FINAL TEST

MCQ - NLKT

TABLE OF CONTENTS
CHAPTER 1 Accounting in Action
CHAPTER 2 The Recording Process
CHAPTER 3 Adjusting the Accounts
CHAPTER 4 Completing the Accounting Cycle
CHAPTER 5 Accounting for Merchandise Operations
CHAPTER 6 Inventories
CHAPTER 7 Fraud, Internal Control, and Cash
CHAPTER 9 Plant Assets, Natural Resources, and Intangible Assets
 CHAPTER 1
Accounting in Action

[1] Practice Multiple-Choice Questions

1. (LO 1) Which of the following is not a step in the accounting process?
a. Identification. c. Recording.
b. Economic entity. d. Communication.
2. (LO 1) Which of the following statements about users of accounting information is
incorrect?
a. Management is an internal user.
b. Taxing authorities are external users.
c. Present creditors are external users.
d. Regulatory authorities are internal users.
3. (LO 2) The historical cost principle states that:
a. assets should be initially recorded at cost and adjusted when the fair value changes.
b. activities of an entity are to be kept separate and distinct from its owner.
c. assets should be recorded at their cost.
d. only transaction data capable of being expressed in terms of money be included in the
accounting records.
4. (LO 2) 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. (LO 2) 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.
6. (LO 3) Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
7. (LO 3) As of December 31, 2020, Stoneland AG has assets of €3,500 and equity of
€2,000. What are the liabilities for Stoneland AG as of December 31, 2020?
a. €1,500. b. €1,000. c. €2,500. d. €2,000.
8. (LO 4) Performing services on account will have the following effects on the components
of the basic accounting equation:
a. increase assets and decrease equity.
b. increase assets and increase equity.
c. increase assets and increase liabilities.

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d. increase liabilities and increase equity.
9. (LO 4) Which of the following events is not recorded in the accounting records?
a. Equipment is purchased on account.
b. An employee is terminated.
c. A cash investment is made into the business.
d. The company pays a cash dividend.
10. (LO 4) During 2020, Xia Lin Company’s assets decreased ¥500,000 and its liabilities
decreased ¥900,000. Its equity therefore:
a. increased ¥400,000. c. decreased ¥400,000.
b. decreased ¥1,400,000. d. increased ¥1,400,000.
11. (LO 4) Payment of an account payable affects the components of the accounting equation
in the following way.
a. decreases equity and decreases liabilities.
b. increases assets and decreases liabilities.
c. decreases assets and increases equity.
d. decreases assets and decreases liabilities.
12. (LO 5) 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 statement of financial position reports the assets, liabilities, and equity at a specific date.
c. An income statement presents the revenues, expenses, assets,and liabilities for a specific
period of time.
d. A retained earnings statement summarizes the changes in retained earnings for a specific
period of time.
13. (LO 5) On the last day of the period, Jim Otto Company buys a $900 machine on credit.
This transaction will affect the:
a. income statement only.
b. statement of financial position only.
c. income statement and retained earnings statement only.
d. income statement, retained earnings statement, and statement of financial position.
14. (LO 5) The financial statement that reports assets, liabilities, and equity is the:
a. income statement.
b. retained earnings statement.
c. statement of financial position.
d. statement of cash flows.
*15. (LO 6) Services performed by a public accountant include:
a. auditing, taxation, and management consulting.
b. auditing, budgeting, and management consulting.
c. auditing, budgeting, and cost accounting.
d. internal auditing, budgeting, and management consulting.

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 Practice Brief Exercises
1. (LO 3) At the beginning of the year, Ortiz Eyewear had total assets of £900,000 and total
liabilities of £440,000. Answer the following questions.
a. If total assets decreased £100,000 during the year and total liabilities increased £80,000
during the year, what is the amount of equity at the end of the year?
b. During the year, total liabilities decreased £100,000 and equity increased £200,000. What
is the amount of total assets at the end of the year?
c. If total assets increased £50,000 during the year and equity increased £60,000 during the
year, what is the amount of total liabilities at the end of the year?
Use basic accounting equation.
………………………………………………………………………………………………….
………………………………………………………………………………………………….
………………………………………………………………………………………………….
………………………………………………………………………………………………….
…………………………………………………………………………………………………
………………………………………………………………………………………………….
2. (LO 4) Presented below are three business transactions. List the letters (a), (b), and (c)
with columns for assets, liabilities and equity. For each column, indicate whether the
transactions increased (+), decreased (−), or had no effect (NE) on assets, liabilities, and
equity.
a. Purchased equipment on account.
b. Declared and paid cash dividends.
c. Paid expenses in cash.
3. (LO 4) Follow the same format as in Practice Brief Exercise 2. Determine the effect on
assets, liabilities, and equity of the following three transactions.
a. Performed accounting services for clients for cash.
b. Borrowed cash from a bank on a note payable.
c. Paid cash for rent for the month
4. (LO 5) Indicate whether the following items would appear on the income statement (IS),
statement of financial position (SFP), or retained earnings statement (RES).
a. Dividends.
b. Cash.
c. Salaries and wages expense.
d. Service revenue.
e. Accounts payable.
5. (LO 5) Presented below in alphabetical order are statement of financial position items for
Feagler Gardening at December 31, 2020. Prepare a statement of financial position following
the format of Illustration 1.10.
Accounts receivable €12,500
Cash 38,000
Notes payable 40,000
Share capital—ordinary 10,500

