1. Communication of economic events is the part of the accounting process that involves
A) identifying economic events.
B) quantifying transactions into dollars and cents.
C) preparing accounting reports.
D) recording and classifying information.
2. The SEC and FASB are two organizations that are primarily responsible for establishing generally accepted accounting principles. It is true that
A) they are both governmental agencies.
B) the SEC is a private organization of accountants.
C) the SEC often mandates guidelines when no accounting principles exist.
D) the SEC and FASB rarely cooperate in developing accounting standards.
3. Revenues would not result from
A) sale of merchandise.
B) issuance of common stock.
C) performance of services.
D) rental of property.
4. The accounting equation for Goodboys Enterprises is as follows:
Assets Liabilities Stockholders' Equity
$120,000 = $60,000 + $60,000
If Goodboys purchases office equipment on account for $12,000, the accounting equation will change to
Assets Liabilities Stockholders' Equity
a. $120,000 = $60,000 + $60,000
b. $132,000 = $60,000 + $72,000
c. $132,000 = $66,000 + $66,000
d. $132,000 = $72,000 + $60,000
5. The usual sequence of steps in the transaction recording process is:
A) journal ? analyze ? ledger.
B) analyze ? journal ? ledger.
C) journal ? ledger ? analyze.
D) ledger ? journal ? analyze.
6. At September 1, 2008, Foli Co. reported retained earnings of $136,000. During the month, Foli generated revenues of $20,000, incurred expenses of $12,000, purchased equipment for $5,000 and paid dividends of $2,000. What is the amount of retained earnings at September 30, 2008?
7. Which of the following statements is false?
A) Revenues increase stockholders' equity.
B) Revenues have normal credit balances.
C) Revenues are a positive factor in the computation of net income.
D) Revenues are increased by debits.
8. Under accrual-basis accounting
A) cash must be received before revenue is recognized.
B) net income is calculated by matching cash outflows against cash inflows.
C) events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
D) the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.
9. The matching principle states that expenses should be matched with revenues. Another way of stating the principle is to say that
A) assets should be matched with liabilities.
B) efforts should be matched with accomplishments.
C) dividends to stockholders should be matched with stockholders' investments.
D) cash payments should be matched with cash receipts.
10. Which statement is correct?
A) As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use.
B) The use of the cash basis of accounting violates both the revenue recognition and matching principles.
C) The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received.
D) As long as management is ethical, there are no problems with using the cash basis of accounting.
11. An adjusting entry
A) affects two balance sheet accounts.
B) affects two income statement accounts.
C) affects a balance sheet account and an income statement account.
D) is always a compound entry.
12. Expenses incurred but not yet paid or recorded are called
A) prepaid expenses.
B) accrued expenses.
C) interim expenses.
D) unearned expenses.
13. Unearned revenues are
A) received and recorded as liabilities before they are earned.
B) earned and recorded as liabilities before they are received.
C) earned but not yet received or recorded.
D) earned and already received and recorded.
14. Younger Corporation purchased a one-year insurance policy in January 2008 for $48,000. The insurance policy is in effect from May 2008 through April 2009. If the company neglects to make the proper year-end adjustment for the expired insurance
A) Net income and assets will be understated by $32,000.
B) Net income and assets will be overstated by $32,000.
C) Net income and assets will be understated by $16,000.
D) Net income and assets will be overstated by $16,000.
Use the following to answer questions 15-19:
The following items are taken from the financial statements of Cerner Company for the year ending December 31, 2008:
Accounts payable $ 18,000
Accounts receivable 11,000
Accumulated depreciation – equipment 28,000
Advertising expense 21,000
Retained Earnings (1/1/08) 80,000
Common Stock 22,000
Depreciation expense 12,000
Insurance expense 3,000
Note payable, due 6/30/10 70,000
Prepaid insurance (12-month policy) 6,000
Rent expense 17,000
Salaries expense 32,000
Service revenue 133,000
Supplies expense 6,000
15. What is the company's net income for the year ending December 31, 2008?
Use the following to answer questions 33-39:
The following information pertains to Soho Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.
