Final Exam

All Multiple Choice

Financial Accounting

Final Exam

All Multiple Choice

h

Problems Test

b

Multiple Choice and Problem Test

All Multiple Choice

Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

1. When the company determines that a customer will not pay an amount owed, the account bad debt expense will

a. increase
b. decrease
c. not change
d. it depends on the current balance in the allowance account

Answerd

C. Write-offs are recorded with a debit to the allowance account and a credit to accounts receivable. Bad debt expense is not recorded when accounts are written off, it is only recorded when it is estimated in the same period as the sale. See Accounts Receivable

2. Which of the following transactions will be recorded using both an income statement and a balance sheet?

a. collecting from a customer on account
b. providing goods to a customer on account
c. an account that is written off
d. both b. and c.

Answer
B. Providing goods to a customer is recorded with a debit (increase) to accounts receivable and a credit (increase) to sales. Sales is an income statement account and accounts receivable is a balance sheet account. (a. & c.) affects two balance sheet accounts. (a) affects cash and accounts receivable and (c) affects accounts receivable and the allowance account. See Recording Income Statement Transactions

3. Adjusting journal entries are made at the end of the period to ensure

a. total debits equal total credits
b. total expenses equal total revenues
c. all cash transactions are recorded
d. the financial statements reflect all economic events that occurred during the current period

Answer
D. Adjusting entries are made at the end of the period to record economic events that occurred this period and have not been recorded because cash was not paid or received. They are new entries and will not correct other entries that were made incorrectly (a.) The goal is not to make expenses equal to revenues, but to record all revenues earned and all expenses incurred during this period. Adjustments are never made to the cash account. See Adjusting Entries

4. Liabilities never include

a. short term notes payable
b. loans from investors
c. accrued expenses
d. notes receivable

Answer

D. A receivable is always an asset. It is a future benefit when collected. The other items listed are always liabilities. (b.) is bonds payable and (c.) is expenses not yet paid, still owed. See Introduction

5. Bonds payable is always reported as a

a. current asset
b. current liability
c. long term liability
d. can’t determine where to report it without additional information

Answer
D. Bonds payable is reported as either current or long term, based on the repayment date. Repayment in one year or less is current and repayment in more than one year is long term. It is always a liability. “Payables” are always liabilities. It is most common for bonds payable to be long term since it is borrowing from investors. See Balance Sheet

6. When the effective yield is higher than the stated rate, the bond will be sold at

a. a discount
b. a premium
c. par
d. maturity value

Answer
A. To get a higher effective yield, a lower amount must be invested. When the investor gives the company an amount lower than maturity value it is a discount. Because the annual cash received (stated interest rate x maturity value) from the bond will not change, a lower investment gives a higher return and a higher investment gives a lower return. See Bonds Payable and Long Term Liabilities

7. Which of the following is an example of good cash internal controls?

a. the same person receives checks and records checks from customers
b. the bank reconciliation is done annually
c. outstanding checks are not allowed to occur
d. the accounting manager signs all checks after agreeing the check to supporting documentation approved by another manager

Answer
D. Good internal controls have approval procedures before money is paid. A different manager should give approval before the check is signed by the accounting manager. The same person should not handle cash and record cash (a). Bank reconciliations should be done monthly (b). Outstanding checks will occur every month due to the delay of when the check is written and the check is cleared by the bank (c). See Cash

8. The concept that requires a gain to be recorded when it is realized is called

a. relevance
b. conservatism
c. conceptualism
d. reliability

Answer
B. Conservatism requires the accountant to error on the low side when making an estimate. Therefore, the company does not record gains until realized. Relevance means it makes a difference to the user’s decision. Conceptualism is not a concept. Reliability is not applicable when the transaction has not yet occurred. See Concepts and Principles

9. Which of the following is not true?

a. current liabilities are paid within one year or less of incurring the obligation
b. liquidity refers to the company’s ability to meet long term obligations
c. current liabilities have no affect on liquidity
d. both a. & c.

