1) Bank Overdrafts, If Material, Should Be

1) Bank overdrafts, if material, should be
A. / reported as a deduction from cash.
B. / netted against cash and a net cash amount reported.
C. / reported as a deduction from the current asset section.
D. / reported as a current liability.
2) A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and
A. / has a current market value that is greater than its original cost.
B. / bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation.
C. / is acceptable as a means to pay current liabilities.
D. / is so near its maturity that it presents insignificant risk of changes in interest rates.
3) Which of the following is NOT considered cash for financial reporting purposes?
A. / Money orders, certified checks, and personal checks
B. / Coin, currency, and available funds
C. / Petty cash funds and change funds
D. / Postdated checks and I.O.U.'s
4) If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as
A. / an item of "other expense" in the income statement.
B. / a deduction from accounts receivable in determining the net realizable value of accounts receivable.
C. / a deduction from sales in the income statement.
D. / sales discounts forfeited in the cost of goods sold section of the income statement.
5) Which of the following methods of determining bad debt expense does NOT properly match expense and revenue?
A. / Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method.
B. / Charging bad debts with an amount derived from aging accounts receivable under the allowance method.
C. / Charging bad debts with a percentage of sales under the allowance method.
D. / Charging bad debts as accounts are written off as uncollectible.
6) Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does NOT make the balance sheet misleading because
A. / the allowance for uncollectible accounts includes a discount element.
B. / the amount of the discount is NOT material.
C. / most short-term receivables are NOT interest-bearing.
D. / most receivables can be sold to a bank or factor.
7) Valuation of inventories requires the determination of all of the following EXCEPT
A. / the cost of goods held on consignment from other companies.
B. / the physical goods to be included in inventory.
C. / the cost flow assumption to be adopted.
D. / the costs to be included in inventory.
8) Eller Co. received merchandise on consignment. As of January 31, Eller included the goods in inventory, but did NOT record the transaction. The effect of this on its financial statements for January 31 would be
A. / net income and current assets were overstated and current liabilities were understated.
B. / net income was correct and current assets were understated.
C. / net income, current assets, and retained earnings were understated.
D. / net income, current assets, and retained earnings were overstated.
9) The accountant for the Orion Sales Company is preparing the income statement for 2007 and the balance sheet at December 31, 2007. Orion uses the periodic inventory system. The January 1, 2007 merchandise inventory balance will appear
A. / as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet.
B. / only in the cost of goods sold section of the income statement.
C. / as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet.
D. / only as an asset on the balance sheet.
10) Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method?
A. / Prices increased.
B. / Prices remained unchanged.
C. / Price trend cannot be determined from information given.
D. / Prices decreased.
11) The use of a Discounts Lost account implies that the recorded cost of a purchased inventory item is its
A. / invoice price less the purchase discount taken.
B. / invoice price plus the purchase discount lost.
C. / invoice price less the purchase discount allowable whether taken or not.
D. / invoice price.
12) All of the following costs should be charged against revenue in the period in which costs are incurred EXCEPT for
A. / costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
B. / costs which will NOT benefit any future period.
C. / costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.
D. / manufacturing overhead costs for a product manufactured and sold in the same accounting period.
13) In no case can "market" in the lower-of-cost-or-market rule be more than
A. / estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal and an allowance for an approximately normal profit margin.
B. / estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.
C. / estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses.
D. / estimated selling price in the ordinary course of business.
14) The primary basis of accounting for inventories is cost. A departure from the cost basis of pricing the inventory is required where there is evidence that when the goods are sold in the ordinary course of business their
A. / selling price will be less than their replacement cost.
B. / cost will be less than their replacement cost.
C. / replacement cost will be more than their net realizable value.
D. / future utility will be less than their cost.
15) An item of inventory purchased this period for $15.00 has been incorrectly written down to its current replacement cost of $10.00. It sells during the following period for $30.00, its normal selling price, with disposal costs of $3.00 and normal profit of $12.00. Which of the following statements is NOT true?
A. / The cost of sales of the following year will be understated.
B. / The closing inventory of the current year is understated.
C. / The current year's income is understated.
D. / Income of the following year will be understated.
16) Which of the following is NOT a basic assumption of the gross profit method?
