For which item does a bank not issue a debit memorandum?

a. to notify a depositor of all withdrawals through an ATM.

b. to notify a depositor of a fee assessed to the depositor's account.
c. to notify a depositor of an uncollectible check.
d. to notify a depositor of periodic payments arranged in advance, by a depositor.
e. to notify a depositor of a deposit to their account.

Answer: to notify a depositor of a deposit to their account.

A remittance advice is:

An explanation for a payment by check

A check:
Involves the maker, the payee and the bank

An internal control system consists of all of the following policies and

procedures except ones designed to
guarantee a return to investors

The principles of internal control include

establish responsibilities

When two clerks share the same cash register it is a violation of which internal
control principle?
establish responsibilities

An income statement account that is used to record cash overages and cash
shortages arising from petty cash transactions or from errors in making
change is titled
Cash Over and Short

At the end of the day, the cash register's record shows $1,250, but the count of
cash in the cash register is $1,245. The correct entry to record the cash sales is
Debit Cash $1,245; debit Cash Over and Short $5; credit Sales $1,250

The entry necessary to establish a petty cash fund should include

A debit to Petty Cash and a credit to Cash

Assume that the custodian of a $450 petty cash fund has $62.50 in coins and
currency plus $382.50 in receipts at the end of the month. The entry to
replenish the petty cash fund will include
A credit to Cash for $387.50

If a check correctly written and paid by the bank for $794 is incorrectly
recorded in the company's books for $749, how should this error be treated on
the bank reconciliation?
Subtract $45 from the book balance

If the allowance method of accounting for uncollectible receivables is used,

what account is credited in the entry to write off a customer's account as
uncollectible?
Accounts receivable

Allowance for doubtful accounts has a credit balance of $900 at the end of the
current year (prior to adjustment). An analysis of the accounts in the
customers' ledger indicates uncollectible accounts of $16,000. The adjusting
entry would require a debit to
Bad debts expense for $15,100

Mandy Smith's account was written off last year. She owed City Company
$5,000. Using the allowance method, the journal entry to reinstate her account
involves
A debit to Smith's account receivable and a credit to allowance for doubtful accounts

The Maderite Furniture Company has an allowance for doubtful accounts

account with a $300 debit balance. Net credit sales for the period were
$160,000. An aging process shows that $5,400 of the accounts receivable
probably will be uncollectible. In addition, Maderite Furniture believes that 4%
of all net credit sales are uncollectible. The percent of sales method is used to
account for uncollectible. What is the amount of the adjusting entry to record
bad debt expense and what is the balance in allowance for doubtful accounts
after the adjusting entry is made?
$6,400 and $6,100 respectively

A company that uses national credit cards avoids all of the following except
Paying a credit card discount expense

A 90-day note dated August 26 matures on

November 24

Carolina Supply accepted an 8-month, $16,000 note receivable, with 8%

interest, from Reading Corporation on August 1, 20x6. Carolina Supply's year-
end is December 31. The amount of interest to be accrued on December 31,
20x6 is
$533

Eyewear Unlimited has accounts receivable of $16,000 and an allowance for

doubtful accounts with a credit balance of $1,700 before a specific account of
$60 is written off. What were net accounts receivable before and after the write
off?
Before: $14,300
After: $14,300

Using the balance sheet approach to estimate uncollectibles, accounts which

are 90 days old are
Less likely to be collected than accounts 30 days old

If the direct write-off method is used for uncollectible receivables, what

account is debited when writing off a customer's account?
Bad debit expense

The current credit balance in allowance for doubtful accounts is $150.

Management estimates that 2.5% of net credit sales of $105,000 will be
uncollectible. Based on the foregoing data, what is the bad debt expense
balance on the income statement?
$2,625

Mento,Inc.spent $3,000,000 during 2011 to repair and update its plant

assets.Mento spent $1,200,000 to paint the building, $230,000 to place worn-out
gears on motors, $640,000 to install special shelving that will increase
operating efficiency in the plant, and $930,000 on new machinery.What amount
of these costs would appear as assets on Mento, Inc.’s December 31, 2011
statement of financial position?
A)$3,000,000
B)$1,570,000
C)$1,430,000
D)$2,770,000

Monthly and quarterly time periods are called

interim periods

The time period assumption states that

the economic life of a business can be divided into artificial time period

Adjustments would not be necessary if financial statements were prepared to

reflect net income from
lifetime operations

The fiscal year of a business is usually determined by

the business
The revenue recognition principle dictates that revenue should be recognized
in the accounting records
when it is earned

The expense recognition principle matches

expenses with revenues

Ron's hot rod shop follows the revenue recognition principle. ron services a
car on july 31. the customer picks up the vehicle on august 1 and mails the
payment to ron on august 5. ron receives the check in the mail on august 6.
when should ron show that the revenue was earned?
july 31

The expense recognition principle states that expenses should be matched

with revenues. another way of stating the principle is to say that
efforts should be matched with accomplishments

a flower shop makes a large sale $1,000 on november 30. the customer is sent
a statement on december 5 and a check is received on december 10. the flower
shop follows gaap and applies the revenue recognition principle. when is the
$1,000 considered to be earned?
november 30

Under accrual-basis accounting

events that change a company's financial statements are recognized in the period
they occur rather than in the period in which cash is paid or received

