119. In comparing the canceled checks on the bank statement with the entries in the
accounting records, it is found that check number 4239 for November's rent was correctly
written and drawn for $3,790, but was erroneously entered in the accounting records as
$7,390. When preparing the November bank statement, the company should:
A. Deduct $3,600 from the book balance of cash
B. Add $3,700 to the bank statement balance
C. Add $7,390 to the book balance of cash
D. Deduct $3,600 from the bank statement balance
E. Add 3,600 to the book balance of cash
Answer: E
Feedback: 7,390 - 3,790 = 3,600
Bloom’s Taxonomy: Analysis
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
1-719
Chapter 01 - Introducing Accounting in Business
[Question]
120. In comparing the canceled checks on the bank statement with the entries in the
accounting records, it is found that check number 4239 for November's rent was correctly
written and drawn for $7,390, but was erroneously entered in the accounting records as
$3,790. When preparing the November bank statement, the company should:
A. Deduct $3,600 from the book balance of cash
B. Add $3,600 to the bank statement balance
C. Add $7,390 to the book balance of cash
D. Deduct $3,600 from the bank statement balance
E. Add $3,600 to the book balance of cash
Answer: A
Feedback: 3,790 - 7,390 = (3,600)
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
1-720
Chapter 01 - Introducing Accounting in Business
[Question]
121. In comparing the canceled checks on the bank statement with the entries in the
accounting records, it is found that check number 2889 for December's utilities was correctly
written and drawn for $790, but was erroneously entered in the accounting records as $970.
The journal entry to adjust the books for the bank reconciliation would include which of the
following for this situation?
A. $180 decrease to Cash and a $180 decrease to Utility Expense
B. $180 increase to Cash and a $180 decrease to Utility Expense
C. $20 decrease to Cash and a $20 decrease to Utility Expense
D. $20 increase to Cash and a $120 decrease to Utility Expense
E. $970 increase to Cash
Answer: B
Feedback: 790 - 970 = (180)
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
1-721
Chapter 01 - Introducing Accounting in Business
[Question]
122. In comparing the canceled checks on the bank statement with the entries in the
accounting records, it is found that check number 2889 for December's utilities was correctly
written and drawn for $970, but was erroneously entered in the accounting records as $790.
The journal entry to adjust the books for the bank reconciliation would include which of the
following for this situation?
A. $180 decrease to Cash and a $180 decrease to Utility Expense
B. $180 increase to Cash and a $180 increase to Utility Expense
C. $180 decrease to Cash and a $180 increase to Utility Expense
D. $180 increase to Cash and a $120 decrease to Utility Expense
E. $970 increase to Cash and a $790 decrease to Utility Expense
Answer: C
Feedback: 970 - 790 = 180
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
1-722
Chapter 01 - Introducing Accounting in Business
[Question]
123. A seller of goods or services, which is usually a manufacturer or wholesaler is known as
a:
A. Vendor
B. Payee
C. Vendee
D. Creditor
E. Debtor
Answer: A
Bloom’s Taxonomy: Knowledge
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P4
[Question]
124. The internal document prepared by a department manager that informs the purchasing
department of its needs is the
A. Purchase requisition
B. Purchase order
C. Invoice
D. Receiving report
E. Invoice approval
Answer: A
Bloom’s Taxonomy: Knowledge
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P4
1-723
Chapter 01 - Introducing Accounting in Business
[Question]
125. The document that the purchasing department prepares and sends to the vendor to place
an order is the
A. Purchase requisition
B. Purchase order
C. Invoice
D. Receiving report
E. Invoice approval
Answer: B
Bloom’s Taxonomy: Knowledge
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P4
[Question]
126. The document that is an itemized statement of goods prepared by a vendor listing the
customer's name, items sold, sales prices and terms of the sale is the
A. Purchase requisition
B. Purchase order
C. Invoice
D. Receiving report
E. Invoice approval
Answer: C
Bloom’s Taxonomy: Knowledge
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P4
1-724
Chapter 01 - Introducing Accounting in Business
[Question]
127. The internal document that is prepared to notify the appropriate persons that ordered
goods have been received and describes the quantities and condition of the goods is the
A. Purchase requisition
B. Purchase order
C. Invoice
D. Receiving report
E. Invoice approval
Answer: D
Bloom’s Taxonomy: Knowledge
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P4
[Question]
128. The document, also known as the check authorization, that is a checklist of steps
necessary for approving an invoice for approval and payments is the
A. Purchase requisition
B. Purchase order
C. Invoice
D. Receiving report
E. Invoice approval
Answer: E
Bloom’s Taxonomy: Knowledge
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P4
1-725
Chapter 01 - Introducing Accounting in Business
[Question]
129. Which of the following statements is true regarding the documents in a voucher system?
A. All voucher systems are the same
B. Recording a purchase is initiated by an invoice approval
C. A well designed voucher system will allow department managers to place orders directly
with suppliers for control purposes
D. A voucher system is most commonly used in very small companies to make up for the lack
of other internal controls
E. A well designed voucher system will eliminate all fraud and error
Answer: B
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P4
[Question]
130. Triple Company’s accountant made an entry that included the following items: debit
postage expense $12.42; debit office supplies expense $27.33, credit to cash over/short $2.19.
If the original amount in petty cash is $320, how much was the credit to cash for the
reimbursement?
A. $320.00
B. $202.44
C. $37.56
D. $39.75
E. $41.94
1-726
Chapter 01 - Introducing Accounting in Business
Answer: C
Feedback: $12.42+27.33-2.19 = 37.56
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
[Question]
131. Triple Company’s accountant made an entry that included the following items: debit
postage expense $12.42; debit office supplies expense $27.33, credit to cash over/short $2.19.
If the original amount in petty cash is $320, how much is in petty cash before the
reimbursement?
A. $320.00
B. $282.44
C. $37.56
D. $39.75
E. $41.94
Answer: B
Feedback: $320.00-12.42 - 27.33 + 2.19 = 282.44
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
1-727
Chapter 01 - Introducing Accounting in Business
[Question]
132. Triple Company’s accountant made an entry that included the following items: debit
postage expense $12.42; debit office supplies expense $27.33, debit to cash over/short $2.19.
If the original amount in petty cash is $320, how much was the credit to cash for the
reimbursement?
A. $320.00
B. $202.44
C. $37.56
D. $39.75
E. $41.94
Answer: E
Feedback: $12.42+27.33+2.19 = 41.94
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
[Question]
133. Triple Company’s accountant made an entry that included the following items: debit
postage expense $12.42; debit office supplies expense $27.33, debit to cash over/short $2.19.
