1 General-purpose financial statements are the product of

a. financial accounting.
b. managerial accounting.
c. both financial and managerial accounting.
d. neither financial nor managerial accounting

2 . Users of financial reports include all of the following except

a. creditors.
b. government agencies.
c. unions.
d. All of these are users.

3 . Which of the following statements is not an objective of financial reporting?

a. Provide information that is useful in investment and credit decisions.
b. Provide information about enterprise resources, claims to those resources, and
changes to them.
c. Provide information on the liquidation value of an enterprise.
d. Provide information that is useful in assessing cash flow prospects.

4 . Accrual accounting is used because

a. cash flows are considered less important.
b. it provides a better indication of ability to generate cash flows than the cash
basis.
c. it recognizes revenues when cash is received and expenses when cash is paid.
d. none of the above.

5 . Which of the following (a-c) are not true concerning a conceptual framework in
accounting?
a. It should be a basis for standard-setting.
b. It should allow practical problems to be solved more quickly by reference to it.
c. It should be based on fundamental truths that are derived from the laws of
nature.
d. All of the above (a-c) are true.

6 . In the conceptual framework for financial reporting, what provides "the why"--
the goals and purposes of accounting?
a. Measurement and recognition concepts such as assumptions, principles, and
constraints
b. Qualitative characteristics of accounting information
c. Elements of financial statements
d. Objectives of financial reporting
7 . Accounting information is considered to be relevant when it
a. can be depended on to represent the economic conditions and events that it is
intended to represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.

8 . According to Statement of Financial Accounting Concepts No. 2, which of the

following relates to both relevance and reliability?
a. Materiality
b. Understandability
c. Usefulness
d. All of these

9 . Factors that shape an accounting information system include the

a. nature of the business.
b. size of the firm.
c. volume of data to be handled.
d. all of these.

10 . A journal entry to record the sale of inventory on account will include a

a. debit to inventory.
b. debit to accounts receivable.
c. debit to sales.
d. credit to cost of goods sold.

11 . At the time a company prepays a cost

a. it debits an asset account to show the service or benefit it will receive in
the future.
b. it debits an expense account to match the expense against revenues earned.
c. its credits a liability account to show the obligation to pay for the service in
the future.
d. more than one of the above.

12 . Which of the following would not be a correct form for an adjusting entry?
a. A debit to a revenue and a credit to a liability
b. A debit to an expense and a credit to a liability
c. A debit to a liability and a credit to a revenue
d. A debit to an asset and a credit to a liability
13 . The major elements of the income statement are
a. revenue, cost of goods sold, selling expenses, and general expense.
b. operating section, nonoperating section, discontinued operations, extraordinary
items, and cumulative effect.
c. revenues, expenses, gains, and losses.
d. all of these.

14 . Which of the following is not a generally practiced method of presenting the

income statement?
a. Including prior period adjustments in determining net income
b. The single-step income statement
c. The consolidated statement of income
d. Including gains and losses from discontinued operations of a component of a
business in determining net income

15 . In order to be classified as an extraordinary item in the income statement, an event

or transaction should be
a. unusual in nature, infrequent, and material in amount.
b. unusual in nature and infrequent, but it need not be material.
c. infrequent and material in amount, but it need not be unusual in nature.
d. unusual in nature and material, but it need not be infrequent.

16 . Which of the following items will not appear in the retained earnings statement?
a. Net loss
b. Prior period adjustment
c. Discontinued operations
d. Dividends

17 . The revenue recognition principle provides that revenue is recognized when

a. it is realized.
b. it is realizable.
c. it is realized or realizable and it is earned.
d. none of these.

18 . Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service
contract on each appliance sold. Although Dot Point sells the appliances on an
installment basis, all service contracts are cash sales at the time of purchase by the buyer.
Collections received for service contracts should be recorded as
a. service revenue.
b. deferred service revenue.
c. a reduction in installment accounts receivable.
d. a direct addition to retained earnings.

19 . The percentage-of-completion method must be used when certain conditions exist.

Which of the following is not one of those necessary conditions?
a. Estimates of progress toward completion, revenues, and costs are reasonably
dependable.
b. The contractor can be expected to perform the contractual obligation.
c. The buyer can be expected to satisfy some of the obligations under the contract.
d. The contract clearly specifies the enforceable rights of the parties, the consideration
to be exchanged, and the manner and terms of settlement.

