1Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is 5 percent, total

assets are $8 million, and ROI is 8 percent.

1.60

2.05

2.50

4.00

2.Felton Farm Supplies, Inc., has an 8 percent return on total assets of $300,000 and a net
profit margin of 5 percent. What are its sales?

$3,750,000

$480,000

$300,000

$1,500,000

3.Which of the following would NOT improve the current ratio?

Borrow short term to finance additional fixed assets.

Issue long-term debt to buy inventory.

Sell common stock to reduce current liabilities.

Sell fixed assets to reduce accounts payable.

4.The gross profit margin is unchanged, but the net profit margin declined over the same
period. This could have happened if

cost of goods sold increased relative to sales.

sales increased relative to expenses.

the U.S. Congress increased the tax rate.

dividends were decreased.

5.Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of
1.4. This means that the company

will not experience any difficulty with its creditors.

has less liquidity than other firms in the industry.

will be viewed as having high creditworthiness.

has greater than average financial risk when compared to other firms in its industry.

6.Kanji Company had sales last year of $265 million, including cash sales of $25 million. If its
average collection period was 36 days, its ending accounts receivable balance is closest to .
(Assume a 365-day year.)

$26.1 million

$23.7 million

$7.4 million

$18.7 million

7.A company can improve (lower) its debt-to-total assets ratio by doing which of the
following?

Borrow more.

Shift short-term to long-term debt.

Shift long-term to short-term debt.

Sell common stock.

8.Which of the following statements (in general) is correct?

A low receivables turnover is desirable.

The lower the total debt-to-equity ratio, the lower the financial risk for a firm.

An increase in net profit margin with no change in sales or assets means a poor ROI.
 The higher the tax rate for a firm, the lower the interest coverage ratio.

9.Retained earnings for the "base year" equals 100.0 percent. You must be looking at
a common-size balance sheet.

a common-size income statement.

an indexed balance sheet.

an indexed income statement.

10.Krisle and Kringle's debt-to-total assets (D/TA) ratio is .4. What is its debt-to-equity (D/E)
ratio?

.2

.6

.667

.333

11.A firm's operating cycle is equal to its inventory turnover in days (ITD)
plus its receivable turnover in days (RTD).

minus its RTD.

plus its RTD minus its payable turnover in days (PTD).

minus its RTD minus its PTD.

12.When doing an "index analysis," we should expect that changes in a number of the firm's
current asset and liabilities accounts (e.g., cash, accounts receivable, and accounts payable)
would move roughly together with for a normal, well-run company.

net sales

cost of goods sold

earnings before interest and taxes (EBIT)

 earnings before taxes (EBT)

Evaluating financial statement information can be divided into broad

categories including
horizontal analysis (compares financial statement amounts to amounts from
previous years in terms of the percentage of change)

vertical analysis (shows the relationship between numbers on a financial statement

for one year)

ratio analysis (expresses the relationship of one number to another number)

all of the above

Use the following information and horizontal analysis to compute the

percentage increase in sales: 2007 sales were $200,000 and 2008 sales
were $250,000.
sales increased by 20%

sales increased by 125%

sales increased by 80%

sales increased by 25%

2006 sales were $200,000, 2007 sales were $220,000, 2008 sales were
$240,000, and 2009 sales were $300,000. 2006 is the base year. Using
the previous information and your knowledge of trend analysis, select
the statement that is false.
The trend analysis % for 2006 is 100%.
 The trend analysis % for 2009 is 125%.

Amounts are always compared to, or divided by, the base year amount.

Trend analysis is a type of horizontal analysis.

2007 net sales $200,000; 2007 Cost of Goods Sold $130,000; 2001
operating expenses $50,000; and 2007 net income $20,000. Use this
information and your knowledge of vertical analysis to select the
statement that is false.
The vertical analysis % for Cost of Goods Sold is 65%.

Vertical analysis shows the relative importance of each income statement item.

On the balance sheet, all amounts are compared to, or divided by, total liabilities.

On the income statement, all amounts are usually compared to, or divided by,
net sales.

2007 current assets $100,000; 2007 long-term assets $300,000; 2007

total liabilities $150,000; and 2007 total shareholders' equity
$250,000. Using the previous information and your knowledge of
common-sized statements, select the statement that is false.
The common-size % for current assets is 33.3%.

Common-size statements are a type of vertical analysis.

The common-size % for total liabilities is 37.5%.

Common-size statements allow companies of different sizes to be more easily

compared.
All of the following are true regarding benchmarking except
if the industry average for cost of goods sold (COGS) is 50% and your company
average is 60%, this would be considered favourable

benchmarking includes comparing one company with a key competitor

if the industry average for gross profit is 35% and your company average is 40%,
this would be considered favourable

benchmarking includes comparing one company with the industry average

Ratio analysis expresses the relationship of one number to another

number. To add meaning to a ratio it can be compared to
ratios of prior years or accounting periods

industry averages

budgeted ratios

all of the above

All of the following statements are true regarding ratios that measure a
company's ability to pay current liabilities except
inventory and prepaid expense are included in the numerator of the current ratio,
but not in the numerator of the acid-test ratio

working capital = current assets - current liabilities

 in most industries, a current ratio of 2.0 is considered adequate

a higher current ratio is always preferred to a lower current ratio

All of the following statements are true regarding ratios that measure a
company's ability to sell inventory and collect receivables except
an increased inventory turnover ratio indicates a company is selling merchandise
more quickly than in previous accounting periods; in general, this translates into
more merchandise being sold and higher profitability
a decreased days' sales in receivables ratio indicates the company is collecting
cash from credit customers more quickly. In general, this results in greater cash
inflows
an increased accounts receivable turnover ratio indicates an increased ability to
collect cash from credit customers

the formula for the inventory turnover ratio is sales/average inventory

All of the following statements are true regarding ratios that measure a
company's ability to pay short-term and long-term debt except
a high times-interest-earned ratio indicates a company can pay interest expense
with relative ease

a debt ratio of 60% indicates 60% of assets are financed with debt

the average debt ratio is between 0.57 and 0.67 according to Robert Morris
Associates

a debt ratio of 90% indicates lower financial risk than a debt ratio of 60%; in
general, lower financial risk results in lower interest rates
All of the following statements are true regarding ratios that measure a
company's profitability except
return on assets (ROA) is usually greater than return on equity (ROE) because
creditors demand a higher return than shareholders

earnings per share is the only ratio that must appear on the face of the income
statement

companies strive for a high return on sales

return on assets includes interest expense plus net income in the numerator
because these are the returns to the two groups that have financed company
assets

All of the following statements are true regarding ratios that analyze a
stock investment except
shareholders who invest primarily to receive dividends pay special attention to
the dividend yield ratio

in general, an increased price/earnings ratio indicates increased investor

confidence in the future of the company

two ways for shareholders to earn a return on a share investment are receiving
dividends and selling the stock investment at a gain

many experts argue that book value is the most useful ratio for investment
analysis

Given the following information: Cash 29,000, Accounts Receivable

$114,000, Inventory $113,000, Prepaid Expenses $6,000, Total capital
assets $525,000, Total current liabilities $142,000, Long-term debt
$289,000, Total shareholders' equity $356,000' Net sales $858,000,
Cost of goods sold $513,000, Gross Margin $345,000, Net income
$48,000. The acid test ratio is:
75%

1.01
 1.85

55%

Given the following information: Cash 29,000, Accounts Receivable

$114,000, Inventory $113,000, Prepaid Expenses $6,000, Total capital
assets $525,000, Total current liabilities $142,000, Long-term debt
$289,000, Total shareholders' equity $356,000' Net sales $858,000,
Cost of goods sold $513,000, Gross Margin $345,000, Net income
$48,000. The debt ratio is:
101%

185%

55%

75%

Given the following information: Cash 29,000, Accounts Receivable

$114,000, Inventory $113,000, Prepaid Expenses $6,000, Total capital
assets $525,000, Total current liabilities $142,000, Long-term debt
$289,000, Total shareholders' equity $356,000' Net sales $858,000,
Cost of goods sold $513,000, Gross Margin $345,000, Net income
$48,000. The inventory turnover ratio is:
5.56

8.62

4.54

7.52
A company makes a profit of £5,000 before tax and after all interest
totaling £1,200 has been charged. The capital of the company is made
up of £35,000 ordinary shares, £35,000 preference shares, £25,000
debentures and £30,000 reserves. The return on capital employed for
this company before tax is:
6.2%

4.96%

4.0%

6.5%

Return on capital employed for a company will increase if:

sales volume decreases and margins decrease.

sales volume doesn't change but margins decrease.

sales volume increases with no change in margins.

sales volume decreases with no change in margins.