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………………………………………………………………………………………………….
………………………………………………………………………………………………….
………………………………………………………………………………………………….
………………………………………………………………………………………………….
…………………………………………………………………………………………………
………………………………………………………………………………………………….
………………………………………………………………………………………………….

Practice Exercises
1. (LO 3, 4) Selected transactions for Fabulous Flora are listed below.
1. Issued ordinary shares for cash to start business.
2. Purchased equipment on account.
3. Paid salaries.
4. Billed customers for services performed.
5. Received cash from customers billed in (4).
6. Paid dividends.
7. Incurred advertising expense on account.
8. Purchased additional equipment for cash.
9. Received cash from customers when service was performed.
Instructions
List the numbers of the above transactions and describe the effect of each transaction on
assets, liabilities, and equity.
For example, the first answer is: (1) Increase in assets and increase in equity.
2. (LO 3, 4) Alma’s Payroll Services entered into the following transactions during May
2020.
1. Purchased computers for $15,000 from Bytes of Data on account.
2. Paid $3,000 cash for May rent on storage space.
3. Received $12,000 cash from customers for contracts billed in April.
4. Performed payroll services for Magic Construction Company for $2,500 cash.
5. Paid Northern Ohio Power Co. $7,000 cash for energy usage in May.
6. Shareholders invested an additional $25,000 in the business.
7. Paid Bytes of Data for the computers purchased in (1) above.
8. Incurred advertising expense for May of $900 on account.
Instructions
Indicate with the appropriate letter whether each of the transactions above results in:
a. an increase in assets and a decrease in assets.
b. an increase in assets and an increase in equity.
c. an increase in assets and an increase in liabilities.
d. a decrease in assets and a decrease in equity.

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 e. a decrease in assets and a decrease in liabilities.
f. an increase in liabilities and a decrease in equity.
g. an increase in equity and a decrease in liabilities.

DO IT! Exercises
TRUE-FALSE
DO IT! 1.1 (LO 1) Indicate whether each of the fi ve statements presented below is true or
false. If false, indicate how to correct the statement.
1. The three steps in the accounting process are identifi cation, recording, and examination.
2. The accounting process includes the bookkeeping function.
3. Managerial accounting provides reports to help investors and creditors evaluate a company.
4. The two most common types of external users are investors and creditors.
5. Internal users include human resources managers.
DO IT! 1.2 (LO 2) Indicate whether each of the fi ve statements presented below is true or
false. If false, indicate how to correct the statement.
1. IFRS are issued by the FASB.
2. The standards of conduct by which actions are judged as loyal or disloyal are ethics.
3. The primary accounting standard-setting body in the United States is the Securities and
Exchange Commission (SEC).
4. The historical cost principle dictates that companies record assets at their cost and continue
to report them at their cost over the time the assets are held.
5. The monetary unit assumption requires that companies record only transactions that can be
measured in money.
E1.4 (LO 2) The following situations involve accounting principles and assumptions.
1. Julia A/S owns buildings that are worth substantially more than they originally cost. In an
effort to provide more relevant information, Julia reports the buildings at fair value in its
accounting reports.
2. Dekalb Creations includes in its accounting records only transaction data that can be
expressed in terms of money.
3. Omar Shariff, owner of Omar’s Oasis, records his personal living costs as expenses of the
business.
Instructions
For each of the three situations, determine if the accounting method used is correct or
incorrect. If correct, identify which principle or assumption supports the method used. If
incorrect, identify which principle or assumption has been violated.

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 CHAPTER 2
The Recording Process

Practice Multiple-Choice Questions

1. (LO 1) Which of the following statements about an account is true?
a. The right side of an account is the debit, or increase, side.
b. An account is an individual accounting record of increases and decreases in specific asset,
liability, and equity items.
c. There are separate accounts for specific assets and liabilities but only one account for
equity items.
d. The left side of an account is the credit, or decrease, side.
2. (LO 1) 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.
3. (LO 1) 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.
4. (LO 1) Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and share capital—ordinary.
c. assets, liabilities, and dividends.
d. assets, dividends, and expenses.
5. (LO 1) The expanded accounting equation is:
a. Assets + Liabilities = Share Capital + Retained Earnings + Dividends + Revenues +
Expenses.
b. Assets = Liabilities + Share Capital + Retained Earnings + Dividends + Revenues –
Expenses.
c. Assets = Liabilities – Share Capital – Retained Earnings – Dividends – Revenues –
Expenses.
d. Assets = Liabilities + Share Capital + Retained Earnings + Revenues – Expenses –
Dividends.
6. (LO 2) Which of the following is not part of the recording process?
a. Analyzing transactions.
b. Preparing an income statement.
c. Entering transactions in a journal.
d. Posting journal entries.
7. (LO 2) 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.

