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Test Bank
Chapter 2: Concepts and Elements Underlying Accounting
Multiple Choice
1.Probable future economic benefits obtained or controlled by an entity because of a past transactions or events are known as
a. assets.
b. liabilities.
c.stockholders’ equity.
d.revenues.
e. expenses.
2.Which of the following are assets?
PatentPrepaid SuppliesRetained EarningsEarned Revenue
a. noyesyesno
b. yesyesyesno
c.noyesyesyes
d.yesyesnono
e. yesyesnoyes
3.A current asset must
I.be easily converted into cash.
II.have future economic benefit.
III.be used up or converted into cash within the next year or operating cycle, whichever is shorter.
a.I is true.
b.I and II are true.
c.II and III are true.
d.I and III are true.
e.I, II, and III are true.
4. Which of the following statements is false?
a. A business’s operating cycle is the average time a company takes to buy inventory, sell that inventory, and collect cash from customers.
b.Operating cycles can be shorter or longer than one year.
c.A current asset is cash or any other asset that will be converted into cash, sold, or used up within the next year.
d. Cash and inventory are current assets.
e.Current assets are listed in descending order of liquidity.
5.Amounts owed to a business by customers are called
a.cash.
b.short-term investments.
c.accounts payable.
d.accounts receivable.
e.revenue.
6.Q Company paid $3,600 for a two-year insurance policy on January 2, 2010. On that date, Q Company considers the $3,600 payment a(an)
a.account payable.
b.prepaid asset.
c.expense.
d.revenue.
e.short-term investment.
7.On May 15, 2010, R Co. purchased land for $150,000. R Co. intends to build a new headquarters building on that land in 2015. On May 15, 2010, R Co. considers the land a(an)
a.prepaid asset.
b.property, plant and equipment item.
c.expense.
d.short-term investment.
e.long-term investment.
8. Which of the following statements about property, plant, and equipment and depreciation is true?
a. Plant, property, and equipment assets are sold to customers in the normal course of business.
b.Accounting requires that the cost of a depreciable asset be recorded as an expense over time periods benefited by that asset.
c.Accumulated depreciation is the total amount of depreciation that has been recorded on a depreciable asset in the current period.
d.Accounting and general usages of the term depreciation are the same.
e. All of the above statements are true.
9.On Jan. 2, 2010, Sivan Corporation acquires a truck for $500,000. Cash of $400,000 is paid and a note payable for the remaining $100,000 was signed at acquisition. The truck is depreciated over a 10 year period at $50,000 per year. What is the historical cost recorded on the year-end 2013 balance sheet?
a.$ 50,000
b.$150,000
c.$350,000
d.$400,000
e.$500,000
10.On Jan. 2, 2010, Sivan Corporation acquires a truck for $500,000. Cash of $400,000 is paid and a note payable for the remaining $100,000 was signed at acquisition. The truck is depreciated over a 10 year period at $50,000 per year. What is the accumulated depreciation at January 1, 2012?
a.$ 50,000
b.$100,000
c.$150,000
d.$400,000
e.$500,000
11.On Jan. 2, 2010, Wright Construction Co. purchased equipment for $50,000. Wright expects to use the equipment for three years, at which time it will have an estimated salvage value of $27,500. What is the depreciation expense for2010?
a.$ 7,500
b.$ 9,167
c.$16,667
d.$27,500
e.$50,000
12.On Jan.2, 2010, Doric Company purchased a machine for $75,000. Doric expects the machine to have a useful life of 10 years and $5,000 salvage value. What is the book value of machine at the end of 2011?
a.$56,000
b.$60,000
c.$61,000
d.$70,000
e.$75,000
13.On Jan. 2, 2010, Doric Company purchased a new machine for $75,000. Doric expects the machine to have a useful life of 10 years and $5,000 salvage value. What is the accumulated depreciation on the machine at the end of 2012?
a.$ 7,000
b.$ 7,500
c.$14,000
d.$21,000
e.$22,500
14.Which of the following are examples of intangible assets?
CopyrightsShort-Term InvestmentsPrepaid SuppliesTrademarks
a.yesyesyesyes
b.yesnoyesyes
c.noyesyesno
d.yesnonoyes
e.yesyesyesno
15.Amounts owed by businesses to third parties are known as
a. assets.
b. liabilities.
c.stockholders’ equity.
d.revenues.
e. expenses.
16.A debt or obligation that will be eliminated by giving up current assets or incurring a current liability is a
a. prepaid asset.
b. current asset.
c. current liability.
d.long-term asset.
e.long-term liability.
