Multiple-choice questions

1) On the last day of the period, Alan Cesska Company buys a $900 machine on credit.
This transaction will affect the:
A) income statement only.
B) balance sheet only.
C) income statement and owner’s equity statement only.
D) income statement, owner’s equity statement, and balance sheet.
2) Which of the following statements is false?
A) A statement of cash flows summarizes information about the cash inflows (receipts)
and outflows (payments) for a specific period of time.
B) A balance sheet reports the assets, liabilities, and owner’s equity at a specific date.
C) An income statement presents the revenues, expenses, changes in owner’s equity,
and resulting net income or net loss for a specific period of time.
D) An owner’s equity statement summarizes the changes in owner’s equity for a specific
period of time.
3) The three types of business entities are:
A) proprietorships, small businesses, and partnerships.
B) proprietorships, partnerships, and corporations.
C) proprietorships, partnerships, and large businesses
D) financial, manufacturing, and service companies.
4) Which of the following statements about basic assumptions is correct?
A) Basic assumptions are the same as accounting principles.
B) The economic entity assumption states that there should be a particular unit of
accountability.
C) The monetary unit assumption enables accounting to measure employee morale.
D) Partnerships are not economic entities
5) 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 entries.
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.
7) 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.
8) Before posting a payment of $5,000, the Accounts Payable of Senator Company had a
normal balance of $16,000. The balance after posting this transaction was:
A) $21,000
B) $5,000
C) $11,000
D) Cannot be determined
9) Adjustments for prepaid expenses:
A) decrease assets and increase revenues.
B) decrease expenses and increase assets.
C) decrease assets and increase expenses.
D) decrease revenues and increase assets.
10) The principle or assumption dictating that efforts (expenses) be matched with
accomplishments (revenues) is the:
A) expense recognition principle.
B) cost assumption.
C) time period assumption.
D) revenue recognition principle
11) 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
12) The time period assumption states that:
 A) companies must wait until the calendar year is completed to prepare financial
statements.
B) companies use the fiscal year to report financial information.
C) the economic life of a business can be divided into artificial time periods.
D) companies record information in the time period in which the events occur
13) In the unadjusted trial balance of its worksheet for the year ended December 31, 2017,
Knox Company reported Equipment of $120,000. The year-end adjusting entries require
an adjustment of $15,000 for depreciation expense for the equipment. After the adjusted
trial balance is completed, what amount should be shown in the financial statement
columns?
A) A debit of $105,000 for Equipment in the balance sheet column.
B) A credit of $15,000 for Depreciation Expense— Equipment in the income statement
column.
C) A debit of $120,000 for Equipment in the balance sheet column.
D) A debit of $15,000 for Accumulated Depreciation—Equipment in the balance sheet
column.
14) Current assets are listed:
A) by expected conversion to cash.
B) by importance.
C) by longevity.
D) alphabetically
15) The closing process involves separate entries to close (1) expenses, (2) drawings, (3)
revenues, and (4) income summary. The correct sequencing of the entries is:
A) (4), (3), (2), (1).
B) (1), (2), (3), (4).
C) (3), (1), (4), (2).
D) (3), (2), (1), (4).
16) A company has purchased a tract of land. It expects to build a production plant on the
land in approximately 5 years. During the 5 years before construction, the land will be
idle. The land should be reported as:
A) property, plant, and equipment.
B) land expense.
C) a long-term investment.
D) an intangible asset.
17) The multiple-step income statement for a merchandising company shows each of the
following features except:
A) gross profit.
 B) cost of goods sold.
C) a sales section.
D) an investing activities section
18) To record the sale of goods for cash in a perpetual inventory system:
A) only one journal entry is necessary to record cost of goods sold and reduction of
inventory.
B) only one journal entry is necessary to record the receipt of cash and the sales
revenue.
C) two journal entries are necessary: one to record the receipt of cash and sales
revenue, and one to record the cost of goods sold and reduction of inventory.
D) two journal entries are necessary: one to record the receipt of cash and reduction of
inventory, and one to record the cost of goods sold and sales revenue.
19) Which of the following appears on both a single-step and a multiple-step income
statement?
A) Inventory.
B) Gross profit.
C) Income from operations.
D) Cost of goods sold.
20) 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 the cost of goods sold.
D) operating expenses are greater than the cost of goods sold.
21) 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
22) Falk 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
23) 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
24) Which of these would cause the inventory turnover 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.
25) The basic principles of an accounting information system include all of the following
except:
A) cost-effectiveness.
B) flexibility.
C) useful output.
D) periodicity.
26) If a customer returns goods for credit, the selling company normally makes an entry in
the:
A) cash payments journal.
B) sales journal.
C) general journal.
D) cash receipts journal.
27) Which of the following statements is correct?
A) The sales discount column is included in the cash receipts journal.
B) The purchases journal records all purchases of merchandise whether for cash or on
account.
C) The cash receipts journal records sales on account.
D) Merchandise returned by the buyer is recorded by the seller in the purchases journal.
28) At the beginning of the month, the accounts receivable subsidiary ledger showed
balances for Apple Company $5,000 and Berry Company $7,000. During the month,
credit sales were made to Apple $6,000, Berry $4,500, and Cantaloupe $8,500. Cash
was collected on account from Berry $11,500 and Cantaloupe $3,000. At the end of the
month, the control account Accounts Receivable in the general ledger should have a
balance of:
A) $11,000.
B) $12,000.
C) $16,500.
D) $31,000.
29) Receivables are frequently classified as:
A) accounts receivable, company receivables, and other receivables.
 B) accounts receivable, notes receivable, and employee receivables.
C) accounts receivable and general receivables.
D) accounts receivable, notes receivable, and other receivables
30) Oliveras Company had net credit sales during the year of $800,000 and cost of goods
sold of $500,000. The balance in accounts receivable at the beginning of the year was
$100,000, and the end of the year it was $150,000. What were the accounts receivable
turnover and the average collection period in days?
A) 4.0 and 91.3 days.
B) 5.3 and 68.9 days.
C) 6.4 and 57 days.
D) 8.0 and 45.6 days.
31) Net sales for the month are $800,000, and bad debts are expected to be 1.5% of net
sales. The company uses the percentage-of-sales basis. If Allowance for Doubtful
Accounts has a credit balance of $15,000 before adjustment, what is the balance after
adjustment?
A) $15,000.
B) $27,000.
C) $23,000.
D) $31,000.
32) Which of the following approaches for bad debts is best described as a balance sheet
method?
A) Percentage-of-receivables basis.
B) Direct write-off method.
C) Percentage-of-sales basis.
D) Both percentage-of-receivables basis and direct write-off method.
33) When there is a change in estimated depreciation:
A) previous depreciation should be corrected.
B) current and future years’ depreciation should be revised.
C) only future years’ depreciation should be revised.
D) None of the above
34) Depreciation is a process of:
A) valuation.
B) cost allocation.
C) cash accumulation.
D) appraisal
35) Indicate which of the following statements is true.
 A) Since intangible assets lack physical substance, they need be disclosed only in the
notes to the financial statements.
B) Goodwill should be reported as a contra account in the owner’s equity section.
C) Totals of major classes of assets can be shown in the balance sheet, with asset
details disclosed in the notes to the financial statements.
D) Intangible assets are typically combined with plant assets and natural resources and
shown in the property, plant, and equipment section.
36) Micah Bartlett Company purchased equipment on January 1, 2016, at a total invoice cost
of $400,000. The equipment has an estimated salvage value of $10,000 and an
estimated useful life of 5 years. The amount of accumulated depreciation at December
31, 2017, if the straight-line method of depreciation is used, is:
A) $80,000.
B) $160,000.
C) $78,000.
D) $156,000
37) The statement of cash flows classifies cash receipts and cash payments by these
activities:
A) operating and nonoperating.
B) investing, financing, and operating.
C) financing, operating, and nonoperating.
D) investing, financing, and nonoperating
38) Free cash flow provides an indication of a company’s ability to:
A) generate net income.
B) generate cash to pay dividends.
C) generate cash to invest in new capital expenditures.
D) Both B) and C)
39) Items that are added back to net income in determining net cash provided by operating
activities under the indirect method do not include:
A) depreciation expense.
B) an increase in inventory.
C) amortization expense.
D) loss on disposal of equipment
40) Cash dividends paid to stockholders are classified on the statement of cash flows as:
A) an operating activity.
B) an investing activity.
C) a combination of A) and B).
D) a financing activity.
 Short-Answer Questions
Question 1
Tevis Company reports the following for the month of June.
Units Unit Cost Total Cost
June 1 Inventory 250 $7 $1,750
12 Purchase 325 8 2,600
23 Purchase 475 9 4,275
30 Inventory 110
Instructions
(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO
and (2) LIFO.
(b) Which costing method gives the higher ending inventory? Why?
(c) Which method results in the higher cost of goods sold? Why?