If the original amount in petty cash is $320, how much is in petty cash before the
reimbursement?
A. $320.00
B. $202.44
C. $37.56
D.$275.87
E. $278.06
Answer: D
Feedback: $320.00-12.42-27.33-2.19 = $278.06
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
1-728
Chapter 01 - Introducing Accounting in Business
[Question]
134. Given the following information:
Petty cash balance:
$450.00
Courier receipt:
$82.50
Postage receipt:
$ 48.00
Office Supplies receipt:
$56.22
Business Meal receipt:
$102.34
Cash on hand at the end of the month: $76.21
What is the amount that needs to be reimbursed?
A. $365.27
B. $289.06
C. $373.79
D. $289.00
E. $450.00
Answer: C
Feedback: $450.00-76.21 = $373.79
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
[Question]
135. Given the following information:
Petty cash balance:
$450.00
Courier receipt:
$82.50
Postage receipt:
$ 48.00
Office Supplies receipt:
$56.22
Business Meal receipt:
$102.34
Cash on hand at the end of the month: $76.21
What is the amount of cash over and short?
A. debit $84.73
B. credit $84.73
C. debit $160.94
D. credit $160.94
E. no cash over or short would be recorded
Answer: A
1-729
Chapter 01 - Introducing Accounting in Business
Feedback: $450.00-76.21 = $373.79 – 48.00-102.34-82.50-56.22 = 84.73 debit
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
[Question]
136. Given the following information:
Petty cash balance:
$530.00
Courier receipt:
$74.22
Postage receipt:
$ 25.00
Office Supplies receipt:
$95.64
Business Meal receipt:
$ 54.21
Cash on hand at the end of the month: $299.71
What is the amount that needs to be reimbursed?
A. $365.27
B. $289.06
C. $280.73
D. $181.22
E. $230.29
Answer: E
Feedback: $530.00-299.71 = $230.29
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
1-730
Chapter 01 - Introducing Accounting in Business
[Question]
137. Given the following information:
Petty cash balance:
$530.00
Courier receipt:
$ 74.22
Postage receipt:
$ 25.00
Office Supplies receipt:
$ 95.64
Business Meal receipt:
$ 54.21
Cash on hand at the end of the month: $299.71
What is the amount that needs to be recorded for cash over and short?
A. debit $23.29
B. credit $23.29
C. debit $18.78
D. no cash over and short is necessary
E. credit $18.78
Answer: E
Feedback: $530.00-299.71=230.29-25.00-54.21-74.22-95.64=-18.78 (credit)
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
1-731
Chapter 01 - Introducing Accounting in Business
[Question]
138. Fluffy Pet Grooming deposits all cash receipts on the day when they are received and all
cash payments are made by check. At the close of business on June 30, its Cash account
shows a $14,811, debit balance. Fluffy Pet Grooming's June 30 bank statement shows
$14,472 on deposit in the bank. Prepare a bank reconciliation for Fluffy Pet Grooming using
the following information
a. Outstanding checks as of June 30 total $2,261.
b. The June 30 bank statement included a $75 debit memorandum for bank services.
c. Check No. 919, listed with the canceled checks, was correctly drawn for $789 in payment of
a utility bill on June 15. Fluffy Pet Grooming mistakenly recorded it with a debit to Utilities
Expense and a credit to Cash in the amount of $798.
d. The June 30 cash receipts of $2,534 were placed in the bank’s night depository after banking
hours and were not recorded on the June 30 bank statement.
What is the adjusted bank balance?
A. $14,265
B. $14,745
C. $14,677
D. $14,538
E. $14,877
Answer: B
Feedback: $14,472-2,261+2,534=$14,745
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
1-732
Chapter 01 - Introducing Accounting in Business
[Question]
139. Fluffy Pet Grooming deposits all cash receipts on the day when they are received and all
payments are made by check. At the close of business on June 30, its Cash account shows a
$14,811, debit balance. Fluffy Pet Grooming's June 30 bank statement shows $14,472 on
deposit in the bank. Prepare a bank reconciliation for Fluffy Pet Grooming using the
following information
a. Outstanding checks as of June 30 total $2,261.
b. The June 30 bank statement included a $75 debit memorandum for bank services.
c. Check No. 919, listed with the canceled checks, was correctly drawn for $789 in payment of
a utility bill on June 15. Fluffy Pet Grooming mistakenly recorded it with a debit to Utilities
Expense and a credit to Cash in the amount of $798.
d. The June 30 cash receipts of $2,534 were placed in the bank’s night depository after banking
hours and were not recorded on the June 30 bank statement.
What is the adjusting journal entry required to record the increase in cash for the adjusted
bank balance?
A. debit to cash $2,261 credit to accounts receivable $2,261
B. credit to accounts receivable $2,261 debit to cash $2,261
C. no adjusting entry is necessary
D. debit to cash $2,534 credit to accounts receivable $2,534
E. credit to cash $2,534 credit to accounts receivable $2,534
Answer: C
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
1-733
Chapter 01 - Introducing Accounting in Business
[Question]
140. The following information is available to reconcile Sleepy Time Bedding's book balance
of cash with its bank statement cash balance as of July 31:
a. On July 31, the company's Cash account has a $25,862 debit balance, but its July bank
statement shows a $28,177 cash balance.
b. Check No. 1531 for $1,520 and Check No. 1540 for $752 were outstanding on the June 30
bank reconciliation. Check No. 1540 is listed with the July canceled checks, but Check No.
1531 is not. Also, Check No. 1565 for $536 and Check No. 1569 for $2,288, both written in
July, are not among the canceled checks on the July 31 statement.
c. In comparing the canceled checks on the bank statement with the entries in the accounting
records, it is found that Check No. 1556 for July rent was correctly written and drawn for
$1,240 but was erroneously entered in the accounting records as $1,230.
d. A credit memorandum enclosed with the July bank statement indicates the bank collected
$9,500 cash on a noninterest-bearing note for Sleepy Time Bedding, deducted a $48
collection fee, and credited the remainder to its account. Sleepy Time Bedding had not
recorded this event before receiving the statement.
e. A debit memorandum for $805 lists a $795 NSF check plus a $10 NSF charge. The check
had been received from a customer, Evan Shaw. Sleepy Time Bedding has not yet recorded
this check as NSF.
f. Enclosed with the July statement is a $14 debit memorandum for bank services. It has not yet
been recorded because no previous notification had been received.
g. Sleepy Time Bedding July 31 daily cash receipts of $10,652 were placed in the bank's night
depository on that date, but do not appear on the July 31 bank statement.
