PBL ACCOUNTING PRINCIPLES2002 NLC

Indicate whether the sentence or statement is true or false. Mark “A” if the statement is True or “B” if the statement is False.

  1. A proprietorship is a one owner, incorporated business. F
  1. Owner’s Equity is increased by net income and decreased by net loss and owner’s withdrawals. T
  1. The rules of debit and credit are reversed for “contra” accounts. T
  1. Closing entries, done at the end of each month, set the revenue and expense accounts to zero and transfer the balance to equity. F
  1. An entity, where inventory is a material Balance Sheet item, recognizes profit or loss through inventory valuation. T
  1. The periodic system is more accurate and provides better internal control than the perpetual system, but it is more costly to maintain. F
  1. The full disclosure principle requires that events that make a difference to financial statement users be disclosed. T
  1. Free On Board (FOB) Destination means that it is the buyer’s risk of loss while goods are in transit. F
  1. Depreciation allocates the cost of an asset to the period it’s expected to benefit, under the matching principle. T
  1. An accountant’s work paper is a part of the formal accounting records of an entity. F
  1. Petty Cash is an example of a “contra” account. F
  1. An asset becomes an expense when it is consumed to generate revenue. T
  1. A reversing entry eliminates an adjusting entry. T
  1. Materiality and conservatism are two constraints in applying operating guidelines. T
  1. One would expect to find a credit to the cash account in the cash receipts journal. F
  1. If a work sheet is used, financial statements may be prepared before adjusting entries are journalized. T
  1. Management accounting and financial accounting have to meet the same external standards of reliability. F
  1. The statement of retained earnings is organized in terms of the organization’s operating, investing, and financing activities. F
  1. The act of any partner is binding on all other partners if the act appears to be appropriate for the partnership. T
  1. All items classified as long-lived assets should be realized in cash (i.e., sold or consumed) during the normal operating cycle of the business. F

Mark the correct answer on your scantron sheet for each of the following questions.

  1. An accounting firm received $3,000 cash for accounting services to be rendered in the future. The full amount was credited to the liability account Unearned Accounting Services. If the accounting services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause A
  2. revenues to be understated.
  3. expenses to be overstated.
  4. net income to be overstated.
  5. liabilities to be understated.
  1. An entity has a beginning Retained Earnings balance of $525,000. Its sales for the year were $1,650,000 and its expenses were $675,000. Also, it declared and paid $100,000 in dividends. Its year end balance in Retained Earnings is D
  2. $2,750,000.
  3. $1,600,000.
  4. $1,700,000.
  5. $1,400,000.
  1. What best describes accounting? A
  2. Identifies, records, and communicates
  3. Evaluates, records, and communicates
  4. Identifies, evaluates, and communicates
  5. Classifies, evaluates, and communicates
  1. The intent of accrual accounting is the prime financial accounting principle of “matching.” Matching is defined as D
  2. matching debits with credits.
  3. matching assets with liabilities.
  4. matching revenues with assets.
  5. matching revenues with expenses.
  1. The relationship between current assets and current liabilities is B
  2. useful in determining income.
  3. useful in evaluating a company’s liquidity.
  4. called the matching principle.
  5. useful in determining the amount of a company’s long-term debt.
  1. Most companies pay current liabilities A
  2. out of current assets.
  3. by issuing interest-bearing notes payable.
  4. by issuing stock.
  5. by creating long-term liabilities.

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PBL ACCOUNTING PRINCIPLES2002 NLC

  1. Which of the following is usually not an accrued liability? D
  2. Interest payable
  3. Wages payable
  4. Taxes payable
  5. Notes payable
  1. Unearned Rental Revenue is C
  2. a contra account to Rental Revenue.
  3. a revenue account.
  4. reported as a current liability.
  5. debited when rent is received in advance.
  1. A ledger that contains a separate account for each customer is called an accounts receivable B
  2. control ledger.
  3. subsidiary ledger.
  4. trade ledger.
  5. current ledger.
  1. The two methods of recording bad debts are D
  2. allowance method and the aging method.
  3. receivables method and the aging method.
  4. direct write-off method and the percentage of sales method.
  5. allowance method and the direct write-off method.
  1. Under the allowance method for estimating uncollectible accounts, the result of the entry recording the estimated bad debts A
  2. reduces total assets.
  3. increases net income.
  4. has no effect on total assets.
  5. has no effect on net income.
  1. Using the aging of accounts receivable method to estimate uncollectibles, Wonder Corporation estimates that $3,750 of its accounts receivable will be uncollectible. Prior to adjustment, the allowance for uncollectible accounts has a credit balance of $600. The uncollectible account expense to be reported on the income statement is B
  2. $ 600.
  3. $3,150.
  4. $3,750.
  5. $4,350.
  1. A vehicle with a cost of $22,000 has accumulated depreciation of $8,000. Its book value is B
  2. $30,000.
  3. $14,000.
  4. $16,000.
  5. $15,000.

