Financial and Managerial Accounting Jan Williams 18th Edition- Test Bank

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Financial and Managerial Accounting Jan Williams 18th Edition- Test Bank

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Chapter 2   Basic Financial Statements

 

1) The sale of additional shares of capital stock will cause retained earnings to increase.

 

2) A business entity is regarded as separate from the personal activities of its owners whether it is a sole proprietorship, a partnership, or a corporation.

 

3) Assets need not always have physical characteristics as do buildings, machinery, or inventory.

 

4) The going concern principle assumes that the business will continue indefinitely.

 

5) Notes payable and accounts payable both require a company to pay an amount owed by a certain date. Notes payable generally have interest, while accounts payable generally do not.

 

6) Any business event that might affect the future profitability of a business should be reported in its balance sheet.

 

7) The practice of showing assets on the balance sheet at their cost, rather than at their current market value is explained, in part, by the fact that cost is supported by objective evidence that can be verified by independent experts.

 

8) Liabilities are usually listed in order of magnitude, from smallest dollar amount to largest dollar amount.

 

9) The entity principle states that the affairs of the owners are not part of the financial

operations of a business entity and should be separated.

 

10) The accounting equation may be stated as “assets minus liabilities equals owners’ equity.”

 

11) Total assets plus total liabilities must equal total owners’ equity.

 

12) A transaction that causes an increase in an asset may also cause a decrease in another asset, an increase in a liability, or an increase in owners’ equity.

 

13) The collection of an account receivable will cause total assets to decrease.

 

14) The payment of a liability causes an increase in owners’ equity.

 

15) When a business borrows money from a bank, the immediate effect is an increase in total assets and a decrease in liabilities or owners’ equity.

 

16) The purchase of an asset, such as office equipment, for cash will cause owners’ equity to decrease.

 

17) Total assets must always equal total liabilities plus total owners’ equity.

 

18) If a company purchases equipment with cash, its total assets will increase.

 

19) If a company purchases equipment by issuing a note payable, its total assets will not change.

 

20) The balance sheet shows assets, liabilities, and equity, as an extension of the accounting equation.

 

21) A net profit results from having more revenues than liabilities.

 

22) A statement of cash flows reports revenue and expense activities for a specific time period such as one month or one year.

 

23) It is not unusual for an entity to report a significant increase in cash from operating activities, but a decrease in the total amount of cash.

 

24) The statement of cash flows provides a link between two balance sheets by showing how net income (or loss) has changed owners’ equity from one balance sheet date to the next.

 

25) Articulation between the financial statements means that they relate closely to each other on the basis of the same underlying transaction information.

 

26) Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford.

 

27) In a business organized as a corporation, it is not necessary to list the equity of each stockholder on the balance sheet.

 

28) The owner of a sole proprietorship is personally liable for the debts of the business, whereas the stockholders of a corporation are not personally liable for the debts of the business.

 

29) Window dressing occurs when management attempts to make a company look financially stronger than it actually is.

 

30) Decision makers outside the organization base their credit decisions on weekly, or even daily, financial statements.

 

31) The major outgrowth from business failures and allegations of fraudulent financial reporting during the 1990s was the passage of the Securities and Exchange Act.

 

 

 

32) Which of the following is the primary objective of an income statement?

1. A) Providing managers with detailed information about where the enterprise stands at a specific date.
2. B) Providing users outside the business organization with information about the company’s operating results for a period of time.
3. C) Reporting to the Internal Revenue Service the company’s taxable income.
4. D) Indicating to investors in a particular company the current market values of their investments.

 

33) Which of the following describes the proper form of a balance sheet?

1. A) Owners’ equity is always the first section listed because it is the most important to external users.
2. B) Cash is always the first asset listed, followed by permanent assets (such as land and buildings), and finally by assets such as receivables and supplies.
3. C) Liabilities are listed before owners’ equity.
4. D) A subtotal for total assets plus total liabilities is shown.

 

34) A balance sheet is designed to show:

1. A) How much a business is worth.
2. B) The profitability of the business during the current year.
3. C) The assets, liabilities, and owners’ equity of a business as of a particular date.
4. D) The cost of replacing the assets and of paying off the liabilities at December 31.

 

35) Blue Wholesale Shirt Co. sold shirts to Pink Retail Shoppe. The owner of Pink Retail said she would pay Blue at a later date, which Blue Wholesale agreed to. Blue Wholesale Shirt Co. is considered to be a:

1. A) borrower.
2. B) liability.
3. C) creditor.
4. D) debtor.

 

36) Which of the following best defines an asset?

1. A) Something with physical form that is valued at cost in the accounting records.
2. B) An economic resource owned by a business and expected to benefit future operations.
3. C) An economic resource representing cash or the right to receive cash in the near future.
4. D) Something owned by a business that has a ready market value.

 

37) From an accounting viewpoint, when is a business considered as an entity separate from its owner(s)?

1. A) Only when organized as a sole proprietorship.
2. B) Only when organized as a partnership.
3. C) Only when organized as a corporation.
4. D) A business is always considered as an accounting entity separate from the activities of the owner(s).

 

 

 

38) The accounting principle that assumes that a company will operate in the foreseeable future is:

1. A) Going concern.
2. B) Objectivity.
3. C) Liquidity.
4. D) Disclosure.

 

39) The valuation of assets in the balance sheet is based primarily upon:

1. A) What it would cost to replace the assets.
2. B) Cost, because cost is usually factual and verifiable.
3. C) Current fair market value as established by independent appraisers.
4. D) Cost, because in the event of liquidation, the assets would be sold at an amount equal to their original cost.

 

40) Which of the following is not a generally accepted accounting principle relating to the valuation of assets?

1. A) The cost principle – in general, assets are valued at cost, rather than at estimated market values.
2. B) The objectivity principle – accountants prefer to use objective, rather than subjective, information as the basis for accounting information.
3. C) The safety principle – assets are valued at no more than the value for which they are insured.
4. D) The going-concern assumption – one reason for valuing assets such as buildings and equipment at cost rather than at their current market values is the assumption that the business will use these assets rather than sell them.

 

41) Each year, the accountant for Southern Real Estate Company adjusts the recorded value of each asset to its market value. Using these market value figures on the balance sheet violates:

1. A) The accounting equation.
2. B) The stable-dollar assumption.
3. C) The business entity concept.
4. D) The cost principle.

 

42) The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the restaurant’s balance sheet. The reporting of this item in this manner violated the:

1. A) Cost principle.
2. B) Business entity concept.
3. C) Objectivity principle.
4. D) Going-concern assumption.

 

 

 

43) Eton Corporation purchased land in 1998 for $190,000. In 2018, it purchased a nearly identical parcel of land for $430,000. In its 2018 balance sheet, Eton valued these two parcels of land at a combined value of $860,000. Reporting the land in this manner violated the:

1. A) Cost principle.
2. B) Principle of the business entity.
3. C) Objectivity principle.
4. D) Going-concern assumption.

 

44) Bob Bertolucci, owner of Bob’s Bazaar, also owns a personal residence that costs $575,000. The market value of his residence is $725,000. During preparation of the financial statements for Bob’s Bazaar, the accounting principle most relevant to the presentation of Bob’s home is:

1. A) The concept of the business entity.
2. B) The cost principle.
3. C) The going-concern assumption.
4. D) The objectivity principle.

 

45) Which of the following will not cause a change in the owners’ equity of a business?

1. A) Purchase of land with cash.
2. B) Withdrawal of cash by the owner.
3. C) Sale of land at a profit.
4. D) Losses from unprofitable operations.

 

46) Which of the following is correct when a corporation uses cash to pay for an expense?

1. A) Total assets will decrease.
2. B) Retained earnings will increase.
3. C) Owners’ equity will increase.
4. D) Liabilities will increase.