17.When a company determines that there is an amount that it currently owes but has not yet recorded, that company will record a(an)
a. prepaid asset acount.
b. current asset account.
c. intangible asset account.
d.accrued liability account.
e.equity account.
18.Lima Co. has received $12,000 for future subscriptions to The Bean Magazine. Lima should record this amount as a(an)
a.long-term investment.
b.earned revenue.
c.account receivable.
d.expense.
e.unearned revenue.
19.In 2007, Alca Co. issued a long-term note payable that would come due on May 15, 2011. On its December 31, 2010 balance sheet, this note should be classified as a(an)
a.long-term liability.
b.short-term liability.
c.intangible asset.
d.long-term investment.
e.expense.
20.The owners’ interest in a corporation is represented by
a. total assets.
b. long-term liabilities.
c.total stockholders’ equity.
d.common stock.
e. revenues.
21.A share of ownership in a corporation is known as
a. common stock.
b. par value.
c. additional paid-in capital.
d. retained earnings.
e. an expense.
22.The specific dollar amount printed on each stock certificate is the
a. book value.
b. par value.
c.net realizable value.
d.net present value.
e. market value.
23.When a share of stock is first sold, the amount received by the company may be different from the amount printed on the stock certificate. Any amount over that printed amount will be recognized in which of the following accounts?
a. Common Stock.
b. Retained Earnings
c.Revenue from Stock Sales
d.Additional Paid-In Capital
e. Long-Term Investment
24.Barrington Industries recently sold 1,000 shares of common stock with a par value of $0.10 per share and a market price of $15.00 per share. As a result of this sale, Barrington’s additional paid-in capital should increase by
a. $100.
b.$14,900.
c. $15,000.
d.$15,100.
e.none of the above
25.Barrington Industries recently sold 1,000 shares of common stock with a par value of $0.10 per share and a market price of $15.00 per share. As a result of this sale, Barrington’s total stockholders’ equity should increase by
a. $100.
b.$14,900.
c. $15,000.
d.$15,100.
e.none of the above
26.The total amount of profits generated by a company and not distributed as dividends to stockholders is called
a. revenue.
b. common stock.
c. par value.
d.additional paid-in capital.
e.retained earnings.
27.A distribution of a corporation’s profits to owners is a
DividendExpense
a.yesno
b.noyes
c.yesyes
d.nono
28.Inflows of new assets into a business that have been generated by business operating activities are included in
a. common stock.
b. liabilities.
c.additional paid-in capital.
d.revenues.
e. expenses.
29.When Deliteful Bites sells the gourmet food that it makes, the company should record a(an)
a. accounts payable if cash was not collected at the point of sale.
b. unearned revenue if cash was not collected at the point of sale.
c.operating revenue regardless of whether cash was collected at the point of sale.
d.non-operating revenue if cash was not collected at the point of sale.
e. operating revenue only if cash was collected at the point of sale.
30.On March 13, 2010, Strauss Department Store purchased five sweaters from Charter Manufacturers for $20 each. On April 1, 2010, Lela Landers purchased all of those sweaters from Strauss for $35 each. Strauss should recognize a
a. $75 increase in revenue for the sale of the sweaters to Landers.
b. $100 increase in revenue for the sale of the sweaters to Landers.
c. $75 increase in cost of goods sold for the sale of sweaters to Landers.
d. $100 increase in cost of goods sold for its sale of sweaters to Landers.
e. $175 increase in cost of goods sold for its sale of sweaters to Landers.
31.Salaries paid to employees working at cash registers in a grocery store would be considered part of
a.dividends.
b.operating expenses.
c.non-operating expenses.
d. cost of good sold.
e. none of the above
32.Cool Dudes, a chain of record stores, is expanding and has obtained loans from several major banks. Cool Dude should record all interest associated with the loans as
a. operating revenues.
b.non-operating revenues.
c.operating expenses.
d.non-operating expenses.
e. cost of goods sold.
33.The difference between sales revenue and cost of goods sold during a period is
a. gross profit.
b.net income.
c.operating income.
d.retained earnings.
e. accounts receivable.
