Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
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2. Wal-Mart would likely have a shorter operating cycle than General Motors.
TRUE
3. The time period assumption allows a company to meet the qualitative characteristic of
relevance by allowing for timelier reporting of financial information.
TRUE
4. An example of ongoing operations is revenue earned through the sale of a new automobile
by a car dealership.
TRUE
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5. An example of revenue earned from ongoing operating activities is the sale of an extended
warranty contract on a washer and dryer.
FALSE
9. Under accrual accounting, interest expense would be recognized when the interest has
accrued with the passage of time even though cash has not been paid.
TRUE
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10. Application of generally accepted accounting principles requires that accrual basis
accounting be used for the income statement.
TRUE
11. Revenues are recognized when delivery has occurred or services have been rendered,
there is persuasive evidence of an arrangement for customer payment, the price is fixed or
determinable and collection is reasonably assured.
TRUE
12. The matching principle states that expenses are recognized when incurred in generating
revenue.
TRUE
13. The revenue principle recognizes revenue from the sale of goods when ownership passes
from the seller to the buyer. In the sale of services, revenue is recognized when the services
are completed.
TRUE
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14. When a business pays for a two-year insurance policy it has incurred an expense.
FALSE
15. Revenue collected in advance of being earned represents a liability until it is earned.
TRUE
16. Expense accounts are debited to recognize an incurred expense and not usually credited.
TRUE
17. The balance sheet is always prepared before the income statement.
FALSE
18. The statement of cash flows is prepared last and is the only financial statement which
shows the cash inflows and outflows from transactions.
TRUE
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19. The asset turnover ratio is computed by dividing average total assets by sales revenue.
FALSE
20. Delta Air Lines reports an asset turnover of .52 compared to Harley-Davidson's turnover
of 1.05. Delta Air Lines is less efficient at generating revenues on its asset base because of
their significantly higher investment in property, plant and equipment assets.
TRUE
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23. Which of the following would shorten the operating cycle causing an improvement in cash
flows?
A. Faster collection of accounts receivables.
B. Selling inventory in a shorter period of time.
C. Increasing the number of customers who paid cash to buy our goods.
D. All of these would shorten the operating cycle.
24. Which of the following is true about the time period assumption?
A. It assumes we value the business properly as of the end of every month.
B. It is the cutoff point for asset and liability recognition.
C. It keeps the company's transactions separate and apart from those of the owners.
D. It assumes we divide the long life of a business into a series of shorter time periods for
accounting and reporting purposes.
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28. Which of the following costs is most likely to be the largest expense item on the income
statement of a merchandising chain such as Wal-Mart?
A. Wage, salary and benefits expense
B. Cost of Sales
C. Advertising
D. Income tax expense
29. Which of the following businesses would not report cost of sales on their income
statements?
A. A large law firm
B. An automobile dealership
C. A pizza restaurant chain
D. A computer chip manufacturer
30. Calculate the effective income tax rate for a company that reports income tax expense of
$142.5 million, net income of $357.5 million, and income before income taxes of $500
million.
A. 33 1/3%
B. 25%
C. 28.5%
D. 71.5%.
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33. Which of the following activities will most likely result in a reported gain on the income
statement?
A. The sale of inventory to customers
B. The sale of old equipment
C. The wages and benefits paid to employees
D. The payment of dividends to stockholders
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34. Which of the following expenses is usually listed last on the income statement?
A. Cost of sales
B. Salaries and benefits expense
C. Advertising expense
D. Income tax expense
35. A landlord received $5,000 cash for December 2011's rent but the tenant's rent for
December is $8,000. Which of the following is true for year ended 2011?