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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.
8. (LO 2) The purchase of supplies on account should result in:
a. a debit to Supplies Expense and a credit to Cash.
b. a debit to Supplies Expense and a credit to Accounts Payable.
c. a debit to Supplies and a credit to Accounts Payable.
d. a debit to Supplies and a credit to Accounts Receivable.
9. (LO 3) The order of the accounts in the ledger is:
a. assets, revenues, expenses, liabilities, share capital—ordinary, dividends.
b. assets, liabilities, share capital—ordinary, dividends, revenues, expenses.
c. share capital—ordinary, assets, revenues, expenses, liabilities, dividends.
d. revenues, assets, expenses, liabilities, share capital—ordinary, dividends.
10. (LO 3) 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.
11. (LO 3) 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.
12. (LO 3) Before posting a payment of €5,000, the Accounts Payable of Green Grocers had
a normal balance of €16,000. The balance after posting this transaction was:
a. €21,000. c. €11,000.
b. €5,000. d. cannot be determined.
13. (LO 4) A trial balance:
a. is a list of accounts with their balances at a given time.
b. proves the journalized transactions are correct.
c. will not balance if a correct journal entry is posted twice.
d. proves that all transactions have been recorded.
14. (LO 4) 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 dividend 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.
15. (LO 4) The trial balance of Jeong Company had accounts with the following normal
balances: Cash $5,000, Service Revenue $85,000, Salaries and Wages Payable $4,000,
Salaries and Wages Expense $40,000, Rent Expense $10,000, Share Capital—Ordinary
$42,000, Dividends $15,000, and Equipment $61,000. In preparing a trial balance, the total in
the debit column is:
a. $131,000. c. $91,000.

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b. $216,000. d. $116,000.

Exercises
E2.1 (LO 1) Kim Yi has prepared the following list of statements about accounts.
1. An account is an accounting record of either a specifi c asset or a specifi c liability.
2. An account shows only increases, not decreases, in the item it relates to.
3. Some items, such as Cash and Accounts Receivable, are combined into one account.
4. An account has a left, or credit side, and a right, or debit side.
5. A simple form of an account consisting of just the account title, the left side, and the right
side, is called a T-account.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.

E2.10 (LO 3) Alma Ortiz has prepared the following list of statements about the general
ledger.
1. The general ledger contains all the asset and liability accounts but no equity accounts.
2. The general ledger is sometimes referred to as simply the ledger.
3. The accounts in the general ledger are arranged in alphabetical order.
4. Each account in the general ledger is numbered for easier identifi cation.
5. The general ledger is a book of original entry.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.

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 CHAPTER 3
Adjusting the Accounts

Practice Multiple-Choice Questions

1. (LO 1) The revenue recognition principle states that:
a. revenue should be recognized in the accounting period in which a performance obligation
is satisfied.
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.
2. (LO 1) 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.

3. (LO 1) Which of the following statements about the accrual basis of accounting is false?
a. Events that change a company’s fi nancial statements are recorded in the periods in which
the events occur.
b. Revenue is recognized in the period in which services are performed.
c. This basis is in accordance with International Financial Reporting Standards.
d. Revenue is recorded only when cash is received, and expense is recorded only when cash
is paid.

4. (LO 1) The principle or assumption dictating that efforts (expenses) should be recognized
in the period in which a company consumes assets or incurs liabilities to generate revenue is
the:
a. expense recognition principle.
b. cost assumption.
c. time period assumption.
d. revenue recognition principle.

5. (LO 1) 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 services are performed.
c. statement of financial position and income statement accounts have correct balances at the
end of an accounting period.
d. All the responses above are correct.

6. (LO 1) Each of the following is a major type (or category) of adjusting entries except:
a. prepaid expenses. c. accrued expenses.
b. accrued revenues. d. recognized revenues.

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7. (LO 2) 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

8. (LO 2) 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.

9. (LO 2) Accumulated Depreciation is:

a. a contra asset account. c. an equity account.
b. an expense account. d. a liability account.

10. (LO 2) Rivera Shipping computes depreciation on delivery equipment at ¥1,000 (amounts
in thousands) for the month of June. The adjusting entry to record this depreciation is as
follows.
a. Depreciation Expense 1,000
Accumulated Depreciation—Rivera Shipping 1,000
b. Depreciation Expense 1,000
Equipment 1,000
c. Depreciation Expense 1,000
Accumulated Depreciation—Equipment 1,000
d. Equipment Expense 1,000
Accumulated Depreciation—Equipment 1,000

11. (LO 2) 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.