The PE ratio is calculated as follows:

profit of the company attributable to ordinary shareholders divided by the total
earnings for the year.

price of ordinary share on the market divided by earnings per share.

 profit of the company divided by sales earnings.

price of ordinary share on the market divided by total earnings of the company.

The interest cover for the company referred to in question 1 is:

5.17 times

5.17%

4.17 times

4.17%

If a company revalues its non-current assets upwards from historical

cost, then its sales to capital employed ratio will:
stay the same.

decrease.

increase.

A debtor collection ratio of 12:1 means that:

the average debtor takes about one month to pay.
 debtors are about twelve times as big as creditors.

in any given month, twelve debtors are expected to pay in full.

one-twelfth of debtors will turn out to be bad debts.

Given inventory of £24,000, other current assets of £12,000 and

current liabilities of £20,000, the acid test (quick ratio) will be:
1.8

1.6

0.6

1.2

Common stock is recorded where on the financial

statements?

A.In stockholders’ equity.

B.In accounts payable.

C.In accounts receivable.

D.In other expense.

Answer: A

Hint: Common stock is a component of stockholders’ equity; it is the investment in shares made by
stockholders.

Q2. Which of the following is the CORRECT way to record an unrealized holding gain on a trading
investment? An unrealized holding gain is recorded as:

A.a receivable on the balance sheet.

B.an increase to current liabilities.

C.a gain on the income statement.

D.an adjustment to stockholder’s equity.

Answer: C

Hint: An unrealized holding gain on a trading investment is recorded as a gain on the income
statement. On the balance sheet, the investment is written up to its fair market value.

Q3. To record a loss on an available-for-sale investment a company would need to:

A.credit stockholder’s equity.

B.debit a fair value adjustment account.

C.debit stockholders’ equity.

D.credit current assets.

Answer: C

Hint: If management classifies a short-term investment as an available-for-sale (AFS) investment,

then the investment is reported on the balance sheet at its fair market value. Any unrealized holding
gains or losses due to the appreciation or depreciation of the investment must be listed as an
adjustment to stockholders' equity. A debit to stockholders’ equity is required when recording a loss
on an available-for-sale investment; the offsetting credit would be to a fair value adjustment account.

Q4. How is an available-for-sale investment recorded on the financial statements?

A.As accounts payable on the balance sheet.

B.At cost plus any acquisition costs on the balance sheet.

C.As an expense on the income statement.

D.At fair market value on the balance sheet.

Answer: D

Hint: An available-for-sale investment is recorded at fair market value as a current asset on the
balance sheet.

Q5. Allowance for doubtful accounts decreases the balance in what account to obtain the net realized
value?

A.Cash.

B.Accounts payable.

C.Bad debt expense.

D.Accounts receivable.

Answer: D

Hint: Accounts receivable is decreased by the allowance for doubtful accounts to obtain the net
realized value of accounts receivable.

Multiple Choice Questions Strategies

New Recommended Recommended Multiple Choice Questions Exam Cheatin
s Books Links Strategies g

This guide is written with the explicit aim to help my students to do their best on exams in my
computer science classes. At the same time most of the ideas are generic enough and can be
useful in a wider context. Booklet contains additional information about "grey areas"
(using/abusing breaks, prevention of burnout and fatigue, etc.)

Dr. Nikolai Bezroukov

When students took SAT the first time they usually have a limited
experience with multiple choice questions and anticipate that a multiple choice exam is a simple
matter of recognizing true statements. This is wrong. Multiple choice questions require fine
distinctions between correct and nearly-correct statements. Often these distinctions require only
memory and recognition, but involve the analysis and guesswork. These higher-order processes
can help even when at first glance the content of a question is unrecognizable.

•
Read every
question
carefully
but quickly
two times.
If you can
anticipate
the correct
alternative
before
actually
looking at the
alternatives
answer this
question
immediately.
Put a "?" on those that need more thought. Underline qualifying words
(without that you can answer a wrong question, for example positive instead
of negative; this is a very common mistake):
○ Note negatives. If a negative such as "none", "not", "never", or
"neither" occurs, know that the correct alternative must be a fact or
absolute and that the other alternatives could be true statements, but
not the correct answer.
○ Note superlatives. Words such as "every", "all", "none", "always", and
"only" are superlatives that indicate the correct answer must be an
undisputed fact.
○ Note qualifying words. "Usually", "often", "generally", "may", and
"seldom" are qualifiers that could help to indicate a true statement.
• Underline the directions carefully.The directions usually indicate that
some alternatives may be partly correct or correct statements in themselves,
but not for this particular question. The directions may say: "choose the most
correct answer" or "mark the one best answer." Sometimes you may be
asked to "mark all correct answers."
• Always cover up the possible responses with a piece of paper or with
your hand while you read the stem, or body, of the question.
Try to anticipate the correct response before you are distracted by seeing the options provided.
Then, uncover the responses.
• Plan your time carefully. Some questions, of course, will take you only a
few seconds, while others will require more time for thought. Plan to progress
through the exam in three ways:

Three rounds answering strategy

• Round 1: Review. Read each question covering answers with the sheet of
write paper. Answer only questions that you know answers without looking
into provided multiple choices. Do not spend more that a few seconds on the
question, just mark it with "?" at the end (but not at the beginning). That pass
should take no more more that 20% of your time. At this point you read all
questions and has more or less complete picture of the exam.

Shut your eyes, stretch and take some deep breaths and relax for 30
seconds. Periodically clearing your head in this way can help you stay fresh
during the exam session.
• Round 2: Then, examine/study the questions not yet answered. Eliminate
the obviously incorrect alternatives by crossing them on the sheet. If you are
able to eliminate all obviously wrong answers but two, you've greatly
improved your odds of answering the question correctly.
Try taking a few breaks during the exam by stopping for a
moment, shutting your eyes, and taking some deep
breaths. Periodically clearing your head in this way can
help you stay fresh during the exam session. Remember,
you get no points for being the first person to finish the
exam, so don't feel like you have to race through all the
items -- even two or three 30-second breaks can be very
helpful.

• Erase the "?" at the end Change answers to previous questions as you progress. Often the
second question that you encounter after the first provides additional information about
the correct answer to the prev. question.
• If you cannot come to a decision by reasoning, guess. Do not erase the "?", you may be
able to do something wth them during the final review. There is no penalty for the wrong
answers, and a guess is better than a blank. If you managed to eliminate all but two
alternative you chances are close to 50%. Consider some of the following strategies to
eliminate responses that are probably wrong.
1. Responses that use absolute words, such as "always" or "never" are
less likely to be correct than ones that use conditional words like
"usually" or "probably."
2. "All of the above" is often a correct response. If you can verify that
more than one of the other responses is probably correct, then choose
"all of the above."
3. "None of the above" is usually an incorrect response, but this is less
reliable than the "all of the above" rule. Be very careful not to be
trapped by double negatives.
4. Look for grammatical clues. If the stem ends with the indefinite article
"an," for example, then the correct response probably begins with a
vowel.
5. The longest response is often the correct one, because the instructor
tends to load it with qualifying adjectives or phrases.
 6. Look for verbal associations. A response that repeats key words that
are in the stem is likely to be correct.
7. If all else fails, choose response that caught you eye. There is some
evidence that "gut" reactions can help improve your score.
• Leave 10% of your time on the final review. You might discover
blunders and eliminate a couple of wrong answers because now you have a
full picture of the exam.
• Make sure that you have filled the appropriate bubbles carefully in pencil!.if
you fail to fill in bubbles completely or if you make stray marks, only the
computer will notice, and you will be penalized. Erase any accidental marks
completely.
•
•

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Home Student Resources Chapter 2: Accounting rules and regulations Multiple Choice Questions

• Multiple Choice Questions

•

This activity contains 8 questions.