A. $8,000 would be reported on the statement of cash flows.
B. $8,000 would appear on the balance sheet as rent receivable.
C. $8,000 would appear on the income statement as rent revenue earned.
D. $5,000 would appear on the balance sheet as prepaid rent.
36. Two basic accounting principles determine when revenues and expenses are to be
recorded under accrual basis accounting. They are
A. revenue recognition and matching principles.
B. revenue recognition and measurement principles.
C. cost and matching principles.
D. none of these.
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37. During 2010, Sigma Company earned service revenues amounting to $700,000, of which
$630,000 was collected in cash; the balance will be collected in January 2011. The 2010
income statement of the company should report the following amount for service revenues
A. $ 630,000.
B. $ 700,000.
C. $ 70,000.
D. $1,330,000.
38. The owner of an office building should report rent collected in advance as a debit to cash
and a credit to
A. a liability.
B. an asset other than cash.
C. a revenue.
D. an expense.
39. The revenue principle requires four conditions to be met. Which of the following is one of
the four conditions?
A. The customer has paid for the goods or services.
B. Delivery of goods or performance of service has occurred or is scheduled to occur.
C. The price is fixed or determinable.
D. The customer has signed a contract.
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40. Accrued expenses which must be recorded in adjusting entries represent expenses
A. incurred and paid.
B. incurred but not paid.
C. paid in advance.
D. paid in advance and not recorded.
42. Which of the following is not an example of the application of the revenue principle?
A. Recording the sale of merchandise on credit in sales revenue.
B. Recording rent received in advance as unearned rent revenue.
C. Recording interest collected due to a note receivable.
D. Reducing the service revenue account for service revenue collected but not yet performed
at the end of the accounting period.
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43. Which of the following is an example of revenue or expense recognized in the current
period's income statement?
A. Cash received from a client before the lawyer represents them in court.
B. Inventory purchased by a retail store.
C. Wage costs owed to employees who worked during the period.
D. Cash collected from an accounts receivable.
44. The principle which holds that all of the expenses incurred in earning revenue should be
identified with the revenue recognized and reported for the same period is the
A. revenue principle.
B. liability principle.
C. timing principle.
D. matching principle.
45. Which of the following is not normally a condition that must be met for revenue to be
recognized (recorded under the revenue principle)?
A. Delivery has occurred or services have been rendered.
B. An exchange in the future has been planned.
C. Collection of receivables from credit sales is reasonably assured.
D. The price is fixed or determinable.
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46. Which of the following liability accounts is likely to be satisfied with other than payment
of cash?
A. Wages payable
B. Unearned subscriptions revenue
C. Accounts payable
D. Taxes payable
47. An example of an asset account that would be created at the end of the accounting period
because revenue has been earned but not collected or recorded yet would be?
A. Rent receivable
B. Inventory
C. Prepaid rent
D. Unearned rent
48. A company receives a $50,000 cash deposit from a customer on October 15 but will not
deliver the goods until November 20. Which of the following statements is true?
A. Cash will be reported on the statement of cash flows for the month of November
B. Revenue will be recorded and reported on the income statement for October
C. A liability will be reported on the balance sheet at the end of October
D. A prepaid asset will be reported on the balance sheet at the end of October
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49. A company purchases $20,000 of inventory in February 2011 and will pay for it in March
2011. Which of the following statements is false?
A. The company will report an accounts payable of $20,000 in February 2011.
B. The statement of cash flows will report an operating cash outflow of $20,000 in March
2011.
C. The income statement will report the $20,000 as cost of goods sold in February 2011 when
it was purchased.
D. The company will record $20,000 in inventory purchased in February 2011.
50. Which of the following activities does not violate the revenue recognition principle?
A. Recording revenue in December 2009 for units manufactured but not yet sold to customers
B. Recording cash received in advance from customers as revenue when the product is not yet
shipped
C. Not recording interest earned in 2009 until the cash is received in 2010
D. Recording revenue in December 2009 for units sold but not yet paid for in full
51. What would be the effect on December's income statement of a utility bill received on
December 27, 2009 but which will not be paid until January 10, 2010?
