BU127 ACCOUNTING MIDTERM 1 , 2 AND FINAL Questions And Answers (Verified Update)

BU127 ACCOUNTING MIDTERM 1 , 2 AND FINAL Multiple Choice : Midterm no. 1 1. Financing that individuals or institutions have provided to a company is: a. Always classified as liabilities. b. Classified as liabilities when provided by creditors and shareholders' equity when provided by owners. c. Always classified as shareholders' equity. d. Classified as shareholders' equity when provided by creditors and liabilities when provided by owners. 2. At the end of last year, the company's assets totalled $860,000 and its liabilities totalled $740,000. At the end of the current year, the company's total assets increased by $58,000 and its total liabilities increased by $24,000. At the end of the current year: a. Shareholders' equity was $154,000. b. Shareholders' equity was $120,000. c. Shareholders' equity was $34,000. d. Shareholders' equity was $178,000. 3. The Whackem-Smackem Software Company sold $11 million of computer games in its first year of operations. The company received payments of $7.5 million for these computer games. The company's income statement would report: a. Sales revenue of $7.5 million. b. Accounts receivable of $3.5 million. c. Expenses of $3.5 million. d. Sales revenue of $11 million. 4. Every financial statement should have "who, what, and when" in its heading. These are: a. The name of the person preparing the statement, the type of financial statement, and when the financial statement was reported to the Stock Exchange. b. The name of the person preparing the statement, the name of the company, and the date the statement was prepared. c. The name of the company, the type of financial statement, and the time period from which the data were taken. d. The name of the company, the purpose of the statement, and when the financial statement was reported to the Canada Revenue Agency. 5. Which of the following are the two fundamental characteristics financial information must possess to be judged useful to decision makers? a. Relevance and faithful representation b. Truthful and clarity c. Complete and relevant d. Elaborate and faithful representation 6. Which of the following are elements to be measure and reported? a. Assets, liabilities, shareholders equity, revenues, expenses, dividends b. Unit of measure, separate entity, going concern, time period c. Cost, revenue recognition, matching, full disclosure d. Cost-benefit, materiality, industry practices 7. The effects of net income and its distribution on the financial position of the company is reported in: a. Balance sheet b. Income statement c. Statement of changes in equity. d. Statement of cash flows 8. Which of the following equations is correct? a. Net income - expenses = revenues b. Ending retained earnings - beginning retained earnings = net income - dividends c. Asset = liabilities - shareholders equity d. None of the choices are correct 9. The Sweet Smell of Success Fragrance Company borrowed $60,000 from the bank and used all of the money to redesign its new store. Sweet Smell's balance sheet would show this as: a. $60,000 under Furnishings & Equipment and $60,000 under Notes Payable. b. $60,000 under Supplies and $60,000 under Accounts Payable. c. $60,000 under Prepaid Expenses and $60,000 under Accrued Liabilities. d. $60,000 under Other Assets and $60,000 under Other Liabilities. 10. If a company is paid $20,000 on accounts receivable and uses the money to pay $20,000 on accounts payable then: a. Assets would increase by $20,000 while liabilities would decrease by $20,000. b. Liabilities would decrease by $20,000 while shareholders' equity would increase by $20,000. c. Both assets and liabilities would decrease by $20,000. d. Both assets and shareholders' equity would decrease by $20,000. 11. Your company's president donates a large amount of her own money to charity and receives significant publicity that includes the company's name. How would the benefits of this publicity appear on the statement of financial position? a. It would appear as a current asset. b. It would appear as a liability. c. It would appear as a long-term asset. d. It would not appear on the statement of financial position. 12. When dealing with claims on company assets,: a. Owners take precedence over creditors. b. Creditors take precedence over owners. c. Owners and creditors are treated equally. d. All of the choices are possible; it depends on the situation. 13. Sparkling Pools provides $1,000 of pool maintenance services during July and collects payment in August. The company performs $1,600 of pool maintenance services during July that were paid for in June. The company will perform $500 of pool maintenance services in August and will be paid in the same month. Revenue should be credited for: a. $1,600 in June, $1,000 in July, and $500 in August. b. $1,600 in June, $0 in July, and $1,500 in August. c. $0 in June, $1,600 in July, and $1,500 in August. d. $0 in June, $2,600 in July, and $500 in August. 14. Which of the following statements is true? a. When net income is positive, revenue is greater than expenses. b. When net income is negative, retained earnings decrease, all other things being equal. c. When net income is positive, Shareholders' equity increases, all other things being equal. d. All of the answers are acceptable. 