 

47) Deerpark Corporation recently borrowed $70,000 cash from its bank. Which of the following was unaffected by this transaction?

1. A) Assets.
2. B) Liabilities.
3. C) Owners’ equity.
4. D) Cash.

 

48) Which of the following transactions would cause an increase in both assets and owners’ equity?

1. A) Investment of cash in the business by the owner.
2. B) Sale of land for a price less than its cost.
3. C) Borrowing money from a bank.
4. D) Sale of land for cash at a price equal to its cost.

 

 

 

49) A transaction caused an increase in both assets and owners’ equity. This transaction could have been resulted from the:

1. A) Sale of services to a customer.
2. B) Sale of land for a price less than its cost.
3. C) Borrowing money from a bank.
4. D) Sale of land for cash at a price equal to its cost.

 

50) The amount of owners’ equity in a business is not affected by:

1. A) The percentage of total assets held in cash.
2. B) The investments made in the business by the owner.
3. C) The profitability of the business.
4. D) The amount of dividends paid to stockholders.

 

51) Decreases in owners’ equity are caused by:

1. A) Purchases of assets and payment of liabilities.
2. B) Purchases of assets and incurrence of liabilities.
3. C) Payment of liabilities and unprofitable operations.
4. D) Distributions of assets to the owners and unprofitable operations.

 

52) Which of the following transactions would cause a change in owners’ equity?

1. A) Repayment of the principal on a bank loan.
2. B) Purchase of a delivery truck on credit.
3. C) Sale of land on credit for a price above cost.
4. D) Borrowing money from a bank.

 

53) On the statement of financial position, how are assets and liabilities normally presented?

1. A) Assets are presented in their order of permanence; liabilities are presented in the order in which they become due.
2. B) Assets are presented in the order in which they become due; liabilities are presented in their order of permanence.
3. C) Assets are presented in order of profitability; liabilities are presented in order of liquidity.
4. D) Assets are presented in order of liquidity; liabilities are presented in order of profitability.

 

54) Which of the following assets would most likely be listed last on a statement of financial position?

1. A) Land.
2. B) Cash.
3. C) Accounts receivable.
4. D) Equipment.

 

55) Which of the following liabilities would most likely be listed last on a statement of financial position?

1. A) Bonds payable, due in 20 years.
2. B) Accounts payable.
3. C) Note payable, due in 3 years.
4. D) Income taxes payable.

 

56) If a transaction causes an asset account to decrease, which of the following related effects may occur?

1. A) An increase of equal amount in an owners’ equity account.
2. B) An increase in a liability account.
3. C) An increase of equal amount in another asset account.
4. D) An increase in the combined total of liabilities and owners’ equity.

 

57) A payment of a business debt not including interest:

1. A) Decreases total assets.
2. B) Increases total liabilities.
3. C) Increases the owners’ equity in the business.
4. D) Decreases the owners’ equity in the business.

 

58) If total assets equal $270,000 and total liabilities equal $202,500, the total owners’ equity must equal:

500. A) $472,500.
501. B) $67,500.
502. C) $270,000.
503. D) Cannot be determined from the information given.

 

59) If total assets equal $345,000 and total owners’ equity equal $120,000, then total liabilities must equal:

1. A) $465,000.
2. B) $225,000.
3. C) $120,000.
4. D) Cannot be determined from the information given.

 

60) Owners’ equity in a business increases as a result of which of the following?

1. A) Payments of cash to the owners.
2. B) Losses from unprofitable operation of the business.
3. C) Earnings from profitable operation of the business.
4. D) Borrowing from a commercial bank.

 

61) Owners’ equity in a business decreases as a result of which of the following?

1. A) Investments of cash by the owners.
2. B) Profits from operating the business.
3. C) Losses from unprofitable operation of the business.
4. D) Repaying a loan to a commercial bank.

 

62) To appear in a balance sheet of a business entity, an asset need not:

1. A) Be an economic resource.
2. B) Have a ready market value.
3. C) Be expected to benefit future operations.
4. D) Be owned by the business.

 

 

63) A balance sheet:

1. A) Provides owners, investors, and other interested parties with all the financial information they need to evaluate the financial strength, profitability, and future prospects of a given business entity.
2. B) Shows the current market value of the owners’ equity in the business at the balance sheet date.
3. C) Assists creditors in evaluating the debt-paying ability of a business by showing the assets and liabilities of the business, plus the assets and liabilities of its owner (or owners).
4. D) Shows the assets, liabilities, and owners’ equity of a business entity, valued in conformity with generally accepted accounting principles.

 

64) Which of the following is correct if a company purchases equipment for $70,000 cash?

1. A) Total assets will increase by $70,000.
2. B) Total assets will decrease by $70,000.
3. C) Total assets will remain the same.
4. D) Total owners’ equity will decrease.

 

65) If a company purchases equipment for $65,000 by issuing a note payable:

1. A) Total assets will increase by $65,000.
2. B) Total assets will decrease by $65,000.
3. C) Total assets will remain the same.
4. D) Total owners’ equity will decrease.

 

66) If a company has a profit:

1. A) Assets will be equal to liabilities plus owners’ equity.
2. B) Assets will be less than liabilities plus owners’ equity.
3. C) Assets will be greater than liabilities plus owners’ equity.
4. D) Owners’ equity will be greater than its assets.

 

67) Capital stock represents:

1. A) The amount invested in the business by stockholders when shares of stock were initially issued by a corporation.
2. B) The owners’ equity for a business organized as a corporation.
3. C) The owners’ equity accumulated through profitable operations that have not been paid out as dividends.
4. D) The price paid by the current owners to acquire shares of stock in the corporation, regardless of whether they bought the shares directly from the corporation or from another stockholder.

 

68) The balance sheet item that represents the portion of owners’ equity resulting from profitable operations of the business is:

1. A) Accounts receivable.
2. B) Cash.
3. C) Capital stock.
4. D) Retained earnings.

 

69) Retained earnings appears on:

1. A) The income statement.
2. B) The balance sheet.
3. C) The statement of cash flows.
4. D) All three of the financial statements.

 

At December 31, 2018, the accounting records of Braun Corporation contain the following items:

Accounts Payable	$	16,000		Accounts Receivable	$	40,000
Land	$	240,000		Cash		?
Capital Stock		?		Equipment	$	120,000
Building	$	180,000		Notes Payable	$	190,000
Retained Earnings	$	160,000
–

 

70) If Capital Stock is $260,000, what is the December 31, 2018 cash balance?

1. A) $86,000.
2. B) $94,000.
3. C) $46,000.
4. D) $686,000.

 

71) If Capital Stock is $320,000, total assets of Braun Corporation at December 31, 2018, amounts to:

1. A) $686,000.
2. B) $926,000.
3. C) $726,000.
4. D) $106,000.

 

72) If Cash at December 31, 2018, is $86,000, Capital Stock is:

1. A) $260,000.
2. B) $300,000.
3. C) $620,000.
4. D) $168,000.

 

73) If Cash at December 31, 2018, is $26,000, total owners’ equity is:

1. A) $160,000.
2. B) $366,000.
3. C) $606,000.
4. D) $400,000.

 

74) If Cash at December 31, 2018, is $66,000, total assets amounts to:

1. A) $606,000.
2. B) $806,000.
3. C) $662,000.
4. D) $646,000.

At December 31, 2018, the accounting records of Hercules Manufacturing, Inc. contain the following items:

Accounts Payable	$	12,000		Accounts Receivable	$	30,000
Land	$	90,000		Cash	$	7,000
Building		250,000		Equipment	$	?
Notes Payable	$	135,000		Capital Stock		188,000
Retained Earnings		?
–

 

75) If total assets of Hercules Manufacturing, Inc. are $556,000, Equipment is carried in Hercules Manufacturing accounting records at:

1. A) $377,000.
2. B) $179,000.
3. C) $150,000.
4. D) $ 90,000.

 

76) If total assets of Hercules Manufacturing, Inc. are $556,000, Retained Earnings at December 31, 2018, must be:

1. A) $811,000.
2. B) $180,000.
3. C) $221,000.
4. D) $335,000.

 

77) If Retained Earnings at December 31, 2018, is $140,000, total assets amounts to:

1. A) $ 98,000.
2. B) $377,000.
3. C) $475,000.
4. D) $188,000.

 

78) If Retained Earnings at December 31, 2018, is $100,000, Equipment is carried in Hercules Manufacturing, Inc. accounting records at:

1. A) $ 42,000.
2. B) $ 58,000.
3. C) $ 43,500.
4. D) $345,000.

 

79) Assume that the Equipment shown above was acquired by the business five years ago and has a book value of $156,000, but has a current appraised value of $200,000. Hercules Manufacturing’s Retained Earnings at December 31, 2018, amounts to:

1. A) $533,000.
2. B) $345,000.
3. C) $198,000.
4. D) $356,000.

 

 

At December 31, 2018 the accounting records of Gordon, Inc. contain the following items:

Accounts Payable	$	2,500		Accounts Receivable	$	18,750
Land	$	30,000		Cash		?
Building	$	31,250		Equipment	$	40,000
Notes Payable		?		Capital Stock	$	12,500
Retained Earnings	$	125,000

 

 

80) If the Notes Payable is $10,000, the December 31, 2018 cash balance is:

1. A) $ 60,000.
2. B) $160,000.
3. C) $ 30,000.
4. D) $ 20,000.

 

81) If the Notes Payable balance is $25,000, then the total assets of Gordon, Inc. at December 31, 2018 amount to:

500. A) $ 27,500.
501. B) $152,500.
502. C) $120,000.
503. D) $165,000.

 

82) If the Cash balance at December 31, 2018 is $67,500, the Notes Payable balance is:

750. A) $118,750.
751. B) $ 47,500.
752. C) $137,500.
753. D) $140,000.

 

83) Refer to the information above. If the Cash balance at December 31, 2018 is $62,500 then Total Liabilities amounts to:

500. A) $ 42,500.
501. B) $140,000.
502. C) $ 45,000.
503. D) $182,500.

 

84) Which of the following is correct if at the end of Crystal Imports’ first year of operations, Assets are $800,000 and Owners’ Equity is $720,000?

1. A) The owner(s) must have invested $800,000 to start the business.
2. B) The business must be operating profitably.
3. C) Liabilities are $80,000.
4. D) Liabilities are $1,520,000.

 

 

 

85) During the current year, the assets of Wheatley’s increased by $362,000, and the liabilities increased by $260,000. The owners’ equity in the business must have:

1. A) Decreased by $102,000.
2. B) Decreased by $622,000.
3. C) Increased by $102,000.
4. D) Increased by $622,000.

 

86) The total liabilities of Hogan’s Company on the balance sheet are $270,000; this amount is equal to three-fourths of the total assets. What is the amount of owners’ equity?

500. A) $202,500.
501. B) $ 90,000.
502. C) $360,000.
503. D) $630,000.

 

87) Thirty percent of the total assets of Shanahan Corporation have been financed through borrowing. The total liabilities of the company are $600,000. What is the amount of owners’ equity?

1. A) $ 180,000.
2. B) $2,000,000.
3. C) $1,400,000.
4. D) $2,600,000.

 

88) A transaction caused a $60,000 increase in both total assets and total liabilities. This transaction could have been which of the following?

1. A) Purchase for office equipment for $60,000 cash.
2. B) Purchase of office equipment for $120,000, paying $60,000 cash and issuing a note payable for the balance.
3. C) Repayment of a $60,000 bank loan.
4. D) Investment of $60,000 cash in the business by the owner.

 

89) If $9,600 cash and a $31,000 note payable are given in exchange for some office machines to be used in a business:

1. A) Total assets are increased.
2. B) Total liabilities are decreased.
3. C) Total assets are decreased.
4. D) The owners’ equity is increased.

 

90) If during the current year, liabilities of Corbett’s Store increased by $220,000 and owners’ equity increased by $160,000, then:

1. A) Assets at the end of the year total $380,000.
2. B) Assets at the end of the year total $60,000.
3. C) Assets increased during the year by $380,000.
4. D) Assets decreased during the year by $60,000.

 

 

91) If during the current year, liabilities of Hayden Travel decreased by $50,000 and owners’ equity increased by $75,000, then:

1. A) Assets at the end of the year total $125,000.
2. B) Assets at the end of the year total $25,000.
3. C) Assets increased during the year by $25,000.
4. D) Assets decreased during the year by $125,000.

 

92) At the end of the current year, the owners’ equity in Barclay Bakery is $246,000. During the year, the assets of the business had increased by $120,000 and the liabilities had increased by $72,000. Owners’ equity at the beginning of the year must have been:

1. A) $198,000.
2. B) $174,000.
3. C) $284,000.
4. D) $438,000.

 

93) At the end of the current year, the owners’ equity in Durante Co. is $360,000. During the year, the assets of the business had increased by $68,000 and the liabilities had increased by $118,000. Owners’ equity at the beginning of the year must have been:

1. A) $410,000.
2. B) $310,000.
3. C) $546,000.
4. D) $174,000.

 

94) During the current year, the assets of Quality Stairs increased by $175,000 and the liabilities decreased by $15,000. If the owners’ equity in the business is $475,000 at the end of the year, the owners’ equity at the beginning of the year must have been:

1. A) $335,000.
2. B) $285,000.
3. C) $665,000.
4. D) $615,000.

 

95) An expense is best defined as:

1. A) Any payment of cash for the benefit of the company.
2. B) Past, present, or future payments of cash required to generate revenues.
3. C) Past payments of cash required to generate revenues.
4. D) Future payments of cash required to generate revenues.

 

96) A revenue transaction may result in all of the following except:

1. A) An increase in assets.
2. B) An increase in owners’ equity.
3. C) A positive cash flow in either the past, present, or future.
4. D) An increase in liabilities.

 

 

 

[The following information applies to the questions displayed below.]

 

Astoria Co. had the following transactions during the month of August 2018:

 

(1) Cash received from bank loans was $20,000.

(2) Dividends of $9,500 were paid to stockholders in cash.

(3) Revenues earned and received in cash amounted to $33,500.

(4) Expenses incurred and paid were $26,000.

 

97) What amount of net income will be reported on an income statement for the month of August?

1. A) $20,000.
2. B) $7,500.
3. C) $0.
4. D) $33,500.

 

98) At the beginning of August, 2018, owners’ equity in Astoria was $160,000. Given the transactions of August, what will be the owners’ equity be at the end of the month?

500. A) $167,500.
501. B) $150,500.
502. C) $193,500.
503. D) $158,000.

 

99) For the month of August, net cash flows from operating activities for Astoria were:

500. A) $33,500.
501. B) $7,500.
502. C) $20,000.
503. D) $26,000.

 

[The following information applies to the questions displayed below.]

 

Waldorf Co. had the following transactions during the month of October 2018:

 

(1) Cash received from bank loans was $60,000.

(2) Dividends of $18,500 were paid to stockholders in cash.

(3) Revenues earned and received in cash amounted to $100,500.

(4) Expenses incurred and paid were $78,000.

 

100) What amount of net income will be reported on an income statement for the month of October?

500. A) $ 18,500.
501. B) $ 22,500.
502. C) $ 78,000.
503. D) $100,500.

 

 

 

101) At the beginning of October, owners’ equity in Waldorf was $480,000. Given the transactions in October 2018, what will be the owners’ equity at the end of the month?

