CHAPTER 1

Question Explain & Review

Bookkeeping differs from accounting in that bookkeeping *Notes:
primarily involves which part of the accounting process? - Bookkeeping usually involves only the recording of economic events → it
A. Identification. is just one part of the entire accounting process
1
B. Communication. *Review:
C. Recording. - The accounting process: identifying, recording, and communicating.
D. Analysis. - Accounting process includes the bookkeeping function → Most important.
The field of accounting that focuses on providing
information for external decision makers is ________. *Review:
A. financial accounting - Financial accounting: provide information for external users.
2
B. managerial accounting - Managerial/private accounting: provide information for internal users.
C. cost accounting - External users (investors, creditors) & Internal users
D. non-monetary accounting
The Dulce company has five plants nationwide that cost a
*Notes:
total of $200 million. The current fair value of the plants is
- Historical cost & fair value are the same on the date of acquisition.
$600 million. The plants will be recorded and reported as
- Selection of which principle to follow relates to trade-offs between
assets at
3 relevance and faithful representation.
A. $200 million.
*Review:
B. $600 million.
- Historical cost principle → unchanged
C. $400 million.
- Fair value principle
D. $800 million.
The assumption that enables accounting to quantify
economic event:
*Review:
A. economic entity assumption.
4 - Monetary unit assumption
B. cost principle.
- Economic entity assumption
C. historical cost principle.
D. monetary unit assumption
George and Ringo met at law school and decided to start a
small law practice after graduation. They agree to split
revenues and expenses evenly. The most common form of *Notes:
business organization for a business such as this would be - Generally unlimited personal liabilities
5 a: *Review:
A. joint venture. - Three basic forms of business organization: proprietorship, partnership,
B. partnership. corporation.
C. corporation.
D. proprietorship
 In terms of tax payment, the earnings of a sole *Notes:
proprietorship are not combined with the personal income - The owner receives any profits, suffers any loses, is personally liable for
6 of the proprietor. all debts of the business
A. True - No legal distinction between business and owner in proprietorship.
B. False
Choose the INCORRECT statement: *Explain:
A. Asset – Equity = Liability - Equity = Capital + Revenue – Expense – Drawings
7 B. Net income = Revenue – Expense *Review:
C. Drawings = Capital – Equity – Net loss - The basic/expanded accounting equation
D. Capital = Equity + Drawings + Net income - Define components
Golden company had the following accounts and balances
at the end of the first year of operations. What are total
assets at the end of the year?
Cash $78,000
Accounts Payable $20,000
Common Stock $21,000
Dividends $12,000
*Review:
Operating Expenses $25,000
- Asset: Cash, Equipment, Supplies, Accounts receivable, Inventory
8 Accounts Receivable $51,000 - Liability: Accounts payable, notes payable, salaries payable
Inventory $45,000 - Owner’s equity: investment, common stock, dividend, revenues, expense
Long-term Notes Payable $33,000
Revenues $111,000
Salaries Payable $26,000
A. $78,000
B. $123,000
C. $129,000
D. $174,000
Liabilities represent one of the two claims to asset.
*Explain:
9 A. True
- Asset = Liability + Equity
B. False
Montgomery Equipment Rental Company received $1,000
cash from a customer; the amount was owed to the *Notes:
business from the previous month. What is the effect of - The two sides of the equation must always be equal
10 this transaction on the accounting equation? - Each transaction must have a dual effect on the accounting equation
A. Cash increases and Service Revenue increases (affect at least 2 accounts)
B. Cash increases and Accounts Receivable decreases
C. Cash increases and Accounts Payable decreases
 D. Accounts Receivable increases and Service Revenue
increases
Performed services for $5,000 on account; received cash on
account, $9,000; paid $1,200 for repair expense; paid
$1,900 to a supplier that it owed from the previous month.
What is the combined effect on Cash of these June
11 transactions? $9,000 – $1,200 - $1,200 = $5,900
A. $5,900 increase
B. $6,100 decrease
C. $900 increase
D. $10,900 increase
Hollywood Talent Services is a sole proprietorship
operated by Phil Morris. The net loss of Hollywood Talent
Services is $14,000 for the year. The beginning and ending
Morris’s Capital account was $50,000 and $32,000,
respectively. During the year, Morris invested $10,000 and
12 $50,000 + $10,000 - $32,000 - $14,000 = $14,000
gained $12,000 revenue. Calculate Morris’s drawing.
A. $32,000
B. $25,000
C. $4,000
D. $14,000
A business can enter a transaction in which only the left
*Explain:
side of the basic accounting equation is affected.
13 A+E+D=L+C+R
A. True
→ Ex. Increase Equipment, decrease Cash.