15. The separate entity assumption means: a. A company's financial statements reflect only the business activities of that company and not that of the shareholders. b. Each shareholders' activities must be revealed in the financial statements. c. Each separate owner's finances must be revealed in the financial statements. d. Each separate entity that has a claim on a company's assets must be shown in the financial statements. 16. The Buddy Burger Corporation owes $1.5 million to the Alberta Wholesale Meat Company from whom Buddy Burger buys its burger meat. Which account would Buddy Burger use to report the amount owed? a. Deferred/Unearned Revenue b. Accounts Payable c. Supplies d. Accounts Receivable 17. Your company pays back $2 million on a loan it had borrowed earlier from a bank. How does this transaction affect the accounting equation? a. Assets are unchanged, liabilities and shareholders' equity both increase by $2 million. b. Assets decrease by $2 million, liabilities decrease by $2 million, shareholders' equity is unchanged. c. Assets are unchanged, liabilities increase by $2 million, contributed capital decreases by $2 million. d. Assets decrease by $2 million, liabilities are unchanged, contributed capital decreases by $2 million. 18. PetPlanet Ltd., uses $10,000 in cash to pay $10,000 on Accounts Payable. This would result in a: a. $10,000 credit to Cash and a $10,000 credit to Accounts Payable. b. $10,000 debit to Cash and a $10,000 debit to Accounts Payable. c. $10,000 credit to Cash and a $10,000 debit to Accounts Payable. d. $10,000 debit to Cash and a $10,000 credit to Accounts Payable. 19. During the month you purchased $12,000 of supplies on credit and $19,000 of equipment for cash. When you prepare a statement of financial position, assets are $24,000 more than liabilities plus shareholders' equity. a. You may have posted the increase in supplies as a credit rather than a debit. b. You may have neglected to post the change in accounts payable. c. You may have posted the increase in accounts payable as a debit rather than a credit. d. All would have resulted in the $24,000 error. 20. When dealing with claims on company assets: a. Owners take precedence over creditors. b. Creditors take precedence over owners. c. Owners and creditors are treated equally. d. All of the choices are possible; it depends on the situation. 21. Which of the following represents a subtotal rather than an account? a. Advertising Expense. b. Sales Revenues. c. Cost of Goods Sold. d. Operating Income. 22. Rogers Communications is a communications company, specializing in cable television operation, television program development, and other telecommunication services. Its financial statements show $37,666 in an account called "Deferred Subscriber Revenue," which represents amounts that customers have paid in advance of receiving cable television and internet services. What type of account is this and on what statement is it reported? a. Option A b. Option B c. Option C d. Option D 23. When cash is paid before the expense is incurred to generate revenue, costs are stated as: a. Prepaid ( asset ). b. Payable ( liability ). c. Receivable ( asset ). d. Shareholders' equity. 24. Guessco reported the following amounts on its statement of earnings: total revenues, $31,500; interest expense, $300; net income, $1,600; income tax expense, $900; and operating income, $2,800. What was the amount of Guessco's income before income tax expense? a. $1,300. b. $2,500. c. $29,000. d. $29,900. 25. During June, the Grass is Greener Company mows 100 lawns a week; the company was paid in advance during May by those customers. The company uses the accrual basis of accounting and prepares its financial statements monthly. How will these events affect the company's financial statements? a. The statement of earnings shows the effects of the transactions in May. b. The statement of earnings shows the effects of the transactions in June. c. The statement of financial position shows no effect from the transactions in May. d. The transactions have no effect on the statement of financial position. 26. In October, your company prepays rent of $7,000 for November and December. Which of the following describes the effects of this transaction in October? a. Assets decrease $7,000 and liabilities decrease $7,000. b. Assets increase $7,000 and Shareholders' equity increases $7,000. c. There is no change to total assets, liabilities or Shareholders' equity. d. Liabilities decrease $7,000 and Shareholders' equity increases $7,000. 