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PBL ACCOUNTING PRINCIPLES2002 NLC

  1. If beginning inventory is $42,000, ending inventory is $36,000, and cost of goods is sold $38,000, purchases must be A
  2. $32,000.
  3. $35,000.
  4. $33,000.
  5. $34,000.
  1. Using the Double Declining Balance Depreciation Method, what will be the depreciation expense for the third year ending December 31, 2003? D

Purchase Date: January 1, 2001

Cost: $10,000

Salvage Value: $2,000

Useful Life: 4 years

  1. $5,000
  2. $2,500
  3. $2,000
  4. $1,250
  1. Ashley Clinic purchases land for $60,000 cash. The Clinic assumes $1,000 in property taxes due on the land. The title and attorney fees totaled $600. The Clinic has the land graded for $1,500. What amount does the Clinic record as the cost for the land? C
  2. $61,500
  3. $60,000
  4. $63,100
  5. $61,600
  1. On July 1, 2003, Wellen Kennels sells equipment for $16,000. The equipment originally cost $50,000, had an estimated 5-year life, and an expected salvage value of $5,000. The accumulated depreciation account had a balance of $30,000 on January 1, 2003, using the straight-line method. The gain or loss on disposal is A
  2. $500 gain.
  3. $4,000 gain.
  4. $500 loss.
  5. $4,000 loss.
  1. A company purchased land for $80,000 cash. The real estate broker’s commission was $5,000, and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the cost principle, the cost of land would be recorded at D
  2. $87,000.
  3. $80,000.
  4. $85,000.
  5. $92,000.
  1. What are the primary sections of the Statement of Cash Flows? A
  2. Operating, Investing, Financing
  3. Operating, Selling, Investing
  4. Operating, Investing, Divesting
  5. Operating, Discovering, Investing
  1. Depreciation is the process of allocating the cost of a plant asset over its service life in C
  2. an equal and equitable manner.
  3. an accelerated and accurate manner.
  4. a systematic and rational manner.
  5. a conservative market-based manner.
  1. An entity shows at $5,600 net change in cash and cash equivalents on its statement of cash flows. Cash Outflows in Investing were ($10,400) and Cash Outflows in Financing were ($7,000). The net cash flows from Operating should be A
  2. $23,000.
  3. $20,000.
  4. $21,000.
  5. $22,000.
  1. In what section of the statement of cash does the sale of newly issued common stock for cash appear? C
  2. Operating section
  3. Investing section
  4. Financing section
  5. Only a footnote to the statement
  1. If assets increase $115,000 during a given period and liabilities decrease $25,000 during the same period, stockholders’ equity must B
  2. increase $90,000.
  3. increase $140,000.
  4. decrease $90,000.
  5. decrease $140,000.
  1. To assess a company’s financial position at the end of the period, an investor would probably look on the A
  2. balance sheet.
  3. income statement.
  4. statement of cash flows.
  5. statement of retained earnings.
  1. Common stock appears on the B
  2. income statement.
  3. balance sheet.
  4. statement of cash flows.
  5. retained earnings statement.
  1. The repayment of a note payable would be classified as a(n) D
  2. investing activity on a statement of cash flows.
  3. current asset on the balance sheet.
  4. operating activity on a statement of cash flows.
  5. financing activity on a statement of cash flows.