Answer

B. Liquidity refers to whether or not the company has enough cash on hand to meet current obligations. Current liabilities that are paid within one year affect liquidity. See Balance Sheet

10. When a company incurs a loss from restructuring, it will be reported as

a. income from discontinued operations
b. operating expense
c. other revenues or expenses
d. gross profit

Answer
B. A restructuring loss is incurred when a company restructures their operations. Therefore, it is reported as an operating expense. Restructuring is done to increase future profits and the business continues (a.). The company is restructuring primary business operations and it is not a peripheral activity (c.). See Income Statement

11. Which of the following is not true?

a. assets = liabilities + equity
b. liabilities = assets – equity
c. equity = assets – liabilities
d. assets + liabilities = equity

Answer
D. The accounting equation is assets = liabilities + owners’ equity. D is the only equation that does not give the same answer. See Introduction

12. When purchase prices are falling

a. LIFO results in a lower income than FIFO
b. LIFO results in a higher income than FIFO
c. FIFO results in a lower inventory valuation than LIFO
d. Weighted average gives the highest inventory valuation

Answer
B. Falling prices mean the last items purchased have the lowest cost. LIFO means those sold have the lowest cost which gives the highest net income. See Inventory

13. Items recorded that increase income when using the fair market value method are

a. dividends received
b. profits earned by the company invested in
c. losses earned by the company invested in
d. appreciation in market value when the investment is held long term

Answer
A. Dividends received are recorded as an increase to dividend income. A share of profits and losses is not recorded under the fair market value method. Changes in fair market value is reported on the income statement when the investment is held short term. See Investments

14. The company made a payment to suppliers for amounts owed. Which of the following is done to record this transaction?

a. credit accounts payable
b. debit cash
c. debit accounts payable
d. credit accounts receivable

Answer
C. Paying amounts owed is a decrease to a liability which is recorded with a debit. Amounts owed to suppliers is called accounts payable. Making a payment is a decrease (credit) to cash, which is not a choice. See Journal Entries

15. Which of the following is true of book value?

a. it is an approximation of appraised value
b. it is an approximation of current fair market value
c. it is the amount that will be depreciation expense in the future
d. it is the allocation of an asset’s cost over time used

Answer
C. Book value is cost less accumulated depreciation. It is the amount that has not yet been expensed. It is not a reflection of fair market value (which is the same thing as appraised value). (d.) is depreciation expense. See Long Term Assets

16. Additional paid in capital changes when

a. treasury stock is repurchased
b. treasury stock is sold for more than original cost
c. common stock is issued for more than par value
d. both b. & c.

Answer
D. Additional PIC-common stock represents amounts of capital raised from common stock above par value. Additional PIC-treasury stock represents net gain from treasury stock transactions. A gain occurs when it is sold for more than original cost. See Owner’s Equity

17. What is recorded when goods are provided to a customer on account?

a. an increase in two asset accounts and 2 revenue accounts
b. an increase in an asset and revenue and a decrease in an asset and an increase in an expense
c. an increase in a liability and revenue and a decrease in an asset and an increase in an expense
d. only an increase in an asset and an increase in revenue

Answer
B. Goods provided to a customer on account is recorded using 4 accounts. Sales, a revenue account, is increased and accounts receivable, an asset account is increased. For the goods provided the asset inventory is decreased and using this asset is an expense called cost of goods sold. A liability account is not used because the company does not owe anything. See Journal Entries

18. Which of the following occurs when closing journal entries are made?

a. make revenues and assets equal to 0
b. make expenses and liabilities equal to 0
c. make revenues, expenses, gains, losses and dividends paid equal to 0
d. make dividends paid equal to retained earnings

Answer
C. Closing journal entries are made for the purpose of transferring all accounts reported on the income statement and dividends paid to retained earnings so the balance goes to 0 and starts over the next period. Assets, liabilities, and owner’s equity accounts are not closed (a. & b.). Dividends paid is also transferred to retained earnings (goes to 0 and starts over). See The Accounting Cycle

19. When a company uses the % of accounts receivable method, the amount recorded to accounts receivable is always equal to

a. the difference in the total the company does not expect to collect at the end of the period and the current unadjusted balance in the allowance account.
b. the historical % of sales not collected x current period sales
c. the historical % of accounts receivable not collected x current period sales
d. none of the above

Answer
D. The accounts receivable account is not used when the amount estimated to be uncollectible is recorded. The amount recorded will be (a.) and the accounts used will be bad debt expense and allowance for uncollectible accounts. See Accounts Receivable

20. Recording more revenue than is earned requires an adjusting entry that will include

a. a credit to unearned revenue
b. a credit to revenue
c. a debit to unearned revenue
d. a credit to prepaid asset