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•
false false

In preparing accounting statements accountants adopt a number of

basic rules. These rules can be classified into three broad categories:
boundary, measurement and ethical. Which one of the following is not
a measurement rule?
Matching

Dual aspect

Historic cost

Comparability
•

Which accounting rule requires that a degree of caution should be

applied when preparing financial statements under conditions of
uncertainty? should be applied?
Matching

Going concern

Reliability

Consistency

The realisation concept states that revenue should only be recognised

when it has been realised. A manufacturing business which sells goods
on credit would normally recognise revenue when:
The goods are delivered to the customer

The goods are produced

The cash is received from the customer

An order is received from a customer

The restrictions relating to the formation and running of companies are

included in:
The Companies Act 2006
 International accounting standards

There are no legal requirements

UK accounting standards

In the UK accounting standards are formulated and issued by the:

Financial Accounting Standards Board

Financial Reporting Council

Accounting Standards Board

Accounting Standards Committee

In the UK newly issued accounting standards are called:

Statements of Recommended Accounting Practice

Statements of Standard Accounting Practice

Financial Reporting Standards

Financial Accounting Standards

•
 Which of the following statements is false?
UK accounting standards are not recognised in UK company law

Financial statements should be prepared so that they represent a true and fair
view

The Companies Act 2006 lays down the minimum amount of information that
must be supplied to company shareholders

UK publicly listed group companies must publish financial statements that comply
with international accounting standards

Which of the following statement is true?

UK limited liability companies are not bound by any type of accounting standard

UK limited liability companies must use UK accounting standards

UK limited liability companies may use international accounting standards

UK limited liability companies are bound by European accounting standards

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1. The business entity principle refers to:
1

Keeping ownership limited to one person.

Using company cheques instead of personal cheques.

Listing assets at the price that they were obtained.

Keeping personal and business financial data separated.

2. The calculation of financial position is determined by:

2

The value of the assets of a company

The amount of liabilities for a company

Revenue for the year

Total value of items owned minus total owed to creditors

3. The accounting equation is:

3

Only used when the balance sheet does not balance

 Assets = Liabilities + Owner's Equity

Owner's Equity = Assets + Liabilities + debts

Liabilities = Assets + Owner's Equity

4. What is the correct order for the balance sheet preparation:

4

Prepare statement heading, list assets, list liabilities, show equity

Prepare statement heading, show equity, list liabilities, list assets , show
equity

Prepare statement heading, show equity, list assets, list liabilities

Prepare statement heading, list liabilities, list assets, show equity

5. Liquidity order is:

5

the recording of assets at the actual cost to the business

the claims against the assets of a company

the order in which assets can be converted to cash

the order in which liabilities are listed

6. When assets are obtained they are recorded at the actual cost to the business.
This is called the :
 6

Purchase Principle

Cost Principle

Classification System

Maturity Date rule

7. The accounting period is always:

7

January 1st to December 31st

the last point in the balance sheet heading

the same for all companies

the period of time covered by financial statements

8. If you purchase $50 of office supplies on credit, then you would increase:
8

office supplies and cash

office supplies and liabilities

assets and owner's equity

accounts receivable and accounts payable

9. Computers are useful to accountants because they can:
9

analyze and summarize data

store data for later retrieval

perform complex mathematical tasks

all of the above

10. Standard accounting rules and guidelines are called:

10

Generally Accepted Accounting Principles

Chartered Accountant Rules

Canadian Institute of Acconting Rules

Guiding Principles of Accounting

CLEP Financial Accounting Practice Questions

1. What is the basic accounting equation?

A: assets = equity + capital

B: assets = capital + profits
C: assets = capital - depreciation
D: assets = liabilities + capital
E: assets = capital + liquidity

2. Which financial statement presents a summary of the assets, liabilities, and owners' equity of a
firm?

A: general ledger
B: work sheet
C: balance sheet
D: spreadsheet
E: cash flow statement

3. Who is in charge of setting the generally accepted accounting principles?

A: Federal Reserve
B: Financial Accounting Standards Board
C: United States Securities and Exchange Commission
D: Governmental Accounting Standards Board
E: Institute of Chartered Accountants

4. Which kind of organization has no more than 35 stockholders and pays no income tax as a firm,
though owners must pay income tax on profits?

A: association
B: limited partnership
C: C corporations
D: full partnership
E: S corporation

5. Subtracting expenses from revenues yields _____.

A: net income
B: net profits
C: carrying value
D: long-term assets
E: net liabilities

6. Which type of inventory system requires updating the inventory balance at the end of the
accounting period?

A: periodic inventory system

B: contingency inventory system
C: LIFO
D: perpetual inventory system
E: FIFO

7. Which accounting document keeps track of the cash receipts and cash payments of a business
during a specific period?

A: balance sheet
B: income statement
C: financial report
D: network statement
E: cash flow statement

8. Total liabilities divided by total shareholders' equity yields the _____.

A: deferred-tax-liability ratio
B: interest-coverage ratio
C: debt-to-equity ratio
D: debt-to-total-assets ratio
E: long-term-debt-to-total-capital ratio

9. Which is the most popular method of accelerated depreciation?

A: straight-line depreciation
B: double-declining-balance depreciation
C: acquisition cost depreciation
D: declining-balance depreciation
E: unit depreciation

10. What is the name of the process of identifying each posting and journal entry?
A: balance calculation
B: network retrieval
C: inventory manipulation
D: cross-referencing
E: balance sheet organization

CLEP Financial Accounting Answer Key

1. D. Capital is also known as owners' equity.
2. C. A balance sheet contains three sections: assets, liabilities, and equity.
3. B. The FASB is an independent group consisting of seven recognized experts in accounting.
4. E. Shareholders in an S corporation are required to declare their share of profits on an income tax
statement even if they do not receive a distribution.
5. A. Net income is also known as net earnings.
6. A. A periodic inventory system is much less costly to operate than a perpetual inventory system.
7. E. The cash flow statement is simply a detailed account of the changes in one section of the balance
sheet account.
8. C. The ratio of borrowing to equity indicates the degree of risk involved in loaning money to a given
firm.
9. B. Double-declining-balance depreciation entails doubling the straight-line rate and then multiplying the
resulting rate by the beginning book value.
10. D. Accountants cross-reference in order to organize their books.

This is a Multiple Choice Test that goes over Chapters 1-5 in College Accounting: A practical
Approach, tenth Edition with new statements added by: Jeffrey Slater

1.Carr Hardware has total assets of $75,000. What are the total assets if new baking equipment
is purchased for $10,000 cash?

A. $85,000
B. $65,000
C. $10,000
D. $75,000

2.Which of the following sequence of actions describes the proper order in the accounting
cycle?

A. Journalize, post, close, prepare financial statements, adjust, and analyze transactions.
B. Prepare financial statements, journalize, post, adjust, analyze transactions, close.
C. Analyze transactions, journalize, post, adjust, prepare financial statements, and close.
D. Post, close, prepare financial statements, adjust, analyze transactions, and journalize.

3.Items owned by the business such as land, supplies, and equipment are its:

A. assets.
B. liabilities.
C. owner's equity.
D. revenue.

4.The difference between the balance of a fixed asset account and the related accumulated
depreciation account is termed:

A. liability.
B. contra asset.
C. book value.
D. market value.

5.Ellen's Bakery collects $3,500 of its account receivables. The expanded accounting equation
changes include:

A. Cash and Ellen, Capital increases, $3,500

B. Cash and Revenue increases, $3,500
C. Cash increases and Accounts Receivable decreases, $3,500
D. Accounts Receivable decreases and Ellen, Capital increases, $3,500

6. A $600 check written for supplies was journalized as $60. The entry to correct this error is:

A. debit Supplies, $540; credit Cash, $540

B. debit Cash, $540; credit Supplies, $540
C. debit Supplies, $60; credit Cash, $60
D. debit Cash, $60; credit Cash, $60

7.On which financial statement would you find Salaries Expense?