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PBL ACCOUNTING PRINCIPLES2002 NLC

  1. Equipment would appear on the C
  2. income statement with the revenues.
  3. balance sheet with the current assets.
  4. balance sheet with the long-term assets.
  5. income statement with the operating expenses.
  1. Which of the following statements should be prepared before the balance sheet is prepared? D
  2. Statement of Cash Flows
  3. General Ledger
  4. Statement of Financial Position
  5. Income Statement
  1. Cash spent to purchase new equipment would appear on the Statement of Cash Flows as B
  2. a financing activity.
  3. an investing activity.
  4. an operating activity.
  5. a footnote only.
  1. The main source of cash for a business stems from A
  2. operating activities.
  3. current assets.
  4. financing activities.
  5. investing activities.
  1. The accounting concept which maintains that each organization or section of an organization stands apart from other organizations and individuals is known as the B
  2. reliability principle.
  3. entity concept.
  4. going-concern concept.
  5. monetary unit concept.
  1. The relevant measure of value of the assets of a company that is going out of business is its C
  2. historical cost.
  3. recorded value.
  4. current market value.
  5. book value.
  1. Economic resources of a business that are expected to be of benefit in the future are referred to as A
  2. assets.
  3. stockholders’ equity.
  4. expenses.
  5. revenues.

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PBL ACCOUNTING PRINCIPLES2002 NLC

  1. Expenses are B
  2. increases in assets resulting from operations.
  3. decreases in retained earnings resulting from operations.
  4. increases in liabilities resulting from purchasing assets.
  5. increases in retained earnings resulting from operations.
  1. Which of the following represent(s) claims to economic resources? B
  2. Assets, but not liabilities or owners’ equity
  3. Liabilities and owners’ equity, but not assets
  4. Liabilities, but not assets or owners’ equity
  5. Owners’ equity, but not assets or liabilities
  1. Income taxes owed to the federal government would be classified as a(n) A
  2. current liability on the balance sheet.
  3. current asset on the balance sheet.
  4. long-term asset on the balance sheet.
  5. financing activity on the statement of cash flows.
  1. The Financial Accounting Standards Board is responsible for establishing B
  2. the American Institute of Certified Public Accountants.
  3. generally accepted accounting principles.
  4. the Securities and Exchange Commission.
  5. the code of professional conduct for accountants.
  1. “Generally accepted” in the phrase “generally accepted accounting principles” means that the principles B
  2. are proven theories of accounting.
  3. have substantial authoritative support.
  4. have been approved by the Internal Revenue Service.
  5. have been approved for use by the management of business firms.
  1. If generally accepted accounting principles did not exist, C
  2. comparability between companies’ financial statements would be enhanced.
  3. financial statements of different companies would be presented more uniformly.
  4. each company would have to develop its own set of accounting practices.
  5. social welfare would have greater potential of being maximized.
  1. Which of the following is not a goal of financial reporting? C
  2. To provide information that is useful to those making investment decisions
  3. To provide information that is useful to those making credit decisions
  4. To provide information that is useful in understanding everything about the company
  5. To provide information that identifies changes in resources and claims
  1. Information that relates to a firm’s solvency is used to assess the firm’s ability to B
  2. convert assets to cash.
  3. pay its debts.
  4. collect its receivables on time.
  5. prepare income tax information.

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PBL ACCOUNTING PRINCIPLES2002 NLC

  1. An overriding criterion in evaluating the accounting information to be presented is D
  2. fairness.
  3. legality.
  4. management’s goals.
  5. decision usefulness.
  1. In order for accounting information to be relevant, it must A
  2. be used by a lot of different firms.
  3. have very little cost.
  4. have predictive or feedback value.
  5. not be reported to the public.
  1. Which of the following is not an element of financial statements? D
  2. Assets
  3. Revenues
  4. Expenses
  5. Journals
  1. The time period assumption states that the economic life of a business can be divided into C
  2. equal time periods.
  3. cyclical time periods.
  4. artificial time periods.
  5. perpetual time periods.
  1. The revenue recognition principle dictates that revenue should be recognized in the accounting period in which it is B
  2. collected.
  3. earned.
  4. most likely to be collected.
  5. earned and collected.
  1. The summary of significant accounting policies footnoted in the financial statements would not normally discuss B
  2. depreciation methods.
  3. board of directors’ salaries.
  4. methods of inventory costing.
  5. amortization of intangible assets.
  1. Firms that conduct their operations in more than one country through subsidiaries or branches are referred to as C
  2. global corporations.
  3. international corporations.
  4. multinational corporations.
  5. foreign corporations.