1. A) $480,000.
2. B) $484,000.
3. C) $502,500.
4. D) $580,500.

 

102) Refer to the information above. For the month of October, net cash flows from operating activities for Waldorf were:

500. A) $ 18,500.
501. B) $ 22,500.
502. C) $ 78,000.
503. D) $100,500.

 

103) Which of the following activities is not a category into which cash flows are classified?

1. A) Marketing activities.
2. B) Operating activities.
3. C) Financing activities.
4. D) Investing activities.

 

104) A strong statement of cash flows indicates that significant cash is being generated by:

1. A) Operating activities.
2. B) Financing activities.
3. C) Investing activities.
4. D) Effective tax planning.

 

105) During the month of May, Henderson Company had the following transactions:

(1) Revenues of $60,000 were earned and received in cash.

(2) Bank loans of $9,000 were paid off.

(3) Equipment of $20,000 was purchased.

(4) Expenses of $36,800 were paid.

(5) Stockholders purchased additional shares for $22,000 cash.

 

A statement of cash flows for May would report net cash flows from operating activities of:

1. A) $60,000.
2. B) $16,200.
3. C) $23,200.
4. D) $20,000.

 

 

 

[The following information applies to the questions displayed below.]

 

During the month of August, Boyce Company had the following transactions:

 

(1)Revenues of $120,000 were earned and received in cash.

(2)Bank loans of $18,000 were paid off.

(3)Equipment of $40,000 was purchased with cash.

(4)Expenses of $73,600 were paid.

(5)Stockholders purchased additional shares for $44,000 cash.

 

106) A statement of cash flows for August would report net cash flows from operating activities of:

1. A) $26,000.
2. B) $32,400.
3. C) $40,000.
4. D) $46,400.

 

107) A statement of cash flows for August would report net cash flows from financing activities of:

1. A) $40,000.
2. B) $26,000.
3. C) $46,400.
4. D) $32,400.

 

108) A statement of cash flows for August would report net cash flows from investing activities of:

1. A) ($26,000).
2. B) $32,400.
3. C) ($40,000).
4. D) $46,400.

 

109) A statement of cash flows for August would report an increase in cash of:

1. A) $26,000.
2. B) $32,400.
3. C) $40,000.
4. D) $46,400.

 

 

 

[The following information applies to the questions displayed below.]

 

During the month of February, Fadness Company had the following transactions:

 

(1) Revenues of $225,000 were earned and received in cash.

(2) Bank loans of $18,000 were paid off.

(3) New bank loans of $15,000 were incurred.

(4) Equipment of $40,000 was purchased with cash.

(5) Equipment was sold for its book value of $36,000. Cash was received.

(6) Expenses of $171,400 were paid.

(7) Stockholders purchased additional shares for $50,000 cash.

 

110) A statement of cash flows for February would report net cash flows from operating activities of:

1. A) $ 4,000.
2. B) $35,600.
3. C) $53,600.
4. D) $96,600.

 

111) A statement of cash flows for February would report net cash flows from financing activities of:

1. A) $4,000.
2. B) $47,000.
3. C) $83,000.
4. D) $96,600.

 

112) A statement of cash flows for February would report net cash flows from investing activities of:

1. A) ($ 4,000).
2. B) $47,000.
3. C) $53,600.
4. D) $76,000.

 

113) A statement of cash flows for February would report an increase in cash of:

1. A) ($ 4,000).
2. B) $47,000.
3. C) $53,600.
4. D) $96,600.

 

114) If cash flows from operating activities is a positive amount, then:

1. A) The amount will be shown on the statement of cash flows in parentheses.
2. B) The company must have had a net profit for the year.
3. C) The company must have paid off more debts than it earned during the year.
4. D) The company may still have a decrease in the total amount of cash for the period.

 

 

 

115) The change in owners’ equity due to only revenue and expense transactions is explained by the:

1. A) Statement of cash flows.
2. B) Statement of financial position.
3. C) Income statement.
4. D) Tax return.

 

116) Which one of the following is not considered as one of the three primary financial statements?

1. A) Balance sheet.
2. B) Income statement.
3. C) Statement of cash flows.
4. D) Statement of budgeting activities.

 

117) The way in which financial statements relate is known as:

1. A) Solvency.
2. B) Objectivity.
3. C) Articulation.
4. D) Entity.

 

118) Which business organization is recognized as a separate legal entity under the law?

1. A) Corporation.
2. B) Sole proprietorship.
3. C) Partnership.
4. D) All business organizations are separate legal entities.

 

119) Retained earnings is:

1. A) The positive cash flows of a company.
2. B) The net worth of a company.
3. C) The owners’ equity that has accumulated as a result of profitable operations.
4. D) Equal to the total assets of a company.

 

120) Which of the following best describes liquidity?

1. A) The ability to increase the value of retained earnings.
2. B) The ability to pay the debts of the company as they become due.
3. C) Being able to buy everything the company requires for cash.
4. D) Purchasing everything the company requires on credit.

 

121) Profitability may be defined as:

1. A) The ability to pay the debts of the company as they become due.
2. B) The ability to increase retained earnings.
3. C) Distributing dividends out of retained earnings.
4. D) Having excess cash.

 

 

 

122) The principle of adequate disclosure means that a company should disclose:

1. A) Only the important monetary information.
2. B) All confidential information regarding the company.
3. C) Any financial facts that a reasonably informed person would consider necessary for the proper interpretation of the financial statements.
4. D) Only subsequent events.

 

123) Which of the following statements regarding liquidity and profitability is not true?

1. A) If a business is unable to pay its debts as they come due, it is operating unprofitably.
2. B) A business may be liquid, yet operate unprofitably for several years.
3. C) A business may operate profitably, yet be unable to meet its obligations.
4. D) In order to survive in the long run, a business must both remain liquid and operate profitably.

 

124) The concept of adequate disclosure means that:

1. A) The accounting department of a business must inform management of the accounting principles used in preparing the financial statements.
2. B) The company must inform users of any significant facts necessary for proper interpretation of the financial statements, including events occurring after the financial statement date.
3. C) The independent auditors must disclose in the financial statements any and all errors detected in the company’s accounting records.
4. D) The financial statements should include a comprehensive list of each transaction that occurred during the year.

 

125) According to the Sarbanes-Oxley Act, CEOs and CFOs must certify to the accuracy of their company’s financial statements:

1. A) Monthly and Quarterly.
2. B) Quarterly and Annually.
3. C) Monthly and Annually.
4. D) CEOs and CFOs are not required to certify to the company’s financial statement; only CPAs do.

 

126) A strong statement of financial position shows:

1. A) Large amounts of liquid assets relative to the liabilities due in the near future.
2. B) Large amounts of debt relative to stockholders’ equity.
3. C) That cash is being generated by operations.
4. D) That profits are being generated by operations.

 

127) Financial statements

A set of financial statements includes three related accounting reports, or statements. In the space provided, list the names of three primary statements, and give a brief description of the accounting information contained in each.

 

 

Financial and Managerial Accounting, 18e Williams

Chapter 4   The Accounting Cycle: Accruals and Deferrals

 

1) Adjusting entries are needed whenever transactions affect the revenue or expenses of more than one accounting period.

 

2) Adjusting entries are usually made on a daily basis.

 

3) Adjusting entries are only required when errors are made.

 

4) The Cash account is usually affected by adjusting entries.

 

5) Every adjusting entry involves the recognition of either revenue or an expense.

 

6) Depreciation expense on equipment is considered a cash expense since the company must pay cash for the equipment.

 

7) The failure to record an adjusting entry for depreciation would cause assets to be overstated and net income to be understated.

 

8) If a depreciable asset’s market value increases during the year, no depreciation expense should be recorded.