A. Income Statement
B. Balance Sheet
C. Statement of owner's equity
D. It does not appear on a financial statement.

8.Residual value is the:

A. value of the asset when it is purchased.

B. value of the asset at the end of its useful life.
C. cost of the asset.
D. allocation of the cost.

9.An acceptable variation of the accounting equation is:

A. Assets - Liabilities = Owner's Equity.

B. Assets + Owner's Equity = Liabilities.
C. Assets = Liabilities - Owner's Equity.
D. All of the above.

10. Which type of account would not be reported on the income statement?

A. Revenue
B. Expenses
C. Withdrawals
D. None of the above.

11. In the normal accounting cycle the:

A. financial statements are prepared after the adjusting entries are posted.
B. financial statements are prepared before the adjusting entries are posted.
C. adjusting and closing entries are journalized before the financial statements are prepared.
D. post-closing trial balance is prepared before the closing entries are posted.

12. Which of the following is most likely to result in an adjusting entry at the end of the period?

A. Payment of two months' insurance in advance.

B. Payment of one month's rent.
C. Owner's withdrawals.
D. Payment for routine maintenance on the company van.

13. Which of the following columns of the worksheet are referred to when preparing closing
entries to the Income Summary?

A. Adjusted Trail Balance columns.

B. Balance Sheet columns.
C. Adjustments columns.
D. Income Statement columns.

14.Motel 10 received and paid a utility bill for $550 for the month of November. This transaction
will:

A. increase cash $550 and increase Utility Expense $550.

B. decrease Cash $550 and increase Utility Expense $550.
C. increase Cash $550 and decrease Utility Expense $550.
D. increase expenses and decrease withdrawal.

15. Amy flew to Philadelphia on a business trip. The purchase price of the ticket was $400 on
account. The entry to record the transaction is:

A. debit Accounts Payable, $400; credit Travel Expense, $400.

B. debit Travel Expense, $400; credit Accounts Payable, $400.
C. debit Capital, $400; credit Accounts Payable, $400.
D. debit Travel Expense, $400; credit Cash, $400.

16. C. Miller service purchased a microscope for $1,500. It has an expected life of 30 months
and no residual value. The adjusting journal entry for the month is:

A. debit Depreciation Expense $50, credit Accumulated Depreciation $50.

B. debit Depreciation Expense $500, credit Accumulated Depreciation $500.
C. debit Accumulated Depreciation $50, credit Depreciation Expense $50.
D. debit Accumulated Depreciation $500, credit Equipment $500.

17.A contra asset is:

A. in reality a liability.
B. an asset with a debit balance.
C. an asset account with a credit balance.
D. an account that increases the asset.

18. Which of the following accounting cycle steps comes after the others?
A. Preparing the financial statements.
B. Journalizing and posting closing entries.
C. Preparing the worksheet.
D. Journalizing and posting adjusting entries.

19.Which is an advantage of a sole proprietorship form of business?

A. Limited personal risk.

B. Can continue indefinitely.
C. Owner makes all the decisions.
D. All of the above.

20. Susan Mitchell Law Firm purchases $1,000 worth of office equipment on account. This
causes:

A. Cash and Mitchell, Capital to decrease by $1,000.

B. Office Equipment and Accounts Payable to increase by $1,000.
C. Office Equipment to decrease and Accounts Payable to increase by $1,000.
D. Accounts Payable to increase and Mitchell, Capital to decrease by $1,000.

21.The Income Statement credit column of the worksheet showed the following revenues:
Catering Fees $900 and Cleaning Fees $850. The journal entry to close the revenue accounts
is:

A. debit Income Summary $1,750; credit Catering fees $900 and Cleaning Fees $850.
B. debit Catering Fees $900 and Cleaning Feels $850; credit Income Summary $1,750.
C. debit all Revenues $1,750; credit Income Summary $1,750.
D. none of the above.

22.A debit may signify a(n):

A. decrease in asset accounts.

B. decrease in liability accounts.
C. increase in the capital account.
D. decrease in expense accounts.

23.Which of the following is prepared first?

A. Balance Sheet.
B. Income Statement.
C. Statement of Owner's Equity.
D. Trial Balance.

24. Carmen's catered a reception. The total price was $1,200. The customer paid $200 cash
and charged the remainder. The journal entry to record this transaction is:

A. debit Cash $200 and Accounts Receivable $1,000; credit Catering Service Fees $1,200.
B. debit Cash $200; credit Accounts Receivable $200.
C. debit Cash $1,000 and Accounts Receivable $200; credit Catering Service Fees $1,200.
D. debit Accounts Receivable $1,200; credit Cash $200 and Catering Service Fees $1,000.
25.The left column of a financial statement is often used to:

A. show debits.
B. show credits.
C. show totals.
D. subtotal numbers.

26. An account is said to have a debit balance if:

A. the amount of the debits exceeds the amount of the credits.

B. there are more entries on the debit side than on the credit side.
C. its normal balance is debit without regard to the amounts or number of entries on the debit
side.
D. the last entry of the accounting period was posted on the debit side.

27. Sun Glow Glass estimated depreciation for office equipment is $100. The adjusting entry
would include:

A. a credit to Accumulated Depreciation for $100.

B. a credit to Depreciation Expense for $100.
C. a debit to Accumulated Depreciation for $100
D. a credit to Office Equipment for $100.

28. Adjusting journal entries are prepared from:

A. source documents.
B. the balance sheet.
C. the income statement.
D. the adjustment columns of the worksheet.

29.When the balance of the Income Summary account is a credit, the entry to close this account
is:

A. debit Capital, credit Income Summary.

B. debit Income Summary, credit Revenue.
C. debit Income Summary, credit Capital.
D. debit Revenue, credit Income Summary.

30.Which of the following accounts would be considered a temporary account?

A. Revenue.
B. Assets.
C. Liabilities.
D. Owner's Equity.

31.A corporation is a business which is:

A. easy to form.
B. ends with the death of a stockholder.
C. owned by stockholders.
D. none of the above.
32. The entry to record the payment of office salaries would be:

A. debit to Cash, credit to Accounts Receivable.

B. debit to Cash, credit to Salaries Expense.
C. debit to Salaries Expense, credit to Accounts Payable.
D. debit to Salaries Expense, credit to Cash.

33. On a worksheet, the Balance Sheet debit column total is $25,000 and the credit column total
is $15,000. Which of the following statements is correct?

A. The company had a net income of $3,000.

B. The company had a net income of $10,000.
C. The company's expenses were greater than revenues.
D. None of the above are correct statements.
41. Hemingway Corporation had net book income of $1,000,000 for the current year. In
preparing its Schedule M-1 reconciliation for the year, the corporation's tax account noted that
Hemingway had the following: Federal tax expense=$250,000; Net capital losses=$50,000;
Excess of tax depreciation [MACRS] over book depreciation = $150,000; interest income on
U.S. Treasury securities = $90,000. What is Hemingway's taxable income for the year?
A. $1,060,000
B. $1,150,000
C. $1,250,000
D. $1,450,000

42. An S corporation that used to be a C corporation is subject to the "built-in gains tax" for what
length of time after conversion to S corporation status?
A. 20 years
B. 10 years
C. Six months
D. 5 years

43. Which of the following is a true statement concerning an affiliated group?

A. The parent must directly own at least 80 percent of the stock in one subsidiary
B. The stock ownership test for affiliated groups is based on both the total voting power and the
total value of a corporation's stock.
C. A life insurance company is NOT an includible corporation.
D. Only domestic subsidiaries can be included in the parent's consolidated tax return.
E. All of these are true statements.

44. Jimbo Corporation acquires all of the net assets of Sabo Corporation in a tax-deferred
merger. Heather was one of the shareholders of Sabo. As part of the merger, she exchanged all of
her Sabo shares for shares in Jimbo Corporation. At the time of the exchange, her shares in Sabo
had a tax basis of $10,000 and a FMV of $90,000, which was also the FMV of the Jimbo stock.
What is Heather's tax basis in her Jimbo stock?
A. 0
B. $80,000
C. $10,000
D. $90,000
45. Little Rock, Inc. distributed $1,750,000 in a year in which its current E&P was $800,000 and
it accumulated E&P was $450,000. How much of this distribution was a dividend to Little
Rock's shareholders?
A. $ 800,000
B. $ 650,000
C. $1,750,000
D. $1,250,000

46. Oliver and Wendell formed the Holmes Partnership. Each contributed $50,000 in cash for an
equal partnership interest. During the year the partnership had a $44,000 loss from operations.
On December 21, each partner received $20,000 in cash. Which of the following is a true
statement?
A. Basis is reduced by the loss before distributions are considered.
B. Each partner will recognize ordinary income on the receipt of cash from the partnership
C. Each partner will have a $8,000 basis in the partnership after these items are considered.
D. More than one of these is a true statement.