A. No expense will be recognized until the bill is paid in January
B. Net income would increase by recording the expense in December
C. Recording the expense in December when it is incurred will increase expenses
D. Net income will be decreased when we pay the bill in January
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52. Which group of accounts contains only those that normally have a credit balance?
A. Accounts receivable; Prepaid rent; Fees earned.
B. Bonds payable; Cash; Contributed capital.
C. Cash; Inventory; Unearned revenue.
D. Notes payable; Wages payable; Contributed capital.
53. During 2010, Sensa Corporation incurred operating expenses amounting to $100,000 of
which $75,000 was paid in cash; the balance will be paid in January 2011. Transaction
analysis of operating expenses for 2010 should reflect only the following:
A. decrease stockholders' equity, $75,000; decrease assets, $75,000.
B. decrease assets, $100,000; decrease stockholders' equity, $100,000.
C. decrease assets, $100,000; increase liabilities, $25,000; decrease stockholders' equity,
$100,000.
D. decrease stockholders' equity, $100,000; decrease assets, $75,000; increase liabilities,
$25,000.
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55. Which group of accounts contains only those that normally have a debit balance?
A. Prepaid expenses, wages payable, and contributed capital
B. Cash, utilities expense, and accounts receivable
C. Retained earnings, cost of sales, and wages expense
D. Utilities expense, prepaid expenses, and wages payable
57. Which of the following is not one of the elements in the transaction analysis model?
A. Stockholders' equity
B. Liabilities
C. Gains
D. Expenses
58. If Royal Company paid $2,000 for wages to its employees, this would
A. decrease assets.
B. increase assets.
C. decrease expenses.
D. increase liabilities.
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59. If Cedar Corporation declared a dividend to its stockholders, which has not been paid, this
would
A. decrease stockholders' equity and decrease cash.
B. increase liabilities and decrease retained earnings.
C. increase liabilities and decrease contributed capital.
D. decrease assets and decrease liabilities.
60. Which of the following would not cause stockholders' equity to change?
A. Sale of additional stock to investors.
B. Earning revenue for services performed.
C. Cash payment for dividends previously declared.
D. Declaration of a cash dividend to stockholders.
61. During 2010, Burlington Company incurred operating expenses amounting to $600,000,
of which $550,000 was paid in cash; the balance will be paid in January 2011. On the 2010
income statement of the company, what amount should be reported for operating expenses?
A. $550,000.
B. $560,000.
C. $600,000.
D. $1,150,000.
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62. With respect to stockholders' equity, indicate which one of the following statements is
correct.
A. Revenues are recorded as credits to the revenue accounts.
B. Gains are recorded as debits to the revenue accounts.
C. Contributions (investments) by owners are recorded as debits to the contributed capital
accounts.
D. Expenses are recorded as credits to the expense accounts.
64. Boone's Cleaning Service performed cleaning services during December, 2009, but had
not collected any cash (or other assets) from its customers by the end of the accounting
period, December 31, 2009. What effect did performing these services have on the accounting
equation?
A. Increased assets and increased liabilities.
B. Increased assets and increased stockholders' equity.
C. Increased assets and decreased stockholders' equity.
D. Decreased liabilities and decreased stockholders' equity.
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65. For each transaction recorded in an accounting system, the two basic equalities that must
be maintained at all times are
A. (1) Assets = Liabilities + Stockholders' Equity. (2) Net Income = Revenues + Expenses.
B. (1) Cash Increase = Cash Inflows Cash Outflows. (2) Net income = Revenues +
Expenses.
C. (1) Assets = Liabilities + Stockholders' Equity. (2) Debits = Credits.
D. (1) Net Income = Revenues + Expenses. (2) Debits = Credits.
66. On December 31, 2009, Avery Corporation paid $10,000 for next year's insurance policy.
This transaction should be recorded as follows by Avery:
A.
B.
C.
D.
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67. On January 1, 2009 Gucci Brothers Inc. started the year with a $500,000 credit balance in
retained earnings and $600,000 balance in capital stock. During 2009, the company earned net
income of $100,000, declared a dividend of $15,000, and issued more stock for $25,000.
