Reference no: EM13928203

1. Which of the following is NOT normally an objective of financial reporting?

a. To provide information about an entity's assets and claims against those assets
b. To provide information that is useful in assessing an entity's sources and uses of cash
c. To provide information that is useful in lending and investing decisions
d. To provide information about an entity's liquidation value

2. As independent (or external) auditors, CPAs are primarily responsible for

a. preparing financial statements in conformity with GAAP.
b. certifying the accuracy of financial statements.
c. expressing an opinion as to the fairness of financial statements.
d. filing financial statements with the SEC.

3. The assumed continuation of a business entity in the absence of evidence to the contrary is an example of the accounting concept of

a. accrual.
b. consistency.
c. comparability.
d. going concern.

4. According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is

a. realization.
b. recognition.
c. matching.
d. allocation.

5. Generally accepted accounting principles

a. are accounting adaptations based on the laws of economic science.
b. derive their credibility and authority from legal rulings and court precedents.
c. derive their credibility and authority from the federal government through the financial reporting section of the SEC.
d. derive their credibility and authority from general recognition and acceptance by the accounting profession.

6. On June 30, a company paid $3,600 for insurance premiums for the current year and debited the amount to Prepaid Insurance. At December 31, the bookkeeper forgot to record the amount expired. The omission has the following effect on the financial statements prepared December 31:

a. overstates owners' equity.
b. overstates assets.
c. understates net income.
d. overstates both owners' equity and assets.

7. Which of the following criteria must be met before an event should be recorded for accounting purposes?

a. The event must be an arm's-length transaction.
b. The event must be repeatable in a future period.
c. The event must be measurable in financial terms.
d. The event must be disclosed in the reported footnotes.

8. Adjusting entries normally involve

a. real accounts only.
b. nominal accounts only.
c. real and nominal accounts.
d. liability accounts only.

9. If an inventory account is understated at year end, the effect will be to overstate the

a. net purchases.
b. gross margin.
c. cost of goods available for sale.
d. cost of goods sold.

10. Beginning and ending Accounts Receivable balances were $28,000 and $24,000, respectively. If collections from clients during the period were $80,000, then total services rendered on account were apparently

a. $76,000.
b. $84,000.
c. $104,000.
d. $108,000.

11. The following balances have been excerpted from Edwards' balance sheets:

December 31, 2013 December 31, 2012

Prepaid Insurance ............ $ 6,000 $ 7,500

Interest Receivable .......... 3,700 14,500

Salaries Payable ............. 61,500 53,000

Edwards Company paid or collected during 2013 the following items:

Insurance premiums paid ...... $ 41,500

Interest collected ........... 123,500

Salaries paid ................ 481,000

The interest revenue on the income statement for 2013 was

a. $90,500.
b. $112,700.
c. $117,500.
d. $156,500.

12. Comet Corporation's liability account balances at June 30, 2013, included a 10 percent note payable. The note is dated October 1, 2011, and carried an original principal amount of $600,000. The note is payable in three equal annual payments of $200,000 plus interest. The first interest and principal payment was made on October 1, 2012. In Comet's June 30, 2013, balance sheet, what amount should be reported as Interest Payable for this note?

a. $10,000
b. $15,000
c. $30,000
d. $45,000

13. The correct order to present current assets is

a. cash, inventories, prepaid items, accounts receivable.
b. cash, inventories, accounts receivable, prepaid items.
c. cash, accounts receivable, prepaid items, inventories.
d. cash, accounts receivable, inventories, prepaid items.

14. Unearned rent would normally appear on the balance sheet as a

a. plant asset.
b. current liability.
c. long-term liability.
d. current asset.

15. Which of the following is NOT a long-term investment?

a. Stock held to exert influence on another company
b. Land held for speculation
c. Trademarks
d. Cash surrender value of life insurance

16. The operating cycle

a. measures the time elapsed between cash disbursement for inventory and cash collection of the sales price.
b. refers to the seasonal variations experienced by business enterprises.
c. should be used to classify assets and liabilities as current if it is less than one year.
d. cannot exceed one year.

