Practice multiple choice questions and problems for first midterm

1.Which activity is not one of the principal business activities common to all entities?
a. Establishing goals and strategies
b. Obtaining financing
c. Developing low cost leadership strategies
d. Conducting operations
2.The primary purpose for external financial statements is to provide
a. the current replacement cost of a business enterprise at today's market prices
b. information that is useful to present and potential investors, creditors, and others in
making rational financial decisions regarding the enterprise
c. the rationale for determining the value of an enterprise's future stock price
d. the expected future dividends flow to the enterprise's owners and interest payments to its
creditors

3.Which financial statement is divided into three components: assets, liabilities, and shareholders' equity?
a. Balance sheet
b. Income statement
c. Statement of cash flows
d. Statement of retained earnings

4. Which financial statement is divided into three sections: revenues, expenses, and net income (loss)?
a. Balance sheet
b. Income statement
c. Statement of cash flows
d. Statement of retained earnings

5.Which financial statement is divided into three components: operating, investing, and financing activities?
a. Balance sheet
b. Income statement
c. Statement of cash flows
d. Statement of retained earnings
6.Which equation correctly states a basic accounting relationship?
a. Assets = Liabilities + Contributed capital
b. Assets + Shareholders' equity = Liabilities
c. Assets = Liabilities + Shareholders' equity
d. Assets = Liabilities - Shareholders' equity
7.At year end, Julianna Corporation reported total assets of $30 million, total shareholders' equity of $10 million,
and total contributed capital of $7 million. Total liabilities equal
a. $3 million
b. $7 million
c. $10 million
d. $20 million
8.In its first year of operations, George Corporation's earnings are $3.1 million. Retained earnings at the end of
the year were $2 million and contributed capital totaled $1.1 million. How much did the corporation
distribute in dividends?
a. $2.0 million
b. $1.1 million
c. $0.9 million
d. None
9. At the end of its first year, Ben Company reported total assets of $690,000 and total liabilities of $240,000.
The company earned $150,000 during the first year and distributed $30,000 in dividends. What was Ben
Company's contributed capital?
a. $450,000
b. $330,000
c. $300,000
d. $210,000
10.All of the following are classified as noncurrent assets except
a. land and buildings
b. trademarks
c. advances from customers
d. goodwill
11.All of the following are classified as current liabilities except
a. short-term notes payable due to banks
b. prepaid insurance
c. accounts payable to suppliers
d. sales tax payable to state or local governments
12.In the income statement, revenues are generally classified by the
a. nature of the good or service sold
b. department in the firm that carried out the operating activity
c. nature of the related expenses
d. Internal Revenue Service
13.Revenues measure
a. the inflows of assets from selling goods and providing services to customers
b. the reduction of liabilities from selling goods and providing services to customers
c. all sources of cash received by a firm
d. both a and b
14.Expenses measure
a. the outflows of assets from selling goods and providing services to customers
b. the increase of liabilities from selling goods and providing services to customers
c. all uses of cash by a firm
d. both a and b
15. In the income statement, a firm incurs a net loss when
a. assets exceed liabilities at the end of an accounting period
b. revenues exceed expenses during an accounting period
c. expenses exceed revenues during an accounting period
d. cash disbursements exceed cash receipts during an accounting period
16.Assets measure
a. economic resources
b. a residual interest
c. future claims on a firm
d. both a and b

17.Liabilities measure
a. creditors' claims on the assets of a firm
b. shareholders' claims on the assets of a firm
c. future benefits to the firm
d. both a and b
18.The balance sheet amount for retained earnings represents
a. the current period's change in retained earnings
b. the sum of all prior earnings of a firm in excess of dividends
c. the amount of paid-in-capital not returned in the form of dividends
d. the amount available to creditors in the event of liquidation of the company
19.The value of fixed assets (such as plant, property, and equipment) included in total assets on the statement of
financial position is/are the
a. loan value
b. wholesale or liquidation value
c. real estate tax basis assessment
d. acquisition cost reduced by accumulated deprecation
20.Assets are classified as current for reporting purposes when
a. shares of common stock in a company's important supplier are acquired to ensure
continued availability of raw materials
b. shares of common stock in another company are acquired to diversify operations
c. expenditures are made in developing new technologies or advertising products
d. they are reasonably expected to be turned into cash or to be sold or consumed during the
normal operating cycle of the business.
21.A liability arises when a firm
a. signs a new labor union contract which includes a 6% pay raise for its union employees
b. issues a purchase order for 100,000 units of inventory from a supplier over the next two
years
c. receives inventory previously ordered
d. both b and c
22. The shareholders' equity section of the balance sheet for a corporation generally does not include
a. dividends paid
b. retained earnings
c. par or stated value of common stock
d. amounts contributed in excess of par or stated value