Adjusting entries are required

every time financial statements are prepared

The following is selected information from alpha-beta-gamma corporation for

the fiscal year ending october 31, 2011
$134,000
Lamb company had the following transactions during 2011
- sales $9,000 on account
- collected $4,000 for services to be performed in 2012
- paid $1,250 cash in salaries
- purchased airline ticket for $500 in december for a trip to take place in 2012

what is lamb's 2011 net income using accrual accounting

$7,750

Lamb company had the following transactions during 2011

- sales $9,000 on account
- collected $4,000 for services to be performed in 2012
- paid $1,250 cash in salaries
- purchased airline ticket for $500 in december for a trip to take place in 2012

what is lamb's 2010 net income using cash basis accounting

$2,250

An adjusting entry
affects a balance sheet account and an income statement account
Expenses incurred but not yet paid or recorded are called
accrued expenses

A law firm received $2,000 cash for legal services to be rendered in the future.
the full amount was credited to the liability account unearned legal fees. if the
legal services have been rendered at the end of the accounting period and no
adjusting entry is made this would cause
revenues to be understated

Adjusting entries can be classified as

accruals and deferrals

Prepaid expenses are

paid and recorded in an asset account before they are used or consumed

Accrued expenses are

incurred but not yet paid or recorded

Bee-in-the bonnet company purchased office supplies costing $8k and debited
office supplies for the full amount. at the end of the accounting period, a
physical count of office supplies revealed $3,200 still on hand. the appropriate
adjusting journal entry to be made at the end of the period would be
debit office supplies expenses $4,800; credit office supplies $4,800

Accumulated depreciation is
a contra asset account

Hercules company purchased a computer for $3,600 on december 1. it is

estimated that annual depreciation on the computer will be $720. if financial
statements are to be prepared on december 31, the company should make the
following adjusting entry;
debit depreciation expense $60, credit accumulated depreciation $60

Action real estate received a check for $18k on july1 whuch represents a 6
month advance payment of rent on a building it rents to a client. unearned rent
was credited for the full $18k. financial statements will be prepared on july 31.
action real estate should make the following adjusting entry on july 31
debit unearned rent $3k, credit rental revenue $3k

At december 31, 2011, before any year-end adjustments, cable car company's
insurance expense account had a balance of $1,450 and its prepaid insurance
account had a balance of $3,800. it was determined that $3k of the prepaid
insurance had expired. the adjusted balance for insurance expense for the year
would be
$4,450

On january 1, 2011, grills and grates inc. purchased equipment for $45k. the
company is depreciating the equipment at the rate of $600 per month. at
january 31, 2012, the balance in accumulated depreciation is
$7,800

Turner company collected $6,500 in may of 2011 for 5 months of service which
would take place from october of 2011 through february 2012. the revenue
reported from this transaction during 2011 would be
$3,900
Betty carson has performed $500 of cpa services for a client but has not billed
the client as of the end of the accounting period. what adjusting entry must
betty make?
debit accounts receivable and credit service revenue

Joyce's gifts signs a three-month note payable to help finance increases in

inventory for the christmas shopping season. the note is signed on november
1 in the amount of $50k with annual interest of 12%. what is the adjusting entry
to be made on december 31 for the interest expense accrued to that date, if no
entries have been made previously for the interest
interest expense $1,000 / interest payable $1,000

A company shows a balance in salaries payable of $40k at the end of the

month. the next payroll amounting to $45k is to be paid in the following month.
what will be the journal entry to record the payment of salaries
salaries expense $5k - salaries payable $40k / cash $45k

Becki jean corporation issued a one-year, 6%, $200k note on april 30, 2011.
interest expense for the year ended december 31, 2011
$8,000

A 12 month accounting period

fiscal year

Expenses paid before they are incurred

prepaid expenses

Cost less accumulated depreciation

book value

Divides the economic life of a business into artificial time periods

time period assumption
Efforts are related to accomplishments
expense recognition principle

A contra asset account

accumulated depreciation

Recognition of revenue when it is recorded when earned

revenue recognition principle

Revenues earned but not yet received

accrued revenues

Expenses incurred but not yet paid

accrued expenses

A cost allocation process

depreciation

The following information is available for Fenton Manufacturing Company at

June 30:

-Cash in bank account: $11,455.

-Inventory of postage stamps: $74.
-Money market fund balance: $10,400.
-Petty cash balance: $350.
-NSF checks from customers returned by bank: $867.
-Postdated checks received from customers: $791.
-Money orders: $290.
-A nine-month certificate of deposit maturing on December 31 of current year:
$6,000.

Based on this information, Fenton Manufacturing Company should report Cash

and Cash Equivalents on June 30 of:
1. $28,495.
2. $29,286.
3. $23,286.
4. $12,095.
5. $22,495.

$11,455 of cash in bank + $10,400 of money market fund + $350 of petty cash
balance + $290 of money orders = $22,495.

1. Which of the following statements about an account is true?

A. In its simplest form, an account consists of two parts.
B. An account is an individual accounting record of increases and
decreases in specific asset, liability, and stockholder's equity
items.
C. There are separate accounts for specific assets and liabilities
but only one account for stockholder's equity items.
D. The left side of an account is the credit or decrease side.

 This is a true statement about an account. (p.46)

2. Debits:
A. increase both assets and liabilities.
B. decrease both assets and liabilities.
C. increase assets and decrease liabilities.
D. decrease assets and increase liabilities.