17. Wolfe Co. was incorporated on July 1, 2014, with $200,000 from the issuance of stock and borrowed funds of $30,000. During the first year of operations, net income was $10,000. On December 15, Wolfe paid an $800 cash dividend. No additional activities affected owners' equity in 2014. At December 31, 2014, Wolfe's liabilities had increased to $37,600. In Wolfe's December 31, 2014, balance sheet, total assets should be reported at

a. $239,200.
b. $240,000.
c. $246,800.
d. $276,800.

18. Volta Electronics Inc. reported the following items on its December 31, 2014, trial balance:

Accounts Payable ........................................ $108,900
Advances to Employees ................................... 4,500
Unearned Rent Revenue ................................... 28,800
Estimated Liability Under Warranties .................... 25,800
Cash Surrender Value of Officers' Life Insurance ........ 7,500
Bonds Payable ........................................... 555,000
Discount on Bonds Payable ............................... 22,500
Trademarks .............................................. 3,900

The amount that should be recorded on Volta's balance sheet as total liabilities is

a. $696,000.
b. $700,500.
c. $703,500.
d. $741,000.

19. In contrast with a multiple-step income statement, a single-step income statement does not show the amount of

a. income taxes on continuing operations.
b. cost of goods sold.
c. gross profit.
d. earnings per share.

20. The term "comprehensive income" as defined by the FASB

a. must be reported on the face of the income statement.
b. includes all changes in equity during a period except those resulting from investments by and distributions to owners.
c. is the net change in owners' equity for the period.
d. is synonymous with the term "net income."

21. The following amounts are from Silverton Co.'s 2014 income statement:

Sales ................................................. $340,000
Sales returns and allowances .......................... 5,000
Cost of goods sold .................................... 132,000
Utilities expense ..................................... 66,000
Interest revenue ...................................... 1,000
Income tax on operations .............................. 28,000
Extraordinary loss due to earthquake, net of tax ...... 5,000
Interest expense ...................................... 4,000
Salaries expense ...................................... 46,000
Loss on sale of investments ........................... 3,000

What amount would Silverton show for income from continuing operations on a multiple-step format income statement?

a. $52,000
b. $68,000
c. $57,000
d. $96,000

22. Saginaw Inc. decided on August 1, 2014, to dispose of a component of its business. The component was sold on November 30, 2014. Saginaw's income for 2014 included income of $250,000 from operating the discontinued segment from January 1 to the sale date. Saginaw incurred a loss on the November 30 sale of $220,000. Ignoring income taxes, what amount should be reported in the 2014 income statement as the net income or loss under "Discontinued Operations"?

a. $220,000 loss
b. $30,000 loss
c. $30,000 income
d. $250,000 income

23. The financial statements of Mannassass Corporation for 2014 and 2015 contained the following errors:

2014 2015
Ending Inventory $14,000 overstated $20,000 understated
Rent Expense $4,800 understated $6,600 overstated

Assuming that none of the errors were detected or corrected, by what amount will 2014 operating income be overstated or understated?

a. $9,200 overstated
b. $9,200 understated
c. $18,800 understated
d. $18,800 overstated

24. In a statement of cash flows, receipts from sales of property, plant, and equipment would be classified as cash inflows from

a. liquidating activities.
b. operating activities.
c. investing activities.
d. financing activities.

25. In a statement of cash flows (indirect method), depreciation is treated as an adjustment to reported net income because depreciation

a. is an inflow of cash to a reserve account for asset replacement.
b. reduces the reported net income and involves an inflow of cash.
c. reduces the reported net income but does not involve an outflow of cash.
d. usually represents a significant portion of operating expenses.

26. Which of the following statements regarding cash equivalents is correct?

a. A one-year Treasury note could not qualify as a cash equivalent.
b. All investments meeting the FASB's criteria for cash equivalents must be reported as such.
c. The date a security is purchased determines its "original maturity" for cash equivalent classification purposes.
d. Once established, management's policy for classifying items as cash equivalents cannot be changed.

27. Which of the following would not be classified as an operating activity?

a. Interest income
b. Income tax expense
c. Dividend income
d. Payment of dividends

28. The amount reported as "Cash" on a company's balance sheet normally should exclude

a. postdated checks that are payable to the company.
b. cash in a payroll account.
c. undelivered checks written and signed by the company.
d. petty cash.