47. End-Run, Inc. had the following results for its first two years of operation

2003 2004
Regular Tax $292,000 $320,000
Alternative Minimum Tax $275,000 $370,000

Which of the following is a true statement?

A. If the AMT tax liability in 2004 is caused by preferences there is an AMT credit carryback to
2003.
B. If the AMT tax liability in 2004 is caused by adjustments there is an AMT credit carryback to
2003.
C. If the AMT tax liability in 2004 is caused by basic exemption there is an AMT credit
carryback to 2003.
D. There is never an AMT credit carryback

48. Which of the following items must be computed on a consolidated basis?

A. Capital gain net income.
B. Charitable contributions deduction.
C. Net operating loss (NOL) deduction.
D. Dividend-received deduction
E. All of these must be computed on a consolidated basis.

49. Melodious Corporation is having cash flow problems, although it is not insolvent nor in
bankruptcy proceedings. One of its suppliers decides to accept a $100,000 cash payment from
Melodius in full settlement of a $140,000 debt. What is Melodious Corporation's gross income, if
any, from the debt settlement?
A. 0
B. $140,000
C. $40,000
D. $100,000

50. Shirley received $40,000 cash and investment land (FMV $75,000, tax basis $60,000) in a
liquidating distribution from her partnership when her outside basis was $120,000. Based on this
information, what is Shirley's tax basis in the land?
A. 0
B. $60,000
C. $120,000
D. $80,000

51. London Inc. is the common parent of a calendar year consolidated group. Fox-Hound, its
wholly owned subsidiary, generated $800,000 taxable income that was included in the group's
CTI. Fox-Hound had no tax-exempt income or nondeductible expenses and paid a $200,000
dividend to London. Before these items were considered, London's basis in Fox-Hound was
$1,000,000. After these items are considered, its basis is
A. $1,000,000
B. $1,800,000
C. $1,600,000
D. $ 800,000

52. Chowder Corporation operates in three states - Vermont, Maine and New Hampshire. It has
state taxable income to be apportioned totaling $1,000,000. For the purposes of this question,
assume that each state has adopted the 3-factor UDITPA formula, without modification. Using
the information in the following chart, determine the amount of income apportioned to Vermont.

Maine
Vermont New Hampshire
Total
Gross Receipts/Sales $270,000 $190,000 $ 40,000 $ 500,000
Payroll Expense 120,000 40,000 20,000 180,000
Property Costs 500,000 70,000 130,000 700,000
Total $890,000 $300,000 $190,000 $1,380,000

A. $640,000
B. $500,000
C. $750,000
D. $234,000

53. Which of the following is a true statement concerning tax treaties?

A. Many countries enter into tax treaties.
B. U. S person and an Italian doing business in France will be bound by different tax treaties.
C. Tax treaties mitigate double taxation by decreasing the withholding rate on some types of
income.
D. Tax treaties mitigate double taxation through reciprocal tax exemptions.
E. All of these are true statements.
54. All of Sundown Inc.'s taxable income of is from foreign sources. It paid foreign taxes of
$250,000 on $750,000 of income. Sundown Inc. had no AMT adjustments or preferences. Which
of these is a true statement?
A. Sundown Inc. will be able to use the full tax paid as a foreign tax credit.
B. Sundown Inc.'s foreign tax credit is $250,000.
C. Sundown Inc.'s final U.S. tax will be $5,000.
D. All of these statements are true.

55. This year, Bonnie sold 1,000 shares of Armor stock for $30 per share. She purchased her
shares of stock in the following transactions:

January 13, 1999: 1,800 shares at $18 per share

October 8, 2001: 4,000 shares at $25 per share

If Bonnie does not specifically identify any of the shares sold, what is her realized gain?
A. $23,000
B. $5,000
C. $12,000
D. $8,000

56. Jim and his best friend Michael each own 50 of the 100 shares of The Buddy Corporation.
Jim decides to retire and has the corporation redeem all of his stock for $500,000. Jim's basis in
his stock was $50,000 and the corporation had E&P of $2,000,000 at the time of the redemption.
How much of the redemption proceeds are treated as dividend income.
A. $500,000
B. $450,000
C. 0
D. $50,000

57. On January 1, 2004, Bender Inc. paid $25,000,000 cash to the shareholders of Groeing
Corporation to acquire control. Bender also paid $300,000 of investment banking fees directly
relating to this acquisition. How much of the $300,000 can be deducted by Bender in its 2004 tax
return?
A. $300,000
B. $ 20,000
C. 0
D. $ 7,500

58. On January 1, 2004, Van Winkle Inc. paid $30 million to purchase the assets of a retail
business. The FMV of the target's assets was $24 million with a tax basis of $18 million . What
is the amount of the goodwill deduction in Van Winkle's 2004 tax return?
A. $ 6 million
B. $800,000
C. $400,000
D. 0

59. Schwartz Inc. acquired the business operated by Music Inc. in a qualifying Type A
reorganization. At the acquisition date, Music had $418,000 accumulated E&P and a $68,000
foreign tax credit (FTC) carryforward. Based on this information, which of the following is a
true statement?
A. Schwartz must increase its E&P by $418,000.
B. Schwartz can use the FTC in the first tax return filed after the merger.
C. Both of these are true statements.
D. Neither of these is a true statement.

60. Baskerville Inc. distributed all of its stock in River Inc. to its shareholders in a tax-free Type
D split-off. Judy owns 15,000 shares of Baskerville stock ($180,000 basis; FMV $500,000 at the
date of this split-off). Pursuant to the split-off, Judy received River stock with a $500,000 FMV
and redeemed all of her Baskerville stock in the exchange. Based on this information, Judy's
basis in the River stock is
A. $180,000
B. $ 90,000
C. $ 30,000
D. $500,000

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1. The cash disbursements journal also is called the
a) Voucher register.
b) Purchases journal.
c) Check register.
d) Accounts payable subsidiary ledger.

2. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to
the supporting documents. Which assertion would this test of controls most likely support?
a) Completeness.
b) Existence or occurrence.
c) Valuation or allocation.
d) Rights and obligations.

3. An important purpose of the auditor's review of the client's procurement system should be to determine
the effectiveness of the procedures to protect against
a) Improper materials handling.
b) Unauthorized persons issuing purchase orders.
c) Mispostings of purchase returns.
d) Excessive shrinkage or spoilage.

4. A client erroneously recorded a large purchase twice. Which of the following internal control measures
would be most likely to detect this error in a timely and efficient manner?
a) Footing the purchases journal.
b) Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
c) Tracing totals from the purchases journal to the ledger accounts.
d) Sending written quarterly confirmation to all vendors.

5. Which of the following departments most likely would approve changes in pay rates and deductions from
employee salaries?
a) Personnel.
b) Treasurer.
c) Controller.
d) Payroll.

6. Possible misstatements related to the validity internal control objective for payroll transactions include all
of the following except
a) Payments to fictitious employees.
b) Payments to terminated employees.
c) Payments to valid employees who have not worked.
d) Payment to valid employees at a rate in excess of the authorized amount.

7. When examining payroll transactions, an auditor is primarily concerned with the possibility of
a) Posting of gross payroll amounts to incorrect salary expense accounts.
b) Overpayments and unauthorized payments.
c) Misfootings of employee time records.
d) Excess withholding of amounts required to be withheld.

8. An auditor vouched data for a sample of employees in a payroll register to approved clock card data to
provide assurance that
a) Payments to employees are computed at authorized rates.
b) Internal controls relating to unclaimed payroll checks are operating effectively.
c) Segregation of duties exist between the preparation and distribution of the payroll.
d) Employees work the number of hours for which they are paid.

9. Which of the following circumstances most likely would cause an auditor to suspect an employee payroll
fraud scheme?
a) Payrolls checks are disbursed be the same employee each payday.
b) There are significant unexplained variances between standard and actual labor cost.
c) Employee time cards are approved by individual departmental supervisors.
d) A separate payroll bank account is maintained on an imprest basis.