What is the adjusted book balance?
A. $34,485
B. $34,994
C. $28,150
D. $27,025
E. $31,617
Answer: A
Feedback: $25,862-10+9500-48-805-14=$34,485
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
1-734
Chapter 01 - Introducing Accounting in Business
[Question]
141. The following information is available to reconcile Sleepy Time Bedding's book balance
of cash with its bank statement cash balance as of July 31:
a. On July 31, the company's Cash account has a $25,862 debit balance, but its July bank
statement shows a $28,177 cash balance.
b. Check No. 1531 for $1,520 and Check No. 1540 for $752 were outstanding on the June 30
bank reconciliation. Check No. 1540 is listed with the July canceled checks, but Check No.
1531 is not. Also, Check No. 1565 for $536 and Check No. 1569 for $2,288, both written in
July, are not among the canceled checks on the July 31 statement.
c. In comparing the canceled checks on the bank statement with the entries in the accounting
records, it is found that Check No. 1556 for July rent was correctly written and drawn for
$1,240 but was erroneously entered in the accounting records as $1,230.
d. A credit memorandum enclosed with the July bank statement indicates the bank collected
$9,500 cash on a noninterest-bearing note for Sleepy Time Bedding, deducted a $48
collection fee, and credited the remainder to its account. Sleepy Time Bedding had not
recorded this event before receiving the statement.
e. A debit memorandum for $805 lists a $795 NSF check plus a $10 NSF charge. The check
had been received from a customer, Evan Shaw. Sleepy Time Bedding has not yet recorded
this check as NSF.
f. Enclosed with the July statement is a $14 debit memorandum for bank services. It has not yet
been recorded because no previous notification had been received.
g. Sleepy Time Bedding July 31 daily cash receipts of $10,652 were placed in the bank's night
depository on that date, but do not appear on the July 31 bank statement.
1-735
Chapter 01 - Introducing Accounting in Business
What is the appropriate journal entry to record the collection made by the bank?
A. debit to cash $9,500 credit to accounts receivable $9,500
B. credit to accounts receivable $9,500 credit to cash $9,500
C. debit to cash $9,452 debit to collection expense $48 credit accounts receivable $9,500
D. debit to cash $9,452 debit to collection expense $48 credit notes receivable $9,500
E. no adjusting entry is necessary
Answer: D
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
1-736
Chapter 01 - Introducing Accounting in Business
Matching Questions
[Question]
142. Match each of the following terms with the appropriate definitions.
1. A fund used for disbursements related to small items
such as postage
2. Principles requiring management to establish
responsibility, maintain adequate records, insure assets,
separate recordkeeping from custody of assets, divide
responsibility for related transactions, apply technological
controls and perform reviews
3. A measure of the liquidity of receivables computed by
taking the current balance of receivables and dividing by
periods credit sales and then multiplied by 365
4. A document used by the purchasing department to place
an order with a vendor purchase
5. An internal business document (or file) used to
accumulate information to control cash disbursements and
to ensure that the transaction is properly recorded
6. A method of recording purchases at the full invoice price
without deducting any cash discounts
7. An income statement account used to record cash
overages and cash shortages arising from missing petty cash
receipts or from errors in making change
8. A report that explains any differences between the
checking account balance according to the depositor's
records and the balance reported on the bank statement
9. The ability of a company to pay for its short-term
obligations
10. An internal document used to report that ordered goods
are received and to describe the quantity and condition
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-A1
Learning Objective: 06-C1
Learning Objective: 06-C2
Learning Objective: 06-P1
Learning Objective: 06-P4
1-737
Bank
reconciliation 8
Voucher 5
Principles of
internal control 2
Days' sales
uncollected 3
Liquidity 9
Gross method 6
Petty Cash 1
Purchase
order 4
Receiving
report 10
Cash Over and
Short 7
Chapter 01 - Introducing Accounting in Business
[Question]
143. Match each of the following transactions with the applicable internal control principle.
1. A company uses a check protector
2. A company has separate departments for
purchasing, receiving and accounts payable
3. A company buys an insurance policy to
protect against employee theft
4. A company uses a computerized point of sale
system
5. A company uses a voucher system
6. A company hires CPAs to perform an audit
7. No two clerks share the same cash drawer
8. A company has an internal auditor on staff
9. Cashier does not have access to the cash
register recorded tape or file
10. The bookkeeper prepares and signs checks
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-C1
1-738
Establish responsibility 9
Divide responsibility for
related transactions 5
Establish responsibility
Separate recordkeeping
from custody of assets
Apply technological
controls
Perform regular and
independent reviews
Insure assets and bond
employees
Divide responsibility for
related transactions
Perform regular and
independent reviews
Apply technological
controls
7
10
4
6
3
2
8
1
Chapter 01 - Introducing Accounting in Business
[Question]
144. Identify each of the following items as either (a) cash or (b) cash equivalent.
1. U.S. treasury bills
2. Commercial paper
3. Certified check
4. Currency
5. Coins
6. Three-month certificate of deposit
7. Money market accounts
8. Money orders
9. Cashier's check
10. Petty cash
cash
cash
cash equivalent
cash equivalent
cash
cash
cash
cash equivalent
cash
cash equivalent
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C2
1-739
5
10
6
2
4
3
9
7
8
1
Chapter 01 - Introducing Accounting in Business
[Question]
145. Match the following terms with the appropriate definition.
1. An asset such as cash that can be readily used to settle
short-term obligations
2. Currency, coins and amounts on deposit in bank
checking and many savings accounts
3. An internal document listing the goods needed by a
department and requesting that it be purchased
4. Short-term, highly liquid investments that are readily
convertible to known cash amount and are sufficiently
close to their maturity date so that the market value is not
sensitive to interest rate change
5. An itemized statement of goods prepared by the vendor
that lists the customer's name, the items sold, the sales price
of each item and the terms of sale
6. All the policies and procedures managers use to protect
assets, ensure reliable accounting, promote efficient
operations and urge adherence to company policies
7. The buyer or purchaser of goods or services
8. Checks written by the depositor, deducted on the
depositor's records, sent to the payees but not yet received
by the bank for payment
9. A document signed by the depositor instructing the bank
to pay a specified amount to a designated recipient
10. The seller of goods or services
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
Learning Objective: 06-C2
Learning Objective: 06-P4
1-740
Cash 2
Cash
equivalent 4
Check 9
Outstanding
checks 8
Liquid asset 1
Internal control
system 6
Vendee 7
Vendor 10
Purchase
requisition 3
Invoice 5
Chapter 01 - Introducing Accounting in Business
[Question]
146. Identify whether each of the following items would on appear on the bank side or the
book side of a bank reconciliation.