27. Trudy's Café paid its employees $50,000 in September for work done that month. What journal entry will Trudy's record in September, assuming Trudy's did not owe any amounts to employees at the end of September? a. Debit Cash, credit Wages Revenue. b. Debit Cash, credit Wages Payable. c. Debit Wages Revenue, credit Cash. d. Debit Wages Expense, credit Cash. 28. Closing entries : a. Are prepared before financial statements are prepared. b. Reduce the balance of permanent accounts. c. Cause the revenue and expense accounts to have zero balances. d. Summarize the activity in every account. Multiple Choice : Midterm no. 2 1. An NSF cheque should appear in which section of the bank reconciliation? a. Addition to the balance per books. b. Deduction from the balance per books. c. Addition to the balance per bank. d. Deduction from the balance per bank. 2. If a cheque correctly written and paid by the bank for $521 is incorrectly recorded on the company's books for $251, the appropriate treatment on the bank reconciliation would be to a. Add $270 to the balance per bank. b. Add $270 to the balance per books. c. Deduct $270 from the balance per books. d. Deduct $270 from the balance per bank. 3. On Eli Corp's June bank reconciliation, cheques outstanding totaled $5,400. In July, the corporation issued cheques totalling $38,900. The July bank statement shows that $26,300 in cheques cleared the bank in July. A cheque from one of Eli Corp's customers in the amount of $300 was also returned marked "NSF." The amount of outstanding cheques on Eli's July bank reconciliation should be a. $7,200. b. $12,600. c. $17,700. d. $18,000. Calculation : $5,400 + $38,900 - $26300 = $18,000 4. What happens when the actual profit reported exceed the expected profit for a company? a. There is no share price reaction because forecasts of profit almost never reflect actual results. b. It causes an increase in the share price. c. It causes a decrease in the share price. d. It is impossible to understand the changes in market price of share. 5. The following information was available to the accountant of Midland Company when preparing the monthly bank reconciliation: What is the corrected cash balance per books following completion of the reconciliation? a. $120. b. $430. c. $620. d. $645. Calculation : $145 - $25 + $500 = $620 6. Which of the following statements is true? a. Accumulated depreciation is the amount of depreciation on the income statement for the current year. b. Current liabilities are debts expected to be paid out of current assets within the next year. c. Current assets are resources of a company which might include cash and copyrights. d. Property, plant, and equipment are classified as intangible assets on the statement of financial position. 7. When goods are sold on credit, revenue usually should be recognized at the date of which of the following? a. Receipt of the sales order b. Receipt of the goods by the buyer. c. Passage of title from the seller to the buyer. d. Manufacture of the goods. 8. The following information was taken from the 2016 income statement of Milburn Company: Pretax profit, $12,000; Total operating expenses, $20,000; Sales revenue, $120,000. Compute the cost of goods sold. a. $88,000 b. $100,000 c. $108,000 d. $112,000 Calculation : $120,000 - 88,000 - 20,000 = $12,000 9. Which of the following costs would be included in the costs of inventory of a manufacturer? a. Sales salaries. b. Electricity for the office building. c. Wages for factory workers. d. Wages for administrative staff. 10. A $15,000 overstatement of the 2016 ending inventory was discovered after the financial statements for 2016 were prepared. What was the effect of the inventory error on the 2016 financial statements? a. Current assets were overstated and profit was understated. b. Current assets were understated and profit was understated. c. Current assets were understated and profit was overstated. d. Current assets were overstated and profit was overstated. 11. On December 15, 2016, Toby Company accepted delivery of merchandise which it purchased on credit. As of December 31, 2016, the company had neither recorded the transaction nor included the merchandise in its inventory because the seller's invoice had not been received. The effect of this omission on its statement of financial position at December 31, 2016, (end of the accounting period) was which of the following? a. Assets and shareholders' equity were overstated but liabilities were not affected. b. Shareholder's equity was the only item affected by the omission. c. Assets and liabilities were understated but shareholders' equity was not affected. d. Assets and shareholders' equity were understated but liabilities were not affected. 12. Belmont Corporation made a basket purchase of land, a building and equipment, paying a total of $1,500,000. Market values for the assets were not available, but the appraised values were $300,000 for the land, $900,000 for the building, and $600,000 for equipment. What amounts should be recorded in the Land, Building, and Equipment accounts, respectively? a. $300,000, $900,000, and $600,000 b. $1,500,000, $-0-, and $-0- c. $250,000, $750,000, and $500,000 d. $500,000, $500,000, and $500,000 Calculation : - [ ( 300 / 1,800 ) x 1,500,000 ] = $250,000 - [ ( 900 / 1,800 ) x 1,500,000 ] = $750,000 - [ ( 600 / 1,800 ) x 1,500,000 ] = $500,000 13. Which of the following costs would be excluded from the acquisition cost of equipment purchased from a supplier? a. Cost to install the equipment. b. The cost of freight paid to get the equipment to our factory. c. The cost to widen an entrance in the building to bring the equipment into the facilities. d. A purchases discount offered by the supplier. 