1.A Balance Sheet: (Indicate all correct answers.

)
A.Shows the financial position of a business entity at a specific date.
B.Contains three distinct sections: assets, liabilities, and owner's equity.
C.Includes the assets of the business and its owner in a sole proprietorship.
D.Uusually lists the more liquid assets before the more permanent assets.
E.A, B and D are correct
F.All of the above

The correct answer is E. Choice C is incorrect as this would violate the business entity concept.

2.Waverley Gold Mines, a sole proprietorship, completed the most recent year with Cash +2 - $3,500;
Accounts receivable +2 - $10,500; Equipment +2 - $12,000; Land +2 - $45,000; Buildings +2 - $15,000;
Notes payable +2 - $3,000; Accounts payable +2 - $6,000. (Indicate all correct answers.)
A.Total assets for Waverley Gold Mines at the end of the most recent year +2 - $77,000.
B.Total liabilities for Waverley Gold Mines at the end of the most recent year +2 - $9,000.
C.Owner's Equity for Waverley Gold Mines at the end of the most recent year +2 - $86,000.
D.Owner's Equity for Waverley Gold Mines at the end of the most recent year +2 - $77,000.
E.B and D are correct.
F.None of the above.

Choice A is incorrect. The total of the assets is $86,000, which is the cash, accounts receivable,
equipment, land, and buildings. ($3,000 + $10,500 + $12,000 + $45,000 + $15,000 = $86,000). Choice C is
incorrect. The owner's equity is calculated by subtracting the total liabilities of $9,000 from the total
assets of $86,000. ($86,000 - $9,000 = $77,000)

3.Which of the following statements is consistent with generally accepted accounting principles relating
to asset valuation?
A.Assets are valued on the balance sheet at their most current market value.
B.Asset values are adjusted on the balance sheet to reflect the effects of inflation.
C.Asset values are determined by the owner at the end of each year.
D.Assets are valued at their original cost to the business entity.
E.B and D are correct.
F.None of the above

Choice A is incorrect because it violates the cost principle. Choice B is incorrect because it violates the
stable dollar assumption. Choice C is incorrect because it violates the cost and objectivity principles.

4.Alice Brown opened her sole proprietorship by depositing $10,000 in a bank account. She immediately
purchased Equipment with a cost of $20,000 by paying cash of $5,000 and signing a Note Payable for the
balance. The Balance Sheet immediately following these transactions would have:
A.Total assets of $30,000; total liabilities of $15,000; and owner's equity of $15,000.
B.Total assets of $25,000; total liabilities of $15,000; and owner's equity of $10,000.
C.Total assets of $15,000; total liabilities of $5,000; and owner's equity of $10,000.
D.Total assets of $25,000 and owner's equity of $25,000.
E.All of the above.
F.None of the above.

Choice A is incorrect. Total assets are $25,000 ($10,000 + $20,000 - $5,000) and owner's equity is the
$10,000 which Alice Brown contributed to start the business. Choice C is incorrect. Total assets are
$25,000 and the total liabilities are $15,000 ($20,000 - $5,000). Choice D is incorrect because it ignores
the fact that $15,000 is still owed on the purchase of the Equipment.

5.Which of the following statements is not a characteristic of a corporation?

A.A corporation is a separate legal entity for legal, accounting, and tax purposes.
B.Owners of a corporation are called "shareholders".
C.Shareholders are personally liable for corporate debts.
D.Corporations may have an indefinite life.
E.B, C and D
F.None of the above

Shareholders are not personally liable for corporate debts. Choices A, B and D are characteristics of a
corporation.

6.Creditors can evaluate the short term solvency of the business: (Indicate all correct answers.)
A.By reading the notes to the financial statements.
B.By comparing the liquid assets with the liabilities which will come due in the near future
C.By comparing the total assets with the total liabilities.
D.By looking only at the balance of Cash on the Balance Sheet.
E.A and B are correct.
F.None of the above.

The correct answer is E. Choice C is incorrect. Short term solvency means meeting the short term debts
of the business. Some liabilities may be long term and be paid in installments over a period of years.
Choice D is incorrect. Other liquid or short term assets such as Accounts receivable will be converted to
Cash and be available to pay liabilities which become due in the near future.

7.Financial Statements of a business entity are considered fair and reliable by decision makers outside an
organization because: (Indicate all correct answers.)
A.The business entity is a corporation and has followed all laws relating to corporations.
B.The business entity has been audited by an independent accounting firm.
C.The business entity has prepared the financial statements according to generally accepted accounting
principles.
D.The business entity has been in business for a long time.
E.A, B and C are correct.
F.All of the above.

The correct answer is E. Choice D is incorrect. Being in business for a long time does not necessarily
mean the financial statements are fair and reliable.