10. If preparation of a periodic scrap report is essential in order to maintain adequate control over the
manufacturing process, the data for this report should be accumulated in the
a) Production Department.
b) Accounting Department.
c) Warehousing Department.
d) Budget Department.

11. Which of the following departments typically approves purchase requisitions?

a) Raw materials stores.
b) Cost accounting.
c) IT.
d) Inventory management.

12. Which of the following best describes the validity audit objectives for inventory?
a) Purchase requisitions initiated by authorized personnel.
b) Recorded inventory actually exists.
c) Inventory properly accumulated from journals and ledgers.
d) All inventory is recorded.

13. Auditors are most likely to ensure that no production activity is scheduled prior to
a) Determining standard costs.
b) Observing physical inventory.
c) Completing the book to physical adjustment.
d) Determining the amount of consigned inventory.

14. Which of the following is least likely to be a possible cause of book-to-physical differences in inventory
quantities?
a) Inventory cutoff errors.
b) Misapplication of LIFO.
c) Unreported scrap or spoilage.
d) Theft.

15. The auditor is most likely t seek information from the plant manager with respect to the
a) Adequacy of the provision for uncollectible accounts.
b) Appropriateness of physical inventory observation procedures.
c) Existence of obsolete machinery.
d) Deferral or procurement of certain necessary insurance coverage.

16. In the examination of property, plant, and equipment, the auditor tries to determine all of the following
except the
a) Adequacy of internal controls.
b) Extent of property abandoned during the year.
c) Adequacy of replacement funds.
d) Reasonableness of the depreciation.

17. The auditor may conclude that depreciation charges are insufficient by noting
a) Insured values greatly in excess of book values.
b) Large amounts of fully depreciated assts.
c) Continuous trade-in s of relatively new assets.
d) Excessive recurring losses on assets retired.

18. Which of the following accounts should be reviewed by the auditor to gain reasonable assurance that
additions to property, plant, and equipment are not understated?
a) Depreciation expense.
b) Accounts payable.
c) Cash.
d) Repairs and maintenance.
19. In auditing intangible assets, an auditor most likely would review or recomputed amortization and
determine whether the amortization period is reasonable in support of management's financial statement
assertion of
a) Valuation or allocation.
b) Existence or occurrence.
c) Completeness.
d) Rights and obligations.

20. Several years ago, Conway, Inc. secured a conventional real estate mortgage loan. Which of the
following audit procedures would be least likely to be performed by an auditor examining the mortgage
balance?
a) Examine the current year's canceled checks.
b) Review the mortgage amortization schedule.
c) Inspect public records of lien balances.
d) Re-compute mortgage interest expense.

21. An internal control that ensures that long-term borrowing is properly initiated by appropriate individuals
addresses the internal control objective of
a) Validity.
b) Authorization.
c) Completeness.
d) Ownership.

22. The primary reason for preparing a reconciliation between interest-bearing obligations outstanding
during the year and interest expense presented in the financial statements is to
a) Evaluate internal control over securities.
b) Determine the validity of prepaid interest expense.
c) Ascertain the reasonableness of imputed interest.
d) Detect unrecorded liabilities.

23. Valuation is most likely an issue for long-term debt if

a) Bonds are sold on the open market.
b) Bonds are issued at a discount or premium.
c) The loans are from banks.
d) The company has many short-term leases.

24. A substantive strategy is typically used to audit stockholders' equity because

a) The number of transactions is small.
b) Controls over stockholders' equity transactions typically are weak.
c) A reliance strategy is most efficient.
d) A substantive strategy likely was used in prior years.

25. The least crucial element of internal control over cash is

a) Separation of cash record-keeping from custody of cash.
b) Preparation of the monthly bank reconciliation.
c) Batch processing of checks.
d) Separation of cash receipts from cash disbursements.

26. Which of the following is one of the better auditing techniques that might be used by an auditor to
detect kiting between inter-company banks?
a) Review the composition of authenticated deposit slips.
b) Review subsequent bank statements received directly from the banks.
c) Prepare a schedule of bank transfers.
d) Prepare year-end bank reconciliations.
27. An unrecorded check issued during the last week of the year would most likely be discovered by the
auditor when the
a) Check register for the last month is reviewed.
b) Cutoff bank statement is reconciled.
c) Bank confirmation is reviewed.
d) Search for unrecorded liabilities is preformed.

28. Which of the following audit procedures is the most appropriate when internal control over cash is weak
or when a client requests an investigation of cash transactions?
a) Proof of cash.
b) Bank reconciliation.
c) Cash confirmation.
d) Evaluate ratio of cash to current liabilities.

29. Which of the following internal controls most likely would reduce the risk of diversion of customer
receipts by an entity's employees?
a) A bank lockbox system.
b) Pre-numbered remittance advices.
c) Monthly bank reconciliation.
d) Daily deposit of cash receipts.
30. When auditing contingent liabilities, which of the following procedures would be least effective?
a) Reading the minutes of the board of directors.
b) Reviewing the bank confirmation letter.
c) Examining customer confirmation replies.
d) Examining invoices for professional services.

31. The auditor's primary means of obtaining corroboration of management's information concerning
litigation is a
a) Letter of audit inquiry to the client's lawyer.
b) Letter of corroboration from the auditor's lawyer upon review of the legal documentation.
c) Confirmation of claims and assessments from the other parties to the litigation.
d) Confirmation of claims and assessments from an officer of the court presiding over the litigation.

32. An auditor will ordinarily examine invoices from lawyers primarily in order to
a) Substantiate accruals.
b) Assess the legal ramifications of litigation in progress.
c) Estimate the dollar amount of contingent liabilities.
d) Identify possible unasserted litigation, claims, and assessments.

33. If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments,
the auditor should
a) Honor the confidentiality of the client-lawyer relationship.
b) Consider the refusal to be tantamount to a scope limitation.
c) Seek to obtain the corroborating information from management.
d) Disclose this fact in a footnote to the financial statements.

34. Which of the following situations would require adjustment to or disclosure in the financial statements?
a) a merger discussion.
b) The application for a patent on a new production process.
c) Discussions with a customer that could lead to a 40 percent increase in the client's sales.
d) The bankruptcy of a customer who regularly purchased 30 of the company's output.

35. Which of the following parties is responsible for the fairness of the representations made in financial
statements?
a) Client's management.
b) Independent auditor.
c) Audit committee.
d) AICPA.

36. Which of the following situations will not result in modification of the auditor's report because of a scope
limitation?
a) Restriction imposed by the client.
b) Reliance placed on the report of another auditor.
c) Inability to obtain sufficient competent evidential matter.
d) Inadequacy in the accounting records.
37. Management believes, and the auditor is satisfied, that a material loss probably will occur when pending
litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the
potential loss, but fully discloses the situation in the notes to the financial statements. If management does
not make an accrual in the financial statements, the auditor should express a/an
a) Qualified opinion due to a scope limitation.
b) Qualified opinion due to a departure from GAAP.
c) Unqualified opinion with an explanatory paragraph.
d) Unqualified opinion in a standard auditor's report.

38. When a question arises about an entity's continued existence, the auditor should consider factors
tending to mitigate the significance of contrary information concerning the entity's alternative means for
maintaining adequate cash flow. An example of such a factor is the
a) Possibility of purchasing certain assets rather than leasing them.
b) Capability of extending the due dates of existing loans.
c) Feasibility of operating at increased levels of production.
d) Marketability of property and equipment that management plans to keep.

39. An auditor issued an audit report that was dual dated for a subsequent event occurring after the
completion of fieldwork but before issuance of the auditor's report. The auditor's responsibility for events
occurring subsequent to the completion of fieldwork was
a) Limited to include only events occurring up to the date of the last subsequent event referenced.
b) Limited to the specific event referenced.
c) Extended to subsequent events occurring through the date of issuance of the report.
d) Extended to include all events occurring since the completion f fieldwork.

40. With respect to ethics, the theory of rights

a) Suggests that auditors should always verify ownership of a client's material tangible assets.
b) Is primarily concerned with equity and impartiality.
c) Suggests that an individual's actions should not violate the liberties of any individual.
d) Recognizes that decisions involve trade-offs between costs and benefits.