34.Shelton Corp., a local manufacturer, reported the following information for 2010:
Sales $750,000
Cost of Goods Sold 562,500
Operating Expenses 112,500
Income Tax Expense 22,500
What is Shelton Corp.’s gross profit percentage?
a. 7%
b.10%
c.15%
d.25%
e.30%
35.Shelton Corp., a local manufacturer, reported the following information for 2010:
Sales $750,000
Cost of Goods Sold 562,500
Operating Expenses 112,500
Income Tax Expense 22,500
What is Shelton Co.’s operating income?
a.$ 52,500
b.$ 75,000
c.$ 90,000
d.$187,500
e.$615,000
36.On September 25, 2010, Fox Department Store purchased five bottles of perfume from Bloomington Manufacturers for $39 each. On October 1, 2010, Janet Wyatt purchased two bottles of the perfume from Fox for $65 each. For this sale, Fox’s gross profit and gross profit percentage were
Gross ProfitGross Profit %
a. $13030%
b.$ 2660%
c.$ 7867%
d.$ 5260%
e. $ 5240%
37.Which of the following formulas is correct?
a. Revenues – Gross Profit – Non-Operating Expenses = Net Income
b.Gross Profit – Non-Operating Expenses – Income Tax Expense = Net Income
c.Revenues – Cost of Goods Sold – Non-Operating Expenses – Income Tax Expense = Net Income
d.Revenues – Cost of Goods Sold – Other Operating Expenses – Non-Operating Expenses – Income Tax Expense = Net Income
e. Revenues – Unearned Revenues – Cost of Goods Sold – Non-Operating Expenses – Income Tax Expense = Net Income
38.In the U.S., the income generated by
a.sole proprietorships and partnerships is never taxed.
b.corporations is taxed using a graduated scale.
c.sole proprietorships, partnerships, and corporations is taxed using a flat rate.
d.sole proprietorships and partnerships is taxed to the individual stockholders at their personal income tax rates.
e.both a and b are correct.
39.The primary purpose of financial reports is to
a.reflect a company’s profitability.
b.measure a company’s current market value.
c.indicate to users the best organization in which to invest.
d.provide useful information in making economic decisions.
e.reflect a company’s ability to generate cash.
40.In its simplest form, earnings per share for a company is calculated as
a.gross profit divided by the number of shares of stock held by that company’s stockholders.
b.net income divided by the number of shares of stock held by that company’s stockholders.
c.net income divided by the number of shares of stock traded for that company on the stock exchange at the end of the company’s fiscal year.
d.operating income divided by the number of shares of stock held by that company’s stockholders.
e.operating income divided by the number of shares of stock that the company is allowed to sell.
41.Which of the following statements about the objectives of financial reporting is false?
a. The financial reporting objectives indicate that accrual accounting provides the best information for decision makers and there is no need for information related to cash.
b.Financial reports should provide information that is useful in making investing, lending, and other economic decisions.
c.Financial reports should provide information that is useful to decision makers in predicting the future cash flows of businesses and future cash dividends from those businesses.
d.Financial reports should provide information about the assets and liabilities of businesses and the transactions and other events that have resulted in changes in those assets and liabilities.
e.Statements a and c are false.
42.The concept that states that financial reports should be comprehensible to people who are reasonably perceptive about business and economic activities and are willing to study the information with reasonable diligence is
a. understandability.
b.relevance.
c.reliability.
d.materiality.
e. comparability.
43.The most important qualitative characteristic that accounting information should possess is
a.relevance.
b.reliability.
c.accuracy.
d.representation faithfulness.
e.decision usefulness.
44.Which of the following statements about relevant accounting information is true?
a. Predictive value helps decision makers confirm or correct earlier expectations.
b.Predictive value implies that accounting data should portray the true nature of a business’s economic resources, obligations, and transactions.
c.Relevant information is provided to decision makers in a time frame that will influence their decisions.
d.Feedback value allows a user to forecast future occurrences from a current situation.
e. Information that is provided to stockholders within one month of its occurrence would always be considered timely.
45.Which of the following characteristics make accounting information relevant?
Verifiability Neutrality Timeliness Feedback Value
a. yesyesyesyes
b.noyesnoyes
c.nonoyesyes
d.yesyesnono
e. yesnoyesno
46.Which of the following statements about reliable accounting information is true?
a. Reliable accounting information is timely and has predictive and feedback value.
b.Neutrality implies that accounting data should portray the true nature of a business’s economic resources, obligations, and transactions.
c.A set of financial statements that contains only a balance sheet and an income statement would be considered representationally faithful.
d.Verifiability means that the accounting data could be duplicated by multiple people.
e. Reliable accounting information is completely free from errors.
47.Reliability in accounting indicates the possession by information of which of the following traits?
