1) Which of the following statements is true?
A. Publicly traded U.S. companies must provide an annual report to their shareholders only when operating conditions change significantly.
B. An unqualified independent auditor’s report must be included in the annual report.
C. Notes to the financial statements do not need to be included in the annual report because that information is only for internal users.
D. A Management Discussion and Analysis section is required in annual reports to shareholders even when financial results are positive.
2) Notes to the financial statements include which of the following:
A. An independent auditors report.
B. Explanations of uncertainties.
C. Short-form Income Statement
D. Subsidiary ledger for Accounts Receivable
3) Which of the following financial statements is divided into major categories of operating, investing, and financing activities?
A. The income statement.
B. The balance sheet.
C. The retained earnings statement.
D. The statement of cash flows.
4) If the retained earnings account increases from the beginning of the year to the end of the year, then A. net income is less than dividends.
B. a net loss is less than dividends.
C. additional investments are less than net losses.
D. net income is greater than dividends.
5) If services are rendered on account, then
A. assets will decrease.
B. liabilities will increase.
C. stockholders’ equity will increase.
D. liabilities will decrease.
6) An investment by the stockholders in a business increases
A. assets and stockholders’ equity.
B. assets and liabilities.
C. liabilities and stockholders’ equity.
D. assets only.
7) Using accrual accounting, expenses are recorded and reported only:
A. when they are incurred whether or not cash is paid.
B. when they are incurred and paid at the same time.
C. if they are paid before they are incurred.
D. if they are paid after they are incurred.
8) A small company may be able to justify using a cash basis of accounting if they have:
A. sales under $1,000,000.
B. no accountants on staff.
C. few receivables and payables.
D. all sales and purchases on account.
9) Stockholders’ equity can be described as claims of
A. creditors on total assets.
B. owners on total assets.
C. customers on total assets.
D. debtors on total assets.
10) Common stock is reported on the
A. statement of cash flows.
B. retained earnings statement.
C. income statement.
D. balance sheet.
11) The Vintage Laundry Company purchased $6,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $2,000 on hand. The adjusting entry that should be made by the company on June 30 is:
A. debit Laundry Supplies Expense, $2,000; credit Laundry Supplies, $2,000.
B. debit Laundry Supplies, $4,500; credit Laundry Supplies Expense, $4,500.
C. debit Laundry Supplies, $2,000; credit Laundry Supplies Expense, $2,000.
D. debit Laundry Supplies Expense, $4,500; credit Laundry Supplies, $4,500.
12) On July 1 the Fisher Shoe Store paid $15,000 to Acme Realty for 6 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by the Fisher Shoe Store is:
A. debit Rent Expense, $15,000; credit Prepaid Rent, $2,500.
B. debit Prepaid Rent, $2,500; credit Rent Expense, $2,500.
C. debit Rent Expense, $2,500; credit Prepaid Rent, $2,500.
D. debit Rent Expense, $15,000; credit Prepaid Rent, $12,500.
13. Use the following data to determine the total dollar amount of assets to be classified as current assets.
Carne Auto Supplies Balance Sheet December 31, 2012
Cash $ 130,000 Accounts Payable $ 140,000
Prepaid Insurance 60,000 Salaries Payable 20,000
Accounts Receivable 100,000 Mortgage Payable 160,000
Inventory 140,000 Total Liabilities $320,000
Land held for Investment 150,000
Buildings $200,000 Common Stock $240,000
Less Accumulated Retained Earnings 500,000
Depreciation (40,000) 160,000 Total Stockholders' Equity $740,000
Trademarks 140,000 Total Liabilities and
Total Assets $1,060,000 Stockholders' Equity $1,060,000
14. Use the following data to calculate the current ratio.
Koonce Office Supplies Balance Sheet December 31, 2012 Cash $ 130,000
Accounts Payable $ 140,000
Prepaid Insurance 60,000
Salaries Payable 20,000
Accounts Receivable 100,000
Mortgage Payable 160,000
Total Liabilities $320,000
Land held for Investment 150,000
Land 180,000 Buildings $200,000
Common Stock $240,000
Less Accumulated Retained Earnings 500,000
Depreciation (40,000) 160,000 Total Stockholders’
Total Liabilities and Total Assets $1,060,000
Stockholders’ Equity $1,060,000
A. 1.81 : 1.
B. 1.44 : 1.
C. 3.07 : 1.
D. 2.69 : 1.
15) In horizontal analysis, each item is expressed as a percentage of the A. net income amount.