B. False
Which statement reports the revenues, gains, expenses, and
losses of an entity? *Review: Four financial statements
A. Balance sheet - Income statement
14 B. Statement of cash flows and income statement - Owner’s equity statement
C. Statement of retained earnings and statement of - Balance sheet
operations. - Statement of cash flow
D. Income statement
*Explain:
Net income appears directly on the income statement and - Directly:
the owner’s equity statement, and indirectly in the balance • On the income statement: Revenue – Expense
15 sheet. • On the owner’s equity statement: an addition to the beginning-of-
A. True period capital.
B. False - Indirectly in the balance sheet: It is included in the capital account which
appears in the owner’s equity section of the balance sheet
 CHAPTER 2
The terms debit and credit mean increase and decrease,
respectively.
1 *Explain:
A. True
- The term debit and credit mean left and right respectively
B. False
*Review:
Which accounts are increased by debits?
- T-account
A. Cash and accounts Payable
- Debit/credit
2 B. Salaries Expense and common Stock
- Normal balance, debit/credit balance
C. Accounts Receivable and Utilities Expense
D. Accounts Payable and Service Revenue
Which of the following is the correct sequence of steps in
the recording process?
A. Analyzing, journalizing, posting
3
B. Posting, journalizing, analyzing *Review:
C. Analyzing, posting, journalizing - The basic steps in the recording process are:
D. Journalizing, analyzing, posting • Analyze each transaction for its effects on the accounts.
The proper order for the accounting process is: • Enter the transaction information in a journal.
A. posting, transaction occurs, journalizing. • Transfer the journal information to the appropriate accounts in the
B. transaction occurs, posting, journalizing. ledger.
4
C. transaction occurs, transaction analyzed,
journalizing, and posting.
D. transaction occurs, posting, analyzing, journalizing
The double – entry system means each transaction must be *Explain:
recorded twice. - A transaction is not recorded twice; it is recorded once, with a dual effect.
5
A. True *Notes:
B. False - Affect at least 2 accounts (2 or more)
*Review:
In which order does the Journal list transactions? The advantages of using a journal (book of original entry):
A. Chronological
• Discloses in one place the complete effects of a transaction.
6 B. Decreasing
• Provides a chronological record of transactions.
C. Increasing
• Prevents or locates errors because the debit and credit amounts can
D. Alphabetical
be easily compared.
Which of the following items would NOT be included in the
journal entry for a transaction?
A. the names of the employees involved in recording
7 the transaction.
B. the date the transaction occurred.
C. the titles of the accounts debited.
D. the dollar amount of the transaction
 Which of the following is incorrect regarding a trial
balance?
A. It proves that the debits equal the credits after
posting. *Review:
B. A trial balance uncovers errors in journalizing and - Prepare a trial balance
8
posting. • It is a list of accounts and their balances at a given time.
C. A trial balance is useful in the preparation of • Its primary purpose is to prove the equality of debits and credits
financial statements. after posting.
D. It proves that the company has recorded all • It uncovers errors in journalizing and posting and is useful in
transactions preparing financial statements.
A trial balance is the list of only a company's asset and - Indicate limitations of trial balance
liability accounts, along with their account numbers, at a • Incorrect accounts are used in journalizing and posting.
9 point in time. • Offsetting errors are made in recording the amount of a transaction.
A. True → Does not prove that the company has recorded all transactions, or
B. False the ledger is correct
A trial balance is a required financial statement.
10 A. True
B. False
The Accounts Payable account of Waterford company has
the following postings:

*Explain:
11 - Accounts payable: credit balance
- $27,000 + $11,000 - $16,000 - $7,000 = $15,000
Calculate the ending balance of the account.
A. $11,000 credit
B. $15,000 debit
C. $15,000 credit
D. $7,000 debit
Cash $4,000; Prepaid insurance $10,000; Accounts
receivable $8,000; Accounts payable $4,000; Notes payable
$7,000; Owner’s capital $3,000; Owner’s drawings $2,000;
Revenues $32,000; Expenses $25,000. Calculate total
*Explain:
12 credits on trial balance?
$4,000 + $7,000 + $3,000 + $32,000 = $46,000
A. $48,000
B. $44,000
C. $14,000
D. $46,000
 CHAPTER 3
All fiscal year are calendar year.
*Explain:
1 A. True
- All calendar years are fiscal years, but not all fiscal years are calendar
B. False
years
Monthly and quarterly time periods are commonly referred
*Review:
to as fiscal periods.
2 - Time period assumption
A. True
- Artificial time period: fiscal year, calendar year, interim period
B. False
The revenue recognition principle dictates that revenue
should be recognized in the
accounting records
3 A. when the performance obligation is satisfied.
B. when cash is received.
C. at the end of the month.
D. in the period that income taxes are paid *Review:
Adjusting entries are required by the historical cost principle of - The revenue recognition principle
accounting. - The matching principle
4
A. True
B. False
The expense recognition principle recognizes expenses in
the period they are paid.