12. (LO 3) 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.

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13. (LO 3) Anika Winter earned a salary of €400 for the last week of September. She will be
paid on October 1. The adjusting entry for Anika’s employer at September 30 is:
a. No entry is required.
b. Salaries and Wages Expense 400
Salaries and Wages Payable 400
c. Salaries and Wages Expense 400
Cash 400
d. Salaries and Wages Payable 400
Cash 400

14. (LO 4) 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.

15. * (LO 5) The trial balance shows Supplies NT$0 and Supplies Expense NT$1,500. If
NT$800 of supplies are on hand at the end of the period, the adjusting entry is:
a. debit Supplies NT$800 and credit Supplies Expense NT$800.
b. debit Supplies Expense NT$800 and credit Supplies NT$800.
c. debit Supplies NT$700 and credit Supplies Expense NT$700.
d. debit Supplies Expense NT$700 and credit Supplies NT$700.

16. * (LO 6) Neutrality is an ingredient of:

Faithful Representation Relevance
a. Yes Yes
b. No No
c. Yes No
d. No Yes

17. * (LO 6) Which item is a constraint in fi nancial accounting?

a. Comparability. c. Cost.
b. Materiality. d. Consistency.

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 Exercises
E3.1 (LO 1) Chloe Davis has prepared the following list of statements about the time period
assumption.
1. Adjusting entries would not be necessary if a company’s life were not divided into artificial
time periods.
2. Taxing authorities require companies to fi le annual tax returns.
3. Accountants divide the economic life of a business into artificial time periods, but each
transaction affects only one of these periods.
4. Accounting time periods are generally a month, a quarter, or a year.
5. A time period lasting one year is called an interim period.
6. All fi scal years are calendar years, but not all calendar years are fi scal years.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.

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 CHAPTER 4
Completing the Accounting Cycle

Practice Multiple-Choice Questions

1. (LO 1) Which of the following statements is incorrect concerning the worksheet?
a. The worksheet is essentially a working tool of the accountant.
b. The worksheet is distributed to management and other interested parties.
c. The worksheet cannot be used as a basis for posting to ledger accounts.
d. Financial statements can be prepared directly from the worksheet before journalizing and
posting the adjusting entries.

2. (LO 1) In a worksheet, net income is entered in the following columns:

a. income statement (Dr) and statement of financial position (Dr).
b. income statement (Cr) and statement of financial position (Dr).
c. income statement (Dr) and statement of financial position (Cr).
d. income statement (Cr) and statement of financial position (Cr).

3. (LO 1) In the unadjusted trial balance of its worksheet for the year ended December 31,
2020, Kim Company reported Equipment of NT$120,000. The year-end adjusting entries
require an adjustment of NT$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 NT$105,000 for Equipment in the statement of financial position column.
b. A credit of NT$15,000 for Depreciation Expense in the income statement column.
c. A debit of NT$120,000 for Equipment in the statement of financial position column.
d. A debit of NT$15,000 for Accumulated Depreciation—Equipment in the statement of
financial position column.

4. (LO 2) An account that will have a zero balance after closing entries have been journalized
and posted is:
a. Service Revenue.
b. Supplies.
c. Prepaid Insurance.
d. Accumulated Depreciation—Equipment.

5. (LO 2) When a net loss has occurred, Income Summary is:

a. debited and Retained Earnings is credited.
b. credited and Retained Earnings is debited.
c. debited and Dividends is credited.
d. credited and Dividends is debited.

6. (LO 2) The closing process involves separate entries to close (1) expenses, (2) dividends,
(3) revenues, and (4) income summary. The correct sequencing of the entries is:

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a. (4), (3), (2), (1).
b. (1), (2), (3), (4).
c. (3), (1), (4), (2).
d. (3), (2), (1), (4).

7. (LO 2) Which types of accounts will appear in the post-closing trial balance?
a. Permanent (real) accounts.
b. Temporary (nominal) accounts.
c. Accounts shown in the income statement columns of a worksheet.
d. None of these answer choices is correct.

8. (LO 3) All of the following are required steps in the accounting cycle except:
a. journalizing and posting closing entries.
b. preparing financial statements.
c. journalizing the transactions.
d. preparing a worksheet.

9. (LO 3) The proper order of the following steps in the accounting cycle is:
a. prepare unadjusted trial balance, journalize transactions, post to ledger accounts, journalize
and post adjusting entries.
b. journalize transactions, prepare unadjusted trial balance, post to ledger accounts, journalize
and post adjusting entries.
c. journalize transactions, post to ledger accounts, prepare unadjusted trial balance, journalize
and post adjusting entries.
d. prepare unadjusted trial balance, journalize and post adjusting entries, journalize
transactions, post to ledger accounts.