1. Bank service charges
2. The bank printed checks for the depositor for a fee
3. NSF check
4. Bank debit memorandum
5. The bank collected a $1,000 note for the depositor
6. Bank credit memorandum
7. Interest on a checking account
8. The bank incorrectly recorded a check for $9.58. The company
properly wrote the check for $95.80
Book
Book
Book
Bank
Book
Book
Book
1
3
7
8
2
4
6
Book 5
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
Essay Questions
[Question]
147. Define an internal control system and describe the purpose that it serves.
Answer: An internal control system refers to the policies and procedures designed to protect
the firm's assets and to ensure reliable accounting. It also should promote efficient operations
and urge employees to comply with company policies. Internal control systems can help
prevent losses, help managers plan operations and monitor company and employer
performance.
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
1-741
Chapter 01 - Introducing Accounting in Business
[Question]
148. List the main principles of internal controls.
Answer: Principles of internal controls include the following: establishing responsibilities,
maintaining adequate records, insuring assets and bonding employees, separating
recordkeeping from custody of assets, dividing responsibilities for related transactions,
applying technological controls and performing regular independent reviews.
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
[Question]
149. Explain the differences between cash and cash equivalents.
Answer: Cash includes coins, currency and amounts in demand deposits in banks such as
checking accounts. Cash equivalents are short-term investments that meet two specific
criteria. The first is that the investments must be readily convertible to a known cash amount.
The second requirement is the investments should be sufficiently close to their maturity so
that the market value is not sensitive to changes in interest rates. Examples of short-term
investments include certificates of deposits and government treasury bills.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-C2
1-742
Chapter 01 - Introducing Accounting in Business
[Question]
150. Describe the banking activities that promote the control of cash and identify the internal
control objectives served by the banking activities.
Answer: Banking activities can be organized into three areas: the bank account, deposit
services and checking services. A bank account is an account set up by a bank permitting a
customer to deposit money for safeguarding and to withdraw funds by writing checks. A bank
deposit is money contributed to the account with a deposit ticket as proof. A check is a
document signed by the authorized representative of the depositor. The check instructs the
bank to transfer cash from the depository to the payee.
The internal control objectives aided by the bank include safeguarding of cash, record
keeping, technological controls, independent review and divided responsibility for
transactions.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-C3
[Question]
151. What is the purpose of the days' sales uncollected ratio?
Answer: The days' sales uncollected ratio is a liquidity measure. It is used to estimate how
much time is likely to pass before the current amount of accounts receivable is collected in
cash. The measure is also valuable for analysis in comparing ratios from other companies in
the same industry and as a means to compare current with prior years' performance.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-A1
1-743
Chapter 01 - Introducing Accounting in Business
[Question]
152. What is a voucher system?
Answer: A voucher system is a set of procedures and authorizations designed to control cash
disbursements and acceptance of obligations. In this way, small cash payments can be made
without excessive employee access to the main cash account of the company.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P1
[Question]
153. Discuss how the principles of internal controls apply to cash receipts.
Answer: Internal control principles as applied to cash receipts should ensure that all cash
received is properly recorded and deposited. Cash receipts are usually generated via over-thecounter sales or through the mail as money is received as payments on account. Employees
who are assigned to receive cash should not be allowed to record the amounts of the cash
received into the accounting system. Technological devices such as cash registers enforce this
principle of separation of recordkeeping from custody of cash. Responsibilities for receipts of
cash should include at least two people assigned to open mail and prepare a list that includes
the sender's name, amount and explanation for the payment. This meets the internal control
principles of establishing responsibilities and dividing responsibility for related transactions.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P1
1-744
Chapter 01 - Introducing Accounting in Business
[Question]
154. What is the purpose of the petty cash account?
Answer: The petty cash account is used to serve as a controlling account for small amounts of
cash disbursements. In this way, small cash payments can be made without excessive
employee access to the main cash account of the company.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P2
[Question]
155. Discuss the purpose of a bank reconciliation.
Answer: A bank reconciliation is a report explaining any differences between the balance
according to a depositor's records and the balance on the company's bank statement. The
reconciliation procedure examines the differences based on the information available to the
company and adjusts for the differences. It also serves as a format for the discovery and
correction of errors.
Bloom’s Taxonomy: Understand
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P3
1-745
Chapter 01 - Introducing Accounting in Business
[Question]
156. What are the checks that must be completed prior to the completion of invoice approval
and voucher preparation?
Answer: There are four steps that must be completed, each with its own checks. The
requisition check determines whether the items on the invoice are requested per the purchase
requisition. The Purchase order check determines whether the items on the invoice are
ordered per the purchase order. The receiving report check determines whether the items on
the invoice are received per the receiving report. Finally, the invoice check determines
whether the invoice prices are as agreed with the vendor, the invoice has no calculation errors
and the terms are as agreed with the vendor.
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P4
[Question]
157. Kim Jordan of New Belgium Brewing Company maintains a system of internal controls
and managing cash. Identify some of these internal controls and explain how they contribute
to the success of the company.
Answer: Kim maintains control procedures to monitor New Belgium’s business activities and
safeguard its assets. Kim explains that such controls raise productivity and cut expenses. Her
company’s cash management practices, include controls over cash receipts, disbursements, and petty
cash. The use of bank reconciliations further helps with the control and management of cash. Kim says
she takes advantage of available banking services to enhance control of cash.
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
1-746
Chapter 01 - Introducing Accounting in Business
Short Answer Questions
[Question]
158. For each of the independent cases below, identify the principle of internal control that is
violated and recommend what should be done to remedy the violation.
1. In order to save money, Regal Company has decided to drop its property insurance on
assets and to stop bonding the cashiers who handle about $10,000 in cash each day.
2. Halton Company records each sale on a preprinted invoice. On certain occasions invoices
are spoiled when they are prepared, which is why the invoices are not pre-numbered, but the
sales clerk writes the next number onto each invoice.
3. Marion Company is a very small business. Bob Lepley, one of the two office clerks, opens
the mail each day and removes the cash receipts that come in the mail. Bob then records the
receipts in the cash records and the customer's account and deposits the cash in the bank.