 Debits increase assets and decrease liabilities. (Illustration 2-3)

3. A revenue account:
A. is increased by debits.
B. is decreased by credits.
C. has a normal balance of a debit.
D. is increased by credits.
  A revenue account IS increased by credits. (Illustration 2-9)

4. Accounts that normally have debit balances are:

A. assets, expenses, and revenues.
B. assets, expenses, and common stock.
C. assets, liabilities, and dividends.
D. assets, dividends, and expenses.

 Assets, dividends, and expenses and have normal debit balances.

(p.48-50)

5. Which of the following is not part of the recording process?

A. Analyzing transactions.
B. Preparing a trial balance.
C. Entering transactions in a journal.
D. Posting transactions.

 Preparing the trial balance is NOT part of the recording process.

(p.52)

6. Which of the following statements about a journal is false?

A. It is not a book of original entry.
B. It provides a chronological record of transactions.
C. It helps to locate errors because the debit and credit amounts
for each entry can be readily compared.
D. It discloses in one place the complete effect of a transaction.

 A journal IS a book of original entry. (p.53)

7. A ledger:
A. contains only asset and liability accounts.
B. should show accounts in alphabetical order.
C. is a collection of the entire group of accounts maintained by a
company.
D. is a book of original entry.

 A ledger is NOT a book of original entry because entries made in

 the ledger come from the books of original entry. (p.55)

8. Posting:
A. normally occurs before journalizing.
B. transfers ledger transaction data to the journal.
C. is an optional step in the recording process.
D. transfers journal entries to ledger accounts.

 Posting does transfer journal entries to ledger accounts. (p.57)

9. A trial balance:
A. is a list of accounts with their balances at a given time
B. proves the mathematical accuracy of journalized transactions.
C. will not balance if a correct journal entry is posted twice.
D. proves that all transactions have been recorded.

 This is an accurate statement about the trial balance. (p.67)

10. A trial balance will not balance if:

A. a correct journal entry is posted twice.
B. the purchase of supplies on account is debited to Supplies
and credited to Cash.
C. a $100 cash dividend by the corporation is debited to
Dividends for $1,000 and credited to Cash for $100.
D. a $450 payment on account is debited to Accounts Payable
for $45 and credited to Cash for $45.

 The trial balance will not balance in this case because the debit
of $1000 to Dividends is not equal to the credit of $100 Cash.
(p.68)

1. The time period assumption states that:

A. revenue should be recognized in the accounting period in which it is
earned.
B. expenses should be matched with revenues.
C. the economic life of a business can be divided into artificial time
periods.
D. the fiscal year should correspond with the calendar year.

 This is an accurate description of the time period assumption. (p.91)

2. The principle dictating that efforts (expenses) be matched with
accomplishments (revenues) is the:
A. matching principle.
B. cost principle.
C. periodicity principle.
D. revenue recognition principle.

 The matching principle dictates that efforts be matched with

accomplishments. (p.92)

3. Which one of the following statements about the accrual basis of

accounting is false.
A. Events that change a company's financial statements are
recorded in the periods in which the events occur.
B. Revenue is recognized in the period in which it is earned.
C. This basis is in accord with generally accepted accounting
principles.
D. Revenue is recorded only when cash is received, and expense
is recorded only when cash is paid.

 Under the accrual basis of accounting, revenue is recognized

when it is earned, not when cash is received and expenses are
recognized when incurred rather than when cash is paid. (p.91)

4. Adjusting entries are made to ensure that:

A. expenses are recognized in the period in which they are
incurred.
B. revenues are recorded in the period in which they are earned.
C. balance sheet and income statement accounts have correct
balances at the end of an accounting period.
D. all of these.

 Adjusting entries are made for all the reasons noted in a through
c. (p.93)

5. Each of the following is a major type (or category) of adjusting

entries except: 
A. prepaid expenses.
 B. accrued revenues.
C. accrued expenses.
D. earned revenues.

 Accrued revenues is one of the major categories of adjusting

entries. (p.94)

6. The trial balance shows Supplies $1,350 and Supplies Expense $0.
If $600 of supplies are on hand at the end of the period, the
adjusting entry is:
A. Supplies---600, Supplies Expense---600
B. Supplies---750, Supplies Expense---750
C. Supplies Expense---750, Supplies---750
D. Supplies Expense---600, Supplies---600

 This adjusting entry will cause Supplies to have a balance of $600

($1,350 - 750) and Supplies Expense to have a balance of $750 ($0
+ $750). These are the correct balances. (p.95-96)

7. Adjustments for unearned revenues:

A. decrease liabilities and increase revenues.
B. have an assets and revenues account relationship.
C. increase assets and increase revenues.
D. decrease revenues and decrease assets.

 Adjustments for unearned revenues will consist of a debit

(decrease) to unearned revenues (a liability) and a credit (increase)
to a revenue account. (p.99)

8. Adjustments for accrued revenues:

A. have a liabilities and revenues account relationship.
B. have an assets and revenues account relationship.
C. decrease assets and revenues.
D. decrease liabilities and increase revenues.