10. (LO 3) When Lopez Company purchased supplies worth $600, it incorrectly recorded a
credit to Supplies for $6,000 and a debit to Cash for $6,000. Before correcting this error:
a. Cash is overstated and Supplies is overstated.
b. Cash is understated and Supplies is understated.
c. Cash is understated and Supplies is overstated.
d. Cash is overstated and Supplies is understated.

11. (LO 3) Cash of €100 received at the time the service was performed 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 Accounts Receivable €100 and credit Service Revenue €100.
c. debit Cash €100 and credit Service Revenue €100.
d. debit Accounts Receivable €100 and credit Cash €100.

12. (LO 4) The correct order of presentation in a classified statement of financial position for
the following current assets is:

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a. accounts receivable, cash, prepaid insurance, inventory.
b. prepaid insurance, inventory, accounts receivable, cash.
c. cash, accounts receivable, inventory, prepaid insurance.
d. inventory, cash, accounts receivable, prepaid insurance.

13. (LO 4) 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.

14. (LO 4) In a classifi ed statement of fi nancial position, assets and liabilities are usually
shown in the following order:
a. current assets, current liabilities, non-current liabilities, and non-current assets.
b. non-current liabilities, current liabilities, current assets, and non-current assets.
c. non-current liabilities, non-current assets, current liabilities, and non-current assets.
d. non-current assets, current assets, non-current liabilities, and current liabilities.

15. (LO 4) Current assets are listed:

a. in the reverse order of expected conversion to cash.
b. by importance.
c. by longevity.
d. by size.

16. * (LO 5) On December 31, Kohl Company correctly made an adjusting entry to recognize
$2,000 of accrued salaries payable. On January 8 of the next year, total salaries of $3,800
were paid. Assuming the correct reversing entry was made on January 1, the entry on January
8 will result in a credit to Cash $3,800 and the following debit(s):
a. Salaries and Wages Payable $1,800 and Salaries and Wages Expense $2,000.
b. Salaries and Wages Payable $2,000 and Salaries and Wages Expense $1,800.
c. Salaries and Wages Expense $3,800.
d. Salaries and Wages Payable $3,800.

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 CHAPTER 5
Accounting for Merchandise Operations

1. (LO 1) Gross profi t will result if:

a. operating expenses are less than net income.
b. net sales are greater than operating expenses.
c. net sales are greater than cost of goods sold.
d. operating expenses are greater than cost of goods sold.

2. (LO 2) Under a perpetual inventory system, when goods are purchased for resale by a
company:
a. purchases on account are debited to 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.

3. (LO 3) The sales accounts that normally have a debit balance are:
a. Sales Discounts.
b. Sales Returns and Allowances.
c. Both (a) and (b).
d. Neither (a) nor (b).

4. (LO 3) A credit sale of NT$7,500 is made on June 13, terms 2/10, net/30. A return of
NT$500 is granted on June 16. The amount received as payment in full on June 23 is:
a. NT$7,000. c. NT$6,850.
b. NT$6,860. d. NT$6,500.

5. (LO 2) Which of the following accounts will normally appear in the ledger of a
merchandising company that uses a perpetual inventory system?
a. Purchases. c. Cost of Goods Sold.
b. Freight-In. d. Purchase Discounts.

6. (LO 3) 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.

7. (LO 4) The steps in the accounting cycle for a merchandising company are the same as
those in a service company except:

17
a. an additional adjusting journal entry for inventory may be needed in a merchandising
company.
b. closing journal entries are not required for a merchandising company.
c. a post-closing trial balance is not required for a merchandising company.
d. an income statement is required for a merchandising company.

8. (LO 5) The 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. investing activities section.

9. (LO 5) If net sales are €400,000, cost of goods sold is €310,000, and operating expenses
are €60,000, the gross profi t is:
a. €30,000.
b. €90,000.
c. €340,000.
d. €400,000.

10. (LO 6) In a worksheet using a perpetual inventory system, Inventory is shown in the
following columns:
a. adjusted trial balance debit and statement of fi nancial position debit.
b. income statement debit and statement of fi nancial position debit.
c income statement credit and statement of financial position debit.
d. income statement credit and adjusted trial balance debit.

11. (LO 7) In determining cost of goods sold in a periodic system:

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.

12. (LO 7) If beginning inventory is HK$600,000, cost of goods purchased is HK$3,800,000,

and ending inventory is HK$500,000, cost of goods sold is:
a. HK$3,900,000. c. HK$3,300,000.
b. HK$3,700,000. d. HK$4,200,000.

13. (LO 7) When goods are purchased for resale by a company using a periodic inventory
system:
a. purchases on account are debited to 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.

18
 Practice Brief Exercises

1. (LO 1) Presented below are the components in determining cost of goods sold for (a)
Frazier Hardware, (b) Todd Supplies, and (c) Abreu Beverages. Determine the missing
amounts.