14. In 2016, Gamma Company made an ordinary repair to a delivery truck at a cost of $300. Gamma's accountant debited the asset account, Delivery Vehicles. Was this treatment an error, and if so, what will be the effect on the financial statements of Gamma? a. The repair was accounted for correctly. b. The error increased assets and profit in 2016. c. In the years following 2016, net income will be too high. d. The error decreased profit in 2016. 15. Which of the following statements is true? a. Long-lived tangible assets will not be used up within one year, but there is no minimum useful life for long-lived intangible assets. b. Items in a company's inventory that are not expected to be sold in the next year are considered long-lived assets. c. All long-lived intangible assets must be expensed over a period of 40 years or less. d. Intangible assets with unlimited or indefinite lives are not amortized. 16. If a company capitalizes costs that should be expensed, how is its income statement for current period impacted? a. Net income will be lower than it should be. b. Revenues will be lower than they should be. c. Expenses will be lower than they should be. d. Assets will be lower than they should be. 17. The Gulp convenience store chain buys new soda machines for $450,000 and pays $50,000 for installation. One-half of the total cost is paid in cash; the other half is financed. How should the company record this transaction? a. Debit cash for $250,000, debit notes payable for $250,000, and credit equipment for $500,000. b. Debit equipment for $500,000, credit cash for $250,000, and credit notes payable for $250,000. c. Debit cash for $250,000, debit notes payable for $250,000 credit equipment for $450,000, and credit expenses for $50,000. d. Debit equipment for $450,000, debit expenses for $50,000, credit cash for $250,000, and credit notes payable for $250,000. 18. Ordinary repairs and maintenance always: a. Are part of the asset cost of equipment and facilities. b. Are recorded as expenses. c. Are recorded as liabilities. d. Improve the asset beyond the current accounting period. 19. Which of the following is not an amount that is needed to calculate straight-line depreciation? a. The cost of the asset. b. An estimate of the asset's useful economic life to the company. c. The amount that the company will get when it disposes of the asset. d. The cost the company will be required to incur to replace the asset. 20. A company expects to use equipment that cost $48,000 for ten years and then sell it for $6,000. Using the straight-line method, the company should report depreciation for the equipment of: a. $4,200 per year. b. $8,400 per year. c. $4,800 per year. d. $9,600 per year. 21. The Widget Tool and Die Company buys a $400,000 stamping machine that has an estimated residual value of $20,000. The company expects the machine to produce two million units. It makes 400,000 units during the current period. If the units-of-production method is used, the depreciation rate is: a. $0.95 per unit. b. $0.19 per unit. c. $0.05 per unit. d. $1.00 per unit. 22. The Widget Tool and Die Company buys a $400,000 stamping machine that has an estimated residual value of $20,000. The company expects the machine to produce two million units. It makes 400,000 units during the current period. If the units-of-production method is used, the depreciation expense for this period is: a. $80,000. b. $400,000. c. $76,000. d. $380,000. 23. A machine is purchased on January 1, 2016, for $90,000. It is expected to have a useful life of five years and a residual value of $5,000. The company closes its books on December 31. Under the double-declining balance method, what is the total amount of depreciation to be expensed during the 2017 fiscal year (year 2 of 5)? a. $21,600 b. $22,000 c. $22,400 d. $34,000 24. A piece of equipment was acquired on January 1, 2017, at a cost of $22,000, with an estimated residual value of $2,000 and an estimated useful life of four years. The company uses the double-declining-balance method. What is its book value at December 31, 2018? a. $5,500 b. $10,000 c. $11,000 d. $12,000 Multiple Choice : Final Exam 1. When the amount of a contingent liability can be estimated and its likelihood is possible but not probable, the company should: a. Include a description in the footnotes to the financial statements. b. Record the amount of the liability times the probability of its occurrence. c. Record the liability and estimated amount of the loss on the statement of financial position. d. Omit the information about the contingent liability from its financial statements and footnotes. 2. When a company encounters a contingent liability that is remote in likelihood, the company should: a. Include a description in the footnotes to the financial statements. b. Record the amount of the liability times the probability of its occurrence. c. Record the liability and estimated amount of the loss on the statement of financial position. d. Omit the information about the contingent liability from its financial statements and footnotes. 3. If a company's gross salaries are $12,000, and it withholds $1,800 for income taxes and $800 for Employment Insurance and other deductions, the journal entry to record the employees' pay should include a: a. Debit to Salaries Expense for $9,400. b. Debit to Salaries Payable for $9,400. c. Credit to Salaries Payable for $12,000. d. Credit to Cash for $9,400. 