 

9) The period of time over which the cost of an asset is allocated to depreciation expense is called its useful life.

 

10) Avalon Company paid $4,400 cash for an insurance policy providing three years’ protection against fire loss. This transaction could properly be recorded by a $4,400 debit to Unexpired Insurance and a $4,400 credit to Cash.

 

11) Prepaid expenses are assets that should appear on the balance sheet.

 

12) One of the purposes of adjusting entries is to convert assets to expenses.

 

13) Since the Accumulated Depreciation account has a credit balance, it is reported on the liability side of the balance sheet along with other accounts that have a credit balance.

 

14) Recording depreciation expense is an example of an adjusting entry to accrue unpaid expenses resulting from expenses being incurred before cash is paid.

 

15) When a company receives cash in advance and is obligated to provide a service or a product in the future, the entry would be a debit to a revenue account and a credit to a liability account.

 

16) Unearned revenue is a liability and should be reported on the income statement.

 

17) The adjusting entry to record estimated income taxes in a profitable period consists of a debit to Income Tax Payable and a credit to Income Tax Expense.

 

18) Unpaid expenses may be included as an expense on the income statement.

 

19) Omission of the adjusting entry needed to accrue an expense at the end of the period would cause liabilities to be understated.

 

20) Wages are an expense to the employer when earned, rather than when paid.

 

21) An expenditure that benefits year one but is paid for in year two should not be recorded until year two.

 

22) An adjusting entry to recognize revenue that has been earned but not yet billed or collected will cause an increase in total liabilities.

 

23) The realization principle underlies the accounting practices of depreciating plant assets and amortizing the cost of unexpired insurance policies.

 

24) Immaterial items may be accounted for in the most convenient manner, without regard to other theoretical concepts.

 

25) Materiality is determined by the Financial Accounting Standards Board.

 

26) The adjusted trial balance may be used in place of the income statement.

 

27) The balance in the Retained Earnings account that appears on the adjusted trial balance is the same as the balance of the Retained Earnings account that is reported on the balance sheet.

 

28) Adjusting entries are prepared:

1. A) Before financial statements and after a trial balance has been prepared.
2. B) After a trial balance has been prepared and after financial statements are prepared.
3. C) After posting but before a trial balance is prepared.
4. D) Anytime an accountant sees fit to prepare the entries.

 

29) Adjusting entries:

1. A) Are generally made daily.
2. B) Assign revenues to the period in which they are received.
3. C) Generally fall into one of two categories.
4. D) Are needed whenever revenue transactions affect more than one period.

 

 

30) We can compare income of the current period with income of a previous period to determine whether the operating results are improving or declining:

1. A) Only if each accounting period covered is a full year.
2. B) Only if the same accountant prepares the income statement each period.
3. C) Only if the accounting periods are equal in length.
4. D) Only if a manual accounting system is used in both periods.

 

31) The purpose of adjusting entries is to:

1. A) Prepare the revenue and expense accounts for recording the revenue and expenses of the next accounting period.
2. B) Record certain revenue and expenses that are not properly measured in the course of recording daily routine transactions.
3. C) Correct errors made during the accounting period.
4. D) Update the owners’ equity account for the changes in owners’ equity that had been recorded in revenue and expense accounts throughout the period.

 

32) Which of the following is not a purpose of adjusting entries?

1. A) To prepare the revenue and expense accounts for recording transactions of the following period.
2. B) To apportion the proper amounts of revenue and expense to the current accounting period.
3. C) To establish the proper amounts of assets and liabilities in the balance sheet.
4. D) To accomplish the objective of offsetting the revenue of the period with all the expenses incurred in generating that revenue.

 

33) Which of the following situations does not require Empire Company to record an adjusting entry at the end of January?

1. A) On January 1, Empire Company purchased delivery equipment with an estimated useful life of five years.
2. B) On January 1, Empire Company began delivery service for a large client who will pay at the end of a three-month period.
3. C) At the end of January, Empire Company pays the custodian for January office cleaning services.
4. D) On January 1, Empire Company paid rent for six months on its office building.

 

34) Which of the following is not considered a basic type of adjusting entry?

1. A) An entry to convert a liability to a revenue.
2. B) An entry to accrue unpaid expenses.
3. C) An entry to convert an asset to an expense.
4. D) An entry to convert an asset to a liability.

 

35) Adjusting entries are needed:

1. A) Whenever revenue is not received in cash.
2. B) Whenever expenses are not paid in cash.
3. C) Only to correct errors in the initial recording of business transactions.
4. D) Whenever transactions affect the revenue or expenses of more than one accounting period.

 

36) No adjusting entry should consist of:

1. A) A debit to an expense and a credit to an asset.
2. B) A debit to an expense and a credit to revenue.
3. C) A debit to an expense and a credit to a liability.
4. D) A debit to a liability and a credit to revenue.

 

37) Which of the following is not an example of an adjusting entry?

1. A) The entry to record unpaid expenses.
2. B) The entry to record uncollected revenues.
3. C) The entry to convert liabilities to revenue.
4. D) The entry to pay outstanding bills.

 

38) Which of the following is considered an adjusting entry?

1. A) The entry to record depreciation.
2. B) The entry to pay salaries.
3. C) The entry to pay outstanding bills.
4. D) The entry to declare a dividend distribution.

 

39) The normal balance of the Accumulated Depreciation account is:

1. A) A debit balance.
2. B) A credit balance.
3. C) Either a debit balance or a credit balance.
4. D) There is no normal balance for this account.

 

40) If Hot Bagel Co. estimates depreciation on an automobile to be $578 for the year, the company should make the following adjusting entry:

578. A) Debit Accumulated Depreciation $578 and credit Depreciation Expense $578.
579. B) Debit Depreciation Expense $578 and credit Automobile $578.
580. C) Debit Depreciation Expense $578 and credit Accumulated Depreciation $578.
581. D) Debit Automobile $578 and credit Depreciation Expense $578.

 

41) Accumulated Depreciation is:

1. A) An asset account.
2. B) A revenue account.
3. C) A contra-asset account.
4. D) An expense account.

 

42) Which of the following statements regarding depreciation is correct?

1. A) Depreciation is an exact calculation of the decline in value of an asset.
2. B) Depreciation is only an estimate of the decline in value of an asset.
3. C) Depreciation is only recorded at the end of a year and never over a shorter time period.
4. D) Management must know the exact life of an asset in order to calculate an acceptable depreciation expense.

 

43) The entry to record depreciation is an example of an adjusting entry:

1. A) To apportion a recorded cost.
2. B) To apportion unearned revenue.
3. C) To convert a liability to revenue.
4. D) To record unrecorded revenue.

 

44) Prepaid expenses are:

1. A) Assets.
2. B) Income.
3. C) Liabilities.
4. D) Expenses.

 

45) Colonial Systems prepares monthly financial statements. Colonial would record a prepaid expense in each of the following situations except:

1. A) Colonial Systems purchased a two-year fire insurance policy.
2. B) Colonial Systems paid for six months’ gardening services in advance.
3. C) A tenant paid Colonial Systems three months’ rent in advance.
4. D) Colonial Systems purchased enough office supplies to last several months.

 

46) Which of the following statements is not true regarding prepaid expenses?

1. A) Prepaid expenses represent assets.
2. B) Prepaid expenses are shown in a special section of the income statement.
3. C) Prepaid expenses become expenses only as goods or services are used up.
4. D) Prepaid expenses appear in the balance sheet.

 

47) Recently, Bon Appetite Café contracted and paid for a relatively expensive advertisement in Haute Cuisine magazine. Despite the fact that the ad will appear in Haute Cuisine three months after the end of Bon Appetite Café’s current fiscal year, the Café’s accountant recorded the disbursement to advertising expense. If no adjusting entry is made, how will this year’s financial statements of Bon Appetite Café be affected?