23. Before preparing the balance sheet and income statement, an accountant would use what accounting
record to first record the firm's transactions?
a. the trial balance
b. the adjusting entry
c. the general ledger
d. the journal
24.The accounting system uses a device called an account. An account
a. is created each time a transaction takes place
b. accumulates the increases and decreases that occur during the period for a single item
c. is created only for income statement items
d. is created only for balance sheet items
25.When analyzing a balance sheet
a. one looks for a reasonable match between the nature and mix of assets and mix of
liabilities plus shareholders' equity
b. the proportion of short-term versus long-term financing should match the proportion of
current assets versus noncurrent assets
c. the mix of long-term debt versus shareholders' equity should reflect the degree of
operating risk
d. all of the above
26.If a corporation issues 1,000 shares of $1 par value common stock at $5 per share, how should the transaction
be accounted for?
a. debit cash for $5,000 and credit common stock for $5,000
b. debit cash for $5,000 and credit common stock for $1,000 and credit additional paid-in
capital for $4,000
c. debit cash for $5,000 and credit common stock for $1,000 and credit retained earnings for
$4,000
d. credit cash for $5,000 and debit common stock for $5,000

27.A T-account is often used as an analysis tool. When looking at a T-account, how would increases to a liability
account be recorded?
a. increase the left side of the account (called a debit)
b. increase the left side of the account (called a credit)
c. increase the right side of the account (called a debit)
d. increase the right side of the account (called a credit)
28.Property, plant, and equipment refers to
a. tangible, long-lived assets used in a firm's operations over a period of years and generally
not acquired for resale
b. tangible, long-lived assets generally acquired for immediate resale
c. tangible, short-lived assets used in a firm's operations during an operating cycle and
generally not acquired for resale
d. intangible, long-lived assets used in a firm's operations over a period of years and
generally not acquired for resale
29.Usually, land appears on the balance sheet at
a. acquisition cost reduced by the cumulative depreciation
b. the present value of expected future cash flows
c. acquisition cost
d. current replacement value
30.Long-term debt consists of
a. obligations arising from borrowings having due dates, or maturities, more than one year
after the balance sheet date
b. bonds, mortgages, and some obligations under long-term leases
c. both a and b
d. none of the above
31.Other long-term liabilities are
a. obligations not properly considered as current liabilities or long-term debt
b. some deferred income taxes
c. some retirement obligations
d. all of the above
32.At December 31, Year 1, Adam Corporation has 5,000 shares of par value common stock, additional paid-in
capital of $25,000, total shareholders' equity of $80,000, and retained earnings of $45,000. What is the
par value per share?
a. $1.00
b. $1.50
c. $2.00
d. $2.50
33.At December 31, Year 1, Bubba Corporation has par value common stock with a par value of $1.50 per share,
Additional paid-in capital of $60,000, total shareholders' equity of $100,000, and retained earnings of
$25,000. What is the number of common stock shares?
a. 5,000
b. 10,000
c. 15,000
d. 20,000
34.Which of the following is (are) true regarding the T-account?
a. the name or title of the account appears on the horizontal line.
b. dates and other information can appear in T-accounts.
c. one side of the space formed by the vertical line records increases in the item and the other
side records decreases.
d. all of the above
35.Which of the following is (are) true regarding T-accounts?
a. for each transaction, the amount entered on the left side of (or debited to) the accounts for
each transaction equals the amount entered on the right side of (or credited to) the
accounts.
b. recording equal amounts of debits and credits for each transaction ensures that the balance
sheet equation will always balance.
c. one side of the space formed by the vertical line records increases in the item and the other
side records decreases.