4. Gerald McNichols, the owner of McNichols Company prides himself on hiring only the
most competent employees. McNichols believes that since these employees are highly
competent, he trusts them completely and feels there is no need for anyone to check up on the
employees' performance.
5. Service Products is a small business with only 3 accounting employees. Each employee is
well-trained and so can perform any of the accounting tasks, including handling cash receipts
and cash disbursements and preparing the bank reconciliation.
1-747
Chapter 01 - Introducing Accounting in Business
Answer:
1. Insure assets and bond key employees. Even though it may save money in the short run,
insurance protects the company if assets are stolen. Bonding reduces the risk of loss from the
theft of cash by employees. It also discourages theft because bonded employees know that an
independent company will be involved when a theft is discovered. It is unlikely that the
bonding company will be sympathetic to any employee involved in the theft.
2. Maintain adequate records. All the important company documents, including sales invoices,
should be pre-numbered. This will help ensure that all sales are recorded and that salespeople
cannot pocket cash from a sale and destroy the sales invoice.
3. Divide responsibility for related transactions. Lepley has too many responsibilities with
respect to cash. He controls the cash and maintains the records of cash. These responsibilities
with respect to cash should be split up among several employees. One person should open the
mail (ideally with a second employee present) and prepare a list in triplicate that indicates
each sender's name, the amount sent and an explanation of why the money was sent. One
copy goes to the cashier with the money. The cashier deposits the money in the bank and
records the amounts received in the accounting records for cash. The second copy goes to the
record keeper in the accounting area who records the amounts in the customer's records. The
third copy stays with the person who opens the mail. Lepley may carry out one of these tasks,
but not all of them
.
4. Perform regular and independent reviews. Even the most competent person sometimes
makes mistakes. Sometimes individuals who appear honest may turn out not to be. McNichols
should set up regular, independent reviews of each employee's performance to evaluate
possible errors and to ensure that procedures are followed.
5. Establish responsibilities. Each employee should be assigned specific tasks. As things stand
now, if a problem occurs, it is difficult to know who is at fault. It is hard to hold employees
accountable for their actions if it cannot be determined who is responsible for the action.
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-C1
1-748
Chapter 01 - Introducing Accounting in Business
[Question]
159. At the end of the current period, a company reported $475,000 in net credit sales and
$75,000 in ending accounts receivable. Calculate this company's days' sales uncollected at the
end of the current period.
Answer: ($75,000/$475,000) x 365 = 57.6 days
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-A1
[Question]
160. Hasbro had $2,816 million in sales and $555 million in ending accounts receivable for
the current period. For the same period, Mattel reported $4,885 million in sales and $491
million in ending accounts receivable. Calculate the days' sales uncollected for both
companies as of the end of the current period. Which company is doing a better job in
managing the collection of its receivables?
Answer:
Hasbro: ($555/$2,816) x 365 = 71.9 days
Mattel: ($491/$4,885) x 365 = 36.7 days
Mattel is doing a better job of collecting its receivables in a timely manner as it only takes
36.7 days to collect the average receivable compared to 71.9 days.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-A1
1-749
Chapter 01 - Introducing Accounting in Business
[Question]
161. A company reported net sales for Year 1 of $285,000 and $575,000 for Year 2. The yearend balances of accounts receivable were $49,000 for Year 1 and $85,000 for Year 2.
Calculate the days' sales uncollected at the end of each year for this company and describe
any changes in the apparent liquidity of the company's receivables.
Answer:
Year 1: ($49,000/$285,000) x 365 = 63 days
Year 2: ($85,000/$575,000) x 365 = 54 days
The decrease of 9 days means that this company has improved its management of receivables
and its liquidity position.
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-A1
[Question]
162. On August 17, at the end of the day, the cash register's record shows $957, but the count
of cash in the register is $965. Prepare the general journal entry to record the day's cash sales.
Answer:
Aug. 17
Cash
Sales
Cash over and short
965
957
8
Bloom’s Taxonomy: Apply
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P1
1-750
Chapter 01 - Introducing Accounting in Business
[Question]
163. A company established a petty cash fund of $100 on September 1. On September 10, the
petty cash fund was replenished when there was $16 remaining and there were petty cash
receipts for: office supplies, $27; courier, $32; and postage, $22. On September 15, the petty
cash fund was increased to $125 in total. Record the above transactions in general journal
form.
Answer:
Sept.
1
10
15
Petty Cash
Cash
Office Supplies
Courier (Delivery) Expense
Postage Expense
Cash Over and Short
Cash
Petty Cash
Cash
100
100
27
32
22
3
84
25
25
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
1-751
Chapter 01 - Introducing Accounting in Business
[Question]
164. A petty cash fund was originally established with a check for $150. In the petty cash
fund on December 31 (the period-end), you find the following:
Petty cash receipts
Postage
Office supplies
Office equipment repair
Cash
$43.50
51.85
49.00
4.25
Prepare the general journal entry to record the replenishment of the petty cash fund on
December 31.
Answer:
Dec.
31
Postage Expense
Office supplies
Office Equipment Repair Expense
Cash Over and Short
Cash
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
1-752
43.50
51.85
49.00
1.40
145.75
Chapter 01 - Introducing Accounting in Business
[Question]
165. A company established a $400 petty cash fund by issuing a check to the custodian on
October 1. On October 15, the petty cash fund was replenished and increased to $1,000 in
total. The contents of the petty cash fund at the time of the October 15 replenishment were:
Currency and coins
Petty cash receipts for:
Transportation-in for inventory
Delivery expense
Repairs to office equipment
Postage
Entertainment of customers
Total
$ 12
$ 39
138
47
114
53
391
$ 403
Prepare the general journal entry to record both the reimbursement and the increase of the
petty cash fund on October 15.
Answer:
Oct.
15
Merchandise Inventory
Delivery Expense
Repairs Expense
Postage Expense
Entertainment Expense
Petty Cash
Cash Over and Short
Cash
39
138
47
114
53
600
3
988
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
1-753
Chapter 01 - Introducing Accounting in Business
[Question]
166. On November 1, a company established a $90 petty cash fund. On November 12, the
petty cash fund contains $3 in cash and the following paid petty cash receipts: transportationin on merchandise inventory $14.25; postage, $34.50; and office supplies, $36. Give the entry
to reimburse the fund and to increase its amount to $150 on November 12.
Answer:
Nov.