5
A. True
B. False
Under accrual basis accounting, revenue is recorded only
when cash is received.
6
A. True
B. False
The key differences between the cash basis and accrual
basis of accounting are the timing and recognition of assets
7 and liabilities. *Review:
A. True - Accrual basis accounting
B. False - Cash basis accounting
ABC Company had the following transactions during the
month. What would be the total amount of expenses for the
month if ABC Company uses the cash basis method?
8
a) Paid $2,400 for insurance for the next 12 months.
b) Received $7,200 for services to be performed equally
over the next 12 months.
 c) Paid $1,400 for the current month's rent.
d) Paid $250 cash for office supplies.
e) Paid $700 in Salaries Expense.
f) Received $1,100 in cash for service revenue earned this
month.
A. $2,900
B. $4,500
C. $2,550
D. $4,750
Laramie Company signed a contract with a service provider
for security services at a rate of $260 per month for the
period of January through June. Laramie Company will pay
the service provider the entire amount at the end of June.
9 Laramie Company makes adjusting entries each month.
During the month of June, it should record total security
expense of $520.
A. True
B. False
Improvements, a home improvement magazine, collected
$960,000 in subscription revenue on June 30. Each
subscriber will receive an issue of the magazine in each of
the next 12 months, beginning with the July issue. The
*Review:
company uses the accrual method of accounting. What is
- 2 categories of adjusting entries: deferrals and accruals
10 the amount of Subscription Revenue that has been earned
- Deferrals: prepaid expense, unearned revenue
by the end of December?
- Accruals: accrued expense, accrued revenue
A. $400,000
B. $560,000
C. $960,000
D. $480,000
A&D Window Cleaning performed $450 of services but has
not yet billed customers for the month. If A&D fails to
record the adjusting entry, what is the impact on the
balance sheet?
11
A. Assets understated.
B. Assets overstated.
C. Revenue understated.
D. Revenue overstated.
A company started the year with $300 of supplies. During
12 the year, the company purchased an additional $1,300 of
supplies. There were $900 of supplies on hand at the end of
 the year. An adjusting entry prepared at the end of the
accounting period includes:
A. debit to Supplies for $1,000.
B. debit to Supplies for $900.
C. debit to Supplies Expense for $700.
D. debit to Supplies Expense for $600.
On February 1, Clovis Wilson Law Firm contracted to
provide $3000 of legal services for the next three month
and received $3000 cash from the client. Assuming Wilson
records deferred revenue using the alternative treatment,
what would be the adjusting entry recorded on February
28?
13 A. Accounts Receivable 2000 Debit; Service Revenue
2000 Credit
B. Unearned Revenue 2000 Debit; Service Revenue
2000 Credit
C. Cash 2000 Debit; Service Revenue 2000 Credit
D. Service Revenue 2000 Debit; Unearned Revenue
2000 Credit
Global Enterprises Company signed a one-year $42,000
note payable at 8% interest on April 1, 2025. If Global only
adjusts its accounts once a year at year-end, how much *Explain:
interest expense was accrued on December 31, 2025? Interest expense for 1-year: $42,000 × 0.08 = $3,360
14
A. $840 Interest expense for 1-month: $3,360 ÷ 12 = $280
B. $3360 Interest expense from Apr 1 to Dec 31: $280 × 9 = $2,520
C. $2520
D. $2800
Depreciation is a valuation process that results in the
reporting of the fair value of the asset.
15 *Explain:
A. True
- The process of allocating cost
B. False
- Depreciation results in the presentation of the book value of the asset, not
Jones Company purchased a piece of equipment for
its market value.
$12,000. It has accumulated depreciation at the end of
- $12,000 - $4,000 = $8,000
three years of $4,000. What is the book value of the
- $98,000 ÷ 7 × 3 = $42,000
equipment at the end of year 3?
16 *Review:
A. $12,000
- Depreciation, accumulated depreciation
B. $4,000
- Book value = Cost – accumulated depreciation
C. $8,000
D. $6,000
 Doorglam paid $98,000 for office furniture. The furniture is
depreciated using the straight-line method and has an
estimated service life of 7 years and no residual value. After
three years of use, the accumulated depreciation of the
17 furniture will be:
A. $42,000.
B. $56,000.
C. $84,000.
D. $98,000

CHAPTER 4
The income statement and balance sheet columns of Beer
and Nuts Company's worksheet reflect the following totals

*Review:
1 - Worksheet
The net income (or loss) for the period is
- Compute net income/net loss
A. $51,000 income
*Notes:
B. not determinable
- The use of a worksheet is an optional step in the accounting cycle.
C. $24,000 income
- The complete worksheet is not a substitute for formal financial
D. $24,000 loss
statements
A worksheet can be used to help prepare adjusting entries
and the financial statements.
