1. When a special class of customers receives a reduced price for goods and services at the
time of the sale, this is known as a:
A) Trade discount
B) Sales discount
C) Sales allowance
D) Sales return
E) Purchase discount
2. The current year’s beginning and ending balances for Allowance for Uncollectible Accounts is
$21,000 and $18,000, respectively. If the amount of actual bad debts for the year is $22,000,
what is the amount of Bad Debt Expense for the year?
A) $43,000
B) $40,000
C) $22,000
D) $19,000
E) $25,000
Working: Amount of Bad Debts Expenses = Closing Balance of Allowance for
Uncollectible Accounts + Actual Bad Debts for the Year – Beginning Balance
Amount of Bad Debts Expenses = 18,000 + 22,000 – 21,000 = 19,000
3. Financial accounting can be described best as:
A) Recording the necessary amounts to calculate taxes owed to the government
B) Measuring business activities and communicating those measurements to decision
makers
C) Deciding whether to buy or sell a company’s stock
D) Maintaining internal records of business activities to improve the decision-making capability
of management
E) Just another math course necessary to get a college degree
4. On June 8, Aughtry Corp. purchased inventory on account for $15,000 with terms of 3/15,
n/30. On June 10, Aughtry Corp. returned $1,000 worth of inventory, and then paid the
remaining balance on June 30. How would Aughtry record the payment on June 30?
A) Debit Accounts Payable $14,000; Credit Cash $14,000
B) Debit Accounts Payable $13,580; Debit Inventory $420; Credit Cash $14,000
C) Debit Accounts Payable $14,000; Credit Inventory $420; Credit Cash $13,580
D) Debit Accounts Payable $14,550; Debit Inventory $450; Credit Cash $15,000
E) Debit Accounts Payable $15,000; Credit Inventory $450; Credit Cash $14,550
Working: Since payment is not made within 15 Days so no discount will be given and full
payment of $14,000 (15,000 – 1,000) has to be made.
Journal Entry will be : Account Payable Dr. 14,000 Cash Cr. 14,000
5. Which depreciation method will result in the least amount of depreciation expense in the last
year of the asset’s life?
A) Straight-line method
B) Impairment method
C) Double-declining balance method
D) Direct write-off method
E) Allowance method
6. The statement of stockholders’ equity reports changes in which of the following accounts?
A) Common Stock
B) Retained Earnings
C) Additional Paid-In Capital
D) Three of the other answers are correct
E) Only two of the other answers are correct
Working: Common Stock, Retained Earnings and Additional paid in Capital are all part of
statement of stockholders’ equity.
7. How many of the following transactions decrease a company’s liquidity?
a. Purchase a building by signing a long-term note payable
b. Pay workers’ salaries in the current period
c. Receive cash from providing services to customers
d. Pay dividends to stockholders
A) 0
B) 1
C) 2
D) 3
E) 4
Working: Liquidity will be decreased by the outflow of cash and there is an outflow of
cash only in two transactions.
8. Capitalized expenditures involve recording increases to:
A) Expenses
B) Revenues
C) Assets
D) Liabilities
E) Stockholders’ Equity
9. The book value of an asset equals:
A) The expected selling price of the asset
B) The expected future cash flows from owning the asset
C) Original cost less accumulated depreciation
D) The original cost of the asset
E) None of the other answers are correct
10. The adjusting entry to estimate future bad debts includes a:
A) Debit to Bad Debt Expense
B) Credit to Accounts Receivable
C) Debit to Allowance for Uncollectible Accounts
D) Debit to Accounts Receivable
E) Debit to Sales Allowance
Working: Adjusting Entry is: Bad Debts Expenses Debit, Allowance for Bad Debts Credit
11. Based on the information below, what amount of impairment loss would be reported?
Asset Fair value Estimated cash flows Book value
Building $120,000 $145,000 $138,000
Equipment $75,000 $86,000 $92,000
Truck $44,000 $49,000 $52,000
A) $25,000
B) $18,000
C) $7,000
D) $19,000
E) $43,000
Working: Impairment loss is the Difference between the Fair Value of the Asset and its
Book Value.
Building: 138,000 – 120,000 = $18,000
Equipment: 92,000 – 75,000 = $17,000
Truck: 52,000 – 44,000 = $8,000
Total = 43,000
12. At the end of the year, DeLaney provides the following financial statement information:
Balance Sheet
Assets Liabilities Stockholders’ Equity
$500,000 $200,000 $300,000
Income Statement Revenues Expenses Net Income
$300,000 $250,000 $50,000
In addition, the fair value of DeLaney’s assets is $625,000. The fair value of liabilities is
$200,000. If Henderson decides to purchase DeLaney for $500,000, how much goodwill would
Henderson record?