Answer
A. A company that has recorded more revenue than it has earned must decrease the revenue account. Revenues are decreased with a debit. If the revenue is not yet earned, it is unearned. Unearned revenue is a liability, which is increased with a credit. See Adjusting Entries

21. The difference in long term notes payable and bonds payable is

a. long term notes have a premium or discount and bonds payable do not
b. the interest rate on bonds payable is generally much higher
c. one incurs interest expense periodically and the other does not
d. when principle is repaid

Answer
D. A portion of principle is repaid with each payment on notes payable. Principle is repaid at maturity on bonds payable. The opposite is true for (a.). Interest rates are determined by economic factors and risk factors and is similar for both types. Interest is always incurred as time passes (c) See Bonds Payable and Long-term Liabilities

22. The revenue recognition principle generally states

a. revenues are recognized when expenses occur
b. revenues are recognized when cash is collected
c. revenues are recognized when the order is placed
d. revenues are recognized when earned

Answer
D. The revenue recognition principle states that revenues are recognized when the goods or services are provided and you believe you will be paid. This is “when earned”. When the cash is collected does not matter. Expenses are not part of the revenue recognition principle. See Concepts and Principles

23. A company sold equipment and realized a gain which will be reported as

a. a change in accounting principles
b. operating expenses
c. other revenues or expenses
d. an extraordinary item

Answer
C. Gains and losses that result from selling assets are always reported under “other revenues and expense”. A company is not in business to sell their assets used to product profits and is a peripheral activity. See Income Statement

24. Which of the following statements is true relative to the statement of cash flows?

a. it reports the financial resources a company owns
b. it reports the amount of services a company provided
c. it reports the amounts owed by a company
d. it reports the amount of cash spent for long term assets

Answer
D. The investing activities section will report amounts spent for long term assets. Financial resources are assets reported only on the balance sheet. Services a company provided are revenues reported only on the income statement. Amounts owed are liabilities reported only on the balance sheet. See Introduction

25. Beginning inventory was $52,000. Sales totaled $100,000. Gross profit is $33,000 for the period. Ending inventory was $36,000. Selling Expenses totaled $17,600. Purchases totaled

a. $ 51,000
b. $ 55,000
c. $ 21,000
d. $ 88,000

Answer
A. Sales – CGS = GP so CGS must be $48,000. Beg Inv + Pur – End inv = CGS 100,000 – ? = 33,000 and then 52,000 + ? – 36,000 = 67,000. Purchases must equal 51,000 for CGS to be 33,000. See Inventory

26. The amount reported on the income statement related to a trading security will be

a. dividends received this period plus change in market value during the period
b. the cumulative change in market value
c. the cumulative change in market value plus dividends received
d. the profits or losses of the company invested in

Answer
A. Dividends are reported on the income statement as dividend revenue. Changes in fair market value are reported on the income statement as unrealized gain/loss under “other revenues/expenses”. The income statement only reports activity for the current period and is not cumulative (b. & c.) The equity method reports (d.) on the income statement (not the fair market value method). See Investments

27. The inventory account is credited when

a. inventory is sold to a customer
b. the supplier is paid for inventory purchased on account
c. inventory is purchased and received
d. the company pays for inventory at the same time it is received

Answer
A. Inventory is an asset which is credited when it decreases. This occurs when it is sold to a customer. Increases in inventory occur when it is purchased and received (c.) and (d.). Paying the supplier does not change the inventory account (b.), it changes accounts payable and cash. See Journal Entries

28. A cost of an improvement to a machine that extends the useful life is

a. expensed
b. capitalized
c. expensed over the subsequent life of the asset
d. both b. & c.

Answer
D. This is a subsequent expenditure and subsequent expenditures are capitalized when they extend the useful life or increase productivity, efficiency, output. All long-term assets that have a useful life are expensed over the life of the asset. This cost is added to the cost of the asset and expensed through depreciation. See Long Term Assets

29. What is recorded when dividends are paid?

a. an increase in an asset and an increase in a liability
b. an increase in revenue and an increase in an asset
c. an increase in an expense and a decrease in an asset
d. a decrease in owner’s equity and a decrease in cash

Answer
D. Dividends paid is a direct reduction to retained earnings and a decrease to cash. Dividends paid is not an expense, it is a return of capital to shareholders. See Owner’s Equity

30. An adjusted trial balance that is “in balance” means

a. assets = liabilities
b. debits = credits
c. all adjusting entries are properly recorded
d. all transactions are properly recorded

