Multiple Choice questions and show your work :

1.

2.

3.

An accounting principle must receive substantial authoritative support to qualify as generally accepted. Among
the organizations and agencies which have been influential in the development of generally accepted accounting
principles, which of the following has provided the most influential leadership?
a

Internal Revenue Service.

National Association of Accountants.

Financial Accounting Standards Board.

New York Stock Exchange.

The nature of an asset is best described as:

a

Something with physical form which is valued at cost in the accounting records.

An economic resource owned by a business and expected to benefit future operations.

An economic resource representing cash or the right to receive cash in the near future.

Something owned by a business that has a ready market value.

Mike Rodgers, owner of Mike's Taco Barn, also owns a personal residence that cost $130,000, but has a market
value of $250,000. During preparation of the financial statements for Mike's Taco Barn, the accounting
principle most relevant to the presentation of Mike's home is:
a

The concept of the business entity.

The cost principle.

The going-concern assumption.

The objectivity principle.

4.

At December 31, 1993, the accounting records of Darcy, Inc., contain the following items:

Accounts Payable....$ 24,000 Accounts Receivable....$ 60,000

Land....................

Cash.............................. 54,000

Capital Stock........... 600,000 Equipment................... 180,000

Building.................. 500,000

Retained Earnings.........

Note Payable........... 250,000

If Retained Earnings at December 31, 1993, are $300,000, total assets amount to:

5.

$900,000

$1,174,000.

$354,000.

$1,434,000.

During the current year, liabilities of Bowie's Meats increased by $320,000, and owners' equity increased by
$90,000.
a

Assets at the end of the year total $410,000.

Assets at the end of the year total $230,000.

Assets increased during the year by $410,000.

Assets decreased during the year by $230,000.

Assets = Liability+Equity
Assets =320,000 increase +90,000 increase = 410,000 increase

6.

The process of originally recording a business transaction in the accounting records is termed:
a

Journalizing.

Footing.

Posting.

Balancing.

7.

The journal entry to record a particular business transaction includes a debit to a liability account. This
transaction is most likely also to include:
a

A cash receipt.

The purchase of an asset on account.

A cash payment.

A credit to Accounts Receivable.

When there is a debit to the liability account, it means that you have paid money back that you owed using cash

8.

9.

A trial balance will indicate the existence of an error if:

a

The purchase of a typewriter for $870 is entered in the accounting records as a debit of $87 to
Office Equipment and a credit of $87 to Accounts Payable.

The collection of $75 cash is recorded by a debit to Accounts Receivable and a credit to Cash.

A ledger account with a credit balance is listed as a debit amount in the trial balance.

A journal entry debiting Equipment is posted as a debit to the Building account.

The Accountant for the McCarthy Company forgot to make an adjusting entry to record depreciation for the
current year. The effect of this error would be:
a

An overstatement of net income and an understatement of assets.

An overstatement of assets offset by an understatement of owners' equity.

An overstatement of assets, net income, and owners' equity.

d.

An overstatement of assets and of net income and an understatement of owners' equity.

10. The balance in retained earnings of Dayton Company at the beginning of the year was $65,000. During the
year, the corporation earned revenue of $430,000 and incurred expenses of $360,000, dividends of $50,000
were declared and paid, and the balance of the Cash account increased by $10,000. The company's net income
and the year-end balance in the retained earnings account are, respectively:
a

$20,000 and $95,000.

$70,000 and $85,000.

$20,000 and $85,000.

$70,000 and $95,000.

Net income = Earned revenue Incurred expenses

Year end balance= Beginning balance+ Net income- dividends + cash account increase = 65000+7000050000+ 10000= 95000
11. The balance of an unearned revenue account:
a

Appears in the balance sheet as a component of stockholders' equity.

Appears in the income statement along with other revenue accounts.

Appears in a separate section of the income statement for revenue not yet earned.

Appears in the liability section of the balance sheet.

12. The concept of materiality:

a

Treats as material only those items that are greater than 2% or 3% of net income.

Justifies ignoring the matching principle in certain circumstances.

Affects only items reported in the income statement.

Results in financial statements that are less useful to decision makers because many details have
been omitted.

13. In a perpetual inventory system, purchases of merchandise on account are recorded by debiting:
a

Cost of Goods Sold.

Accounts Payable.

Purchases.

Inventory.

14. In a multiple-step income statement, interest expense usually is not classified as an operating expense because
interest charges:
a

do not contribute to the production of revenue.

Stem from the manner in which assets are financed, not the manner in which they are used in
business operations.

Relate directly to the cost of goods sold.

The statement is incorrect. Interest usually is classified as an operating expense.

15. Telecote Pro Shop uses a periodic inventory system. The beginning inventory was $20,000, purchases
amounted to $110,000, sales totaled $215,000, and the year-end inventory was $25,000. The cost of goods sold
must have been:
a

$100,000.

$105,000

$110,000.

some other amount.

16. AllNight Stores purchased canned goods at an invoice price of $2,000 and terms of 2/10, n/30. Half of the
goods had been mislabeled and were returned immediately to the supplier. If AllNight pays the invoice within
the discount period, the amount paid should be:
a

$960.

$980.

1,960.

2,000.

17. An important distinction between the direct method and the indirect method of preparing a
statement of cash flows is that:
a

The format of the section computing net cash flow from operating activities is
different under the two methods.

The direct method reconciles accrual-based net income with net cash flow from
operations; the indirect method shows the specific cash inflows and outflows
constituting the operating activities.

The direct method results in a lower (more conservative) figure for net cash flow
from operating activities than does the indirect method.

Only those statements of cash flows prepared using the direct method are in
accordance with generally accepted accounting principles as set forth by the FASB.

18. Which of the following is not classified among the financing activities in a statement of
cash flows?
a

Long-term borrowing.

Payment of dividends to stockholders.

Payment of interest to creditors.

Short-term borrowing.

19. The cost principle is the basis for preparing financial statements because it is
a.

A conservative value.

b.

Objectively measured.

c.

An international standard.

d.

The most accurate measure of purchasing power.

20. RSV Co reports only current assets and current liabilities on its balance sheet. Property, plant and equipment
and bonds payable are reported as current assets and current liabilities, respectively. Liquidation of the
company is unlikely. Which of the following principle, assumption or constraint is violated.
a.

Entity.

b.

Periodicity.

c.

Going concern.

d.

Materiality.