d. all of the above
36.Under accrual accounting, revenue is recognized when
a. the firm has performed all, or most of, the services it expects to provide
b. the firm has received cash, or some other asset such as a receivable, whose cash-
equivalent value it can measure with reasonable precision
c. the firm has significant uncertainty about the amount and timing of the cash inflows and
outflows from the sales transaction
d. both a and b must be present
37.Under the accrual method, the timing of revenue recognition is influenced by
a. where the purchaser gets funds to pay the seller
b. whether the buyer pays with cash or a promise
c. when the services or product are provided
d. when the seller has received a form of payment in settlement of a purchaser's promise
38.Julia Corporation purchased an insurance policy for three years beginning January 1, Year 2, and recorded the
$6,000 premium in the Prepaid Insurance account. What adjusting entry is required to reflect the proper
balances, in the insurance-related accounts at year-end, on December 31, Year 2?
a. Insurance Expense 2,000
Prepaid Insurance 2,000
b. Prepaid Insurance 2,000
Insurance Expense 2,000
c. Insurance Expense 4,000
Prepaid Insurance 4,000
d. Insurance Expense 6,000
Prepaid Insurance 6,000
39.The income statement provides information for assessing the operating profitability of a firm. One tool used
for analysis is the common-size income statement that expresses
a. each expense and net income as a percentage of revenues
b. each revenue and net income as a percentage of expenses
c. each expense and net income as a percentage of total assets
d. each expense and net income as a percentage of shareholders' equity
40.The sales manager of Sebastian Company failed to record a valid sale on account of merchandise that had
been shipped to a customer prior to the end of the current year, however the merchandise had been
properly excluded from inventory at the end of the current year. As a result of this error, Sebastian
Company's
a. total revenues are overstated for the current year
b. total expenses are understated for the current year
c. net income is overstated for the current year
d. total assets are understated at the end of the current year
41.Electra Company purchased $50,000 worth of office supplies on January 1. Electra expects to use 60 percent
of the supplies in the first year and the remainder in the second year. After adjusting entries (and before
closing entries), how much should Electra show in its Supplies Expense account?
a. $50,000
b. $30,000
c. $25,000
d. $0
42.Bethesda Manufacturing Corp. purchased a new lathe machine for its baseball bat manufacturing plant on
January 1. The machine cost $12,000 and is expected to be used in production for 4 years at which time
its estimated salvage value will be $2,000. The yearly straight-line depreciation for this asset would be
a. $2,500
b. $3,000
c. $4,000
d. $12,000
43.Charles Company reports the following:

Contributed Capital $ 200

Total Revenues $ 800
Total Liabilities $1,200
Beginning Retained Earnings ($ 100)
Total Expenses $ 500
Dividends $ 0
 What are Total Assets?
a. $2,600
b. $1,600
c. $1,400
d. $1,000
44.Darius Company reports the following:

Total Assets $800

Contributed Capital $300
Total Revenues $600
Beginning Retained Earnings $200
Total Expenses $700
Dividends $100

What are Total liabilities?

a. $600
b. $500
c. $400
d. $300
45.Ellie Company reports the following:

Total Assets $1,200

Total Revenues $ 800
Total Liabilities $ 500
Beginning Retained Earnings $ 200
Total Expenses $ 400
Dividends $ 0

What is Contributed Capital?

a. $300
b. $200
c. $100
d. $0
46.If cash decreases by $10,000 during the year, liabilities decrease by $5,000, and shareholders' equity increases
by $5,000, what is the total change in noncash assets for the year?
a. a decrease of $5,000
b. an increase of $10,000
c. a decrease of $10,000
d. an increase of $5,000
47.Mother's Company has current assets of $900,000 and current liabilities of $1,000,000. Mother's Company's
current ratio would be increased by
a. borrowing $100,000 on a line-of-credit (short-term loan)
b. purchase of merchandise inventory costing $100,000 cash
c. purchase of marketable equity securities for $100,000 cash
d. paying $100,000 of wages payable