Answer
B. A trial balance that balances means only that debits = credits. It does not mean that all transactions are properly recorded. The wrong account could have been used and some transactions/adjusting entries may not have been recorded (c. & d.). See The Accounting Cycle

31. The term 1.5/20, n30 means

a. 15% discount if pay within 30-day, full payment due in 30 days
b. 1.5% discount if pay within 20 days, if not, full payment is due in 30 days
c. 75% discount if pay within 60 days
d. 2% discount if pay within 60 days

Answer
B. The first number is the % discount that can be taken if payment is made within the number of days after the slash. The amount following the “n” is the number of days full payment is due if the discount is not taken. See Accounts Receivable

32. Which of the following accounts will do not require an adjustment in the future?

a. supplies
b. prepaid rent
c. unearned revenue
d. equipment

Answer
D. Equipment must always remain at cost. The adjustment for using long term equipment will be recorded to accumulated depreciation. Supplies and prepaid rent require an adjustment when used. Unearned revenue requires an adjustment when it is earned. See Adjusting Entries

33. Which of the following is usually a characteristic of the balance sheet?

a. assets are listed in order of usefulness
b. the balance sheet is used to project future income
c. the balance sheet reports changes in financial position
d. the balance sheet reports economic resources

Answer
D. Economic resources are assets. Assets are reported on the balance sheet. The balance sheet is listed in the order of liquidity. It shows financial position at a given point in time and does not show the change or project future income. The income statement can be used to project future income given trends reported. See Balance Sheet and Introduction

34. When a company makes an investment in its own common stock the effect is

a. assets increase and decrease for the same amount
b. assets increase and shareholder’s equity increase
c. assets decrease and shareholder’s equity decrease
d. assets increase and liabilities increase

Answer
C. This is treasury stock. Treasury stock is reported as a reduction in owner’s equity because it offsets the common stock to get a net amount held by outsiders. Treasury stock is not an asset because a company can not invest in itself. Cash is used to purchase the treasury stock from the outside investor (cash decreases). Treasury stock decreases; decreasing owner’s equity. See Owner’s Equity

35. Which is true when a bond is issued at a discount?

a. cash received is greater than maturity value
b. the amount of interest expense is greater each period
c. the amount of interest expense is lower each period
d. the amount owed will eventually be less than the discount

Answer
B. Less cash is received than will be repaid on the maturity date. The present value of the amount owed increases with each interest payment. As the amount owed increases, interest expense increases. The present value of the amount owed increases until it reaches the maturity value paid on the maturity date (a.). See Bonds Payable

36. The matching principle provides the investor with more useful information on

a. the balance sheet
b. the income statement
c. the statement of cash flows
d. the statement of stockholder’s equity

Answer
B. The matching principle applies to when revenues and expenses are reported. Revenues and expenses are reported on the income statement. See Concepts

37. How much the company incurs to support primary business operations is reported as

a. cost of goods sold
b. other revenues and expenses
c. gross profit
d. operating expenses

Answer
D. Operating expenses are costs incurred to support primary business. Cost of goods sold is the cost of the goods provided to the customer (a.). Gross profit gives the amount earned only from providing the goods to the customer (c.). Other revenues and expenses are peripheral activities not part of day to day business operations (b). See Income Statement

38. Retained earnings will decrease when

a. common stock is increased (credit)
b. cash is collected from a customer on account
c. the company pays accounts payable
d. the company declares a dividend

Answer
D. Retained earnings decreases when dividends are declared or the company incurs a net loss. Declaring dividends is a reduction to shareholder’s equity (debit to retained earnings). See Journal Entries

39. An audit is done by _________ for the purpose of giving an opinion that the financial statements are materially stated in accordance with GAAP.

a. management
b. internal auditors
c. a certified public accountant
d. the government

Answer
C. The audit report is provided by an independent certified public accounting firm after examining accounts and determining if the financial statements are materially stated in accordance with GAAP. Internal auditors are accountants that work for the company. Internal auditors can not do the audit because they are not independent. Management is responsible for financial statements, however; they do not perform the audit. See Introduction

40. Which inventory method gives the lowest cost of goods sold in an inflationary environment?

a. FIFO
b. LIFO
c. Weighted average
d. each method listed will give the same cost of goods sold

Answer
A. An inflationary environment means that costs are increasing. The lowest cost of goods sold will be from the first items purchased being sold first because they have a lower cost. First items purchased sold first is FIFO. See Inventory