 Adjustments for accrued revenues increase revenues but have no

affect on liabilities. (p.101-102)
9. Kathy Siska earned a salary of $400 for the last week of September.
She will be paid on October 1. The adjusting entry for Kathy's
employer at September 30 is:
A. No entry is required.
B. Salaries Expense---400, Salaries Payable---400
C. Salaries Expense---400, Cash---400
D. Salaries Payable---400, Cash---400

 This is the adjusting entry Kathy's employer should make at

September 30. (p. 103-104)

10. Which of the following statements is incorrect concerning the

adjusted trial balance?
A. An adjusted trial balance proves the equality of the total debit
balances and the total credit balances in the ledger after all
adjustments are made.
B. The adjusted trial balance provides the primary basis for the
preparation of financial statements.
C. The adjusted trial balance lists the account balances
segregated by assets and liabilities.
D. The adjusted trial balance is prepared after the adjusting
entries have been journalized and posted.

 This is a correct statement about the adjusted trial balance.

(p.108)

11. The trial balance shows Supplies $0 and Supplies Expense

$1,500. If $800 of supplies are on hand at the end of the period,
the adjusting entry is:
A. Debit Supplies $800 and credit Supplies Expense $800.
B. Debit Supplies Expense $800 and credit Supplies $800.
C. Debit Supplies $700 and credit Supplies Expense $700.
D. Debit Supplies Expense $700 and credit Supplies $700.

 This is the correct adjusting entry because it correctly states the

Supplies account at $800 ($0 + $800) and it correctly states the
Supplies Expense account at $700 ($1,500 - $800). (p.113)

1. Which of the following statements is incorrect concerning the work sheet?

A. The work sheet is essentially a working tool of the
accountant.
B. The work sheet cannot be used as a basis for posting to
 ledger accounts.
C. The work sheet is distributed to management and other
interested parties.
D. Financial statements can be prepared directly from the
work sheet before journalizing and posting the adjusting
entries.

 This is an accurate statement about the worksheet. (p.138)

2. In a work sheet, net income is entered in the following columns:

A. income statement (Dr) and balance sheet (Dr).
B. income statement (Dr) and balance sheet (Cr).
C. income statement (Cr) and balance sheet (Dr).
D. income statement (Cr) and balance sheet (Cr).

 This statement correctly identifies the columns into which net income is
entered. (p.141 & Illustration 4-3D)

3. An account that will have a zero balance after closing entries have been
journalized and posted is:
A. Unearned Revenue.
B. Advertising Supplies.
C. Prepaid Insurance.
D. Rent Expense.

 Renet Expense will have a zero balance after closing entries have been
journalized and posted because it is an income statement or temporary
account. (p.144-145)

4. When a net loss has occurred, Income Summary is:

A. credited and retained earnings is debited.
B. debited and retained earnings is credited.
C. debited and common stock is credited.
D. credited and common stock is debited.

 This is the correct description of the effect of a net loss on the Income
Summary and Retained Earnings accounts. (p.145)
5. The closing process involves separate entries to close (1) expenses, (2)
dividends, (3) revenues, and (4) net income (or loss). The correct
sequencing of the entries is:
A. (4), (3), (2), (1)
B. (1), (2), (3), (4)
C. (3), (2), (1), (4)
D. (3), (1), (4), (2)

 This is the correct order. (p.145)

6. Which types of accounts will appear in the post-closing trial balance?

A. Temporary (nominal) accounts.
B. Permanent (real) accounts.
C. Accounts shown in the income statement columns of a work
sheet.
D. None of these.

 Only permanent or real accounts (balance sheet accounts) appear in the

post- closing trial balance. (p.149)

7. All of the following are required steps in the accounting cycle except:

A. preparing a work sheet.
B. journalizing and posting closing entries.
C. preparing an adjusted trial balance.
D. preparing a post-closing trial balance.

 Journalizing and posting closing entries is one of the required steps in the
accounting cycle. (Illustration 4-12)

8. Cash of $100 received at the time the service was rendered was journalized
and posted as a debit to Cash $100 and a credit to Accounts Receivable
$100. Assuming the incorrect entry is not reversed, the correcting entry is:
A. debit Service Revenue $100 and credit Accounts
Receivable $100.
B. debit Cash $100 and credit Service Revenue $100.
C. debit Accounts Receivable $100 and credit Service
Revenue $100.
D. debit Accounts Receivable $100 and credit Cash $100.

 This is the correcting entry that should be made. (p.152-153)

9. In a classified balance sheet, assets are usually classified using the
following categories:
A. current assets; long-term assets; property, plant, and
equipment; and intangible assets.
B. current assets; long-term investments; property, plant,
and equipment; and other assets.
C. current assets; long-term investments; property, plant,
and equipment; and intangible assets.
D. current assets; long-term investments; tangible assets;
and intangible assets.

 These are the categories usually used in a classified balance sheet.

(p.155)

10. Current assets are listed:

A. by importance.
B. by liquidity.
C. by longevity.
D. alphabetically.

 Current assets are listed in order of their liquidity. (p.156)

11. On December 31, Regis Company correctly made an adjusting entry to

recognize $2,000 of accrued salaries payable. On January 8 of the next
year, total salaries of $3,500 were paid. Assuming the correct reversing
entry was made on January 1, the entry on January 8 will result in a credit
to Cash $3,500 and
A. Salaries Payable $3,500.
B. Salaries Expense $3,500.
C. Salaries Payable $2,000 and Salaries Expense $1,500.
D. Salaries Payable $1,500, and Salaries Expense $2,000.