1. A) Net income will be overstated and total assets will be understated.
2. B) Net income will be overstated and total assets will be overstated.
3. C) Net income will be understated and total assets will be understated
4. D) Net income will be understated and total assets will be overstated.

 

48) An example of a contra-asset account is:

1. A) Depreciation Expense.
2. B) Accumulated Depreciation.
3. C) Prepaid expenses.
4. D) Unearned revenue.

 

 

49) Which of the following entries causes an immediate decrease in assets and in net income?

1. A) The entry to record depreciation expense.
2. B) The entry to record revenue earned but not yet received.
3. C) The entry to record the earned portion of rent received in advance.
4. D) The entry to record accrued wages payable.

 

50) Prepaid expenses appear:

1. A) As an expense on the income statement.
2. B) As an asset on the balance sheet.
3. C) As a liability on the balance sheet.
4. D) As a reduction to retained earnings.

 

51) An adjusting entry to convert an asset to expense consists of:

1. A) A debit to a liability and a credit to cash.
2. B) A debit to an expense and a credit to cash.
3. C) A debit to an expense and a credit to an asset account.
4. D) A debit to an asset account and a credit to an expense account.

 

52) Which statement is true about land?

1. A) Land should be depreciated over the same period as the building located on it.
2. B) Land cannot be depreciated for greater than a 40-year period.
3. C) Land should not be depreciated.
4. D) The straight-line method should be used to depreciate land.

 

53) Depreciation expense is:

1. A) Only an estimate.
2. B) An exact calculation prepared by an appraiser.
3. C) Not to be calculated unless the exact life of an asset can be determined.
4. D) To be determined for all assets owned by a company.

 

54) The cost of insurance is considered an expense:

1. A) Only when the entire policy period has passed.
2. B) Only when the policy is purchased.
3. C) Only when the premium is paid.
4. D) Evenly over the term of the policy.

 

55) Shop supplies are expensed when:

1. A) Consumed.
2. B) Purchased.
3. C) Paid for.
4. D) Ordered.

 

56) Accumulated depreciation is:

1. A) The depreciation expense recorded on an asset to date.
2. B) The remaining book value of an asset.
3. C) The depreciation expense taken on an asset during the current period.
4. D) An expense on the income statement.

 

57) In which of the following situations would the largest amount be recorded as an expense of the current year? (Assume accrual basis accounting.)

1. A) $4,000 is paid in January for equipment with a useful life of four years.
2. B) $1,800 is paid in January for a two-year fire insurance policy.
3. C) $1,200 cash dividends are declared and paid.
4. D) $900 is paid to an attorney for legal services rendered during the current year.

 

58) Gourmet Shop purchased cash registers on April 1 for $12,000. If this asset has an estimated useful life of four years, what is the book value of the cash registers on May 31?

250. A) $ 250.
251. B) $ 3,000.
252. C) $ 9,000.
253. D) $11,500.

 

59) An asset purchased on January 1, 2015 for $60,000 that has an estimated life of 10 years will have a book value on December 31, 2018 of:

1. A) $60,000.
2. B) $24,000.
3. C) $36,000.
4. D) $42,000.

 

60) If an asset was purchased on January 1, 2015 for $140,000 with an estimated life of 5 years, what is the accumulated depreciation at December 31, 2018?

1. A) $28,000.
2. B) $112,000.
3. C) $56,000.
4. D) $84,000.

 

61) Tuna Co. purchased a building in 2018 for $650,000 and debited an asset called “Buildings” for the entire amount. The company never depreciated the building although it had a useful life of 15 years. At the end of 2018, this action will cause:

1. A) Net income to be understated.
2. B) Net income to be overstated.
3. C) Net income will not be affected.
4. D) Total assets will be understated.

 

 

62) On June 1, Norma Company signed a 12-month lease for warehouse space. The lease requires monthly rent of $550, with 4 months paid in advance. Norma Company records the payment by debiting Prepaid Rent $2,200 and crediting Cash $2,200. At the end of June, what should be the balance of Norma’s Prepaid Rent account?

1. A) $0
2. B) $2,200
3. C) $1,650
4. D) $550

 

63) Paddle, Inc. purchased equipment for $14,760 on February 1, 2018. The equipment has a useful life of 3 years. How much depreciation expense should Paddle recognize on its income statement for 2018?

1. A) $4,510
2. B) $410
3. C) $4,920
4. D) $14,760

 

64) Unearned revenue may also be called:

1. A) Net income.
2. B) Deferred revenue.
3. C) Unexpired revenue.
4. D) Services rendered.

 

65) Unearned revenue is:

1. A) An asset.
2. B) Income.
3. C) A liability.
4. D) An expense.

 

66) The balance of an unearned revenue account:

1. A) Appears in the balance sheet as a component of owners’ equity.
2. B) Appears in the income statement along with other revenue accounts.
3. C) Appears in a separate section of the income statement for revenue not yet earned.
4. D) Appears in the liability section of the balance sheet.

 

67) In which of the following situations would Daystar Company record unearned revenue in May?

1. A) In April, Daystar Company received payment from a customer for services that are performed in May.
2. B) Daystar Company completes a job for a customer in May; payment will be received in June.
3. C) Daystar Company is paid on May 25 for work done in the first two weeks of May.
4. D) Daystar Company receives payment in May for work to be performed in June and July.

 

 

68) Unearned revenue appears:

1. A) As income on the income statement.
2. B) As an asset on the balance sheet.
3. C) As a liability on the balance sheet.
4. D) As a part of the retained earnings.

 

69) Videobusters, Inc. offered books of video rental coupons to its patrons at $40 per book. Each book contained a certain number of coupons for video rentals. During the current period 500 books were sold for $20,000, and this amount was credited to Unearned Rental Revenue. At the end of the period, it was determined that $15,000 worth of coupons had been used by customers to rent videos. The appropriate adjusting entry at the end of the period would be:

1. A) Debit Rental Revenue $5,000 and credit Unearned Rental Revenue $5,000.
2. B) Debit Rental Revenue $15,000 and credit Unearned Rental Revenue $15,000.
3. C) Debit Unearned Rental Revenue $5,000 and credit Rental Revenue $5,000.
4. D) Debit Unearned Rental Revenue $15,000 and credit Rental Revenue $15,000.

 

 

[The following information applies to the questions displayed below.]

 

Hoffman, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance at March 31 before adjustments is as follows:

 

	Debit				Credit
Cash	$	10,920
Accounts Receivable		9,620
Supplies		1,300
Prepaid Insurance		3,120
Equipment		26,000			$	10,400
Accumulated Depreciation: Equipment						6,500
Unearned Service Revenue						5,200
Capital Stock						23,400
Retained Earnings		1,560
Dividends						16,510
Service Revenue Earned		7,800
Salaries Expense		390
Utilities Expense		1,300
Rent Expense	$	62,010			$	62,010
–

 

70) According to service contracts, $4,810 of the Unearned Service Revenue has been earned in March. The amount of Service Revenue Earned to be reported in the March income statement is:

510. A) $16,510.
511. B) $21,320.
512. C) $11,700.
513. D) $20,410.

 

71) On March 1, Hoffman paid in advance for four months’ insurance. The necessary adjusting entry at March 31 includes which of the following?

340. A) A credit to Prepaid Insurance for $2,340.
341. B) A credit to Prepaid Insurance for $780.
342. C) A debit to Prepaid Insurance for $2,340.
343. D) A debit to Prepaid Insurance for $780.

 

72) At March 31, the amount of supplies on hand is $520. What amount is reported in the March income statement for supplies expense?

1. A) $1,300
2. B) $0
3. C) $520
4. D) $780

 

 

73) The equipment had an estimated useful life of five years. Compute the book value of the equipment at March 31, after the proper March adjustment is recorded.