Brief Exercises
BE5.1 (LO 1) Presented below are the components in Clearwater Pools’ income statement.
Determine the missing amounts.

2. (LO 2) Prepare the journal entries to record the following transactions on Kowloon
Group’s books using a perpetual inventory system (amounts in thousands).
a. On March 2, Totoro Equipment sold W800,000 of merchandise to Kowloon, terms 2/10,
n/30.
b. On March 6, Kowloon returned W100,000 of the merchandise purchased on March 2.
c. On March 12, Kowloon paid the balance due to Totoro.
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………..
3. (LO 4) Cabrera Enterprise has the following account balances: Sales Revenue €300,000,
Sales Returns and Allowances €10,000, Cost of Goods Sold €174,000, and Inventory
€50,000. Prepare the entries to record the closing of these items to Income Summary.
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………

19
4. (LO 5) Assume Yoan Company has the following reported amounts: Sales revenue
$400,000, Sales discounts $10,000, Cost of goods sold $234,000, and Operating expenses
$60,000. Compute the following: (a) net sales, (b) gross profit, (c) income from operations,
and (d) gross profit rate. (Round to one decimal place.)
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
BE5.9 (LO 5) Assume Jose Foods has the following reported amounts: Sales revenue
€506,000, Sales returns and allowances €13,000, Cost of goods sold €342,000, Operating
expenses €110,000. Compute the following: (a) net sales, (b) gross profit, (c) income from
operations, and (d) gross profit rate. (Round to one decimal place.)
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………

DO IT! Exercises
DO IT! 5.1 (LO 1) Indicate whether the following statements are true or false. If false,
indicate how to correct the statement.
1. A merchandising company reports gross profi t but a service company does not.
2. Under a periodic inventory system, a company determines the cost of goods sold each time
a sale occurs.
3. A service company is likely to use accounts receivable but a merchandising company is not
likely to do so.
4. Under a periodic inventory system, the cost of goods on hand at the beginning of the
accounting period plus the cost of goods purchased less the cost of goods on hand at the end
of the accounting period equals cost of goods sold.

Exercises
E5.1 (LO 1) Mr. Soukup has prepared the following list of statements about service
companies and merchandisers.
1. Measuring net income for a merchandiser is conceptually the same as for a service
company.
2. For a merchandiser, sales less operating expenses is called gross profi t.
3. For a merchandiser, the primary source of revenues is the sale of inventory.
4. Sales salaries and wages is an example of an operating expense.
5. The operating cycle of a merchandiser is the same as that of a service company.
6. In a perpetual inventory system, no detailed inventory records of goods on hand are
maintained.

20
7. In a periodic inventory system, the cost of goods sold is determined only at the end of the
accounting period.
8. A periodic inventory system provides better control over inventories than a perpetual
system.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.

21
 CHAPTER 6
INVENTORIES

1. (LO 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. All of the above should be included.

2. (LO 1) As a result of a thorough physical inventory, Railway Ltd. determined that it had
inventory worth €180,000 at December 31, 2020. This count did not take into consideration
the following facts. Rogers Consignment currently has goods that would cost €35,000
on its sales floor that belong to Railway but are being sold on consignment by Rogers. The
selling price of these goods is €50,000. Railway purchased €13,000 of goods that were
shipped on December 27, FOB destination, that will be received by Railway on January 3.
Determine the correct amount of inventory that Railway should report.
a. €230,000. c. €228,000.
b. €215,000. d. €193,000.

3. (LO 1) Cost of goods available for sale consists of two elements: beginning inventory and:
a. ending inventory.
b. cost of goods purchased.
c. cost of goods sold.
d. All of the answers are correct.
4. (LO 2) Tinker Bell Magic Shop has the following:
Units Unit Cost
Inventory, Jan. 1 8,000 £11
Purchase, June 19 13,000 12
Purchase, Nov. 8 5,000 13
If Tinker Bell has 9,000 units on hand at December 31, the cost of the ending inventory under
FIFO is:
a. £99,000. c. £113,000.
b. £108,000. d. £117,000.

5. (LO 2) Davidson Electronics has the following:

Units Unit Cost
Inventory, Jan. 1 5,000 £8
Purchase, April 2 15,000 £10
Purchase, Aug. 28 20,000 £12
If Davidson has 7,000 units on hand at December 31, the cost of ending inventory under the
average-cost method is:
a. £84,000. c. £56,000.

22
b. £70,000. d. £75,250.
6. (LO 2) In periods of rising prices, average-cost will produce:
a. higher net income than FIFO.
b. the same net income as FIFO.
c. lower net income than FIFO.
d. net income equal to the specifi c identifi cation method.

7. (LO 2) Factors that affect the selection of an inventory costing method do not include:
a. tax effects.
b. statement of fi nancial position effects.
c. income statement effects.
d. perpetual vs. periodic inventory system.

8. (LO 3) Atlantis Aquarium’s ending inventory is understated NT$122,000. 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.