B. stockholders’ equity amount.
C. total assets amount.
D. base-year amount.
16) When a change in depreciation method occurs:
A. prior years’ financial statements should be changed to reflect the newly adopted method.
B. the change should be reported in current and future years.
C. the cumulative effect of the change should be reflected on the income statement as of the beginning of the next year.
D. the cumulative effect of the change in accounting principle should be classified as an extraordinary item on the income statement.
17) Which of the following statements is true with respect to financial statement reporting for all cases when a company changes from one acceptable accounting method to another?
A. Comparability across periods is impaired.
B. Only a footnote is required to report the change.
C. Changes in both depreciation methods and inventory methods are reported retroactively.
D. Management must indicate that the accounting method change is preferable to the old method.
18) Which of the following would be considered a change in accounting principle?
A. Changing the estimated percentage used in calculating bad debt expense.
B. Changing the inventory costing method used from FIFO to LIFO.
C. Changing the estimated useful life of a plant asset from 5 to 10 years
D. Changing auditing firms to find a more liberal opinion.
19) From an internal control standpoint, the asset most susceptible to improper diversion and use is
A. prepaid insurance.
20) A very small company would have the most difficulty in implementing which of the following internal control activities?
A. Separation of duties.
B. Limited access to assets.
C. Periodic independent verification.
D. Sound personnel procedures.
21) The reconciliation of the cash register tape with the cash in the register is an example of
A. other controls.
B. independent internal verification.
C. establishment of responsibility.
D. segregation of duties.
22) Deposits in transit
A. have been recorded on the company’s books 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’ checks that have not yet been received by the company
23) Which of the following items on a bank reconciliation would require an adjusting entry on the company’s books?
A. An error by the bank.
B. Outstanding checks.
C. A bank service charge.
D. A deposit in transit
24) Notification by the bank that a deposited customer check was returned NSF requires that the company make the following adjusting entry:
A. Accounts Receivable/Cash
B. Cash/Accounts Receivable
C. Miscellaneous Expense/Accounts Receivable
D. No adjusting entry is necessary.
25) Why do pension and mutual funds invest in debt and equity securities?
A. They have excess cash.
B. They want to generate earnings from investment income.
C. They invest for strategic reasons.
D. They invest for speculative reasons
26) Which of the following is a debt security?
A. IBM stock.
B. Treasury stock.
C. Treasury bills.
D. Real Estate.
27) Reed Company acquires 80 Holmes 10%, 5 year, $1,000 bonds on January 1, 2012 for $82,000. This includes a brokerage commission of $2,000. The journal entry to record this investment includes a debit to
A. Debt Investments for $80,000.
B. Debt Investments for $82,000.
C. Cash for $82,000.
D. Stock Investments for $80,000.
28) Reed Company acquires 80 Holmes 10%, 5 year, $1,000 bonds on January 1, 2012 for $82,000. This includes a brokerage commission of $2,000. Assume Holmes pays interest semiannually and the July 1 entry was done correctly. The journal entry at December 31, 2012 would include a credit to
A. Interest Receivable for $4,000.
B. Interest Revenue for $8,000.
C. Accrued Expense for $8,000.
D. Interest Revenue for $4,000.
29) A company that owns more than 50% of the common stock of another company is known as the
A. charge company.
B. subsidiary company.
C. parent company.
D. management company
30) If a parent company has two wholly owned subsidiaries, how many legal and economic entities are there from the viewpoint of the shareholders of the parent company?
A. Legal 3 Economic 3
B. Legal 1 Economic 2
C. Legal 3 Economic 1
D. Legal 2 Economic 1