 Because the correct reversing entry was made, the Salaries Payable
account is not part of the entry to record the payment of payroll on January
8th. Also, the debit to Salaries Expense should be for $3,500, not $1,500.
(p.165

1. Gross profit will result if:

A. operating expenses are less than net income.
 B. sales revenues are greater than operating expenses.
C. sales revenues are greater than cost of goods sold.
D. operating expenses are greater than cost of goods sold.

 This statement accurately describes the situation in which gross profit

results. (p.188)

2. Under a perpetual inventory system, when goods are purchased for resale
by a company:
A. purchases on account are debited to Merchandise
Inventory.
B. purchases on account are debited to Purchases.
C. purchase returns are debited to Purchase Returns and
Allowances.
D. freight costs are debited to Freight-out.

 When using a perpetual inventory system, purchases on account are

debited to the Merchandise Inventory account. (p.192)

3. The sales accounts that normally have a debit balance are:

A. Sales Discounts.
B. Sales Returns and Allowances.
C. both.
D. neither.

 Both accounts mentioned above have normal debit balances. (p.197-198)

4. A credit sale of $750 is made on June 13, terms 2/10, net/30. A return of
$50 is granted on June 16. The amount received as payment in full on June
23 is:
A. $700.
B. $686.
C. $685.
D. $650.

 This amount constitutes payment in full because it is paid within 10 days

of the purchase ($750 - $50) (($750 - $50) * .02). (p.198)
5. Which of the following accounts will normally appear in the ledger of a
merchandising company that uses a perpetual inventory system?
A. Purchases.
B. Freight-in.
C. Cost of Goods Sold.
D. Purchase Discounts.

 The Cost of Good Sold account is one of the accounts that normally
appears in the ledger of a merchandising firm using a perpetual inventory
system. (p.200)

6. The multiple-step income statement for a merchandiser shows each of the

following features except:
A. gross profit.
B. cost of goods sold.
C. a sales revenue section.
D. investing activities section.

 This item appears on the statement of cash flows, not on a multiple-step

income statement. (Illustration 5-12)

7. If sales revenues are $400,000, cost of goods sold is $310,000, and

operating expenses are $60,000, the gross profit is:
A. $30,000.
B. $90,000.
C. $340,000.
D. $400,000.

 This is the amount of gross profit ($400,000 - $310,000). (p.203)

8. In a single-step income statement:

A. gross profit is reported.
B. cost of goods sold is not reported.
C. sales revenues and "other revenues and gains" are
reported in the revenues section of the income
statement.
D. operating income is separately reported.

 Sales and "other revenues and gains" ARE reported in the revenue
section of a single-step income statement. (Illustration 5-13)
9. Which of the following appears on both a single-step and a multiple-step
income statement?
A. sales.
B. gross profit.
C. income from operations.
D. cost of goods sold.

 Cost of Goods Sold appears on both a single-step and a multiple-step

income statement. (Illustrations 5-11 & 5-12)

10. In a work sheet, Merchandise Inventory is shown in the following

columns:
A. Adjusted trial balance debit and balance sheet debit.
B. Income statement debit and balance sheet debit.
C. Income statement credit and balance sheet debit.
D. Income statement credit and adjusted trial balance
debit.

 Merchandise Inventory is shown in the adjusted trial balance debit

column and in the balance sheet debit column. (Illustration 5A-1)

1. Which of the following should not be included in the physical inventory of

a company?
A. Goods held on consignment from another company.
B. Goods shipped on consignment to another company.
C. Goods in transit from another company shipped FOB
shipping point.
D. None of the above.

 Goods shipped on consignment to another company should be included

because they belong the the firm that shipped them. (p.233)

2. When goods are purchased for resale by a company using a periodic

inventory system:
A. purchases on account are debited to Merchandise
Inventory.
B. purchases on account are debited to Purchases.
C. purchase returns are debited to Purchase Returns and
 Allowances.
D. freight costs are debited to Purchases.

 Purchases on account are debited to Purchases when a periodic inventory

system is used. (p.234)

3. In determining cost of goods sold:

A. purchase discounts are deducted from net purchases.
B. freight-out is added to net purchases.
C. purchase returns and allowances are deducted from net
purchases.
D. freight-in is added to net purchases.

 Freight-in is added to net purchases in computing cost of goods sold.

(Illustration 6-3)

4. If beginning inventory is $60,000, cost of goods purchased is $380,000, and

ending inventory is $50,000, cost of goods sold is:
A. $390,000.
B. $370,000.
C. $330,000.
D. $420,000.

 Beginning inventory + Cost of goods purchased - Ending inventory =

Cost of goods sold.

d $60,000 + $380,000 - $50,000 = $390,000. (p.237)

5. Inventoriable costs consist of two elements: beginning inventory and

A. ending inventory.
B. cost of goods purchased.
C. cost of goods sold.
D. cost of goods available for sale.

 Inventoriable costs consist of beginning inventory and cost of goods

purchased, not cost of goods available for sale. (p.239)
6. Bullwinkle Company has the following

If 9,000 units are on hand at December 31, the cost of the ending inventory under FIFO is: 
A. $99,000.
B. $108,000.
C. $113,000.
D. $117,000.

 Using FIFO, ending inventory will consist of 5,000 units from the Nov. 8
purchase and 4,000 units from the June 19 purchase. Ending inventory is
(5,000 * $13) + (4,000 * $12), or $113,000. (p.242)

7. Bullwinkle Company has the following:

If 9,000 units are on hand at December 31, the cost of the ending inventory under LIFO is: 
A. $113,000.
B. $108,000.
C. $99,000.
D. $100,000.