4. A company receives $95 for merchandise sold to a consumer, of which $5 is for sales tax. The $5 of sales tax: a. Increases sales revenue. b. Increases current liabilities. c. Increases selling expenses. d. None of the answers are acceptable. 5. If the market rate of interest is 6%, a $10,000, 10-year bond with a stated annual interest rate of 8% would issue at an amount: a. Less than face value ( discount ). b. Equal to the face value ( par ). c. Greater than face value ( premium ). d. That cannot be determined. 6. Under the cost principle: a. Only reasonable and necessary costs of acquiring an asset should be recorded as a cost of the asset. b. Costs of preparing an asset for use should never be recorded as part of the cost of the asset. c. All reasonable and necessary costs of acquiring an asset and preparing it for use should be recorded as a cost of the asset. d. Only the actual purchase price of the asset is recorded as the cost of the asset. 7. Ordinary repairs and maintenance always: a. Are part of the asset cost of equipment and facilities. b. Are recorded as expenses. c. Are recorded as liabilities. d. Improve the asset beyond the current accounting period. 8. Which of the following statements most appropriately describes the purpose of depreciation of a long-lived tangible asset? a. To indicate how the asset has physically deteriorated. b. To show that the asset will eventually and gradually become obsolete. c. To record that the asset's market value declines over time. d. To match the cost of the asset to the period in which it generates revenue. 9. Under what circumstance should a company record an asset impairment loss? a. When residual value is greater than the repairs and maintenance expenses needed to keep the asset. b. When net book value is less than the residual value of the asset. c. When accumulated depreciation equals the purchase cost of the asset. d. When net book value is greater than expected future cash flows for the asset. 10. How does an asset impairment loss impact a company's financial statements? a. Raise expenses and lower both revenue and net income. b. Lower assets, shareholders' equity, and net income. c. Raise expenses and lower net income with no effect on any other items. d. Raise liabilities and lower shareholders' equity. 11. In recording the acquisition cost of an entire business: a. Goodwill is recorded as the excess of cost over the fair market value of identifiable net assets. b. Assets are recorded at the seller's book values. c. Goodwill, if it exists, is never recorded. d. Goodwill is recorded as the excess of cost over the book value of identifiable net assets. Questions 12 - 13 Use the Information Below In March, BetterBuy purchases six plasma TVs from Toshiba for $1,500 each ( serial numbers through ). In April, the company purchases four more identical TVs from Toshiba for $1,450 each ( serial numbers through ). In May, the company purchases five more identical TVs for $1,600 each ( serial numbers through ). In June, BetterBuy sells two of these TVs ( serial numbers and ). 12. BetterBuy records $3,000 as the cost of goods sold. BetterBuy is using the: a. Specific identification method. b. LIFO method. c. FIFO method. d. Weighted average cost method. 13. If BetterBuy uses the weighted average method, its cost of goods sold will be: a. $2,900. b. $2,950. c. $3,040. d. $3,033. Calculation : - 6 @ $1,500 = $9,000 - 4 @ $1,450 = $5,800 - 5 @ $1,600 = $8,000 Average cost per unit = ( 22,800 / 15 ) = ( 1,520 * 2 ) = $3,040 14. The following information was available to the accountant of Horton Company when preparing the monthly bank reconciliation: The amount of cash that should appear on the statement of financial position following completion of the reconciliation and adjustment of the accounting records is: a. $660. b. $640. c. $620. d. $305. Calculation : - Cash on balance sheet = Cash per bank + Deposits in transit - Outstanding cheques - [ 975 + 190 - ( 502 + 43 ) ] = $620 - Cash on balance sheet = Cash per books + Interest received from bank - NSF checks - Bank service charges. - [ 660 + 5 - 20 - 25 ] = $620 15. Deposits in transit: a. Have been recorded by the company but not yet by the bank. b. Have been recorded by the bank but not yet by the company. c. Have not been recorded by the bank or the company. d. Are customers' cheques that have not yet been received by the company. 16. Which of the following situations would cause the balance per bank to be more than the balance per books? a. Deposits in transit. b. Service charges. c. Outstanding cheques. d. Cheques from customers returned as NSF. 17. When are ratios most useful for analysis? a. When used alone. b. When compared with historical ratios of the same company. c. When compared with ratios for other companies in the industry. d. When compared with both historical ratios of the same company and ratios for other companies in the industry. 18. The cash flow statement will not report the a. Amount of cheques outstanding at the end of the period. b. Sources of cash in the current period. c. Uses of cash in the current period. d. Change in the cash balance for the current period. 