12
Merchandise Inventory
Postage Expense
Office Supplies
Cash Over and Short
Petty Cash
Cash
14.25
34.50
36.00
2.25
60.00
147.00
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P2
1-754
Chapter 01 - Introducing Accounting in Business
[Question]
167. A company established a petty cash fund in February of the current year and experienced
the following transactions affecting the fund during February:
Feb.
1
5
8
18
20
25
28
Established a $250 petty cash fund.
Paid $55 to acquire office supplies.
Reimbursed the company controller for $30 spent on beverages for recruits.
Paid $45 for postage.
Paid $65 for C.O.D. charges on merchandise inventory.
Paid $50 for janitorial services.
When sorting the petty cash receipts to replenish the fund, the custodian noted
that there was $245 in receipts and $10 cash remaining. Also, a decision was
made to reduce the fund to $200 in total.
Prepare the journal entry to reimburse the fund and to reduce its amount on February 28.
Answer:
Feb.
28
Office Supplies
Entertainment Expenses
Postage Expense
Merchandise Inventory
Janitorial Expense
Cash Over and Short
Petty Cash
Cash
55
30
45
65
50
5
50
190
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P2
1-755
Chapter 01 - Introducing Accounting in Business
[Question]
168. Following are seven items a through g that would cause Xavier Company's book balance
of cash to differ from its bank statement balance of cash.
a. A service charge imposed by the bank.
b. A check listed as outstanding on the previous period's reconciliation and still outstanding at
the end of this month.
c. A customer's check returned by the bank is marked "Not Sufficient Funds. (NSF)"
d. A deposit that was mailed to the bank on the last day of the current month and is
unrecorded on this month's bank statement.
e. A check paid by the bank at its correct $190 amount was recorded in error in the company's
Check Register at $109.
f. An unrecorded credit memorandum indicated that bank had collected a note receivable for
Xavier Company and deposited the proceeds in the company's account.
g. A check was written in the current period that is not yet paid or returned by the bank.
Indicate where each item a through g would appear on Xavier Company's bank reconciliation
by placing its identifying letter in the parentheses in the proper section of the form below.
Bank statement cash balance
Add:
( )
( )
( )
( )
Deduct:
( )
( )
( )
( )
Book balance of cash
( )
( )
( )
( )
Deduct:
( )
( )
( )
( )
Add:
Reconciled balance
Reconciled balance
1-756
Chapter 01 - Introducing Accounting in Business
Answer:
Bank statement cash balance
Add:
(d)
( )
( )
( )
Deduct:
(b)
(g)
( )
( )
Book balance of cash
Add:
(f)
( )
( )
( )
Deduct:
(a)
(c)
(e)
( )
Reconciled balance
Reconciled balance
Bloom’s Taxonomy: Analyze
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
1-757
Chapter 01 - Introducing Accounting in Business
[Question]
169. Based on the following information, prepare the November bank reconciliation for the
Avisa Company.
The following information is available for the Avisa Company for the month of November:
a. On November 30, after all transactions have been recorded, the balance in the company's
Cash account has a balance of $27,202.
b. The company's bank statement shows a balance on November 30 of $29,279.
c. Outstanding checks at November 30 include check #3030 in the amount of $1,525 and
check #3556 in the amount of $1,459.
d. A credit memo included with the bank statement indicates that the bank collected $780 on a
noninterest-bearing note receivable for Avisa. The bank deducted a $10 collection fee and
credited the remainder of $770 to Avisa's account.
e. A debit memo included with the bank statement shows a $67 NSF check from a customer,
J. Brown.
f. A deposit placed in the bank's night depository on November 30 totaled $1,675 and did not
appear on the bank statement.
g. Examination of the checks on the bank statement with the entries in the accounting records
reveals that check #3445 for the payment of an account payable was correctly written for
$2,450, but was recorded in the accounting records as $2,540.
h. Included with the bank statement was a debit memorandum in the amount of $25 for bank
service charges. It has not been recorded on the company's books.
Answer:
Bank statement balance
Add:
Deposit in transit
Deduct:
Outstanding checks
#3030
#3556
Adjusted bank balance
$1,525
1,459
Avisa Company
Bank Reconciliation
November 30
$29,279 Book balance
Add:
Collect a $780 note less
1,675 $10 collection fee
Error on check #3445
30,954
Deduct:
NSF check
Service charge
2,984
$27,970
1-758
$27,202
$770
90
$ 67
25
860
28,062
92
$27,970
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
[Question]
170. Based on the following information, prepare the general journal entries Avisa must make
at November 30.
The following information is available for the Avisa Company for the month of November:
a. On November 30, after all transactions have been recorded, the balance in the company's
Cash account has a balance of $27,202.
b. The company's bank statement shows a balance on November 30 of $29,279.
c. Outstanding checks at November 30 include check #3030 in the amount of $1,525 and
check #3556 in the amount of $1,459.
d. A credit memo included with the bank statement indicates that the bank collected $780 on a
noninterest-bearing note receivable for Avisa. The bank deducted a $10 collection fee and
credited the remainder of $770 to Avisa's account.
e. A debit memo included with the bank statement shows a $67 NSF check from a customer,
J. Brown.
f. A deposit placed in the bank's night depository on November 30 totaled $1,675 and did not
appear on the bank statement.
g. Examination of the checks on the bank statement with the entries in the accounting records
reveals that check #3445 for the payment of an account payable was correctly written for
$2,450, but was recorded in the accounting records as $2,540.
h. Included with the bank statement was a debit memorandum in the amount of $25 for bank
service charges. It has not been recorded on the company's books.
Answer:
Nov. 30
Nov. 30
Nov. 30
Nov. 30
Cash
Collection expense
Note receivable
Cash
Accounts payable
770
10
780
90
90
Accounts receivable: J. Brown
Cash
67
Miscellaneous expense
Cash
25
67
25
1-759
Chapter 01 - Introducing Accounting in Business
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
[Question]
171. Brown Company's bank statement for September 30 showed a cash balance of $1,350.
The company's Cash account in its general ledger showed a $995 debit balance. The
following information was also available as of September 30.
a. A customer's check for $100 marked NSF was returned to Brown Company by the bank. In
addition, the bank charged the company's account a $25 processing fee.
b. The September 30 cash receipts, $1,250, were placed in the bank's night depository after
banking hours on that date and this amount did not appear on the September 30 bank
statement.
c. A $15 debit memorandum for checks printed by the bank was included with the canceled
checks.
d. Outstanding checks amounted to $1,145.
e. A customer's note for $900 was collected by the bank. A collection fee of $25 was deducted
by the bank and the difference was deposited in the account.
f. Included with the canceled checks was a check for $275, drawn on another company,
Browne Inc.