 Using LIFO, ending inventory will consist of 8,000 units from the
inventory at Jan. 1 and 1,000 units from the June 19 purchase. Ending
inventory is (8,000 * $11) + (1,000 * $12), or $100,000. (p.243)

8. In periods of rising prices, LIFO will produce:

A. higher net income than FIFO.
B. the same net income as FIFO.
C. lower net income than FIFO.
D. higher net income than average costing.

 In periods of rising prices, LIFO will produce lower net income than
FIFO. (p.246)

9. Factors that affect the selection of an inventory costing method

do not include:
 A. tax effects.
B. balance sheet effects.
C. income statement effects.
D. perpetual vs. periodic inventory system.

 Perpetual vs. periodic inventory system is one not one of the factors that
affect the selection of an inventory costing method. (p.245)

10. The lower of cost or market basis may be applied to:

A. categories of inventories.
B. individual items of inventories.
C. total inventory.
D. all of the above.

 The lower of cost or market basis may be applied to categories of

inventories, individual items of inventories or total inventory. (p.249)

11. Titan A.E. Company's ending inventory is understated $4,000. The effects
of this error on the current year's cost of goods sold and net income,
respectively, are:
A. understated, overstated.
B. overstated, understated.
C. overstated, overstated.
D. understated, understated.

 Because ending inventory is too low, cost of goods sold will be too high
(overstated) and since cost of goods sold (an expense) is too high, net
income will be too low (understated). (p.250)

12. Which of these would cause the inventory turnover ratio to increase the
most?
A. Increasing the amount of inventory on hand.
B. Keeping the amount of inventory on hand constant but
increasing sales.
C. Keeping the amount of inventory on hand constant but
decreasing sales.
D. Decreasing the amount of inventory on hand and
increasing sales.

 Decreasing the amount of inventory on hand will cause the denominator

to decrease, causing the ratio to increase. Increasing sales will cause the
 numerator of the ratio to increase (higher sales means higher COGS), thus
causing the ratio to increase even more. (p.252)

13. Butterfly Company has sales of $150,000 and cost of goods available for
sale of $135,000. If the gross profit rate is 30%, the estimated cost of the
ending inventory under the gross profit method is:
A. $15,000.
B. $30,000.
C. $45,000.
D. $75,000.

 Estimated cost of ending inventory is computed as follows: Sales -

Gross profit = COGS. $150,000 - ($150,000 * 30%) = $105,000. Cost of
goods available for sale - COGS = Ending inventory. $135,000 - $105,000
= $30,000. (p.257)

14. In a perpetual inventory system,

A. LIFO cost of goods sold will be the same as in a
periodic inventory system.
B. average costs are based entirely on unit cost averages.
C. a new average is computed under the average cost method
after each sale.
D. FIFO cost of goods sold will be the same as in a
periodic inventory system.

 In a perpetual inventory system, average costs are based on a weighted

average of unit costs, not an average of unit costs. (p.261)

1. Which of the following should not be included in the physical inventory of

a company?
A. Goods held on consignment from another company.
B. Goods shipped on consignment to another company.
C. Goods in transit from another company shipped FOB
shipping point.
D. None of the above.

 Goods held on consignment should NOT be included because the other

company has title (ownership) to the goods. (p.233)
2. When goods are purchased for resale by a company using a periodic
inventory system:
A. purchases on account are debited to Merchandise
Inventory.
B. purchases on account are debited to Purchases.
C. purchase returns are debited to Purchase Returns and
Allowances.
D. freight costs are debited to Purchases.

 Purchases on account are debited to Purchases when a periodic inventory

system is used. (p.234)

3. In determining cost of goods sold:

A. purchase discounts are deducted from net purchases.
B. freight-out is added to net purchases.
C. purchase returns and allowances are deducted from net
purchases.
D. freight-in is added to net purchases.

 Freight-in is added to net purchases in computing cost of goods sold.

(Illustration 6-3)

4. If beginning inventory is $60,000, cost of goods purchased is $380,000, and

ending inventory is $50,000, cost of goods sold is:
A. $390,000.
B. $370,000.
C. $330,000.
D. $420,000.

 Beginning inventory + Cost of goods purchased - Ending inventory =

Cost of goods sold.

d $60,000 + $380,000 - $50,000 = $390,000. (p.237)

5. Inventoriable costs consist of two elements: beginning inventory and

A. ending inventory.
B. cost of goods purchased.
C. cost of goods sold.
D. cost of goods available for sale.
  Inventoriable costs consist of beginning inventory and cost of goods
purchased. (p.239)

6. Bullwinkle Company has the following

If 9,000 units are on hand at December 31, the cost of the ending inventory
under FIFO is:
A. $99,000.
B. $108,000.
C. $113,000.
D. $117,000.

 Using FIFO, ending inventory will consist of 5,000 units from the Nov. 8
purchase and 4,000 units from the June 19 purchase. Ending inventory is
(5,000 * $13) + (4,000 * $12), or $113,000. (p.242)

7. Bullwinkle Company has the following:

If 9,000 units are on hand at December 31, the cost of the ending inventory
under LIFO is:
A. $113,000.
B. $108,000.
C. $99,000.
D. $100,000.