1. A) $10,833
2. B) $15,167
3. C) $25,567
4. D) $10,400

 

74) Employees are owed $750 for services since the last payday in March, to be paid the first week in April. The amount to be reported in the March income statement for salaries expense is:

1. A) $ 7,800
2. B) $ 750
3. C) $ 7,050
4. D) $ 8,550

 

75) Under accrual accounting, fees received in advance from customers should be shown as being earned:

1. A) When cash is collected.
2. B) When services are performed or goods delivered.
3. C) When tax rates are low.
4. D) When tax rates are high.

 

76) The United Shipping Co. borrowed $25,000 at 12% interest on March 1, 2018. The note is to be repaid, with interest, in six months. If United Shipping makes monthly adjusting entries, which of the following is included as part of the March 31 adjusting entry?

250. A) Debit Interest Receivable $250.
251. B) Credit Interest Payable $2,500
252. C) Debit Interest Expense $250.
253. D) Debit Interest Payable $250.

 

77) Hahn Corp. has three employees. Each earns $600 per week for a five-day workweek ending on Friday. This month the last day of the month falls on a Wednesday. The company should make an adjusting entry:

80. A) Debiting Wage Expense for $1,080 and crediting Wages Payable for $1,080.
81. B) Debiting Wage Expense for $360 and crediting Wages Payable for $360.
82. C) Crediting Wage Expense for $1,080 and debiting Wages Payable for $1,080.
83. D) Crediting Wage Expense for $360 and debiting Wages Payable for $360.

 

78) Interest that has accrued during the accounting period on a note payable requires an adjusting entry consisting of:

1. A) A debit to Interest Expense and a credit to Cash.
2. B) A debit to Notes Payable and a credit to Interest Payable.
3. C) A debit to an asset and a credit to a liability.
4. D) A debit to Interest Expense and a credit to Interest Payable.

 

 

79) The adjusting entry to record interest that has accrued on a note payable to the bank will cause an immediate:

1. A) Increase in liabilities and reduction in net income.
2. B) Decrease in liabilities and reduction in net income.
3. C) Decrease in assets and reduction in net income.
4. D) Increase in assets and increase in net income.

 

80) Which of the following would not be considered an adjusting entry?

 

A)	Supplies expense	400
	Supplies		400
B)	Depreciation expense	400
	Accumulated depreciation		400
C)	Wage expense	400
	Cash		400
D)	Insurance expense	400
	Prepaid insurance		400

 

1. A) A
2. B) B
3. C) C
4. D) D

 

81) In which of the following situations would an adjusting entry be made at the end of January to record an accrued expense?

1. A) Ramona’s Nursery purchased playground equipment on January 1 with an estimated useful life of six years.
2. B) On January 25, Ramona’s Nursery hired a college student to drive the minibus; the new employee is to begin work in February.
3. C) January 31 falls on a Tuesday; salaries are paid on Friday of each week.
4. D) On January 31, Ramona’s Nursery paid the interest owed on a note payable for January.

 

82) As of January 31, Princess Company owes $500 to Butler Co. for equipment rented during January. If no adjustment is made for this item at January 31, how will Princess’s financial statements be affected?

31. A) Cash will be overstated at January 31.
32. B) Net income for January will be overstated.
33. C) Owners’ equity will be understated.
34. D) The financial statements will be accurate since the $500 does not have to be paid yet.

 

83) Which of the following is not considered an end-of-period adjusting entry?

1. A) The entry to record the portion of unexpired insurance which has become expense during the period.
2. B) An entry to record revenue that has been earned but has not yet been billed to customers.
3. C) The entry to record depreciation expense.
4. D) An entry to record repayment of a bank loan and to recognize related interest expense.

 

84) The accrual of interest on a note payable will:

1. A) Reduce total liabilities.
2. B) Increase total liabilities.
3. C) Have no effect upon total liabilities.
4. D) Will have no effect upon the income statement but will affect the balance sheet.

 

[The following information applies to the questions displayed below.]

 

Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31:

 

(1) A one-year bank loan of $720,000 at an annual interest rate of 12% had been obtained on December 1.

(2) The company pays all employees up-to-date each Friday. Since December 31 fell on Tuesday, there was a liability to employees at December 31 for two day’s pay amounting to $6,800.

(3) On December 1, rent on the office building had been paid for four months. The monthly rent is $6,000.

(4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office Equipment account is $9,360; no change has occurred in the account during the year.

(5) Fees of $9,800 were earned during the month for clients who had paid in advance.

 

85) What amount of interest expense has accrued on the bank loan?

1. A) $6,400
2. B) $7,000
3. C) $7,200
4. D) $7,800

 

86) The accrued interest should be:

1. A) Debited to Notes Payable.
2. B) Credited to Interest Payable.
3. C) Credited to Cash.
4. D) Credited to Interest Expense.

 

 

87) By what amount will the book value of the office equipment decline after the appropriate December adjustment is recorded?

1. A) $1,560
2. B) $130
3. C) $0
4. D) $1,430

 

88) After the appropriate adjusting entry is recorded, the balance in the liability account Unearned Fees will:

800. A) Decrease by $9,800.
801. B) Increase by $9,800.
802. C) Equal $9,800.
803. D) Be unaffected.

 

89) The entry to record rent expense will include:

1. A) A debit to Prepaid Rent for $6,000.
2. B) A credit to Prepaid Rent for $6,000.
3. C) A credit to Prepaid Rent for $18,000.
4. D) A debit to Prepaid Rent for $18,000.

 

90) Failure to make the appropriate adjustment to the Salary Expense account will:

800. A) Understate net income for December by $6,800.
801. B) Understate net income for January by $6,800.
802. C) Overstate total liabilities at December 31.
803. D) Overstate the balance in Cash at December 31.

 

91) On December 31, Louis Jeweler’s made an adjusting entry to record $4,200 accrued interest payable on its mortgage. On January 10, the mortgage payment was made. This payment included interest charges of $6,300, $2,100 of which were applicable to the period from January 1 through January 10. When recording this mortgage payment, the accountant should:

200. A) Debit Interest Expense $2,100 and debit Accrued Interest Payable $4,200.
201. B) Debit Interest Expense $6,300.
202. C) Debit Accrued Interest Payable $6,300.
203. D) Debit Interest Expense $2,100 and credit Accrued Interest Payable $4,200.

 

92) Under accrual accounting, salaries earned by employees but not yet paid should be expensed:

1. A) In the period in which they are earned.
2. B) In the period in which they are paid.
3. C) In the period with the higher earnings.
4. D) In the period with the lower earnings.

 

 

93) Gordy’s Corp. has seven employees. Each earns $800 per week for a five-day work week ending on Friday. This month, the last day of the month falls on a Thursday. The company should make an adjusting entry:

480. A) Debiting Wage Expense for $4,480 and crediting Wages Payable for $4,480.
481. B) Debiting Wage Expense for $640 and crediting Wages Payable for $640.
482. C) Crediting Wage Expense for $4,480 and debiting Wages Payable for $4,480.
483. D) Crediting Wage Expense for $640 and debiting Wages Payable for $640.

 

[The following information applies to the questions displayed below.]

 

Gamma Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31:

 

(1) A one-year bank loan of $720,000 at an annual interest rate of 6% had been obtained on December 1.

(2) The company’s pays all employees up-to-date each Friday. Since December 31 fell on Tuesday, there was a liability to employees at December 31 for two day’s pay. Employees earn a total of $12,800 per week.

(3) On December 1, rent on the office building had been paid for three months. The monthly rent is $7,000.

(4) Depreciation of office equipment is based on an estimated useful life of five years. The balance in the Office Equipment account is $12,360; no change has occurred in the account during the year.