NeutralityRepresentational FaithfulnessTimeliness
a.yesyesno
b.noyesyes
c.yesnoyes
d.yesyesyes
e.nonono
48.The concept indicating that specific items of accounting information are important is
a. understandability.
b.relevance.
c.reliability.
d.materiality.
e. comparability.
49.GAAP refers to
a.government adjusted accounting principles.
b.generally accepted accounting principles.
c.general accrual accounting principles.
d.granted annual accounting period.
e.governmentally approved accounting principles.
50.The situation of accountants preparing meaningful financial reports for on-going businesses by dividing their lives into reporting intervals of equal length reflects the
a. accounting period concept.
b.historical cost principle.
c.unit of measurement concept.
d.going concern assumption.
e. revenue recognition rules.
51.The requirement for publicly owned companies to issue quarterly and annual financial statements is mandated by the
a. Securities and Exchange Commission.
b.Financial Accounting Standards Board.
c.New York Stock Exchange.
d.Internal Revenue Service.
e. American Institute of CPAs.
52.In the U.S., the historical cost principle
a. states that all assets be shown on the financial statements at the company’s original cost.
b.allows assets to be shown on the financial statements at the most reliable financial value.
c.allows the balance sheet amount of stockholders’ equity to reflect the organization’s market value.
d.is not affected by the conservatism principle.
e. provides values that are more verifiable and less subject to estimation or opinion than current values.
53.Tipple Co. is located in southern Mississippi and the property value of the company’s headquarters was reduced after a hurricane uprooted all the trees and caused significant erosion. Tipple Co. should
a.nake no adjustments to its financial statements because of the historical cost principle.
b.nake no adjustments to its financial statements but provide full disclosure of the incident in the footnotes.
c.write up the property value for the planting of new trees based on the going concern principle.
d.write down the property value to fair market value based on the matching principle.
e.write down the property value to fair market value based on the conservatism principle.
54.Which of the following concepts is of highest importance in recording asset values in recessionary times?
a.Unit of measurement
b.Historical cost
c.Going concern
d.Conservatism
e.Materiality
55.The concept that mandates that businesses use a common unit in accounting for their transactions is the
a. accounting period concept.
b.historical cost principle.
c.unit of measurement concept.
d.going concern assumption.
e. revenue recognition rule.
56.The belief that an entity will continue to operate, unless there is evidence to the contrary, is the
a. accounting period concept.
b.historical cost principle.
c.unit of measurement concept.
d.going concern assumption.
e. revenue recognition rule.
57.Requiring the transactions of a business be accounted for separately from the personal transactions of its owners reflects the
a. entity concept.
b.historical cost principle.
c.unit of measurement concept.
d.going concern assumption.
e. revenue recognition rule.
58.Before being recorded in a business’s accounting records, revenue should be
EarnedRealizedReceived Cash
a. yesyesyes
b.noyesyes
c.yesnoyes
d.yesyesno
e. noyesno
59.Tyler Tours provides transportation services and requires clients to book trips at least one month in advance. Tyler Tours bills its customers on the first day of the month and requires payments to be made on the last day of the month. When should Tyler Tours recognize revenue from its services?
a.On the first day of the month of billing
b.On the last day of the month of billing
c.When customer places order
d.When customers travel
e.When customers pay for their trips
60.O’Connor Inc. provides apartments to local university students under different revenue packages. One popular package allows students to pay the annual rent in advance and take a 25% discount over the monthly rate. O’Connor should recognize the related revenue for students who choose this package
a.when the cash is collected at the beginning of the contract period.
b.at the end of the year after the contract period has ended.
c.evenly over the contract period.
d.when the contract is signed by the student.
e.for the amount received at the beginning of the contract period and a 25 percent additional revenue amount each month of the contract period.
61.An internet service provider requires customers to prepay for six months’ service. On August 1, 2010 Ricky Roberts paid $480 for internet service for the next six-month period. On August 1, how will the internet service record the amount received from Roberts?
a.Prepaid expense
b.Unearned revenue
c.Accrued revenue
d.Earned revenue
e.Long-term liability
62.Which of the following statements about expense recognition rules is true?
a. Expenses may be recognized in any period, including those periods unrelated to the related revenue recognition.
b.To recognize an expense, a company must either pay out cash or incur a revenue.
c.When no direct cause and effect can be determined and no clear expected benefit time frame can be identified, an expenditure should be recorded as an asset and remain on a business’s books indefinitely.
d.Cash need not be paid by a company for an item to be recognized as an expense.
e. The matching principle indicates that all expenses can be clearly associated with particular revenues.