 Using LIFO, ending inventory will consist of 8,000 units from the
inventory at Jan. 1 and 1,000 units from the June 19 purchase. Ending
inventory is (8,000 * $11) + (1,000 * $12), or $100,000. (p.243)

8. In periods of rising prices, LIFO will produce:

A. higher net income than FIFO.
B. the same net income as FIFO.
C. lower net income than FIFO.
D. higher net income than average costing.
  In periods of rising prices, LIFO will produce lower net income than
FIFO. (p.246)

9. Factors that affect the selection of an inventory costing method

do not include:
A. tax effects.
B. balance sheet effects.
C. income statement effects.
D. perpetual vs. periodic inventory system.

 Perpetual vs. periodic inventory system is one not one of the factors that
affect the selection of an inventory costing method. (p.245)

10. The lower of cost or market basis may be applied to:

A. categories of inventories.
B. individual items of inventories.
C. total inventory.
D. all of the above.

 The lower of cost or market basis may be applied to categories of

inventories, individual items of inventories or total inventory. (p.249)

11. Titan A.E. Company's ending inventory is understated $4,000. The effects
of this error on the current year's cost of goods sold and net income,
respectively, are:
A. understated, overstated.
B. overstated, understated.
C. overstated, overstated.
D. understated, understated.

 Because ending inventory is too low, cost of goods sold will be too high
(overstated) and since cost of goods sold (an expense) is too high, net
income will be too low (understated). (p.250)

12. Which of these would cause the inventory turnover ratio to increase the
most?
A. Increasing the amount of inventory on hand.
 B. Keeping the amount of inventory on hand constant but
increasing sales.
C. Keeping the amount of inventory on hand constant but
decreasing sales.
D. Decreasing the amount of inventory on hand and
increasing sales.

 Decreasing the amount of inventory on hand will cause the denominator

to decrease, causing the ratio to increase. Increasing sales will cause the
numerator of the ratio to increase (higher sales means higher COGS), thus
causing the ratio to increase even more. (p.252)

13. Butterfly Company has sales of $150,000 and cost of goods available for
sale of $135,000. If the gross profit rate is 30%, the estimated cost of the
ending inventory under the gross profit method is:
A. $15,000.
B. $30,000.
C. $45,000.
D. $75,000.

 Estimated cost of ending inventory is computed as follows: Sales -

Gross profit = COGS. $150,000 - ($150,000 * 30%) = $105,000. Cost of
goods available for sale - COGS = Ending inventory. $135,000 - $105,000
= $30,000. (p.257)

14. In a perpetual inventory system,

A. LIFO cost of goods sold will be the same as in a
periodic inventory system.
B. average costs are based entirely on unit cost averages.
C. a new average is computed under the average cost method
after each sale.
D. FIFO cost of goods sold will be the same as in a
periodic inventory system.

 FIFO cost of goods sold is the same under both a periodic and a
perpetual inventory system. (260)

1. Internal control is used in a business to enhance the accuracy and reliability

of its accounting records and to:
A. safeguard its assets.
B. prevent fraud.
C. produce correct financial statements.
 D. deter employee dishonesty.

 This is one of the purposes of using internal control. (p.328)

2. The principles of internal control do not include:

A. establishment of responsibility.
B. documentation procedures.
C. management responsibility.
D. independent internal verification.

 This is NOT one of the principles of internal control. (Illustration 8-1)

3. Physical controls do not include is:

A. safes and vaults to store cash.
B. independent bank reconciliations.
C. locked warehouses for inventories.
D. bank safety deposit boxes for important papers.

 This is NOT a physical control. (Illustration 8-2)

4. Which of the following items in a cash drawer at November 30 is not cash?

A. Money orders.
B. Coins and currency.
C. customer check dated December 1.
D. A customer check dated November 28.

 A customer check dated December 1 should NOT be included in cash at

November 30 because it is a postdated check. (p.335)

5. Permitting only designated personnel to handle cash receipts is an

application of the principle of:
A. segregation of duties.
B. establishment of responsibility.
C. independent check.
D. other controls.

 Permitting only designated personnel to handle cash receipts is an

application of the principle of establishment of responsibility. (Illustration
 8-4)

6. The use of prenumbered checks in disbursing cash is an application of the

principle of:
A. establishment of responsibility.
B. segregation of duties.
C. physical, mechanical, and electronic controls.
D. documentation procedures.

 The use of prenumbered checks in disbursing cash is an application of

the principle of documentation procedures. (p.331)

7. A check is written to replenish a $100 petty cash fund when the fund
contains receipts of $94 and $3 in cash. In recording the check:
A. Cash Over and Short should be debited for $3.
B. Petty Cash should be debited for $94.
C. Cash should be credited for $94.
D. Petty Cash should be credited for $3.

 When this check is recorded, Cash Over and Short should be debited for
$3. (p.341-342)

8. The control features of a bank account do not include:

A. having bank auditors verify the correctness of the bank
balance per books.
B. minimizing the amount of cash that must be kept on hand.
C. providing a double record of all bank transactions.
D. safeguarding cash by using a bank as a depository.

 This is NOT one of the control features of a bank account. (p.343)

9. In a bank reconciliation, deposits in transit are:

A. deducted from the book balance.
B. added to the book balance.
C. added to the bank balance.
D. deducted from the bank balance.