8.Examples of when a company's accountant and its independent auditors must exercise professional
judgment: (Indicate all correct answers.)
A.Determining the amount of information to include in notes to the financial statements.
B.Determining when a business in financial difficulty ceases to be a going concern.
C.Distinguishing between legitimate "window dressing" and "window dressing" that could be
misleading.
D.Determining when any liabilities on the Balance Sheet are due.
E.A, B and C are correct.
F.All of the above.

The correct answer is E. Choice D is incorrect. The due dates for the liabilities are determined by the
individual invoices and debt contracts

1.The effects of individual business transactions in a company's accounting records are accumulated at
regular intervals to prepare financial statements, income tax returns and other types of accounting
reports. Managers and employees of the business frequently use these records for all of the
following except:
A.Evaluating the efficiency and performance of various departments within the organization.
B.Establishing accountability for the assets and/or transactions under an individual's control.
C.Assessing the credit worthiness of a new customer.
D.Keeping track of routine business activities such as the amounts due from credit customers.
E.C and D
F.None of the above.

Choice C is correct. Financial statements of an organization will not assist in assessing the credit
worthiness of a new customer.

2.Which of the following statements is true? (Indicate all correct answers.)

A.A ledger account shows all increases and decreases for the individual balance sheet item.
 B.A ledger account has four elements: a title of the asset, liability, or owner's equity item; a left side,
which is a debit; a right side, which is a credit; and a balance column.
C.The balance of a ledger account is the sum of either the debit side of the account or the credit side of
the account.
D.The balance of a ledger account is the difference between the debit and credit entries in the account.
E.A, B and D
F.All of the above

Choice C is incorrect. The balance is calculated by computing the difference in the total debits and total
credits in an account.

3.A debit of $500 to the Cash account of Future Corporation indicates:

A.Future Corporation received a cheque or cash of $500.
B.Future Corporation paid a supplier or an employee $500.
C.The amount of cash Future Corporation has in its bank account.
D.The amount of cash Future Corporation will receive from a customer.
E.A and D are correct.
F.None of the above.

Choice A is correct. A debit to Cash of $500 is an increase to the Cash account due to the receipt of
either cash or a cheque.

4.An account such as Accounts Payable: (Indicate all correct answers.)

A.Is increased by debiting the account.
B.Is increased by crediting the account.
C.Has a normal balance which is a credit.
D.Is a liability which appears on the right side of the Balance Sheet.
E.B, C and D are correct.
F.All of the above.

Answer A is incorrect. Debiting a liability account decreases the account.

5.Double-entry Accounting requires:

A.Keeping two sets of books: one for the company and one for the bank.
B.Recording equal amounts of debit entries and credit entries to record every transaction.
C.The use of a computer to record all transactions.
D.Recording equal amounts of debit entries to asset accounts and credit entries to liability accounts for
every transaction.
E.A and B are correct.
F.None of the above.

6.The Journal: (Indicate all correct answers.)

A.Shows all information about a transaction in one place and provides an explanation of the transaction.
B.Helps to prevent errors in posting the debits and credits to the ledger accounts.
C.Is sometimes called a book of original entry.
D.Is saved until the end of the month and then disposed of.
E.A, B and C are correct.
F.All of the above.

7.On May 31, Midnight Madness Company had an accounts payable to Starlight Express of $3,000. On
June 4, Midnight wrote a cheque to Starlight for $1,500. The journal entry made on June 4 by Midnight
Madness to record this transaction includes:
A.A debit to the Cash account for $1,500 and a credit to the Accounts Payable account for $1,500.
B.A credit to the Cash account for $3,000 and a debit to the Accounts Payable account for $3,000.
C.A credit to the Cash account for $1,500 and a debit to the Accounts Payable account for $1,500.
D.A credit to the Cash Paid account for $1,500 and a debit to the Accounts Payable Paid account for
$1,500.
E.C and D are correct.
F.None of the above.

Choice C is correct. Choice D is incorrect because of the account titles used.

8.Joan Smith, owner of Bedford Software Company, purchased a new building for her business at a total
cost of $50,000. Bedford paid Metro Storage Company $10,000 at the time of purchase and promised to
pay the balance in 90 days by signing a note payable. Bedford would record this transaction as:
A.A debit to Building of $10,000 and a credit to Cash of $10,000.
B.A debit to Building of $50,000, a credit to Cash of $10,000, and a credit to Notes Payable of
$40,000.
C.A debit to Building of $50,000 and a credit to Cash of $50,000.
D.A debit to Building of $50,000, a credit to Cash of $10,000, and a credit to Joan Smith, Capital of
$40,000.
E.B and D are correct.
F.None of the above.
9.The trial balance is a two-column schedule listing the names and balances of all the accounts in the
order in which they appear in the ledger. The following statements describing a trial balance are
true except for:
A.A trial balance provides proof that the ledger is in balance.
B.A trial balance gives assurance that equal debits and credits have been recorded for all transactions.
C.A trial balance ensures that the debit or credit balance of each account has been correctly computed.
D.A trial balance ensures that the balance of each account is correct.
E.A and D are correct.
F.None of the above.