20 . The principal disadvantage of using the percentage-of-completion method of

recognizing revenue from long-term contracts is that it
a. is unacceptable for income tax purposes.
b. gives results based upon estimates which may be subject to considerable
uncertainty.
c. is likely to assign a small amount of revenue to a period during which much revenue
was actually earned.
d. none of these.

21 . Which of the following is a limitation of the balance sheet?

a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
c. Current fair value is not reported.
d. All of these

22 . The net assets of a business are equal to

a. current assets minus current liabilities.
b. total assets plus total liabilities.
c. total assets minus total stockholders' equity.
d. none of these.

23 . The current assets section of the balance sheet should include

a. machinery.
b. patents.
c. goodwill.
d. inventory.

24 . Which of the following is a current asset?

a. Cash surrender value of a life insurance policy of which the company is the bene-
ficiary.
b. Investment in equity securities for the purpose of controlling the issuing company.
c. Cash designated for the purchase of tangible fixed assets.
d. Trade installment receivables normally collectible in 18 months.

25 . An example of an item which is not an element of working capital is

a. accrued interest on notes receivable.
b. goodwill.
c. goods in process.
d. temporary investments.

26 . Which of the following should be disclosed in a Summary of Significant

Accounting Policies?
a. Types of executory contracts
b. Amount for cumulative effect of change in accounting principle
c. Claims of equity holders
d. Depreciation method followed

27 . Which of the following subsequent events (post-balance-sheet events) would

require adjustment of the accounts before issuance of the financial statements?
a. Loss of plant as a result of fire
b. Changes in the quoted market prices of securities held as an investment
c. Loss on an uncollectible account receivable resulting from a customer’s major flood
loss
d. Loss on a lawsuit, the outcome of which was deemed uncertain at year end.

28 . The basic limitations associated with ratio analysis include

a. the lack of comparability among firms in a given industry.
b. the use of estimated items in accounting.
c. the use of historical costs in accounting.
d. all of these.

29 . Cash equivalents are

a. treasury bills, commercial paper, and money market funds purchased with excess
cash.
b. investments with original maturities of three months or less.
c. readily convertible into known amounts of cash.
d. all of these.

30 . An increase in inventory balance would be reported in a statement of cash flows

using the indirect method (reconciliation method) as a(n)
a. addition to net income in arriving at net cash flow from operating activities.
b. deduction from net income in arriving at net cash flow from operating
activities.
c. cash outflow from investing activities.
d. cash outflow from financing activities.

31 . Xanthe Corporation had the following transactions occur in the current year:
1. Cash sale of merchandise inventory.
2. Sale of delivery truck at book value.
3. Sale of Xanthe common stock for cash.
4. Issuance of a note payable to a bank for cash.
5. Sale of a security held as an available-for-sale investment.
6. Collection of loan receivable.
How many of the above items will appear as a cash inflow from investing activities on a
statement of cash flows for the current year?
a. Five items
b. Four items
c. Three items
d. Two items

32 . A series of equal receipts at equal intervals of time when each receipt is received
at the beginning of each time period is called an
a. ordinary annuity.
b. annuity in arrears.
c. annuity due.
d. unearned receipt

33 . Which of the following statements is true?

a. The higher the discount rate, the higher the present value.
b. The process of accumulating interest on interest is referred to as discounting.
c. If money is worth 10% compounded annually, $1,100 due one year from today
is equivalent to $1,000 today.
d. If a single sum is due on December 31, 2010, the present value of that sum decreases
as the date draws closer to December 31, 2010.

34 . Present value is
a. the value now of a future amount.
b. the amount that must be invested now to produce a known future value.
c. always smaller than the future value.
d. all of these.

35 . If an annuity due and an ordinary annuity have the same number of equal
payments and the same interest rates, then
a. the present value of the annuity due is less than the present value of the ordinary
annuity.
b. the present value of the annuity due is greater than the present value of the
ordinary annuity.
c. the future value of the annuity due is equal to the future value of the ordinary
annuity.
d. the future value of the annuity due is less than the future value of the ordinary
annuity.