What is total stockholders' equity on December 31, 2009?
A. $1,100,000
B. $1,210,000
C. $1,225,000
D. $1,240,000
68. On January 1, 2010, Denmark Inc., started the year with a $200,000 credit balance in its
retained earnings account. During 2010, the company earned net income of $70,000 and
declared and paid dividends of $10,000. Also, the company received cash of $15,000 as an
additional investment by its owners. Therefore, the balance in retained earnings on December
31, 2010, would be
A. $200,000.
B. $270,000.
C. $245,000.
D. $260,000.
69. Which of the following transactions would most likely create cash inflow from an
operating activity?
A. Collected cash from a credit customer
B. Borrowed money from the bank
C. Paid suppliers from whom purchases had been made on credit
D. None of these is cash inflow from an operating activity
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70. For a law firm, typically the largest operating cash outflow would be
A. payment to suppliers for inventory.
B. wages and benefits paid to employees.
C. payment for utilities.
D. interest paid on notes payable.
71. The following is the correct order for preparing the financial statements.
A. Balance sheet, statement of retained earnings, income statement, and statement of cash
flows.
B. Statement of cash flows, balance sheet, statement of retained earnings, and income
statement.
C. Balance sheet, income statement, statement of retained earnings, and statement of cash
flows.
D. Income statement, statement of retained earnings, balance sheet, and statement of cash
flows.
72. Typically, the largest, continuous cash inflow for a business will come from?
A. Sale of our stock to investors
B. Bank loans
C. Cash collected from customers
D. Cash interest received on our investments
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73. For a merchandising company, the largest operating cash outflow would result from
A. payments to suppliers for inventory.
B. payment of benefits to employees.
C. payment of taxes to the various government entities.
D. payment of interest on notes payable.
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76. Which of the following activities would most likely cause the asset turnover ratio to
increase?
A. A decrease in sales.
B. Buying facilities instead of renting or leasing them.
C. A decrease in inventory.
D. An increase in assets.
77. Which of the following would most likely decrease the asset turnover ratio?
A. A decrease in expenses causing net income to increase as a percentage of sales.
B. An increase in total assets during the year.
C. An increase in sales revenue.
D. A decrease in debts owed for asset purchases.
78. A company reports sales revenue of $200 million the current year and $180 million last
year. Their total assets in the current year are $150 million and last year's total assets were
$130 million. What is the current year's asset turnover ratio?
A. 1.48
B. 1.33
C. 1.36
D. 1.43
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79. If Hawks Company reports an asset turnover ratio of 2.57 for 2009 and their competitor
reports 2.89 for their 2009 ratio, it means that Hawks
A. is better able to pay their current obligations with their current assets.
B. has been more effective in managing the use and level of its assets.
C. has been less effective in managing the use and level of its assets.
D. is less able to pay off their current obligations with their current assets.
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Essay Questions
80. The Harris TV Store had the following transactions in August:
a. Sold $60,000 of goods to customers, receiving $56,000 in cash with the rest on account.
b. The cost of the inventory sold was $36,000.
c. The store purchased $16,000 of inventory and paid for $12,000 in cash and the rest on
account.
d. They paid $16,000 in wages to employees who worked in August.
e. Received a $2,000 bill for utilities for August that will not be paid until September.
f. Received rent for the adjacent store front for the months of August and September in the
amount of $4,000.
Complete the following statements:
(a) $56,000, (b) $4,000, (c) $12,000, (d) $16,000, (e) $32,000, (f) $60,000, (g) $2,000, (h)
$36,000, (i) $16,000, (j) $2,000, (k) $8,000
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81. Zone Company rendered services to customers amounting to $20,000 during 2009; the
related cash was collected as follows: $16,000 in 2009; $4,000 in 2010. During 2009, $8,000
was incurred for wages expense; the related cash payments were made as follows: $6,000 in
2009; in 2010 $2,000. Based only on these data, provide the following amounts:
a. Amount to be reported for revenue in 2009 and 2010.
b. Amount to be reported for expense in 2009 and 2010.
a. 2009
$20,000, 2010
$0. b. 2009
$8,000, 2010
0.