Question 2
Vox Corporation’s comparative balance sheets are presented below.
VOX CORPORATION
Comparative Balance Sheets
December 31
2017 2016
Cash $ 19,300 $ 10,000
Accounts receivable 21,200 23,000
Land 20,000 26,000
Building 70,000 70,000
Accumulated depreciation (15,000) (10,000)
Total $115,500 $119,000

Accounts payable $ 17,370 $ 30,000

Common stock 75,000 69,000
Retained earnings 23,130 20,000
Total $115,500 $119,000
Additional information:
1. Net income was $27,630. Dividends declared and paid were $24,500.
2. All other changes in noncurrent account balances had a direct effect on cash flows, except the change in
accumulated depreciation. The land was sold for $3,900.
Instructions
(a) Prepare a statement of cash flows for 2017 using the indirect method.
(b) Compute free cash flow.

Question 3
Jefferies Company purchased a delivery truck for $50,000 on January 1, 2017. The truck has an expected
salvage value of $4,000 and is expected to be driven 100,000 miles over its estimated useful life of 8
years. Actual miles driven were 15,000 in 2017 and 12,000 in 2018.
Instructions
(a) Compute depreciation expense for 2017 and 2018 using (1) the straight-line method, (2) the
units-of-activity method, and (3) the double-declining balance method.
(b) Assume that Jeffries uses the straight-line method.
(1) Prepare the journal entry to record 2017 depreciation.
(2) Show how the truck would be reported in the December 31, 2017, balance sheet.

Question 4
A.
Compare methods of estimating allowance for doubtful debts
B.
On May 10, Ogle Company sold merchandise for $2,700 and accepted the customer’s National Bank
MasterCard. National Bank charges a 4% service charge for credit card sales.
Prepare the entry on Ogle Company’s books to record the sale of merchandise.

Question 5
In 2017, Phil Mickelson Company has net credit sales of $923,795 for the year. It had a
beginning accounts receivable (net) balance of $38,275 and an ending accounts receivable
(net) balance of $35,988. Compute Phil Mickelson Company’s (a) accounts receivable
turnover and (b) average collection period in days