41. In which of the following instances would the independence of the CPA not be considered to be
impaired? The CPA has been retained as the auditor f a brokerage firm
a) Which owes the CPA audit fees for more than one year.
b) In which the CPA has a large active margin account.
c) In which the CPA's brother is the controller.
d) Which owes the CPA audit fees for current year services and has just filed a petition for bankruptcy.

42. A CPA, while performing an audit, strives to achieve independence in appearance in order to
a) Reduce risk and liability.
b) Comply with the generally accepted standards of fieldwork.
c) Become independent in face.
d) Maintain public confidence in the profession.

43. Which of the following is not a principle of professional conduct as defined by the Code of Professional
Conduct?
a) Integrity.
b) Due care.
c) Reporting.
d) Scope and nature of services.

44. According to the profession's standards, which of the following is not required of a CPA performing a
consulting engagement?
a) Complying with Statements on Standards for Consulting Services.
b) Obtaining an understanding of the nature, scope, and limitations of the engagement.
c) Supervising staff who are assigned to the engagement.
d) Maintaining independence from the client.

45. According to the ethical standards of the profession, which of the following acts is generally prohibited?
a) Issuing a modified report explaining a failure to follow a governmental regulatory agency's standards
when conducting an attest service for a client.
b) Revealing confidential client information during a quality review of a professional practice by a team
from the state CPA society.
c) Accepting a contingent fee for representing a client in an examination of the client's federal tax return
by an IRS agent.
d) Retaining client records after an engagement is terminated prior to completion and the client has
demanded their return.

46. An auditor, using the same degree of due care as other members of the profession, fails to create an
adequate allowance for bad debts. This occurrence is an example of
a) Negligence.
b) Fraud.
c) An error in judgment.
d) Constructive negligence.

47. Which of the following is the best statement of the general standard of performance owed by an
accountant in his or her professional work?
a) To do the job correctly and discover all irregularities.
b) To follow generally accepted accounting principles (GAAP) and generally accepted auditing standards
(GAAS).
c) To act as a professional and not commit fraud.
d) To exercise the skill and care of the ordinarily prudent accountant in the same circumstances.
48. Which of the following is not within the class of foreseen users of an accountant's work product?
a) A shareholder of the client.
b) A lender bank when the accountant knows only that the client will use the financial statements to
obtain a loan from an unspecified source.
c) A bank when the accountant knows the client will rely on the financial statements as the basis for a
loan from the bank.
d) An investor if the accountant knows that the client is seeking capital from a select group of investors.

49. Which of the following statements is correct with respect to ownership, possession, or access to a CPA
firm's audit work-papers?
a) Work-papers are subject to the privileged communication rule, which, in most jurisdictions, prevents
any third-party access to the work-papers.
b) Work-papers may never be obtained by a third-party unless the client consents.
c) Work-papers are the client's exclusive property.
d) Work-papers are not transferable to a purchaser of a CPA practice unless the client consents.

50. At which point in an ordinary sales transaction of a wholesaling business would a lack of specific
authorization be of least concern to the auditor?
a) Granting of credit.
b) Shipment f goods.
c) Determination of discounts.
d) Selling of goods for cash

Financial Accounting Multiple Choice

Questions
1. The requirement that only transaction data capable of being expressed in terms of money be
included in the accounting records relates to the
a. cost principle.
b. monetary unit assumption.
c. economic entity assumption.
d. both a and b above.

2. A financial statement that reports accounting data at a specific date is the

a. income statement.
b. retained earnings statement.
c. balance sheet.
d. statement of cash flows.

3. Which of the following presents key aspects of the process of accounting in the correct
chronological order?
a. Communicating, recording, and identifying
b. Recording, identifying, and communicating
c. Recording, totaling, and identifying
d. Identifying, recording, and communicating

4. The process of transferring transaction effects into the appropriate accounts is referred to as
a. closing.
b. journalizing.
c. recording.
d. posting.

5. Transactions are initially recorded in the

a. general ledger.
b. trial balance.
c. general journal.
d. balance sheet.

6. For which of the following accounts is the normal balance a debit?

a. Rent Payable
b. Unearned Rent Revenue
c. Rent Revenue
d. Prepaid Rent

7. Which of the following is false with regard to a general journal?

a. It tracks the increases and decreases in an individual account.
b. It provides a chronological record of transactions.
c. It discloses in one place the complete effect of a transaction.
d. It helps to prevent errors since the debit and credit amounts in an individual entry can be
readily compared.

8. Financial statements combining the operations of Sears and J. C. Penney would violate the
a. monetary unit assumption.
b. economic entity assumption.
c. cost principle.
d. both a and c above.

9. A debit will reduce _______________, but increase ______________.

a. accounts receivable; accounts payable
b. revenues; accounts payable
c. accounts payable; common stock
d. common stock; prepaid insurance
10. Which of the following entries made to record the payment of $200 on account will cause the
trial balance to be out of balance?
a. No entry is recorded.
b. Cash is debited for $200 and Service Revenue is credited for $200.
c. Cash is debited for $20 and Accounts Payable is credited for $20.
d. Both Cash and Accounts Payable are credited for $200.

11. Although a separate legal entity, the transactions of the following still must be kept separate
from the personal activities of the owners for accounting purposes:
a. Proprietorship.
b. Partnership.
c. Corporation.
d. Both a and b above.

12. The Retained Earnings column had a beginning total of $30,000 and an ending total of
$50,000. If $10,000 of dividends were paid during the period, net income must have been
a. $20,000.
b. $40,000.
c. $10,000.
d. $30,000.

13. The matching principle states that

a. revenues should be matched with assets when they are recorded.
b. revenues should be matched with the periods when cash is collected from customers.
c. recorded values of assets should match their purchase prices.
d. none of the above.

This solution is comprised of a detailed explanation to answer the financial accounting multiple
choice questions.

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Accounting 101 - 20 multiple choice questions

1) Each cell in a spreadsheet is defined by:
A) a row number and a label B) a formula and a column number
C) formulas and labels D) a row number and a column letter

2) The __________ indicates a cell is active in a computerized spreadsheet.

A) grid B) program C) module D) cursor

3) Posting the entries in the sales journal to the accounts receivable subsidiary ledger should be
done:
A) on a weekly basis B) only at the end of the accounting period
C) on a daily basis D) at the end of each month

4) Customers' individual accounts are included in a subsidiary ledger referred to as the:

A) general ledger B) controlling ledger
C) accounts receivable ledger D) accounts payable ledger

5) Which of the following is recorded in the sales journal?

A) sale of merchandise on account
B) sale of merchandise for cash
C) return of merchandise purchased for cash
D) return of merchandise purchased on account

6) The total of the customer accounts receivable ledger at the end of the accounting period must
equal
the:
A) total of the accounts receivable credit column in the cash receipts journal
B) total of the accounts receivable account in the general ledger
C) total of the creditors' accounts payable ledger
D) total of the accounts payable account in the general ledger

7) Assuming the use of special journals, the sale of equipment in exchange for a promissory note
would be recorded in the:
A) cash receipts journal B) sales journal
C) general journal D) cash payments journal
Debit: notes receivable; credit: sales

8) Garner Enterprises received payment within the discount period from a customer who had
purchased merchandise on account. The sales invoice was for $2,000, and credit terms were
3/15, n/30. In the cash receipts journal, $1,940 will appear under the:
A) accounts receivable credit column B) sales revenue credit column
C) cash debit column D) cash credit column
Note: sales is still $2000

9) Jets Company records returns and allowances in the general journal. On August 16, Jets issued
a
$150 credit memo to Celtics Company for merchandise sold on credit on August 1. What entry
does Jets make?
A) no entry is required by Jets Company
B) Sales Returns and Allowances 150
Accounts Receivable-Celtic Company 150
C) Accounts Receivable-Celtics Company 150
Sales Returns and Allowances 150
D) Accounts Payable-Celtics Company 150
Inventory 150