29. When a specific customer's account is written off by a company using the allowance method, the effect on net income and the net realizable value of the accounts receivable is

Net Realizable Value

Net Income of Accounts Receivable

a. Increase Increase
b. Decrease Decrease
c. None None
d. Decrease None

30. The following information is from the records of Sumter, Inc. for the year ended December 31, 2014.

Allowance for Doubtful Accounts, January 1, 2014 .. $ 6,000 (cr)
Sales, 2014 ....................................... 2,920,000
Sales Returns and Allowances, 2014 ................ 32,000

If the basis for estimating bad debts is 1 percent of net sales, the correct amount of doubtful accounts expense for 2014 is

a. $22,800.
b. $23,200.
c. $28,880.
d. $34,880.

31. In preparing the bank reconciliation of Yardley Company for the month of July, the following information is available:

Balance per bank statement, 7/31 ..................... $60,075
Deposits in transit, 7/31 ............................ 9,375
Outstanding checks, 7/31 ............................. 8,625
Deposit erroneously recorded by bank to Yardley's
account, 7/18 ...................................... 375
Bank service charges for July ........................ 75

What is the correct cash balance at July 31?

a. $52,875
b. $54,375
c. $54,825
d. $60,450

32. Lawson Corporation's checkbook balance on December 31, 2014, was $8,000. In addition, Lawson held the following items in its safe on December 31:

Check payable to Lawson Corporation, dated January 2, 2015, not included in December 31 checkbook balance..
$2,000

Check payable to Lawson Corporation, deposited December 20, and included in December 31 checkbook balance, but returned by bank on December 30, stamped "NSF." The check was redeposited January 2, 2015, and cleared January 7 ..

400
Post-dated checks ....................................... 150
Check drawn on Lawson Corporation's account, payable to a vendor, dated and recorded December 31, but not mailed until January 15, 2015 ..................................
1,000

The proper amount to be shown as cash on Lawson's balance sheet at December 31, 2014, is

a. $7,600.
b. $8,000.
c. $8,600.
d. $9,750.

33. Which of the following would be considered part of the category "trade receivables"?

a. Advances to employees
b. Amounts due from customers
c. Dividends receivable
d. Income tax refunds receivable

34. The installment method of recognizing revenue

a. should be used only in cases in which no reasonable basis exists for estimating the collectibility of receivables.
b. is not a generally accepted accounting principle under any circumstances.
c. should be used for book purposes only if it is used for tax purposes.
d. is an acceptable alternative accounting principle for a firm that makes installment sales.

35. The cost recovery method is

a. used only when circumstances surrounding a sale are so uncertain that earlier recognition is impossible.
b. the most common method of accounting for real estate sales.
c. similar to percentage-of-completion accounting.
d. never acceptable under generally accepted accounting principles.

36. Goods on consignment should be included in the inventory of

a. the consignor but not the consignee.
b. both the consignor and the consignee.
c. the consignee but not the consignor.
d. neither the consignor nor the consignee.

37. Gunner Construction, Inc. has consistently used the percentage-of-completion method of recognizing revenue. During 2014, Gunner started work on a $2,500,000 fixed-price construction contract. The accounting records disclosed the following data for the year ended December 31, 2014:

Costs incurred ........................................ $ 465,000

Estimated cost to complete ............................ 2,085,000

Progress billings ..................................... 550,000

Collections ........................................... 350,000

How much loss should Gunner have recognized in 2014?

a. $15,000
b. $35,000
c. $50,000
d. $315,000

38. Commodity L sells for $12.00; selling expenses are $2.40; normal profit is $3.00. If the cost of Commodity L is $7.80 and the replacement cost is $6.00, the lower of cost or market is

a. $5.40.
b. $6.60.
c. $6.00.
d. $7.80.

39. Montana Company is a wholesale electronics distributor. On December 31, 2014, it prepared the following partial income statement:

Gross sales ............................... $800,400
Sales discounts ........................... 400
Net sales ................................. $800,000
Cost of goods sold:
Beginning inventory ..................... $300,000
Net purchases ........................... 300,000

Given this information, if Montana Company's gross margin is 30 percent of net sales, what is the correct ending inventory balance?

a. $40,000
b. $240,000
c. $360,000
d. $600,000

40. Which of the following statements is true?

a. A company must use the FIFO cost flow assumption for taxes as well as for financial accounting and reporting.
b. A company may use FIFO for inventory valuation purposes on the balance sheet provided that LIFO cost of goods sold is reported on the income statement.
c. Application of LIFO for financial reporting purposes must strictly follow IRS regulations relating to LIFO.
d. LIFO is the only inventory method that must be used for financial reporting purposes if used for tax purposes.

