PRACTICE QUESTIONS - CHAPTER FOUR

TRUE-FALSE STATEMENTS
1. A work sheet is a mandatory form that must be prepared along with an income
statement and balance sheet.

2. Closing entries are necessary if the business plans to continue operating in the
future and issue financial statements each year.

3. The owner's drawings account is closed to the owners capital account in order to
properly determine net income (or loss) for the period.

4. After closing entries have been journalized and posted, all temporary accounts in
the ledger should have zero balances.

5. Closing revenue and expense accounts to the Income Summary account is an

optional bookkeeping procedure.

6. Closing the drawings account to Capital is not necessary if net income is greater
than owner's drawings during the period.

7. The owner's drawings account is a permanent account whose balance is carried

forward to the next accounting period.

8. Closing entries are journalized after adjusting entries have been journalized.

9. The amounts appearing on an income statement should agree with the amounts
appearing on the post-closing trial balance.

10. The post-closing trial balance is entered in the first two columns of a work sheet.

11. A business entity has only one accounting cycle over its economic existence.

12. The accounting cycle begins at the start of a new accounting period.

13. Both correcting entries and adjusting entries always affect at least one balance
sheet account and one income statement account.

14. Correcting entries are made any time an error is discovered even though it may
not be at the end of an accounting period.

15. An incorrect debit to Accounts Receivable instead of the correct account Notes
Receivable does not require a correcting entry because total assets will not be
misstated.

16. In a corporation, Retained Earnings is a part of equity.

17. A company's operating cycle and fiscal year are usually the same length of time.

18. Cash and office supplies are both classified as current assets.
19. Long-term investments would appear in the capital asset section of the balance
sheet.
 20. A liability is classified as a current liability if it is to be paid from current assets
within the next year or operating cycle, whichever is longer.

21. A company's liquidity is concerned with the relationship between long-term

investments and long-term debt.

22. Current assets are customarily the first items listed on a classified balance sheet.

23. The operating cycle of a company is determined by the number of years the
company has been operating.

24. The difference between current assets and current liabilities is called the current
ratio.

25. A companys liquidity represents the companys ability to pay obligations that
become due within the next year or operating cycle.

*26. The balance of the amortization expense account will appear in the income
statement debit column of a work sheet.

*27. If a work sheet is used, financial statements can be prepared before adjusting
entries are journalized.

*28. If total credits in the income statement columns of a work sheet exceed total
debits, the enterprise has net income.

*29. It is not necessary to prepare formal financial statements if a work sheet has
been prepared because financial position and net income are shown on the work
sheet.

*30. The adjustments on a work sheet can be posted directly to the accounts in the
ledger from the work sheet.

*31. The adjusted trial balance columns of a work sheet are obtained by subtracting
the adjustment columns from the trial balance columns.

*32. Reversing entries are an optional bookkeeping procedure.

Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 6. F 11. F 16. T 21. F *26. T *31. F
2. T 7. F 12. T 17. F 22. T *27. F *32. T
3. F 8. T 13. F 18. T 23. F *28. T
4. T 9. F 14. T 19. F 24. F *29. F
5. T 10. F 15. F 20. T 25. T *30. F
 MULTIPLE CHOICE QUESTIONS
33. Closing entries are made
a. in order to terminate the business as an operating entity.
b. so that all assets, liabilities, and owner's capital accounts will have zero
balances when the next accounting period starts.
c. in order to transfer net income (or loss) and owner's drawing to the owner's
capital account.
d. so that financial statements can be prepared.

34. Closing entries are

a. an optional step in the accounting cycle.
b. posted to the ledger accounts from the work sheet.
c. made to close permanent or real accounts.
d. journalized in the general journal.

35. The Owners Capital account

a. is a permanent account.
b. appears on the cash flow statement.
c. appears on the income statement.
d. is a temporary account.

36. Which of the following is an example of a temporary account that will be closed to
Owners Capital at the end of the accounting period?
a. Prepaid Rent.
b. Cash.
c. Accounts Payable.
d. Salaries Expense.