2
A. True
B. False
All the closing entries for a net loss are the same as the
closing entries for a net income.
3
A. True
*Review:
B. False
- Closing the book: close only temporary accounts and provide zero
The closing process helps in measuring each period's net balance.
income separately from all other periods. - Closing entries:
4
A. True
• Dr. Revenue, Cr. Income Summary.
B. False
• Dr. Income Summary, Cr. Expense.
After closing entries have been posted ________.
• Dr. Income Summary, Cr. Owner’s Capital (for net income).
A. All temporary accounts will have a zero balance.
• Dr. Owner’s Capital, Cr. Owner’s Drawings
5 B. Only temporary accounts carry balances.
C. All permanent accounts will have a zero balance.
D. None of the statements are correct
 Which of the following entries is necessary to close the
appropriate depreciation account at the end of the year?
A. debit Accumulated Depreciation and credit Income
Summary
B. debit Depreciation Expense and credit Income
6
Summary
C. debit Income Summary and credit Accumulated
Depreciation
D. debit Income Summary and credit Depreciation
Expense
Woods Company earned revenues of $11,000 and incurred
expenses of $5,000. The company's owner withdrew
$2,000. What is the balance in the Income Summary
account after closing net income or loss to the Owner’s
7 Capital account?
A. debit balance of $11,000
B. credit balance of $5,000
C. credit balance of $6,000
D. balance of $0
Which financial statement is always prepared first?
A. Balance Sheet
8 B. Statement of Owner's Equity
C. Income Statement
D. There is no specific order
The beginning balance of Jones’s Capital account was
$10,000. The revenues and expenses were $240,000 and
$100,000, respectively. During the year, Mr. Jones withdrew
*Explain:
$5,000. The ending balance for Jones’s Capital account is:
9 Net income = $240,000 - $100,000 = $140,000
A. $135,000
After closing: $10,000 + $140,000 - $5,000 = $145,000
B. $140,000
C. $115,000
D. $145,000
Which of the following steps must be completed before
preparing the adjusted trial balance?
A. journalize and post the closing entries. *Review:
10
B. prepare the post-closing trial balance. - The required steps in the accounting cycle
C. prepare the financial statements.
D. post journal entries to the accounts.
Olsten Company earned revenues of $61,000 and incurred
11
expenses of $71,000. No withdrawals were taken. The
 owner did not make any new capital contributions during
the year. The company is a sole proprietorship. Which of
the following statements is correct? *Explain
A. Olsten’s Capital will be debited $10,000 and Income - Revenue < Expense → Net loss
Summary will be credited for $10,000. - Net loss = $71,000 - $61,000 = $10,000
B. The entries to close revenues and expenses will
differ if there is a net loss.
C. The entry to close Income Summary is the same
regardless of a net income or a net loss.
D. The entry to close Income Summary requires a debit
to the Income Summary account
On May 25, Mt. Hood Company received a $370 check from
Douglas Fir for services to be performed in the future. The
bookkeeper for Mt. Wood Company incorrectly debited
Cash for $370 and credited Accounts Receivable for $370.
The amounts have been posted to the ledger. To correct this
entry, the bookkeeper should
a. debit Accounts Receivable $370 and credit
12
Unearned Service Revenue $370
*Review:
b. debit Cash $370 and credit Unearned Service
- Correcting entries:
Revenue $370.
• Only if records have errors.
c. debit Accounts Receivable $370 and credit Service
• Whenever discovering an error.
Revenue $370.
A. debit Accounts Receivable $370 and credit Cash • Involve any combination of accounts in need of correction.
$370 → Correcting entries must be posted before closing entries.
On May 10, Mercato Co. journalized and posted a $50 cash
collection on account from a customer as a debit to Cash
$50 and a credit to Service Revenue $50. The correcting
entries are:
13
A. Dr. Cash, Cr. Accounts Receivable
B. Dr. Accounts Receivable, Cr. Cash
C. Dr. Revenue, Cr. Accounts Receivable
D. Dr. Cash, Cr. Revenue
In a balance sheet, assets are classified as either current or
*Review:
long term, depending on
- The sections of a classified balance sheet .
A. Liquidity
14 - Current assets are listed in the order in which they expect to convert them
B. Return on assets ratio.
into cash (liquidity).
C. Debt ratio
• Cash
D. Useful life
 Land and building, machinery, furniture, investments all • Investments
15
come under Fixed assets. • Receivables
A. True • Inventories
B. False • Prepaid expenses
Equipment would appear on the: - Long-term investments versus PPE
A. balance sheet with long-term assets. • Long-term investment: stock and bonds, long-term assets (land,
16 B. income statement with revenues. building), long-term notes receivable → not currently use.
C. income statement with operating expenses. • PPE: currently use
D. balance sheet with current assets.

Total: 20 True/False, 40 MCQs