41. A company using a periodic inventory system neglected to record a purchase of merchandise on account at year-end. This merchandise was omitted from the year-end physical count. How will these errors affect inventory at year-end and cost of goods sold for the year?

Cost of
Inventory Goods Sold

a. No effect Understate
b. Understate No effect
c. Understate Understate
d. No effect Overstate

 

42. If goods shipped FOB destination are in transit at the end of the year, they should be included in the inventory balance of the

a. seller.
b. common carrier.
c. buyer.
d. bank.

43.Digipro Inc. is a wholesaler of photography equipment. The activity for the VTC cameras during July is shown below:

Balance/
Date Transaction Units Cost
July 1 Inventory 2,000 $36.00
7 Purchase 3,000 37.00
12 Sales 3,600
21 Purchase 5,000 37.88
22 Sales 3,800
29 Purchase 1,600 38.11

If Digipro Inc. uses the average cost method to account for inventory, the ending inventory of VTC cameras at July 31 is reported as

a. $153,400.
b. $156,912.
c. $158,736.
d. $159,464.

44. An asset is being constructed for an enterprise's own use. The asset has been financed with a specific new borrowing. The interest cost incurred during the construction period as a result of expenditures for the asset is

a. a part of the historical cost of acquiring the asset to be written off over the estimated useful life of the asset.
b. interest expense in the construction period.
c. recorded as a deferred charge and amortized over the term of the borrowing.
d. a part of the historical cost of acquiring the asset to be written off over the term of the borrowing used to finance the construction of the asset.

45. Which of the following research and development related costs should be capitalized and amortized over current and future periods?

a. Labor and material costs incurred in building a prototype model.
b. Cost of testing equipment that will also be used in another separate research and development project scheduled to begin next year.
c. Administrative salaries allocated to research and development.
d. Research findings purchased from another company to aid a particular research project currently in process.

46. An improvement made to a machine increased its fair market value and its production capacity by 25 percent without extending the machine's useful life. The cost of the improvement should be

a. expensed.
b. debited to Accumulated Depreciation.
c. capitalized in the machine account.
d. allocated between Accumulated Depreciation and the machine account.

47. On February 12, Oceans Company purchased a tract of land as a factory site for $190,000. An existing building on the property was razed and construction was begun on a new factory building in March of the same year. Additional data are available as follows:

Cost of razing old building .......................... $ 55,000
Title insurance and legal fees to purchase land ...... 7,500
Architect's fees ..................................... 52,500
New building construction cost ....................... 975,000

The recorded cost of the completed factory building should be

a. $1,165,000
b. $1,220,000
c. $1,027,500
d. $1,082,500

48. The Morris Corporation acquired land, buildings, and equipment from a bankrupt company at a lump-sum price of $180,000. At the time of acquisition, Morris paid $12,000 to have the assets appraised. The appraisal disclosed the following values:

Land .................................................. $120,000
Buildings ............................................. 80,000
Equipment ............................................. 40,000

What cost should be assigned to the land, buildings, and equipment, respectively?

a. $64,000, $64,000, and $64,000
b. $90,000, $60,000, and $30,000
c. $96,000, $64,000, and $32,000
d. $120,000, $80,000, and $40,000

49. Stanley Company purchased a machine that was installed and placed in service on January 2, 2013, at a total cost of $680,000. Residual value was estimated at $70,000. The machine is being depreciated over ten years by the double-declining-balance method. For the year 2014, Stanley should record depreciation expense of

a. $108,800
b. $97,600
c. $68,000
d. $61,000

50. The Chisholm Company purchased a machine on November 1, 2005, for $148,000. At the time of acquisition, the machine was estimated to have a useful life of ten years and an estimated salvage value of $4,000. Chisholm has recorded monthly depreciation using the straight-line method. On July 1, 2014, the machine was sold for $13,000. What should be the loss recognized from the sale of the machine?

a. $4,000
b. $5,000
c. $10,200
d. $13,000