82. Explain why a $5,000 revenue collected in advance for service would be recorded as a
debit to cash and a credit to a liability account.
A debit is recorded to cash because a receipt of cash increases this asset account. A
corresponding credit to a liability account (unearned revenue) is appropriate because the
customer is "owed" services in the future. If the services are not performed, the customer
would get a refund. The revenue can not be recognized until all of the conditions of the
revenue principle have been met.
83. Why might managers be tempted to violate the revenue principle and the matching
principle in financial reporting?
Managers want their companies to appear successful when financial statements are issued.
With revenues as high as possible and expenses as low as possible, net income will be
elevated. Managers might be tempted to report revenues even though the earnings process is
not complete. Also, if some expenses can be put off until a later time, net income will appear
larger. Many times manager bonuses are calculated based on net income. In addition, earnings
expectations in the marketplace create tremendous pressures for those expectations to be met.
Lower net income could cause an adverse reaction in the market place regarding stock prices.
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84. Complete the chart below for Monticello Corporation by entering check marks in the
appropriate spaces to indicate how the transaction should be recorded.
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85. Indicate the sequential order of the following steps in the accounting information
processing cycle.
Analyzing transactions
Preparing financial statements
Developing a trial balance
Collecting original data
Posting to the accounts
Journalizing transactions
Collecting original data
Analyzing transactions
Journalizing transactions
Posting to the accounts
Preparing financial statements
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Part B. Determine whether the transactions A-F above affected cash flows. If so, determine
the type of activity as an operating activity, an investing activity, or a financing activity. If
cash is not affected use "no effect." Place a check mark under the appropriate column for each
transaction.
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87. For the year ending December 31, 2010, the accounts of Jackson Corporation showed the
following balances:
Give the amount that should be shown in each of the following accounts at the beginning of
2011:
$90,000
$10,000
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89. On October 1, 2009, World Services, Inc. was started with $100,000 invested by the
owners as contributed capital. On October 31, the accounting records contained the following
amounts:
Prepare an income statement in good form for October 31, 2009 which is the first month of
operations. Ignore income taxes.
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90. Explain why the net income reported on the income statement is usually not equal to net
cash flows from operating activities on the statement of cash flows.
Net income on the income statement is an application of the accrual basis of accounting.
Revenues are reported when earned and expenses incurred are matched to those earned
revenues. The net cash flows from operating activities on the statement of cash flows are
reported on the cash basis of accounting. That is, amounts received from customers and
amounts paid for expenses are on the statement of cash flows. Therefore, the difference in net
income and net cash from operating activities is a timing issue.
91. Patti's Pizza reported revenues of $728.1 million for 2007 and $654.6 million for 2006.
Their total assets were $612.0 million in 2007 and $582.9 million in 2006. Compute and
interpret their asset turnover ratio for 2007.
1.22 = $728.1 million divided by ($612.0 + $582.9)/2. This means that for each $1 of total
assets owned by Patti's Pizza, the company generates $1.22 in sales revenue during the year.
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Compute Gauthier Machine Shop's asset turnover ratio for the two most recent years
(A) 2011 __________
(B) 2010 __________
(A) 2.05, (B) 1.95
Matching Questions
93. Match the following statements with the terms given below by entering the appropriate
letter in the blank space.
1. D. A revenue earned, but not yet recorded nor
collected
2. A. A revenue collected, but not yet earned
3. C. An expense paid, but not yet incurred
4. B. An expense incurred, but not yet recorded nor paid
Unearned revenue
Accrued expense
Prepaid expense
Accrued revenue
2
4
3
1
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