37. Closing entries are journalized and posted

a. before the financial statements are prepared.
b. after the financial statements are prepared.
c. at management's discretion.
d. at the end of each interim accounting period.

38. Closing entries

a. are prepared before the financial statements.
b. reduce the number of permanent accounts.
c. cause the revenue and expense accounts to have zero balances.
d. summarize the activity in every account.

39. Which of the following is a true statement about closing the books of a
proprietorship?
a. Expenses are closed to the owners drawings account.
b. Only revenues are closed to the owners capital account.
c. Only revenues and expenses are closed to the owners capital account.
d. Revenues, expenses, and the owner's drawings account are closed to the
owners capital account.
40. Closing entries may be prepared from all but which one of the following sources?
a. Adjusted balances in the ledger
b. Income statement and balance sheet columns of the work sheet
c. Balance sheet
d. Income statements and statements of owner's equity

41. In order to close the owner's drawings account, the

a. salaries expense account should be debited.
b. salaries expense account should be credited.
c. owner's capital account should be credited.
d. owner's capital account should be debited.

42. In preparing closing entries

a. each revenue account will be credited.
b. each expense account will be credited.
c. the owner's capital account will be debited if there is net income for the
period.
d. the owner's drawings account will be debited.

43. The most efficient way to accomplish closing entries is to

a. credit the owners equity account for each revenue account balance.
b. debit the owners equity account for each expense account balance.
c. credit the owner's drawings balance directly to the owners equity account.
d. credit the owners equity account for total revenues and debit the owners
equity account for total expenses.

44. The closing entry process consists of closing

a. all asset and liability accounts.
b. out the owner's capital account.
c. all permanent accounts.
d. all temporary accounts.

45. The final closing entry to be journalized is typically the entry that closes the
a. revenue accounts.
b. owner's drawings account.
c. owner's capital account.
d. expense accounts.

46. An error has occurred in the closing entry process if

a. revenue and expense accounts have zero balances.
b. the owner's capital account is credited for the amount of net income.
c. the owner's drawings account is closed to the owner's capital account.
d. the balance sheet accounts have zero balances.

47. Closing entries are journalized in the

a. closing journal.
b. general journal.
c. general ledger.
d. temporary journal.
48. The balance in the owners drawings account after all closing entries have been
posted will be equal to
a. zero.
b. the net income.
c. the cash withdrawn by the owner during the period.
d. the balance in the Owners Capital account.

49. After closing entries are posted, the balance in the owner's capital account in the
ledger will be equal to
a. the beginning owner's capital reported on the statement of owner's equity.
b. the amount of the owner's capital reported on the balance sheet.
c. zero.
d. the net income for the period.

50. A post-closing trial balance will show

a. only permanent account balances.
b. only temporary account balances.
c. zero balances for all accounts.
d. the amount of net income (or loss) for the period.

51. A post-closing trial balance should be prepared

a. before closing entries are posted to the ledger accounts.
b. after closing entries are posted to the ledger accounts.
c. before adjusting entries are posted to the ledger accounts.
d. only if an error in the accounts is detected.

52. A post-closing trial balance will show

a. zero balances for all accounts.
b. zero balances for balance sheet accounts.
c. only balance sheet accounts.
d. only income statement accounts.

53. The purpose of the post-closing trial balance is to

a. prove that no mistakes were made.
b. prove the equality of the balance sheet account balances that are carried
forward into the next accounting period.
c. prove the equality of the income statement account balances that are carried
forward into the next accounting period.
d. list all the balance sheet accounts in alphabetical order for easy reference.

54. The balances that appear on the post-closing trial balance will match the
a. income statement account balances after adjustments.
b. balance sheet account balances after closing entries.
c. income statement account balances after closing entries.
d. balance sheet account balances after adjustments.

55. The heading for a post-closing trial balance has a date line that is similar to the
one found on
a. a balance sheet.
b. an income statement.
c. a statement of owner's equity.
 d. the work sheet.