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PBL ACCOUNTING PRINCIPLES2002 NLC

  1. Allstate, Inc. has 10,000 shares of 10%, $100 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2001. If the board of directors declared an $80,000 dividend, the B
  2. preferred shareholders will receive 1/10th of what the common shareholders will receive.
  3. preferred shareholders will receive the entire $80,000.
  4. $80,000 will be held as restricted retained earnings and paid out at some future date.
  5. preferred shareholders will receive $40,000 and the common shareholders will receive $40,000.
  1. Which one of the following would not be considered a disadvantage of the partnership form of organization? D
  2. Limited life
  3. Unlimited liability
  4. Mutual agency
  5. Ease of formation
  1. In a partnership, mutual agency means C
  2. each partner acts on his own behalf when engaging in partnership business.
  3. the act of any partner is binding on all other partners, only if partners act within their scope of authority.
  4. an act by a partner is judged as binding on other partners, depending on whether the act appears to be appropriate for the partnership.
  5. that partners must pay taxes on a mutual or combined basis.
  1. Which of the following statements is incorrect regarding partnership agreements? B
  2. It may be referred to as the “articles of co-partnership.”
  3. Oral agreements are preferable to written articles.
  4. It should specify the different relationships that are to exist among the partners.
  5. It should state the procedures for submitting disputes to arbitration.
  1. Partner B is investing in a partnership with Partner A. B contributes as part of his initial investment: Accounts Receivable of $20,000; an Allowance for Doubtful Accounts of $3,000; and $2,000 cash. The entry that the partnership makes to record B’s initial contribution includes a C
  2. credit to B, Capital for $22,000.
  3. debit to Accounts Receivable for $17,000.
  4. credit to B, Capital for $19,000.
  5. debit to Allowance for Doubtful Accounts for $3,000.
  1. Sam Jackson started the year with a capital balance of $54,000. During the year, his share of partnership net income was $48,000 and he withdrew $12,000 from the partnership for personal use. He made an additional capital contribution of $15,000 during the year. The amount of Sam Jackson’s capital balance that will be reported on the year-end balance sheet will be D
  2. $48,000.
  3. $117,000.
  4. $90,000.
  5. $105,000.
  1. Which of the following is not a necessary action that the partnership must take upon the death of a partner? B
  2. Determine the net income or net loss for the year-to-date
  3. Discontinue business operations
  4. Close the books
  5. Prepare financial statements
  1. If a corporation has only one class stock, it is referred to as D
  2. Classless stock.
  3. Preferred stock.
  4. Solitary stock.
  5. Common stock.
  1. Retained earning A
  2. is unique to the corporate form of business.
  3. is an optional account in the partnership form of business.
  4. reflects cash paid in by shareholders to date.
  5. is closed at the end of the year.
  1. The letters GAAP stand for C
  2. General Auditing Associated Planning.
  3. Good Accounting Applied Principles.
  4. Generally Accepted Accounting Principles.
  5. Generally Accepted Audited Practices.
  1. The entire group of accounts maintained by a company and to which transactions are posted, is a C
  2. Payroll Ledger.
  3. General Journal.
  4. General Ledger.
  5. Cash Receipts Journal.
  1. A Chart of Accounts is A
  2. a listing of all existing accounts and their account number.
  3. a listing of all existing accounts and their balances to prove debit and credit parity.
  4. an accountant’s workpaper from which financial statements are prepared.
  5. a listing of all accounts with credit balances for accounts payable purposes.
  1. Which of the following is a “contra” account? C
  2. Deferred cost of relocation
  3. Provision for income taxes
  4. Accumulated Depreciation
  5. Petty Cash
  1. When a company misstates its results, who is affected? D
  2. Stockholders
  3. Creditors
  4. Employees
  5. All of the above
  6. There was a significant overstatement of last year’s net income on the financial statements at Sarah’s Perfume Company. The financial statements had been distributed to bankers and creditors before the error was found. Upon learning of the error, the company president states that it’s too late to fix it and the company will make the correction in this year’s statements. D
  7. The controller should have never reported the error.
  8. The bank won’t be concerned because the error will get adjusted this year.
  9. The stockholders prefer the company to look better than it really is on paper.
  10. The controller should be allowed to issue corrected financial statements.