A. / The beginning inventory plus the purchases equal total goods to be accounted for.
B. / If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus purchases, the result is the amount of inventory on hand.
C. / Goods NOT sold must be on hand.
D. / The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period.
17) The gross profit method of inventory valuation is invalid when
A. / a portion of the inventory is destroyed.
B. / there is no beginning inventory because it is the first year of operation.
C. / there is a substantial increase in inventory during the year.
D. / none of these.
18) When the conventional retail inventory method is used, markdowns are commonly ignored in the computation of the cost to retail ratio because
A. / there may be no markdowns in a given year.
B. / markups are also ignored.
C. / this tends to give a better approximation of the lower of cost or market.
D. / this tends to result in the showing of a normal profit margin in a period when no markdown goods have been sold.
19) The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to
A. / the machinery account.
B. / miscellaneous tax expense (which includes all taxes other than those on income).
C. / a separate deferred charge account.
D. / accumulated depreciation--machinery.
20) The cost of land typically includes the purchase price and all of the following costs EXCEPT
A. / private driveways and parking lots.
B. / street lights, sewers, and drainage systems cost.
C. / assumption of any liens or mortgages on the property.
D. / grading, filling, draining, and clearing costs.
21) Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is located with the plan to tear down the Holiday Hotel and build a new luxury hotel on the site. The cost of the Holiday Hotel should be
A. / capitalized as part of the cost of the land.
B. / written off as an extraordinary loss in the year the hotel is torn down.
C. / capitalized as part of the cost of the new hotel.
D. / depreciated over the period from acquisition to the date the hotel is scheduled to be torn down.
22) Which of the following assets do NOT qualify for capitalization of interest costs incurred during construction of the assets?
A. / Assets financed through the issuance of long-term debt.
B. / Assets intended for sale or lease that are produced as discrete projects.
C. / Assets NOT currently undergoing the activities necessary to prepare them for their intended use.
D. / Assets under construction for an enterprise's own use.
23) Which of the following costs are capitalized for self-constructed assets?
A. / Materials and overhead only
B. / Labor and overhead only
C. / Materials, labor, and overhead
D. / Materials and labor only
24) To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be
A. / allocated on an opportunity cost basis.
B. / eliminated completely from the cost of the asset.
C. / allocated on a pro rata basis between the asset and normal operations.
D. / allocated on the basis of lost production.
25) The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset and the exchange has commercial substance is usually recorded at
A. / the fair value of the asset received if it is equally reliable as the fair value of the asset given up.
B. / the fair value of the asset given up, and a gain but NOT a loss may be recognized.
C. / either the fair value of the asset given up or the asset received, whichever one results in the largest gain (smallest loss) to the company.
D. / the fair value of the asset given up, and a gain or loss is recognized.
26) The King-Kong Corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange. The exchange is NOT expected to cause a material change in the future cash flows for either entity. If a gain on the disposal of the old asset is indicated, the gain will
A. / effectively increase the amount to be recorded as the cost of the new asset.
B. / effectively reduce the amount to be recorded as the cost of the new asset.
C. / be credited directly to the owner's capital account.
D. / be reported in the Other Revenues and Gains section of the income statement.
27) When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds NOT needed to pay for construction may be temporarily invested in interest-bearing securities. Interest earned on these temporary investments should be
A. / offset against interest cost incurred during construction.
B. / used to reduce the cost of assets being constructed.
C. / multiplied by an appropriate interest rate to determine the amount of interest to be capitalized.
D. / recognized as revenue of the period.
28) If an industrial firm uses the units-of-production method for computing depreciation on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will
A. / be constant.
B. / vary with unit sales.
C. / vary with sales revenue.
D. / vary with production.
29) The major difference between the service life of an asset and its physical life is that
A. / service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.
B. / physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value.
C. / physical life is always longer than service life.
D. / service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners.
30) Which of the following most accurately reflects the concept of depreciation as used in accounting?
A. / The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred.
B. / The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
C. / A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved.
D. / An accounting concept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible assets.
31) Pine Company purchased a depreciable asset for $360,000. The estimated salvage value is $24,000, and the estimated useful life is 8 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?