56. Which one of the following is an optional step in the accounting cycle of a
business enterprise?
a. Analyse business transactions
b. Prepare a work sheet
c. Prepare a trial balance
d. Post to the ledger accounts

57. The final step in the accounting cycle is to prepare

a. closing entries.
b. financial statements.
c. a post-closing trial balance.
d. adjusting entries.

58. Which of the following steps in the accounting cycle would not generally be
performed daily?
a. Journalize transactions
b. Post to ledger accounts
c. Prepare adjusting entries
d. Analyse business transactions

59. Which of the following steps in the accounting cycle may be performed more
frequently than annually?
a. Prepare a post-closing trial balance
b. Journalize closing entries
c. Post closing entries
d. Prepare a trial balance

60. Which of the following depicts the proper sequence of steps in the accounting
cycle?
a. Journalize the transactions, analyse business transactions, prepare a trial
balance
b. Prepare a trial balance, prepare financial statements, prepare adjusting
entries
c. Prepare a trial balance, prepare adjusting entries, prepare financial
statements
d. Prepare a trial balance, post to ledger accounts, post adjusting entries

61. The two optional steps in the accounting cycle are preparing
a. a post-closing trial balance and reversing entries.
b. a work sheet and post-closing trial balances.
c. reversing entries and a work sheet.
d. an adjusted trial balance and a post-closing trial balance.

62. The first required step in the accounting cycle is

a. reversing entries.
b. journalizing transactions in the book of original entry.
c. analysing transactions.
d. posting transactions.
63. Zorowski Bike Company received a $640 cheque from a customer for the
balance due. The transaction was erroneously recorded as a debit to Cash $460
and a credit to Service Revenue $460. The correcting entry is
a. Debit Cash, $640; Credit Accounts Receivable, $640.
b. Debit Cash, $180 and Accounts Receivable, $460; Credit Service Revenue,
$640.
c. Debit Cash, $180 and Service Revenue, $460; Credit Accounts Receivable,
$640.
d. Debit Accounts Receivable, $640; Credit Cash, $180 and Service Revenue,
$460.
64. If errors occur in the recording process, they
a. should be corrected as adjustments at the end of the period.
b. should be corrected as soon as they are discovered.
c. should be corrected when preparing closing entries.
d. cannot be corrected until the next accounting period.

65. A correcting entry

a. must involve one balance sheet account and one income statement account.
b. is another name for a closing entry.
c. may involve any combination of accounts.
d. is a required step in the accounting cycle.

66. An unacceptable way to make a correcting entry is to

a. reverse the incorrect entry.
b. erase the incorrect entry.
c. compare the incorrect entry with the correct entry and make a correcting
entry to correct the accounts.
d. correct it immediately upon discovery.

67. Carr Company paid the weekly payroll on January 2 by debiting Wages Expense
for $40,000. The accountant preparing the payroll entry overlooked the fact that
Wages Expense of $24,000 had been accrued at year end on December 31. The
correcting entry is
a. Wages Payable .................................................................. 24,000
Cash ....................................................................... 24,000
b. Cash ................................................................................ 16,000
Wages Expense ..................................................... 16,000
c. Wages Payable .................................................................. 24,000
Wages Expense ..................................................... 24,000
d. Cash ................................................................................ 24,000
Wages Expense ..................................................... 24,000

68. The Singh Company paid $630 on account to a creditor. The transaction was
erroneously recorded as a debit to Cash of $360 and a credit to Accounts
Receivable, $360. The correcting entry is
a. Accounts Payable .............................................................. 630
Cash ....................................................................... 630
b. Accounts Receivable ......................................................... 360
Cash ....................................................................... 360
c. Accounts Receivable ......................................................... 360
Accounts Payable ................................................... 360
d. Accounts Receivable ......................................................... 360
Accounts Payable .............................................................. 630
Cash ....................................................................... 990
69. A lawyer collected $860 of legal fees in advance. He erroneously debited Cash
for $680 and credited Accounts Receivable for $680. The correcting entry is
a. Cash ................................................................................. 680
Accounts Receivable ......................................................... 180
Unearned Legal Fees ............................................. 860
b. Cash ................................................................................. 860
Legal Fees Earned ................................................. 860
c. Cash .................................................................................. 180
Accounts Receivable ......................................................... 680
Unearned Legal Fees ............................................. 860
d. Cash ................................................................................. 180
Accounts Receivable .............................................. 180

70. Office Equipment is classified in the balance sheet as

a. a current asset.
b. a capital asset.
c. an equity item.
d. a long-term investment.