A) $75,000
B) $0
C) $200,000
D) $150,000
E) $450,000
Working: Goodwill is the difference between Purchase Price and the Fair Value of the Assets –
Liabilities.
Fair Value of the Asset – Liabilities = 625,000 – 200,000 = $425,000
Price Paid = 500,000
Goodwill = 500,000 – 425,000 = $75,000
13. Ai creates the following accounts receivable aging report at the end of the year.
Age Amount Estimated uncollectible
Less than 30 days $15,000 6%
31-60 days $6,000 20%
61+ days $4,000 40%
Prior to adjusting entries, the Allowance for Uncollectible Accounts has a debit balance of $300.
The year-end adjustment would include a:
A) Credit to Allowance for Uncollectible Accounts for $4,000
B) Debit to Bad Debt Expense for $3,700
C) Debit to Bad Debt Expense for $3,100
D) Credit to Accounts Receivable for $3,700
E) Credit to Allowance for Uncollectible Accounts for $3,400
Working: Calculation of Estimated Bad Debts Expenses:
Less than 30 Days = 15,000 x 6% = 900
31-60 Days = 6,000 x 20% = 1,200
61+ days = 4,000 x 40% = 1,600
Total = 3,700
Add: debit balance of Allowance for Uncollectible Accounts = 300
Total adjustment for Uncollectible Account = $4,000
14. A company issues a $1,000,000, 9%, 10-year bond that pays interest semiannually. If the
market rate is 7%, the bond will issue for:
A) Premium
B) Discount
C) Face amount
15. When preparing a bank reconciliation, a note collected by the bank would be _______, and
a service fee by the bank would be ________:
A) Subtracted from the company’s cash balance; Added to the company’s cash balance.
B) Subtracted from the bank’s cash balance; Added to the bank’s cash balance.
C) Added to the company’s cash balance; Subtracted from the company’s cash balance.
D) Added to the bank’s cash balance; Subtracted from the bank’s cash balance.
E) Subtracted from the company’s cash balance; Subtracted from the bank’s cash balance.
16. Consider the following transactions:
1. The company pays dividends to shareholders in the current year, $2,200.
2. The company pays cash for rent in the current period, $2,000.
3. The company pays cash for utilities in the current period, $1,300.
The amount of accrual-basis expense is _____ while the amount of cash-basis expense is
_____.
A) $3,300; $3,300
B) $5,500; 5,500
C) $3,300; 5,500
D) $5,500; $3,300
E) $5,500; $4,200
Working: There are two expenses. First payment of rent and second payment of Utility.
Both are accrued and paid in the same year so, balance of both accrual basis and cash
basis accounting will show same expenses of $3,300.
17. Which of the following accounts have a temporary balance?
A) Salaries Expense
B) Supplies
C) Retained Earnings
D) Prepaid Rent
E) Two of the other answers have temporary balances
18. Which of the following best describes the balance of retained earnings?
A) The amount of common stock less dividends over the life of the company
B) The difference between total revenues and total expenses, less dividends for the year
C) Total assets minus total liabilities of the company
D) The amount of capital invested by stockholders
E) Revenues minus expenses and dividends over the life of the company
19. In 2012, Shurtleff estimates that warranty costs in the following year will be $25,000. Actual
warranty costs in 2013 are only $20,000. What is the effect on the accounting equation when
recording estimated warranty costs in 2012?
A) Assets decrease
B) Stockholders’ equity increases
C) Assets increase
D) Stockholders’ equity decreases
E) Liabilities decrease
Working: Estimated Warranty expenses are deducted from the income, so they will result
in decrease in Stockholder’s Equity.
20. Suppose a company collects cash in advance from customers for services to be performed
in the future.
Using cash-basis accounting, what would be recorded the day the company provides the
services?
A) Credit Service Revenue
B) Credit Unearned Revenue
C) Credit Cash
D) Debit Unearned Revenue
E) None of the other answers are correct
Working: Because in cash basis accounting, entry is recorded when cash is received.
21. A company has two transactions: (1) pay salaries to workers for the current period, $10,000
and (2) receive cash in advance from customers, $7,000. What impact do these transactions
have on the accounting equation?
A) Decrease liabilities by $10,000
B) Increase assets by $7,000
C) Increase stockholders’ equity by $3,000
D) Decrease stockholders’ equity by $10,000
E) Decrease stockholders’ equity by $3,000
Working: Payment of Salary will reduce Cash and Stockholder’s Equity by 10,000
Receipt of Advance money will increase cash and liability by $7,000
So, the Correct option from the available is D.
