ACC 300 Final Exam

Section I: True/False

The response to each question or statement is either True or False.

1. A business organized as a separate legal entity owned by stockholders is a partnership.         

2. External users of accounting information are managers who plan, organize, and run a business.

3. Two primary external users of accounting information are investors and creditors.

4. Financing activities for corporations include borrowing money and selling shares of their own stock.

5. Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.

6. The difference between unearned revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and unearned revenue has never been recorded.

7. Cash is a temporary account.

8. Bonding means insuring a company against theft by employees.

9. The treasurer should prepare and sign a check only after authorization to issue a check has been provided.

10. Using borrowed money to increase the rate of return on common stockholders' equity is called "trading on the equity."The extent of internal control features adopted by a company must be evaluated in terms of cost-benefit.

11. A good system of internal control will safeguard its assets and enhance the accuracy and reliability of its accounting records.

12. All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting journal entries to the Cash account.

13. Cash equivalents include money market accounts, commercial paper, and U.S. treasury bills held for ninety days or less.

14. A basic principle of cash management is to increase the speed of paying liabilities.

15. A cash budget contributes to more effective cash management.

16. A change in accounting principle occurs when the principle used in the current year is different from the one used by competitors in the current year.

17. If a company has sales of $110 in 2007 and $154 in 2006, the percentage decrease in sales from 2006 to 2007 is 140%.

18. In a common size income statement, each item is expressed as a percentage of net income.

19. Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness

20. Inventory turnover is a measure of liquidity that focuses on efficient use of inventory.

21. The current ratio is a measure of all the ratios calculated for the current year.

22. From a creditor's point of view, the higher the total debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations.

23. Alternative accounting methods affect the quality of earnings

24. Because pro forma earnings are based on specific rules, these amounts are highly reliable.

Section II: Multiple Choice

Choose your response from one of the possible answers provided.

26. A business organized as a corporation

a).is not a separate legal entity in most states.

b).requires that stockholders be personally liable for the debts of the business.

c).is owned by its stockholders.

d).has tax advantages over a proprietorship or partnership.

27.Which of the following is not one of the three forms of business organization?

a).corporations.

b).partnerships.

c).proprietorships.

d).investors.

28.An advantage of the corporate form of business is that

a).it has limited life.

b).its owner’s personal resources are at stake.

c).its ownership is easily transferable via the sale of shares of stock.

d).it is simple to establish.

29.The group of users of accounting information charged with achieving the goals of the business is its

a).auditors.

b).investors.

c).managers.

d).creditors.

30.Which of the following is a primary user of accounting information with a direct financial interest in the business?

a).Taxing authority

b).Creditor

c). Regulatory agency

d).Labor union

31. An income statement

a).summarizes the changes in retained earnings for a specific period of time.

b).reports the changes in assets, liabilities, and stockholders’ equity over a period of time.

c).reports the assets, liabilities, and stockholders’ equity at a specific date.

d).presents the revenues and expenses for a specific period of time.

32.Which financial statement is prepared first?

a).Balance sheet

b).Income statement

c).Retained earnings statement

d).Statement of cash flows

33. Which one of the following is not a justification for adjusting entries?

a).Adjusting entries are necessary to ensure that revenue recognition principles are followed.

b).Adjusting entries are necessary to ensure that the matching principle is followed.

c).Adjusting entries are necessary to enable financial statements to be in conformity with GAAP.

d).Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

34. If a resource has been consumed but a bill has not been received at the end of the accounting period, then

a).an expense should be recorded when the bill is received.

b).an expense should be recorded when the cash is paid out.

c).an adjusting entry should be made recognizing the expense.

d).it is optional whether to record the expense before the bill is received.

35.An adjusting entry would not include which of the following accounts?

a).Cash

b).Interest Receivable

c).Property Tax Payable

d).Unearned Revenue

36.At December 31, 2007, before any year-end adjustments, Bollis Company's Prepaid Insurance

account had a balance of $2,700.  It was determined that $1,500 of the Prepaid Insurance had expired.  The adjusted balance for Insurance Expense for the year would be

a).$1,500.

b).$1,200.

c).$2,700.

d). $1,900.

37.Which one of the following is not an objective of a system of internal controls?

a).Safeguard company assets

b).Overstate liabilities in order to be conservative

c).Enhance the accuracy and reliability of accounting records

d).Reduce the risks of errors

38.Which one of the following would be considered a long-term solvency ratio?

a).Receivables turnover

b).Return on total assets

c).Current cash debt coverage ratio

d. Debt to total assets ratio

39.Which of the following is not a limitation of internal control?

a).Cost of establishing control procedures should not exceed their benefit

b).The human element

c).Collusion

d).The size of the company

40).Companies that fail to maintain an adequate system of internal control

a).may be subject to charges of fraud.

b).will be automatically dissolved.

c). may be subject to fines and officer imprisonment.

d). may be forced to sell their assets.

41.Internal auditors

a). are hired by CPA firms to audit business firms.

b). are employees of the IRS who evaluate the internal controls of companies filing tax returns.

c). evaluate the system of internal controls for the companies that employ them.

d). cannot evaluate the system of internal controls of the company that employs them because  they are not independent.

42.From an internal control standpoint, the asset most susceptible to improper diversion and use is

a).prepaid insurance.

b).cash.

c).buildings.

d).land.

43.Which of the following statements is true?

a).Due to its liquid nature, cash is the easiest asset to steal.

b).A good system of internal control will ensure that employees will not be able to steal cash.

c).It takes two or more employees working together to be able to steal cash.

d).All statements are true.

44.Which of the following is not an internal control procedure for cash?

a).Only designated personnel are authorized to handle cash.

b).The same individual receives the cash and pays the bills.

c).Surprise audits of cash on hand should be made occasionally.

d).Access to cash is limited.

45.A check for $167 is incorrectly recorded by a company as $176. On the bank recon-ciliation, the $9 error should be

a).added to the balance per books.

b).deducted from the balance per books.

c).added to the balance per bank.

d).deducted from the balance per bank.

46.Which of the following would not be reported on the balance sheet as a cash equivalent?

a). Money market fund

b). Commercial paper

c). Treasury bill

d). Restricted cash

47.An income statement would not include

a).other revenue and gains.

b).extraordinary items.

c).discontinued operations.

d).dividends paid.

48.Which one of the following would be classified as an extraordinary item?

a).Expropriation of property by a foreign government

b).Losses attributed to a labor strike

c).Write-down of inventories

d).Gains or losses from sales of equipment

49.The disposal of a significant segment of a business is called

a).a change in accounting principle.

b).an extraordinary item.

c).an other expense.

d).discontinued operations.

50.A successful grocery store would probably have

a).a low inventory turnover.

b).a high inventory turnover.

c).zero profit margin.

d).low volume.