Choice D is correct. A trial balance does not ensure that debits and credits have been posted to the
correct account. Therefore, a trial balance cannot ensure that the balance of each account is correct.

Q2-1
According to the rules of debit and credit for balance sheet accounts:
Increases in asset, liability, owners equity accounts are recorded by debits.
Decreases in asset, and liability accounts are recorded by credits.
Increases in asset and owners equity accounts are recorded by debits.
Decreases in liability and owners equity accounts are recorded by debits.

Q2-2
Which of the following about accounting procedures is not correct?
The journal shows in one place all the information about specific transactions, arranged in chronological
order.
A ledger account shows in one place all information about changes in a specific asset or liability, or in
owners equity.
Posting is the process of transferring debit and credit changes into account balances from the ledger to
the journal.
The end product of the accounting cycle consists of formal financial statements, such as the
balance sheet and the income statement.

1.An expense: (Indicate all correct answers.)

A.Is the cost of goods and services used up in the process of earning revenue.
B.Is recorded in the accounting records only when the amount is paid.
C.Is increased by a debit entry.
D.Includes personal cash withdrawals by the owner from the company's bank account.
E.A and C are correct.
F.None of the above.
2.A revenue is the price of goods sold and services rendered during a given accounting period and
includes the following except:
A.An airplane ticket paid for by a customer in the current accounting period for a flight to be taken in
the next accounting period.
B.Repairs performed for a customer in the current accounting period.
C.Commission earned on a real estate transaction which occurred in the current accounting period.
D.Cash received for the sale of merchandise in the current accounting period.
E.A and D are correct.
F.None of the above.

3.Rocky Mountain Lodge began operations on January 1 and immediately purchased, on credit, a four-
month supply of shop supplies for its ski repair and conditioning operation for $4,000. At the end of
January, the manager of the ski repair and conditioning operation estimated that $3,250 of supplies
were still on hand. The journal entry to record the use of shop supplies during January is:
A.A debit to Supplies Expense of $3,250 and a credit to Shop Supplies of $3,250.
B.A debit to Supplies Expense of $750 and a credit to Shop Supplies of $750.
C.A debit to Shop Supplies of $4,000 and a credit to Cash of $4,000.
D.A debit to Shop Supplies of $750 and a credit to Accounts Payable of $750.
E.B and C are correct.
F.None of the above.

4.Depreciation is: (Indicate all correct answers.)

A.The systematic allocation of the cost of a depreciable asset to expense.
B.Used to record changes to the asset's market value.
C.Occurs because of the matching principle.
D.Based on estimates such as the useful life of the asset.
E.A, C, and D are correct.
F.All of the above.

5.Grand Plains Company purchased equipment at a cost of $48,000 when it started its business on
September 1. Gary Parsons, the owner, estimated the equipment would last four years. The amount of
depreciation expense that Grand Plains Company should record as amortization or depreciation expense
each month using the straight-line method is:
A.$12,000
B.$1,000
C.$400
D.$48,000
E.All of the above.
F.None of the above.

Choice C is correct. ($48,000 / 4 years = $12,000 per year. $12,000 / 12 months = $1,000 per month.)

6.Closing entries have a number of purposes that include all of the following except:
A.Updating the balance of the owner's capital account for changes in owner's equity occurring during
the accounting period.
B.Returning the balances in the temporary or nominal accounts (revenue and expense) to zero.
C.Determining the amount of net income or net loss for the accounting period.
D.Deciding whether to continue the business next year or not.
E.B and D are correct.
F.None of the above.

Choice D is correct. The information provided by calculating net income or net loss may assist the owner
in deciding whether to continue the business next year or not but this is not usually the only
consideration in such a decision.

7.Brenda Bart, owner of Bart's MicroBrewery, began the current accounting period with a balance of
$42,000 in her owner's capital account. During the current year, Bart's MicroBrewery earned revenues of
$500,000 and incurred expenses of $325,000 before making an adjusting entry to record amortization
(depreciation) expense of $100,000. Brenda withdrew $80,000 cash from the company during the year
to pay her personal living and recreation expenses. The net income for Bart's MicroBrewery and the
balance in Brenda Bart's capital account at the end of the current accounting period are, respectively:
A.$175,000 and $137,000.
B.$75,000 and $37,000.
C.$95,000 and $137,000.
D.($5,000) and $37,000.
E.All of the above.
F.None of the above.

Choice B is correct. Net income is $500,000 - $325,000 - $100,000 = $75,000. Brenda Bart, Capital is
$42,000 + $75,000 - $80,000 = $37,000.
8.The policy of recognizing revenue in the accounting records when it is earned and recognizing
expenses when the related goods or services are used is called:
A.The cash basis of accounting.
B.The realization principle.
C.The objectivity principle.
D.The accrual basis of accounting.
E.B and D are correct.
F.None of the above.