48. Collette and Cohen incorporate as CC Designs, Inc. on January 1, Year 1. CC Designs creates custom wall
finishes and sells painting products. The following transactions occur during January.
 a. Cohen contributes cash of $75,000 and receives 15,000 shares of $1 par value stock.
b. Collette contributes $35,000 cash, office furniture with a value of $5,000, and computer
equipment with a value of $10,000 and receives 15,000 shares of $1 par value stock. The
furniture and equipment is expected to last 5 years and has no salvage value.
c. On January 2, $10,000 of painting products re purchased. CC paid $8,000 cash with the
remaining amount on account.
d. During January, painting products are sold for $8,000 cash. The cost of the products is
$2,000.
e. Additional painting products with a value of $5,000 are sold, with a cost of $1,500, but the
cash is not collected as of January 31st. It is expected that the $5,000 will be collected in
full by February 15th.
f. Cohen is paid a salary of $2,000.
g. CC paid $1,200 for January and February rent.

Required:

Prepare appropriate accrual basis journal entries.

49. Assume that a firm uses the accrual basis of accounting. For each of the following independent cases,
indicate the amount of revenue the firm recognizes for the month of August.

a. Collects $2,000 in July for merchandise to be delivered in August.

b. Collects $1,200 in May for subscriptions that will be delivered during the next twelve months
(beginning in May).
c. Collects $800 in August for merchandise sold and delivered in July.
d. Collects $2,400 interest on a 6-month certificate of deposit, which matures on August 15th.
e. Sells $3,000 of merchandise on account in August. The firm allows a 2% discount for
payment prior to 30 days and customers take the discount.

50.The following cash-basis income statement has been prepared for the first year of business.

Smart Mail, Inc.

Statement of Cash Receipts and Expenditures
For the Year Ending December 31, Year 1
Cash Receipts from Sales of Merchandise $25,000
Less: Cash Expenditures for Merchandise and Services
Merchandise $10,000
Salaries 5,000
Rent 7,000
Total Cash Expenditures 22,000
Excess of Cash Receipts over Cash Expenditures $ 3,000

At year-end, the firm had inventory with a cost of $2,000 remaining. Also, customers owed $1,000 for
goods that had already been delivered. The utilities for December were $500 and were billed to but not
yet paid by the company. The rent of $3,500 for January, Year 2, was paid in December, Year 1.

Required:

Prepare an accrual-basis income statement for the year.

 Answers
1. C
2. B
3. A
4. B
5. C
6. C
7. D
8. B
9. B
10. C
11. B
12. A
13. D
14. D
15. C
16. A
17. A
18. B
19. D
20. D
21. C
22. A
23. D
24. B
25. D
26. B
27. D
28. A
29. C
30. C
31. D
32. C
33. B
34. D
35. D
36. D
37. C
38. A
39. A
40. D
41. B
42. A
43. B
44. B
45. C
46. B
47. A
48. ANS:
a. Cash 75,000
Common Stock 15,000
Additional Paid-in Capital 60,000
b. Cash 35,000
Furniture 5,000
Computer Equipment 10,000
Common Stock 15,000
Additional Paid-in Capital 35,000
c. Inventory 10,000
Cash 8,000
Accounts Payable 2,000
d. Cash 8,000
Sales Revenue 8,000
Cost of Goods Sold 2,000
Inventory 2,000
e. Accounts Receivable 5,000
Sales Revenue 5,000
Cost of Goods Sold 1,500
Inventory 1,500
f. Salary Expense 2,000
Cash 2,000
g. Rent Expense (Jan) 600
Prepaid Rent (Feb) 600
Cash 1,200

49. ANS:
a. $2,000
b. $100
c. $0
d. $200
e. $2,940

50. ANS:

Smart Mail, Inc.

Income Statement
For the Year Ending December 31, Year 1
Sales Revenue $26,000
Less: Expenses
Cost of Goods Sold $8,000
Salaries Expense 5,000
Rent Expense 3,500
Utilities Expense 500
Total Expenses 17,000
Net Income $ 9,000

Sales = $25,000 + $1,000 AR

Cost of Goods Sold = $10,000 - $2,000 Inventory
Rent = $7,000 - $3,500 Prepaid
Utilities = $0 + 500 Accrued