(a) Prepare a bank reconciliation as of September 30.
(b) Prepare any necessary adjusting journal entries necessary as a result of the bank
reconciliation.
1-760
Chapter 01 - Introducing Accounting in Business
Answer:
a.
Bank statement balance
Add:
Deposit in transit
Bank error
Deduct:
Outstanding checks
Reconciled balance
BROWN COMPANY
Bank Reconciliation
September 30
$1,350 Book balance of cash
Add:
1,250 Proceeds of note less collection fee
275
$2,875
Deduct:
1,145 NSF check plus processing fee
Bank service charge
$1,730 Reconciled balance
$ 995
875
$1,870
125
15
$1,730
b.
Cash
Service charge expense
Notes receivable
875
25
Accounts receivable
Service charge expense
Cash
100
25
Service charge expense
Cash
15
900
125
15
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
1-761
Chapter 01 - Introducing Accounting in Business
[Question]
172. The following information is available for the Edwards Company for its March 31 bank
reconciliation:
From the March 31 bank statement:
Previous Balance
$10,908
Date
03/03
03/11
03/15
03/25
03/29
03/30
Total Checks and Debits
$7,805
Checks and Debits
No.
Amount
2874
1,210
2906
3,850
2905
170
2910
725
2908
1,350
500
Total Deposits and Credits
$11,905
Deposits and Credits
Date
Amount
03/02
4,340
03/27
7,270
03/31
295 IN
NSF
Current Balance
$15,008
Daily Balance
Date
Amount
03/01
10,908
03/02
15,248
03/03
14,038
03/11
10,188
03/15
10,018
03/25
9,293
03/27
16,563
03/29
15,213
03/30
14,713
03/31
15,008
NSF: A check from a customer, Cook Co. in payment of their account.
IN: Interest earned on the account.
From the Edwards Company's accounting records:
Date
March
Date
February
March
Cash Receipts Deposited
Cash Debit
7
4,340
27
7,270
31
2,090
13,700
28
31
31
Cash
Explanation
Balance
Total receipts
Total disbursements
1-762
Cash Disbursements
Check No.
Cash Credit
2905
170
2906
3,850
2907
460
2908
1,350
2910
725
2911
340
6,895
PR
Debit
R4
D5
13,700
Acct. No. 101
Credit
9,698
23,398
6,895
16,503
Chapter 01 - Introducing Accounting in Business
a. Based on the above information, prepare a bank reconciliation for the Edwards Company.
b. Prepare the necessary general journal entries to adjust cash to the reconciled balance.
Answer:
a.
Edwards Company
Bank Reconciliation
March 31
$15,008 Book balance
Add:
2,090
Interest earned on account
Bank statement balance
Add:
Deposit in transit
$16,503
295
17,098
Deduct:
Outstanding checks
#2907
#2911
Adjusted bank balance
16,798
Deduct:
NSF check
$ 460
340
500
800
$16,298 Adjusted book balance
$16,298
b.
Mar. 31
Mar. 31
Cash
Interest revenue
295
Accounts receivable – Cook Company
Cash
500
295
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
1-763
500
Chapter 01 - Introducing Accounting in Business
[Question]
173. Highlight Hotel deposits all cash receipts on the day when they are received and it
makes all cash payments by check. At the close of business on December 31, its Cash account
shows a $18,393, debit balance. Highlight Hotel's June 30 bank statement shows $15,921 on
deposit in the bank. Prepare a bank reconciliation for Highlight Hotel using the following
information
1.
2.
3.
4.
Outstanding checks as of December 31 total $2,261.
The December 31 bank statement included a $35 debit memorandum for bank services.
Check No. 2519, listed with the canceled checks, was correctly drawn for $850 in
payment of a utility bill on December 16. Highlight Hotel mistakenly recorded it with a
debit to Utilities Expense and a credit to Cash in the amount of $805.
The December 31 cash receipts of $3,425 were placed in the bank’s night depository
after banking hours and were not recorded on the December 31 bank statement.
The bank statement included a check from a customer’s payment of an account
receivable that had been returned NSF in the amount of $1,228.
Prepare the bank reconciliation for December 31.
Answer:
Bank
Unadjust. Bal.
Outstand Checks
Deposits in Transit
Adjusted Balance
Book
Unadjust. Bal.
Svc. Charge
NSF
Utilities Exp.
Adjusted Balance
$15,921
-2,261
+3,425
$17,085
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
1-764
$18,393
-35
-1,228
-45
$17,085
Chapter 01 - Introducing Accounting in Business
[Question]
174. Highlight Hotel deposits all cash receipts on the day when they are received and it
makes all cash payments by check. At the close of business on December 31, its Cash account
shows a $18,393, debit balance. Highlight Hotel's June 30 bank statement shows $15,921 on
deposit in the bank. Prepare the necessary adjusting journal entries using the following
information
1. Outstanding checks as of December 31 total $2,261.
2. The December 31 bank statement included a $35 debit memorandum for bank
services.
3. Check No. 2519, listed with the canceled checks, was correctly drawn for $850 in
payment of a utility bill on December 16. Highlight Hotel mistakenly recorded it with
a debit to Utilities Expense and a credit to Cash in the amount of $805.
4. The December 31 cash receipts of $3,425 were placed in the bank’s night depository
after banking hours and were not recorded on the December 31 bank statement.
5. The bank statement included a check from a customer’s payment of an account
receivable that had been returned NSF in the amount of $1,228.
Prepare the necessary adjusting journal entries.
Answer:
Miscellaneous Expense……………...35
Utilities Expense…………………….45
Accounts Receivable……………...1,228
Cash……………………….1,308
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: 06-P3
1-765
Chapter 01 - Introducing Accounting in Business
[Question]
175. A company established a petty cash fund in May of the current year and experienced the
following transactions affecting the fund during May:
May 1
Establish petty cash account in the amount of $300
May 5
Paid for miscellaneous office supplies in the amount of $53.22
May 9
Reimbursed Human Resource Manager for business lunch, $45.09
May 15
Paid for minor landscaping services, $75.00
May 22
Paid $65.00 for postage
May 31
Counted remaining cash and discovered that $56.34 remained
Prepare the journal entry to establish the fund on May 1.