19. Which of the following transactions does not affect cash during a period? a. Write-off of an uncollectible account b. Collection of an accounts receivable c. Sale of common shares d. Redemption of bonds 20. At the end of 2013, Libby Company reported an ending balance for retained earnings of $50,000. During 2014, the company reported the following amounts: Dividends declared and paid, $30,000 and profit, $40,000. The 2014 statement of Retained Earnings should report an ending balance for retained earnings of which of the following? a. $60,000. b. $80,000. c. $90,000. d. $100,000. Calculation: $50,000 - $30,000 + $40,000 = $60,000 21. If a business declared and paid a $500 dividend, it would appear on which of the following? a. Income statement only. b. Statement of financial position only. c. Statement of changes in equity and the statement of cash flows. d. Statement of changes in equity only. 22. Financing that individuals or institutions have provided to a company is a. Always classified as liabilities. b. Classified as liabilities when provided by creditors and shareholders' equity when provided by owners. c. Always classified as shareholders' equity. d. Classified as shareholders' equity when provided by creditors and liabilities when provided by owners. 23. Which of the following would affect shareholders' equity? a. A company borrows $100 million and buys $100 million in equipment. b. A company pays $100 million to shareholders as a dividend. c. A company sells $100 million in assets for $100 million cash. d. A company receives payment for $100 million in accounts receivable. 24. During 2007, a company's assets rise $56,000 and its liabilities rise $38,000. If no dividend is paid and no further capital is contributed, shareholders' equity would: a. Rise $56,000. b. Rise $18,000. c. Fall $38,000. d. Fall $94,000. 25. Which of the following is incorrect about the notes to the financial statements: a. Explain what accounting policies were used to prepare the financial statements. b. Provide additional information about what is included in the financial statements. c. Provide additional information about financial matters that are not included in the financial statements. d. Certify to the fact that the statements have been audited. 26. Investors are often interested in the amount distributed as dividends. In which section of the financial statements would investors look to find this amount? a. Statement of retained earnings. b. Balance sheet. c. Notes to the financial statements. d. Income statement 27. When is the financial information relevant? a. If it makes a difference in decision making. b. Meets the requirement of Toronto Stock Exchange. c. If it fully depicts the economic substance of business activities. d. If it allows management the discretion when to release it to investors and general public. 28. When is the financial information a faithful representation? a. If it fully depicts the economic substance of business activities b. If it allows management to be faithful to its shareholders c. Meets the requirements of the stock exchanges d. If it makes a difference in decision making 29. Your company pays back $2 million on a loan it had received earlier from a bank. How does this transaction affect the accounting equation? a. Assets are unchanged, liabilities and shareholders' equity both increase by $2 million. b. Assets decrease by $2 million, liabilities decrease by $2 million, shareholders' equity is unchanged. c. Assets are unchanged, liabilities increase by $2 million, contributed capital decreases by $2 million. d. Assets decrease by $2 million, liabilities are unchanged, contributed capital decreases by $2 million. 30. Which of the following would not be recorded as an identifiable accounting transaction? a. Putting a deposit down on a new vehicle. b. Hiring a new employee. c. Obtaining a bank loan. d. Receiving a deposit from a customer. 31. During June, The Grass Is Greener Company mows 100 lawns a week and is paid in July by those customers. The company uses the accrual basis of accounting. How will these events affect the company's financial statements? a. The income statement shows the effects of the transactions in June. b. The income statement shows the effects of the transactions in July. c. The balance sheet shows no effect from the transactions in June. d. The transactions have no effect on the balance sheet. 32. During April, the Grass is Greener Company buys and pays for a six-month supply of fertilizer in order to receive a bulk discount. The cost of fertilizer is recorded: a. Immediately as an expense. b. As a liability, which will later be reduced as the fertilizer used. c. Partially as an expense and partially as a liability. d. As an asset, which will later be reduced as the fertilizer is used. 33. A customer purchased $1,500 of services on credit two months ago and has just paid the bill. The receipt of the payment from the customer is recorded as a a. Debit to Cash and a credit to Accounts Receivable. b. Debit to Cash and a credit to Inventory. c. Debit to Expenses and a credit to Revenue. d. Debit to Accounts Receivable and a credit to Retained Earnings. 