1.

a.
b.
c.

Which of the following is a satisfactory statement of the balance sheet equation?

Assets + owner's equity = liabilities
Assets = liabilities + owners' equity
Assets + liabilities = owners' equity

2.
a.
b.
c.

A revenue
increases assets and liabilities.
increases assets and owners' equity.
increases assets and decreases owners' equity.

3.
a.
b.
c.

In accounting, depreciation refers to the

decline in value of an asset.
obsolescence of an asset.
allocation of asset cost.

4.
a.
b.
c.

Gross margin is equal to the difference in

net sales and operating expenses.
net sales and cost of goods sold.
net sales and operating income.

5.
a.
b.
c.

Which of the following does NOT include net income in its computation?
Profit margin
Return on assets
Debt to equity ratio

6. What do current assets and current liabilities have in common?

a. Current assets are claims against current liabilities.
b. If current assets increase, there will be a corresponding increase in current liabilities.
c. Current liabilities and current assets are those items that will be satisfied and
converted into cash, respectively, in one year or operating cycle, whichever is longer.
7.
a.
b.
c.

What does the retained earnings account measure?

Cash held by the company since its inception.
Financial resources currently available to satisfy obligtions.
All undistributed earnings.

8.
a.
b.
c.

An overstatement of beginning inventory results in

no effect on the period's net income.
an overstatement of net income.
an understatement of net income.

9. Which inventory method generally results in the most realistic ending inventory
figure?
a. LIFO
b. FIFO
c. Average-cost

10. All else remaining equal, when a LIFO liquidation occurs during a period of rising
prices, which of the following statements about the effects on a firm's financial
statements is generally true?
a. Cost of goods sold increases
b. Taxes decrease
c. Gross profit margin increases
11. A machine was purchased for $17,000, has accumulated depreciation of $9,000,
and has a depreciable cost of $10,000. Its estimated residual value is
a. $2,000.
b. $7,000.
c. $8,000.
12. A truck was purchased for $35,000. It had a five-year life and a $5,000 residual
value. Under the double-declining-balance method, what is the accumulated
depreciation after two years?
a. $19,200
b. $21,200
c. $22,400
13. The amortization of a bond discount will result in reporting an amount of interest
expense for an interest period that
a. is less than the amount of cash to be paid for interest for the period.
b. exceeds the amount of cash to be paid for interest for the period.
c. equals the amount of cash to be paid for interest for the period.
14. A $100,000 bond issue with a carrying value of $97,000 is called at 101 and retired.
Which of the following statements is true?
a. No gain or loss is recorded.
b. A loss of $4,000 is recorded.
c. A loss of $1,000 is recorded.
15. Under a finance lease, the lessee does NOT record which of the following?
a. Rent expense
b. Lease obligations
c. Depreciation on the leased asset
16. Under a defined benefit pension plan,
a. the employer guarantees the employees certain benefits upon retirement.
b. retirement payments are based on the amount accumulated in the pension fund.
c. accounting for annual pension expense is simple.
17. Deferred income taxes are justified by what basic concept?
a. Revenue recognition
b. Matching
c. Conservatism

Use the following to answer the next 3 questions:

Net income
Depreciation expense
Increase in deferred tax liabilities
Decrease in accounts receivable
Increase in inventories
Decrease in accounts payable
Increase in accrued liabilities
Increase in property and equipment
Increase in short-term notes payable
Decrease in long-term bonds payable
18. What is net cash flow from operating activities?
a. ($3,000)
b. ($1,000)
c. $5,000

$5,000
2,500
500
2,000
9,000
5,000
1,000
14,000
19,000
4,000

19. What is net cash flow from investing activities?

a. $14,000
b. ($14,000)
c. $21,000
20. What is net cash flow from financing activities?
a. $15,000
b. ($15,000)
c. $17,000
Answers:
1-b, 2-b, 3-c, 4-b, 5-c, 6-c, 7-c, 8-c, 9-b, 10-c, 11-b, 12-c, 13-b, 14-b, 15-a, 16-a, 17-b,
18-a, 19-b, 20-a.