41. Goodwill is

a. recorded by the company when profits are earned during the year
b. the difference in what was paid for the company and the book value of net assets purchased
c. expensed annually as the company uses the benefits to produce revenues
d. the difference in what was paid for the company and the fair market value of net assets purchased

Answer
D. The technical definition of goodwill is (d.). The reason the company is willing to pay more than the separate fair market value of net asset is they believe they are getting intangible assets, such as a good management team, name brand, good location, etc; which make up the intangible asset goodwill. Goodwill has indefinite life and is not expensed annually (amortized). Goodwill is tested annually for impairment (permanent loss of value). See Long Term Assets

42. Paying for a service before it is provided creates

a. an increase in owner’s equity
b. a decrease in owner’s equity
c. an increase in an asset
d. an increase in a liability

Answer
C. Paying for a service ahead of time is a prepaid expense. This is an increase in an asset. Liabilities never increase when an amount is paid (d). Owner’s equity increases when stock is issued to investors or profit occurs. Owner’s equity decreases when a loss is incurred or dividends are paid to shareholders. See Recording Transactions

43. Net accounts receivable is reported on the balance sheet

a. net of the allowance for estimated uncollectible amounts
b. net of sales discounts
c. the total amount customers owe the company
d. the total amount owed from current period sales

Answer
A. Accounts receivable is reported net of the allowance for uncollectible accounts. Accounts receivable is what is owed the company, the allowance is what is not expected to be collected, and the net balance that is reported is the amount the company expects to collect. (c) is the balance in the accounts receivable account only. Accounts receivable is a cumulative account which includes amounts owed from all periods (d). See Accounts Receivable

44. The balance in the accumulated depreciation account at the end of the second year of operations will equal

a. the adjustment made to property expense
b. the book value of property, plant & equipment
c. depreciation expense for all prior years
d. depreciation expense for the current year

Answer
C. Accumulated depreciation is the cumulative amount of depreciation expense from all prior years. Book value is equal to the cost of the asset less accumulated depreciation (b.). Property expense is not an account name used; it is always called depreciation expense (a.). See Long Term Assets

45. When a bond is issued at a lower rate of market interest than the stated rate

a. cash received is lower than maturity value
b. cash received is higher than maturity value
c. interest expense will be higher than cash paid
d. the net amount owed at the end of the period will increase with each payment made for interest

Answer
B. To incur a lower rate of interest, more cash must be received. Interest expense will be lower than the stated rate/cash paid (c.) When more cash is received, the net amount owed (carrying value) decreases each period to get down to maturity value (d).
See Bonds Payable and Long-term Liabilities

46. Characteristics of reliability include

a. representational faithfulness
b. consistency
c. timeliness
d. predictive feedback

Answer
A. Representative faithfulness, verifiability and neutrality are characteristics that make financial information reliable. See Concepts

47. When a company increases the sales price and no other factors change,

a. income will decrease
b. gross profit will not change
c. income from operations will increase
d. cost of goods sold will decrease

Answer

C. An increase in the sales price with all other expenses remaining the same will increase gross profit which in turn will increase income from operations and increase net income. This will not affect cost of goods sold. See Income Statement

48. Cost of goods sold is increased (debited) when

a. inventory is purchased and paid for
b. inventory is provided to a customer
c. a service is provided to a customer
d. a service is provided to the company

Answer
B. Cost of goods sold represents the cost of inventory provided to the customer. Inventory decreases (credit) and cost of goods sold increases (debit). See Journal Entries

49. The cost of developing new technology (research & development) is

a. expensed if it is not probable the technology can be sold
b. expensed if there is a market for the technology
c. always capitalized
d. capitalized if there is no probable future benefit

Answer
A. Research and development is always expensed unless there is probable future benefit and than it is capitalized as an intangible asset. The future benefit must be probable (certain) for it to be an asset. Probable future benefit exists when there is a market for the product and it can be sold (typically occurs with improvements to an already existing product). See Long-term Assets

50. The change in current assets and current liabilities will be reported on

a. the income statement
b. the cash flow statement
c. the statement of stockholder’s equity
d. none of the above

Answer
B. The cash flow statement shows the change in current assets and current liabilities. This change represents the part of net income that was not paid or collected in cash during the current period. The cash flow statement reconciles net income to the change in cash during the period. See Cash Flow Statement