22. Closing entries transfer the balance of __________ to __________?
A) Revenues; Retained Earnings
B) Common Stock; Stockholders’ Equity
C) Assets; Liabilities
D) Dividends; Common Stock
E) Accounts Payable; Liabilities
23. How many of the following would decrease net income in the current year?
a. Estimating future uncollectible accounts receivable
b. Estimating future warranty costs
c. Estimating future selling price of inventory to be below its original cost
d. Estimating future cash flows of a long-term asset to be below its book value
e. Paying cash for research and development costs in the current year
A) 1
B) 2
C) 3
D) 4
E) 5
Working: All of the above mentioned events are expenses hence decrease net income.
24. In accounting, the gain on the sale of an asset has what effect on the accounting equation:
A) Decrease total assets
B) Decrease liabilities
C) Increase stockholders’ equity
D) Increase liabilities
E) Decrease stockholders’ equity
25. The collection of federal income taxes by an employer on workers’ salaries would be
recorded as a (an):
A) Liability
B) Contra asset
C) Dividend
D) Revenue
E) Contra revenue
Working: Collection of federal income tax by the employer is his current liability because
he has to pay it to government.
26. Williamson Inc. issued 10,000 share of $1 par value common stock for $50,000. The
issuance would be recorded with a:
A) Credit to Common Stock for $10,000
B) Debit to Cash for $40,000
C) Debit to Additional Paid-In Capital for $40,000
D) Credit to Cash for $40,000
E) Credit to Common Stock for $40,000
Working: Journal Entry :
Cash Debit 50,000 (10,000 x 5)
Common Stock Credit 10,000 (10,000 x 1) (Only with par value)
Additional paid in capital Credit 40,000
27. All of the following are advantages of a corporate form of business except:
A) Separation of owners and the company
B) Increased regulation
C) Easy generation of capital
D) Easy transfer of ownership
E) Limited liability for owners
28. A company had the following cash transactions for the year:
(a) Purchased land, $60,000
(b) Borrowed from a local bank, $100,000
(c) Paid employee salaries, $50,000
(d) Issued common stock, $75,000
(e) Paid dividends, $20,000
(f) Sold equipment, $40,000
(g) Sold services to customers, $120,000
Calculate investing cash flows for the year.
A) $70,000
B) -$20,000
C) $155,000
D) $205,000
E) $40,000
Working: Only two are investing activity:
Purchase Land $60,000 (Outflow of Cash)
Sold Equipment $40,000 (Inflow of Cash)
Net: -20,000 Outflow
29. A company had the following cash transactions for the year:
(a) Purchased land, $60,000
(b) Borrowed from a local bank, $100,000
(c) Paid employee salaries, $50,000
(d) Issued common stock, $75,000
(e) Paid dividends, $20,000
(f) Sold equipment, $40,000
(g) Sold services to customers, $120,000
Calculate financing cash flows for the year.
A) $70,000
B) -$20,000
C) $155,000
D) $205,000
E) $175,000
Working: There are three financing Activities:
Borrowed from Local Bank = 100,000 (Inflow)
Issue of Common Stock = 75,000 (Inflow)
Paid Dividend = 20,000 (Outflow)
Net = 155,000 Inflow
30. A company purchases 1,000 shares of its own $1 par common stock for $20 each. The
company then reissues 400 of those shares for $25. The reissuance of this stock would be
recorded with a:
A) Credit to Additional Paid-In Capital for $2,000
B) Credit to cash for $25,000
C) Debit to Common Stock for $400
D) Credit to Common Stock for $400
E) Credit to Additional Paid-In Capital for $10,000
Working: Per Share gain on Treasury Stock reissue = 25 – 20 = $5
Total Share reissued = 400
Total Gain = 400 x 5 = $2,000
This will be credited to Additional Paid in Capital.
31. Stenson Inc. purchased 2,000 shares (or 8%) of Pixel Company for $10 per share. At the
end of the year, Pixel’s stock price was $7. How would Stenson account for Pixel’s decrease in
stock price?
A) Record a $6,000 unrealized holding loss
B) Record a $6,000 realized gain
C) Record a $6,000 unrealized holding gain
D) Record a $6,000 realized loss
E) No entry for the decrease in stock price
Working: Per Share Loss = 10 – 7 = $3
Total Loss = 3 x 2,000 = $6000
This is unrealized holding loss.
32. Calculate the balance of retained earnings at the end of the fourth year of a company’s
operations:
Net Income Dividends
Year 1 $2,000 $1,000
Year 2 -$1,000 $0
Year 3 $3,000 $1,000
Year 4 $10,000 $2,000
A) $10,000
B) $8,000
C) $1,000
D) $18,000
E) $16,000
Working: Retained Earnings = Net Income - Dividend
For the First Year = 2,000 – 1,000 = 1,000
Second Year = -1,000 (Net 0)
Third Year = 3,000 – 1,000 = 2,000
Fourth Year = 10,000 – 2,000= 8,000
Total = 10,000
33. On, December 1, the board of directors declares a cash dividend to be paid on December
31 to shareholders of record on December 15. On which date would the company record a debit
to the Dividends account?