 Deposits in transit are added to the bank balance because they are
 increases in the balance that the bank has not yet included. (p.348)

10. The reconciling item in a bank reconciliation that will result in an

adjusting entry by the depositor is:
A. outstanding checks.
B. deposit in transit.
C. a bank error.
D. bank service charges.

 Because the depositor does not know the amount of the bank service
charges until the bank statement is received, an adjusting entry must be
made when the statement is received. (p.350)

1. Which of the following is incorrect about the statement of cash flows?

A. It is a fourth basic financial statement.
B. It provides information about cash receipts and cash
payments of an entity during a period.
C. It reconciles the ending cash account balance to the
balance per the bank statement.
D. It provides information about the operating, investing,
and financing activities of the business.

 The statement of cash flows reconciles the ending cash balance to the
beginning cash balance, not the balance per the bank statement. (p.611)

2. The statement of cash flows classifies cash receipts and cash payments by
the following activities:
A. operating and nonoperating.
B. investing, financing, and operating.
C. financing, operating, and nonoperating.
D. investing, financing, and nonoperating.

 The statement of cash flows classifies cash receipts and cash payments
by investing, financing and operating activities. (p.611)

3. An example of a cash flow from an operating activity is:

A. payment of cash to lenders for interest.
B. receipt of cash from the sale of capital stock.
C. payment of cash dividends to the company's stockholders.
 D. None of the above.

 Since a is correct, this answer cannot be correct.

4. An example of a cash flow from an investing activity is:

A. receipt of cash from the issuance of bonds payable.
B. payment of cash to repurchase outstanding capital stock.
C. receipt of cash from the sale of equipment.
D. payment of cash to suppliers for inventory.

 The receipt of cash from the sale of equipment is an example of a cash

flow from an investing activity. (Illustration 14-1)

5. Cash dividends paid to stockholders are classified on the statement of cash

flows as:
A. operating activities.
B. investing activities.
C. a combination of the above.
D. financing activities.

 Cash dividends paid to stockholders are classified on the statement of

cash flows as financing activities. (Illustration 14-1)

6. An example of a cash flow from a financing activity is:

A. receipt of cash from sale of land.
B. issuance of debt for cash.
C. purchase of equipment for cash
D. None of the above.

 Since b is correct, this answer cannot be correct.

7. Which of the following about the statement of cash flows is incorrect? 

A. The direct method may be used to report cash provided by
operations.
B. The statement shows the cash provided (used) for three
categories of activity.
C. The operating section is the last section of the
statement.
 D. The indirect method may be used to report cash provided
by operations.

 The operating section is the first, not the last section of the statement.
(p.614)

8. (This question applies only to the indirect method.) Net income is

$132,000. During the year, accounts payable increased $10,000, inventory
decreased $6,000, and accounts receivable increased $12,000. Under the
indirect method, net cash provided by operations is:
A. $102,000.
B. $112,000.
C. $124,000.
D. $136,000.

 Net cash provided by operations is computed by adding the A/P increase

($10,000) and the inventory decrease ($6,000) to net income and
subtracting the A/R increase ($12,000). $132,000 + $10,000 + $6,000 -
$12,000 = $136,000. (Illustration 14-18)

9. (This question applies only to the indirect method.) Noncash charges that
are added back to net income in determining cash provided by operations
under the indirect method do not include:
A. depreciation expense.
B. an increase in inventory.
C. amortization expense.
D. loss on sale of equipment.

 An increase in inventory is NOT a noncash charge to net income.

(Illustration 14-19)

10. (This question applies only to the direct method.) The beginning balance
in accounts receivable is $44,000. The ending balance is $42,000. Sales
during the period are $129,000. Cash receipts from customers are:
A. $127,000.
B. $129,000.
C. $131,000.
D. $141,000.

 Cash receipts from customers is computed by taking the A/R beginning

balance ($44,000), adding Sales for the period ($129,000) and subtracting
 the A/R ending balance ($42,000), or $44,000 + $129,000 - $42,000 =
$131,000. (p.631)

11. (This question applies only to the direct method.) Which of the following
items is reported on a cash flow statement prepared by the direct method?
A. Loss on sale of building.
B. Increase in accounts receivable.
C. Depreciation expense.
D. Cash payments to suppliers.

 Cash payments to suppliers items is reported on a cash flow statement

prepared by the direct method. (Illustration 14-22)

12. The statement of cash flows should not be used to evaluate an entity's

ability to:
A. earn net income.
B. generate future cash flows.
C. pay dividends.
D. meet obligations.

 The statement of cash flows should be used to evaluate an entity's

ability to meet obligations because obligations are paid with cash. (p. 642-
643)

13. In a work sheet for the statement of cash flows, a decrease in accounts
receivable is entered in the reconciling columns as a credit to Accounts
Receivable and a debit in the:
A. investing activities section.
B. operating activities section.
C. financing activities section.
D. None of the above.

 Because accounts receivable is a current asset, the debit belongs in the

operating activites section of the the worksheet. (p.650 & Illustration 14A-
4)

On the statement of cash flows worksheet,

significant noncash investing and financing activities are omitted

   in the reconciling columns.
 a decrease in cash will be offset by a debit in the reconciling
   items columns at the bottom of the worksheet.
an increase in cash will be offset by a debit in the reconciling
   items column at the bottom of the worksheet.
income statement accounts are listed after statement of financial
   position accounts in the top half of the worksheet under the
indirect method