9. (LO 3) Lee Athletics overstated its inventory by NT$500,000 at December 31, 2019. It did
not correct the error in 2019 or 2020. As a result, Lee’s equity was:
a. overstated at December 31, 2019, and understated at December 31, 2020.
b. overstated at December 31, 2019, and properly stated at December 31, 2020.
c. understated at December 31, 2019, and understated at December 31, 2020.
d. overstated at December 31, 2019, and overstated at December 31, 2020.

10. (LO 4) Rickety Company purchased 1,000 widgets and has 200 widgets in its ending
inventory at a cost of HK$91 each and a net realizable value of HK$80 each. The ending
inventory under LCNRV is:
a. HK$91,000. c. HK$18,200.
b. HK$80,000. d. HK$16,000.

11. (LO 4) 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

23
 CHAPTER 7
Fraud, Internal Control, and Cash

Practice Multiple-Choice Questions

1. (LO 1) Which of the following is not an element of the fraud triangle?
a. Rationalization.
b. Financial pressure.
c. Segregation of duties.
d. Opportunity.

2. (LO 1) An organization uses internal control to enhance the accuracy and reliability of
accounting records and to:
a. safeguard assets.
b. prevent fraud.
c. produce correct financial statements.
d. deter employee dishonesty.

3. (LO 1) The principles of internal control do not include:

a. establishment of responsibility.
b. documentation procedures.
c. management responsibility.
d. independent internal verifi cation.

4. (LO 1) Physical controls do not include:

a. safes and vaults to store cash.
b. independent bank reconciliations.
c. locked warehouses for inventories.
d. bank safety deposit boxes for important papers.

5. (LO 1) Which of the following control activities is not relevant when a company uses a
computerized (rather than manual) accounting system?
a. Establishment of responsibility.
b. Segregation of duties.
c. Independent internal verifi cation.
d. All of these control activities are relevant to a computerized system.

6. (LO 2) 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 internal verifi cation.
d. human resource controls.

24
7. (LO 2) 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 controls.
d. documentation procedures.

8. (LO 2) A company writes a check to replenish a €100 petty cash fund when the fund
contains receipts of €94 and €4 in cash. In recording the check, the company should:
a. debit Cash Over and Short for €2.
b. debit Petty Cash for €94.
c. credit Cash for €94.
d. credit Petty Cash for €2.
9. (LO 3) 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.

10. (LO 3) 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.

11. (LO 3) 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.

12. (LO 4) Which of the following items in a cash drawer at November 30 is not cash?
a. Money orders.
b. Coins and currency.
c. An NSF check.
d. A customer check dated November 28.

13. (LO 4) Which of the following statements correctly describes the reporting of cash?
a. Cash cannot be combined with cash equivalents.
b. Restricted cash funds may be combined with cash.
c. Cash is listed last in the current assets section.
d. Restricted cash funds cannot be reported as a current asset.

25
DO IT! 7.4 (LO 4) Indicate whether each of the following statements is true or false
(amounts in thousands).
1. A company has the following assets at the end of the year: cash on hand NT$40,000, cash
refund due from customer NT$30,000, and checking account balance NT$22,000. Cash and
cash equivalents is therefore NT$62,000.
2. A company that has received NSF checks should report these checks as a current liability
on the statement of fi nancial position.
3. Restricted cash that is a current asset is reported as part of cash and cash equivalents.
4. A company has cash in the bank of NT$50,000, petty cash of NT$400, and equity
investments of NT$100,000. Total cash and cash equivalents is therefore NT$50,400.

26
 CHAPTER 9
Plant Assets, Natural Resources, and Intangible Assets

Practice Multiple-Choice Questions

1. (LO 1) Erin Danielle Electronics purchased equipment and incurred the following costs.

What amount should be recorded as the cost of the equipment?

a. €24,000. c. €25,400.
b. €25,200. d. €25,800.

2. (LO 1) Additions to plant assets are:

a. revenue expenditures.
b. debited to the Maintenance and Repairs Expense account.
c. debited to the Purchases account.
d. capital expenditures.

3. (LO 2) Depreciation is a process of:

a. valuation. c. cash accumulation.
b. cost allocation. d. appraisal.

4. (LO 2) Micah Bartlett Ltd. purchased equipment on January 1, 2019, at a total invoice cost
of £400,000. The equipment has an estimated residual value of £10,000 and an estimated
useful life of 5 years. The amount of accumulated depreciation at December 31, 2020, if the
straight-line method of depreciation is used, is:
a. £80,000. c. £78,000.
b. £160,000. d. £156,000.