71. A current asset is

a. the last asset purchased by a business.
b. an asset which is currently being used to produce a product or service.
c. usually found as a separate classification in the income statement.
d. expected to be realized in cash, sold or consumed within one year of the
balance sheet or the company's operating cycle, whichever is longer.

72. An intangible capital asset

a. derives its value from the rights and privileges it provides the owner.
b. is worthless because it has no physical substance.
c. is converted into a tangible capital asset during the operating cycle.
d. cannot be classified on the balance sheet because it lacks physical
substance.

73. Liabilities are generally classified on a balance sheet as

a. small liabilities and large liabilities.
b. present liabilities and future liabilities.
c. tangible liabilities and intangible liabilities.
d. current liabilities and long-term liabilities.

74. Which of the following would not be classified a long-term liability?

a. Current maturities of long-term debt
b. Bonds payable
c. Mortgage payable
d. Lease liabilities

75. Which of the following liabilities are not related to the operating cycle?
a. Wages payable
b. Accounts payable
c. Utilities payable
d. Bonds payable
76. The report form of the balance sheet
a. is identical to the account form.
b. lists the asset section to the left and the liabilities and owner's equity sections
to the right.
c. shows assets above liabilities and owner's equity.
d. lists assets to the left, liabilities in the middle, and owner's equity to the right.

77. It is not true that current assets are resources that are expected to be
a. realized in cash within one year.
b. sold within one year.
c. consumed within one year.
d. acquired within one year.

78. The operating cycle of a company is the average time that is required to go from
cash to
a. sales in producing revenues.
b. cash in producing revenues.
c. inventory in producing revenues.
d. accounts receivable in producing revenues.

79. On a classified balance sheet, current assets are customarily listed

a. in alphabetical order.
b. with the largest dollar amounts first.
c. in the order of liquidity.
d. in the order of acquisition.

80. Intangible assets are

a. listed under current assets on the balance sheet.
b. not listed on the balance sheet because they do not have physical substance.
c. listed as a capital asset on the balance sheet.
d. listed as a long-term investment on the balance sheet.

81. The relationship between current assets and current liabilities is important in
evaluating a company's
a. profitability.
b. liquidity.
c. market value.
d. accounting cycle.

82. The most important information needed to determine if companies can pay their
current obligations is the
a. net income for this year.
b. projected net income for next year.
c. relationship between current assets and current liabilities.
d. relationship between short-term and long-term liabilities.

83. The current ratio is expressed as

a. current assets divided by current liabilities
b. current assets minus current liabilities
c. current liabilities divided by long-term liabilities
d. current assets minus owners equity
84. The current ratio should be interpreted by considering all but
a. general economic and industry conditions.
b. other special financial information.
c. other firms in the same or related industry.
d. other firms in unrelated industries.

*85. The information for preparing a trial balance on a work sheet is obtained from
a. financial statements.
b. general ledger accounts.
c. general journal entries.
d. business documents.

*86. After the adjusting entries are journalized and posted to the accounts in the
general ledger, the balance of each account should agree with the balance
shown on the
a. adjusted trial balance.
b. post-closing trial balance.
c. the general journal.
d. adjustment columns of the work sheet.

*87. If the total debit column exceeds the total credit column of the income statement
columns on a work sheet, then the company has
a. earned net income for the period.
b. an error because debits do not equal credits.
c. suffered a net loss for the period.
d. to make an adjusting entry.

*88. A work sheet is a multiple column form that facilitates the

a. identification of events.
b. measurement process.
c. preparation of financial statements.
d. analysis process.