34. At the end of the month, the adjusting journal entry to record the use of supplies would include: a. A debit to supplies and a credit to expenses. b. A credit to supplies and a debit to expenses. c. A debit to supplies and a credit to revenue. d. A credit to supplies and a debit to cash. 35. A company has a loan that accrues interest at a rate of $20 a day. The company pays the interest once a quarter. Which of these would be an accurate adjustment for a month in which no payments are made? a. Debit Interest Payable and credit Interest Expense. b. Debit Loans Payable and credit Cash. c. Debit Interest Expense and credit Interest Payable. d. Debit Cash and credit Loans Payable. 36. Contra-accounts: a. Are used to increase the original value of the account they offset. b. Always appear in the same column of the trial balance as the account they offset. c. Always reduce the account they offset. d. Always increase the account they offset. 37. Closing entries: a. Are prepared before financial statements are prepared. b. educe the number of permanent accounts. c. Cause the revenue and expense accounts to have zero balances. d. Summarize the activity in every account. 38. All of the following bank reconciliation items would result in an adjusting journal entry on the company's books except: a. Interest earned. b. Deposits in transit. c. Service charge. d. A customer's cheque returned NSF. 39. DigDug Corporation had outstanding cheques totalling $5,400 on its June bank reconciliation. In July, DigDug issued cheques totalling $38,900. The July bank statement shows that $26,300 in cheques cleared the bank in July. The amount of outstanding cheques on DigDug's July bank reconciliation should be: a. $12,600. b. $18,000. c. $5,400. d. $7,200. Calculation : - Remaining outstanding cheques = Outstanding cheques + additional cheques issued - cheques cleared - [ 5,400 + 38,900 - 26,300 ] = $18,000 40. The perpetual inventory method of tracking inventory is considered superior to the periodic method because the perpetual method: a. Makes calculations easier and less technology can be deployed. b. Tells what inventory a company should have at any point in time. c. Saves a company from ever having to count the goods in inventory. d. Is more consistent with how companies calculated inventory in the past. 41. When goods are sold to a customer with credit terms of 2/15, n/30, the customer will: a. Receive a 15% discount if they pay within 2 days. b. Receive a 2% discount if they pay 15% of the amount due within 30 days. c. Receive a 15% discount if they pay within 30 days. d. Receive a 2% discount if they pay within 15 days. 42. At the beginning of the quarter Purrfect Pets has $30,000 in inventory. During the quarter the company purchases $7,900 of new inventory, has purchase returns of $700, and purchase discounts of $200. At the end of the quarter the balance in the Inventory account is $26,500. What is the cost of goods sold? a. $10,500. b. $11,400. c. $3,500. d. $11,900. Calculation : - Net purchases = $7, = 7,000 - COGS = Beg. Inventory + Net Purchases - Ending Inventory - 30,000 + 7000 - 26,500 COGS = $10,500 43. The Acme Corporation buys 300 units of merchandise in January at $5 each. In February, Acme buys 500 units at $4 each and in March it buys 200 units at $6 each. Acme sells 150 units during this quarter. What is the cost of goods sold under the FIFO method? a. $600 b. $934 c. $750 d. $900 FIFO method determines cost of goods sold using the cost of the oldest units first. 150 units @ $5 / unit = $750 44. When the replacement cost of inventory drops below the cost recorded in the financial records, applying the lower of cost or net realizable value ( LC&NRV ) rule means: a. A decrease in cost of goods sold. b. No change in net income, other things being equal. c. Inventory be written down to its net realizable value. d. None of the above. 45. A $15,000 overstatement of the 2011 ending inventory was discovered after the financial statements for 2011 were prepared. How would that inventory error impact the 2011 financial status? a. Current assets were overstated and net income was understated. b. Current assets were understated and net income was understated. c. Current assets were overstated and net income was overstated. d. Current assets were understated and net income was overstated. 46. During the year, a company concludes that $6,844 of specific customer accounts will not be collected. These are written off by: a. Debiting Accounts Receivable and crediting Allowance for Doubtful Accounts for $6,844. b. Debiting Accounts Receivable and crediting Bad Debt Expense for $6,844. c. Debiting Bad Debt Expense and crediting Accounts Receivable for $6,844. d. Debiting Allowance for Doubtful Accounts and crediting Accounts Receivable for $6,844. 47. The amount of uncollectible accounts at the end of the year is estimated, using the aging of receivables method, to be $25,000. The balance in the Allowance for Doubtful Accounts account is an $8,000 credit before adjustment. Assuming no accounts are written off during the period, what will be the amount of bad debts expense for the period? a. $8,000. b. $17,000. c. $25,000. d. $33,000. 