5. (LO 2) Ann Torbert purchased a truck for €11,000 on January 1, m2019. The truck will
have an estimated residual value of €1,000 at the end of 5 years. Using the units-of-activity
method, the balance in accumulated depreciation at December 31, 2020, can be computed by
the following formula:
a. (€11,000 ÷ Total estimated activity) × Units of activity for 2020.
b. (€10,000 ÷ Total estimated activity) × Units of activity for 2020.
c. (€11,000 ÷ Total estimated activity) × Units of activity for 2019 and 2020.
d. (€10,000 ÷ Total estimated activity) × Units of activity for 2019 and 2020.

27
6. (LO 2) Chang Industries purchased a piece of equipment on January 1, 2020. The
equipment cost HK$600,000 and has an estimated life of 8 years and a residual value of
HK$80,000. What was the depreciation expense for the asset for 2021 under the double
declining-balance method?
a. HK$65,000. c. HK$150,000.
b. HK$112,500. d. HK$65,620.

7. (LO 2) 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 ab

8. (LO 2) Able Towing purchased a tow truck for £60,000 on January 1, 2018. It was
originally depreciated on a straight-line basis over 10 years with an assumed residual value of
£12,000. On December 31, 2020, before adjusting entries had been made, the company
decided to change the remaining estimated life to 4 years (including 2020) and the residual
value to £2,000. What was the depreciation expense for 2020?
a. £6,000. c. £15,000.
b. £4,800. d. £12,100.

9. (LO 2) Wales Remodeling applies revaluation accounting to equipment that is recorded on

its books at €800,000, with €100,000 of accumulated depreciation after depreciation for the
year recorded. It has determined that the asset is now worth €775,000. The entry to record the
revaluation would include a:
a. credit to Equipment of €25,000.
b. debit to Equipment of €75,000.
c. credit to Accumulated Depreciation of €100,000.
d. debit to Revaluation Surplus of €75,000.

10. (LO 3) Bennie Razors has decided to sell one of its old manufacturing machines on June
30, 2020. The machine was purchased for €80,000 on January 1, 2016, and was depreciated
on a straight-line basis for 10 years assuming no residual value. If the machine was sold
for €26,000, what was the amount of the gain or loss recorded at the time of the sale?
a. €18,000. c. €22,000.
b. €54,000. d. €46,000.

11. (LO 4) Maggie Sharrer Energy expects to extract 20 million tons of coal from a mine that
cost NT$12 million. If no residual value is expected and 2 million tons are mined in the fi rst
year, the entry to record depletion will include a:
a. debit to Accumulated Depletion of NT$2,000,000.
b. credit to Depletion Expense of NT$1,200,000.
c. debit to Inventory of NT$1,200,000.
d. credit to Accumulated Depletion of NT$2,000,000.

28
12. (LO 4) Which of the following statements is false?
a. If an intangible asset has a fi nite life, it should be amortized.
b. The amortization period of an intangible asset can exceed
20 years.
c. Goodwill is recorded only when a business is purchased.
d. Development costs are always expensed when incurred.

13. (LO 5) 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 fi nancial statements.
b. Goodwill should be reported as a contra account in the equity section.
c. Totals of major classes of assets can be shown in the statement of fi nancial position, with
asset details disclosed in the notes to the fi nancial statements.
d. Intangible assets are typically combined with plant assets and extractable natural resources
and shown in the property, plant, and equipment section.

14. (LO 5) Tianzi Coffee reported net sales of HK$1,800,000, net income of HK$540,000,
beginning total assets of HK$2,000,000, and ending total assets of HK$3,000,000. What was
the company’s asset turnover?
a. 0.90. c. 0.72.
b. 0.20. d. 1.39.

15. * (LO 6) Schopenhauer NV exchanged an old machine, with a book value of €39,000 and
a fair value of €35,000, and paid €10,000 cash for a similar new machine. The transaction has
commercial substance. At what amount should the machine acquired in the exchange be
recorded on Schopenhauer’s books?
a. €45,000. c. €49,000.
b. €46,000. d. €50,000.

16. * (LO 6) In exchanges of assets in which the exchange has commercial substance:
a. neither gains nor losses are recognized immediately.
b. gains, but not losses, are recognized immediately.
c. losses, but not gains, are recognized immediately.
d. both gains and losses are recognized immediately

E9.4 (LO 2) Ann Tremel has prepared the following list of statements about depreciation.
1. Depreciation is a process of asset valuation, not cost allocation.
2. Depreciation provides for the proper matching of expenses with revenues.
3. The book value of a plant asset should approximate its fair value.
4. Depreciation applies to three classes of plant assets: land, buildings, and equipment.
5. Depreciation does not apply to a building because its usefulness and revenue- producing
ability generally remain intact over time.
6. The revenue-producing ability of a depreciable asset will decline due to wear and tear and
to obsolescence.

29
7. Recognizing depreciation on an asset results in an accumulation of cash for replacement of
the asset.
8. The balance in accumulated depreciation represents the total cost that has been charged to
expense.
9. Depreciation expense and accumulated depreciation are reported on the income statement.
10. Three factors affect the computation of depreciation: cost, useful life, and residual value.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement

30