*89. Which of the following companies would be least likely to use a work sheet to
facilitate the adjustment process?
a. Large company with numerous accounts
b. Small company with numerous accounts
c. All companies, since work sheets are required under generally accepted
accounting principles
d. Small company with few accounts

*90. A work sheet can be thought of as a(n)

a. permanent accounting record.
b. optional device used by accountants.
c. part of the general ledger.
d. part of the journal.

*91. The account, Supplies, will appear in the following debit columns of the work
sheet.
a. Trial balance
b. Adjusted trial balance
 c. Balance sheet
d. All of these

*92. When constructing a work sheet, accounts are often needed that are not listed in
the trial balance already entered on the work sheet from the ledger. Where
should these additional accounts be shown on the work sheet?
a. They should be inserted in alphabetical order into the trial balance accounts
already given.
b. They should be inserted in chart of account order into the trial balance
already given.
c. They should be inserted on the lines immediately below the trial balance
totals.
d. They should not be inserted on the trial balance until the next accounting
period.

*93. When using a work sheet, adjusting entries are journalized

a. after the work sheet is completed and before financial statements are
prepared.
b. before the adjustments are entered on to the work sheet.
c. after the work sheet is completed and after financial statements have been
prepared.
d. before the adjusted trial balance is extended to the proper financial statement
columns.

*94. Assuming that there is a net loss for the period, debits equal credits in all but
which section of the work sheet?
a. Income statement columns
b. Adjustment columns
c. Trial balance columns
d. Adjusted trial balance columns

*95. Adjusting entries are prepared from

a. source documents.
b. the adjustment columns of the work sheet.
c. the general ledger.
d. last year's work sheet.

*96. The net income (or loss) for the period

a. is found by calculating the difference between the income statement credit
column and the balance sheet credit column on the work sheet.
b. cannot be found on the work sheet.
c. is found by calculating the difference between the income statement columns
of the work sheet.
d. is found by calculating the difference between the trial balance totals and the
adjusted trial balance totals.

*97. The work sheet does not show

a. net income or loss for the period.
b. revenue and expense account balances.
c. the ending balance in the owner's capital account.
d. the trial balance before adjustments.
*98. If the total debits exceed total credits in the balance sheet columns of the work
sheet, owner's equity
a. will increase because net income has occurred.
b. will decrease because a net loss has occurred.
c. is in error because a mistake has occurred.
d. will not be affected.
 Use the following information for questions 99100.

The income statement and balance sheet columns of Rand Company's work sheet
reflects the following totals:

Income Statement Balance Sheet

Dr. Cr. Dr. Cr.
Totals $55,000 $50,000 $34,000 $39,000

*99. The net income (or loss) for the period is

a. $50,000 income.
b. $5,000 income.
c. $5,000 loss.
d. not determinable.

*100. To enter the net income (or loss) for the period into the above work sheet
requires an entry to the
a. income statement debit column and the balance sheet credit column.
b. income statement credit column and to the balance sheet debit column.
c. income statement debit column and the income statement credit column.
d. balance sheet debit column and to the balance sheet credit column.

*101. A reversing entry

a. reverses entries that were made in error.
b. is the exact opposite of an adjusting entry made in a previous period.
c. is made when a business disposes of an asset it previously purchased.
d. is made when a company sustains a loss in one period and reverses the
effect with a profit in the next period.

*102. If a company utilizes reversing entries, they will

a. be made at the beginning of the next accounting period.
b. not actually be posted to the general ledger accounts.
c. be made before the post-closing trial balance.
d. be part of the adjusting entry process.

Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
33. c 43. a 53. b 63. c 73. d 83. a *93. c
34. d 44. d 54. b 64. b 74. a 84. d *94. a
35. a 45. b 55. a 65. c 75. d *85. b *95. b
36. d 46. d 56. b 66. b 76. c *86. a *96. c
37. b 47. b 57. c 67. c 77. d *87. c *97. c
38. c 48. a 58. c 68. d 78. b *88. c *98. a
39. d 49. b 59. d 69. c 79. c *89. d *99. c
40. c 50. a 60. c 70. b 80. c *90. b *100. b
41. d 51. b 61. c 71. d 81. b *91. d *101. b
42. b 52. c 62. c 72. a 82. c *92. c *102. a