I can email you the information (please advise)
33. What is the current ratio for this company?
34. What is the receivables turnover for this company?
A) 2.8 times
B) 2 times
C) 3.4 times
D) 3 times
35. What is the inventory turnover for this company?
A) 2 times
B) 2.25 times
C) 1 time
D) .44 times
36. What is the return on assets for this company?
37. What is the profit margin for this company?
38. What is the return on common stockholders' equity for this company?
39. What is the price-earnings ratio for this company?
A) 6 times
B) 2.5 times
C) 8 times
D) 4 times
40. Which one of the following is primarily interested in the liquidity of a company?
A) Federal government
C) Long-term creditors
D) Short-term creditors
41. Stockholders are most interested in evaluating
A) liquidity and solvency.
B) profitability and solvency.
C) liquidity and profitability.
D) marketability and solvency.
42. Vertical analysis is also known as
A) perpendicular analysis.
B) common size analysis.
C) trend analysis.
D) straight-line analysis.
43. A general rule to use in assessing the average collection period is that
A) it should not exceed 30 days.
B) it can be any length as long as the customer continues to buy merchandise.
C) it should not greatly exceed the discount period.
D) it should not greatly exceed the credit term period
1. Generally accepted accounting principles require that certain lease agreements be accounted for as purchases. The theoretical basis for this treatment is that a lease of this type
A. effectively conveys all of the benefits and risks incident to the ownership of property.
B. is an example of form over substance.
C. provides the use of the leased asset to the lessee for a limited period of time.
D. must be recorded in accordance with the concept of cause and effect.
2. On February 1, Shoemaker Corporation entered into a firm commitment to purchase specialized equipment from the Okazaki Trading Company for ¥80,000,000 on April 1. Shoemaker would like to reduce the exchange rate risk that could increase the cost of the equipment in U.S. dollars by April 1, but Shoemaker isn’t sure which direction the exchange rate may move. What type of contract would protect Shoemaker from an unfavorable movement in the exchange rate while allowing them to benefit from a favorable movement in the exchange rate?
A. Interest rate swap
B. Forward contract
C. Call option
D. Put option
3. Which of the following temporary differences ordinarily creates a deferred tax asset?
A. Accrued warranty costs
C. Installment sales
D. Amortization of goodwill
4. The vested benefits of an employee in a pension plan represent benefits
A. to be paid to the retired employee in the current year.
B. to be paid to the retired employee in subsequent years.
C. to be paid from funds currently in the hands of an independent trustee.
D. that aren’t contingent on the employee’s continuing in the service of the employer.
5. For a capital lease, the amount recorded initially by the lessee as a liability should
A. exceed the present value at the beginning of the lease term of minimum lease payments during the lease term.
B. exceed the total of the minimum lease payments during the lease term.
C. not exceed the fair value of the leased property at the inception of the lease.
D. equal the total of the minimum lease payments during the lease term.
6. Piston Corporation has the following pension information for the year ended December 31, 2006:
Service cost $ 225,000
Contributions to the plan 240,000
Actual return on plan assets 210,000
Projected benefit obligation
(beginning of year) 2,700,000
Market-related and fair value of
plan assets (beginning of year) 1,800,000
Assuming the expected return on plan assets and the settlement rate are both 10 percent,
what amount should Piston report for pension expense for 2006?
7. The Gayle Corporation reported a $66,000 operating loss in 2006. In the preceding three years, Gayle reported the following income before taxes and paid the indicated income taxes:
Year Income Taxes Tax Rate
2003 $36,000 $10,800 30 percent
2004 24,000 8,400 35 percent
2005 48,000 16,800 35 percent
The amount of tax benefit to be reported in 2006 arising from the tax carryback provisions
of the current tax code would be
8. Washington Corporation provides an incentive compensation plan under which its
president is to receive a bonus equal to 10 percent of Washington’s income in excess of
$100,000 before deducting income tax but after deducting bonus. If income before income
tax and bonus is $320,000 and the effective tax rate is 40 percent, the amount of the
bonus should be
9. Uncertainty that the party on the other side of an agreement will abide by the terms of the agreement is referred to as _______ risk.
C. interest rate
D. exchange rate
10. During the first week of January, Sam Jones earned $200. Assume that FICA taxes are 7.65 percent of wages up to $50,000, state unemployment tax is 5.0 percent of wages up to $13,000, and federal unemployment tax is 0.8 percent of wages up to $13,000. Assume that Sam has voluntary withholdings of $10 (in addition to taxes) and that federal and state income tax withholdings are $18 and $6, respectively. What amount is the check, net of all deductions, that Sam received for the week’s pay?