48. At the beginning of the quarter, your company borrows $20,000 using a four-year promissory note that states an annual interest rate of 8% plus principal repayments of $5,000 each year. Interest is paid at the end of the second and fourth quarter, whereas principal payments are due at the end of each year. How does this new promissory note affect the amounts of current and non-current liabilities reported on the balance sheet at the end of the first quarter? a. Option A b. Option B c. Option C d. Option D At the end of the first quarter, the accrued interest payable is $400 ($20,000 * .08 * 3/12), $5,000 of the principal is a current liability since it is owed within one year, and the remaining $15,000 is a long-term liability. 49. A company pays $18,000 in interest on notes, consisting of $12,000 interest that accrued during the last accounting period and $6,000 of interest accumulated during this accounting period but not previously accrued on the books. The journal entry for the interest payment should: a. Debit Interest Expense for $18,000 and credit Cash for $18,000. b. Debit Cash for $18,000 and credit Interest Payable for $18,000. c. Debit Interest Expense for $6,000, debit Interest Payable $12,000 and credit Cash for $18,000. d. Debit Interest Payable for $12,000, debit Accrued Interest $6,000 and credit Cash for $18,000. 50. IBM is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15, 2012. Interest rates rise in the economy so that similar financial investments pay 9%. IBM will: a. Not be able to issue the bonds because no one will buy them. b. Receive a higher issue price to compensate buyers for the lower stated interest rate. c. Have to accept a lower issue price to attract buyers. d. Have to reprint the bond certificates to change the stated interest rate to 9%. 51. The going-concern assumption states that the: a. Company will always maximize the profit for shareholders. b. Company is not expected to go out of business in the near future. c. Company is a separate concern from the shareholders. d. Company's results will be reported in a consistent manner from period to period. 52. Which of the following would cause the greatest increase in a company's inventory turnover ratio? a. Keeping the same amount of inventory on hand while unit sales are increasing. b. Increasing the amount of inventory on hand while unit sales are increasing. c. Keeping the same amount of inventory on hand while unit sales are decreasing. d. Decreasing the amount of inventory on hand while unit sales are increasing. 53. A high accounts receivable turnover ratio indicates: a. The company's sales are increasing. b. A large proportion of the company's sales are on credit. c. Customers are making payments very quickly. d. The company is taking longer to sell inventory 54. The Grass is Greener Corporation's receivables turnover ratio decreases from 14.1 to 11.8. Which of the following statements is true? a. This indicates that the company is taking longer to collect credit payments. b. This is an indication that the company is experiencing falling credit costs. c. This could be an indication that the company is using more efficient collection methods. d. This is an indication that the company is buying and selling financial assets less rapidly. 55. A company has $72,500 of inventory at the beginning of the year and $65,500 at the end of the year. Sales revenue is $986,400, cost of goods sold is $572,700, and net income is $124,200 for the year. The inventory turnover ratio is: a. 1.8. b. 8.3. c. 6.0. d. 14.3 Calculation : - Avg. inventory = (prior EB inventory + current EB inventory)/2 - [ ( 72,500 + 65,500) / 2 ] = $69,000 - Inventory turnover ratio = COGS/Avg. Inventory - [ ( 572, 700 / 69,000 ) / 8.3 ] 56. A company has current assets of $5 million and net income of $10 million. Current liabilities total $2.5 million, interest expense is $2 million, and income tax expense is $3 million. The times interest earned ratio for this company is approximately: a. 0.5. b. 7.5. c. 0.3. d. 2.0. { [ ( 10,000,000 + 2,000,000 + 3,000,000 ) ] / 2,000,000 } = 7.5 57. A company sells $200,000 in long-term bonds and pays off $200,000 in accounts payable. Which of the following statements is true? a. Both the quick ratio and times interest earned ratio will rise. b. The quick ratio will fall but the times interest earned ratio will rise. c. The quick ratio will rise but the times interest earned ratio will fall. d. Both the quick ratio and times interest earned ratio will fall. 58. Company X has net sales revenue of $1,250,000, cost of goods sold of $760,000, and all other expenses of $290,000. The beginning balance of shareholders' equity is $400,000 and the beginning balance of fixed assets is $361,000. The ending balance of shareholders' equity is $600,000 and the ending balance of fixed assets is $389,000. What is the fixed asset turnover ratio? a. 0.53 b. 2.50 c. 3.33 d. 0. Calculation : - Average net assets = ( Beginning fixed assets + Ending fixed assets )/2 - [ ( 361,000 + 389,000 ) / 2 ] = $375,000 - Fixed asset turnover = Net Sales/Average Net Fixed Assets - ( 1,250,000 / 375,000 ) = 3.33 59. A company that has a current ratio less than one cannot cover: A. Current liabilities with its current cash flow. B. Current expenses with its current sales revenue. C. Expenses with its current revenues. D. Current liabilities with its current assets.