  1. The sales department of the Tom Company needs three new computer systems. The Capital Expenditure program for the year has been frozen because of increased unbudgeted expenditures. The sales manager places three (3) computer systems on an Accounts Payable voucher for payment. D
  2. This is a recommended business practice.
  3. The auditors will accept this practice.
  4. The computer systems purchase is not considered material.
  5. This violates GAAP principles.
  1. The quarterly financial statements must be sent to corporate headquarters by 5:00 p.m. today. It is now 4:00 pm, and the cash account is off by $10,000. The best alternative is B
  2. plug in the amount and hope you can find it later.
  3. go to your supervisor for help.
  4. borrow from a lender to cover the difference.
  5. ignore the problem.
  1. The president of the Sethallison Company has requested that the accountant prepare an inventory report that is inaccurate. The best action for the accountant to take first is to C
  2. report the president of the company to the police.
  3. consult an attorney regarding a lawsuit.
  4. report the situation to the immediate supervisor and ask for direction.
  5. resign from the company and call the press.
  1. The general ledger accountant at Disneyland has been close friends with the former controller who now works at DavislandAmusement Park. When the former controller was in town to visit relatives recently, he called to meet for lunch. It has been rumored that Disney is interested in buying Davisland. The general ledger accountant should D
  2. meet the former employee for lunch at a public place.
  3. meet the former employee for lunch at a private place.
  4. meet the former employee for lunch at Disney.
  5. refrain from meeting the former employee at this time.
  1. Adjusting entries are required A
  2. because some costs expire with the passage of time and have not yet been journalized.
  3. when the company’s profits are below the budget.
  4. when expenses are recorded in the period in which they are incurred.
  5. when revenues are recorded in the period in which they are earned.
  6. The purchasing agent at ABC Company meets two times a year with the sales manager at XYZ company. For the last ten years, the sales manager has had Boston Celtics basketball season tickets and offers tickets each year to the purchasing agent. The purchasing agent always refuses. The Celtics are in the playoffs and offers the purchasing agent tickets to a playoff game. The purchasing agent should A
  7. call his boss and ask if it’s okay to take the tickets.
  8. refuse the tickets and cancel the account.
  9. take the tickets because playoff tickets are hard to come by.
  10. refuse the tickets as in the past.
  1. Clavin Company, once privately owned, has been a publicly-held company for the last ten years. There is a petty cash fund kept in the accounting office. The president of the company, who was the original owner before he took the company public, would take funds from the petty cash whenever he needed pocket money. He would fill out a miscellaneous expense slip at the time. D
  2. This was allowed when the company was private, but not now that the company is public.
  3. This was not allowed when the company was private, but now is allowed that the company is public.
  4. This is only allowed if the president gives an oral report to the accountant.
  5. This is only allowed if the president submits a written report of the expense.
  1. The president, vice-president, and the controller are authorized to sign checks and two signatures are required for checks over $2,500. The vice-president submitted an expense report for $3,000 for recent travel expenditures. The president and the controller are out of town on Friday when the expense checks are signed and distributed. The vice-president’s credit card bill must be paid over the weekend to avoid a finance charge. The vice-president should D
  2. sign the check and get an AutoSignature for the second signature.
  3. sign the check and don’t worry about the second signature.
  4. sign the check and ask the accountant to sign the controller’s name.
  5. wait until Monday when the president and the controller can sign the check.
  1. While the current ratio is a healthy 1.8:1, there has been a 75% increase in inventory. The president of the company has received reports on this and is presenting a press release focusing only on the positive areas with no mention of the potential negatives. The accountant is concerned about this and should C
  2. interrupt the press conference and provide the potential negatives.
  3. speak to her supervisor and express her concerns.
  4. contact a member of the board of directors and talk with them.
  5. call the president of the company before the press conference to discuss it.
  1. An adjusting entry C
  2. affects two balance sheet accounts.
  3. affects two income statement accounts.
  4. affects a balance sheet account and an income statement account.
  5. is always a compound entry.

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