11. Begal Corporation paid $20,000 in January of 2006 for premiums on a two-year life insurance
policy that names the company as the beneficiary. Additionally, Begal Corporation’s financial statements for the year ended December 31, 2006, revealed the company paid $105,000 in taxes during the year and also accrued estimated losses on disposal of unused plant facilities of $200,000. Assuming these facilities were sold in February of 2007 (at which time a $200,000 loss was recognized for tax purposes) and that Begal’s
tax rate is 30 percent for both 2006 and 2007, what amount should Begal report as asset for net deferred income taxes on its 2006 balance sheet?
12. Lease Y doesn’t contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease Z doesn’t transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases?
Lease Y Lease Z
A. Capital lease Operating lease
B. Capital lease Capital lease
C. Operating lease Capital lease
D. Operating lease Operating lease
13. Chester Company has a defined benefit plan. The fair value of plan assets on January 1, 2006, was $1,500,000. No unrecognized net loss or gain existed. On December 31, 2006, the fair value of the plan assets was $1,860,000. Benefits paid to retirees equaled $300,000. Company contributions to the plan totaled $360,000. The settlement rate was 8 percent, and the expected long-term rate of return on plan assets was 10 percent. The actual return on plan assets was
14. On January 1, 2006, Shak, Inc. signed a noncancellable lease for a sneaker-shining
machine. The machine has an estimated useful life of nine years. The term of the lease is
a six-year term with title passing to Shak at the end of the lease. The agreement called for
annual payments of $40,000 starting at the end of the first year. Assume aggregate lease
payments were determined to have a present value of $200,000, based on implicit interest
of 12 percent. What amount of interest expense should Shak report in its 2006 income
statement from this lease transaction?
15. In 2005, The Worf Company reported pretax financial income of $500,000. Included in that pretax financial income was $90,000 of nontaxable life insurance proceeds received as a result of the death of an officer; $120,000 of warranty expenses accrued but unpaid as of December 31, 2005; and $20,000 of goodwill amortization. Assuming no income taxes were previously paid during the year and an income tax rate of 40 percent, the amount of income taxes payable on December 31, 2005, would be
16. Viking Corporation reported depreciation of $250,000 on its 2005 tax return. However, in
its 2005 income statement, Viking reported depreciation of $100,000. The difference in
depreciation is a temporary difference that will reverse over time. Assuming Viking’s tax
rate is constant at 30 percent, what amount should be added to the deferred income tax
liability in Viking’s December 31, 2005, balance sheet?
17. On December 31, 2005, Gephardt Enterprises leased equipment from B & B Equipment Rental. Pertinent lease transaction data are as follows:
¦ The estimated seven-year useful equipment life coincides with the lease term.
¦ The first of the seven equal annual $200,000 lease payments was paid on December 31, 2005.
¦ B & B’s implicit interest rate of 12 percent is known to Gephardt.
¦ Gephardt’s incremental borrowing rate is 14 percent.
¦ Present values of an annuity of 1 in advance for seven periods are 5.11 at12 percent and 4.89 at 14%.
Gephardt should record the equipment on the books at
18. Hazard Inc. manufactures equipment that’s sold or leased. On December 31, 2005, Hazard leased equipment to Robards for a five-year period expiring December 31, 2010, at which date ownership of the leased asset will be transferred to Robards. Equal $40,000 payments under the lease are due on December 31 of each year. The first payment was made on December 31, 2005. Collectibility of the remaining lease payments is reasonably assured, and Hazard has no material cost uncertainties. The normal sales price of the
equipment is $154,000 and cost is $120,000. For the year ended December 31, 2005, how much income should Hazard recognize from the lease transaction?
19. Each full-time employee of Sunshine Greenhouse is entitled to 10 paid sick days each year. The sick pay isn’t vested, but any unused sick days can be carried over to subsequent years. Under FASB Statement No. 43, Sunshine Greenhouse should
A. recognize sick pay as an expense when actually paid.
B. recognize an estimated current liability for unused sick pay at the end of each period.
C. recognize an estimated noncurrent liability for unused sick pay at the end of each period.
D. accrue or not accrue sick pay based on historical rates of absenteeism.
20. Which of the following creates a permanent difference between financial income and taxable income?
A. Interest received on municipal bonds
B. Completed contract method of recognizing construction revenue
C. Unearned rent revenue
D. Accelerated cost recovery on plant and equipment