A) December 1
B) December 15
C) December 31
34. Losses on the reissuance of treasury stock are recorded:
A) As a credit to the Additional Paid-In Capital account
B) As a debit to the Additional Paid-In Capital account
C) As a revenue used to calculate net income
D) As an increase to the Common Stock account
E) Two of the other answers are correct.
35. Consolidated financial statements refer to:
A) The combined financial statements of the parent company and subsidiaries for which
the parent has greater than 50% ownership.
B) The combined financial statements of the parent company and subsidiaries for which the
parent has 100% ownership.
C) The combined financial statements of the parent company and subsidiaries for which the
parent has greater than 20% ownership.
D) The combined financial statements of the parent company and subsidiaries for which the
parent has less than 50% ownership.
E) The combined financial statements of the parent company and subsidiaries for which the
parent has less than 20% ownership.
36. The change in ____________ in the _______________ equals net cash flows reported in
the _______________________.
A) Cash; Balance Sheet; Statement of Cash Flows
B) Net Income; Income Statement; Statement of Cash Flows
C) Retained Earnings; Balance Sheet; Income Statement
D) Stockholders’ Equity; Balance Sheet; Statement of Cash Flows
E) Cash; Balance Sheet; Income Statement
37. At the beginning of the period, Utilities Payable equals $500. At the end of the period,
Utilities Payable equals $700. If Utilities Expense for the period equals $1,500, what was the
cash paid for utilities for the period?
A) $1,300
B) $1,500
C) $1,700
D) $500
E) $700
Working: Cash Paid for utilities = Beginning Balance of Utility payable + Utility expense
for the Year –Ending Balance of the Utility Payable
Cash Paid for Utilities = 500 + 1,500 – 700 = 1,300
38. At the beginning of the period, Accounts Receivable equals $1,700. At the end of the period,
Accounts Receivable equals $2,200. If Service Revenue for the period equals $15,400, what
was the cash received from customers for the period?
A) $14,900
B) $15,900
C) $15,400
D) $17,100
E) $13,200
Working: Cash Received from Customers = Beginning Account Receivable + Service
Revenue – Ending Balance for Account Receivable
Cash Received from Customers = 1,700 + 15,400 – 2,200 = $14,900
39. In which financial statement is the difference between accrual-basis net income and cashbasis net income detailed for investors and creditors?
A) Statement of Cash Flows
B) Balance Sheet
C) Income Statement
D) Statement of Stockholders’ Equity
E) Statement of Cash-Basis Net Income
40. Which financial ratio relates most closely to understanding the risk of creditors forcing the
company into bankruptcy?
A) Return on assets
B) Profit margin
C) Inventory turnover
D) Receivables turnover
E) Debt to equity
41. It is always true that when a company sells its inventory more quickly, the company will have
a:
A) Higher inventory turnover ratio
B) Lower receivables turnover ratio
C) Higher profit margin
D) Lower return on equity
E) Higher current ratio
42.Calculate the issue price of a $1,000,000, 8%, 10-year bond that pays interest semiannually,
assuming the market rate is 10%. Use the time value factors below to help you complete your
answer (you may have a small rounding error):
Periods 4% 5% 8% 10%
Rate =
Present Value of $1 10 0.67556 0.61391 0.46319 0.38554
20 0.45639 0.37689 0.21455 0.14864
Present Value of Annuity 10 8.11090 7.72173 6.71008 6.14457
20 13.59033 12.46221 9.81815 8.51356
A) $875,378
B) $877,106
C) $1,000,000
D) $872,311
E) $878,129
Working: To calculate issue price we need to calculate Present Value of Interest Payment
and Maturity Value.
Interest per Period = 1,000,000 x 8% = 80,000 / 2 = $40,000
Total Period = 10 x 2 = 20
Discounting Factor = 10 / 2 =5%
Present Value of Interest payment = 40,000 x 12.46221 = $498,488
Present Value of Maturity = 1,000,000 x 0.37689 = $376,890
Total = $875,378
43. Which of the following is (are) true about bonds?
A) All of the other answers are true about bonds
B) They are considered a source of debt financing
C) Only two of the other answers are true about bonds
D) The issuer pays periodic interest of a fixed amount and then a final fixed amount at
maturity
E) Bonds that issue for a premium are issued for more than their face amount