10) Ruby Company purchased inventory from Diamond Company, and received a credit memo
from
Diamond Company. Diamond Company had charged Ruby Company $3.85 rather than $3.58 for
each of the 100 items ordered. What entry will Diamond Company make?
A) Sales Returns and Allowances 27
Inventory 27
B) Inventory 27
Accounts Payable-Ruby Company 27
C) Accounts Payable-Ruby Company 27
Inventory 27
D) Sales Returns and Allowances 27
Accounts Receivable-Ruby Company 27

11) The following data are available for Wonder Boutique for October:
Book balance, October 31 $5,575
Outstanding checks 584
Deposits in transit 2,500
Service charges 75
Interest revenue 25
What is the adjusted book balance on October 31 for Wonder Boutique based on the above data?
A) $5,550 B) $5,525 C) $5,500 D) $7,466
= balance - service charge+ interest = 5575 -75+25

12) The following data are available for Cline Paper Company for March:
Book balance, March 31 $3,620
Service charges 50
Interest revenue 35
Note collected by bank 1,500
Check returned marked NSF 700
What is Cline's adjusted book balance on March 31 from the above data?
A) $2,905 B) $3,620 C) $4,505 D) $4,405
= balance - service charge+ interest -check returned = 3620-700-50+35

13) A check for the cash purchase of supplies for $329 was recorded on the books as $239. On a
bank reconciliation, this will appear as a(n):
A) addition to the bank balance B) deduction from the bank balance
C) addition to the book balance D) deduction from the book balance

14) After preparing the bank reconciliation, journal entries must be prepared for:
A) only for outstanding checks
B) any errors made on the books revealed by the bank reconciliation
C) all items on the bank's side
D) any errors made by the bank revealed by the bank reconciliation

15) Internal control over cash receipts is demonstrated by:

A) a mailroom employee sending all customer checks to the treasurer who makes the bank
deposit
B) a mailroom employee sending remittance advices to the treasurer
C) a mailroom employee depositing all customer checks at the bank
D) all the above

16) All of the following are controls over petty cash except:
A) supporting all fund disbursements with a petty cash ticket
B) keeping an unlimited amount of cash on hand
C) replenishing the fund through normal cash disbursement procedures
D) designating one employee to administer the fund

17) Certified public accountants are expected to maintain higher standards than society in
general:
A) only if they are certifying the financial statements of a company whose stock is listed on a
national exchange
B) because they are required to by federal law
C) as long as they are working for themselves
D) because their ability to attract business depends entirely upon their reputation

18) Another dimension to most ethical issues is:

A) external controls B) the possible consequences
C) internal controls D) the individuals involved

19) Accountants who are members of the Institute of Management Accountants must abide by
the:
A) AICPA Code of Professional Conduct
B) Standards of Ethical Conduct for Management Accountants
C) both A and B
D) neither A nor B

Certified Management Accountant is awarded by the Institute of Certified Management

Accountants (ICMA) to management accountants who pass a four-part exam, meet certain work
requirements, comply with the ICMA's Standards of Ethical Conduct for Practitioners of
Management Accounting and Financial Management and who are members of the Institute of
Management Accountants (IMA).

20) Banks may require customers to keep a(n) _____ on deposit in order to borrow from the
bank.
A) compensating balance B) accounts receivable
C) cash equivalent D) note receivable

An excess balance that is left in a bank to provide indirect compensation for loans extended or
services provided
Attached file(s):

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acct 101.pdf
Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.

1) Each cell in a spreadsheet is defined by: 1)

A) a row number and a label B) a formula and a column number
C) formulas and labels D) a row number and a column letter

2) The __________ indicates a cell is active in a computerized spreadsheet. 2)

A) grid B) program C) module D) cursor
3) Posting the entries in the sales journal to the accounts receivable subsidiary ledger should be
done: 3)
A) on a weekly basis B) only at the end of the accounting period
C) on a daily basis D) at the end of each month

4) Customers' individual accounts are included in a subsidiary ledger referred to as the: 4)

A) general ledger B) controlling ledger
C) accounts receivable ledger D) accounts payable ledger

5) Which of the following is recorded in the sales journal? 5)

A) sale of merchandise on account
B) sale of merchandise for cash
C) return of merchandise purchased for cash
D) return of merchandise purchased on account

6) The total of the customer accounts receivable ledger at the end of the accounting period must
equal 6)
the:
A) total of the accounts receivable credit column in the cash receipts journal
B) total of the accounts receivable account in the general ledger
C) total of the creditors' accounts payable ledger
D) total of the accounts payable account in the general ledger

7) Assuming the use of special journals, the sale of equipment in exchange for a promissory note
7)
would be recorded in the:
A) cash receipts journal B) sales journal
C) general journal D) cash payments journal

8) Garner Enterprises received payment within the discount period from a customer who had 8)
purchased merchandise on account. The sales invoice was for $2,000, and credit terms were 3/15
n/30. In the cash receipts journal, $1,940 will appear under the:
A) accounts receivable credit column B) sales revenue credit column
C) cash debit column D) cash credit column

1
9) Jets Company records returns and allowances in the general journal. On August 16, Jets issued
a 9)
$150 credit memo to Celtics Company for merchandise sold on credit on August 1. What entry
does
Jets make?
A) no entry is required by Jets Company
B) Sales Returns and Allowances 150
Accounts Receivable-Celtic Company 150
C) Accounts Receivable-Celtics Company 150
Sales Returns and Allowances 150
D) Accounts Payable-Celtics Company 150
Inventory 150

10) Ruby Company purchased inventory from Diamond Company, and received a credit memo
from 10)
Diamond Company. Diamond Company had charged Ruby Company $3.85 rather than $3.58 for
each of the 100 items ordered. What entry will Diamond Company make?
A) Sales Returns and Allowances 27
Inventory 27
B) Inventory 27
Accounts Payable-Ruby Company 27
C) Accounts Payable-Ruby Company 27
Inventory 27
D) Sales Returns and Allowances 27
Accounts Receivable-Ruby Company 27

11) The following data are available for Wonder Boutique for October: 11)

Book balance, October 31 $5,575

Outstanding checks 584
Deposits in transit 2,500
Service charges 75
Interest revenue 25

What is the adjusted book balance on October 31 for Wonder Boutique based on the above data?
A) $5,550 B) $5,525 C) $5,500 D) $7,466

12) The following data are available for Cline Paper Company for March: 12)

Book balance, March 31 $3,620

Service charges 50
Interest revenue 35
Note collected by bank 1,500
Check returned marked NSF 700

What is Cline's adjusted book balance on March 31 from the above data?
A) $2,905 B) $3,620 C) $4,505 D) $4,405

13) A check for the cash purchase of supplies for $329 was recorded on the books as $239. On a
bank 13)
reconciliation, this will appear as a(n):
A) addition to the bank balance B) deduction from the bank balance
C) addition to the book balance D) deduction from the book balance

2
14) After preparing the bank reconciliation, journal entries must be prepared for: 14)
A) only for outstanding checks
B) any errors made on the books revealed by the bank reconciliation
C) all items on the bank's side
D) any errors made by the bank revealed by the bank reconciliation

15) Internal control over cash receipts is demonstrated by: 15)

A) a mailroom employee sending all customer checks to the treasurer who makes the bank
deposit
B) a mailroom employee sending remittance advices to the treasurer
C) a mailroom employee depositing all customer checks at the bank
D) all the above

16) All of the following are controls over petty cash except: 16)
A) supporting all fund disbursements with a petty cash ticket
B) keeping an unlimited amount of cash on hand
C) replenishing the fund through normal cash disbursement procedures
D) designating one employee to administer the fund

17) Certified public accountants are expected to maintain higher standards than society in
general: 17)
A) only if they are certifying the financial statements of a company whose stock is listed on a
national exchange
B) because they are required to by federal law
C) as long as they are working for themselves
D) because their ability to attract business depends entirely upon their reputation

18) Another dimension to most ethical issues is: 18)

A) external controls B) the possible consequences
C) internal controls D) the individuals involved

19) Accountants who are members of the Institute of Management Accountants must abide by
the: 19)
A) AICPA Code of Professional Conduct
B) Standards of Ethical Conduct for Management Accountants
C) both A and B
D) neither A nor B

20) Banks may require customers to keep a(n) ________ on deposit in order to borrow from the
bank. 20)
A) compensating balance B) accounts receivable
C) cash equivalent D) note receivable