Answer:
Petty Cash……………….300
Cash………………………300
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P2
1-766
Chapter 01 - Introducing Accounting in Business
[Question]
176. A company established a petty cash fund in May of the current year and experienced the
following transactions affecting the fund during May:
May 1
Establish petty cash account in the amount of $300
May 5
Paid for miscellaneous office supplies in the amount of $53.22
May 9
Reimbursed Human Resource Manager for business lunch, $45.09
May 15
Paid for minor landscaping services, $75.00
May 22
Paid $65.00 for postage
May 31
Counted remaining cash and discovered that $56.34 remained
Prepare the journal entry to reimburse the fund on May 31.
Answer:
Office Supplies Expense………………..53.22
Business Meal Expense………………...45.09
Landscaping Expense…………………...75.00
Postage Expense………………………...65.00
Cash Over and Short……………………...5.35
Cash……………………….………………243.66
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
1-767
Chapter 01 - Introducing Accounting in Business
[Question]
177. A company established a petty cash fund in May of the current year and experienced the
following transactions affecting the fund during May:
May 1
Establish petty cash account in the amount of $300
May 5
Paid for miscellaneous office supplies in the amount of $53.22
May 9
Reimbursed Human Resource Manager for business lunch, $45.09
May 15
Paid for minor landscaping services, $75.00
May 22
Paid $65.00 for postage
May 31
Counted remaining cash and discovered that $56.34 remained
The company decided to increase the petty cash balance to $450. Prepare the journal entry to
increase the fund on May 31.
Answer:
Petty Cash………………..150.00
Cash…………..……………150.00
Bloom’s Taxonomy: Create
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
Fill in the Blank Questions
[Question]
178. An internal control system refers to the policies and procedures managers use to
__________, ensure reliable accounting, promote efficient operations and urge adherence to
company policies.
Answer: Protect assets
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
1-768
Chapter 01 - Introducing Accounting in Business
[Question]
179. An employee is __________ when a company purchases an insurance policy against
losses from theft by that employee.
Answer: Bonded
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
[Question]
180. Two sales clerks should not share the same cash register. This refers to the internal
control principle of _______________________.
Answer: Establish responsibilities
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
[Question]
181. A sales system with pre-numbered, controlled sales slips is an example of the internal
control principle of _______________________.
Answer: Maintain adequate records
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
1-769
Chapter 01 - Introducing Accounting in Business
[Question]
182. A person who controls or has access to an asset must not keep that asset's accounting
records. This refers to the internal control principle of ________________________.
Answer: Separation of duties
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
[Question]
183. Having external auditors test the company's financial records and evaluate the
effectiveness of the internal control system is part of the internal control principle of
________________________.
Answer: Perform regular and independent reviews
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
1-770
Chapter 01 - Introducing Accounting in Business
[Question]
184. Two limitations of internal control systems are ____________________ and
________________.
Answer: Human error or human fraud; the cost-benefit principle
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C1
[Question]
185. ____________ are short-term, highly liquid investment assets that are readily convertible
to a known amount of cash.
Answer: Cash equivalents
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C2
[Question]
186. ________________ includes currency, coins and amounts on deposit in checking
accounts and many savings accounts.
Answer: Cash
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C2
1-771
Chapter 01 - Introducing Accounting in Business
[Question]
187. ________________________ refers to a company's ability to pay for its short-term
obligations.
Answer: Liquidity
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C2
[Question]
188. A ________ is a document signed by the depositor instructing the bank to pay a specified
amount of money to a designated recipient.
Answer: Check
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C3
[Question]
189. _________________________ is the electronic transfer of cash from one party to
another.
Answer: Electronic fund transfer (EFT)
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-C3
1-772
Chapter 01 - Introducing Accounting in Business
[Question]
190. A __________________________ is a document explaining the payment of a check.
Answer: Remittance advice
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C3
[Question]
191. On a bank statement, deposits are shown as __________________, because the
depositor's account is a liability on the bank's records.
Answer: Credits
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-C3
[Question]
192. The ________________ ratio reflects the liquidity of a company's accounts receivable.
Answer: Days' sales uncollected
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-A1
1-773
Chapter 01 - Introducing Accounting in Business
[Question]
193. The _________________ account is used to record the effects of cash overages and
shortages from errors in making change.
Answer: Cash Over and Short
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P1
[Question]
194. A ________ is an internal document (or file) that is used to accumulate information to
control cash disbursements.
Answer: Voucher
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P1
[Question]
195. A _____________________________ fund is used for the control of small amounts of
cash disbursements.
Answer: Petty cash
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P2
1-774
Chapter 01 - Introducing Accounting in Business
[Question]
196. ________________________ are checks written (or drawn) by the depositor, deducted
on the depositor's records and sent to the payee, but not yet recorded by the bank for payment
at the bank statement date.
Answer: Outstanding checks
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P3
[Question]
197. _______________________ are deposits made and recorded by the depositor but not yet
recorded on the bank statement.
Answer: Deposits in transit
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P3
[Question]
198. A ____________ is a report explaining any differences between the checking account
balance according to the depositor's records and the balance reported on the bank statement.
Answer: Bank reconciliation
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
1-775
Chapter 01 - Introducing Accounting in Business
[Question]
199. After preparing a bank reconciliation, a company must prepare journal entries to adjust
the book balance to the correct balance. Only the items reconciling the _____________
balance require adjustment.
Answer: Book
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
[Question]
200. A customer's check is deposited by a company. The check is uncollectible because the
balance in the customer's account is not large enough to cover the check. This check is
referred to as a __________ check.
Answer: Non-sufficient funds (or NSF)
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P3
[Question]
201. The internal document that is prepared by a department manager to inform the
purchasing department of its needs is called the ________________________.
Answer: Purchase requisition
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P4
1-776
Chapter 01 - Introducing Accounting in Business
[Question]
202. The document the purchasing department sends to the vendor that is used to place an
order is the __________________________.
Answer: Purchase order
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P4
[Question]
203. The document that is an itemized statement of goods prepared by the vendor listing the
customer's name, items sold, sales prices and terms of the sale is the
__________________________.
Answer: Invoice
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P4
1-777
Chapter 01 - Introducing Accounting in Business
[Question]
204. The internal document that is used to notify the appropriate person that ordered goods
have been received and to describe the quantities and condition of the goods is the
____________________.
Answer: Receiving report
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: 06-P4
[Question]
205. The _________________________ is also called the check authorization.
Answer: Invoice approval
Bloom’s Taxonomy: Remember
AACSB: Analytic
AACSB: Communication
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA BB: Resource Management
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: 06-P4
1-778