(5) All fees totaling $19,800 were earned during the month for clients who had paid in advance.

 

94) What amount of interest expense has accrued on the bank loan?

1. A) $3,200
2. B) $3,500
3. C) $3,600
4. D) $3,900

 

95) How much is owed the employees for their wages?

1. A) $0
2. B) $2,560
3. C) $5,120
4. D) $12,800

 

96) What should be the balance of the Prepaid Rent?

1. A) $0
2. B) $7,000
3. C) $14,000
4. D) $21,000

 

 

97) How much depreciation expense should be recorded for December?

1. A) $206
2. B) $472
3. C) $12,360
4. D) $9,800

 

98) During the last month of its fiscal year, Echo Lake Resort provided catering services for local business. Echo Lake Resort has not yet received payment from the local business. The entry to record this event is an example of an adjusting entry:

1. A) To apportion unearned revenue.
2. B) To accrue an uncollected revenue.
3. C) To record unrecorded expenses.
4. D) To record unearned revenue.

 

99) The accountant for the Grassroots Company failed to make an adjusting entry to record revenue earned but not yet billed to customers. The effect of this error is:

1. A) An overstatement of assets and of net income offset by an understatement of owners’ equity.
2. B) An overstatement of net income and an understatement of assets.
3. C) An understatement of assets, net income, and owners’ equity.
4. D) An overstatement of liabilities offset by an understatement of owners’ equity.

 

100) An adjusting entry involving recognition of accrued revenue is necessary at the end of March in which of the following situations?

1. A) Midwood Consultants received payment in February for consulting services rendered in March.
2. B) Midwood Consultants began working for a client on March 15; bills will be sent monthly beginning April 15.
3. C) Midwood Consultants made payment in January for office rent for the first three months of the year.
4. D) On March 31, a major customer paid his bill for a consulting job completed in February.

 

101) Regal Real Estate, which maintains its accounts on the basis of a fiscal year ending June 30, began the management of an office building on June 15 for an agreed annual fee of $4,800. The first payment is due on July 15. The adjusting entry required at June 30 is:

200. A) A debit to Management Fees Receivable for $200 and a credit to a revenue account for $200.
201. B) A $200 debit to Unearned Management Fees and a $200 credit to Management Fees Earned.
202. C) A debit to Cash for $200 and a credit to Management Fees Earned.
203. D) A debit to Cash for $400 offset by a credit to a revenue account for $200 and a liability for $200.

 

 

102) Great Kids Co. began providing day care for the children of employees of a large corporation on January 15 for an agreed monthly fee of $9,000. The first payment is to be received on February 15. The adjusting entry required by Great Kids Co. on January 30 includes:

500. A) A credit to Child Care Fees Earned of $4,500.
501. B) A debit to Child Care Fees Receivable of $9,000.
502. C) A debit to Unearned Child Care Revenue of $4,500.
503. D) A debit to Fees Receivable of $9,000.

 

103) Adjusting entries help achieve the goals of accrual accounting by applying which two accounting principles?

1. A) Business entity concept and realization principle
2. B) Cost principle and the accounting equation
3. C) Realization principle and matching principle
4. D) Matching principle and safety principle

 

104) Which of the following is the accounting principle that governs the timing of revenue recognition?

1. A) Realization principle
2. B) Materiality
3. C) Matching
4. D) Depreciation

 

105) Which of the following accounting principles is concerned with offsetting revenue with the expenses incurred in producing that revenue?

1. A) Realization principle
2. B) Materiality
3. C) Matching
4. D) Depreciation

 

106) Dolphin Co. received $1,500 in fees during 2017, 1/3 of which will be earned in 2018. The rest was earned when the amount was received. The company should report which of the following amounts as income in 2017?

1. A) $1,500
2. B) $500
3. C) $1,000
4. D) $0

 

107) Swordfish Co. earned $75,000 in 2018 and expects to receive 2/3 of the amount in 2019 and the remainder in 2020. How much revenue should Swordfish Co. report in 2018?

1. A) $0
2. B) $25,000
3. C) $50,000
4. D) $75,000

 

 

108) The concept of materiality:

1. A) Involves only tangible assets and not intangible assets.
2. B) Relates only to the income statement and not the balance sheet.
3. C) Is always an exact percentage of a financial account balance.
4. D) Is measured as an item significant enough to influence the decisions of users of financial statements.

 

109) Which of the following statements concerning materiality is true?

1. A) Generally accepted accounting principles are violated if estimates are used in end-of-period adjustments.
2. B) Each year the Financial Accounting Standards Board (FASB) publishes the dollar amount considered “material” for each industry.
3. C) Immaterial items should be handled in the most expedient manner, even if resulting financial statements are not completely precise.
4. D) Accountants should not waste time and money in recording transactions involving small dollar amounts.

 

110) The concept of materiality:

1. A) Treats as material only those items that are greater than 2% or 3% of net income.
2. B) Justifies ignoring the matching principle or the realization principle in certain circumstances.
3. C) Affects only items reported in the income statement.
4. D) Results in financial statements that are less useful to decision makers because many details have been omitted.

 

111) Which of the following would not be a proper application of the concept of materiality by Millridge Corporation?

1. A) Transactions involving small dollar amounts are not recorded in Millridge’s accounting records.
2. B) Estimates of supplies on hand are used to determine the supplies expense for the period.
3. C) On a monthly basis, utility bills are expensed in the month paid, rather than in the month in which services are used.
4. D) Immaterial items are ignored in making end-of-period adjusting entries.

 

112) Which statement is true about an adjusted trial balance?

1. A) It is prepared before adjusting entries.
2. B) Revenue accounts and expense accounts should not appear on the adjusted trial balance.
3. C) Balance sheet items are presented before income statement items.
4. D) Accumulated depreciation should equal depreciation expense.

 

113) On the adjusted trial balance, retained earnings is:

1. A) Stated at the period-end amount.
2. B) Stated at the period-beginning amount.
3. C) Adjusted for all revenues and expenses for the period.
4. D) Adjusted for the period’s dividends.

 

114) Before any month-end adjustments are made, the net income of Bennett Company is $76,000. The following adjustments are necessary: office supplies used, $3,160; services performed for clients but not yet recorded or collected, $3,640; interest accrued on note payable to bank, $3,040. After adjusting entries are made for the items listed above, Bennett Company’s net income will be:

160. A) $66,160.
161. B) $78,560.
162. C) $73,440.
163. D) $76,000

 

115) The accountant for Perfect Painting forgot the following two adjustments at the end of 2018:

(a) The entry to record depreciation: $3,000.

(b) The entry to record the portion of fees received in advance, which have now been earned: $3,000.

As a result of these two omissions:

1. A) Net income for Perfect Painting for 2018 is overstated.
2. B) Net income for Perfect Painting for 2018 is understated.
3. C) Assets of Perfect Painting are overstated at December 31, 2018.
4. D) Liabilities of Perfect Painting are understated at December 31, 2018.

 

116) Before making month-end adjustments, net income of Cardinal Company was $116,000 for March. Adjusting entries are necessary for the following items:

-Depreciation for the month of March: $2,300.

-Rental income accrued during March, tenant to pay in April: $800.

-Supplies used in March: $100.

-Fees earned in March that had been collected in advance: $2,600.

After recording these adjustments, net income for March is:

400. A) $112,400.
401. B) $113,620.
402. C) $117,000.
403. D) $110,800.

 

117) Before any month-end adjustments are made, the net income of Russell Company is $38,000. However, the following adjustments are necessary: office supplies used, $3,160; services performed for clients but not yet recorded or collected, $3,040; interest accrued on a note payable to bank, $3,640. After adjusting entries are made for the items listed above, Russell Company’s net income would be:

1. A) $38,000.
2. B) $34,240.
3. C) $41,160.
4. D) $44,200.